Sound Financial Bancorp, Inc. [SFBC] Filings

10-K 1 sfbc-20221231.htm 10-K sfbc-20221231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


☒			ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

COMMISSION FILE NUMBER 001-35633

Sound Financial Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Maryland						45-5188530
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2400 3rd Avenue, Suite 150, Seattle, Washington						98121
(Address of principal executive offices)						(Zip Code)

Registrant's telephone number, including area code: (206) 448-0884

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common Stock, par value $0.01 per share	SFBC	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer," accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements

of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant

to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2022, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $55.3 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: As of March 10, 2023, there were 2,601,647 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

PART III of Form 10-K – Portions of the Registrant's Proxy Statement for its 2023 Annual Meeting of Stockholders. The 2023 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

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SOUND FINANCIAL BANCORP, INC.

FORM 10-K

TABLE OF CONTENTS


PART I
		Page
Item 1.	Business	4
Item 1A.	Risk Factors	37
Item 1B.	Unresolved Staff Comments	46
Item 2.	Properties	47
Item 3.	Legal Proceedings	47
Item 4.	Mine Safety Disclosures	47

PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	47
Item 6.	[Reserved]
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	49
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 8.	Financial Statements and Supplementary Data	65
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	106
Item 9A.	Controls and Procedures	106
Item 9B.	Other Information	107
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	107

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	107
Item 11.	Executive Compensation	108
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	108
Item 13.	Certain Relationships and Related Transactions, and Director Independence	108
Item 14.	Principal Accountant Fees and Services	108

PART IV

Item 15.	Exhibits and Financial Statement Schedules	109
Item 16.	Form 10-K Summary	110

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PART I

Item 1. Business

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact but are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions, or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to:

•potential adverse impacts to economic conditions in the Company's local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation or deflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as increasing energy prices and supply chain disruptions, and any governmental or societal responses to the novel coronavirus disease 2019 (“COVID-19”) pandemic, including the possibility of new COVID-19 variants;

•changes in consumer spending, borrowing and savings habits;

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

•monetary and fiscal policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the U.S. Government and other governmental initiatives affecting the financial services industry;

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

•fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area;

•our ability to access cost-effective funding;

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

•our ability to control operating costs and expenses;

•secondary market conditions for loans and our ability to sell loans in the secondary market;

•fluctuations in interest rates;

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

•inability of key third-party providers to perform their obligations to us;

•our ability to attract and retain deposits;

•competitive pressures among financial services companies;

•our ability to successfully integrate any assets, liabilities, clients, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all;

•the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors that perform several of our critical processing functions;

•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB");

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•legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry and the availability of resources to address such changes;

•our ability to retain or attract key employees or members of our senior management team;

•costs and effects of litigation, including settlements and judgments;

•our ability to implement our business strategies;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

•our ability to pay dividends on our common stock;

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

•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and

•the other risks described from time to time in our documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”), including this Form 10-K.

We caution readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and could cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance.

We do not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the "Bank" refer to Sound Community Bank. References to the “Company,” “we,” “us,” and “our” means Sound Financial Bancorp and its wholly-owned subsidiary, Sound Community Bank, unless the context otherwise requires.

Sound Financial Bancorp, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, Sound Community Bank. Substantially all of Sound Financial Bancorp's business is conducted through Sound Community Bank, a Washington state-chartered commercial bank. As a Washington commercial bank that is not a member of the Federal Reserve System, the Bank's regulators are the Washington State Department of Financial Institutions (“WDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). As a bank holding company, Sound Financial Bancorp is regulated by the Federal Reserve. We also sell insurance products and services to consumers through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank.

Sound Community Bank's deposits are insured up to applicable limits by the FDIC. At December 31, 2022, Sound Financial Bancorp had total consolidated assets of $976.4 million, including $866.0 million of loans held-for-portfolio, deposits of $808.8 million and stockholders' equity of $97.7 million. The common stock of Sound Financial Bancorp is listed on The NASDAQ Capital Market under the symbol "SFBC." Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121 and our telephone number is 206-448-0884.

Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds, along with borrowed funds, in loans secured by first and second mortgages on one-to-four family residences (including home equity loans and lines of credit), commercial and multifamily real estate, construction and land, consumer and commercial business loans. Our commercial business loans include unsecured lines of credit and secured term loans and lines of credit secured by inventory, equipment and accounts receivable. We also offer a variety of secured and unsecured consumer loan products, including manufactured home loans, floating home loans, automobile loans, boat loans and recreational vehicle loans. As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to the Federal National Mortgage Association ("Fannie Mae") and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives. We sell loans that conform to the underwriting standards of Fannie Mae ("conforming") but generally retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income. Residential loans that do not conform to the underwriting standards of Fannie Mae ("non-conforming"), are either held in our loan portfolio or sold with servicing released. We originate and retain a significant amount of commercial real estate loans, including those secured by owner-occupied and nonowner-occupied commercial real estate,

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multifamily property, mobile home parks and construction and land development loans.

Market Area

We serve the Seattle Metropolitan Statistical Area ("MSA"), which includes King County (which includes the city of Seattle), Pierce County and Snohomish County within the Puget Sound region, and also serve Clallam and Jefferson Counties, on the North Olympic Peninsula of Washington. We serve these markets through our headquarters in Seattle and eight branch offices, four of which are located in the Seattle MSA, three that are located in Clallam County and one that is located in Jefferson County. We also have a loan production office in the Madison Park neighborhood of Seattle. Based on the most recent branch deposit data provided by the FDIC, our share of deposits was approximately 0.14% in King County, 0.37% in Pierce County and 0.31% in Snohomish County. In Clallam and Jefferson Counties, we have approximately 16.33% and 6.04%, respectively, of the deposits in those markets. See "—Competition."

Our market area includes a diverse population of management, professional and sales personnel, office employees, health care workers, manufacturing and transportation workers, service industry workers and government employees, as well as retired and self-employed individuals. The population has a skilled work force with a wide range of education levels and ethnic backgrounds. Major employment sectors include information and communications technology, financial services, aerospace, military, manufacturing, maritime, biotechnology, education, health and social services, retail trades, transportation and professional services. Significant employers headquartered in our market area include U.S. Joint Base Lewis-McChord, Microsoft, University of Washington, Providence Health, Costco, Boeing, Nordstrom, Amazon.com, Starbucks, Alaska Air Group and Weyerhaeuser.

Economic conditions in our markets, and the U.S. as a whole, have been negatively impacted by inflation and the rising interest rate environment, partially offset by the continued trend of low unemployment rates. Recent trends in housing prices in our market areas reflect the impact rising interest rates have had on housing prices. For December 2022, the preliminary Seattle MSA reported an unemployment rate of 3.4%, compared to the national average of 3.3%, according to the latest available information from the Bureau of Labor Statistics. Home prices in our markets decreased over the past year. Based on information from Case-Shiller, the average home price in the Seattle MSA decreased 1.8% in 2022.

King County has the largest population of any county in the state of Washington with approximately 2.2 million residents and a median household income of approximately $108 thousand. Based on information from the Northwest Multiple Listing Service ("MLS"), the median home sales price in King County in December 2022 was $815 thousand, an 9% increase from December 2021's median home sales price of $750 thousand.

Pierce County has approximately 910,225 residents and a median household income of approximately $86 thousand. Based on information from the MLS, the median home sales price in Pierce County in December 2022 was $545 thousand, a 9% increase from December 2021's median home sales price of $500 thousand.

Snohomish County has approximately 820,024 residents and a median household income of approximately $100 thousand. Based on information from the MLS, the median home sales price in Snohomish County at December 2022 was $730 thousand, an 12% increase from December 2021's median home sales price of $650 thousand.

Clallam County, with a population of approximately 76,727, has a median household income of approximately $63 thousand. The economy of Clallam County is primarily manufacturing and shipping. The Sequim Dungeness Valley continues to be a growing retirement location. Based on information from the MLS, the median home sales price in Clallam County in December 2022 was $446 thousand, an 8% increase from December 2021's median home sales price of $413 thousand.

Jefferson County, with a population of approximately 32,590, has a median household income of approximately $62 thousand. Based on information from the MLS, the average home sales price in Jefferson County in December 2022 was $608 thousand, a 13% increase from December 2021's median home sales price of $538 thousand.

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Lending Activities

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


	December 31,
	2022				2021
	Amount		Percent		Amount		Percent
Real estate loans:
One-to-four family	$	274,638	31.6	%	$	207,660	30.2	%
Home equity	19,548		2.3		13,250		1.9
Commercial and multifamily	313,358		36.1		278,175		40.4
Construction and land	116,878		13.5		63,105		9.2
Total real estate loans	724,422		83.5		562,190		81.7
Consumer loans:
Manufactured homes	26,953		3.1		21,636		3.1
Floating homes	74,443		8.6		59,268		8.7
Other consumer	17,923		2.1		16,748		2.4
Total consumer loans	119,319		13.8		97,652		14.2
Commercial business loans	23,815		2.7		28,026		4.1
Total loans	867,556		100.0	%	687,868		100.0	%
Less:
Premiums	973				897
Deferred fees and discounts	(2,548)				(2,367)
Allowance for loan losses	(7,599)				(6,306)
Total loans, net	$	858,382			$	680,092

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


	December 31,
	2022				2021
	Amount		Percent		Amount		Percent
Fixed-rate loans:
Real estate loans:
One-to-four family	$	181,615	20.9	%	$	140,943	20.5	%
Home equity	7,580		0.9		4,460		0.6
Commercial and multifamily	101,566		11.7		91,553		13.3
Construction and land	29,260		3.4		18,074		2.6
Total real estate loans	320,021		36.9		255,030		37.1
Consumer loans:
Manufactured homes	26,953		3.1		21,636		3.1
Floating homes	66,336		7.6		53,953		7.8
Other consumer	17,603		2.0		16,444		2.4
Total consumer loans	110,892		12.8		92,033		13.4
Commercial business loans	8,631		1.0		11,891		1.7
Total fixed-rate loans	439,544		50.7		358,954		52.2
Adjustable-rate loans:
Real estate loans:
One-to-four family	93,023		10.7		66,717		9.7
Home equity	11,968		1.4		8,790		1.3
Commercial and multifamily	211,792		24.4		186,622		27.1
Construction and land	87,618		10.1		45,031		6.5
Total real estate loans	404,401		46.6		307,160		44.7
Consumer loans:
Floating homes	8,107		0.9		5,315		0.8
Other consumer	320		—		304		—
Total consumer loans	8,427		1.0		5,619		0.8
Commercial business loans	15,184		1.8		16,135		2.3
Total adjustable-rate loans	428,012		49.3		328,914		47.8
Total loans	867,556		100.0	%	687,868		100.0	%
Less:
Premiums	973				897
Deferred fees and discounts	(2,548)				(2,367)
Allowance for loan losses	(7,599)				(6,306)
Total loans, net	$	858,382			$	680,092

At December 31, 2022 and 2021, we had floating or variable rate loans totaling $428.0 million and $328.9 million, respectively. At December 31, 2022, a total of $294.1 million of our floating or variable rate loans had interest rate floors below which the loan's contractual interest rate may not adjust, of which $145.6 million were at their floors.

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Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2022, regarding the amount of total loans in our portfolio based on their contractual terms to maturity (in thousands). The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.


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

Real estate loans:
One-to-four family	$	4,377	$	12,500	$	20,194	$	237,567	$	274,638
Home equity	917		498		3,504		14,629		19,548
Commercial and multifamily	20,789		94,672		175,485		22,412		313,358
Construction and land	50,646		31,239		34,509		484		116,878
Total real estate loans	76,729		138,909		233,692		275,092		724,422
Consumer loans:
Manufactured homes	45		542		12,673		13,693		26,953
Floating homes	278		5,920		10,556		57,689		74,443
Other consumer	368		7,712		5,020		4,823		17,923
Total consumer loans	691		14,174		28,249		76,205		119,319
Commercial business loans	8,030		9,737		6,048		—		23,815
Total	$	85,450	$	162,820	$	267,989	$	351,297	$	867,556

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


	Fixed-Rate		Adjustable-Rate		Total

Real estate loans:
One-to-four family	$	177,238	$	93,023	$	270,261
Home equity	6,723		11,908		18,631
Commercial and multifamily	86,732		205,837		292,569
Construction and land	20,596		45,636		66,232
Total real estate loans	291,289		356,404		647,693
Consumer loans:
Manufactured homes	26,908		—		26,908
Floating homes	66,058		8,107		74,165
Other consumer	17,246		309		17,555
Total consumer loans	110,212		8,416		118,628
Commercial business loans	7,455		8,330		15,785
Total	$	408,956	$	373,150	$	782,106

Lending Authority. Our President and Chief Executive Officer ("CEO") may approve unsecured loans up to $1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $6.9 million at December 31, 2022. Our Senior Vice President and Chief Credit Officer ("CCO") may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $3.5 million at December 31, 2022. The Chief Banking Offer may approve unsecured loans up to $50,000 and all types of secured loans up to approximately $1.5 million at December 31, 2022. The Chief Financial/Strategy Officer may approve unsecured loans up to $400,000 and all types of secured loans up to approximately $2.5 million at December 31, 2022. Any loans over the CEO's lending authority or loans significantly outside our general underwriting

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guidelines must be approved by the Management Loan Committee and approved loans are subsequently reviewed by the Board of Directors Loan Committee, consisting of four independent directors, and the CEO. Lending authority is also granted to certain other lending staff at lower amounts.

Largest Borrowing Relationships. At December 31, 2022, the maximum amount under federal law that we could lend to any one borrower and the borrower's related entities was approximately $23.0 million. Our five largest relationships (including unused commitments) totaled $88.9 million in the aggregate, or 10.3% of our $867.6 million total loan portfolio, at December 31, 2022. At December 31, 2022, the largest lending relationship totaled $19.4 million and consisted of two loans to a business, a construction and land loan totaling $17.5 million, of which $13.2 million remained unfunded at December 31, 2022, and a $1.9 million commercial real estate loan. The second largest relationship totaled $18.2 million and consisted of one construction loan, of which $5.1 million remained unfunded at December 31, 2022, secured by a multifamily real estate property being renovated. The third largest relationship totaled $17.8 million and consisted of three loans to a business totaling $11.5 million collateralized by multifamily and commercial real estate, and two loans to a business with related guarantors totaling $6.3 million, both collateralized by multifamily real estate. The fourth largest relationship totaled $17.0 million and consisted of two loans for the construction of a housing development of one-to-four family homes, of which $7.0 million remained unfunded at December 31, 2022. The fifth largest borrowing relationship totaled $16.6 million, of which $2.3 million remained unfunded at December 31, 2022, and consisted of six loans to four businesses, all with related guarantors, collateralized by one-to-four family homes, commercial real estate, and one-to-four family construction properties. At December 31, 2022, we had 15 additional lending relationships in excess of $7.0 million each, totaling $161.9 million. All of the foregoing loans were performing in accordance with their repayment terms at December 31, 2022.

One-to-Four Family Real Estate Lending. One of our primary lending activities is the origination of loans secured by first mortgages on one-to-four family residences, substantially all of which are secured by properties located in our geographic lending area. We originate both fixed-rate and adjustable-rate loans. During 2022, our fixed-rate, one-to-four family loan originations decreased $143.0 million, or 63.2%, to $83.1 million compared to $226.1 million in 2021, while one-to-four family adjustable-rate loan originations increased $24.8 million, or 139.4% to $42.5 million compared to $17.8 million in 2021. Since 2019, we identified demand in the marketplace for one-to-four family, residential fixed-rate mortgage loans, especially jumbo loans (generally loans above the conforming Fannie Mae limits of $647,200 or $970,800, depending on location within our market area). At December 31, 2022, our average loan amount was $716 thousand for adjustable-rate, one-to-four family mortgages.

Most of our loans are underwritten using generally accepted secondary market underwriting guidelines. A portion of the one-to-four family loans we originate are retained in our portfolio and the remaining loans are sold into the secondary market to Fannie Mae or other private investors. Loans that are sold into the secondary market to Fannie Mae are sold with the servicing retained to maintain the client relationship and to generate noninterest income. We also originate a small portion of government guaranteed and jumbo loans for sale servicing released to certain correspondent purchasers. The sale of mortgage loans provides a source of non-interest income through the gain on sale, reduces our interest-rate risk, provides a stream of servicing income, enhances liquidity and enables us to originate more loans at our current capital level than if we held the loans in our loan portfolio. At December 31, 2022, one-to-four family residential mortgage loans (excluding loans held-for-sale) totaled $274.6 million, or 31.6%, of our gross loan portfolio, of which $181.6 million were fixed-rate loans and $93.0 million were adjustable-rate loans, compared to $207.7 million (excluding loans held-for-sale), or 30.2% of our gross loan portfolio at December 31, 2021, of which $140.9 million were fixed-rate loans and $66.7 million were adjustable-rate loans.

Substantially all of the one-to-four family residential mortgage loans we retain in our portfolio consist of loans that do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Fannie Mae or private investors. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Fannie Mae credit requirements because of personal and financial reasons (i.e., bankruptcy, length of time employed, etc.), and other aspects, which do not conform to Fannie Mae's guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. 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. At December 31, 2022, $162.6 million or 59.2% of our one-to-four family loan portfolio consisted of jumbo loans.

We generally underwrite our one-to-four family loans based on the applicant's employment and credit history and the appraised value of the subject property. We generally lend up to 80% of the lesser of the appraised value or purchase price for one-to-four family first mortgage loans and nonowner-occupied first mortgage loans. For first mortgage loans with a loan-to-value ratio in excess of 80%, we may require private mortgage insurance or other credit enhancement to help mitigate credit risk. Properties securing our one-to-four family loans are typically appraised by independent fee appraisers who are selected in accordance with

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criteria approved by the Loan Committee. For loans that are less than $250 thousand, we may use an automated valuation model, in lieu of an appraisal. We require title insurance policies on all first mortgage real estate loans originated. Homeowners, liability, fire and, if required, flood insurance policies are also required for one-to-four family loans. Our real estate loans generally contain a "due on sale" clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property. The average balance of our one-to-four family residential loans was approximately $478 thousand at December 31, 2022.

Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30 years. All of these loans are fully amortizing, with payments due monthly. At December 31, 2022, our portfolio of fixed-rate loans also included $582 thousand of one-to-four family loans with a five-year call option.

Adjustable-rate loans are offered with annual adjustments and lifetime rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%. We generally use the rate on one-year LIBOR and 30-day secured overnight financing rate (“SOFR”), to re-price our adjustable-rate loans, however, $9.5 million of our adjustable-rate loans are to employees and directors that re-price annually based on a margin of 1%-1.50% over our average 12-month cost of funds. As a consequence of using annual adjustments and lifetime caps, the interest rates on adjustable-rate loans may not be as rate sensitive as our cost of funds. Furthermore, because loan indices may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates. Because of these characteristics, future yields on adjustable-rate loans may not be sufficient to offset increases in our cost of funds.

We continue to offer our fully amortizing adjustable-rate loans with a fixed interest rate for the first one, three, five or seven years, followed by a periodic adjustable interest rate for the remaining term. Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments. Moreover, the interest rates on most of our adjustable-rate loans do not adjust within the next year and may not adjust for up to ten years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.

At December 31, 2022, $30.9 million, or 11.3% of our one-to-four family residential portfolio consisted of nonowner-occupied loans, compared to $25.8 million, or 12.4% of our one-to-four family residential portfolio at December 31, 2021. At December 31, 2022, our average nonowner-occupied residential loan had a balance of $391 thousand. Loans secured by rental properties represent potentially higher risk. As a result, we adhere to more stringent underwriting guidelines which may include, but are not limited to, annual financial statements, a budget factoring in a rental income, cash flow analysis of the borrower as well as the net operating income of the property, information concerning the borrower’s expertise, credit history and profitability, and the value of the underlying property. In addition, these loans are generally secured by a first mortgage on the underlying collateral property along with an assignment of rents and leases. Of primary concern in nonowner-occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties may depend primarily on the tenants’ continuing ability to pay rent to the property owner, the character of the 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. In addition, successful operation and management of nonowner-occupied properties, including property maintenance standards, may affect repayment. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the borrower has multiple rental property loans with us, the loans are typically not cross collateralized.

In 2016, in order to enable individuals to secure the purchase of a new residence before selling their existing residence, we commenced a loan program designed to allow borrowers to access the equity in their current residence to apply towards the purchase of a new residence. The loan or loans to purchase the new residence are generally originated in an amount in excess of $1.0 million and secured by the borrower's existing and/or new residences, with a maximum combined loan-to-value ratio of up to 80%. These loans provide for repayment upon the earlier of the sale of the current residence or the loan maturity date, which is typically up to 12 months. Upon the sale of the borrower's current residence, we may refinance the new residence using our traditional jumbo mortgage loan underwriting guidelines. During 2022, we originated $6.9 million of loans under this program, compared to $3.4 million in 2021. At December 31, 2022, we had $1.3 million of these interest-only residential loans in our one-to-four family residential mortgage loan portfolio.

The primary focus of our underwriting guidelines for interest-only residential loans is on the value of the collateral rather than the ability of the borrower to repay the loan. As a result, this type of lending exposes us to an increased risk of loss due to the larger loan balance and our inability to sell them to Fannie Mae, similar to the risks associated with jumbo one-to-four family

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

Home Equity Lending. We originate home equity loans that consist of fixed-rate, fully-amortizing loans and variable-rate lines of credit. We typically originate home equity loans in amounts of up to 90% of the value of the collateral, minus any senior liens on the property; however, prior to 2010 we originated home equity loans in amounts of up to 100% of the value of the collateral, minus any senior liens on the property. Home equity lines of credit are typically originated for up to $250,000 with an adjustable rate of interest, based on the one-year Treasury Bill rate or the Wall Street Journal Prime rate, plus a margin. Home equity lines of credit generally have a three-, five- or 12-year draw period, during which time the funds may be paid down and redrawn up to the committed amount. Once the draw period has lapsed, the payment is amortized over either a 12-, 19- or 21-year period based on the loan balance at that time. We charge a $50 annual fee on each home equity line of credit and require monthly interest-only payments on the entire amount drawn during the draw period. At December 31, 2022, home equity loans totaled $19.5 million, or 2.3% of our total loan portfolio, compared to $13.3 million, or 1.9% of our total loan portfolio at December 31, 2021. Adjustable-rate home equity lines of credit at December 31, 2022 totaled $12.0 million, or 1.4% of our total loan portfolio, compared to $8.8 million, or 1.3% of our total loan portfolio at December 31, 2021. At December 31, 2022, unfunded commitments on home equity lines of credit totaled $17.4 million.

Our fixed-rate home equity loans generally have terms of up to 20 years and are fully amortizing. At December 31, 2022, fixed-rate home equity loans totaled $7.6 million, or 0.9% of our gross loan portfolio, compared to $4.5 million, or 0.6% of our total loan portfolio at December 31, 2021.

Commercial and Multifamily Real Estate Lending. We offer a variety of commercial and multifamily real estate loans. Most of these loans are secured by owner-occupied and nonowner-occupied commercial income producing properties, apartment buildings, warehouses, office buildings, gas station/convenience stores and mobile home parks located in our market area. At December 31, 2022, commercial and multifamily real estate loans totaled $313.4 million, or 36.1% of our total loan portfolio, compared to $278.2 million, or 40.4% of our total loan portfolio at December 31, 2021.

Loans secured by commercial and multifamily real estate are generally originated with a variable interest rate, fixed for an initial three- to ten-year term and have a 20- to 25-year amortization period. At the end of the initial term, the balance is due in full or the loan re-prices based on an independent index plus a margin over the applicable index of 1% to 4% for another five years. Loan-to-value ratios on our commercial and multifamily real estate loans typically do not exceed 80% of the lower of cost or appraised value of the property securing the loan at origination.

Loans secured by commercial and multifamily real estate are generally underwritten based on the net operating income of the property, quality and location of the real estate, the credit history and financial strength of the borrower and the quality of management involved with the property. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement. We generally impose a minimum debt service coverage ratio of 1.20 for originated loans secured by income producing commercial properties. If the borrower is not an individual, we typically require the personal guaranties of the principal owners of the borrowing entity. We also generally require an assignment of rents in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing commercial and multifamily real estate loans are performed by independent state certified licensed fee appraisers. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide annual financial information. We also from time to time acquire participation interests in commercial and multifamily real estate loans originated by other financial institutions secured by properties located in our market area.

Historically, loans secured by commercial and multifamily properties generally present different credit risks than one-to-four family properties. These loans typically involve larger balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial and multifamily properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. Repayments of loans secured by nonowner-occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. 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. Commercial and multifamily real estate loans also expose a lender to greater credit risk than loans secured by one-to-four family because the collateral securing these loans typically cannot be sold as easily as one-to-four family collateral. In addition, most of our commercial and multifamily real estate loans are not fully amortizing and include balloon payments upon maturity. Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. The largest single commercial and multifamily real estate loan at December 31, 2022, totaled $11.8

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million and was collateralized by a storage facility. At December 31, 2022, this loan was performing in accordance with its repayment terms.

The following table provides information on commercial and multifamily real estate loans by type at December 31, 2022 and 2021 (dollars in thousands):


	December 31,
	2022				2021
	Amount		Percent		Amount		Percent
Multifamily residential	$	100,298	32.0	%	$	71,834	25.8	%
Owner-occupied commercial real estate retail	7,799		2.5		9,636		3.5
Owner-occupied commercial real estate office buildings	16,893		5.4		25,463		9.2
Owner-occupied commercial real estate other (1)	23,629		7.5		16,857		6.1
Non-owner occupied commercial real estate retail	12,012		3.8		8,000		2.9
Non-owner occupied commercial real estate office buildings	8,149		2.6		14,898		5.4
Non-owner occupied commercial real estate other (1)	111,550		35.6		104,606		37.6
Warehouses	12,742		4.1		9,489		3.4
Gas station/Convenience store	12,198		3.9		11,864		4.3
Mobile Home Parks	4,598		1.5		5,528		2.0
Government guaranteed	3,491		1.1		—		—
Total	$	313,358	100.0	%	$	278,175	100.0	%

(1)Other commercial real estate loans include schools, churches, storage facilities, restaurants, etc.

Construction and Land Lending. We originate construction loans secured by single-family residences and commercial and multifamily real estate. We also originate land acquisition and development loans, which are secured by raw land or developed lots on which the borrower intends to build a residence, or a commercial or multifamily property. At December 31, 2022, our construction and land loans totaled $116.9 million, or 13.5% of our total loan portfolio, compared to $63.1 million, or 9.2% of our total loan portfolio at December 31, 2021. At December 31, 2022, unfunded construction loan commitments totaled $65.1 million.

Construction loans to individuals and contractors for the construction of personal residences, including speculative residential construction, totaled $15.3 million, or 13.1%, of our construction and land portfolio at December 31, 2022. In addition to custom home construction loans to individuals, we originate loans that are termed "speculative" which are those loans where the builder does not have, at the time of loan origination, a signed contract with a buyer for the home or lot who has a commitment for permanent financing with either us or another lender. At December 31, 2022, construction loans to contractors for homes that were considered speculative totaled $8.1 million, or 6.9%, of our construction and land loan portfolio. The composition of, and location of underlying collateral securing, our construction and land loan portfolio, excluding loan commitments, at December 31, 2022 was as follows (in thousands):


	Total
Commercial and multifamily construction	$	85,747
Speculative residential construction	8,095
Land acquisition and development and lot loans	15,642
Residential lot loans	187
Residential construction	7,206
Total	$	116,878

Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically twelve to eighteen months. At the end of the construction phase, the construction loan generally either converts to a longer-term mortgage loan or is paid off with a permanent loan from another lender. Residential construction loans are made up to the lesser of a maximum loan-to-value ratio of 100% of cost or 80% of appraised value at completion; however, we generally do not originate construction loans which exceed these limits without some form of credit enhancement to mitigate the higher loan to value.

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At December 31, 2022, our largest residential construction loan commitment was for $3.5 million, $1.5 million of which had been disbursed. This loan was performing according to its repayment terms at December 31, 2022. The average outstanding residential construction loan balance was approximately $379 thousand at December 31, 2022. Before making a commitment to fund a construction loan, we require an appraisal of the subject property by an independent approved appraiser. During the construction phase, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Loan proceeds are disbursed after inspection based on the percentage of completion method. We also require general liability, builder's risk hazard insurance, title insurance, and flood insurance, for properties located in or to be built in a designated flood hazard area, on all construction loans.

We also originate developed lot and raw land loans to individuals intending to construct a residence in the future on the property. We will generally originate these loans in an amount up to 75% of the lower of the purchase price or appraisal. These lot and land loans are secured by a first lien on the property and have a fixed rate of interest with a maximum amortization of 20 years.

We make land acquisition and development loans to experienced builders or residential lot developers in our market area. The maximum loan-to-value limit applicable to these loans is generally 75% of the appraised market value upon completion of the project. We may not require cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required prior to making the loan. Our loan officers visit the proposed site of the development and the sites of competing developments. We require that developers maintain adequate insurance coverage. 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 loan proceeds are disbursed periodically in increments as construction progresses and as an inspection by our approved inspector warrants. We also require these loans to be paid on an accelerated basis as the lots are sold, so that we are repaid before all the lots are sold. At December 31, 2022, land acquisition and development and lot loans totaled $15.6 million, or 13.4% of our construction and land portfolio.

We also offer commercial and multifamily construction loans. These loans are underwritten as interest only with financing typically up to 24 months under terms similar to our residential construction loans. Commercial and multifamily construction loans are made up to the lesser of a maximum loan-to-value ratio of 100% of cost or 80% of appraised value at completion. Most of our commercial and multifamily construction loans provide for disbursement of loan funds during the construction period and conversion to a permanent loan when the construction is complete and either tenant lease-up provisions or prescribed debt service coverage ratios are met. At December 31, 2022, commercial and multifamily construction loans totaled $85.7 million or 73.4% of our construction and land portfolio, compared to $40.6 million, or 64.4% of our construction and land portfolio at December 31, 2021. The three largest commercial and multifamily construction loans at December 31, 2022 included a $13.1 million loan secured by the renovation of a multifamily real estate property, an $8.2 million loan secured by construction of a multifamily real estate property and a $7.3 million loan secured by a townhome development, located in Pierce and King Counties, Washington. At December 31, 2022, all of these loans were performing in accordance with their repayment terms.

Our construction and land development loans are based upon estimates of costs in relation to values associated with the completed project. Construction and land lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes in demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of our builders have more than one loan outstanding with us and have residential mortgage loans for rental properties with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.

In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more

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difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction may be difficult to sell and typically must be completed in order to be successfully sold, which also complicates the process of resolving problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project. Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly impacted by supply and demand conditions. A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

Commercial Business Lending. At December 31, 2022, commercial business loans totaled $23.8 million, or 2.7% of our total loan portfolio, compared to $28.0 million, or 4.1% of our total loan portfolio at December 31, 2021. Substantially all of our commercial business loans have been to borrowers in our market area. Our commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance commercial vehicles and equipment and loans secured by accounts receivable and/or inventory. Our commercial business lending policy includes an analysis of the borrower's background, capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of our credit analysis. We generally require personal guarantees on both our secured and unsecured commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage and commercial real estate loans. At December 31, 2022, approximately $1.7 million of our commercial business loans were unsecured.

Our interest rates on commercial business loans are dependent on the type of loan. Our secured commercial business loans typically have a loan-to-value ratio of up to 80% and are term loans ranging from three to seven years. Secured commercial business term loans generally have a fixed interest rate based on the commensurate FHLB amortizing rate or prime rate as reported in the West Coast edition of the Wall Street Journal plus 1% to 3%. In addition, we typically charge loan fees of 1% to 2% of the principal amount at origination, depending on the credit quality and account relationships of the borrower. Business lines of credit are usually adjustable rate and are based on the prime rate plus 1% to 3%, and are generally originated with both a floor and ceiling to the interest rate. Our business lines of credit generally have terms ranging from 12 months to 24 months and provide for interest-only monthly payments during the term.

Our commercial business loans are primarily based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. This collateral may consist of accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the specific type of business and equipment. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself which, in turn, is often dependent in part upon general economic conditions.

Consumer Lending. We offer a variety of secured and unsecured consumer loans, including new and used manufactured homes, floating homes, automobiles, boats and recreational vehicle loans, and loans secured by deposit accounts. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market area. All of our consumer loans are originated on a direct basis. At December 31, 2022, our consumer loans totaled $119.3 million, or 13.8% of our total loan portfolio, compared to $97.7 million, or 14.2% of our total loan portfolio at December 31, 2021.

We typically originate new and used manufactured home loans to borrowers who intend to use the home as a primary residence. The yields on these loans are higher than that on our other residential lending products and the portfolio has performed reasonably well with an acceptable level of risk and loss in exchange for the higher yield. Our weighted-average yield on manufactured home loans at December 31, 2022 was 8.36%, compared to 3.70% for one-to-four family mortgages, excluding loans held-for-sale. At December 31, 2022, manufactured home loans totaled $27.0 million, or 22.6% of our consumer loans and 3.1% of our total loan portfolio. For both new and used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years. We generally charge a 1% fee at origination. We underwrite these loans based on our review of creditworthiness of the borrower, including credit scores, and the value of the collateral, in which we hold a security interest.

Manufactured home loans are higher risk than loans secured by residential real property, though this risk may be reduced if the owner also owns the land on which the home is located. A small portion of our manufactured home loans involve properties on which we also have financed the land for the owner. The primary risk in manufactured home loans is the difficulty in obtaining adequate value for the collateral due to the cost and limited ability to move the collateral. These loans tend to be made to retired

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individuals and first-time homebuyers. First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources. As a result, these loans may have a higher probability of default and higher delinquency rates than single-family residential loans and other types of consumer loans. We take into account this additional risk as a component of our allowance for loan losses. We attempt to work out delinquent loans with the borrower and, if that is not successful, any past due manufactured homes are repossessed and sold. At December 31, 2022, there were three nonperforming manufactured home loans totaling $96 thousand.

We originate floating home, houseboat and house barge loans, typically located on cooperative or condominium moorages. Terms vary from five to 30 years and generally have a fixed rate of interest. We lend up to 90% of the lesser of the appraised value or purchase price. 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. As a result, these loans may have higher collateral recovery costs than for one-to-four family mortgage loans and other types of consumer loans. We take into account these additional risks as a part of our underwriting criteria. At December 31, 2022, floating home loans totaled $74.4 million, or 62.4% of our consumer loan portfolio and 8.6% of our total loan portfolio. At December 31, 2022, the average principal balance of our floating home loans was $702 thousand. At December 31, 2022, house barge loans totaled $10.7 million, or 9.0% of our consumer loan portfolio and 1.2% of our total loan portfolio.

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

Consumer loans (other than our manufactured and floating homes) generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing client base by increasing the number of client relationships and providing additional marketing opportunities.

Consumer loans generally entail greater risk than do one-to-four family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as manufactured homes, automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower's continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Loan Originations, Purchases, Sales, Repayments and Servicing

We originate both fixed-rate and adjustable-rate loans. Our ability to originate loans, however, is dependent upon client demand for loans in our market area. Over the past several years, we have continued to originate residential and consumer loans, and increased our emphasis on commercial and multifamily real estate, construction and land, and commercial business lending. Demand is affected by competition and the interest-rate environment. During the past few years, we, like many other financial institutions, have experienced significant prepayments on loans due to the prevailing low interest-rate environment in the U.S. In periods of economic uncertainty, the ability of financial institutions, including us, to originate large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in interest income. If a proposed loan exceeds our internal lending limits, we may originate the loan on a participation basis with another financial institution. We also, from time to time, purchase loans from or participate with other financial institutions on loans they originate. We underwrite loan purchases and participations to the same standards as internally originated loans. We did not sell any commercial loan participations in 2022 or 2021. We had $2.6 million in purchases of commercial business loan participations from other financial institutions in 2022 and $4.3 million in 2021.

We originate loans that may meet one or more of the credit characteristics commonly associated with subprime lending. The term ‘subprime’ refers to the credit characteristics of individual borrowers which may include payment delinquencies, judgements, foreclosures, bankruptcies, low credit scores and/or high debt-to-income ratios. In exchange for the additional risk we take with such borrowers, we may require them to pay higher interest rates, require a lower debt-to-income ratio or require other enhancements to manage the additional risk. While no single credit characteristic defines a subprime loan, one commonly used indicator is a loan originated to a borrower with a credit score of 660 or lower. Of the $125.6 million in one-to-four-family loans originated in 2022, $753 thousand or 0.6% were to borrowers with a credit score under 660. Additionally, of the $9.6 million in manufactured home loans originated in 2022, $352 thousand or 3.7% were to borrowers with a credit score of 660 or lower. At December 31, 2022, the total amount of residential and consumer loans held in our loan portfolio to borrowers with a credit score of 660 or lower were $16.2 million. We generally do not originate or purchase negative amortization or option adjustable-rate loans.

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

We also sell whole one-to-four family loans without recourse to Fannie Mae and other investors, subject to a provision for repurchase upon breach of representation, warranty or covenant. These loans are fixed-rate mortgages, which primarily are sold to reduce our interest-rate risk and generate noninterest income. These loans are generally sold for cash in amounts equal to the unpaid principal amount of the loans determined using present value yields to the buyer. These sales allow for a servicing fee on loans when the servicing is retained by us. Most one-to-four family loans are sold with servicing retained. At December 31, 2022, we were servicing a $470.3 million portfolio of residential mortgage loans for Fannie Mae and $2.2 million for other investors. These mortgage servicing rights are carried at fair value and had a value at December 31, 2022 of $4.7 million. We earned mortgage servicing income of $1.2 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively. See “Note 6 — Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K. We repurchased no loans in 2022 and one loan totaling $284 thousand in 2021.

Sales of whole real estate loans are beneficial to us since these sales may generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending, and increase liquidity. We sold $20.3 million and $147.4 million of conforming one-to-four family loans during the year ended December 31, 2022 and 2021, respectively. Gains, losses and transfer fees on sales of one-to-four family loans and participations are recognized at the time of the sale. Our net gains on sales of residential loans for the years ended December 31, 2022 and 2021 were $546 thousand and $4.2 million, respectively. In addition to loans sold to Fannie Mae and others on a servicing retained basis, we also sell nonconforming residential loans to correspondent banks on a servicing released basis. During the year ended December 31, 2022, we sold $636 thousand of loans with servicing released and sold none during the year ended December 31, 2021.

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


	Year Ended December 31,
	2022		2021
Originations by type:
Fixed-rate:
One-to-four family	$	83,122	$	226,125
Home equity	3,770		1,785
Commercial and multifamily	28,827		24,338
Construction and land	6,344		28,313
Manufactured homes	9,590		6,302
Floating homes	18,282		29,226
Other consumer	3,055		5,668
Commercial business	701		27,129
Total fixed-rate	153,691		348,886
Adjustable rate:
One-to-four family	42,513		17,760
Home equity	7,024		8,021
Commercial and multifamily	54,218		58,371
Construction and land	46,483		65,623
Floating homes	3,945		2,879
Other consumer	58		105
Commercial business	256		36,812
Total adjustable-rate	154,497		189,571
Total loans originated	308,188		538,457
Purchases by type:
One-to-four family	—		24,067
Commercial business participations	2,556		4,298
Total loan participations purchased	2,556		28,365
Sales, repayments and participations sold:
One-to-four family	20,274		147,436
Commercial and multifamily	636		1,975
Total loans sold and loan participations	20,910		149,411
Transfers to OREO	—		84
Total principal repayments	113,345		344,932
Total reductions	134,255		494,427
Net increase in loans	$	176,489	$	72,395

The decrease in total loan originations in 2022 compared to 2021 was primarily due to slowing levels of loan activity in nearly all loan categories, partially offset by a decrease in loan sales and paydowns. Demand for one-to-four family loans slowed in 2022 as homeowners, taking advantage of historically low interest rates in prior years, refinanced their homes to lower rates. Additionally, with the rising interest rate environment, the pace of new home loans declined. While the demand for single-family homes remains high, supply of homes available for sale, coupled with the rising rate environment, slowed the ability to purchase. While the demand for construction loans, including new homes and apartment buildings continued to increase in 2022 due to appreciation in market prices, declining supplies of homes for sale and continued strong rental demand in our market area, some borrowers are being priced out of the market as a result of the rising interest rate environment causing a decline in construction loans originated. Commercial business loans decreased due to U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan originations in the prior year. The SBA PPP expired on May 31, 2021.

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Asset Quality

When a borrower fails to make a required payment on a one-to-four family loan, we attempt to cure the delinquency by contacting the borrower. In the case of loans secured by a one-to-four family property, a late notice typically is sent 15 days after the due date. Generally, a pre-foreclosure loss mitigation letter is also mailed to the borrower 30 days after the due date. All delinquent accounts are reviewed by a loan officer or branch manager who attempts to cure the delinquency by contacting the borrower. If the account becomes 120 days delinquent and an acceptable foreclosure alternative has not been agreed upon, we generally refer the account to legal counsel with instructions to prepare a notice of default. The notice of default begins the foreclosure process. 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. Our procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and the determination by us that it would be beneficial from a cost basis.

Once a loan is 90 days past due, it is classified as nonaccrual. Generally, delinquent consumer loans are charged-off at 120 days past due, unless we have a reasonable basis to justify additional collection and recovery efforts.

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


	Loans Delinquent For:
	30-89 Days					90 Days and Over					Total Delinquent Loans
	Number	Amount		Percent of Loan Category		Number	Amount		Percent of Loan Category		Number	Amount		Percent of Loan Category
One-to-four family	7	$	682	0.2	%	7	$	1,934	0.7	%	14	$	2,616	1.0	%
Home equity	2	115		0.6		3	116		0.6		5	231		1.2
Commercial and Multifamily	2	7,198		2.3		—	—		—		2	7,198		2.3
Construction and land	4	1,210		1.0		1	296		0.3		5	1,506		1.3
Manufactured homes	10	416		1.5		2	52		0.2		12	468		1.7
Floating homes	—	—		—		—	—		—		—	—		—
Other consumer	19	365		2.0		—	—		—		19	365		2.0
Commercial Business	1	4		—		—	—		—		1	4		—
Total	45	$	9,991	1.2	%	13	$	2,398	0.3	%	58	$	12,389	1.4	%

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Nonperforming Assets. The table below sets forth the amounts and categories of nonperforming assets in our loan portfolio (in thousands). Loans are placed on nonaccrual status when the collection of principal and/or interest become doubtful or when the loan is more than 90 days past due. Other real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.


	December 31,
	2022			2021
Nonaccrual loans (1):
One-to-four family	$	2,135		$	2,207
Home equity	142			140
Commercial and multifamily	—			2,380
Construction and land	324			33
Manufactured homes	96			122
Floating homes	—			493
Other consumer	262			—
Commercial business	—			176
Total nonaccrual loans	2,959			5,552
OREO and repossessed assets:
One-to-four family	84			84
Commercial and multifamily	575			575

Total OREO and repossessed assets	659			659
Total nonperforming assets	$	3,618		$	6,211
Nonperforming assets as a percentage of total assets	0.37		%	0.68		%
Performing restructured loans:
One-to-four family	$	1,610		$	1,859
Home equity	68			75

Construction and land	34			35
Manufactured homes	92			99

Other consumer	81			106

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

(1)Nonaccrual loans include $103 thousand and $422 thousand in nonperforming troubled debt restructurings (“TDRs”) at December 31, 2022 and 2021, respectively. We had no accruing loan 90 days or more delinquent for the periods reported.

Nonaccrual loans, including nonaccrual TDRs, decreased $2.6 million to $3.0 million at December 31, 2022 from $5.6 million at December 31, 2021, primarily due to the payoff of a $2.3 million nonperforming multifamily loan during the third quarter of 2022. Our largest nonperforming loan relationship at December 31, 2022 consisted of three one-to-four family loans totaling $1.5 million, which were paid off in full subsequent to December 31, 2022. In addition, there were three manufactured home loans, four home equity loans, two construction and land loans, one other consumer loan, and six additional one-to-four family loans classified as nonperforming at December 31, 2022.

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

Troubled Debt Restructured Loans. TDRs, which are accounted for under Accounting Standards Codification (“ASC”) 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity. All TDRs are initially classified as impaired regardless of whether the loan was performing at the time it was restructured. At December 31, 2022, we had $1.9 million of loans that were classified as performing TDRs and still on accrual, compared to $2.2 million at December 31, 2021. Included in nonaccrual loans at December 31, 2022 and 2021 were nonaccrual TDRs of $103 thousand and $422 thousand, respectively.

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OREO and Repossessed Assets. OREO and repossessed assets include assets acquired in settlement of loans. At December 31, 2022, OREO and repossessed assets totaled $659 thousand. Our OREO at December 31, 2022, consisted of two properties. The first is a former bank branch property located in Port Angeles, Washington which was acquired in 2015 as a part of three branches purchased from another financial institution. It is currently leased to a local not-for-profit organization at a below-market rate. The second OREO property is a one-to-four family home located in Michigan.

Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

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 an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC and, since our conversion to a Washington-chartered commercial bank, the WDFI, which can order the establishment of additional loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. At December 31, 2022, special mention assets totaled $4.1 million.

We regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management's review of our assets, at December 31, 2022, we had classified $18.7 million of our assets as substandard, of which $18.1 million represented a variety of outstanding loans and $659 thousand represented the balance of our OREO and repossessed assets. At that date, we had no assets classified as doubtful or loss. This total amount of classified assets represented 19.2% of our equity capital and 1.9% of our assets at December 31, 2022. Classified assets totaled $14.8 million, or 15.9% of our equity capital and 1.6% of our assets at December 31, 2021.

Allowance for Loan Losses. We maintain an allowance for loan losses to absorb probable loan losses in the loan portfolio. The allowance is based on ongoing, monthly assessments of the estimated probable incurred losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Large groups of smaller balance homogeneous loans, such as one-to-four family, small commercial and multifamily real estate, home equity and consumer loans, including floating homes and manufactured homes, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions. More complex loans, such as commercial and multifamily real estate loans and commercial business loans are evaluated individually for impairment, primarily through the evaluation of the borrower's net operating income and available cash flow and their possible impact on collateral values.

At December 31, 2022, our allowance for loan losses was $7.6 million, or 0.88% of our total loan portfolio, compared to $6.3 million, or 0.92% of our total loan portfolio, at December 31, 2021. Specific valuation reserves totaled $184 thousand and $293 thousand at December 31, 2022 and 2021, respectively.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, properly reflects estimated probable loan losses inherent in our loan portfolio. 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. Financial Statements and Supplementary Data" of this report on Form 10-K.

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

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	December 31, 2022		December 31, 2021

Allowance for loan losses as a percentage of total loans outstanding at period end	0.88	%	0.92	%
Allowance for loan losses	7,599		6,306
Total loans outstanding	867,556		687,868

Nonaccrual loans as a percentage of total loans outstanding at period end	0.34	%	0.81	%
Total nonaccrual loans	2,959		5,552
Total loans outstanding	867,556		687,868

Allowance for loan losses as a percentage of nonaccrual loans at period end	256.81	%	113.58	%
Allowance for loan losses	7,599		6,306
Total nonaccrual loans	2,959		5,552

Net recoveries (charge-offs) during period to average loans outstanding:
One-to-four family:	0.04	%	(0.05)	%
Net recoveries (charge-offs)	99		(76)
Average loans outstanding	244,016		162,816

Home equity:	0.36	%	(0.01)	%
Net recoveries (charge-offs)	58		(2)
Average loans outstanding	16,139		14,343

Commercial and multifamily real estate:	—	%	—	%
Net (charge-offs) recoveries	—		—
Average loans outstanding	299,290		253,122

Construction and land:	—	%	—	%
Net (charge-offs) recoveries	—		—
Average loans outstanding	92,594		72,575

Manufactured homes:	0.05	%	—	%
Net recoveries	12		1
Average loans outstanding	23,737		21,067

Floating homes:	—	%	—	%
Net (charge-offs) recoveries	—		—
Average loans outstanding	66,026		46,784

Other consumer:	(0.57)	%	(0.29)	%
Net (charge-offs)	(101)		(44)
Average loans outstanding	17,651		15,500

Commercial business:	—	%	—	%
Net recoveries	—		2
Average loans outstanding	24,511		58,267

Total loans:	0.01	%	(0.02)	%
Net recoveries (charge-offs)	68		(119)
Average loans outstanding	783,963		644,473

Economic conditions in our markets, and the U.S. as a whole, were negatively impacted by inflation and the rising interest rate environment, partially offset by the continued trend of low unemployment rates. Recent trends in housing prices in our market areas reflect the impact rising interest rates have had on housing prices, although we continued to see strong demand for loans

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

The allowance for loan losses as a percentage of nonperforming loans was 256.81% and 113.58% at December 31, 2022 and 2021, respectively. The provision for loan losses totaled $1.2 million for the year ended December 31, 2022, compared to $425 thousand for the year ended December 31, 2021. Net recoveries were $68 thousand for the year ended December 31, 2022, compared to net charge-offs of $119 thousand for the year ended December 31, 2021.

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


	December 31,
	2022				2021
	Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans
Allocated at end of period to:
One-to-four family	$	1,771	31.6	%	$	1,402	30.2	%
Home equity	132		2.3		93		1.9
Commercial and multifamily	2,501		36.1		2,340		40.4
Construction and land	1,209		13.5		650		9.2
Manufactured homes	462		3.1		475		3.1
Floating homes	456		8.6		372		8.7
Other consumer	324		2.1		310		2.4
Commercial business	256		2.7		269		4.1
Unallocated	488		—		395		—
Total	$	7,599	100.0	%	$	6,306	100.0	%

Investment Activities

State chartered commercial banks have the authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, including callable agency securities, certain certificates of deposit of insured commercial banks and savings banks, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, state commercial banks may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that the institution is otherwise authorized to make directly. See "—How We Are Regulated—Sound Community Bank" for a discussion of additional restrictions on our investment activities.

Our CEO and Chief Financial Officer ("CFO") have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors. These officers consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest-rate risk. Our investment quality emphasizes safer investments with the yield on those investments secondary to not taking unnecessary risk with the available funds. See "Quantitative and Qualitative Disclosures About Market Risk" contained in Item 7A. of this report on Form 10-K for additional information about our interest-rate risk management.

At December 31, 2022, we owned $2.8 million of stock issued by the FHLB of Des Moines. As a condition of membership in the FHLB of Des Moines, we are required to purchase and hold a certain amount of FHLB stock.

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We review investment securities on an ongoing basis for the presence of other than temporary impairment (“OTTI”), taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI loss. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected.

Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and the fair value, is recognized as a charge to other comprehensive income. Impairment losses related to all other factors are presented as separate categories within other comprehensive income.

During the year ended December 31, 2022, we did not recognize any non-cash OTTI charges on our investment securities. At December 31, 2022, there were 16 securities in an unrealized loss position for less than 12 months, and three securities in an unrealized loss position for more than 12 months, although management determined the decline in value was not related to specific credit deterioration. We do not intend to sell these securities and it is more likely than not that we will not be required to sell any securities before anticipated recovery of the remaining amortized cost basis. We closely monitor our investment securities for changes in credit risk. The current market environment significantly limits our ability to mitigate our exposure to valuation changes in these securities by selling them. If market conditions deteriorate and we determine our holdings of these or other investment securities have OTTI losses, our future earnings, stockholders' equity, regulatory capital and continuing operations could be materially adversely affected.

See "Note 4—Investments" 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 additional information on our investments.

Sources of Funds

General. Our sources of funds are primarily deposits (including deposits from public entities), borrowings, payments of principal and interest on loans and investments and funds provided from operations.

Deposits. We offer a variety of deposit accounts to both consumers and businesses with a wide range of interest rates and terms. Our deposits consist of savings accounts, money market deposit accounts, NOW accounts, demand accounts and certificates of deposit. We solicit deposits primarily in our market area; however, at December 31, 2022, approximately 6.9% of our deposits were from persons outside the State of Washington. At December 31, 2022, core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250 thousand (excluding brokered deposits and public funds), represented approximately 92.2% of total deposits, compared to 94.6% at December 31, 2021. We did not have any brokered deposits at December 31, 2022 and 2021. We primarily rely on competitive pricing policies, marketing and client service to attract and retain these deposits and we expect to continue these practices in the future.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. We manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe that our deposits are relatively stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them is and will continue to be significantly affected by market conditions.

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


	Year Ended December 31,
	2022			2021
Opening balance	$	798,320		$	747,981
Net deposits	7,493			47,057
Interest credited	2,950			3,282
Ending balance	$	808,763		$	798,320
Net increase	$	10,443		$	50,339
Percent increase	1.3		%	6.7		%

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


	December 31,
	2022				2021
	Amount		Percent of total		Amount		Percent of total
Noninterest-bearing demand	$	170,549	21.1	%	$	187,684	23.5	%
Interest-bearing demand	254,982		31.5		307,061		38.5
Savings	95,641		11.8		103,401		13.0
Money market	74,639		9.2		91,670		11.5
Escrow	2,647		0.3		2,782		0.3
Total non-maturity deposits	598,458		74.0		692,598		86.8
Certificates of deposit:
1.99% or below	38,783		4.8		79,763		10.0
2.00 — 3.99%	153,356		19.0		25,959		3.3
4.00 — 5.99%	18,166		2.2		—		—
Total certificates of deposit	210,305		26.0		105,722		13.2
Total deposits	$	808,763	100.0	%	$	798,320	100.0	%

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


	Year Ended December 31,
	2022				2021
	Average Balance Outstanding		Weighted Average Rate		Average Balance Outstanding		Weighted Average Rate
	(Dollars in thousands)
Demand deposits:
Non-interest bearing	$	190,113	—	%	$	178,535	—	%
Interest bearing	295,919		0.23		289,096		0.21
Savings	102,202		0.05		96,050		0.08
Money Market	86,276		0.19		75,356		0.14
Certificate accounts	129,011		1.59		158,649		1.57
Total deposits	$	803,521	0.37	%	$	797,686	0.41	%

Noninterest-bearing demand accounts decreased $17.1 million, or 9.1%, in 2022 compared to 2021. We also experienced decreases in our interest-bearing demand, savings, money market, and escrow accounts in 2022 compared to 2021. Certificates

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of deposits increased $104.6 million, or 98.9%, in 2022 compared to 2021. The increase in total deposits over the past year was the result of an increase in certificate accounts, which was primarily used to fund organic loan growth in 2022.

We are a public funds depository and at December 31, 2022, we had $7.0 million in public funds compared to $24.0 million at December 31, 2021. These funds consisted of $3.4 million in certificates of deposit, $3.4 million in money market accounts and $126 thousand in checking accounts at December 31, 2022. These accounts must be 50% collateralized if the amount on deposit exceeds FDIC insurance of $250 thousand. We use letters of credit from the FHLB of Des Moines as collateral for these funds. The Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $8 million and $11.5 million at December 31, 2022 and 2021, respectively, to secure public deposits.

The following table shows rate and maturity information for our certificates of deposit at December 31, 2022 (dollars in thousands):


	0.00-1.99%			2.00-3.99%			4.00-5.99%			Total			Percent of Total
Certificate accounts maturing in quarter ending:
March 31, 2023	$	10,289		$	30,602		$	428		$	41,319		19.6	%
June 30, 2023	7,579			39,405			1,247			48,231			22.9
September 30, 2023	5,406			56,706			2,737			64,849			30.8
December 31, 2023	5,258			6,628			2,988			14,874			7.1
March 31, 2024	2,519			1,710			—			4,229			2.0
June 30, 2024	761			70			1,499			2,330			1.1
September 30, 2024	910			6,113			—			7,023			3.3
December 31, 2024	415			10,359			8,782			19,556			9.3
March 31, 2025	1,690			1,052			245			2,987			1.4
June 30, 2025	1,142			—			240			1,382			0.7
September 30, 2025	226			—			—			226			0.1
December 31, 2025	447			—			—			447			0.2
Thereafter	2,141			711			—			2,852			1.4
Total	$	38,783		$	153,356		$	18,166		$	210,305		100.0	%
Percent of total	18.4		%	72.9		%	8.6		%	100.0		%

As of December 31, 2022 and 2021, approximately $161.9 million and $190.0 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for Sound Community Bank’s regulatory reporting requirements. The following table sets forth the portion of our time deposits that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2022 (dollars in thousands).


3 months or less	$	6,010
Over 3 through 6 months	6,659
Over 6 months through 12 months	8,078
Over 12 months	1,580
	$	22,327

For additional information regarding our deposits, see “Note 9 - Deposits” 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.

Borrowings. Although deposits are our primary source of funds, we may utilize borrowings as a cost-effective source of funds when they can be invested at a positive interest-rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals.

We are a member of and obtain advances from the FHLB of Des Moines, which is part of the Federal Home Loan Bank System. The eleven regional FHLBs provide a central credit facility for their member institutions. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to

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several different credit programs, each of which has its own interest rate, range of maturities and call features, and all long-term advances are required to provide funds for residential home financing. We have entered into a loan agreement with the FHLB of Des Moines pursuant to which Sound Community Bank may borrow up to approximately 45% of total assets, secured by a blanket pledge on a portion of our residential mortgage portfolio, including one-to-four family loans, commercial and multifamily real estate loans and home equity loans. Based on eligible collateral, the total amount available under this agreement at December 31, 2022 was $199.0 million. At the same date, we had $43.0 million of outstanding FHLB overnight advances. We had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $8.0 million at December 31, 2022. We plan to rely in part on FHLB advances to fund asset and loan growth. We also use short-term FHLB advances to meet short term liquidity needs. We are required to own stock in the FHLB of Des Moines, the amount of which varies based on the amount of our advance activity.

From time to time, we also may borrow from the Federal Reserve Bank of San Francisco's "discount window" for overnight liquidity needs. 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, 2022 and 2021, the Company had no outstanding borrowings and unused borrowing capacity of $20.8 million and $22.4 million, respectively, under the Borrower-in-Custody program.

The Company completed a private placement of $12.0 million in aggregate principal of 5.25% Fixed-to-Floating Rate Subordinated Notes (the "subordinated notes") due 2030 resulting in net proceeds, after placement fees and offering expenses, of approximately $11.6 million during the year ended December 31, 2020. The subordinated notes have a stated maturity of October 1, 2030 and bear interest at a fixed rate of 5.25% per year until October 1, 2025. From October 1, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR, plus 513 basis points. As provided in the subordinated notes, the interest rate on the subordinated notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. Prior to October 1, 2025, the Company may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes. On or after October 1, 2025, the Company may redeem the subordinated notes, in whole or in part, at its option, on any interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the subordinated notes being redeemed, together with any accrued and unpaid interest on the subordinated notes being redeemed to but excluding the date of redemption.

For additional information regarding our borrowings, see "Note 10—Borrowings, FHLB Stock and Subordinated Notes" 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.

Subsidiary and Other Activities

Sound Financial Bancorp has one subsidiary, Sound Community Bank. In 2018, Sound Community Bank formed Sound Community Insurance Agency, Inc. as a wholly owned subsidiary for purposes of selling a full range of insurance products.

Competition

We face competition in attracting deposits and originating loans. Competition in originating real estate loans comes primarily from commercial banks, credit unions, life insurance companies, mortgage brokers and more recently financial technology (or "FinTech") companies. Commercial banks, credit unions and finance companies, including FinTech companies, provide vigorous competition in consumer lending. Commercial business competition is primarily from local commercial banks, but credit unions also compete for this business. We compete by consistently delivering high-quality, personal service to our clients, which results in a high level of client satisfaction.

Our market area has a high concentration of financial institutions, many of which are branches of large money center and regional banks that have resulted from the consolidation of the banking industry in Washington and other western states. These include such large national lenders as US Bank, JP Morgan Chase, Wells Fargo, Bank of America, Key Bank and others in our market area that have greater resources than we do.

We attract our deposits through our branch offices and web site. Competition for those deposits is principally from commercial banks and credit unions, as well as mutual funds, FinTech companies and other alternative investments. We compete for these deposits by offering superior service, online and mobile access and a variety of deposit accounts at competitive rates. Based on the most recent data provided by the FDIC, there are approximately 50 other commercial banks and savings banks operating in the Seattle MSA, which includes King, Snohomish and Pierce Counties. Based on the most recent branch deposit data provided by the FDIC, our share of deposits in the Seattle MSA is approximately 0.18%. The five largest financial institutions in that area have 72.0% of those deposits. In Clallam County, there are nine other commercial banks and savings banks. Our share of

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deposits in Clallam County was the second highest in the county at approximately 16.33%, with the five largest institutions in that county having 79.5% of the deposits. In Jefferson County there are six other commercial banks and savings banks. Our share of deposits in Jefferson County is approximately 6.04%, while the five largest institutions in that county have 86.7% of those deposits.

How We Are Regulated

The following is a brief description of certain laws and regulations which are applicable to the Company and Sound Community Bank. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

Legislation is introduced from time to time in the United States Congress (“Congress”) or the Washington State Legislature that may affect the Company and Sound Community Bank’s operations. In addition, the regulations governing the Company and Sound Community Bank may be amended from time to time by the WDFI , the FDIC, the Federal Reserve or the SEC, as appropriate. Any such legislation or regulatory changes in the future could have an adverse effect on our operations and financial condition. We cannot predict whether any such changes may occur.

The WDFI and, as the Bank's primary federal regulator, FDIC have extensive enforcement authority over Sound Community Bank. The Federal Reserve and the WDFI have the same type of authority over Sound Financial Bancorp. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease-and-desist orders and removal orders and initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the regulators.

Regulation of Sound Community Bank

General. Sound Community Bank, as a state-chartered commercial bank, is subject to applicable provisions of Washington law and to regulations and examinations of the WDFI. As an insured institution, it also is subject to examination and regulation by the FDIC, which insures the deposits of Sound Community Bank to the maximum permitted by law. 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. This regulation of Sound Community Bank is intended for the protection of depositors and the Deposit Insurance Fund (“DIF”) of the FDIC and not for the purpose of protecting stockholders of Sound Community Bank or Sound Financial Bancorp. 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. State laws and regulations govern Sound Community Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make other loans, to invest in securities, to offer various banking services, and to establish branch offices. As a state-chartered commercial bank, Sound Community Bank must pay semi-annual assessments, examination costs and certain other charges to the WDFI.

Washington law generally provides the same powers for Washington commercial banks as federally and other-state chartered savings banks with branches in Washington. Washington law allows Washington commercial banks to charge the maximum interest rates on loans and other extensions of credit to Washington residents which are allowable for a national bank in another state if higher than Washington limits. In addition, the WDFI may approve applications by Washington commercial banks to engage in an otherwise unauthorized activity, if it determines that the activity is closely related to banking, and Sound Community Bank is otherwise qualified under the statute. Federal laws and regulations generally limit the activities and equity investments of Sound Community Bank to those that are permissible for national banks, unless approved by the FDIC, and govern our relationship with our depositors and borrowers to a great extent, especially with respect to disclosure requirements.

The FDIC has adopted regulatory guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and information systems, audit systems, interest-rate risk exposure and compensation and other benefits. If the FDIC determines that Sound Community Bank fails to meet any standard prescribed by these guidelines, it may require Sound Community Bank to submit an acceptable plan to achieve compliance with the standard. Among these safety and soundness standards are FDIC regulations that require Sound Community Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans. These standards, which must

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be consistent with safe and sound banking practices, establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. Sound Community Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions. Sound Community Bank’s Board of Directors is required to review and approve Sound Community Bank’s standards at least annually. The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on loan-to-value ratios for different categories of real estate loans. Under the guidelines, the aggregate level of all loans in excess of the supervisory loan-to-value ratios should not exceed an aggregate limit of 100% of total capital, and within the aggregate limit, the total of all loans for commercial, agricultural, multifamily or other non-one-to-four family residential properties should not exceed 30% of total capital.

Loans in excess of the supervisory loan-to-value ratio limitations must be identified in Sound Community Bank’s records and reported at least quarterly to Sound Community Bank’s Board of Directors. Sound Community Bank is in compliance with the records and reporting requirements. At December 31, 2022, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $16.4 million and were within the aggregate limits set forth in the preceding paragraph.

The FDIC and the WDFI must approve any merger transaction involving Sound Community Bank as the acquirer, including an assumption of deposits from another depository institution. The FDIC generally is authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described below. The Dodd-Frank Act permits de novo interstate branching for banks.

Insurance of Accounts. Sound Community Bank’s deposits are insured up to $250 thousand per separately insured deposit ownership right or category by the DIF of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.

The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is its average consolidated total assets minus its Tier 1 capital. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments. The FDIC has authority to increase insurance assessments.

Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to decline below the statutory minimum of 1.35 percent as of June 30, 2020. In September 2020, the FDIC Board of Directors adopted a Restoration Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act. The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the deposit insurance fund balance and reserve ratio at least semiannually. In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve ratio. Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository institutions.

In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023. The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35 percent by September 30, 2028. Management cannot predict what assessment rates will be in the future.

The FDIC also conducts examinations of and requires reporting by state non-member banks, such as Sound Community Bank. The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance.

Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources

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

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

The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. At December 31, 2022, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 101.5% of CBLR capital. In addition, at December 31, 2022, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 364.2% of CBLR capital.

Transactions with Related Parties. Sound Community Bancorp and Sound Community Bank are separate and distinct legal entities. Sound Community Bank is an affiliate of Sound Community Bancorp and any non-bank subsidiary of Sound Community Bancorp. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates. Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act between a bank and an affiliate are limited to 10% of the bank's capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank's capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

Capital Rules. Sound Community Bank and Sound Financial Bancorp are required to maintain specified levels of regulatory capital under regulations of the FDIC and FRB, respectively. 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. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. Management has elected to use the CBLR framework for the Bank and Company.

The CBLR is calculated as Tier 1 Capital to average consolidated assets as reported on an institution's regulatory reports. Tier 1 Capital, for the Company and the Bank, generally consists of common stock plus related surplus and retained earnings, adjusted for goodwill and other intangible assets and accumulated other comprehensive amounts (“AOCI”). Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the "well-capitalized" ratio requirements. A qualifying institution utilizing the CBLR framework whose leverage ratio does not fall more than one percent below the required percentage is allowed a two-quarter grace period in which to increase its leverage ratio back above the required percentage. During the grace period, a qualifying institution will still be considered well capitalized so long as its leverage ratio does not fall more than one percent below the required percentage. If an institution either fails to meet all the qualifying criteria within the grace period or has a leverage ratio that falls more than one percent below the required percentage, it becomes ineligible to use the CBLR framework and must instead comply with generally applicable capital rules, sometimes referred to as Basel III rules.

At December 31, 2022, the Bank’s CBLR was 10.83%. Management monitors the Bank's capital levels to provide for current and future business opportunities and to maintain Sound Community Bank’s “well-capitalized” status. At December 31, 2022, Sound Community Bank was considered “well-capitalized” under applicable banking regulations.

See "Note 16—Capital" in Notes to Consolidated Financial Statements in "Part II. Item 8. 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. This standard, referred to as Current Expected Credit Loss or

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CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL. For a banking organization, implementation of CECL is generally likely to reduce retained earnings, and to affect other items, in a manner that reduces its regulatory capital.

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. In connection with its lending and other activities, Sound Community Bank is subject to a number of federal and state laws designed to protect clients and promote lending to various sectors of the economy and population. These include, among others, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (“CRA”). 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.

The Consumer Financial Protection Bureau (“CFPB”), an independent agency within the Federal Reserve, has the authority to amend existing federal consumer protection regulations and implement new regulations, and is charged with examining the compliance of financial institutions with assets in excess of $10 billion with these rules. Sound Community Bank’s compliance with consumer protection rules is examined by the WDFI and the FDIC.

In addition, federal and state regulations limit the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. 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 FDIC examines Sound Community Bank for compliance with its CRA obligations. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance” and the appropriate federal banking agency is to take this rating into account in the evaluation of certain applications of the institution, such as an application relating to a merger or the establishment of a branch. An unsatisfactory rating may be the basis for the denial of such an application. The CRA also requires that all institutions make public disclosures of their CRA ratings. Sound Community Bank received a “satisfactory” rating in its most recent CRA evaluation. Under the law of the state of Washington, Sound Community Bank has a similar obligation to meet the credit needs of the communities it serves, and is subject to examination by the WDFI for this purpose, including assignment of a rating. An unsatisfactory rating may be the basis for denial of certain applications by the WDFI. 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. Federal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. These regulations require Sound Community Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices. In addition, Washington and other federal and state cybersecurity and data privacy laws and regulations may expose Sound Community Bank to risk and result in certain risk management costs. In addition, on November 18, 2021, the federal banking

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agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents. Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred. Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours. Compliance with the new rule was required by May 1, 2022. Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm.

Anti-Money Laundering and Customer Identification. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. 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. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts. Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications.

Standards for Safety and Soundness. Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance.

Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At December 31, 2022, Sound Community Bank was in compliance with the reserve requirements.

The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit. At December 31, 2022, the Bank had no outstanding borrowings from the discount window.

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. The FHLBs make loans to members in accordance with policies and procedures, established by the Boards of Directors of the FHLBs, which are subject to the oversight of the Federal Housing Finance Agency. All borrowings from the FHLBs are required to be fully secured by sufficient collateral as determined by the FHLBs. In addition, all long-term borrowings are required to provide funds for residential home financing. Sound Community Bank had $43.0 million of outstanding borrowings with the FHLB of Des Moines and an available line of credit of $199.0 million at December 31, 2022. We plan to rely in part on FHLB advances to fund asset and loan growth. We also use short-term funding available on our line of credit with the FHLB of Des Moines.

As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines based on the Bank's asset size and level of borrowings from the FHLB of Des Moines. At December 31, 2022, the Bank owned $2.8 million in FHLB of Des Moines stock, which was in compliance with this requirement. The FHLB of Des Moines pays dividends quarterly, and the Bank received $64 thousand in dividends from the FHLB of Des Moines during the year ended December 31, 2022.

The 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

Sound Financial Bancorp, Inc. [SFBC] Filings
10-K	[2023-03-14]
10-Q	[2022-11-10]
10-Q	[2022-08-12]
10-Q	[2022-05-10]
10-K	[2022-03-15]
10-Q	[2021-11-09]
10-Q	[2021-08-13]
10-Q	[2021-05-13]
10-K	[2021-03-30]
10-Q	[2020-11-09]
10-Q	[2020-08-07]
10-Q	[2020-05-11]
10-K	[2020-03-12]
10-Q	[2019-11-08]
10-Q	[2019-08-08]
10-Q	[2019-05-09]
10-K	[2019-03-14]
10-Q	[2018-11-13]
10-Q	[2018-08-14]
10-Q	[2018-05-14]
10-K	[2018-03-27]
10-Q	[2017-11-13]
10-Q	[2017-08-11]
10-Q	[2017-05-12]
10-K	[2017-03-27]
10-Q	[2016-11-14]
10-Q	[2016-08-12]
10-Q	[2016-05-13]
10-K	[2016-03-30]
10-Q	[2015-11-13]
10-Q	[2015-08-13]
10-Q	[2015-05-14]
10-K	[2015-03-31]
10-Q	[2014-11-13]
10-Q	[2014-08-13]
10-Q	[2014-05-14]
10-K	[2014-03-31]
10-Q	[2013-11-13]
10-Q	[2013-08-15]
10-Q	[2013-05-15]
10-K	[2013-04-01]
10-Q	[2012-11-14]
10-Q	[2012-08-14]
S-1	[2012-03-27]