Minimum Regulatory Capital Requirements

The Company is a bank holding company under the supervision of the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve Board, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3 billion is generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations. If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at December 31, 2018, and 2017, the Company would have exceeded all regulatory requirements. The Bank is a state-chartered, federally insured institution and thereby is subject to the capital requirements established by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of their assets, liabilities, and certain off-balance- sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets.

As of December 31, 2018, according to the most recent notification from the FDIC, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The Bank's actual capital amounts (in thousands) and ratios as of December 31, 2018 and 2017 are presented in the following table:



	Actual				Minimum Capital Requirements				Minimum Required to be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2018
Tier 1 Capital to total adjusted assets ⁽¹⁾	$	69,685	9.73	%	$	28,659	4.0	%	$	35,824	5.0	%
Common Equity Tier 1 risk-based capital ratio ⁽²⁾	69,685		11.76		26,665		4.5		38,516		6.5
Tier 1 Capital to risk-weighted assets ⁽²⁾	69,685		11.76		35,553		6.0		47,404		8.0
Total Capital to risk-weighted assets ⁽²⁾	$	75,874	12.80	%	$	47,404	8.0	%	$	59,255	10.0	%

As of December 31, 2017
Tier 1 Capital to total adjusted assets ⁽³⁾	$	62,432	10.10	%	$	24,721	4.0	%	$	30,902	5.0	%
Common Equity Tier 1 risk-based capital ratio ⁽⁴⁾	62,432		12.03		23,354		4.5		33,733		6.5
Tier 1 Capital to risk-weighted assets ⁽⁴⁾	62,432		12.03		31,138		6.0		41,518		8.0
Total Capital to risk-weighted assets ⁽⁴⁾	$	67,868	13.08	%	$	41,518	8.0	%	$	51,897	10.0	%


(1)	Based on total adjusted assets of $716,475 at December 31, 2018.


(2)	Based on risk-weighted assets of $592,551 at December 31, 2018.


(3)	Based on total adjusted assets of $618,035 at December 31, 2017.


(4)	Based on risk-weighted assets of $518,970 at December 31, 2017.

In addition to the minimum common equity Tier 1 capital ratio (“CET1”), the Bank must maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This capital conservation buffer requirement was phased in beginning in January 2016 at an amount more than 0.625% of risk-weighted assets and increased each year to an amount more than 2.5% of risk-weighted assets when fully implemented on January 1, 2019. At December 31, 2018, the conservation buffer requirement was 1.875% and the Bank's actual conservation buffer was 4.80% .

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well capitalized. If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2018 Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated regulatory capital ratios calculated for Sound Financial Bancorp as of December 31, 2018 were 9.85% for Tier 1 leverage-based capital, 11.92% for both Common Equity Tier 1 risk-based capital, Tier 1 Capital to risk-based assets and 12.96% for total risk-based capital.