Sound Financial Bancorp, Inc.SFBC
Sound Financial Bancorp, Inc. Fair Value Disclosure
Fair Value Measurements
The Company determines the fair values of its financial instruments based on the requirements established in ASC 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with 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 December 31, 2025 and 2024 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). 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.
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.
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 premium/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 is 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 impaired loans and OREO is as follows:
Collateral dependent loans - The fair value of collateral dependent loans is based on the current appraised value (or other appropriate third-party market estimates) 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 (or other appropriate third-party market estimates) of the collateral less estimated costs to sell.
Off-balance sheet financial instruments - The fair value of off-balance sheet financial instruments, which consisted entirely of loan commitments at December 31, 2025 and 2024, 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 was not significant at December 31, 2025 and 2024.
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 years ended December 31, 2025 and 2024.
The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value, as of December 31, 2025 and 2024 (in thousands):
| December 31, 2025 | Fair Value Measurements Using: | ||||||||||||||||||||||||||||
| Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| FINANCIAL ASSETS: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 138,453 | $ | 138,453 | $ | 138,453 | $ | — | $ | — | |||||||||||||||||||
AFS securities | 7,699 | 7,699 | — | 7,699 | — | ||||||||||||||||||||||||
HTM securities | 1,892 | 1,578 | — | 1,578 | — | ||||||||||||||||||||||||
| Loans held-for-sale | 542 | 542 | — | 542 | — | ||||||||||||||||||||||||
| Loans held-for-portfolio, net | 896,928 | 868,356 | — | — | 868,356 | ||||||||||||||||||||||||
MSRs | 4,183 | 4,183 | — | — | 4,183 | ||||||||||||||||||||||||
| FINANCIAL LIABILITIES: | |||||||||||||||||||||||||||||
| Time deposits | 299,593 | 300,290 | — | 300,290 | — | ||||||||||||||||||||||||
| Borrowings | 10,000 | 10,000 | — | 10,000 | — | ||||||||||||||||||||||||
| Subordinated notes | 7,801 | 8,102 | — | 8,102 | — | ||||||||||||||||||||||||
| December 31, 2024 | Fair Value Measurements Using: | ||||||||||||||||||||||||||||
| Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| FINANCIAL ASSETS: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 43,641 | $ | 43,641 | $ | 43,641 | $ | — | $ | — | |||||||||||||||||||
AFS securities | 7,790 | 7,790 | — | 7,790 | — | ||||||||||||||||||||||||
HTM securities | 2,130 | 1,712 | — | 1,712 | — | ||||||||||||||||||||||||
| Loans held-for-sale | 487 | 487 | — | 487 | — | ||||||||||||||||||||||||
| Loans held-for-portfolio, net | 891,672 | 850,813 | — | — | 850,813 | ||||||||||||||||||||||||
MSRs | 4,769 | 4,769 | — | — | 4,769 | ||||||||||||||||||||||||
| FINANCIAL LIABILITIES: | |||||||||||||||||||||||||||||
| Time deposits | 295,822 | 296,575 | — | 296,575 | — | ||||||||||||||||||||||||
| Borrowings | 25,000 | 25,000 | — | 25,000 | — | ||||||||||||||||||||||||
| Subordinated notes | 11,759 | 12,653 | — | 12,653 | — | ||||||||||||||||||||||||
The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2025 and 2024 (in thousands):
| Fair Value at December 31, 2025 | ||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Municipal bonds | $ | 5,482 | $ | — | $ | 5,482 | $ | — | ||||||||||||||||||
| Agency mortgage-backed securities | 2,217 | — | 2,217 | — | ||||||||||||||||||||||
| MSRs | 4,183 | — | — | 4,183 | ||||||||||||||||||||||
| Fair Value at December 31, 2024 | ||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Municipal bonds | $ | 5,374 | $ | — | $ | 5,374 | $ | — | ||||||||||||||||||
| Agency mortgage-backed securities | 2,416 | — | 2,416 | — | ||||||||||||||||||||||
| MSRs | 4,769 | — | — | 4,769 | ||||||||||||||||||||||
The following table provides 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 at December 31, 2025:
| Financial Instrument | Valuation Technique | Unobservable Input(s) | Range (Weighted Average) | |||||||||||||||||
| MSRs | Discounted cash flow | Prepayment speed assumption | 125%-368% (125%) | |||||||||||||||||
| Discount rate | 9.0%-13.5% (10%) | |||||||||||||||||||
| Average debt service cost per residential loan | $96.00 | |||||||||||||||||||
The following table provides 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 at December 31, 2024:
| Financial Instrument | Valuation Technique | Unobservable Input(s) | Range (Weighted Average) | |||||||||||||||||
| MSRs | Discounted cash flow | Prepayment speed assumption | 125%-556% (125%) | |||||||||||||||||
| Discount rate | 10.0% | |||||||||||||||||||
| Average debt service cost per residential loan | $80.00 | |||||||||||||||||||
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.
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.”
There were no assets or liabilities (excluding MSRs) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2025 and 2024.
| | ||
The following table presents the balance of assets measured at fair value on a nonrecurring basis (in thousands):
| Fair Value at December 31, 2025 | ||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| OREO and repossessed assets | $ | 344 | $ | — | $ | — | $ | 344 | ||||||||||||||||||
Collateral-dependent loans | 5,934 | — | — | 5,934 | ||||||||||||||||||||||
| Fair Value at December 31, 2024 | ||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| OREO and repossessed assets | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Collateral-dependent loans | 7,627 | — | — | 7,627 | ||||||||||||||||||||||
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2025 and 2024.
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 18, 2026 | Showing above |
| 2024 | Mar 18, 2025 | |
| 2023 | Mar 22, 2024 | |
| 2022 | Mar 14, 2023 | |
| 2021 | Mar 15, 2022 | |
| 2020 | Mar 30, 2021 | |
| 2019 | Mar 12, 2020 | |
| 2018 | Mar 14, 2019 | |
| 2017 | Mar 27, 2018 | |
| 2016 | Mar 27, 2017 | |
| 2015 | Mar 30, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.