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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
or
☐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)
Maryland45-5188530
(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
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueSFBCThe NASDAQ Stock Market LLC

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 definitions 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
As of May 9, 2024, there were 2,557,485 shares of the registrant’s common stock outstanding. 

Table of Contents
SOUND FINANCIAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
 Page Number
PART I    FINANCIAL INFORMATION 
 
 

2



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)
 March 31,
2024		December 31,
2023
ASSETS  
Cash and cash equivalents$137,977 $49,690 
Available-for-sale (“AFS”) securities, at fair value (amortized cost of $9,445 and $9,539 as of March 31, 2024 and December 31, 2023, respectively)
8,115 8,287 
Held-to-maturity (“HTM”) securities, at amortized cost (fair value of $1,730 and $1,787 at March 31, 2024 and December 31, 2023, respectively)
2,157 2,166 
Loans held-for-sale351 603 
Loans held-for-portfolio897,877 894,478 
Allowance for credit losses (“ACL”) on loans
(8,598)(8,760)
Total loans held-for-portfolio, net889,279 885,718 
Accrued interest receivable3,617 3,452 
Bank-owned life insurance (“BOLI”), net
22,037 21,860 
Other real estate owned (“OREO”) and repossessed assets, net
690 575 
Mortgage servicing rights (“MSRs”), at fair value
4,612 4,632 
Federal Home Loan Bank ("FHLB") stock, at cost2,406 2,396 
Premises and equipment, net6,685 5,240 
Right of use assets4,259 4,496 
Other assets4,500 6,106 
Total assets$1,086,685 $995,221 
LIABILITIES
Deposits
Interest-bearing$788,217 $699,813 
Noninterest-bearing demand128,666 126,726 
Total deposits916,883 826,539 
Borrowings40,000 40,000 
Accrued interest payable719 817 
Lease liabilities4,576 4,821 
Other liabilities9,578 9,563 
Advance payments from borrowers for taxes and insurance2,209 1,110 
Subordinated notes, net11,728 11,717 
Total liabilities985,693 894,567 
COMMITMENTS AND CONTINGENCIES (NOTE 7)— — 
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding
— — 
Common stock, $0.01 par value, 40,000,000 shares authorized, 2,558,546 and 2,549,427 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
25 25 
Additional paid-in capital28,110 27,990 
Retained earnings73,907 73,627 
Accumulated other comprehensive loss, net of tax(1,050)(988)
Total stockholders’ equity100,992 100,654 
Total liabilities and stockholders’ equity$1,086,685 $995,221 
See Notes to Condensed Consolidated Financial Statements
3


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except share and per share amounts)
 Three Months Ended March 31,
20242023
INTEREST INCOME
Loans, including fees$12,233 $11,381 
Interest and dividends on investments, cash and cash equivalents1,527 793 
Total interest income13,760 12,174 
INTEREST EXPENSE
Deposits5,703 2,136 
Borrowings429 499 
Subordinated notes168 168 
Total interest expense6,300 2,803 
Net interest income7,460 9,371 
PROVISION FOR (RELEASE OF) CREDIT LOSSES(33)10 
Net interest income after (release of) provision for credit losses
7,493 9,361 
NONINTEREST INCOME
Service charges and fee income612 581 
Earnings on BOLI177 151 
Mortgage servicing income282 299 
Fair value adjustment on MSRs(65)(140)
Net gain on sale of loans90 78 
Total noninterest income1,096 969 
NONINTEREST EXPENSE
Salaries and benefits4,543 4,485 
Operations1,457 1,441 
Regulatory assessments189 153 
Occupancy444 459 
Data processing1,017 993 
Net loss on OREO and repossessed assets6 84 
Total noninterest expense7,656 7,615 
Income before provision for income taxes933 2,715 
Provision for income taxes163 547 
Net income$770 $2,168 
Earnings per common share:
Basic$0.30 $0.84 
Diluted$0.30 $0.83 
Weighted-average number of common shares outstanding:
Basic2,539,213 2,578,413 
Diluted2,556,958 2,604,043 
See Notes to Condensed Consolidated Financial Statements
4


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
Three Months Ended March 31,
20242023
Net income$770 $2,168 
Available for sale securities:
Unrealized (losses) gains arising during the period(78)105 
Income tax benefit (expense) related to unrealized (losses) gains16 (22)
Other comprehensive (loss) income, net of tax(62)83 
Comprehensive income$708 $2,251 

See Notes to Condensed Consolidated Financial Statements
5


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2024 and 2023 (unaudited)
(In thousands, except share and per share amounts)
 SharesCommon
Stock		Additional Paid-in CapitalRetained
Earnings		Accumulated Other
Comprehensive Income/(Loss), net of tax		Total
Stockholders’
Equity
Balance, at December 31, 2023
2,549,427 $25 $27,990 $73,627 $(988)$100,654 
Net income— — — 770 — 770 
Other comprehensive loss, net of tax— — — — (62)(62)
Share-based compensation— — 95 — — 95 
Restricted stock awards issued8,048 — — — — — 
Cash dividends paid on common stock ($0.19 per share)
— — — (486)— (486)
Common stock repurchased(164)(1)(4)— (5)
Common stock options exercised1,235 — 26 — — 26 
Balance, at March 31, 2024
2,558,546 $25 $28,110 $73,907 $(1,050)$100,992 
 SharesCommon
Stock		Additional Paid-in CapitalRetained
Earnings		Accumulated Other Comprehensive
Income/(Loss), net of tax		Total
Stockholders’
Equity
Balance, at December 31, 2022
2,583,619 $26 $28,004 $70,792 $(1,117)$97,705 
Impact of adoption of Accounting Standards Update (“ASU”) 2016-13— — — (1,149)— (1,149)
Net income— — — 2,168 — 2,168 
Other comprehensive income, net of tax— — — — 83 83 
Share-based compensation— — 192 — — 192 
Restricted stock awards issued8,850 — — — — — 
Cash dividends paid on common stock ($0.17 per share)
— — — (442)— (442)
Common stock repurchased(204)— (2)(7)— (9)
Common stock surrendered(4,750)— (190)— — (190)
Restricted stock forfeited(425)— — — — — 
Common stock options exercised14,353 — 247 — — 247 
Balance, at March 31, 2023
2,601,443 $26 $28,251 $71,362 $(1,034)$98,605 
See Notes to Condensed Consolidated Financial Statements
6


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 Three Months Ended March 31,
 20242023
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income$770 $2,168 
Adjustments to reconcile net income to net cash from operating activities:
Amortization of net discounts on investments22 17 
(Release of) provision for credit losses(33)10 
Depreciation and amortization178 178 
Share based compensation95 192 
Fair value adjustment on mortgage servicing rights65 140 
Right of use assets amortization237 236 
Change in lease liabilities(245)(239)
Change in cash surrender value of BOLI(177)(151)
Net change in advances from borrowers for taxes and insurance1,099 1,053 
Net gain on sale of loans(90)(78)
Proceeds from sale of loans held-for-sale4,234 3,906 
Originations of loans held-for-sale(3,937)(5,282)
Net loss on OREO and repossessed assets— 84 
Change in operating assets and liabilities:
Accrued interest receivable(165)(69)
Other assets1,549 (1,273)
Accrued interest payable(98)(10)
Other liabilities15 1,080 
Net cash provided by operating activities3,519 1,962 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal payments, maturities and sales of available-for-sale securities83 1,704 
Proceeds from principal payments of held-to-maturity securities9 9 
Net decrease (increase) in loans(3,570)(4,636)
Purchases of premises and equipment, net(1,623)(35)
Net cash used in investing activities(5,101)(2,958)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits90,344 32,884 
Repayment of borrowings— (8,000)
FHLB stock purchased(10)249 
Common stock repurchases(5)(9)
Purchase of stock surrendered to pay tax liability— (190)
Dividends paid on common stock(486)(442)
Proceeds from common stock option exercises26 247 
Net cash provided by financing activities89,869 24,739 
Net change in cash and cash equivalents88,287 23,743 
Cash and cash equivalents, beginning of period49,690 57,836 
Cash and cash equivalents, end of period$137,977 $81,579 
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes$— $— 
Interest paid on deposits and borrowings6,398 2,813 
ROU assets obtained in exchange for new operating lease liabilities— 334 
Impact of adoption of ASU 2016-13 on retained earnings— (1,149)
See Notes to Condensed Consolidated Financial Statements
7


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1 – Basis of Presentation
The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc.  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 “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires.
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 21, 2024 (“2023 Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full year or any other future period.
Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation. These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share.
We have not made any changes in our significant accounting policies from those disclosed in the 2023 Form 10-K.

Note 2 – Accounting Pronouncements Recently Issued or Adopted
On March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, "Reference Rate Reform" ("Topic 848"). This ASU provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to modifications to eligible contracts (e.g., loans, debt securities, derivatives, borrowings) that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the related Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives. ASU 2020-04 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.
In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification. The amendments in this ASU have differing effective dates, beginning with interim periods including and subsequent to March 12, 2020 through December 31, 2022. Based upon amendments provided in ASU 2022-06 discussed below, provisions of ASU 2021-01 can now generally be applied through December 31, 2024. ASU 2021-01 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.
8


In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. ASU 2022-06 extends the period of time entities can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01, which are discussed above. ASU 2022-06 was effective upon issuance and defers the sunset date of this prior guidance to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. ASU 2022-06 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amended guidance requires incremental reportable segment disclosures, primarily about significant segment expenses. The amendments also require entities with a single reportable segment to provide all disclosures required by these amendments, and all existing segment disclosures. The amendments will be applied retrospectively to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2023-07 on the footnotes to our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amended guidance enhances income tax disclosures primarily related to the effective tax rate reconciliation and income taxes paid information. This guidance requires disclosure of specific categories in the effective tax rate reconciliation and further information on reconciling items meeting a quantitative threshold. In addition, the amended guidance requires disaggregating income taxes paid (net of refunds received) by federal, state, and foreign taxes. It also requires disaggregating individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). The amended guidance is effective for fiscal years beginning after December 15, 2024. The guidance can be applied either prospectively or retrospectively. We do expect the adoption of ASU 2023-09 to have a material impact on the footnotes to our consolidated financial statements.

Note 3 – Investments
At March 31, 2024, the Company did not own any debt securities classified as trading or any equity investment securities, except for the FHLB securities described in “Note 8 — Borrowings, FHLB Stock and Subordinated Notes.”
The amortized cost and fair value of our AFS securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):
 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value
March 31, 2024    
Municipal bonds$6,384 $11 $(953)$5,442 
Agency mortgage-backed securities3,061 4 (392)2,673 
Total$9,445 $15 $(1,345)$8,115 
December 31, 2023
Municipal bonds$6,394 $12 $(878)$5,528 
Agency mortgage-backed securities3,145 7 (393)2,759 
Total$9,539 $19 $(1,271)$8,287 
The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):
9


 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value
March 31, 2024
Municipal bonds$704 $— $(182)$522 
Agency mortgage-backed securities1,453 — (245)1,208 
Total$2,157 $— $(427)$1,730 
December 31, 2023
Municipal bonds$704 $— $(164)$540 
Agency mortgage-backed securities1,462 — (215)1,247 
Total$2,166 $— $(379)$1,787 
The amortized cost and fair value of AFS and HTM securities at March 31, 2024, by contractual maturity, are shown below (in thousands). Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily agency mortgage-backed securities, are shown separately.
March 31, 2024
Available-for-saleHeld-to-maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Due after one year through five years$455 $453 $— $— 
Due after five years through ten years1,199 1,210 — — 
Due after ten years4,730 3,779 704 522 
Agency mortgage-backed securities3,061 2,673 1,453 1,208 
Total$9,445 $8,115 $2,157 $1,730 
There were no pledged securities at March 31, 2024 or December 31, 2023.
There were no sales of AFS or HTM securities during the three months ended March 31, 2024 and 2023.
Accrued interest receivable on securities totaled $77 thousand and $49 thousand at March 31, 2024 and December 31, 2023, respectively, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of expected credit losses.
The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments for which an allowance for credit losses has not been recorded that have been in a continuous unrealized loss position at the dates indicated (in thousands):
 March 31, 2024
 Less Than 12 Months12 Months or LongerTotal
 Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale securities
Municipal bonds$453 $(2)$3,779 $(951)$4,232 $(953)
Agency mortgage-backed securities47 (1)2,228 (391)2,275 (392)
Total available-for-sale securities$500 $(3)$6,007 $(1,342)$6,507 $(1,345)
Held-to-maturity securities
Municipal bonds$— $— $522 $(182)$522 $(182)
Agency mortgage-backed securities— — 1,208 (245)1,208 (245)
Total held-to-maturity securities$— $— $1,730 $(427)$1,730 $(427)
10


 December 31, 2023
 Less Than 12 Months12 Months or LongerTotal
 Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale securities
Municipal bonds— — 3,862 (878)3,862 (878)
Agency mortgage-backed securities48 (1)2,290 (392)2,338 (393)
Total$48 $(1)$6,152 $(1,270)$6,200 $(1,271)
Held-to-maturity securities
Municipal bonds$— $— $540 $(164)$540 $(164)
Agency mortgage-backed securities— — 1,247 (215)1,247 (215)
Total held-to-maturity securities$— $— $1,787 $(379)$1,787 $(379)
There was no allowance for credit losses on securities at March 31, 2024 or December 31, 2023. At March 31, 2024, the total securities portfolio consisted of 12 agency mortgage-backed securities and 11 municipal bonds, with a total portfolio fair value of $9.8 million. At December 31, 2023, the total securities portfolio consisted of 11 municipal bonds and 12 agency mortgage-backed securities, with a total portfolio fair value of $10.1 million. At March 31, 2024, there were three securities in an unrealized loss position for less than 12 months, and 16 securities in an unrealized loss position for more than 12 months. All three securities in an unrealized loss position for less than 12 months were classified as AFS. At December 31, 2023, there was one security in an unrealized loss position for less than 12 months, and 16 securities in an unrealized loss position for more than 12 months. The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. There was no provision for credit losses recognized for investment securities during the three months ended March 31, 2024, because the declines in fair value were not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis. 

11


Note 4 – Loans

Loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, were as follows (in thousands):
 March 31,
2024		December 31,
2023
Real estate loans:  
One-to-four family$279,213 $279,448 
Home equity24,380 23,073 
Commercial and multifamily324,483 315,280 
Construction and land111,726 126,758 
Total real estate loans739,802 744,559 
Consumer loans:
Manufactured homes37,583 36,193 
Floating homes84,237 75,108 
Other consumer18,847 19,612 
Total consumer loans140,667 130,913 
Commercial business loans19,075 20,688 
Total loans held-for-portfolio899,544 896,160 
Premiums for purchased loans(1)
808 829 
Deferred fees, net(2,475)(2,511)
Total loans held-for-portfolio, gross897,877 894,478 
Allowance for credit losses — loans(8,598)(8,760)
Total loans held-for-portfolio, net$889,279 $885,718 
(1)Includes premiums resulting from purchased loans of $458 thousand related to one-to-four family loans, $270 thousand related to commercial and multifamily loans, and $80 thousand related to commercial business loans as of March 31, 2024. Includes premiums resulting from purchased loans of $465 thousand related to one-to-four family loans, $280 thousand related to commercial and multifamily loans, and $84 thousand related to commercial business loans as of December 31, 2023.
As of March 31, 2024, there were three collateral dependent loans, totaling $457 thousand, that were in process of foreclosure.
The following table presents a summary of activity in the ACL on loans and unfunded commitments for the periods indicated (in thousands):
Three Months Ended March 31,
20242023
Allowance for Credit Losses - LoansReserve for Unfunded Loan CommitmentsAllowance for Credit LossesAllowance for Credit Losses - LoansReserve for Unfunded Loan CommitmentsAllowance for Credit Losses
Balance at beginning of period$8,760 $193 $8,953 $7,599 $335 $7,934 
Adoption of ASU 2016-13(1)
— — — 760 695 1,455 
(Release of) provision for credit losses during the period(106)73 (33)245 (235)10 
Net (charge-offs)/recoveries during the period(56)— (56)(72)— (72)
Balance at end of period$8,598 $266 $8,864 $8,532 $795 $9,327 
(1)    Represents the impact of adopting ASU 2016-13, Financial Instruments — Credit Losses on January 1, 2023. Since that date, as a result of adopting ASU 2016-13, our methodology to compute our allowance for credit losses has been based on a current expected credit loss methodology, rather than the previously applied incurred loss methodology.
12


Accrued interest receivable on loans receivable totaled $3.4 million at both March 31, 2024 and December 31, 2023 in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of expected credit losses.
The following tables summarize the activity in the allowance for credit losses - loans, excluding accrued interest, for the periods indicated (in thousands):
Three Months Ended March 31, 2024
 Beginning
Allowance		Charge-offsRecoveriesProvision (Release of)Ending
Allowance
One-to-four family$2,630 $— $— $280 $2,910 
Home equity185 — — (6)179 
Commercial and multifamily1,070 — — 36 1,106 
Construction and land1,349 — — (20)1,329 
Manufactured homes(1)
971 (23)— (115)833 
Floating homes2,022 — — (223)1,799 
Other consumer(2)
426 (39)6 (60)333 
Commercial business107 — — 2 109 
Total$8,760 $(62)$6 $(106)$8,598 
(1)During the three months ended March 31, 2024, there was one manufactured home loan that was charged off and then subsequently foreclosed upon.
(2)During the three months ended March 31, 2024, the gross charge-offs related entirely to deposit overdrafts that were charged off.
Three Months Ended March 31, 2023
 Beginning
Allowance		Charge-offsRecoveriesProvision
(Recapture) 		Ending
Allowance
One-to-four family$1,771 $— $— $(67)$2,059 
Home equity132 — — (4)197 
Commercial and multifamily2,501 — — 44 2,225 
Construction and land1,209 — — 210 2,778 
Manufactured homes462 — — 1 283 
Floating homes456 — — (11)611 
Other consumer(1)
324 (79)7 70 159 
Commercial business256 — — (5)216 
Unallocated488 — — 7 4 
Total$7,599 $(79)$7 $245 $8,532 
(1)During the three months ended March 31, 2023, the gross charge-offs related entirely to deposit overdrafts that were charged off.
Credit Quality Indicators. 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.
13


Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading. The grades for watch and special mention loans are used by the Company to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful, or loss. These are loans which have been criticized and deserve management's close attention based upon known characteristics such as periodic payment delinquency, failure to comply with contractual terms of the loan, or collateral concerns. Loans identified as watch, special mention, substandard, doubtful, or loss are subject to additional problem loan reporting to management every three months.
When we classify problem assets as either substandard or doubtful, we may determine that these assets should be individually analyzed if they no longer share common risk characteristics with the rest of the portfolio. When we classify problem assets as a loss, we are 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 (the Bank’s federal regulator) and the WDFI (the Bank’s state banking regulator), which can order the establishment of additional credit loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess weaknesses are required to be designated as special mention. There were no loans classified as doubtful or loss as of March 31, 2024 and December 31, 2023.
The following tables present the internally assigned grades as of March 31, 2024 and December 31, 2023, by type of loan and origination year (in thousands):
14


At March 31, 2024
Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisRevolving Loans Amortized Cost Basis Converted to Term
20242023202220212020PriorTotal
One-to-four family:
Pass$9,350 $25,154 $83,227 $109,784 $16,015 $35,051 $— $— $278,581 
Substandard— — 259 114 — 504 — — 877 
Total one-to-four family$9,350 $25,154 $83,486 $109,898 $16,015 $35,555 $— $— $279,458 
Home equity:
Pass$1,429 $3,876 $2,511 $1,051 $299 $1,622 $12,593 $811 $24,192 
Substandard— — — — — 62 282 69 413 
Total home equity$1,429 $3,876 $2,511 $1,051 $299 $1,684 $12,875 $880 $24,605 
Commercial and multifamily:
Pass$776 $21,071 $87,192 $93,119 $22,556 $86,776 $— $— $311,490 
Special mention— — — — 4,653 1,396 — — 6,049 
Substandard— — 1,007 — — 4,848 — — 5,855 
Total commercial and multifamily$776 $21,071 $88,199 $93,119 $27,209 $93,020 $— $— $323,394 
Construction and land:
Pass$1,204 $30,957 $34,855 $40,201 $955 $2,261 $— $— $110,433 
Substandard— — — — — 714 — — 714 
Total construction and land$1,204 $30,957 $34,855 $40,201 $955 $2,975 $— $— $111,147 
Manufactured homes:
Pass$2,204 $13,605 $7,876 $4,228 $2,061 $7,263 $— $— $37,237 
Substandard— — 44 — — 185 — — 229 
Total manufactured homes$2,204 $13,605 $7,920 $4,228 $2,061 $7,448 $— $— $37,466 
Floating homes:
Pass$12,557 $8,408 $17,462 $24,928 $6,428 $10,850 $— $— $80,633 
Total floating homes$12,557 $8,408 $20,636 $24,928 $6,428 $10,850 $— $— $83,807 
Other consumer:
Pass$1,253 $4,181 $737 $3,794 $5,830 $2,533 $533 $— $18,861 
Total other consumer$1,253 $4,181 $737 $3,794 $5,830 $2,533 $533 $— $18,861 
Commercial business:
Pass$138 $894 $1,868 $3,438 $358 $4,779 $7,467 $— $18,942 
Substandard— — 45 112 — — 40 — 197 
Total commercial business$138 $894 $1,913 $3,550 $358 $4,779 $7,507 $— $19,139 
Total loans
Pass$28,911 $108,146 $235,728 $280,543 $54,502 $151,135 $20,593 $811 $880,369 
Special mention— — — — 4,653 1,396 — — 6,049 
Substandard— — 4,529 226 — 6,313 322 69 11,459 
Total loans$28,911 $108,146 $240,257 $280,769 $59,155 $158,844 $20,915 $880 $897,877 
15


At December 31, 2023
Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisRevolving Loans Amortized Cost Basis
Converted to Term
20232022202120202019PriorTotal
One-to-four family:
Pass$26,272 $84,467 $110,488 $16,126 $13,029 $28,139 $— $— $278,521 
Substandard— 259 119 — 260 553 — — 1,191 
Total one-to-four family26,272 84,726 110,607 16,126 13,289 28,692 — — 279,712 
Home equity:
Pass3,963 2,783 1,072 302 95 1,608 12,982 2 22,807 
Substandard— — — — — 63 445 — 508 
Total home equity3,963 2,783 1,072 302 95 1,671 13,427 2 23,315 
Commercial and multifamily:
Pass21,144 75,960 93,932 22,731 29,822 58,388 — — 301,977 
Special mention— — — 3,365 — 350 — — 3,715 
Substandard— 1,036 — 1,317 5,134 1,121 — — 8,608 
Total commercial and multifamily21,144 76,996 93,932 27,413 34,956 59,859 — — 314,300 
Construction and land:
Pass32,057 53,302 36,285 967 601 2,031 — — 125,243 
Substandard— — — — 689 44 — — 733 
Total construction and land32,057 53,302 36,285 967 1,290 2,075 — — 125,976 
Manufactured homes:
Pass13,696 7,958 4,365 2,160 2,075 5,498 — — 35,752 
Substandard115 46 — 22 86 64 — — 333 
Total manufactured homes13,811 8,004 4,365 2,182 2,161 5,562 — — 36,085 
Floating homes:
Pass8,779 21,555 26,196 6,471 1,865 9,867 — — 74,733 
Total floating homes8,779 21,555 26,196 6,471 1,865 9,867 — — 74,733 
Other consumer:
Pass4,629 1,845 3,884 5,883 598 2,237 539 — 19,615 
Total other consumer4,629 1,845 3,884 5,883 598 2,237 539 — 19,615 
Commercial business:
Pass987 437 3,564 400 227 5,848 6,854 — 18,317 
Substandard2,128 53 204 — — — 40 — 2,425 
Total commercial business3,115 490 3,768 400 227 5,848 6,894 — 20,742 
Pass111,527 248,307 279,786 55,040 48,312 113,616 20,375 2 876,965 
Special mention— — — 3,365 — 350 — — 3,715 
Substandard2,243 1,394 323 1,339 6,169 1,845 485 — 13,798 
Total loans$113,770 $249,701 $280,109 $59,744 $54,481 $115,811 $20,860 $2 $894,478 
16


Nonaccrual and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.
The following table presents the amortized cost of nonaccrual loans as of the dates indicated, by type of loan (in thousands):
 March 31, 2024December 31, 2023
Total
Nonaccrual
Loans		Total
Nonaccrual
Loans
with no ACL		Total
Nonaccrual
Loans		Total
Nonaccrual
Loans
with no ACL
One-to-four family$835 $575 $1,108 $848 
Home equity83 83 84 84 
Commercial and multifamily4,747 4,747 — — 
Construction and land29 29 — — 
Manufactured homes166 166 228 228 
Floating homes3,192 3,192 — — 
Other consumer1 — 1 — 
Commercial business— — 2,135 2,135 
Total$9,053 $8,792 $3,556 $3,295 
The following tables present the aging of past due loans, based on amortized cost, as of the dates indicated, by type of loan (in thousands):
March 31, 2024
 30-59 Days
Past Due		60-89 Days
Past Due		90 Days and Greater Past Due90 Days and Greater Past Due and AccruingTotal Past
Due		CurrentTotal Loans
One-to-four family$556 $— $711 $— $1,267 $278,191 $279,458 
Home equity— 268 83 — 351 24,254 24,605 
Commercial and multifamily1,346 — 3,733 — 5,079 318,315 323,394 
Construction and land823 — 30 — 853 110,294 111,147 
Manufactured homes419 — 102 — 521 36,945 37,466 
Floating homes3,174 — — — 3,174 80,633 83,807 
Other consumer22 29 — — 51 18,810 18,861 
Commercial business— 55 — — 55 19,084 19,139 
Total$6,340 $352 $4,659 $— $11,351 $886,526 $897,877 
17


December 31, 2023
 30-59 Days
Past Due		60-89 Days
Past Due		90 Days and Greater Past Due90 Days and Greater Past Due and AccruingTotal Past
Due		CurrentTotal Loans
One-to-four family$168 $870 $663 $— $1,701 $278,011 $279,712 
Home equity345 — 84 — 429 22,893 23,322 
Commercial and multifamily4,116 1,036 — — 5,151 309,149 314,300 
Construction and land— — — — — 125,940 125,940 
Manufactured homes295 49 189 — 533 35,552 36,085 
Floating homes— 3,226 — — 3,226 71,507 74,733 
Other consumer34 31 — — 65 19,550 19,615 
Commercial business66 — 2,128 — 2,194 18,551 20,745 
Total$5,024 $5,211 $3,064 $— $13,299 $881,153 $894,452 

Loan Modifications to Borrowers Experiencing Financial Difficulty. The Company has granted modifications which can generally be described in the following categories:
Principal Forgiveness:  A modification in which the principal is reduced.
Rate Modification:  A modification in which the interest rate is changed.
Term Modification:  A modification in which the maturity date, timing of payments or frequency of payments is changed.
Payment Modification:  A modification in which the dollar amount of the payment is changed.  Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category.
Combination Modification:  Any other type of modification, including the use of multiple categories above.
At March 31, 2024, the Company had no commitments to extend additional credit to borrowers owing loan receivables with modified terms.

There were no loans modified within the three months ended March 31, 2024.
We have no modified loan receivables that have subsequently defaulted at March 31, 2024.
Troubled debt restructurings (“TDRs”). Prior to the adoption of ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, the Company had granted a variety of concessions to borrowers in the form of loan modifications that were considered TDRs. Loans classified as legacy TDRs totaled $1.7 million at both March 31, 2024 and December 31, 2023.

Collateral Dependent Loans. Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded.

18


The following tables summarize collateral dependent loans by collateral type as of the dates indicated (in thousands):
March 31, 2024
Commercial Real EstateResidential Real EstateLandOther ResidentialRVs/AutomobilesBusiness Assets Total
Real estate loans:
One- to four- family$— $394 $— $541 $— $— $935 
Home equity— 83 — — — — 83 
Commercial and multifamily4,747 — — — — — 4,747 
Construction and land— — 29 — — — 29 
Total real estate loans4,747 477 29 541 — — 5,794 
Consumer loans:
Manufactured homes— — — 166 — — 166 
Floating homes— — — 3,192 — — 3,192 
Total consumer loans— — — 3,358 — — 3,358 
Total loans$4,747 $477 $29 $3,899 $— $— $9,152 
December 31, 2023
Commercial Real EstateResidential Real EstateLandOther ResidentialRVs/AutomobilesBusiness AssetsTotal
Real estate loans:
One- to four- family$— $664 $— $545 $— $— $1,209 
Home equity— 84 — — — — 84 
Total real estate loans— 748 — 545 — — 1,293 
Consumer loans:
Manufactured homes— — — 228 — — 228 
Total consumer loans— — — 228 — — 228 
Commercial business loans— — — 2,135 — — 2,135 
Total loans$— $748 $— $2,908 $— $— $3,656 

Note 5 – Fair Value Measurements
The Company determines the fair values of its financial instruments based on the requirements established in ASC 820, Fair Value Measurements (“ASC 820”), which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The Company’s fair values for financial instruments at March 31, 2024 and December 31, 2023 were determined based on these requirements.
The following methods and assumptions were used to estimate the fair value of other financial instruments:
Cash and cash equivalents - The estimated fair value is equal to the carrying amount.
Available-for-sale securities – AFS securities are recorded at fair value based on quoted market prices, if available (Level 1).  If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments.  Level 2 securities include those traded on an active exchange, as well as U.S. government securities.  
Held-to-maturity securities – The fair value is based on quoted market prices, if available.  If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments.  Level 2 securities include those traded on an active exchange, as well as U.S. government securities.   
19


Loans held-for-sale - The fair value of fixed-rate one-to-four family loans is based on whole loan forward prices obtained from government sponsored enterprises. At March 31, 2024 and 2023, loans held-for-sale were carried at cost, as no impairment was required.
Loans held-for-portfolio - The estimated fair value of loans held-for-portfolio consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment, to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and estimated current market rate yields on loans with similar characteristics. The estimated fair values of loans held-for-portfolio reflect exit price assumptions. The liquidity premiums/discounts are part of the valuation for exit pricing.
Mortgage servicing rights –The fair value of MSRs is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.
Time deposits - The estimated fair value of time deposits is based on the difference between interest costs paid on the Company’s time deposits and current market rates for time deposits with comparable characteristics.
Borrowings - The fair value of borrowings are estimated using the contractual cash flows of each debt instrument discounted using the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Subordinated notes - The fair value of subordinated notes is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.
A description of the valuation methodologies used for collateral dependent loans and OREO is as follows:
Collateral dependent loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell.
OREO and repossessed assets – The fair value of OREO and repossessed assets is based on the current appraised value of the collateral less estimated costs to sell. 
Off-balance sheet financial instruments - The fair value for the off-balance sheet loan commitments is estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s clients. The estimated fair value of these commitments is not significant.
In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. There were no transfers between levels during the three months ended March 31, 2024 and 2023.
20


The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether recognized or recorded at fair value or not as of the dates indicated (in thousands):
 March 31, 2024Fair Value Measurements Using:
 Carrying
Value		Estimated
Fair Value		Level 1Level 2Level 3
FINANCIAL ASSETS:     
Cash and cash equivalents$137,977 $137,977 $137,977 $— $— 
Available-for-sale securities8,115 8,115 — 8,115 — 
Held-to-maturity securities2,157 1,730 — 1,730 — 
Loans held-for-sale351 351 — 351 — 
   Loans held-for-portfolio, net889,279 840,700 — — 840,700 
Mortgage servicing rights4,612 4,612 — — 4,612 
FINANCIAL LIABILITIES:
   Time deposits321,340 321,737 — 321,737 — 
Borrowings40,000 40,000 — 40,000 — 
Subordinated notes11,728 12,038 — 12,038 — 
 December 31, 2023Fair Value Measurements Using:
 Carrying
Value		Estimated
Fair Value		Level 1Level 2Level 3
FINANCIAL ASSETS:     
Cash and cash equivalents$49,690 $49,690 $49,690 $— $— 
Available-for-sale securities8,287 8,287 — 8,287 — 
Held-to-maturity securities2,166 1,787 — 1,787 — 
Loans held-for-sale603 603 — 603 — 
Loans held-for-portfolio, net885,718 837,579 — — 837,579 
Mortgage servicing rights4,632 4,632 — — 4,632 
FINANCIAL LIABILITIES:
Time deposits307,962 308,604 — 308,604 — 
Borrowings40,000 40,000 — 40,000 — 
Subordinated notes11,717 9,996 — 9,996 — 
21


The following tables present the balance of assets measured at fair value on a recurring basis as of the dates indicated (in thousands):
 Fair Value at March 31, 2024
DescriptionTotalLevel 1Level 2Level 3
Municipal bonds$5,442 $— $5,442 $— 
Agency mortgage-backed securities2,673 — 2,673 — 
Mortgage servicing rights4,612 — — 4,612 
 Fair Value at December 31, 2023
DescriptionTotalLevel 1Level 2Level 3
Municipal bonds$5,528 $— $5,528 $— 
Agency mortgage-backed securities2,759 — 2,759 — 
Mortgage servicing rights4,632 — — 4,632 
The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis as of the dates indicated:
March 31, 2024
Financial InstrumentValuation TechniqueUnobservable Input(s)Range
(Weighted-Average)
Mortgage Servicing RightsDiscounted cash flowPrepayment speed assumption
99%-205% (110%)
Discount rate
10.51%-14.51% (12.51%)
December 31, 2023
Financial InstrumentValuation TechniqueUnobservable Input(s)Range
(Weighted-Average)
Mortgage Servicing RightsDiscounted cash flowPrepayment speed assumption
109%-208% (129%)
Discount rate
10.5%-14.5% (12.5%)
Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the MSRs will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted average life will result in an increase of the constant prepayment rate. As a result of the difficulty in observing certain significant valuation inputs affecting our “Level 3” fair value assets, we are required to make judgments regarding these items’ fair values.
There were no assets or liabilities (excluding MSRs) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months ended March 31, 2024 and 2023. 
MSRs are measured at fair value using significant unobservable inputs (Level 3) on a recurring basis and a reconciliation of this asset can be found in “Note 6—Mortgage Servicing Rights.
22


The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands):
 Fair Value at March 31, 2024
 TotalLevel 1Level 2Level 3
OREO and repossessed assets$690 $— $— $690 
Collateral dependent loans9,152 — — 9,152 
 Fair Value at December 31, 2023
 TotalLevel 1Level 2Level 3
OREO and repossessed assets$575 $— $— $575 
Collateral dependent loans3,656 — — 3,656 
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at both March 31, 2024 and December 31, 2023.

Note 6 – Mortgage Servicing Rights
The unpaid principal balance of the Company’s mortgage servicing rights portfolio totaled $443.6 million at March 31, 2024 compared to $448.9 million at December 31, 2023. Of these total balances, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at March 31, 2024 and December 31, 2023 were $441.5 million and $446.8 million, respectively. The unpaid principal balance of loans serviced for other financial institutions totaled $2.1 million at March 31, 2024 and $2.2 million at December 31, 2023. Loans serviced for Fannie Mae and others are not included in the Company’s financial statements as they are not assets of the Company.
A summary of the change in the balance of mortgage servicing assets during the periods indicated were as follows (in thousands):
Three Months Ended March 31,
20242023
Beginning balance, at fair value$4,632 $4,687 
Servicing rights that result from transfers and sale of financial assets45 40 
Changes in fair value:
Due to changes in model inputs or assumptions and other(1)
(65)(140)
Ending balance, at fair value$4,612 $4,587 
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows:
March 31, 2024December 31, 2023
Prepayment speed (Public Securities Association “PSA” model)110 %129 %
Weighted-average life8.0 years7.7 years
Weighted average discount rate12.5 %12.5 %

The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in
mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $282 thousand and $299 thousand for the three months ended March 31, 2024 and March 31, 2023, respectively.

Note 7 – Commitments and Contingencies
23

Table of Contents
In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks.  These transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments and lines of credit.

Note 8 – Borrowings, FHLB Stock and Subordinated Notes
FHLB Advances
The following tables present advances from the FHLB as of the dates indicated (dollars in thousands):
 March 31, 2024December 31, 2023
FHLB advances:
Overnight advances
$— $— 
Short-term advances
15,000 15,000 
Long-term advances
25,000 25,000 
Total
$40,000 $40,000 
March 31, 2024December 31, 2023
Fixed Rate:
Outstanding balance$40,000 $40,000 
Interest rates ranging from4.06 %4.06 %
Interest rates ranging to4.35 %4.35 %
Weighted average interest rate4.25 %4.25 %
Variable rate:
Outstanding balance$— $— 
Weighted average interest rate— %— %
The following table presents the maturity of our FHLB advances (dollars in thousands):
March 31,
2024
Remainder of 2024$15,000 
2025— 
202615,000 
2027— 
202810,000 
Thereafter— 
$40,000 
FHLB Des Moines Borrowing Capacity
The Company has a loan agreement with the FHLB of Des Moines. The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance. Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines to secure public deposits. The following table presents the borrowing capacity from the FHLB as of the dates indicated:
24


March 31, 2024December 31, 2023
Amount available to borrow under credit facility(1)
$447,919 $463,541 
Advance equivalent of collateral:
One-to-four family mortgage loans195,537 196,547 
Commercial and multifamily mortgage loans34,095 34,464 
Home equity loans293 348 
Notional amount of letters of credit outstanding9,000 10,000 
Remaining FHLB borrowing capacity(2)
$180,925 $181,360 
(1)Subject to eligible pledged collateral.
(2)Amount remaining from the advance equivalent of collateral less letters of credit outstanding and FHLB advances.
As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances. At both March 31, 2024 and December 31, 2023, the Company had an investment of $2.4 million in FHLB of Des Moines stock.
Federal Reserve Bank of San Francisco (“FRB SF”) Borrowings
The Company has a borrowing agreement with the FRB SF. The terms of the agreement call for a blanket pledge of a portion of the Company’s consumer and commercial business loans based on the outstanding balance. At March 31, 2024 and December 31, 2023, the amount available to borrow under this credit facility was $19.5 million and $18.3 million, respectively, subject to eligible pledged collateral. The Company had no outstanding borrowings under this arrangement at March 31, 2024 and December 31, 2023. 
Other Borrowings
The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank (“PCBB”). The line has a one year term maturing on June 30, 2024 and is renewable annually. As of March 31, 2024, the amount available under this line of credit was $20.0 million. There was no balance on this line of credit as of March 31, 2024 and December 31, 2023.
Subordinated Debt
In September 2020, the Company issued $12.0 million of fixed to floating rate subordinated notes that mature in 2030. The subordinated notes have an initial fixed interest rate of 5.25% to, but excluding, October 1, 2025, payable semi-annually in arrears. From, and including, October 1, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030, and may be redeemed by the Company, in whole or in part, on October 1, 2025, or on any subsequent interest payment date. Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the terms of the subordinated notes. The balance of the subordinated notes was $11.7 million as of both March 31, 2024 and December 31, 2023.

Note 9 – Earnings Per Common Share
The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data):
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 Three Months Ended
 20242023
Net income$770 $2,168 
LESS: Participating dividends - Unvested Restricted Stock Awards (“RSAs”)(3)(3)
LESS: Income allocated to participating securities - Unvested RSAs(2)(11)
Net income available to common stockholders - basic765 2,154 
ADD BACK: Income allocated to participating securities - Unvested RSAs2 11 
LESS: Income reallocated to participating securities - Unvested RSAs(2)(11)
Net income available to common stockholders - diluted$765 $2,154 
Weighted average number of shares outstanding, basic2,539,213 2,578,413 
Effect of potentially dilutive common shares17,745 25,630 
Weighted average number of shares outstanding, diluted2,556,958 2,604,043 
Earnings per share, basic$0.30 $0.84 
Earnings per share, diluted$0.30 $0.83 
There were 7,596 anti-dilutive securities at March 31, 2024 and 8,009 anti-dilutive securities at March 31, 2023.

Note 10 – Stock-based Compensation
Stock Options and Restricted Stock
The Company currently has one active stockholder-approved stock-based compensation plan, the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan"). The 2013 Plan permits the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. The equity incentive plan approved by stockholders in 2008 (the"2008 Plan") expired in November 2018 and no further awards may be made under the 2008 Plan; provided, however, all awards outstanding under the 2008 Plan remain outstanding in accordance with their terms. Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units.
As of March 31, 2024, on an adjusted basis, awards for stock options totaling 301,453 shares and awards for restricted stock totaling 167,114 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan. Share-based compensation expense was $95 thousand and $192 thousand for the three months ended March 31, 2024 and March 31, 2023, respectively.
Stock Option Awards
All stock option awards granted under the 2008 Plan vest in 20 percent annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan. The stock option awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each grant date in equal annual installments over periods of one-to-four years subject to the continued service of the participant with the Company. All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting.
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The following is a summary of the Company’s stock option award activity during the three months ended March 31, 2024 (dollars in thousands, except per share amounts):
 SharesWeighted-
Average
Exercise Price		Weighted-Average
Remaining Contractual
Term in Years		Aggregate
Intrinsic
Value
Outstanding at January 1, 202480,735 $32.28 5.36$603 
Granted6,469 39.89 
Exercised(1,235)21.16 
Expired(257)36.57 
Outstanding at March 31, 202485,712 33.00 5.53685 
Exercisable66,231 30.95 4.58661 
Expected to vest, assuming a 0% forfeiture rate over the vesting term
85,712 $33.00 5.53$685 
 
As of March 31, 2024, there was $190 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.4 years. The total intrinsic value of the shares exercised during the three months ended March 31, 2024 was $22 thousand and for the three months ended March 31, 2023 was $327 thousand.
The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The fair values of options granted during the three months ended March 31, 2024 and 2023 were determined using the following weighted-average assumptions as of the grant date.
Three Months Ended March 31,
20242023
Annual dividend yield1.69 %1.69 %
Expected volatility28.15 %28.15 %
Risk-free interest rate4.06 %3.60 %
Expected term6.00 years6.00 years
Weighted-average grant date fair value per option granted$11.64 $11.33 
There were 6,469 and 12,425 options granted during the three months ended March 31, 2024 and March 31, 2023, respectively .
Restricted Stock Awards
The fair value of the restricted stock awards is equal to the fair value of the Company's common stock at the date of grant. Compensation expense is recognized over the vesting periods of the awards. The restricted stock awards granted under the 2008 Plan vest in 20% annual increments commencing one year from the grant date. The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary dates of the grant date in equal annual installments over periods of one-to-four years subject to the continued service of the participant with the Company.
The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended March 31, 2024:
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 SharesWeighted-Average
Grant-Date Fair
Value Per Share		Aggregate Intrinsic Value Per Share
Non-Vested at January 1, 202415,967 $39.20 
Granted8,048 39.89 
Vested(6,872)38.19 
Forfeited— — 
Non-Vested at March 31, 202417,143 39.93 40.17 
Expected to vest assuming a 0% forfeiture rate over the vesting term
17,143 $39.93 $40.17 
 
As of March 31, 2024, there was $632 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans. The cost is expected to be recognized over the weighted-average vesting period of 2.4 years. The total fair value of shares vested for the three months ended March 31, 2024 and 2023 was $262 thousand and $370 thousand, respectively. The weighted average grant date fair value per share for the three months ended March 31, 2024 and 2023 was $39.89 and $40.13, respectively.
Employee Stock Ownership Plan
The fair value of the 169,647 shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) trust was $6.8 million at March 31, 2024. ESOP compensation expense included in salaries and benefits was $189 thousand for the three months ended March 31, 2024, and $204 thousand for the three months ended March 31, 2023.

Note 11 – Leases
We have operating leases for branch locations, a loan production office, our corporate office and in the past, for certain equipment. The term for our leases begins on the date we become legally obligated for the rent payments or we take possession of the building premises, whichever is earlier. Generally, our real estate leases have initial terms of three to ten years and typically include one renewal option. Our leases have remaining lease terms of five months to 5.3 years. The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties.
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The following table presents the lease right-of-use assets and lease liabilities recorded on the Condensed Consolidated Balance Sheets at the dates indicated (in thousands):
March 31,
2024		December 31,
2023
Operating lease right-of-use assets$4,259 $4,496 
Operating lease liabilities$4,576 $4,821 
The following table presents the components of lease expense for the periods indicated (in thousands):
Three Months Ended March 31,
20242023
Operating lease expense
Office leases$270 $268 
Sublease income(3)(3)
Net lease expense$267 $265 
The following table presents the schedule of lease liabilities at the date indicated (in thousands):
March 31, 2024
Remainder of 2024
$1,083 
2025933 
2026944 
2027963 
2028843 
Thereafter136 
Total lease payments4,902 
Less: Present value discount326 
Present value of lease liabilities$4,576 
Lease term and discount rate by lease type consist of the following at the dates indicated:
March 31,
2024		December 31,
2023
Weighted-average remaining lease term:
Office leases4.9 years5.2 years
Weighted-average discount rate (annualized):
Office leases2.78 %2.77 %

Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands):
Three Months Ended March 31,
20242023
Cash paid for amounts included in the measurement of lease liabilities for operating leases:
Operating cash flows
Office leases$278 $271 

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Table of Contents
Note 12 – Subsequent Events
On April 29, 2024, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.19 per common share, payable on May 22, 2024 to stockholders of record at the close of business on May 8, 2024.




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Table of Contents
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Form 10-Q 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, 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, a potential recession, or slowed economic growth;
•changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the Federal Reserve) benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;
•the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto;
•the effects of any federal government shutdown;
•changes in consumer spending, borrowing and savings habits;
•the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of our allowance for credit losses;
•monetary and fiscal policies of the Federal Reserve and the U.S. Government and other governmental initiatives affecting the financial services industry;
•the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;
•fluctuations in the demand for loans, the number of unsold homes, land and other properties;
•fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area;
•our ability to access cost-effective funding, including maintaining the confidence of depositors;
•the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;
•our ability to control operating costs and expenses;
•secondary market conditions for loans and our ability to sell loans in the secondary market;
•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 credit losses or to write-down assets, change Sound Community Bank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
•the inability of key third-party providers to perform their obligations to us;
•our ability to attract and retain deposits;
•competitive pressures among financial services companies;
•our ability to successfully integrate into our operations any assets, liabilities, clients, systems, and management personnel we may acquire and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all;
•the use of estimates in determining the fair values of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
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•our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions;
•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission (the “SEC”), or the Public Company Accounting Oversight Board (“PCAOB”);
•legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry and the availability of resources to address such changes;
•our ability to retain or attract key employees or members of our senior management team;
•costs and effects of litigation, including settlements and judgments;
•our ability to implement our business strategies;
•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
•our ability to pay dividends on our common stock;
•the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;
•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on third-party vendors who perform several of our critical processing functions;
•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest 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 reports filed with or furnished to the SEC, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 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 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
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 Department of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”). As a bank holding company, Sound Financial Bancorp is regulated by the Federal Reserve. We also sell insurance products and services 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 March 31, 2024, Sound Financial Bancorp, on a consolidated basis, had assets of $1.09 billion, net loans held-for-portfolio of $889.3 million, deposits of $916.9 million and stockholders’ equity of $101.0 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.
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, and 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 portion of which we sell to Fannie Mae and other investors and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives. We sell loans which conform to the underwriting standards of Fannie Mae (“conforming”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income. Residential loans which 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
32


owner-occupied and nonowner-occupied commercial real estate, multifamily properties and mobile home parks, and construction and land development loans.
Critical Accounting Estimates
Certain of our accounting policies require management to make difficult, complex or subjective judgments, which may relate to matters that are inherently uncertain.  Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances.  Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.  Management believes that its critical accounting estimates include determining the allowance for credit losses and accounting for mortgage servicing rights. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K. 

Comparison of Financial Condition at March 31, 2024 and December 31, 2023
General.   Total assets increased $91.5 million, or 9.2%, to $1.09 billion at March 31, 2024 from $995.2 million at December 31, 2023. The increase primarily was a result of an increase in cash and cash equivalents reflecting increased deposits and, to a lesser extent, an increase in loans held-for-portfolio.
Cash and Securities, and Investment Securities.  Cash and cash equivalents increased $88.3 million, or 177.7%, to $138.0 million at March 31, 2024 from $49.7 million at December 31, 2023. The increase was primarily due to the strategic decision to sell reciprocal deposits at the end of 2023, which reduced our cash balances. These reciprocal deposits returned to our balance sheet in the first quarter of 2024, which included deposits that had been generated during the fourth quarter of 2023 and subsequently sold.
Investment securities decreased $181 thousand, or 1.7%, to $10.3 million at March 31, 2024, compared to $10.5 million at December 31, 2023. Held-to-maturity securities totaled $2.2 million at both March 31, 2024 and December 31, 2023. Available-for-sale securities totaled $8.1 million at March 31, 2024, compared to $8.3 million at December 31, 2023. The decrease in available-for-sale securities was primarily due to higher net unrealized losses resulting from an increase in municipal bond yields during the current quarter, offset by regularly scheduled payments.
Loans.  Loans held-for-portfolio, net, increased $3.6 million, or 0.4%, to $889.3 million at March 31, 2024 from $885.7 million at December 31, 2023.
The following table reflects the changes in the mix of our loan portfolio at March 31, 2024, as compared to December 31, 2023 (dollars in thousands):
 March 31,
2024		December 31,
2023		Amount
Change		Percent
Change
One-to-four family$279,213 $279,448 $(235)(0.1)%
Home equity24,380 23,073 1,307 5.7 
Commercial and multifamily324,483 315,280 9,203 2.9 
Construction and land111,726 126,758 (15,032)(11.9)
Manufactured homes37,583 36,193 1,390 3.8 
Floating homes84,237 75,108 9,129 12.2 
Other consumer18,847 19,612 (765)(3.9)
Commercial business19,075 20,688 (1,613)(7.8)
Premiums for purchased loans808 829 (21)(2.5)
Deferred loan fees(2,475)(2,511)36 (1.4)
Total loans held-for-portfolio, gross897,877 894,478 3,399 0.4 
Allowance for credit losses — loans(8,598)(8,760)162 (1.8)
Total loans held-for-portfolio, net$889,279 $885,718 $3,561 0.4 %

As noted in the table above, increases in the loan portfolio were driven primarily by increases in commercial and multifamily and floating home loans and, to a lesser extent, increases in home equity and manufactured home loans. The increase in commercial and multifamily loans was primarily due to the conversion of construction projects to permanent financing, while the increase in floating home loans was due to the funding of a large portfolio of individual loans that had been delayed in our pipeline. The increase in home equity loans was primarily driven by homeowners utilizing the equity in their homes. The increase in manufactured home loans was primarily the result of affordability of these homes in the current market and internal
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efficiencies in how we process these loans. These increases were partially offset by decreases in construction and land loans, which was primarily due to projects completing and either paying off or converting to permanent financing, and decreases in other consumer and commercial business loans, which were primarily due to payoffs and paydowns, including the payoff of $2.1 million related to one commercial business loan that was previously on nonaccrual.
At March 31, 2024, our loan portfolio, net of deferred loan fees, remained well-diversified. At that date, commercial and multifamily real estate loans accounted for 36.1% of total loans, one-to-four family loans, including home equity loans, accounted for 33.7% of total loans, commercial business loans accounted for 2.1% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 15.7% of total loans. Construction and land loans accounted for 12.4% of total loans at March 31, 2024.
Loans held-for-sale totaled $351 thousand at March 31, 2024, compared to $603 thousand at December 31, 2023. The decrease was primarily due to timing of mortgage originations and sales.
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Allowance for Credit Losses.

The following table reflects the activity in our allowance for credit losses (“ACL”) during the periods indicated (dollars in thousands):
 Three Months Ended March 31,
 20242023
Allowance for Credit Losses — Loans:
Balance at beginning of period$8,760 $7,599 
Impact of Adoption of ASU 2016-13— 760 
Charge-offs(62)(79)
Recoveries6 7 
Net charge-offs(56)(72)
(Release of) provision for credit losses(106)245 
Balance at end of period8,598 8,532 
Reserve for Unfunded Commitments:
Balance at beginning of period193 335 
Impact of Adoption of ASU 2016-13— 695 
Provision for (release of) credit losses73 (235)
Balance at end of period266 795 
Allowance for credit losses$8,864 $9,327 
Ratio of net charge-offs during the period to average loans outstanding during the period(0.03)%(0.03)%
Our ACL — loans decreased $162 thousand, or 1.8%, to $8.6 million at March 31, 2024, from $8.8 million at December 31, 2023. The decrease in the ACL - loans from December 31, 2023 to March 31, 2024 was primarily a result of lower reserves on our other consumer loan portfolio and residential loan portfolios due to qualitative adjustments for changes in concentration and market conditions, partially offset by the increase in the allowance for credit losses on loans due to portfolio growth, and an increase in nonaccrual loans and the weighted average life of the portfolio. See “Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023 — Provision for Credit Losses.”
The following tables show certain credit ratios at and for the dates and periods indicated and the components of each ratio's calculation (dollars in thousands).
 At March 31, 2024At December 31, 2023
Allowance for credit losses - loans as a percentage of total loans outstanding0.96 %0.98 %
Allowance for credit losses — loans$8,598 $8,760 
Total loans outstanding$899,544 $896,160 
Nonaccrual loans as a percentage of total loans outstanding
1.01 %0.40 %
Total nonaccrual loans$9,053 $3,556 
Total loans outstanding$899,544 $896,160 
Allowance for credit losses - loans as a percentage of nonaccrual loans
94.97 %246.34 %
Allowance for credit losses — loans$8,598 $8,760 
Total nonaccrual loans$9,053 $3,556 
Allowance for credit losses as a percentage of total loans outstanding0.99 %1.00 %
Allowance for credit losses$8,864 $8,953 
Total loans outstanding$899,544 $896,160 
Allowance for credit losses as a percentage of nonaccrual loans97.91 %251.77 %
Allowance for credit losses$8,864 $8,953 
Total nonaccrual loans$9,053 $3,556 
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Three Months Ended March 31,
20242023
($ in thousands)
Net recoveries (charge-offs) during period to average loans outstanding:
One-to-four family:
— %— %
Net (charge-offs)/recoveries
$— $— 
Average loans outstanding
$278,472 $274,261 
Home equity:
— %— %
Net (charge-offs)/recoveries
$— $— 
Average loans outstanding
$23,300 $19,580 
Commercial and multifamily real estate:
— %— %
Net (charge-offs)/recoveries
$— $— 
Average loans outstanding
$313,139 $310,960 
Construction and land:
— %— %
Net (charge-offs)/recoveries
$— $— 
Average loans outstanding
$125,643 $120,704 
Manufactured homes:
(0.25)%— %
Net (charge-offs)/recoveries
$(23)$— 
Average loans outstanding
$36,716 $27,279 
Floating homes:
— %— %
Net (charge-offs)/recoveries
$— $— 
Average loans outstanding
$78,797 $74,043 
Other consumer:
(0.70)%(1.68)%
Net (charge-offs)
$(33)$(72)
Average loans outstanding
$18,945 $17,333 
Commercial business:
— %— %
Net (charge-offs)/recoveries
$— $— 
Average loans outstanding
$21,198 $24,107 
Total loans:(0.03)%(0.03)%
Net (charge-offs)
$(56)$(72)
Average loans outstanding
$896,210 $868,267 
Nonperforming Assets.  
Nonperforming assets (“NPAs”), which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $5.6 million, or 135.9%, to $9.7 million, or 0.90% of total assets, at March 31, 2024 from $4.1 million, or 0.42% of total assets, at December 31, 2023. 
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The table below sets forth the amounts and categories of NPAs at the dates indicated (dollars in thousands):
 Nonperforming Assets
 March 31,
2024		December 31,
2023		Amount
Change		Percent
Change
Total nonperforming loans$9,053 $3,556 $5,497 154.6 
OREO and repossessed assets690 575 115 20.0 
Total nonperforming assets$9,743 $4,131 $5,612 135.9 %

The increase in NPAs primarily was due to the addition of $8.0 million to nonaccrual status, which included a $3.7 million matured commercial real estate loan in process of securing financing from another lender, $3.2 million for two floating homes loans to a single borrower, and a $1.0 million commercial real estate loan, all of which are well secured, and one manufactured home loan of $115 thousand that was repossessed in the first quarter of 2024. These increases in NPAs were partially offset by the payoff of one large commercial business loan totaling $2.1 million, the return of three loans to accrual status, and normal payment amortization. The percentage of nonperforming loans to total loans was 1.01% at March 31, 2024, compared to 0.40% of total loans at December 31, 2023.
Mortgage Servicing Rights.  The fair value of mortgage servicing rights was $4.6 million at both March 31, 2024 and December 31, 2023. We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio. Mortgage servicing rights are carried at fair value. If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted.
Deposits and Borrowings. Total deposits increased $90.3 million, or 10.9%, to $916.9 million at March 31, 2024 from $826.5 million at December 31, 2023. The increase was largely a result of the movement of reciprocal deposits off balance sheet for strategic objectives at year-end, followed by the return of those deposits to our balance sheet in the first quarter of 2024. Additionally, the increase related to higher balances for existing depositors and an increase in certificate accounts, partially offset by lower public funds accounts and brokered money market deposits. Noninterest-bearing deposits increased $1.9 million, or 1.5%, to $128.7 million at March 31, 2024, compared to $126.7 million at December 31, 2023. Noninterest-bearing deposits represented 14.0% of total deposits at March 31, 2024, compared to 15.3% at December 31, 2023.
A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands):
 March 31, 2024December 31, 2023
 AmountWtd. Avg. RateAmountWtd. Avg. Rate
Noninterest-bearing demand$124,085 — %$124,134 — %
Interest-bearing demand159,178 0.32 168,346 0.75 
Savings65,723 0.10 69,461 0.07 
Money market241,976 3.42 154,044 1.39 
Time deposits321,340 4.61 307,962 3.45 
Escrow (1)
4,581 — 2,592 — 
Total deposits$916,883 2.54 %$826,539 1.64 %
(1) Escrow balances shown in noninterest-bearing deposits on the Condensed Consolidated Balance Sheets. 
Scheduled maturities of time deposits at March 31, 2024, are as follows (in thousands):
Year Ending December 31,Amount
2024$240,103 
202573,467 
20265,540 
20271,150 
20281,009 
Thereafter71 
 $321,340 
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Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less.
The aggregate amount of time deposits in denominations of more than $250,000 at March 31, 2024 and December 31, 2023, totaled $94.0 million and $88.3 million, respectively. Deposit amounts in excess of $250,000 are not federally insured. As of March 31, 2024, uninsured deposits totaled $166.7 million, which represented 18.2% of total deposits, as compared to uninsured deposits of $140.1 million, or 17.0% of total deposits as of December 31, 2023. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. The increase in uninsured deposits primarily related to jumbo tier pricing offered on some of our deposit products, as well as normal fluctuation within deposit accounts.
Borrowings, comprised of FHLB advances, remained flat at $40.0 million at both March 31, 2024 and December 31, 2023. FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. FHLB advances outstanding at March 31, 2024 had maturities ranging from late 2024 through early 2028. Subordinated notes, net totaled $11.7 million at both March 31, 2024 and December 31, 2023.
Stockholders’ Equity.   Total stockholders’ equity increased $338 thousand, or 0.3%, to $101.0 million at March 31, 2024, from $100.7 million at December 31, 2023. This increase primarily reflects $770 thousand of net income earned during the three months ended March 31, 2024 and a $62 thousand decrease in accumulated other comprehensive loss, net of tax, partially offset by the cash payment of $486 thousand in dividends to the Company’s stockholders.

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Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).
Three Months Ended March 31,
20242023
Average
Outstanding
Balance		Interest
Earned/
Paid		Yield/
Rate Annualized		Average
Outstanding
Balance		Interest
Earned/
Paid		Yield/
Rate Annualized
Interest-earning assets:
Loans receivable$895,430 $12,233 5.49 %$867,724 $11,381 5.32 %
Investments14,038 111 3.18 15,637 122 3.16 
Cash and cash equivalents107,361 1,416 5.30 64,607 671 4.21 
Total interest-earning assets (1)
1,016,829 13,760 5.44 947,968 12,174 5.21 
Interest-bearing liabilities:
Savings and money market accounts284,455 1,866 2.64 164,270 127 0.31 
Demand and NOW accounts159,762 141 0.35 241,088 233 0.39 
Certificate accounts315,495 3,696 4.71 246,578 1,776 2.92 
Subordinated notes11,724 168 5.76 11,683 168 5.83 
Borrowings40,000 429 4.31 44,911 499 4.51 
Total interest-bearing liabilities811,436 6,300 3.12 %708,530 2,803 1.60 %
Net interest income$7,460 $9,371 
Net interest rate spread2.32 %3.60 %
Net earning assets$205,393  $239,438 
Net interest margin2.95 %4.01 %
Average interest-earning assets to average interest-bearing liabilities125.31 % 133.79 %
Noninterest-bearing deposits$132,438 $172,805 
Total deposits$892,150 $5,703 2.57 %$824,741 $2,136 1.05 %
Total funding(2)
$943,874 $6,300 2.68 %$881,335 $2,803 1.29 %
(1) Calculated net of deferred loan fees, loan discounts and loans in process.
(2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.
Rate/Volume Analysis
The following table presents, for the periods indicated, the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between changes related to outstanding balances and changes due to interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands).
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Three Months Ended March 31, 2024 vs. 2023
 Increase (Decrease) due toTotal
Increase (Decrease)
 VolumeRate
Interest-earning assets:   
Loans receivable$379 $473 $852 
Investments(13)2 (11)
Cash and cash equivalents564 181 745 
Total interest-earning assets930 656 1,586 
Interest-bearing liabilities:
Savings and Money Market accounts788 951 1,739 
Demand and NOW accounts(72)(20)(92)
Certificate accounts807 1,113 1,920 
Subordinated notes1 (1)— 
Borrowings(53)(17)(70)
Total interest-bearing liabilities$1,471 $2,026 $3,497 
Change in net interest income$(1,911)

Comparison of Results of Operation for the Three Months Ended March 31, 2024 and 2023

General.  
Q1 2024 vs Q1 2023. Net income decreased $1.4 million, or 64.5%, to $770 thousand, or $0.30 per diluted common share, for the three months ended March 31, 2024, compared to $2.2 million, or $0.83 per diluted common share, for the three months ended March 31, 2023. The decrease was the result of a $1.9 million decrease in net interest income and a $41 thousand increase in noninterest expense, partially offset by a $43 thousand decrease in the provision for credit losses, a $127 thousand increase in noninterest income and a $384 thousand decrease in the provision for income taxes.

Interest Income 
Q1 2024 vs Q1 2023. Interest income increased $1.6 million, or 13.0%, to $13.8 million for the three months ended March 31, 2024, from $12.2 million for the three months ended March 31, 2023, primarily due to higher average balances of loans and interest-bearing cash, a 17 basis point increase in the average yield on loans, a 109 basis point increase in the average yield on interest-bearing cash, and a two basis point increase in the average yield on investments, partially offset by a decline in the average balance of investments.
Interest income on loans increased $852 thousand, or 7.5%, to $12.2 million for the three months ended March 31, 2024, compared to $11.4 million for the three months ended March 31, 2023. The average balance of total loans was $895.4 million for the three months ended March 31, 2024, compared to $867.7 million for the three months ended March 31, 2023, resulting from increased balances in all loan categories, except commercial business loans. The average yield on total loans was 5.49% for three months ended March 31, 2024, compared to 5.32% for the three months ended March 31, 2023. The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.
Interest income on the investment portfolio decreased $11 thousand, or 9.0%, to $111 thousand for the three months ended March 31, 2024, compared to $122 thousand for the three months ended March 31, 2023. The decrease was primarily due to lower average balances, slightly offset by an increase in the average yield. The average balance of investments was $14.0 million for the three months ended March 31, 2024, compared to $15.6 million for the three months ended March 31, 2023, while the average yield on investments increased two basis points to 3.18% for the three months ended March 31, 2024, compared to 3.16% for the three months ended March 31, 2023.
Interest income on cash and cash equivalents increased $745 thousand, or 111.0% to $1.4 million for the three months ended March 31, 2024, compared to $671 thousand for the three months ended March 31, 2023. The increase was due to higher average balances of and yields on our cash and cash equivalents. The average yield on cash and cash equivalents increased to 5.30% for the three months ended March 31, 2024, compared to 4.21% for the three months ended March 31, 2023, as a result of the high interest rate environment. The average balance of cash and cash equivalents was $107.4 million for the three months ended March 31, 2024, compared to $64.6 million for the three months ended March 31, 2023. The increase in the average
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balance was due to higher average cash balances as deposits increased during the period at a faster pace than we were able to increase loans.

Interest Expense  
Q1 2024 vs Q1 2023. Interest expense increased $3.5 million, or 124.8%, to $6.3 million for the three months ended March 31, 2024, from $2.8 million for the three months ended March 31, 2023. The increase was primarily the result of a $68.9 million increase in the average balance of certificate accounts and an $120.2 million increase in the average balance of savings and money market accounts, as well as higher average rates paid on all interest-bearing liabilities (excluding subordinated notes), partially offset by a $81.3 million decrease in the average balance of demand and NOW accounts and a $4.9 million decrease in the average balance of FHLB advances. The 179 basis point increase in the rate paid on certificate accounts and the 233 basis point increase in the rate paid on savings and money market accounts contributed to an overall 152 basis point increase in the average cost of total deposits to 2.57% for the quarter ended March 31, 2024, from 1.05% for the quarter ended March 31, 2023.
Interest expense on borrowings, comprised solely of FHLB advances, was $429 thousand for the three months ended March 31, 2024, compared to $499 thousand for the three months ended March 31, 2023, primarily due to a 20 basis point decline in the average cost of FHLB advances to 4.31% for the quarter ended March 31, 2024, compared to 4.51% for the same quarter in 2023. The average balance of FHLB advances was $40.0 million for the three months ended March 31, 2024, compared to $44.9 million for the three months ended March 31, 2023. Interest expense on subordinated notes was $168 thousand for both the three months ended March 31, 2024 and 2023.

Net Interest Income.  
Q1 2024 vs Q1 2023. Net interest income decreased $1.9 million, or 20.4%, to $7.5 million for the three months ended March 31, 2024, from $9.4 million for the three months ended March 31, 2023. The decrease in net interest income was primarily the result of increased funding costs, primarily the rates paid on and balances of money market and certificate accounts, partially offset by an increase in the average balance of and yield earned on interest-earning assets. Net interest margin (annualized) was 2.95% and 4.01% for the three months ended March 31,2024 and 2023, respectively. The decrease in net interest margin primarily was due to the higher interest expense on interest-bearing liabilities, driven by the increase in rates paid on interest-bearing liabilities and the higher average balances of savings and money market accounts and certificates of deposits, partially offset by higher interest income earned on interest-earning assets.
During 2023, in response to inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate by 100 basis points, to a range of 5.25% to 5.50% as of March 31, 2024.
Provision for Credit Losses.  
The following table reflects the components of the provision for (release of) credit losses during the periods indicated (dollars in thousands):
Three Months Ended March 31,
20242023
(Release of) provision for credit losses on loans$(106)$245 
Provision for (release of) credit losses on unfunded loan commitments73 (235)
(Release of) provision for credit losses$(33)$10 
During the three months ended March 31, 2024, the provision for credit losses on loans primarily related to lower reserves on our other consumer loan portfolio and residential loan portfolios due to qualitative adjustments for changes in concentration and market conditions, partially offset by the increase in the allowance for credit losses on loans due to portfolio growth, and an increase in nonaccrual loans and the weighted average life of the portfolio. The provision for credit losses on unfunded loan commitments during the current period related to new originations in our construction and land portfolios as of March 31, 2024. Net charge-offs for the three months ended March 31, 2024 totaled $56 thousand, compared to net charge-offs of $72 thousand for the three months ended March 31, 2023.
While we believe the estimates and assumptions used in our determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not have a material adverse impact on our financial condition and results of operations. A further decline in national and local economic conditions, as a result of the effects of inflation, and a potential recession or slowed economic growth, among other
41


factors, could result in a material increase in the ACL and have a material adverse impact on our financial condition and results of operations. In addition, the determination of the amount of our ACL is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.
Noninterest Income.  Noninterest income increased $127 thousand, or 13.1%, to $1.1 million for the three months ended March 31, 2024, as compared to $1.0 million for the three months ended March 31, 2023, as reflected below (dollars in thousands):
 Three Months Ended March 31,Amount
Change		Percent
Change
 20242023
Service charges and fee income$612 $581 $31 5.3 %
Earnings on BOLI177 151 26 17.2 
Mortgage servicing income282 299 (17)(5.7)
Fair value adjustment on mortgage servicing rights(65)(140)75 (53.6)
Net gain on sale of loans90 78 12 15.4
Total noninterest income$1,096 $969 $127 13.1 %
The increase in noninterest income was due to a $31 thousand increase in service charges and fee income, a $26 thousand increase in the cash surrender value of BOLI due to higher market rates, a $75 thousand improvement in the fair value adjustment on mortgage servicing rights due to higher market rates and a $12 thousand increase in net gain on sale of loans as a result of increased sales volume, partially offset by a decrease in mortgage servicing income as a result of the portfolio paying down at a faster speed than we are replacing the loans. Loans sold during the quarter ended March 31, 2024, totaled $4.2 million, compared to $3.9 million during the quarter ended March 31, 2023.

Noninterest Expense.  Noninterest expense increased $41 thousand, or 0.5%, to $7.7 million during the three months ended March 31, 2024, compared to $7.6 million during the three months ended March 31, 2023, as reflected below (dollars in thousands):
 Three Months Ended March 31,Amount
Change		Percent
Change
 20242023
Salaries and benefits$4,543 $4,485 $58 1.3 %
Operations1,457 1,441 16 1.1 
Regulatory assessments189 153 36 23.5 
Occupancy444 459 (15)(3.3)
Data processing1,017 993 24 2.4 
Net gain on OREO and repossessed assets6 84 (78)(92.9)
Total noninterest expense$7,656 $7,615 $41 0.5 %

The increase in noninterest expense was mainly attributable to an increase in salaries and benefits of $58 thousand, reflecting an increase in incentive compensation as a result of deposit and loan production, and higher medical expense, partially offset by lower salaries due to the restructuring of positions at the Bank, lower deferred compensation, lower stock compensation and higher deferred salaries. Data processing expenses increased due to software-related costs for new technology being implemented at the Bank and higher processing charges related to a higher volume of transactional activity and regulatory assessments increased $36 thousand due to the change in the assessment rate during 2023. These increases were partially offset by a decrease in net (gain) loss on OREO and repossessed assets as a result of the write-off of one OREO property in the first quarter of 2023.
The efficiency ratio for the quarter ended March 31, 2024 was 89.48%, compared to 73.65% for the quarter ended March 31, 2023. The deterioration in the efficiency ratio was primarily due to lower net interest income resulting from a faster increase in interest expense compared to interest income, and a slight increase in noninterest expense, partially offset by a slight increase in noninterest income.
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Income Tax Expense.  The provision for income taxes was $163 thousand and $547 thousand for the three months ended March 31, 2024 and March 31, 2023, respectively. The effective tax rates for the three months ended March 31, 2024 and March 31, 2023 were 17.47% and 20.15%, respectively. The effective tax rate for the three months ended March 31, 2024 was lower than the same period the prior year as a result of a higher portion of nontaxable income related to earnings on BOLI and nontaxable AFS securities during the current period in 2024 as compared to the same period in 2023.

Capital and Liquidity
The Management’s Discussion and Analysis in Item 7 of the Company’s 2023 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows. Although there have been no material changes in our liquidity management, sources of liquidity and cash flows since our 2023 Form 10-K, this discussion updates that disclosure for the three months ended March 31, 2024.
Capital. Stockholders’ equity totaled $101.0 million at March 31, 2024 and $100.7 million at December 31, 2023. In addition to net income of $770 thousand, other sources of capital during the three months ended March 31, 2024 primarily included $26 thousand in proceeds from stock option exercises. Uses of capital during the three months ended March 31, 2024 primarily included $486 thousand of dividends paid on common stock.
We paid a quarterly dividend of $0.19 per common share during the three months ended March 31, 2024 and $0.17 per common share during the three months ended March 31, 2023, which equates to a dividend payout ratio of 63.12% and 20.39%, respectively. The Company expects to continue paying quarterly cash dividends on its common stock, subject to the Board of Directors' discretion to change this practice at any time and for any reason, without prior notice. Assuming continued payment of the regular quarterly cash dividend during the remainder of 2024 at the rate of $0.19 per share, our average total dividend paid each quarter would be approximately $486 thousand based on the number of outstanding shares as of March 31, 2024.
The dividends, if any, we pay may be limited as more fully discussed under “Business—How We Are Regulated—Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2023 Form 10-K.
Stock Repurchase Programs. From time to time, our Board of Directors has authorized stock repurchase programs. In general, stock repurchases allow us to proactively manage our capital position and return excess capital to stockholders. Stock repurchases may also offset the dilutive effects of stock compensation awards. As of March 31, 2024, approximately $1.5 million of our common stock remained available for repurchase under our existing stock repurchase program. Purchases under the Company’s existing stock repurchase program may be made through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as well as any constraints specified in any trading plan that may be adopted in accordance with SEC Rule 10b5-1. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The Company’s stock repurchase program does not obligate the Company to purchase any particular number of shares. For additional details on our stock repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II, Item 2 of this Form 10-Q.
Liquidity. Liquidity measures the ability to meet current and future cash flow needs. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.
Asset liquidity is provided by assets that are readily marketable or pledgeable or that will mature in the near future. Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold. Liability liquidity generally is provided by access to funding sources, which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding challenges resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by
43


management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.
As of March 31, 2024, we had $146.1 million in cash and cash equivalents and available-for-sale investment securities, and $351 thousand in loans held-for-sale. At March 31, 2024, we had the ability to borrow $180.9 million in FHLB advances and access to additional borrowings of $19.5 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements. We had $40.0 million in outstanding advances from the FHLB and none from the Federal Reserve at March 31, 2024. We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding at March 31, 2024. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible. As of March 31, 2024, management was not aware of any events reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us. For additional details, see “Note 8—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Condensed Consolidated Financial Statements contained in "Item 1. Financial Statements" of this Form 10-Q.
In the ordinary course of business, we enter into contractual obligations and other commitments to make future payments. Refer to the accompanying Notes to Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of March 31, 2024. These include payments related to (i) long-term borrowings (Note 8—Borrowings, FHLB Stock and Subordinated Notes) and (ii) operating leases (Note 11—Leases). See the discussion below for commitments to extend credit and standby letters of credit.
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments generally represent a commitment to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit- and interest-rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets.
The Company's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established by the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments are not reflected in the condensed consolidated financial statements. The Company evaluates each client's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the client.
At March 31, 2024 and December 31, 2023, financial instrument contract amounts representing credit risk were as follows (in thousands):
 March 31, 2024December 31, 2023
Residential mortgage commitments$11,396 $10,465 
Unfunded construction commitments38,217 34,667 
Unused lines of credit24,889 27,245 
Irrevocable letters of credit277 277 
Total loan commitments$74,779 $72,654 
Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on its outstanding debt, and other general corporate expenses.
Sound Financial Bancorp is a holding company and does not conduct operations; its sources of liquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources. Banking regulations may limit the dividends that may be paid to Sound Financial Bancorp by Sound Community Bank. See “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2023 Form 10-K. At March 31, 2024 Sound Financial Bancorp, on an unconsolidated basis, had $1.9 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.
See also the “Condensed Consolidated Statements of Cash Flows” included in “Item 1. Financial Statements and Supplementary Data” of this Form 10-Q, for further information.
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Regulatory Capital
Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action (“PCA”). Qualifying institutions that elect to use the Community Bank Leverage Ratio, or CBLR, framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework. As of March 31, 2024, the Bank and Company’s CBLR was 10.55% and 9.55%, respectively, which exceeded the minimum requirement of 9%.
In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. The capital relief is phased into regulatory capital at 25% per year over a three-year transition period. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023 and elected to phase in the full effect of CECL on regulatory capital over the three-year transition period.
See "Part I, Item 1. Business – Regulation of Sound Community Bank – Capital Rules " in the Company's 2023 Form 10-K for additional information related to regulatory capital.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
The Company provided information about market risk in Item 7A of its 2023 Form 10-K.  There have been no material changes in our market risk since our 2023 Form 10-K.
Item 4.     Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures.
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(e) under the Securities Exchange Act of 1934 (the “Act”), as of March 31, 2024, was carried out under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, and several other members of the Company’s senior management. The Company’s principal executive officer and principal financial officer concluded that, as of March 31, 2024, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Company’s principal executive officer and principal financial officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
We intend to continually review and evaluate the design and effectiveness of the Company’s disclosure controls and procedures and to improve the Company’s controls and procedures over time and to correct any deficiencies that we may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While we believe the present design of the disclosure controls and procedures is effective to achieve this goal, future events affecting our business may cause the Company to modify its disclosure controls and procedures.
The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
(b)Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the three months ended March 31, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1     Legal Proceedings
In the normal course of business, the Company occasionally becomes involved in various legal proceedings.  Any liability from such currently pending proceedings is not expected to have a material adverse effect on the business or financial condition of the Company. 

Item 1A    Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A of our 2023 Form 10-K.

Item 2    Unregistered Sales of Equity Securities and Use of Proceeds
(a)    Not applicable.
(b)Not applicable.
(c)The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended March 31, 2024:
    
Total Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximated Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs(1)
January 1, 2024 - January 31, 2024100$39.36 100$1,499,900 
February 1, 2024 - February 29, 202464$39.75 641,499,836 
March 1, 2024 - March 31, 2024—$— —1,499,836 
Total164$39.51 164$1,499,836 
(1)Dollar amount excludes commissions paid.

On July 25, 2023, the Company announced that its Board of Directors approved an extension of the Company’s then existing stock repurchase program, which was set to expire on July 31, 2023, until January 31, 2024. Under this stock repurchase program, the Company was authorized to repurchase up to $4.0 million of its outstanding shares of common stock from time to time in the open market, based on prevailing market prices, or in privately negotiated transactions. On January 26
, 2024, the Company announced that its Board of Directors approved a new stock repurchase program, authorizing the Company to purchase up to $1.5 million of the Company’s issued and outstanding common stock over a period of 12 months expiring on January 26, 2025.
The actual timing, number and value of shares repurchased under the Company’s stock repurchase programs will depend on a number of factors, including constraints specified in any trading plan that may be adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934 and limitations imposed on repurchases made pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, price, general business and market conditions, and alternative investment opportunities.

Item 3    Defaults Upon Senior Securities
None.

Item 4.    Mine Safety Disclosures
Not applicable.

Item 5.    Other Information
(a)    Not applicable.
(b)    Not applicable.
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Table of Contents
(c)    Trading Plans. During the three months ended March 31, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
47


Item 6.    Exhibits
Exhibits:
Articles of Incorporation of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Registration Statement on Form S-1 filed with the SEC on March 27, 2012 (File No. 333-180385))
Amended and Restated Bylaws of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on October 26, 2021 (File No. 001-35633))
Form of Common Stock Certificate of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Registration Statement on Form S-1 filed with the SEC on March 27, 2012 (File No. 333-180385))
Forms of 5.25% Fixed-to-Floating Rate Subordinated Note due October 1, 2030 (included as Exhibit A to the Subordinate Note Purchase Agreement included in Exhibit 10.16) (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on September 21, 2020 (File No. 001-35633)).
Amended and Restated Employment Agreement dated January 25, 2019, by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 30, 2019 (File No. 001-35633))
Amended and Restated Supplemental Executive Retirement Agreement dated July 11, 2022, by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on July 14, 2022 (File No. 001-35633))
Amended and Restated Long Term Compensation Agreement dated November 23, 2015, by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 27, 2015 (File No. 001-35633))
Amended and Restated Confidentiality, Non-Competition and Non-Solicitation Agreement dated January 25, 2019, by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 30, 2019 (File No. 001-35633))
2008 Equity Incentive Plan (incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 31, 2009 (File No. 000-52889))
10.6+
Forms of Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Restricted Stock Agreements under the 2008 Equity Incentive Plan (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 29, 2009 (File No. 000-52889))
Summary of Annual Bonus Plan
2013 Equity Incentive Plan (included as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 2013 and incorporated herein by reference (File No. 001-35633))
Form of Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Restricted Stock
Agreement under the 2013 Equity Incentive Plan (included as Exhibit 10.14 to the Registrant's Quarterly
Report on Form 10-Q/A for the quarter ended September 30, 2013 and incorporated herein by reference (File
No. 001-35633))
Amended Form of Adoption Agreement for the Sound Community Bank Nonqualified Deferred Compensation Plan
The Sound Community Bank Nonqualified Deferred Compensation Plan (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on March 24, 2017 (File No. 001-35633))
Change of Control Agreement dated October 25, 2018, by and among Sound Financial Bancorp, Inc., Sound Community Bank and Heidi Sexton (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on October 26, 2018 (File No. (001-35633))
Credit Union of the Pacific Incentive Compensation Achievement Plan, dated January 1, 1994 (incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 14, 2019 (File No. (001-35633))
Form of Subordinated Note Purchase Agreement, dated September 18, 2020, by and among Sound Financial Bancorp, Inc. and the Purchasers (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on September 21, 2020 (File No. 001-35633)).
Change in Control Agreement dated August 25, 2021 by and among Sound Financial Bancorp, Inc., Sound Community Bank and Wes Ochs (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on August 31, 2021 (File No. 001-35633)).
Rule 13(a)-14(a) Certification (Chief Executive Officer)
Rule 13(a)-14(a) Certification (Chief Financial Officer)
Section 1350 Certification
101
The following financial statements from the Sound Financial Bancorp, Inc. Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024, formatted in Extensive Business Reporting Language (XBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of income, (iii) condensed consolidated statements of comprehensive income, (iv) condensed consolidated statements of equity (v) condensed consolidated statements of cash flows and (vi) the notes to condensed consolidated financial statements
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

+ Indicates management contract or compensatory plan or arrangement.
48


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Sound Financial Bancorp, Inc.
   
Date: May 13, 2024By:/s/  Laura Lee Stewart
  Laura Lee Stewart
  President/Chief Executive Officer
  (Principal Executive Officer)
By:/s/  Wes Ochs
Wes Ochs
Executive Vice President/Chief Strategy Officer and Chief Financial Officer
(Principal Financial Officer)
49