UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______ to ________

Commission file number: 000-52889

SOUND FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

United States		26-0776123
(State or other jurisdiction of incorporation of organization)		(IRS Employer Identification No.)

2005 5th Avenue, Second Floor, Seattle, Washington 98121

(Address of principal executive offices)

(206) 448-0884

(Registrant’s telephone number)

None

(Former name, former address and former fiscal year, if changed since last report)

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 [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [ ]

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

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [ X ]

Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date:

As of August 13, 2012, there were 2,960,045 shares of the registrant’s common stock outstanding.

SOUND FINANCIAL, INC.

FORM 10-Q

TABLE OF CONTENTS

	Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	3
Condensed Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 2012 and 2011 (unaudited)`	4
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended June 30, 2012 and 2011 (unaudited)	5
Condensed Consolidated Statement of Stockholders’ Equity for the Six Month Periods Ended June 30, 2012 and 2011(unaudited)	6
Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2012 and 2011 (unaudited)	7
Selected Notes to Condensed Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
Item 4. Controls and Procedures	47
PART II OTHER INFORMATION
Item 1. Legal Proceedings	48
Item 1A Risk Factors	48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3. Defaults Upon Senior Securities	48
Item 4. Mine Safety Disclosures	48
Item 5. Other Information	48
Item 6. Exhibits	49
SIGNATURES
EXHIBITS

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

SOUND FINANCIAL, INC AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Unaudited)
	June 30,			December 31,
	2012			2011
	(Dollars in thousands)
ASSETS
Cash and cash equivalents	$	19,400		$	17,031
Available-for-sale securities, at fair value		9,033			2,992
Federal Home Loan Bank stock, at cost		2,444			2,444
Loans held for sale		1,053			1,807
Loans		306,394			300,096
Less allowance for loan losses		(4,449	)		(4,455	)
Total loans, net		301,945			295,641

Accrued interest receivable		1,234			1,234
Bank-owned life insurance, net		7,099			6,981
Mortgage servicing rights, at fair value		2,558			2,437
Other real estate owned and repossessed assets, net		2,839			2,821
Premises and equipment, net		2,233			2,385
Other assets		5,234			3,967
Total assets	$	355,072		$	339,740

LIABILITIES
Deposits
Interest-bearing		277,607			269,421
Noninterest-bearing demand		36,122			30,576
Total deposits		313,729			299,997

Borrowings		8,185			8,506
Accrued interest payable		78			84
Other liabilities		2,778			2,149
Advance payments from borrowers for taxes and insurance		260			291
Total liabilities		325,030			311,027

COMMITMENTS AND CONTINGENCIES (NOTE 6)

STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none outstanding		-			-
Common stock, $0.01 par value, 24,000,000 shares authorized, 2,960,045 and 2,949,045 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively		30			30
Additional paid-in capital		12,005			11,939
Unearned shares - Employee Stock Ownership Plan (“ESOP”)		(693	)		(693	)
Retained earnings		19,235			18,096
Accumulated other comprehensive loss, net of tax		(535	)		(659	)
Total stockholders’ equity		30,042			28,713
Total liabilities and stockholders’ equity	$	355,072		$	339,740

See notes to condensed consolidated financial statements

SOUND FINANCIAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(Dollars in thousands, except per share amounts)
INTEREST INCOME
Loans, including fees	$	4,514		$	4,645		$	9,022		$	9,232
Interest and dividends on investments, cash and cash equivalents		84			56			139			118
Total interest income		4,598			4,701			9,161			9,350

INTEREST EXPENSE
Deposits		531			618			1,076			1,266
Borrowings		57			65			112			169
Total interest expense		588			683			1,188			1,435

NET INTEREST INCOME		4,010			4,018			7,973			7,915

PROVISION FOR LOAN LOSSES		1,100			1,225			2,600			2,050

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,910			2,793			5,373			5,865

NONINTEREST INCOME
Service charges and fee income		513			476			1,064			999
Earnings on cash surrender value of bank-owned life insurance		52			66			118			128
Mortgage servicing income		21			123			199			207
Fair value adjustment on mortgage servicing rights		(76	)		208			308			257
Loss on sale of securities		-			-			-			(34	)
Other-than-temporary impairment losses on securities		(32	)		-			(124	)		(39	)
Loss on sale of assets		-			(80	)		-			(80	)
Gain on sale of loans		308			102			559			137
Total noninterest income		786			895			2,124			1,575

NONINTEREST EXPENSE
Salaries and benefits		1,423			1,287			2,705			2,753
Operations		728			598			1,310			1,266
Regulatory assessments		99			125			221			351
Occupancy		294			253			604			548
Data processing		262			228			505			467
Losses and expenses on other real estate owned and repossessed assets		22			545			492			684
Total noninterest expense		2,828			3,036			5,837			6,069

INCOME BEFORE PROVISION FOR INCOME TAXES		868			652			1,660			1,371

PROVISION FOR INCOME TAXES		275			198			520			421

NET INCOME	$	593		$	454		$	1,139		$	950

BASIC EARNINGS PER SHARE	$	0.20		$	0.16		$	0.39		$	0.33
DILUTED EARNINGS PER SHARE	$	0.20		$	0.16		$	0.39		$	0.33

See notes to condensed consolidated financial statements

SOUND FINANCIAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of ComprehensiveIncome

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012		2011

Net income	$	593		$	454		$	1,139	$	950
Other comprehensive income, net of tax
Unrealized holding gain on available for sale securities, net of
taxes (benefit) of $(17), $(63), $22 and $5, respectively		(33	)		(121	)		42		10
Reclassification adjustments for realized losses on
sales of securities, net of taxes of $0, $0, $0 and $12, respectively		-			-			-		22
Reclassification adjustments for other-than-temporary
impairment on securities, net of taxes of $11, $0, $42 and $13, respectively		21			-			82		26

Other comprehensive income	$	(12	)	$	(121	)	$	124	$	58

Comprehensive income (loss)	$	581		$	333		$	1,263	$	1,008

See notes to condensed consolidated financial statements

SOUND FINANCIAL, INC. AND SUBSIDIARY

Condensed Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2012 and 2011

(unaudited)

	Shares		Common Stock		Additional Paid-in Capital		Unearned ESOP Shares			Retained Earnings		Accumulated Other Comprehensive Loss, net of tax			Total Stockholders’ Equity
	(in thousands)
BALANCE, December 31, 2010		2,954	$	30	$	11,808	$	(809	)	$	16,545	$	(671	)	$	26,903

Net income											950					950

Other comprehensive income, net of tax													58			58

Share-based compensation						66										66

BALANCE, June 30, 2011		2,954	$	30	$	11,874	$	(809	)	$	17,495	$	(613	)	$	27,977

	Shares		Common Stock		Additional Paid-in Capital		Unearned ESOP Shares			Retained Earnings		Accumulated Other Comprehensive Loss, net of tax			Total Stockholders’ Equity
	(in thousands)
BALANCE, December 31, 2011		2,949	$	30	$	11,939	$	(693	)	$	18,096	$	(659	)	$	28,713

Net income											1,139					1,139

Other comprehensive income, net of tax													124			124

Restricted stock awards		11														-

Share-based compensation						66										66

BALANCE, June 30, 2012		2,960	$	30	$	12,005	$	(693	)	$	19,235	$	(535	)	$	30,042

See notes to condensed consolidated financial statements

SOUND FINANCIAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,139		$	950
Adjustments to reconcile net income to net cash from operating activities
Accretion of net premium on investments		(9	)		-
Loss on sale of available for sale securities		-			34
Other-than-temporary impairment losses on securities		124			39
Provision for loan losses		2,600			2,050
Depreciation and amortization		180			196
Compensation expense related to stock options and restricted stock		66			66
Fair value adjustment on mortgage servicing rights		(308	)		(257	)
Additions to mortgage servicing rights		(328	)		(216	)
Amortization of mortgage servicing rights		515			399
Increase in cash surrender value of bank owned life insurance		(118	)		(128	)
Proceeds from sale of loans		33,046			22,841
Originations of loans held for sale		(31,733	)		(22,194	)
Loss on sale of other real estate owned and repossessed assets		169			395
Loss on sale of fixed assets		-			80
Gain on sale of loans		(559	)		(137	)
Change in operating assets and liabilities
Accrued interest receivable		-			41
Other assets		(1,331	)		759
Accrued interest payable		(6	)		(45	)
Other liabilities		629			(1,241	)

Net cash provided by operating activities		4,076			3,632

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal payments, maturities and sales of available for sale securities		263			1,263
Purchase of available for sale securities		(6,231	)		-
Net increase in loans		(10,583	)		(4,246	)
Improvements to other real estate owned (“OREO”) and other repossessed assets		(358	)		(30	)
Proceeds from sale of OREO and other repossessed assets		1,850			1,474
Purchases of premises and equipment		(28	)		702

Net cash used by investing activities		(15,087	)		(837	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		13,732			9,142
Proceeds from borrowings		-			51,700
Repayment of borrowings		(321	)		(57,721	)
Net change in advances from borrowers for taxes and insurance		(31	)		(74	)

Net cash provided by financing activities		13,380			3,047

INCREASE IN CASH AND CASH EQUIVALENTS		2,369			5,842

CASH AND CASH EQUIVALENTS, beginning of period		17,031			9,092

CASH AND CASH EQUIVALENTS, end of period	$	19,400		$	14,934

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	75		$	1,125
Interest paid on deposits and borrowings	$	1,194		$	1,480
Net transfer of loans to other real estate owned	$	1,679		$	2,791

See notes to condensed consolidated financial statements

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statement (unaudited)

Note 1 – Basis of Presentation

The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial, Inc. (“we,” “us,” “our,” “Sound Financial,” or the “Company”) and its wholly owned subsidiary, Sound Community Bank (the “Bank”). These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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 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, 2011, as filed with the SEC. The results for the interim periods are not necessarily indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2011, included in the Company's Annual Report on Form 10-K.

Certain amounts in the prior quarters’ financial statements have been reclassified to conform to the current presentation. These classifications do not have an impact on previously reported net income, retained earnings or earnings per share.

Note 2 – Accounting Pronouncements Recently Issued or Adopted

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The ASU amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and, as well, the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for the Company’s reporting period beginning on or after December 15, 2011. The guidance applies prospectively to transactions or modification of existing transactions that occur on or after the effective date and early adoption is not permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU amends existing guidance regarding the highest and best use and valuation premise by clarifying these concepts are only applicable to measuring the fair value of nonfinancial assets. The ASU also clarifies that the fair value measurement of financial assets and financial liabilities which have offsetting market risks or counterparty credit risks that are managed on a portfolio basis, when several criteria are met, can be measured at the net risk position. Additional disclosures about Level 3 fair value measurements are required including a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and discussion of the sensitivity of fair value changes in unobservable inputs and interrelationships about those inputs as well disclosure of the level of the fair value of items that are not measured at fair value in the financial statements but disclosure of fair value is required. The provisions of ASU No. 2011-04 are effective for the Company’s reporting period beginning after December 15, 2011 and are applied prospectively. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statement (unaudited)

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The ASU amends current guidance to allow a company the option of presenting the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions do not change the items that must be reported in other comprehensive income or when an item of other comprehensive must to reclassified to net income. The amendments do not change the option for a company to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense (benefit) related to the total of other comprehensive income items. The amendments do not

affect how earnings per share is calculated or presented. The provisions of ASU No. 2011-05 are effective for the Company’s reporting period beginning after December 15, 2011 and are applied retrospectively. Early adoption was permitted and there are no required transition disclosures. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The ASU defers indefinitely the requirement to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. The adoption of the ASUs did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. With the ASU, a company testing goodwill for impairment now has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (the first step of goodwill impairment test). If, on the basis of qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. Additionally, new examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment have been made to the guidance and replace the previous guidance for triggering events for interim impairment assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company’s consolidated financial statements.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statement (unaudited)

In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05 (“ASU 2011-12”). This ASU defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. ASU 2011-12 was issued in order to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, the Company will continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before the issuance of ASU 2011-05. ASU 2011-12 was effective for the Company’s financial statements for annual and interim periods beginning after December 31, 2011, and was applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued ASU No. 2011-02, Testing Indefinite-Lived Intangible Assets for Impairment. With the ASU, a company testing indefinite-lived intangibles for impairment now has the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company’s consolidated financial statements.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

Note 3 – Investments

The amortized cost and fair value of our available for sale securities and the corresponding amounts of gross unrealized gains and losses were as follows:

			Gross Unrealized
	Amortized Cost		Gains		Losses 1 Year or Less			Losses Greater Than 1 Year			Estimated Fair Value
June 30, 2012	(in thousands)
Agency mortgage-backed securities	$	6,273	$	6	$	(47	)	$	-		$	6,232
Non-agency mortgage-backed securities		3,571		-		-			(770	)		2,801
Total	$	9,844	$	6	$	(47	)	$	(770	)	$	9,033


			Gross Unrealized
	Amortized Cost		Gains		Losses 1 Year or Less			Losses Greater Than 1 Year			Estimated Fair Value
December 31, 2011	(in thousands)
Agency mortgage-backed securities	$	53	$	6	$	-		$	-		$	59
Non-agency mortgage-backed securities		3,939		-		-			(1,006	)		2,933
Total	$	3,992	$	6	$	-		$	(1,006	)	$	2,992

The amortized cost and fair value of mortgage-backed securities by contractual maturity, at June 30, 2012, are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2012
	Amortized Cost		Fair Value
	(in thousands)
Due after ten years	$	9,844	$	9,033

Securities with a carrying value of $58,000 at June 30, 2012 were pledged to secure Washington State Public Funds. Additionally, the Company has letters of credit with a notional amount of $31.5 million to secure public deposits.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

Sales of available for sale securities were as follows:

	Six Months Ended June 30,
	2012	2011
	(in thousands)
Proceeds	$-	$1,118
Gross gains	-	3
Gross losses	-	(37)

The following table summarizes the aggregate fair value and gross unrealized loss by length of time those investments have been continuously in an unrealized loss position:

	June 30, 2012
	Less Than 12 Months		12 Months or Longer		Total
	Fair Value	Unrealized Loss	Fair Value	Unrealized Loss	Fair Value	Unrealized Loss
	(in thousands)
Agency mortgage-backed securities	$6,174	$(47)	$-	$-	$6,174	$(47)
Non-agency mortgage-backed securities	-	-	2,801	(770)	2,801	(770)
Total	$6,174	$(47)	$2,801	$(770)	$8,975	$(817)

	December 31, 2011
	Less Than 12 Months		12 Months or Longer		Total
	Fair Value	Unrealized Loss	Fair Value	Unrealized Loss	Fair Value	Unrealized Loss
	(in thousands)
Non-agency mortgage-backed securities	$-	$-	$2,933	$(1,006)	$2,933	$(1,006)
Total	$-	$-	$2,933	$(1,006)	$2,933	$(1,006)

The following table presents the cumulative roll forward of credit losses recognized in earnings relating to the Company’s non-U.S. agency mortgage backed securities:

	Six Months Ended
	June 30,
	2012		2011
	(in thousands)
Estimated credit losses, beginning balance	$	347	$	160
Additions for credit losses not previously recognized		124		39
Reduction for increases in cash flows		-		-
Reduction for realized losses		-		-
Estimated losses, ending balance	$	471	$	199

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

As of June 30, 2012, our securities portfolio consisted of six U.S. agency and five non-U.S. agency mortgage backed securities with a fair value of $9.0 million, of which all five non-U.S. agency securities and four U.S. agency securities were in an unrealized loss position. The unrealized losses were primarily caused by changes in interest rates and a lack of market liquidity causing a decline in the fair value subsequent to the purchase. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. While management does not intend to sell the securities, and it is unlikely that the Company will be required to sell these securities before recovery of its amortized cost basis, management’s impairment evaluation indicates that certain securities possess qualitative and quantitative factors that suggest an other-than-temporary impairment (OTTI). These factors include, but are not limited to: the length of time and extent of the fair value declines, ratings agency down grades, the potential for an increased level of actual defaults, and the extension in duration of the securities. In addition to the qualitative factors, management’s evaluation includes an assessment of quantitative evidence that involves the use of cash flow modeling and present value calculations as determined by considering the applicable OTTI accounting guidance. The Company compares the present value of the current estimated cash flows to the present value of the previously estimated cash flows. Accordingly, if the present value of the current estimated cash flows is less than the present value of the previous period’s present value, an adverse change is considered to exist and the security is considered OTTI. The associated “credit loss” is the amount by which the security’s amortized cost exceeds the present value of the current estimated cash flows. Based upon the results of the cash flow modeling as of June 30, 2012, four securities reflected OTTI during the six month period ended June 30, 2012. Estimating the expected cash flows and determining the present values of the cash flows involves the use of a variety of assumptions and complex modeling. In developing its assumptions, the Company considers all available information relevant to the collectability of the applicable security, including information about past events, current conditions, and reasonable and supportable forecasts. Furthermore, the Company asserts that the cash flows used in the determination of OTTI are its “best estimate” of cash flows.

The Company engages a third party to assist management with modeling cash flows. The model includes each individual non-agency mortgage backed securities’ structural features. The modeled cash flows are discounted and they incorporate additional projected defaults based upon risk analysis of the financial condition and performance. Utilizing the quantitative change in the net present value of the cash flows compared to the amortized cost of the security, the Company recognized additional credit losses of $124,000 in non-cash pre-tax impairment charges for the six months ended June 30, 2012. Cumulative at June 30, 2012, the Company has recognized a total of $471,000 of OTTI on four of the five non-agency mortgage backed securities.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

Note 4 – Loans

The composition of the loan portfolio, including loans held for sale, is as follows:

	June 30, 2012			December 31, 2011
	(in thousands)
Real Estate Loans:
One-to four- family	$	95,657		$	96,305
Home equity		38,175			39,656
Commercial and multifamily		111,804			106,016
Construction and land		20,564			17,805
Total real estate loans		266,200			259,782

Consumer loans:
Manufactured homes		17,463			18,444
Other consumer		9,861			10,920
Total consumer loans		27,324			29,364

Commercial business loans		14,556			13,163

Total loans		308,080			302,309
Deferred fees		(633	)		(406	)
Loans held for sale		(1,053	)		(1,807	)
Total loans, gross		306,394			300,096
Allowance for loan losses		(4,449	)		(4,455	)
Total loans, net	$	301,945		$	295,641

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2012:

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	845	$	212	$	21	$	75	$	140	$	60	$	107	$	-	$	1,460
Ending balance: collectively evaluated for impairment		831		1,000		626		106		196		113		108		9	$	2,989
Ending balance	$	1,676	$	1,212	$	647	$	181	$	336	$	173	$	215	$	9	$	4,449

Loans receivable:
Ending balance: individually evaluated for impairment	$	7,511	$	2,169	$	2,218	$	816	$	772	$	171	$	966	$	-	$	14,623
Ending balance: collectively evaluated for impairment		88,146		36,006		109,586		19,748		16,691		9,690		13,590		-		293,457
Ending balance	$	95,657	$	38,175	$	111,804	$	20,564	$	17,463	$	9,861	$	14,556	$	-	$	308,080

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011:

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	541	$	447	$	38	$	37	$	11	$	48	$	132	$	-	$	1,254
Ending balance: collectively evaluated for impairment		576		979		931		68		279		165		122		81		3,201
Ending balance	$	1,117	$	1,426	$	969	$	105	$	290	$	213	$	254	$	81	$	4,455

Loans receivable:
Ending balance: individually evaluated for impairment	$	8,260	$	1,784	$	2,003	$	902	$	122	$	101	$	447	$	-	$	13,619
Ending balance: collectively evaluated for impairment		88,045		37,872		104,013		16,903		18,322		10,819		12,716		-		288,690
Ending balance	$	96,305	$	39,656	$	106,016	$	17,805	$	18,444	$	10,920	$	13,163	$	-	$	302,309

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the activity in loan losses for the three months ended June 30, 2012:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	1,582	$	(650	)	$	4	$	740		$	1,676
Home equity		1,410		(20	)		130		(308	)		1,212
Commercial and multifamily		508		(503	)		83		559			647
Construction and land		66		(4	)		-		119			181
Manufactured homes		377		(32	)		-		(9	)		336
Other consumer		142		(27	)		9		49			173
Commercial business		234		(1	)		10		(28	)		215
Unallocated		31		-			-		(22	)		9
	$	4,350	$	(1,237	)	$	236	$	1,100		$	4,449

The following table summarizes the activity in loan losses for the six months ended June 30, 2012:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	1,117	$	(1,399	)	$	4	$	1,954		$	1,676
Home equity		1,426		(735	)		132		389			1,212
Commercial and multifamily		969		(503	)		83		98			647
Construction and land		105		(41	)		-		117			181
Manufactured homes		290		(60	)		-		106			336
Other consumer		213		(106	)		16		50			173
Commercial business		254		(7	)		10		(42	)		215
Unallocated		81		-			-		(72	)		9
	$	4,455	$	(2,851	)	$	245	$	2,600		$	4,449

The following table summarizes the activity in loan losses for the three months ended June 30, 2011:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	863	$	(290	)	$	-	$	254		$	827
Home equity		1,405		(360	)		-		560			1,605
Commercial and multifamily		1,300		(434	)		18		329			1,213
Manufactured		287		(100	)		29		86			273
Other consumer		197		(132	)		-		114			208
Commercial business		209		(9	)		-		(28	)		172
Unallocated		155		-			-		(90	)		65
	$	4,416	$	(1,325	)	$	47	$	1,225		$	4,363

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the activity in loan losses for the six months ended June 30, 2011:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	909	$	(533	)	$	12	$	439		$	827
Home equity		1,480		(792	)		6		911			1,605
Commercial and multifamily		664		(504	)		18		1,035			1,213
Manufactured		294		(201	)		-		180			273
Other consumer		309		(162	)		40		21			208
Commercial business		163		(8	)		1		16			172
Unallocated		617		-			-		(552	)		65
	$	4,436	$	(2,200	)	$	77	$	2,050		$	4,363

Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted.

When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically or we may allow the loss to be addressed in the general allowance. General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are required to be classified as either watch or special mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the OCC, which can order the establishment of additional loss allowances.

Early indicator loan grades are used to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful or loss. The grades for watch and special mention are assigned to loans which have been criticized based upon known characteristics such as periodic payment delinquency or stale financial information from the borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful or loss) are subject to monthly problem loan reporting.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following table represents the internally assigned grades as of June 30, 2012 by type of loan:

	One-to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial Business		Total
Grade:	(in thousands)
Pass	$	76,053	$	30,292	$	105,903	$	19,092	$	14,934	$	8,689	$	11,854	$	266,817
Watch		15,497		6,447		3,866		759		2,452		1,064		2,141		32,226
Special Mention		499		506		600		-		53		-		-		1,658
Substandard		3,608		930		1,435		713		24		108		561		7,379
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	95,657	$	38,175	$	111,804	$	20,564	$	17,463	$	9,861	$	14,556	$	308,080

The following table represents the internally assigned grades as of December 31, 2011 by type of loan:

	One-to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial Business		Total
Grade:	(in thousands)
Pass	$	70,392	$	31,943	$	100,002	$	16,087	$	16,062	$	9,507	$	10,331	$	254,324
Watch		18,088		6,138		4,048		778		2,260		1,312		2,385		35,009
Special Mention		1,505		183		-		-		-		4		11		1,703
Substandard		6,320		1,392		1,966		940		122		97		436		11,273
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	96,305	$	39,656	$	106,016	$	17,805	$	18,444	$	10,920	$	13,163	$	302,309

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. Loans are automatically placed on nonaccrual once the loan is 90 days past due or if, in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.

The following table presents the recorded investment in nonaccrual loans as of June 30, 2012 and December 31, 2011 by type of loan:

	June 30, 2012		December 31, 2011
	(in thousands)
One- to four- family	$	1,918	$	3,124
Home equity		623		731
Commercial and multifamily		1,189		1,299
Other consumer		100		64
Total	$	3,830	$	5,218

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following table represents the aging of the recorded investment in past due loans as of June 30, 2012 by type of loan:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Recorded Investment > 90 Days and Accruing		Total Past Due		Current		Total Loans
	(in thousands)
One- to four- family	$	-	$	395	$	2,896	$	-	$	3,291	$	92,366	$	95,657
Home equity		628		33		577		-		1,238		36,937		38,175
Commercial and multifamily		-		-		40		-		40		111,764		111,804
Construction and land		570		143		-		-		713		19,851		20,564
Manufactured homes		53		46		-		-		99		17,364		17,463
Other consumer		44		131		101		-		276		9,585		9,861
Commercial business		245		78		-		-		323		14,233		14,556
Total	$	1,540	$	826	$	3,614	$	-	$	5,980	$	302,100	$	308,080

The following table represents the aging of the recorded investment in past due loans as of December 31, 2011 by type of loan:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Recorded Investment > 90 Days and Accruing		Total Past Due		Current		Total Loans
	(in thousands)
One- to four- family	$	4,321	$	935	$	2,683	$	-	$	7,939	$	88,366	$	96,305
Home equity		583		176		683		-		1,442		38,214		39,656
Commercial and multifamily		-		-		-		-		-		106,016		106,016
Construction and land		-		123		80		-		203		17,602		17,805
Manufactured homes		327		7		-		-		334		18,110		18,444
Other consumer		172		3		-		-		175		10,745		10,920
Commercial business		669		-		-		-		669		12,494		13,163
Total	$	6,072	$	1,244	$	3,446	$	-	$	10,762	$	291,547	$	302,309

Nonperforming Loans. Loans are considered nonperforming when they are 90 days past due, placed on nonaccrual, or when they are past due troubled debt restructurings. The following table represents the credit risk profile based on payment activity as of June 30, 2012 by type of loan:

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
(in thousands)
Performing	$	92,370	$	37,164	$	109,772	$	20,564	$	17,417	$	9,739	$	14,277	$	301,303
Nonperforming		3,287		1,011		2,032		-		46		122		279	$	6,777
Total	$	95,657	$	38,175	$	111,804	$	20,564	$	17,463	$	9,861	$	14,556	$	308,080

The following table represents the credit risk profile based on payment activity as of December 31, 2011 by type of loan:

	One-to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
(in thousands)
Performing	$	91,904	$	38,783	$	104,797	$	17,725	$	18,444	$	10,856	$	13,163	$	295,672
Nonperforming		4,401		873		1,219		80		-		64		-		6,637
Total	$	96,305	$	39,656	$	106,016	$	17,805	$	18,444	$	10,920	$	13,163	$	302,309

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Consolidated Financial Statements (unaudited)

Impaired Loans. A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is measured on a loan by loan basis for all loans in the portfolio.

The following table presents loans individually evaluated for impairment as of June 30, 2012 by type of loan:

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(in thousands)
One-to four-family	$	1,644	$	1,900	$	-
Home equity		630		759		-
Commercial and multifamily		1,972		1,972		-
Construction and land		596		596		-
Manufactured homes		71		71		-
Other consumer		2		43		-
Commercial business		847		847		-
Total	$	5,762	$	6,188	$	-

With an allowance recorded:
One-to four-family	$	5,867	$	5,931	$	845
Home equity		1,539		1,691		212
Commercial and multifamily		246		246		21
Construction and land		220		220		75
Manufactured homes		701		701		140
Other consumer		169		169		60
Commercial business		119		119		107
Total	$	8,861	$	9,077	$	1,460

Totals:
One-to four- family	$	7,511	$	7,831	$	845
Home equity		2,169		2,450		212
Commercial and multifamily		2,218		2,218		21
Construction and land		816		816		75
Manufactured homes		772		772		140
Other consumer		171		212		60
Commercial business		966		966		107
Total	$	14,623	$	15,265	$	1,460

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents loans individually evaluated for impairment as of December 31, 2011 by type of loan:

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(in thousands)
One-to four-family	$	3,104	$	3,104	$	-
Home equity		773		773		-
Commercial and multifamily		1,784		1,784		-
Construction and land		779		785		-
Manufactured homes		-		-		-
Other consumer		14		55		-
Commercial business		233		233		-
Total	$	6,687	$	6,734	$	-

With an allowance recorded:
One-to four-family	$	5,156	$	5,280	$	541
Home equity		1,011		1,038		447
Commercial and multifamily		219		219		38
Construction and land		123		178		37
Manufactured homes		122		122		11
Other consumer		87		87		48
Commercial business		214		214		132
Total	$	6,932	$	7,138	$	1,254

Totals:
One-to four-family	$	8,260	$	8,384	$	541
Home equity		1,784		1,811		447
Commercial and multifamily		2,003		2,003		38
Construction and land		902		963		37
Manufactured homes		122		122		11
Other consumer		101		142		48
Commercial Business		447		447		132
Total	$	13,619	$	13,872	$	1,254

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Consolidated Financial Statements (unaudited)

The following table presents loans individually evaluated for impairment as of June 30, 2012 and 2011 by type of loan:

	Three Months Ended
	June 30, 2012				June 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to four-family	$	2,751	$	12	$	2,081	$	16
Home equity		643		9		627		7
Commercial and multifamily		1,903		15		450		-
Construction and land		661		6		-		-
Manufactured homes		72		1		109		2
Other consumer		15		1		66		-
Commercial business		836		5		78		-
Total	$	6,881	$	49	$	3,411	$	25

With an allowance recorded:
One-to four-family	$	5,759	$	46	$	2,426	$	25
Home equity		1,416		12		509		2
Commercial and multifamily		336		2		2,868		(1	)
Construction and land		149		2		-		-
Manufactured homes		749		12		49		3
Other consumer		117		1		41		-
Commercial business		133		2		205		-
Total	$	8,659	$	77	$	6,098	$	29

Totals:
One-to four-family	$	8,510	$	58	$	4,507	$	41
Home equity		2,059		21		1,135		9
Commercial and multifamily		2,239		17		3,318		(1	)
Construction and land		810		8		-		-
Manufactured homes		821		13		158		5
Other consumer		132		2		107		-
Commercial Business		969		7		282		-
Total	$	15,540	$	126	$	9,507	$	54

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Consolidated Financial Statements (unaudited)

The following table presents loans individually evaluated for impairment as of June 30, 2012 and 2011 by type of loan:

	Six Months Ended
	June 30, 2012				June 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to four-family	$	2,868	$	29	$	1,678	$	12
Home equity		686		22		538		4
Commercial and multifamily		1,863		34		449		2
Construction and land		700		18		-		-
Manufactured homes		48		3		63		-
Other consumer		15		1		48		2
Commercial business		635		10		-		-
Total	$	6,815	$	117	$	2,776	$	20

With an allowance recorded:
One-to four-family	$	5,558	$	117	$	2,426	$	7
Home equity		1,281		25		509		2
Commercial and multifamily		297		3		2,869		31
Construction and land		140		5		-		-
Manufactured homes		540		26		48		-
Other consumer		107		4		40		1
Commercial business		161		3		205		1
Total	$	8,084	$	183	$	6,097	$	42

Totals:
One-to four-family	$	8,426	$	146	$	4,104	$	19
Home equity		1,967		47		1,047		6
Commercial and multifamily		2,160		37		3,318		33
Construction and land		841		23		-		-
Manufactured homes		588		29		111		2
Other consumer		121		5		88		1
Commercial Business		796		13		205		1
Total	$	14,899	$	300	$	8,873	$	62

Forgone interest on nonaccrual loans was $177,000 and $106,000 at June 30, 2012 and 2011, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at June 30, 2012 and December 31, 2011.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

Troubled debt restructurings. Loans classified as troubled debt restructurings totaled $9.8 million and $6.9 million at June 30, 2012 and December 31, 2011, respectively and are included in impaired loans. A troubled debt restructuring is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

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 in 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.

The following table presents newly restructured loans by type of modification:

	Three Months Ended June 30, 2012
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(in thousands, except for number of contracts)
One- to four- family		2	$	-	$	-	$	-	$	276	$	276
Home equity		-		-		-		-		-		-
Commercial and multifamily		1		-		-		-		183		183
Construction and land		2		-		-		-		26		26
Manufactured homes		-		-		-		-		-		-
Other consumer		1		-		-		-		2		2
Commercial business		1		-		-		-		26		281
Total		7	$	-	$	-	$	-	$	513	$	513

	Six Months Ended June 30, 2012
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(in thousands, except for number of contracts)
One- to four- family		4	$	-	$	-	$	-	$	364	$	364
Home equity		1		-		-		-		49		49
Commercial and multifamily		2		-		-		-		426		426
Construction and land		2		-		-		-		26		26
Manufactured homes		-		-		-		-		-		-
Other consumer		2		-		-		-		14		14
Commercial business		3		121		-		-		186		307
Total		14	$	121	$	-	$	-	$	1,065	$	1,186

There were no post-modification changes that were recorded as a result of the troubled debt restructurings for the year ended June 30, 2012.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

The following is a summary of all loans modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the periods shown below:

	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
	(in thousands)
One-to four-family	$	1,547	$	2,055
Home equity		129		129
Commercial and multifamily		1,391		1,391
Manufactured homes		362		444
Other consumer		40		40
Commercial business		540		540
Total	$	4,009	$	4,599

For the preceding table, a loan is considered in default when a payment is 30 days or more past due. Two of the one- to four- family first mortgages and one commercial real estate loans reached 90 days past due and therefore are on nonaccrual.

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in troubled debt restructurings. All troubled debt restructurings are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.

SOUND FINANCIAL, INC. AND SUBSIDIARY

Selected Notes to Condensed Consolidated Financial Statements (unaudited)

Note 5 – Fair Value Measurements

The following table presents estimated fair values of the Company’s financial instruments as of June 30, 2012 and December 31, 2011, whether or not recognized or recorded at fair value is summarized as follows:

	June 30, 2012				December 31, 2011
Description	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:	(in thousands)
Cash and cash equivalents	$	19,400	$	19,400	$	17,031	$	17,031
Available for sale securities		9,033		9,033		2,992		2,992
FHLB Stock		2,444		2,444		2,444		2,444
Loans held for sale		1,053		1,053		1,807		1,807
Loans, net		301,945		305,126		295,641		297,358
Accrued interest receivable		1,234		1,234		1,234		1,234
Bank owned life insurance, net		7,099

Sound Financial, Inc. 10-Q