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Execution Copy SUBORDINATED NOTE PURCHASE AGREEMENT This SUBORDINATED NOTE
PURCHASE AGREEMENT (this “Agreement”) is dated as of September 18, 2020, and is
made by and among Sound Financial Bancorp, Inc., a Maryland corporation (the
“Company”), and the purchasers of the Subordinated Notes (as defined herein)
identified on the signature pages hereto (each a “Purchaser” and collectively,
the “Purchasers”). RECITALS WHEREAS, the Company has requested that the
Purchasers purchase from the Company up to $12.0 million in aggregate principal
amount of Subordinated Notes, which aggregate amount is intended to be eligible
to qualify as Tier 2 Capital (as defined herein). WHEREAS, the Company has
engaged Keefe, Bruyette & Woods, Inc., as its exclusive placement agent
(“Placement Agent”) for the offering of the Subordinated Notes. WHEREAS, each of
the Purchasers is an institutional “accredited investor” as such term is defined
in Rule 501 of Regulation D (“Regulation D”) promulgated under the Securities
Act of 1933, as amended (the “Securities Act”) or a QIB (as defined below).
WHEREAS, the offer and sale of the Subordinated Notes by the Company is being
made in reliance upon the exemptions from registration available under Section
4(a)(2) of the Securities Act and Rule 506(b) of Regulation D. WHEREAS, each
Purchaser is willing to purchase from the Company a Subordinated Note in the
principal amount set forth on such Purchaser’s respective signature page hereto
(the “Subordinated Note Amount”) in accordance with the terms, subject to the
conditions and in reliance on, the recitals, representations, warranties,
covenants and agreements set forth herein and in the Subordinated Notes. NOW,
THEREFORE, in consideration of the mutual covenants, conditions and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows: AGREEMENT 1. DEFINITIONS. 1.1 Defined Terms. The following capitalized
terms used in this Agreement and in the Subordinated Notes have the meanings
defined or referenced below. Certain other capitalized terms used only in
specific sections of this Agreement may be defined in such sections.
“Affiliate(s)” means, with respect to any Person, such Person’s immediate family
members, partners, members or parent and subsidiary corporations, and any other
Person directly or indirectly controlling, controlled by, or under common
control with said Person and their respective Affiliates. “Agreement” has the
meaning set forth in the preamble hereto.

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“Applicable Procedures” means, with respect to any transfer or exchange of or
for beneficial interests in any Subordinated Note represented by a global
certificate, the rules and procedures of DTC that apply to such transfer or
exchange. “Bank” means Sound Community Bank, a Washington state-chartered
commercial bank and wholly owned subsidiary of the Company. “Business Day” means
any day other than a Saturday, Sunday or any other day on which banking
institutions in the State of Washington are permitted or required by any
applicable law or executive order to close. “Bylaws” means the Bylaws of the
Company, as in effect on the Closing Date. “Charter” means the Articles of
Incorporation of the Company, as in effect on the Closing Date. “Closing” has
the meaning set forth in Section 2.5. “Closing Date” means September 18, 2020.
“Company” has the meaning set forth in the preamble hereto and shall include any
successors to the Company. “Company Covered Person” has the meaning set forth in
Section 4.2.4. “Company’s Reports” means (i) the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2019 as filed with the SEC on March
12, 2020; (ii) the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2020 as filed with the SEC on May 11, 2020; (iii) the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2020 as filed with the SEC on August 7, 2020; (iv) the Company’s Definitive
Proxy Statement on Schedule 14A related to its 2020 Annual Meeting of
Shareholders, filed with the SEC on April 16, 2020; and (v) the report on Form
FR Y-9SP filed by the Company for the period ended June 30, 2019. “Disbursement”
has the meaning set forth in Section 3.1. “Disqualification Event” has the
meaning set forth in Section 4.2.4. “DTC” has the meaning set forth in Section
5.9. “Equity Interest” means any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interests in a Person which is not a corporation,
and any and all warrants, options or other rights to purchase any of the
foregoing. “Event of Default” has the meaning set forth in the Subordinated
Notes. 2

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“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the SEC promulgated thereunder. “FDIC” means the
Federal Deposit Insurance Corporation. “GAAP” means generally accepted
accounting principles in effect from time to time in the United States of
America. “Global Note” has the meaning set forth in Section 3.1. “Governmental
Agency(ies)” means, individually or collectively, any arbitrator, court,
federal, state, county or local governmental department, commission, board,
regulatory authority or administrative agency (including, without limitation,
each applicable Regulatory Agency) with jurisdiction over the Company or a
Subsidiary or any of their respective properties, assets or operations.
“Governmental Licenses” has the meaning set forth in Section 4.3. “Hazardous
Materials” means flammable explosives, asbestos, urea formaldehyde insulation,
polychlorinated biphenyls, radioactive materials, hazardous wastes, toxic or
contaminated substances or similar materials, including, without limitation, any
substances which are “hazardous substances,” “hazardous wastes,” “hazardous
materials” or “toxic substances” under the Hazardous Materials Laws and/or other
applicable environmental laws, ordinances or regulations. “Hazardous Materials
Laws” mean any laws, regulations, permits, licenses or requirements pertaining
to the protection, preservation, conservation or regulation of the environment
which relates to real property, including: the Clean Air Act, as amended, 42
U.S.C. Section 7401 et seq.; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. Section 1251 et seq.; the Resource Conservation and Recovery
Act of 1976, as amended, 42 U.S.C. Section 6901 et seq.; the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(including the Superfund Amendments and Reauthorization Act of 1986), 42 U.S.C.
Section 9601 et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C.
Section 2601 et seq.; the Occupational Safety and Health Act, as amended, 29
U.S.C. Section 651, the Emergency Planning and Community Right-to-Know Act of
1986, 42 U.S.C. Section 11001 et seq.; the Mine Safety and Health Act of 1977,
as amended, 30 U.S.C. Section 801 et seq.; the Safe Drinking Water Act, 42
U.S.C. Section 300f et seq.; and all comparable state and local laws and
regulations. “Indebtedness” means: (i) all items arising from the borrowing of
money that, according to GAAP as in effect from time to time, would be included
in determining total liabilities as shown on the consolidated balance sheet of
the Company; and (ii) all obligations for indebtedness secured by any lien in
property owned by the Company or any Subsidiary whether or not such obligations
shall have been assumed; provided, however, Indebtedness shall not include
deposits or other Indebtedness created, incurred or maintained in the ordinary
course of the Company’s or the Bank’s business (including, without limitation,
federal funds purchased, advances from any Federal Home Loan Bank, secured
deposits of municipalities, letters of credit issued by the Company or the Bank
or any other Subsidiary and repurchase arrangements) and consistent with
customary banking practices and applicable laws and regulations. 3

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“Leases” means all leases, licenses or other documents providing for the use or
occupancy of any portion of any Property, including all amendments, extensions,
renewals, supplements, modifications, sublets and assignments thereof and all
separate letters or separate agreements relating thereto. “Material Adverse
Effect” means any change or effect that (i) is or would be reasonably likely to
be material and adverse to the financial condition, results of operations or
business of the Company and its Subsidiaries, on a consolidated basis, or (ii)
would materially impair the ability of the Company to perform its obligations
under any of the Transaction Documents, or otherwise materially impede the
consummation of the transactions contemplated hereby; provided, however, that
“Material Adverse Effect” shall not be deemed to include the impact of (1)
changes in banking and similar laws, rules or regulations of general
applicability or interpretations thereof by Governmental Agencies, (2) changes
in GAAP or regulatory accounting requirements applicable to financial
institutions and their holding companies generally, (3) changes after the date
of this Agreement in general economic or capital market conditions affecting
financial institutions or their market prices generally and not specifically
related to the Company, the Bank or the Purchasers, including changes in
prevailing interest rates, credit availability and liquidity, currency exchange
rates, and price levels or trading volumes in the United States or foreign
securities markets, (4) direct effects of compliance with this Agreement on the
operating performance of the Company, the Bank or the Purchasers, including
expenses incurred by the Company, the Bank or the Purchasers in consummating the
transactions contemplated by this Agreement, (5) the effects of any action or
omission taken by the Company with the prior written consent of the Purchasers,
and vice versa, or as otherwise contemplated by this Agreement and the
Subordinated Notes and (6) the outbreak, continuation or escalation of war,
hostilities or acts of terrorism (whether declared or undeclared), any national
or international calamity, or any natural disaster. “Maturity Date” means
October 1, 2030. “Person” means an individual, a corporation (whether or not for
profit), a partnership, a limited liability company, a joint venture, an
association, a trust, an unincorporated organization, a government or any
department or agency thereof (including a Governmental Agency) or any other
entity or organization. “Placement Agent” has the meaning set forth in the
Recitals. “Property” means any real property owned or leased by the Company or
any Affiliate or Subsidiary of the Company. “Purchaser” or “Purchasers” has the
meaning set forth in the preamble hereto. “QIB” has the meaning set forth in
Section 5.9. “Regulation D” has the meaning set forth in the Recitals.
“Regulatory Agency” means any federal or state agency charged with the
supervision or regulation of depository institutions or holding companies of
depository institutions, or engaged in the insurance of depository institution
deposits, or any court, administrative agency or 4

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commission or other authority, body or agency having supervisory or regulatory
authority with respect to the Company, the Bank or any of their Subsidiaries.
“Risk Factors” has the meaning set forth in Section 4.7. “SEC” means the United
States Securities and Exchange Commission. “Secondary Market Transaction” has
the meaning set forth in Section 5.6. “Securities Act” has the meaning set forth
in the Recitals. “Subordinated Note” means the Subordinated Note (or
collectively, the “Subordinated Notes”) in the form attached as Exhibit A
hereto, as amended, restated, supplemented or modified from time to time, and
each Subordinated Note delivered in substitution or exchange for such
Subordinated Note. “Subordinated Note Amount” has the meaning set forth in the
Recitals. “Subsidiary” or “Subsidiaries” means with respect to any Person, any
corporation or entity in which a majority of the outstanding Equity Interest is
directly or indirectly owned by such Person. “Tier 2 Capital” has the meaning
given to the term “Tier 2 capital” in 12 C.F.R. Parts 217 and 250, as amended,
modified and supplemented and in effect from time to time or any replacement
thereof. “Transaction Documents” has the meaning set forth in Section 3.2.1.1.
“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended, and the
rules and regulations promulgated by the SEC thereunder. 1.2 Interpretations.
The foregoing definitions are equally applicable to both the singular and plural
forms of the terms defined. The words “hereof”, “herein” and “hereunder” and
words of like import when used in this Agreement shall refer to this Agreement
as a whole and not to any particular provision of this Agreement. The word
“including” when used in this Agreement without the phrase “without limitation,”
shall mean “including, without limitation.” All references to time of day herein
are references to Eastern Time unless otherwise specifically provided. All
references to this Agreement and Subordinated Notes shall be deemed to be to
such documents as amended, modified or restated from time to time. With respect
to any reference in this Agreement to any defined term, (i) if such defined term
refers to a Person, then it shall also mean all heirs, legal representatives and
permitted successors and assigns of such Person, and (ii) if such defined term
refers to a document, instrument or agreement, then it shall also include any
amendment, replacement, extension or other modification thereof. 1.3 Exhibits
Incorporated. All Exhibits attached are hereby incorporated into this Agreement.
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2. SUBORDINATED DEBT. 2.1 Certain Terms. Subject to the terms and conditions
herein contained, the Company hereby agrees to issue and sell to the Purchasers,
severally and not jointly, Subordinated Notes in an aggregate principal amount
equal to the aggregate of the Subordinated Note Amounts. The Purchasers,
severally and not jointly, each agree to purchase the Subordinated Notes in an
amount equal to such Purchaser's Subordinated Note Amount from the Company on
the Closing Date in accordance with the terms of, and subject to the conditions
and provisions set forth in, this Agreement and the Subordinated Notes. Each
Purchaser's respective Subordinated Note Amounts shall be disbursed in
accordance with Section 3.1. The Subordinated Notes shall bear interest per
annum as set forth in the Subordinated Notes. The unpaid principal balance of
the Subordinated Notes plus all accrued but unpaid interest thereon shall be due
and payable on the Maturity Date, or such earlier date on which such amount
shall become due and payable on account of (i) acceleration by the Purchasers in
accordance with the terms of the Subordinated Notes and this Agreement or (ii)
the Company’s delivery of a notice of redemption or repayment in accordance with
the terms of the Subordinated Notes. 2.2 Subordination. The Subordinated Notes
shall be subordinated in accordance with the subordination provisions set forth
therein. 2.3 Maturity Date. On the Maturity Date, all sums due and owing under
this Agreement and the Subordinated Notes shall be repaid in full unless such
sums were payable and paid on an earlier date. The Company acknowledges and
agrees that the Purchasers have not made any commitments, either express or
implied, to extend the terms of the Subordinated Notes past their Maturity Date,
and shall not extend such terms beyond the Maturity Date unless the Company and
the Purchasers hereafter specifically otherwise agree in writing. 2.4 Unsecured
Obligations. The obligations of the Company to the Purchasers under the
Subordinated Notes shall be unsecured and not covered by a guarantee of the
Company or an Affiliate of the Company. 2.5 The Closing. The closing of the sale
and purchase of the Subordinated Notes (the “Closing”) shall occur remotely via
the electronic or other exchange of documents and signature pages, on the
Closing Date, or at such other place or time or on such other date as the
parties hereto may agree. 2.6 Payments. The Company agrees that matters
concerning payments and application of payments shall be as set forth in this
Agreement and in the Subordinated Notes. 2.7 Right of Offset. Each Purchaser
hereby expressly waives any right of offset it may have against the Company or
any of its Subsidiaries. 2.8 Use of Proceeds. The Company shall use the net
proceeds from the sale of Subordinated Notes for general corporate purposes. 6

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3. DISBURSEMENT. 3.1 Disbursement. On the Closing Date, assuming all of the
terms and conditions set forth in Section 3.2 have been satisfied by the Company
and the Company has executed and delivered to each of the Purchasers this
Agreement and such Purchaser’s Subordinated Note and any other related documents
required by Section 3.2 in form and substance reasonably satisfactory to the
Purchasers, each Purchaser shall countersign and deliver this Agreement and
disburse in immediately available funds the Subordinated Note Amount set forth
on each Purchaser’s respective signature page hereto to the Company in exchange
for an electronic securities entitlement to be credited to the Purchaser’s
account (or the account of the Purchaser’s securities intermediary) through the
facilities of DTC in accordance with the Applicable Procedures of DTC with a
principal amount equal to such Subordinated Note Amount (the “Disbursement”).
The Company will deliver to U.S. Bank National Association a global certificate
representing the Subordinated Notes (“Global Note”) registered in name of Cede &
Co., to DTC. 3.2 Conditions Precedent to Disbursement. 3.2.1 Conditions to the
Purchasers’ Obligation. The obligation of each Purchaser to consummate the
purchase of the Subordinated Notes to be purchased by them at Closing and to
effect the Disbursement is subject to delivery by or at the direction of the
Company to such Purchaser each of the following (or written waiver by such
Purchaser prior to the Closing of such delivery): 3.2.1.1 Transaction Documents.
This Agreement and the Subordinated Notes (collectively, the “Transaction
Documents”), each duly authorized and executed by the Company. 3.2.1.2 Authority
Documents. (a) A copy, certified by the Secretary or Assistant Secretary of the
Company, of the Charter of the Company; (b) A certificate of good standing of
the Company issued by the Secretary of State of the State of Maryland; (c) A
copy, certified by the Secretary or Assistant Secretary, of the Bylaws of the
Company; (d) A copy, certified by the Secretary or Assistant Secretary of the
Company, of the resolutions of the board of directors of the Company, and any
committee thereof, authorizing the issuance of the Subordinated Notes and the
execution, delivery and performance of the Transaction Documents; (e) An
incumbency certificate of the Secretary or Assistant Secretary of the Company
certifying the names of the officer or officers of the Company authorized to
sign the Transaction Documents and the other documents provided for in this
Agreement; and 7

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(f) The opinion of Silver, Freedman, Taff & Tiernan LLP, counsel to the Company,
dated as of the Closing Date, substantially in the form set forth at Exhibit B
attached hereto addressed to the Purchasers and Placement Agent. 3.2.1.3 Other
Documents. Such other certificates, schedules, resolutions, notes and/or other
documents which are provided for hereunder or as a Purchaser may reasonably
request. 3.2.2 Conditions to the Company’s Obligation. 3.2.2.1 With respect to a
given Purchaser, the obligation of the Company to consummate the sale of the
Subordinated Notes and to effect the Closing is subject to delivery by or at the
direction of such Purchaser to the Company of this Agreement, duly authorized
and executed by such Purchaser. 4. REPRESENTATIONS AND WARRANTIES OF COMPANY.
The Company hereby represents and warrants to each Purchaser as follows: 4.1
Organization and Authority. 4.1.1 Organization Matters of the Company and Its
Subsidiaries. 4.1.1.1 The Company is a duly organized corporation, is validly
existing and in good standing under the laws of the State of Maryland and has
all requisite corporate power and authority to conduct its business and
activities as presently conducted, to own its properties, and to perform its
obligations under the Transaction Documents. The Company is duly qualified as a
foreign corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not reasonably be expected
to result in a Material Adverse Effect. The Company is duly registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended. 4.1.1.2
The entities set forth on Schedule A attached hereto are the only direct or
indirect Subsidiaries of the Company. Each Subsidiary of the Company (other than
the Bank) has been duly organized and is validly existing either as a
corporation, or, in the case of the Bank, has been duly chartered and is validly
existing as a Washington state-chartered commercial bank in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its business
and is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not reasonably be expected to result in a Material Adverse Effect. All of the
issued and outstanding shares of capital stock or other Equity Interests in each
Subsidiary of the Company have been duly authorized and validly issued, are
fully paid and non-assessable and are owned by the Company directly or through
Subsidiaries of the Company, free and clear of any security interest, mortgage,
pledge, lien, encumbrance or claim; none of the outstanding shares of capital
stock of, or other 8

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Equity Interests in, any Subsidiary of the Company were issued in violation of
the preemptive or similar rights of any security holder of such Subsidiary of
the Company or any other entity. 4.1.1.3 The deposit accounts of the Bank are
insured by the FDIC up to applicable limits. The Bank has not received any
notice or other information indicating that the Bank is not an “insured
depository institution” as defined in 12 U.S.C. Section 1813, nor has any event
occurred which could reasonably be expected to adversely affect the status of
the Bank as an FDIC-insured institution. 4.1.2 Capital Stock and Related
Matters. The Charter of the Company authorizes the Company to issue 50,000,000
shares, consisting of 40,000,000 shares of common stock, $0.01 par value, and
10,000,000 shares of preferred stock, $0.01 par value. As of the date of this
Agreement, there are 2,595,289 shares of the Company’s common stock issued and
outstanding and no shares of the Company’s preferred stock issued and
outstanding. All of the outstanding capital stock of the Company has been duly
authorized and validly issued and is fully paid and non-assessable. There are,
as of the date hereof, no outstanding options, rights, warrants or other
agreements or instruments obligating the Company to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of the capital stock of
the Company or obligating the Company to grant, extend or enter into any such
agreement or commitment to any Person other than the Company except pursuant to
the Company’s equity incentive plans duly adopted by the Company’s Board of
Directors or as otherwise disclosed in the Company’s Reports. 4.2 No Impediment
to Transactions. 4.2.1 Transaction is Legal and Authorized. The issuance of the
Subordinated Notes, the borrowing of the aggregate of the Subordinated Note
Amounts, the execution of the Transaction Documents and compliance by the
Company with all of the provisions of the Transaction Documents are within the
corporate and other powers of the Company. 4.2.2 Agreement. This Agreement has
been duly authorized, executed and delivered by the Company, and, assuming due
authorization, execution and delivery by the other parties hereto, constitutes
the legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors’ rights generally or by general
equitable principles. 4.2.3 Subordinated Notes. The Subordinated Notes have been
duly authorized by the Company and when executed by the Company and issued,
delivered to and paid for by the Purchasers in accordance with the terms of the
Agreement, will have been duly executed, issued and delivered, and will
constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors’ rights generally or by
general equitable principles. 4.2.4 Exemption from Registration. Neither the
Company, nor any of its Subsidiaries or Affiliates, nor any Person acting on its
or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with 9

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the offer or sale of the Subordinated Notes. Assuming the accuracy of the
representations and warranties of each Purchaser set forth in this Agreement,
the Subordinated Notes will be issued in a transaction exempt from the
registration requirements of the Securities Act. No “bad actor” disqualifying
event described in Rule 506(d)(1)(i)-(viii) of the Securities Act (a
“Disqualification Event”) is applicable to the Company or, to the Company’s
knowledge, any Person described in Rule 506(d)(1) (each, a “Company Covered
Person”). To the Company’s knowledge, no Company Covered Person is subject to a
Disqualification Event. The Company has complied, to the extent applicable, with
its disclosure obligations under Rule 506(e). 4.2.5 No Defaults or Restrictions.
Neither the execution and delivery of the Transaction Documents by the Company
nor compliance by the Company with their respective terms and conditions will
(whether with or without the giving of notice or lapse of time or both) (i)
violate, conflict with or result in a breach of, or constitute a default under:
(1) the Charter or Bylaws of the Company; (2) any of the terms, obligations,
covenants, conditions or provisions of any corporate restriction or of any
contract, agreement, indenture, note, mortgage, deed of trust, pledge, bank loan
or credit agreement, or any other agreement or instrument to which the Company
or Bank, as applicable, is now a party or by which it or any of its properties
may be bound or affected; (3) any judgment, order, writ, injunction, decree or
demand of any court, arbitrator, grand jury, or Governmental Agency applicable
to the Company or the Bank; or (4) any statute, rule or regulation applicable to
the Company, except, in the case of items (2), (3) or (4), for such violations
and conflicts, breaches and default that would not reasonably be expected to,
singularly or in the aggregate, result in a Material Adverse Effect, or (ii)
result in the creation or imposition of any lien, charge or encumbrance of any
nature whatsoever upon any property or asset of the Company. Neither the Company
nor the Bank is in default in the performance, observance or fulfillment of any
of the terms, obligations, covenants, conditions or provisions contained in any
indenture, note or other agreement or instrument creating, evidencing or
securing Indebtedness of any kind or pursuant to which any such Indebtedness is
issued, or any other agreement or instrument to which the Company or the Bank,
as applicable, is a party or by which the Company or the Bank, as applicable, or
any of its properties may be bound or affected, except, in each case, only such
defaults that would not reasonably be expected to, singularly or in the
aggregate, result in a Material Adverse Effect. 4.2.6 Governmental Consent. No
governmental orders, permissions, consents, approvals or authorizations are
required to be obtained by the Company that have not been obtained, and no
registrations or declarations are required to be filed by the Company that have
not been filed in connection with, or, in contemplation of, the execution and
delivery of, and performance under, the Transaction Documents, except for
applicable requirements, if any, of the Securities Act, the Exchange Act or
state securities laws or “blue sky” laws of the various states and any
applicable federal or state banking laws and regulations. 4.3 Possession of
Licenses and Permits. The Company and its Subsidiaries possess such permits,
licenses, approvals, consents and other authorizations (collectively,
“Governmental Licenses”) issued by the appropriate Governmental Agencies
necessary to conduct the business as described in the Company’s Reports except
where the failure to possess such Governmental Licenses would not reasonably be
expected to, singularly or in the aggregate, have a Material Adverse Effect. The
Company and each Subsidiary of the Company is in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so to
comply 10

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would not reasonably be expected to, individually or in the aggregate, have a
Material Adverse Effect. All of the Governmental Licenses are valid and in full
force and effect, except where the invalidity of such Governmental Licenses or
the failure of such Governmental Licenses to be in full force and effect would
not reasonably be expected to have a Material Adverse Effect. Neither the
Company nor any Subsidiary of the Company has received any notice of proceedings
relating to the revocation or modification of any such Governmental Licenses.
4.4 Financial Condition. 4.4.1 Company Financial Statements. The financial
statements of the Company included in the Company’s Reports (including the
related notes, where applicable), which have been made available to the
Purchasers (i) have been prepared from, and are in accordance with, the books
and records of the Company; (ii) fairly present in all material respects the
results of operations, cash flows, changes in stockholders’ equity and financial
position of the Company and its consolidated Subsidiaries, for the respective
fiscal periods or as of the respective dates therein set forth (subject in the
case of unaudited statements to recurring year-end audit adjustments normal in
nature and amount), as applicable; (iii) complied as to form, as of their
respective dates of filing in all material respects with applicable accounting
and banking requirements as applicable, with respect thereto; and (iv) have been
prepared in accordance with GAAP consistently applied during the periods
involved, except, in each case, (x) as indicated in such statements or in the
notes thereto and (y) for any statement therein or omission therefrom that was
corrected, amended, or supplemented or otherwise disclosed or updated in a
subsequent Company’s Report. The books and records of the Company have been, and
are being, maintained in all material respects in accordance with GAAP and any
other applicable legal and accounting requirements. The Company does not have
any material liability of any nature whatsoever (whether absolute, accrued,
contingent or otherwise and whether due or to become due), except for those
liabilities that are reflected or reserved against on the consolidated balance
sheet of the Company contained in the Company’s Reports for the Company’s most
recently completed quarterly or annual fiscal period, as applicable, and for
liabilities incurred in the ordinary course of business consistent with past
practice or in connection with the Transaction Documents and the transactions
contemplated hereby and thereby. 4.4.2 Absence of Default. Since the date of the
last audited financial statements included in the Company’s Reports, no event
has occurred which either of itself or with the lapse of time or the giving of
notice or both, would give any creditor of the Company the right to accelerate
the maturity of any material Indebtedness of the Company. The Company is not in
default under any Lease, agreement or instrument, or any law, rule, regulation,
order, writ, injunction, decree, determination or award, except for such
defaults as would not reasonably be expected to result in a Material Adverse
Effect. 4.4.3 Solvency. After giving effect to the consummation of the
transactions contemplated by this Agreement, the Company has capital sufficient
to carry on its business and transactions and is solvent and able to pay its
debts as they mature. No transfer of property is being made and no Indebtedness
is being incurred in connection with the transactions contemplated by this
Agreement with the intent to hinder, delay or defraud either present or future
creditors of the Company or any Subsidiary of the Company. 11

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4.4.4 Ownership of Property. The Company and each of its Subsidiaries has good
and marketable title as to all real property owned by it and good title to all
assets and properties owned by the Company and such Subsidiary in the conduct of
its businesses, whether such assets and properties are real or personal,
tangible or intangible, including assets and property reflected in the most
recent balance sheet contained in the Company’s Reports or acquired subsequent
thereto (except to the extent that such assets and properties have been disposed
of in the ordinary course of business, since the date of such balance sheet),
subject to no encumbrances, liens, mortgages, security interests or pledges,
except (i) those items which secure liabilities for public or statutory
obligations or any discount with, borrowing from or other obligations to the
Federal Home Loan Bank, inter-bank credit facilities, reverse repurchase
agreements or any transaction by the Bank acting in a fiduciary capacity, (ii)
statutory liens for amounts not yet delinquent or which are being contested in
good faith and (iii) as would not reasonably be expected to, individually or in
the aggregate, materially and adversely affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company or any of its Subsidiaries. The Company and each of its
Subsidiaries, as lessee, has the right under valid and existing Leases of real
and personal properties that are material to the Company or such Subsidiary, as
applicable, in the conduct of its business to occupy or use all such properties
as presently occupied and used by it. Such existing Leases and commitments to
Lease constitute or will constitute operating Leases for both tax and financial
accounting purposes except as otherwise disclosed in the Company’s Reports and
the Lease expense and minimum rental commitments with respect to such Leases and
Lease commitments are as disclosed in all material respects in the Company’s
Reports. 4.5 No Material Adverse Change. Since the end of the latest audited
financial statements included in the Company’s Reports, there has been no
development or event which has had or would reasonably be expected to have a
Material Adverse Effect. 4.6 Legal Matters. 4.6.1 Compliance with Law. The
Company and each of its Subsidiaries (i) has complied with and (ii) to the
Company’s knowledge, is not under investigation with respect to, and, to the
Company’s knowledge, has not been threatened to be charged with or given any
notice of any material violation of, any applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government, or
any instrumentality or agency thereof, having jurisdiction over the conduct of
its business or the ownership of its properties, except where any such failure
to comply or violation would not reasonably be expected to have a Material
Adverse Effect. The Company and each of its Subsidiaries is in compliance with,
and at all times prior to the date hereof has been in compliance with (x) all
statutes, rules regulations, orders and restrictions of any domestic or foreign
government, or any Governmental Agency, applicable to it, and (y) its own
privacy policies and written commitments to customers, consumers and employees,
concerning data protection, the privacy and security of personal data, and the
nonpublic personal information of its customers, consumers and employees, in
each case except where any such failure to comply would not reasonably be
expected to result, individually or in the aggregate, in a Material Adverse
Effect. At no time during the two years prior to the date hereof has the Company
or any of its Subsidiaries received any written notice asserting any violations
of any of the foregoing. 12

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4.6.2 Regulatory Enforcement Actions. The Company, the Bank and its other
Subsidiaries are in compliance in all material respects with all laws
administered by and regulations of any Governmental Agency applicable to it or
to them, the failure to comply with which would not reasonably be expected to
have a Material Adverse Effect. None of the Company, the Bank, the Company’s or
the Bank’s Subsidiaries nor any of their officers or directors is now operating
under any restrictions, agreements, memoranda, commitment letter, supervisory
letter or similar regulatory correspondence, or other commitments (other than
restrictions of general application) imposed by any Governmental Agency, nor
are, to the Company’s knowledge any such restrictions threatened, or any
agreements, memoranda or commitments being sought by any Governmental Agency. To
the Company’s knowledge, no legal or regulatory violations previously identified
by, or penalties or other remedial action previously imposed by, any
Governmental Agency remains unresolved. 4.6.3 Pending Litigation. There are no
actions, suits, proceedings or written agreements pending, or, to the Company’s
knowledge, threatened or proposed, against the Company or any of its
Subsidiaries at law or in equity or before or by any Governmental Agency, that
would reasonably be expected to have a Material Adverse Effect, or materially
and adversely affect the issuance or payment of the Subordinated Notes; and
neither the Company nor any of its Subsidiaries is a party to or named as
subject to the provisions of any order, writ, injunction, or decree of, or any
written agreement with, any arbitrator, court, federal, state, county or local
governmental department, commission, board, Regulatory Agency, domestic or
foreign, that either separately or in the aggregate, could reasonably be
expected to result in a Material Adverse Effect. 4.6.4 Environmental. Except as
would not, individually or in the aggregate, reasonably be expected to result in
a Material Adverse Effect, (i) no Property is or, to the Company’s knowledge,
has been a site for the use, generation, manufacture, storage, treatment,
release, threatened release, discharge, disposal, transportation or presence of
any Hazardous Materials and neither the Company nor any of its Subsidiaries has
engaged in such activities, and (ii) there are no claims or actions pending or,
to the Company’s knowledge, threatened against the Company or any of its
Subsidiaries by any Governmental Agency or by any other Person relating to any
Hazardous Materials or pursuant to any Hazardous Materials Law. 4.6.5 Brokerage
Commissions. Except for commissions paid to the Placement Agent, neither the
Company nor any Affiliate of the Company is obligated to pay any brokerage
commission or finder’s fee to any Person in connection with the transactions
contemplated by this Agreement. 4.6.6 Investment Company Act. Neither the
Company nor any of its Subsidiaries is an “investment company” or a company
“controlled” by an “investment company,” within the meaning of the Investment
Company Act of 1940, as amended. 4.7 No Misstatement. No information, exhibit,
report, schedule or document (including the risk factors disclosure attached
hereto as Exhibit C (the “Risk Factors”)), when viewed together as a whole,
furnished or made available by Company to Purchasers in connection with the
negotiation, execution or performance of the Transaction Documents contains any
untrue statement of a material fact, or omits to state a material fact necessary
to make the statements contained therein, in light of the circumstances under
which they were made, not misleading, 13

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except for any statement therein or omission therefrom which was corrected,
amended or supplemented or otherwise disclosed or updated in a subsequent
exhibit, report, schedule or document furnished or made available to Purchasers
prior to the date hereof. 4.8 Internal Accounting Controls. The Company, the
Bank and each other material Subsidiary have established and maintain a system
of internal control over financial reporting that pertains to the maintenance of
records that accurately and fairly reflect the transactions and dispositions of
the Company’s assets (on a consolidated basis), provides reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that the Company’s and the Bank’s
receipts and expenditures and receipts and expenditures of each of the Company’s
other Subsidiaries are being made only in accordance with authorizations of the
Company management and Board of Directors, and provides reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of assets of the Company on a consolidated basis that could have a
Material Adverse Effect. Such internal control over financial reporting is
effective to provide reasonable assurance regarding the reliability of the
Company’s financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with GAAP. Since the conclusion
of the Company’s last completed fiscal year there has not been and there
currently is not (i) any significant deficiency or material weakness in the
design or operation of its internal control over financial reporting which is
reasonably likely to adversely affect its ability to record, process, summarize
and report financial information, or (ii) any fraud, whether or not material,
that involves management or other employees who have a role in the Company’s or
the Bank’s internal control over financial reporting. The Company (A) has
implemented and maintains disclosure controls and procedures reasonably designed
and maintained to ensure that material information relating to the Company is
made known to the Chief Executive Officer and the Chief Financial Officer of the
Company by others within the Company and (B) has disclosed, based on its most
recent evaluation prior to the date hereof, to the Company’s outside auditors
and the audit committee of the Company’s Board of Directors (x) any significant
deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely
affect the Company’s internal controls over financial reporting. Such disclosure
controls and procedures are effective for the purposes for which they were
established. 4.9 Tax Matters. The Company, the Bank and each other Subsidiary of
the Company have (i) filed all material foreign, U.S. federal, state and local
tax returns, information returns and similar reports that are required to be
filed, and all such tax returns are true, correct and complete in all material
respects, and (ii) paid all material taxes required to be paid by it and any
other material assessment, fine or penalty levied against it other than taxes
(x) currently payable without penalty or interest, or (y) being contested in
good faith by appropriate proceedings. 4.10 Exempt Offering. Assuming the
accuracy of the Purchasers’ representations and warranties set forth in this
Agreement, no registration under the Securities Act or qualification under the
Trust Indenture Act is required for the offer and sale of the Subordinated Notes
by the Company to the Purchasers. 4.11 Representations and Warranties Generally.
The representations and warranties of the Company set forth in this Agreement or
in any other document delivered to the Purchasers 14

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by or on behalf of the Company pursuant to or in connection with this Agreement
are true and correct as of the Closing Date and as otherwise specifically
provided herein or therein. 5. GENERAL COVENANTS, CONDITIONS AND AGREEMENTS. The
Company hereby further covenants and agrees with each Purchaser as follows: 5.1
Compliance with Transaction Documents. The Company shall comply with, observe
and timely perform each and every one of the covenants, agreements and
obligations under the Transaction Documents. 5.2 Affiliate Transactions. The
Company shall not itself, nor shall it cause, permit or allow any of its
Subsidiaries to enter into any material transaction, including, the purchase,
sale or exchange of property or the rendering of any service, with any Affiliate
of the Company except in the ordinary course of business and pursuant to the
reasonable requirements of the Company’s or such Affiliate’s business and upon
terms consistent with applicable laws and regulations and reasonably found by
the appropriate board(s) of directors to be fair and reasonable and no less
favorable to the Company or such Affiliate than would be obtained in a
comparable arm’s length transaction with a Person not an Affiliate. 5.3
Compliance with Laws. 5.3.1 Generally. The Company shall comply and cause the
Bank and each of its other Subsidiaries to comply in all material respects with
all applicable statutes, rules, regulations, orders and restrictions in respect
of the conduct of its business and the ownership of its properties, except, in
each case, where such noncompliance would not reasonably be expected to have a
Material Adverse Effect. 5.3.2 Regulated Activities. The Company shall not
itself, nor shall it cause, permit or allow the Bank or any other of its
Subsidiaries to (i) engage in any business or activity not permitted by all
applicable laws and regulations, except where such business or activity would
not reasonably be expected to have a Material Adverse Effect, or (ii) make any
loan or advance secured by the capital stock of another bank or depository
institution, or acquire the capital stock, assets or obligations of or any
interest in another bank or depository institution, in each case other than in
accordance with applicable laws and regulations and safe and sound banking
practices. 5.3.3 Taxes. The Company shall and shall cause the Bank and any other
of its Subsidiaries to promptly pay and discharge all taxes, assessments and
other governmental charges imposed upon the Company, the Bank or any other of
its Subsidiaries or upon the income, profits, or property of the Company or any
Subsidiary and all claims for labor, material or supplies which, if unpaid,
might by law become a lien or charge upon the property of the Company, the Bank
or any other of its Subsidiaries. Notwithstanding the foregoing, none of the
Company, the Bank or any other of its Subsidiaries shall be required to pay any
such tax, assessment, charge or claim, so long as the validity thereof shall be
contested in good faith by appropriate proceedings, and appropriate reserves
therefor shall be maintained on the books of the Company, the Bank or such other
Subsidiary, as the case may be. 15

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5.3.4 Corporate Existence. The Company shall do or cause to be done all things
reasonably necessary to maintain, preserve and renew its corporate existence and
that of the Bank and the other Subsidiaries and its and their rights and
franchises, and comply in all material respects with all related laws applicable
to the Company, the Bank or the other Subsidiaries; provided, however, that the
Company may consummate a merger in which (i) the Company is the surviving entity
or (ii) if the Company is not the surviving entity, the surviving entity
assumes, by operation of law or otherwise, all of the obligations of the Company
under the Subordinated Notes in accordance with Section 8(b) thereof and
complies with the other conditions of Section 8(b) thereof. 5.3.5 Dividends,
Payments, and Guarantees During Event of Default. Upon the occurrence of an
Event of Default (as defined under the Subordinated Notes), until such Event of
Default is cured by the Company or waived by the Noteholders (as defined under
the Subordinated Notes) in accordance with Section 17 of the Subordinated Notes,
and except as required by any federal or state Governmental Agency, the Company
shall not (a) declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of its
capital stock; (b) make any payment of principal of, or interest or premium, if
any, on, or repay, repurchase or redeem any of the Company’s Indebtedness that
ranks equal with or junior to the Subordinated Notes; or (c) make any payments
under any guarantee that ranks equal with or junior to the Subordinated Notes,
other than (i) any dividends or distributions in shares of, or options, warrants
or rights to subscribe for or purchase shares of, any class of the Company’s
common stock; (ii) any declaration of a non-cash dividend in connection with the
implementation of a shareholders’ rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto; (iii) as a result of a reclassification of the Company’s
capital stock or the exchange or conversion of one class or series of the
Company’s capital stock for another class or series of the Company’s capital
stock; (iv) the purchase of fractional interests in shares of the Company’s
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged; or (v) purchases of any
class of the Company’s common stock related to the issuance of common stock or
rights under any benefit plans for the Company’s directors, officers or
employees or any of the Company’s dividend reinvestment plans. In addition, the
Company shall comply with the limitations on dividends set forth in Section 8(a)
of the Subordinated Notes. 5.4 Tier 2 Capital. If all or any portion of the
Subordinated Notes ceases to be eligible, or there is a material risk that all
or any portion of the Subordinated Notes will cease to be eligible, to qualify
as Tier 2 Capital, other than due to the limitation imposed on the capital
treatment of subordinated debt during the five (5) years immediately preceding
the Maturity Date of the Subordinated Notes, the Company will promptly notify
the Noteholders (as defined in the Subordinated Notes), and thereafter, subject
to the Company’s right to redeem the Subordinated Notes under such circumstances
pursuant to the terms of the Subordinated Notes, if requested by the Company,
the Company and the Noteholders (as defined in the Subordinated Notes) will work
together in good faith to execute and deliver all agreements as reasonably
necessary in order to restructure the applicable portions of the obligations
evidenced by the Subordinated Notes to be eligible to qualify as Tier 2 Capital;
provided, however, that nothing contained in this Agreement shall limit the
Company’s right to redeem the Subordinated Notes pursuant to the provisions of
the Subordinated Notes, including (without limitation) upon the occurrence of a
Tier 2 Capital Event as described in the Subordinated Notes. 16

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5.5 Absence of Control. It is the intent of the parties to this Agreement that
in no event shall the Purchasers, by reason of any of the Transaction Documents,
be deemed to control, directly or indirectly, the Company, and the Purchasers
shall not exercise, or be deemed to exercise, directly or indirectly, a
controlling influence over the management or policies of the Company. 5.6
Secondary Market Transactions. Each Purchaser shall have the right at any time
and from time to time to securitize its Subordinated Notes or any portion
thereof in a single asset securitization or a pooled loan securitization of
rated single or multi-class securities secured by or evidencing ownership
interests in the Subordinated Notes (each such securitization is referred to
herein as a “Secondary Market Transaction”). In connection with any such
Secondary Market Transaction, the Company shall, at the Company’s expense,
cooperate with the Purchasers and otherwise reasonably assist the Purchasers in
satisfying the market standards to which Purchasers customarily adhere or which
may be reasonably required in the marketplace or by applicable rating agencies
in connection with any such Secondary Market Transaction, but in no event shall
the Company be required to incur more than $5,000 (without reimbursement) in
costs or expenses in connection therewith. Subject to any written
confidentiality obligation, all information regarding the Company may be
furnished, without liability except in the case of gross negligence or willful
misconduct, to any the Purchaser and to any Person reasonably deemed necessary
by Purchaser in connection with participation in such Secondary Market
Transaction. All documents, financial statements, appraisals and other data
relevant to the Company or the Subordinated Notes may be retained by any such
Person, subject to the terms of any applicable confidentiality agreements. 5.7
Bloomberg. The Company shall use commercially reasonable efforts to cause within
90 days after the Closing the Subordinated Notes to be quoted on Bloomberg. 5.8
Rule 144A Information. While any Subordinated Notes remain “restricted
securities” within the meaning of the Securities Act, the Company will make
available, upon request, to any seller of such Subordinated Notes the
information specified in Rule 144A(d)(4) under the Securities Act, unless the
Company is then subject to Section 13 or 15(d) of the Exchange Act. 5.9 DTC
Eligibility. The Company shall use commercially reasonable efforts to provide
that the Subordinated Notes owned by Noteholders that are Qualified
Institutional Buyers within the meaning of Rule 144A under the Securities Act
(“QIBs”) shall be issued in the form of one or more Global Notes registered in
the name of The Depository Trust Company (“DTC”) or another organization
registered as a clearing agency under the Exchange Act, and designated as
depositary by the Company or any successor thereto or a nominee thereof and
delivered to such depositary or a nominee thereof. 5.10 Rating. So long as any
Subordinated Notes remain outstanding, the Company will use commercially
reasonable efforts to maintain a rating by a nationally recognized statistical
rating organization. 17

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6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS. Each Purchaser
hereby represents and warrants to the Company, and covenants with the Company,
severally and not jointly, as follows: 6.1 Legal Power and Authority. It has all
necessary power and authority to execute, deliver and perform its obligations
under this Agreement and to consummate the transactions contemplated hereby. It
is an entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. 6.2 Authorization and Execution. The
execution, delivery and performance of this Agreement has been duly authorized
by all necessary action on the part of such Purchaser, and, assuming due
authorization, execution and delivery by the other parties hereto, this
Agreement is a legal, valid and binding obligation of such Purchaser,
enforceable against such Purchaser in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors’ rights
generally or by general equitable principles. 6.3 No Conflicts. Neither the
execution, delivery or performance of the Transaction Documents nor the
consummation of any of the transactions contemplated thereby will conflict with,
violate, constitute a breach of or a default (whether with or without the giving
of notice or lapse of time or both) under (i) its organizational documents, (ii)
any agreement to which it is party, (iii) any law applicable to it or (iv) any
order, writ, judgment, injunction, decree, determination or award binding upon
or affecting it. 6.4 Purchase for Investment. It is purchasing the Subordinated
Note for its own account and not with a view to distribution and with no present
intention of reselling, distributing or otherwise disposing of the same. It has
no present or contemplated agreement, undertaking, arrangement, obligation,
Indebtedness or commitment providing for, or which is likely to compel, a
disposition of the Subordinated Notes in any manner. 6.5 Institutional
Accredited Investor. It is and will be on the Closing Date (i) an institutional
“accredited investor” as such term is defined in Rule 501(a) of Regulation D and
as contemplated by subsections (1), (2), (3) and (7) of Rule 501(a) of
Regulation D, and has no less than $5,000,000 in total assets, or (ii) a QIB.
6.6 Financial and Business Sophistication. It has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of the prospective investment in the Subordinated Notes and of making
an informed investment decision, and has so evaluated the merits and risks of
such investment. It has relied solely upon its own knowledge of, and/or the
advice of its own legal, financial or other advisors with regard to, the legal,
financial, tax and other considerations involved in deciding to invest in the
Subordinated Notes. 6.7 Ability to Bear Economic Risk of Investment. It
recognizes that an investment in the Subordinated Notes is a speculative
investment that involves substantial risk, including risks related to the
Company’s business, operating results, financial condition and cash flows,
including without limitation those described in the Company’s Reports as well as
those Risk Factors set forth 18

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in Exhibit C hereto, which risks it has carefully considered in connection with
making an investment in the Subordinated Notes. It has the ability to bear the
economic risk of the prospective investment in the Subordinated Notes, including
the ability to hold the Subordinated Notes indefinitely, and further including
the ability to bear a complete loss of all of its investment in the Company. 6.8
Access to Information. It acknowledges that (i) it is not being provided with
the disclosures that would be required if the offer and sale of the Subordinated
Notes were registered under the Securities Act, nor is it being provided with
any offering circular, private placement memorandum or prospectus prepared in
connection with the offer and sale of the Subordinated Notes; (ii) it has
conducted, to its satisfaction, its own examination of the Company and its
business (including the Subsidiaries of the Company and their respective
businesses), as well as the terms and conditions of the Subordinated Notes to
the extent it deems necessary to make its decision to invest in the Subordinated
Notes; (iii) it has availed itself of publicly available financial and other
information concerning the Company to the extent it deems necessary to make its
decision to purchase the Subordinated Notes (including meeting with
representatives of the Company); (iv) it and its advisors have been furnished
with all the materials relating to the business, finances and operations of the
Company that have been requested by it or its advisors and have been given the
opportunity to ask questions of, and to receive answers from, persons acting on
behalf of the Company concerning the terms and conditions of the transactions
contemplated by the Transaction Documents in order to make an informed and
voluntary decision to enter into this Agreement ; (v) it has not received nor
relied on any form of general solicitation or general advertising (within the
meaning of Regulation D) from the Company in connection with the offer and sale
of the Subordinated Notes; and (vi) credit ratings may not reflect the potential
risks related to the Subordinated Notes and credit ratings may be revised or
withdrawn by the rating agency at any time. It has reviewed the information set
forth in the Company’s Reports, the exhibits and schedules thereto and hereto
and as otherwise disclosed to it, including the Risk Factors attached hereto as
Exhibit C. 6.9 Investment Decision. It has made its own investment decision
based upon its own judgment, due diligence and advice from such advisors as it
has deemed necessary and not upon any view expressed by any other Person or
entity, including the Placement Agent. Neither such inquiries nor any other due
diligence investigations conducted by it or its advisors or representatives, if
any, shall modify, amend or affect its right to rely on the Company’s
representations and warranties contained herein. It is not relying upon, and has
not relied upon, any advice, statement, representation or warranty made by any
Person by or on behalf of the Company, including, without limitation, the
Placement Agent, except for the express statements, representations and
warranties of the Company made or contained in this Agreement. Furthermore, it
acknowledges that (i) the Placement Agent has not performed any due diligence
review on behalf of it and (ii) nothing in this Agreement or any other materials
presented by or on behalf of the Company to it in connection with the purchase
of the Subordinated Notes constitutes legal, tax or investment advice. 6.10
Private Placement; No Registration; Restricted Legends. It understands and
acknowledges that the Subordinated Notes are characterized as “restricted
securities” under the Securities Act are being sold by the Company without
registration under the Securities Act in reliance on the exemption from federal
and state registration set forth in, respectively, Rule 506(b) 19

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of Regulation D promulgated under Section 4(a)(2) of the Securities Act and
Section 18 of the Securities Act, or any state securities laws, and accordingly,
may be resold, pledged or otherwise transferred only in compliance with the
registration requirements of federal and state securities laws or if exemptions
from the Securities Act and applicable state securities laws are available to
it. It is not subscribing for the Subordinated Notes as a result of or
subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, or presented at any seminar or meeting. It further
acknowledges and agrees that all certificates or other instruments representing
the Subordinated Notes will bear the restrictive legend set forth in the form of
Subordinated Note. It further acknowledges its primary responsibilities under
the Securities Act and, accordingly, will not sell or otherwise transfer the
Subordinated Notes or any interest therein without complying with the
requirements of the Securities Act and the rules and regulations promulgated
thereunder and the requirements set forth in this Agreement. Neither the
Placement Agent nor the Company have or has made or are or is making any
representation, warranty or covenant, express or implied, as to the availability
of any exemption from registration under the Securities Act or any applicable
state securities laws for the resale, pledge or other transfer of the
Subordinated Notes, or that the Subordinated Notes purchased by it will ever be
able to be lawfully resold, pledged or otherwise transferred. 6.11 Placement
Agent. It will purchase the Subordinated Note(s) directly from the Company and
not from the Placement Agent and understands that neither the Placement Agent
nor any other broker or dealer has any obligation to make a market in the
Subordinated Notes. 6.12 Tier 2 Capital. If the Company provides notice as
contemplated in Section 5.3.6 of the occurrence of the event contemplated in
such Section, thereafter, subject to the Company’s right to redeem the
Subordinated Notes under such circumstances pursuant to the terms of the
Subordinated Notes, if requested by the Company, the Company and the Purchasers
will work together in good faith to execute and deliver all agreements as
reasonably necessary in order to restructure the applicable portions of the
obligations evidenced by the Subordinated Notes to be eligible to qualify as
Tier 2 Capital; provided, however, that nothing contained in this Agreement
shall limit the Company’s right to redeem the Subordinated Notes upon the
occurrence of a Tier 2 Capital Event as described in the Subordinated Notes.
6.13 Not Debt of the Bank, Not Savings Accounts, etc. It acknowledges that the
Company is a holding company and the Company’s rights and the rights of the
Company’s creditors, including the Noteholders (as defined in the Subordinated
Note), to participate in the assets of any Subsidiary during its liquidation or
reorganization are structurally subordinate to the prior claims of the
Subsidiary’s creditors. It acknowledges and agrees that the Subordinated Notes
are not savings accounts or deposits of the Bank and are not insured or
guaranteed by the FDIC or any Governmental Agency, and that no Governmental
Agency has passed upon or will pass upon the offer or sale of the Subordinated
Notes or has made or will make any finding or determination as to the fairness
of this investment. 6.14 Accuracy of Representations. It understands that each
of the Placement Agent and the Company are relying and will rely upon the truth
and accuracy of the foregoing representations, acknowledgements and agreements
in connection with the transactions contemplated by this Agreement. 20

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6.15 Representations and Warranties Generally. The representations and
warranties of such Purchaser set forth in this Agreement are true and correct as
of the date hereof and will be true and correct as of the Closing Date and as
otherwise specifically provided herein. Any certificate signed by a duly
authorized representative of such Purchaser and delivered to the Company or to
counsel for the Company shall be deemed to be a representation and warranty by
such Purchaser to the Company as to the matters set forth therein. 7.
MISCELLANEOUS. 7.1 Prohibition on Assignment by the Company. Except as described
in Section 8(b) (Merger or Sale of Assets) of the Subordinated Notes, the
Company may not assign, transfer or delegate any of its rights or obligations
under this Agreement or the Subordinated Notes without the prior written consent
of all the Noteholders (as defined in the Subordinated Note). In addition, in
accordance with the terms of the Subordinated Notes, any transfer of such
Subordinated Notes by the Noteholders (as defined in the Subordinated Note) must
be made in accordance with the Assignment Form attached thereto and the
requirements and restrictions thereof. 7.2 Time of the Essence. Time is of the
essence for this Agreement. 7.3 Waiver or Amendment. Except as may apply to a
particular waiving or consenting Noteholder, no waiver or amendment of any term,
provision, condition, covenant or agreement herein or in the Subordinated Notes
shall be effective except with the consent of the holders of at least fifty
percent (50%) of the aggregate principal amount (excluding any Subordinated
Notes held by the Company or any of its Affiliates) of the Subordinated Notes at
the time outstanding; provided, however, that without the consent of each holder
of an affected Subordinated Note, no such amendment or waiver may: (i) reduce
the principal amount of the Subordinated Note; (ii) reduce the rate of or change
the time for payment of interest on any Subordinated Note; (iii) extend the
maturity of any Subordinated Note, (iv) change the currency in which payment of
the obligations of the Company under this Agreement and the Subordinated Notes
are to be made; (v) lower the percentage of aggregate principal amount of
outstanding Subordinated Notes required to approve any amendment of this
Agreement or the Subordinated Notes, (vi) make any changes to Section 4(c)
(Partial Redemption), Section 5 (Events of Default; Acceleration); Section 6
(Failure to Make Payments); Section 7 (Affirmative Covenants of the Company);
Section 8 (Negative Covenants of the Company) or Section 17 (Waiver and Consent)
of the Subordinated Notes that adversely affects the rights of any holder of a
Subordinated Note; (vii) make any changes to this Section 7.3 (Waiver or
Amendment) that adversely affects the rights of any Purchaser; or (viii)
disproportionately and adversely affect the rights of any of the holders of the
then outstanding Subordinated Notes. Notwithstanding the foregoing, the Company
may amend or supplement the Subordinated Notes without the consent of the
holders of the Subordinated Notes to cure any ambiguity, defect or inconsistency
or to provide for uncertificated Subordinated Notes in addition to or in place
of certificated Subordinated Notes, or to make any change that does not
adversely affect the rights of any holder of any of the Subordinated Notes. No
failure to exercise or delay in exercising, by a Purchaser or any holder of the
Subordinated Notes, of any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise of any right, power
or privilege preclude any other or further exercise thereof, or the exercise of
any other right or remedy provided by law. The rights and remedies provided in
this Agreement are cumulative and not exclusive of any right or remedy provided
by 21

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law or equity. No notice or demand on the Company in any case shall, in itself,
entitle the Company to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Purchasers to any
other or further action in any circumstances without notice or demand. No
consent or waiver, expressed or implied, by the Purchasers to or of any breach
or default by the Company in the performance of its obligations hereunder shall
be deemed or construed to be a consent or waiver to or of any other breach or
default in the performance of the same or any other obligations of the Company
hereunder. Failure on the part of the Purchasers to complain of any acts or
failure to act or to declare an Event of Default, irrespective of how long such
failure continues, shall not constitute a waiver by the Purchasers of their
rights hereunder or impair any rights, powers or remedies on account of any
breach or default by the Company. 7.4 Required Waiver Disclosure. Appendix A
hereto sets forth certain disclosures relating to the Placement Agent that the
Company is required to provide to the Purchasers. 7.5 Severability. Any
provision of this Agreement which is unenforceable or invalid or contrary to
law, or the inclusion of which would adversely affect the validity, legality or
enforcement of this Agreement, shall be of no effect and, in such case, all the
remaining terms and provisions of this Agreement shall subsist and be fully
effective according to the tenor of this Agreement the same as though any such
invalid portion had never been included herein. Notwithstanding any of the
foregoing to the contrary, if any provisions of this Agreement or the
application thereof are held invalid or unenforceable only as to particular
persons or situations, the remainder of this Agreement, and the application of
such provision to persons or situations other than those to which it shall have
been held invalid or unenforceable, shall not be affected thereby, but shall
continue valid and enforceable to the fullest extent permitted by law. 7.6
Notices. Any notice which any party hereto may be required or may desire to give
hereunder shall be deemed to have been given if in writing and if delivered
personally, or if mailed, postage prepaid, by United States registered or
certified mail, return receipt requested, or if delivered by a responsible
overnight commercial courier promising next business day delivery, addressed: if
to the Company: Sound Financial Bancorp, Inc. 2400 Third Avenue, Suite 100
Seattle, WA 98121 Tel: (206) 436-1495 Attention: Laura (Laurie) Lee Stewart
President and Chief Executive Officer with a copy to: Silver, Freedman, Taff &
Tiernan LLP 3299 K Street, NW, Suite 100 Washington, D.C. 20007 Tel: (202)
295-4500 Attention: Michael S. Sadow, Esquire if to the Purchasers: To the
address indicated on such Purchaser’s signature page. 22

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or to such other address or addresses as the party to be given notice may have
furnished in writing to the party seeking or desiring to give notice, as a place
for the giving of notice; provided that no change in address shall be effective
until five (5) Business Days after being given to the other party in the manner
provided for above. Any notice given in accordance with the foregoing shall be
deemed given when delivered personally or, if mailed, three (3) Business Days
after it shall have been deposited in the United States mails as aforesaid or,
if sent by overnight courier, the Business Day following the date of delivery to
such courier (provided next business day delivery was requested). 7.7 Successors
and Assigns. This Agreement shall inure to the benefit of the parties and their
respective heirs, legal representatives, successors and assigns; except that (i)
unless a Purchaser consents in writing, no assignment made by the Company in
violation of this Agreement shall be effective or confer any rights on any
purported assignee of the Company, and (ii) unless such assignment complies with
the Assignment Form attached to the Subordinated Notes, no assignment made by a
Purchaser shall be effective or confer any rights on any purported assignee of
Purchaser. The term “successors and assigns” will not include a purchaser of any
of the Subordinated Notes from any Purchaser merely because of such purchase but
shall include a purchaser of any of the Subordinated Notes pursuant to an
assignment complying with the Assignment Form attached to the Subordinated
Notes. 7.8 No Joint Venture. Nothing contained herein or in any document
executed pursuant hereto and no action or inaction whatsoever on the part of a
Purchaser, shall be deemed to make a Purchaser a partner or joint venturer with
the Company. 7.9 Documentation. All documents and other matters required by any
of the provisions of this Agreement to be submitted or furnished to a Purchaser
shall be in form and substance satisfactory to such Purchaser. 7.10 Entire
Agreement. This Agreement and the Subordinated Notes, along with any exhibits
hereto and thereto, constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and may not be modified or amended in
any manner other than by supplemental written agreement executed by the parties
hereto. No party, in entering into this Agreement, has relied upon any
representation, warranty, covenant, condition or other term that is not set
forth in this Agreement or in the Subordinated Notes. 7.11 Choice of Law. This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York without giving effect to its laws or principles of conflict of
laws. Nothing herein shall be deemed to limit any rights, powers or privileges
which a Purchaser may have pursuant to any law of the United States of America
or any rule, regulation or order of any department or agency thereof and nothing
herein shall be deemed to make unlawful any transaction or conduct by a
Purchaser which is lawful pursuant to, or which is permitted by, any of the
foregoing. 7.12 No Third Party Beneficiary. This Agreement is made for the sole
benefit of the Company and the Purchasers, and no other Person shall be deemed
to have any privity of contract hereunder nor any right to rely hereon to any
extent or for any purpose whatsoever, nor shall any other Person have any right
of action of any kind hereon or be deemed to be a third party 23

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beneficiary hereunder; provided, that the Placement Agent may rely on the
representations and warranties contained herein to the same extent as if it were
a party to this Agreement. 7.13 Legal Tender of United States. All payments
hereunder shall be made in coin or currency which at the time of payment is
legal tender in the United States of America for public and private debts. 7.14
Captions; Counterparts. Captions contained in this Agreement in no way define,
limit or extend the scope or intent of their respective provisions. This
Agreement may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute but one and the same instrument. In the event that any signature on
this Agreement in favor of the Purchasers and all other documents delivered
hereunder (other than the Subordinated Notes) is delivered by facsimile
transmission, or by e-mail delivery of a “.pdf” format data file, such signature
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) with the same force and effect as if such
facsimile signature page were an original thereof. Notwithstanding the
foregoing, if any Purchaser shall request manually signed counterpart signatures
to any document hereunder, the Company hereby agrees to use its reasonable
endeavors to provide such manually signed signature pages as soon as reasonably
practicable. 7.15 Knowledge; Discretion. All references herein to a Purchaser’s
or the Company’s knowledge shall be deemed to mean the knowledge of such party
based on the actual knowledge of such party’s Chief Executive Officer and Chief
Financial Officer or such other persons holding equivalent offices. Unless
specified to the contrary herein, all references herein to an exercise of
discretion or judgment by a Purchaser, to the making of a determination or
designation by a Purchaser, to the application of a Purchaser’s discretion or
opinion, to the granting or withholding of a Purchaser’s consent or approval, to
the consideration of whether a matter or thing is satisfactory or acceptable to
a Purchaser, or otherwise involving the decision making of a Purchaser, shall be
deemed to mean that such Purchaser shall decide using the reasonable discretion
or judgment of a prudent lender. 7.16 Waiver Of Right To Jury Trial. TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW, THE PARTIES HERETO HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THAT THEY MAY HAVE TO A TRIAL BY
JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH ANY OF THE
TRANSACTION DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF THE COMPANY OR THE
PURCHASERS. THE PARTIES ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED IN THE
SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL SELECTED OF THEIR OWN FREE WILL. THE PARTIES FURTHER ACKNOWLEDGE THAT
(I) THEY HAVE READ AND UNDERSTAND THE MEANING AND RAMIFICATIONS OF THIS WAIVER,
(II) THIS WAIVER HAS BEEN REVIEWED BY THE PARTIES AND THEIR COUNSEL AND IS A
MATERIAL INDUCEMENT FOR ENTRY INTO THIS AGREEMENT AND (III) THIS WAIVER SHALL BE
EFFECTIVE AS TO EACH OF SUCH TRANSACTION DOCUMENTS AS IF FULLY INCORPORATED
THEREIN. 24

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7.17 Expenses. Except as otherwise provided in this Agreement, each of the
parties will bear and pay all other costs and expenses incurred by it or on its
behalf in connection with the transactions contemplated pursuant to this
Agreement. 7.18 Survival. Each of the representations and warranties set forth
in this Agreement shall survive the consummation of the transactions
contemplated hereby for a period of one year after the date hereof. Except as
otherwise provided herein, all covenants and agreements contained herein shall
survive until, by their respective terms, they are no longer operative.
[Signature Pages Follow] 25

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IN WITNESS WHEREOF, the Company has caused this Subordinated Note Purchase
Agreement to be executed by its duly authorized representative as of the date
first above written. COMPANY: SOUND FINANCIAL BANCORP, INC. By: Name: Laura Lee
Stewart Title: President and Chief Executive Officer [Company Signature Page to
Subordinated Note Purchase Agreement]

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IN WITNESS WHEREOF, the Purchaser has caused this Subordinated Note Purchase
Agreement to be executed by its duly authorized representative as of the date
first above written. PURCHASER: [INSERT PURCHASER’S NAME] By: Name: [●] Title:
[●] Address of Purchaser: [●] Principal Amount of Purchased Subordinated Note:
$[●] [Purchaser Signature Page to Subordinated Note Purchase Agreement]

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EXHIBIT A FORM OF SUBORDINATED NOTE SOUND FINANCIAL BANCORP, INC. 5.25%
FIXED-TO-FLOATING RATE SUBORDINATED NOTE DUE OCTOBER 1, 2030 THE INDEBTEDNESS
EVIDENCED BY THIS SUBORDINATED NOTE IS SUBORDINATED AND JUNIOR IN RIGHT OF
PAYMENT TO SENIOR INDEBTEDNESS (AS DEFINED IN SECTION 3 OF THIS SUBORDINATED
NOTE) OF SOUND FINANCIAL BANCORP, INC. (THE “COMPANY”), INCLUDING OBLIGATIONS OF
THE COMPANY TO ITS GENERAL CREDITORS AND SECURED CREDITORS, AND IS UNSECURED. IT
IS INELIGIBLE AS COLLATERAL FOR ANY EXTENSION OF CREDIT BY THE COMPANY OR ANY OF
ITS SUBSIDIARIES. IN THE EVENT OF LIQUIDATION ALL HOLDERS OF SENIOR INDEBTEDNESS
OF THE COMPANY SHALL BE ENTITLED TO BE PAID IN FULL WITH SUCH INTEREST AS MAY BE
PROVIDED BY LAW BEFORE ANY PAYMENT SHALL BE MADE ON ACCOUNT OF PRINCIPAL OF OR
INTEREST ON THIS SUBORDINATED NOTE. AFTER PAYMENT IN FULL OF ALL SUMS OWING TO
SUCH HOLDERS OF SENIOR INDEBTEDNESS, THE HOLDER OF THIS SUBORDINATED NOTE,
TOGETHER WITH THE HOLDERS OF ANY OBLIGATIONS OF THE COMPANY RANKING ON A PARITY
WITH THE SUBORDINATED NOTES, SHALL BE ENTITLED TO BE PAID FROM THE REMAINING
ASSETS OF THE COMPANY THE UNPAID PRINCIPAL AMOUNT OF THIS SUBORDINATED NOTE PLUS
ACCRUED AND UNPAID INTEREST THEREON BEFORE ANY PAYMENT OR OTHER DISTRIBUTION,
WHETHER IN CASH, PROPERTY OR OTHERWISE, SHALL BE MADE (I) WITH RESPECT TO ANY
OBLIGATION THAT BY ITS TERMS EXPRESSLY IS JUNIOR IN THE RIGHT OF PAYMENT TO THE
SUBORDINATED NOTES, (II) WITH RESPECT TO ANY INDEBTEDNESS BETWEEN THE COMPANY
AND ANY OF ITS SUBSIDIARIES OR AFFILIATES, OR (III) ON ACCOUNT OF ANY SHARES OF
CAPITAL STOCK OF THE COMPANY. THIS SUBORDINATED NOTE IS A GLOBAL SUBORDINATED
NOTE WITHIN THE MEANING OF THE PURCHASE AGREEMENT HEREINAFTER REFERRED TO AND IS
REGISTERED IN THE NAME OF CEDE & CO AS NOMINEE OF THE DEPOSITORY TRUST COMPANY
(“DTC”) OR A NOMINEE OF DTC. THIS SUBORDINATED NOTE IS NOT EXCHANGEABLE FOR
SUBORDINATED NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS
NOMINEE AND NO TRANSFER OF THIS SUBORDINATED NOTE (OTHER THAN A TRANSFER OF THIS
SUBORDINATED NOTE AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC
TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED. THE INDEBTEDNESS EVIDENCED
BY THIS SUBORDINATED NOTE IS NOT A DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY OR FUND. A-1

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THIS SUBORDINATED NOTE WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM
DENOMINATIONS OF $250,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY
ATTEMPTED TRANSFER OF THIS SUBORDINATED NOTE IN A DENOMINATION OF LESS THAN
$250,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH
PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SUBORDINATED
NOTE FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PAYMENTS ON
THIS SUBORDINATED NOTE, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO
INTEREST WHATSOEVER IN THIS SUBORDINATED NOTE. THIS SUBORDINATED NOTE MAY BE
SOLD ONLY IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS. THIS
SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS OR ANY
OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SUBORDINATED NOTE NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION
OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH
AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. CERTAIN
ERISA CONSIDERATIONS: THE HOLDER OF THIS SUBORDINATED NOTE, OR ANY INTEREST
HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF AGREES, REPRESENTS AND WARRANTS THAT
IT IS NOT AN EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN
OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT
OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING
ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY,
AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS
SUBORDINATED NOTE OR ANY INTEREST HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS
ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR
PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR
ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SUBORDINATED
A-2

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NOTE, OR ANY INTEREST HEREIN, ARE NOT PROHIBITED BY SECTION 406 OF ERISA OR
SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE AND HOLDING. ANY
PURCHASER OR HOLDER OF THIS SUBORDINATED NOTE OR ANY INTEREST HEREIN WILL BE
DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER: (I)
IT IS NOT AN EMPLOYEE BENEFIT PLAN OR OTHER PLAN TO WHICH TITLE I OF ERISA OR
SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON
BEHALF OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLANS, OR ANY OTHER PERSON OR ENTITY
USING THE “PLAN ASSETS” OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLANS TO FINANCE
SUCH PURCHASE OR (II) SUCH PURCHASE OR HOLDING WILL NOT RESULT IN A PROHIBITED
TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH
FULL EXEMPTIVE RELIEF IS NOT AVAILABLE UNDER APPLICABLE STATUTORY OR
ADMINISTRATIVE EXEMPTION. ANY FIDUCIARY OF ANY PLAN WHO IS CONSIDERING THE
ACQUISITION OF THIS SUBORDINATED NOTE OR ANY INTEREST HEREIN SHOULD CONSULT WITH
HIS OR HER LEGAL COUNSEL PRIOR TO ACQUIRING THIS SUBORDINATED NOTE OR ANY
INTEREST HEREIN. A-3

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No. 2030-1 CUSIP: (QIB) 83607AAA8 ISIN: US83607AAA88 SOUND FINANCIAL BANCORP,
INC. 5.25% FIXED-TO-FLOATING RATE SUBORDINATED NOTE DUE OCTOBER 1, 2030 1.
Subordinated Notes. This Subordinated Note is one of an issue of notes of Sound
Financial Bancorp, Inc., a Maryland corporation (the “Company”) designated as
the “5.25% Fixed- to-Floating Rate Subordinated Notes due October 1, 2030” (the
“Subordinated Notes”) issued pursuant to that Subordinated Note Purchase
Agreement, dated as of September 18, 2020 by and among the Company and the
several purchasers of the Subordinated Notes identified on the signature pages
thereto (the “Purchase Agreement”). 2. Payment. (a)(i)The Company, for value
received, promises to pay to Cede & Co., or its registered assigns, the
principal sum of Twelve Million Dollars (U.S.) ($12,000,000), plus accrued but
unpaid interest on October 1, 2030 (“Stated Maturity”) and to pay interest
thereon (i) from and including September 18, 2020 (the “Issue Date”) to but
excluding October 1, 2025 or the earlier redemption date contemplated by Section
4 of this Subordinated Note, at the rate of 5.25% per annum, computed on the
basis of a 360-day year consisting of twelve 30-day months and payable
semi-annually (each semi-annual period, a “Fixed Rate Period”) in arrears on
April 1 and October 1 of each year (each payment date, a “Fixed Rate Interest
Payment Date”), beginning on April 1, 2021 and (ii) from and including October
1, 2025 to but excluding the Stated Maturity or the earlier redemption date
contemplated by Section 4 of this Subordinated Note, at the rate per annum,
reset quarterly, equal to the Floating Interest Rate (as defined below)
determined on the Floating Interest Determination Date (as defined below) of the
applicable interest period plus 513 basis points, computed on the basis of a
360-day year and the actual number of days elapsed and payable quarterly in
arrears (each quarterly period, a “Floating Rate Period”) on January 1, April 1,
July 1 and October 1 of each year (each payment date, a “Floating Rate Interest
Payment Date”). Dollar amounts resulting from this calculation shall be rounded
to the nearest cent, with one-half cent being rounded up. The term “Floating
Interest Determination Date” means the date upon which the Floating Interest
Rate is determined by the Calculation Agent (as defined below) pursuant to the
Three-Month Term SOFR Conventions (as defined below). Any payment of principal
of or interest on this Subordinated Note that would otherwise become due and
payable on a day which is not a Business Day (as defined below) shall become due
and payable on the next succeeding Business Day, with the same force and effect
as if made on the date for payment of such principal or interest, and no
interest will accrue in respect of such payment for the period after such day;
provided, that in the event that any scheduled Floating Rate Interest Payment
Date falls on a day that is not a Business Day and the next succeeding Business
Day falls in the next succeeding calendar month, such Floating Rate Interest
Payment Date will be accelerated to the immediately preceding Business Day, and,
in each such case, the amounts payable on such Business Day will include
interest accrued to, but excluding, such Business Day. Dollar amounts resulting
from interest calculations will be rounded to the nearest cent, with one half
cent being rounded upward. Notwithstanding anything to the contrary, (i) in the
event the Three-Month Term SOFR (as defined below) is less than zero, the
Three-Month Term SOFR shall be deemed to be zero, and (ii) if a Benchmark
Transition Event (as defined below) and its related Benchmark A-4

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Replacement Date (as defined below) have occurred and the Benchmark Replacement
(as defined below) is less than zero, then the Benchmark Replacement shall be
deemed to be zero. (ii) The Company shall take such actions as are necessary to
ensure that from the commencement of the Floating Rate Period for so long as any
of the Subordinated Notes remain outstanding there will at all times be a
Calculation Agent appointed to calculate Three-Month Term SOFR in respect of
each Floating Rate Period. The calculation of Three-Month Term SOFR for each
applicable Floating Rate Period by the Calculation Agent will (in the absence of
manifest error) be final and binding. The Calculation Agent’s determination of
any interest rate and its calculation of interest payments for any period will
be maintained on file at the Calculation Agent’s principal offices, will be made
available to any Noteholder (as defined below) upon request. The Calculation
Agent may be removed by the Company at any time. If the Calculation Agent is
unable or unwilling to act as Calculation Agent or is removed by the Company,
the Company will promptly appoint a replacement Calculation Agent. The
Calculation Agent may not resign its duties without a successor having been duly
appointed; provided, that if a successor Calculation Agent has not been
appointed by the Company and such successor accepted such position within thirty
(30) days after the giving of notice of resignation by the Calculation Agent,
then the resigning Calculation Agent may petition, at the expense of the
Company, any court of competent jurisdiction for the appointment of a successor
Calculation Agent with respect to such series. For the avoidance of doubt, if at
any time there is no Calculation Agent appointed by the Company, then the
Company shall be the Calculation Agent. (b) An “Interest Payment Date” is either
a Fixed Rate Interest Payment Date or a Floating Rate Interest Payment Date, as
applicable. (c) The “Floating Interest Rate” means: (i) initially Three-Month
Term SOFR (as defined below). (ii) Notwithstanding the foregoing clause (i) of
this Section 2(c): (1) If the Calculation Agent determines prior to the relevant
Floating Interest Determination Date that a Benchmark Transition Event and its
related Benchmark Replacement Date (each of such terms as defined below) have
occurred with respect to Three- Month Term SOFR, then the Company shall promptly
provide notice of such determination to the Noteholders and Section 2(d) will
thereafter apply to all determinations, calculations and quotations made or
obtained for the purposes of calculating the Floating Interest Rate payable on
the Subordinated Notes during a relevant Floating Rate Period. (2) However, if
the Calculation Agent determines that a Benchmark Transition Event and its
related Benchmark Replacement Date have occurred with respect to Three-Month
Term SOFR, but for any reason the Benchmark Replacement has not been determined
as of the relevant Floating Interest Determination Date, the Floating Interest
Rate for the applicable Floating Rate Period will be equal to the Floating
Interest Rate on the last Floating Interest Determination Date for the
Subordinated Notes, as determined by the Calculation Agent. A-5

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(iii) If the then-current Benchmark is Three-Month Term SOFR and any of the
foregoing provisions concerning the calculation of the interest rate and the
payment of interest during the Floating Rate Period are inconsistent with any of
the Three-Month Term SOFR Conventions (as defined below) determined by the
Calculation Agent, then the relevant Three- Month Term SOFR Conventions as
determined by the Calculation Agent will apply. (d) Effect of Benchmark
Transition Event. (i) If the Calculation Agent determines that a Benchmark
Transition Event and its related Benchmark Replacement Date have occurred prior
to the Reference Time (as defined below) in respect of any determination of the
Benchmark (as defined below) on any date, the Benchmark Replacement will replace
the then-current Benchmark for all purposes relating to the Subordinated Notes
during the relevant Floating Rate Period in respect of such determination on
such date and all determinations on all subsequent dates. (ii) In connection
with the implementation of a Benchmark Replacement, the Calculation Agent will
have the right to make Benchmark Replacement Conforming Changes (as defined
below) from time to time, and such changes shall become effective without
consent from the Noteholders or any other party. (iii) The Calculation Agent is
expressly authorized to make certain determinations, decisions and elections
under the Subordinated Notes, including with respect to the use of Three-Month
Term SOFR as the Benchmark under this Section 2(d). Any determination, decision
or election that may be made by the Calculation Agent under the terms of the
Subordinated Notes, including any determination with respect to a tenor, rate or
adjustment or of the occurrence or non-occurrence of an event, circumstance or
date, and any decision to take or refrain from taking any action or any
selection: (1) will be conclusive and binding absent manifest error; (2) if made
by the Company as the Calculation Agent, will be made in the Company’s sole
discretion; (3) if made by the Calculation Agent, if the Calculation Agent is
other than the Company, will be made after consultation with the Company, and
the Calculation Agent will not make any such determination, decision or election
to which the Company reasonably objects; and (4) notwithstanding anything to the
contrary in this Subordinated Note or the Purchase Agreement, shall become
effective without consent from the Noteholders or any other party. (iv) If the
Calculation Agent fails to make any determination, decision or election that it
is required to make under the terms of the Subordinated Notes, then the Company
will make such determination, decision or election on the same basis as
described above. A-6

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(v) For the avoidance of doubt and subject to the last sentence of Section
2(a)(i), after a Benchmark Transition Event and its related Benchmark
Replacement Date have occurred, interest payable on this Subordinated Note for
the Floating Rate Period will be an annual rate equal to the sum of the
applicable Benchmark Replacement plus 513 basis points. (vi) As used in this
Subordinated Note: (1) “Benchmark” means, initially, Three-Month Term SOFR;
provided that if the Calculation Agent determines on or prior to the Reference
Time that a Benchmark Transition Event and its related Benchmark Replacement
Date have occurred with respect to Three-Month Term SOFR or the then-current
Benchmark, then “Benchmark” means the applicable Benchmark Replacement. (2)
“Benchmark Replacement” means the Interpolated Benchmark with respect to the
then-current Benchmark; provided that if (a) the Calculation Agent cannot
determine the Interpolated Benchmark as of the Benchmark Replacement Date or (b)
the then-current Benchmark is Three-Month Term SOFR and a Benchmark Transition
Event and its related Benchmark Replacement Date have occurred with respect to
Three-Month Term SOFR (in which event no Interpolated Benchmark with respect to
Three-Month Term SOFR shall be determined), then “Benchmark Replacement” means
the first alternative set forth in the order below that can be determined by the
Calculation Agent as of the Benchmark Replacement Date: a. The sum of: (i)
Compounded SOFR and (ii) the Benchmark Replacement Adjustment; b. the sum of:
(i) the alternate rate of interest that has been selected or recommended by the
Relevant Governmental Body as the replacement for the then- current Benchmark
for the applicable Corresponding Tenor and (ii) the Benchmark Replacement
Adjustment; c. the sum of: (i) the ISDA Fallback Rate and (ii) the Benchmark
Replacement Adjustment; and d. the sum of: (i) the alternate rate of interest
that has been selected by the Calculation Agent as the replacement for the
then-current Benchmark for the applicable Corresponding Tenor giving due
consideration to any industry-accepted rate of interest as a replacement for the
then-current Benchmark for U.S. dollar denominated floating rate securities at
such time and (ii) the Benchmark Replacement Adjustment. (3) “Benchmark
Replacement Adjustment” means the first alternative set forth in the order below
that can be determined by the Calculation Agent as of the Benchmark Replacement
Date: a. the spread adjustment, or method for calculating or determining such
spread adjustment, (which may be a positive or negative value or zero) that has
been selected or recommended by the Relevant Governmental Body for the
applicable Unadjusted Benchmark Replacement; A-7

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b. if the applicable Unadjusted Benchmark Replacement is equivalent to the ISDA
Fallback Rate, then the ISDA Fallback Adjustment; and c. the spread adjustment
(which may be a positive or negative value or zero) that has been selected by
the Calculation Agent giving due consideration to any industry-accepted spread
adjustment, or method for calculating or determining such spread adjustment, for
the replacement of the then-current Benchmark with the applicable Unadjusted
Benchmark Replacement for U.S. dollar denominated floating rate securities at
such time. (4) “Benchmark Replacement Conforming Changes” means, with respect to
any Benchmark Replacement, any technical, administrative or operational changes
(including changes to the definition of “Floating Rate Period,” timing and
frequency of determining rates with respect to each Floating Rate Period and
making payments of interest, rounding of amounts or tenors, and other
administrative matters) that the Calculation Agent decides may be appropriate to
reflect the adoption of such Benchmark Replacement in a manner substantially
consistent with market practice (or, if the Calculation Agent decides that
adoption of any portion of such market practice is not administratively feasible
or if the Calculation Agent determines that no market practice for use of the
Benchmark Replacement exists, in such other manner as the Calculation Agent
determines is reasonably necessary). (5) “Benchmark Replacement Date” means the
earliest to occur of the following events with respect to the then-current
Benchmark: a. in the case of clause (a) of the definition of “Benchmark
Transition Event,” the relevant Reference Time in respect of any determination;
or b. in the case of clause (b) or (c) of the definition of “Benchmark
Transition Event,” the later of (i) the date of the public statement or
publication of information referenced therein and (ii) the date on which the
administrator of the Benchmark permanently or indefinitely ceases to provide the
Benchmark; or c. in the case of clause (d) of the definition of “Benchmark
Transition Event,” the date of the public statement or publication of
information referenced therein. For the avoidance of doubt, for purposes of the
definitions of Benchmark Replacement Date and Benchmark Transition Event,
references to the Benchmark also include any reference rate underlying the
Benchmark (for example, if the Benchmark becomes Compounded SOFR, references to
the Benchmark would include SOFR). For the avoidance of doubt, if the event
giving rise to the Benchmark Replacement Date occurs on the same day as, but
earlier than, the Reference Time in respect of any determination, the Benchmark
Replacement Date will be deemed to have occurred prior to the Reference Time for
such determination. (6) “Benchmark Transition Event” means the occurrence of one
or more of the following events with respect to the then-current Benchmark: A-8

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a. if the Benchmark is Three-Month Term SOFR, (i) the Relevant Governmental Body
has not selected or recommended a forward-looking term rate for a tenor of three
months based on SOFR, (ii) the development of a forward-looking term rate for a
tenor of three months based on SOFR that has been recommended or selected by the
Relevant Governmental Body is not complete or (iii) the Company determines that
use of a forward-looking rate for a tenor of three months based on SOFR is not
administratively feasible; b. a public statement or publication of information
by or on behalf of the administrator of the Benchmark announcing that such
administrator has ceased or will cease to provide the Benchmark, permanently or
indefinitely, provided that, at the time of such statement or publication, there
is no successor administrator that will continue to provide the Benchmark; c. a
public statement or publication of information by the regulatory supervisor for
the administrator of the Benchmark, the central bank for the currency of the
Benchmark, an insolvency official with jurisdiction over the administrator for
the Benchmark, a resolution authority with jurisdiction over the administrator
for the Benchmark or a court or an entity with similar insolvency or resolution
authority over the administrator for the Benchmark, which states that the
administrator of the Benchmark has ceased or will cease to provide the Benchmark
permanently or indefinitely, provided that, at the time of such statement or
publication, there is no successor administrator that will continue to provide
the Benchmark; or d. a public statement or publication of information by the
regulatory supervisor for the administrator of the Benchmark announcing that the
Benchmark is no longer representative. (7) “Business Day” means any day that is
not a Saturday or Sunday and that is not a day on which banks in the State of
Washington are generally authorized or required by law or executive order to be
closed. (8) “Calculation Agent” means the agent (which may be the Company or an
affiliate of the Company) as may be appointed by the Company to act as
Calculation Agent for the Subordinated Notes prior to the commencement of the
Floating Rate Period to act in accordance with Section 2. (9) “Compounded SOFR”
means the compounded average of SOFRs for the applicable Corresponding Tenor,
with the rate, or methodology for this rate, and conventions for this rate being
established by the Calculation Agent in accordance with: a. the rate, or
methodology for this rate and conventions for this rate selected or recommended
by the Relevant Governmental Body for determining compounded SOFR; provided
that: b. if, and to the extent that, the Calculation Agent determines that
Compounded SOFR cannot be determined in accordance with clause (a) above, then
the rate, or methodology for this rate, and conventions for this rate that have
been selected by the A-9

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Calculation Agent giving due consideration to any industry-accepted market
practice for U.S. dollar denominated floating rate securities at such time. For
the avoidance of doubt, the calculation of Compounded SOFR will exclude the
Benchmark Replacement Adjustment plus 513 basis points. (10) “Corresponding
Tenor” with respect to a Benchmark Replacement means a tenor (including
overnight) having approximately the same length (disregarding Business Day
adjustment) as the applicable tenor for the then-current Benchmark. (11) “FRBNY”
means the Federal Reserve Bank of New York. (12) “FRBNY’s Website” means the
website of the FRBNY at http://www.newyorkfed.org, or any successor source. (13)
“Interpolated Benchmark” with respect to the Benchmark means the rate determined
for the Corresponding Tenor by interpolating on a linear basis between: (1) the
Benchmark for the longest period (for which the Benchmark is available) that is
shorter than the Corresponding Tenor and (2) the Benchmark for the shortest
period (for which the Benchmark is available) that is longer than the
Corresponding Tenor. (14) “ISDA” means the International Swaps and Derivatives
Association, Inc. or any successor thereto. (15) “ISDA Definitions” means the
2006 ISDA Definitions published by the ISDA or any successor thereto, as amended
or supplemented from time to time, or any successor definitional booklet for
interest rate derivatives published from time to time. (16) “ISDA Fallback
Adjustment” means the spread adjustment (which may be a positive or negative
value or zero) that would apply for derivatives transactions referencing the
ISDA Definitions to be determined upon the occurrence of an index cessation
event with respect to the Benchmark for the applicable tenor. (17) “ISDA
Fallback Rate” means the rate that would apply for derivatives transactions
referencing the ISDA Definitions to be effective upon the occurrence of an index
cessation date with respect to the Benchmark for the applicable tenor excluding
the applicable ISDA Fallback Adjustment. (18) “Reference Time” with respect to
any determination of the Benchmark means (a) if the Benchmark is Three-Month
Term SOFR, the time determined by the Calculation Agent after giving effect to
the Three-Month Term SOFR Conventions, and (b) if the Benchmark is not
Three-Month Term SOFR, the time determined by the Calculation Agent after giving
effect to the Benchmark Replacement Conforming Changes. (19) “Relevant
Governmental Body” means the Board of Governors of the Federal Reserve System
(the “Federal Reserve”) and/or the FRBNY, or a committee officially endorsed or
convened by the Federal Reserve and/or the FRBNY or any successor thereto. A-10

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(20) “SOFR” means the daily secured overnight financing rate published by the
FRBNY, as the administrator of the benchmark, (or a successor administrator) on
the FRBNY’s Website (or such successor’s website). (21) “Term SOFR” means the
forward-looking term rate for the applicable Corresponding Tenor based on SOFR
that has been selected or recommended by the Relevant Governmental Body. (22)
“Term SOFR Administrator” means any entity designated by the Relevant
Governmental Body as the administrator of Term SOFR (or successor
administrator). (23) “Three-Month Term SOFR” means the rate for Term SOFR for a
tenor of three months that is published by the Term SOFR Administrator at the
Reference Time for any Floating Rate Period, as determined by the Calculation
Agent after giving effect to the Three-Month Term SOFR Conventions. All
percentages used in or resulting from any calculation of Three-Month Term SOFR
shall be rounded, if necessary, to the nearest one-hundred- thousandth of a
percentage point, with 0.000005% rounded up to 0.00001%. (24) “Three-Month Term
SOFR Conventions” means any determination, decision or election with respect to
any technical, administrative or operational matter (including with respect to
the manner and timing of the publication of Three-Month Term SOFR, or changes to
the definition of “Floating Rate Period,” timing and frequency of determining
Three-Month Term SOFR with respect to each Floating Rate Period and making
payments of interest, rounding of amounts or tenors, and other administrative
matters) that the Calculation Agent decides may be appropriate to reflect the
use of Three-Month Term SOFR as the Benchmark in a manner substantially
consistent with market practice (or, if the Calculation Agent decides that
adoption of any portion of such market practice is not administratively feasible
or if the Calculation Agent determines that no market practice for the use of
Three-Month Term SOFR exists, in such other manner as the Calculation Agent
determines is reasonably necessary). (25) “Unadjusted Benchmark Replacement”
means the Benchmark Replacement excluding the Benchmark Replacement Adjustment.
A-11

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3. Subordination. (a) The indebtedness of the Company evidenced by this
Subordinated Note, including the principal and interest on this Subordinated
Note, shall be subordinate and junior in right of payment to the prior payment
in full of all existing claims of creditors of the Company whether now
outstanding or subsequently created, assumed, guaranteed or incurred
(collectively, “Senior Indebtedness”), which shall consist of principal of (and
premium, if any) and interest, if any, on: (i) all indebtedness and obligations
of, or guaranteed or assumed by, the Company for money borrowed, whether or not
evidenced by bonds, debentures, securities, notes or other similar instruments,
and including, but not limited to, all obligations to the Company’s general
creditors and secured creditors; (ii) any deferred obligations of the Company
for the payment of the purchase price of property or assets acquired other than
in the ordinary course of business; (iii) all obligations, contingent or
otherwise, of the Company in respect of any letters of credit, bankers’
acceptances, security purchase facilities and similar direct credit substitutes;
(iv) any capital lease obligations of the Company; (v) all obligations of the
Company in respect of interest rate swap, cap or other agreements, interest rate
future or option contracts, currency swap agreements, currency future or option
contracts, commodity contracts and other similar arrangements or derivative
products; (vi) any obligation of the Company to its general creditors, as
defined for purposes of the capital adequacy regulations of the Federal Reserve
applicable to the Company, as the same may be amended or modified from time to
time; (vii) all obligations that are similar to those in clauses (i) through
(vi) of other persons for the payment of which the Company is responsible or
liable as obligor, guarantor or otherwise arising from an off-balance sheet
guarantee; (viii) all obligations of the types referred to in clauses (i)
through (vii) of other persons secured by a lien on any property or asset of the
Company; and (ix) in the case of (i) through (viii) above, all amendments,
renewals, extensions, modifications and refundings of such indebtedness and
obligations; except “Senior Indebtedness” does not include (A) the Subordinated
Notes, (B) any obligation that by its terms expressly is junior to, or ranks
equally in right of payment with, the Subordinated Notes, or (C) any
indebtedness between the Company and any of its subsidiaries or Affiliates. This
Subordinated Note is not secured by any assets of the Company or any subsidiary
or Affiliate of the Company. The term “Affiliate(s)” means, with respect to any
Person (as such term is defined in the Purchase Agreement), such Person’s
immediate family members, partners, members or parent and subsidiary
corporations, and any other Person directly or indirectly controlling,
controlled by, or under common control with said Person and their respective
Affiliates. (b) In the event of any liquidation of the Company, holders of
Senior Indebtedness of the Company shall be entitled to be paid in full with
such interest as may be provided by law before any payment shall be made on
account of principal of or interest on this Subordinated Note. Additionally, in
the event of any insolvency, dissolution, assignment for the benefit of
creditors or any liquidation or winding up of or relating to the Company,
whether voluntary or involuntary, holders of Senior Indebtedness shall be
entitled to be paid in full before any payment shall be made on account of the
principal of or interest on the Subordinated Notes, including this Subordinated
Note. In the event of any such proceeding, after payment in full of all sums
owing with respect to the Senior Indebtedness, the registered holders of the
Subordinated Notes from time to time (each a “Noteholder” and, collectively, the
“Noteholders”), together with the holders of any obligations of the Company
ranking on a parity with the Subordinated Notes, shall be entitled to be paid
from the remaining assets of the Company the unpaid principal thereof, and the
unpaid interest thereon A-12

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before any payment or other distribution, whether in cash, property or
otherwise, shall be made (i) with respect to any obligation that by its terms
expressly is junior to in the right of payment to the Subordinated Notes, (ii)
with respect to any indebtedness between the Company and any of its subsidiaries
or Affiliates or (iii) on account of any capital stock. (c) If there shall have
occurred and be continuing (i) a default in any payment with respect to any
Senior Indebtedness or (ii) an event of default with respect to any Senior
Indebtedness as a result of which the maturity thereof is accelerated, unless
and until such payment default or event of default shall have been cured or
waived or shall have ceased to exist, no payments shall be made by the Company
with respect to the Subordinated Notes, notwithstanding the provisions of
Section 18 hereof. The provisions of this paragraph shall not apply to any
payment with respect to which the provisions of Section 3(b) above would be
applicable. (d) Nothing herein shall act to prohibit, limit or impede the
Company from issuing additional debt of the Company having the same rank as the
Subordinated Notes or which may be junior or senior in rank to the Subordinated
Notes. Each Noteholder, by its acceptance hereof, agrees to and shall be bound
by the provisions of this Section 3. Each Noteholder, by its acceptance hereof,
further acknowledges and agrees that the foregoing subordination provisions are,
and are intended to be, an inducement and a consideration for each holder of any
Senior Indebtedness, whether such Senior Indebtedness was created or acquired
before or after the issuance of the Subordinated Notes, to acquire and continue
to hold, or to continue to hold, such Senior Indebtedness, and such holder of
Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold or in continuing to
hold such Senior Indebtedness. 4. Redemption. (a) Redemption Prior to Fifth
Anniversary. This Subordinated Note shall not be redeemable by the Company in
whole or in part prior to the fifth anniversary of the Issue Date, except in the
event of: (i) a Tier 2 Capital Event (as defined below); (ii) a Tax Event (as
defined below); or (iii) an Investment Company Event (as defined below). Upon
the occurrence of a Tier 2 Capital Event, a Tax Event or an Investment Company
Event, subject to Section 4(f) below, the Company may redeem this Subordinated
Note in whole, but not in part, at any time, upon giving not less than 10
calendar days’ notice to the Noteholders at an amount equal to 100% of the
outstanding principal amount being redeemed plus accrued but unpaid interest, to
but excluding the redemption date. “Tier 2 Capital Event” means the receipt by
the Company of an opinion of counsel to the Company to the effect that there is
a material risk that the Subordinated Note no longer qualifies to be eligible
for treatment as “Tier 2” Capital (as defined by the Federal Reserve) (or its
then equivalent) as a result of a change in law or regulation, or interpretation
or application of law or regulation by any judicial, legislative or regulatory
authority that becomes effective after the Issue Date. “Tax Event” means the
receipt by the Company of an opinion of counsel to the Company that as a result
of any amendment to, or change (including any final and adopted (or enacted)
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, there is a material risk that
interest payable by the Company on the Subordinated Notes is not, or within 120
days after the receipt of such opinion will not be, deductible by the Company,
A-13

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in whole or in part, for United States federal income tax purposes. “Investment
Company Event” means the receipt by the Company of an opinion of counsel to the
Company to the effect that there is a material risk that the Company is or,
within 120 days after the receipt of such opinion will be, required to register
as an investment company pursuant to the Investment Company Act of 1940, as
amended. (b) Redemption on or after Fifth Anniversary. On or after the fifth
anniversary of the Issue Date, subject to Section 4(f) below, this Subordinated
Note shall be redeemable at the option of and by the Company, in whole or in
part at any time and from time to time upon any Interest Payment Date, at an
amount equal to 100% of the outstanding principal amount being redeemed plus
accrued but unpaid interest, to but excluding the redemption date, but in all
cases in a principal amount with integral multiples of $1,000. In addition, on
or after the fifth anniversary of the Issue Date, subject to Section 4(f), the
Company may redeem all or a portion of the Subordinated Notes, at any time upon
the occurrence of a Tier 2 Capital Event, Tax Event or an Investment Company
Event. (c) Partial Redemption. If less than the then outstanding principal
amount of this Subordinated Note is redeemed, (i) a new Subordinated Note shall
be issued representing the unredeemed portion without charge to the holder
thereof and (ii) such redemption shall be effected on a pro rata basis as to the
Noteholders. For purposes of clarity, upon a partial redemption, a like
percentage of the principal amount of every Subordinated Note held by every
Noteholder shall be redeemed. (d) No Redemption at Option of Noteholder. This
Subordinated Note is not subject to redemption at the option of the holder of
this Subordinated Note. (e) Effectiveness of Redemption. If notice of redemption
has been duly given and notwithstanding that this Subordinated Note has been
called for redemption but has not yet been surrendered for cancellation, on and
after the date fixed for redemption interest shall cease to accrue on the
portion of this Subordinated Note called for redemption, this Subordinated Note
shall no longer be deemed outstanding with respect to the portion called for
redemption and all rights with respect to the portion of this Subordinated Note
called for redemption shall forthwith on such date fixed for redemption cease
and terminate unless the Company shall default in the payment of the redemption
price, except only the right of the Noteholder to receive the amount payable on
such redemption, without interest. (f) Regulatory Approvals. Any such redemption
shall be subject to receipt of any and all required federal and state regulatory
approvals, including, but not limited to, the consent of the Federal Reserve. In
the case of any redemption of this Subordinated Note pursuant to paragraphs (a)
or (b) of this Section 4, the Company will give the Noteholder notice of
redemption, which notice shall indicate the aggregate principal amount of
Subordinated Notes to be redeemed, not less than 30 nor more than 45 calendar
days prior to the proposed redemption date. (g) Purchase and Resale of the
Subordinated Notes. Subject to any required federal and state regulatory
approvals and the provisions of this Subordinated Note, the Company shall have
the right to purchase any of the Subordinated Notes at any time in the open
market, private A-14

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transactions or otherwise. If the Company purchases any Subordinated Notes, it
may, in its discretion, hold, resell or cancel any of the purchased Subordinated
Notes. 5. Events of Default; Acceleration. Each of the following events shall
constitute an “Event of Default”: (a) the entry of a decree or order for relief
in respect of the Company by a court having jurisdiction in the premises in an
involuntary case or proceeding under any applicable bankruptcy, insolvency, or
reorganization law, now or hereafter in effect of the United States or any
political subdivision thereof, and such decree or order will have continued
unstayed and in effect for a period of 90 consecutive calendar days; (b) the
commencement by the Company of a voluntary case under any applicable bankruptcy,
insolvency or reorganization law, now or hereafter in effect of the United
States or any political subdivision thereof, or the consent by the Company to
the entry of a decree or order for relief in an involuntary case or proceeding
under any such law; (c) the Company (i) becomes insolvent or is unable to pay
its debts as they mature, (ii) makes an assignment for the benefit of creditors,
(iii) admits in writing its inability to pay its debts as they mature, or (iv)
ceases to be a bank holding company or financial holding company under the Bank
Holding Company Act of 1956, as amended; (d) the failure of the Company to pay
any installment of interest on any of the Subordinated Notes as and when the
same will become due and payable, and the continuation of such failure for a
period of 30 calendar days; (e) the failure of the Company to pay all or any
part of the principal of any of the Subordinated Notes as and when the same will
become due and payable; (f) the liquidation of the Company (for the avoidance of
doubt, “liquidation” does not include any merger, consolidation, sale of equity
or assets or reorganization (exclusive of a reorganization in bankruptcy) of the
Company or any of its subsidiaries); (g) the failure of the Company to perform
any other covenant or agreement on the part of the Company contained in the
Subordinated Notes, and the continuation of such failure for a period of 30 days
after the date on which notice specifying such failure, stating that such notice
is a “Notice of Default” hereunder and demanding that the Company remedy the
same, will have been given, in the manner set forth in Section 22, to the
Company by Noteholders of at least twenty- five percent (25%) in aggregate
principal amount of the outstanding Subordinated Notes; or (h) the default by
the Company under any bond, debenture, note or other evidence of indebtedness
for money borrowed by the Company having an aggregate principal amount
outstanding of at least $5,000,000, whether such indebtedness now exists or is
created or incurred in the future, which default (i) constitutes a failure to
pay any portion of the principal of such indebtedness when due and payable after
the expiration of any applicable grace period or (ii) results in such
indebtedness becoming due or being declared due and payable prior to the date on
which it otherwise would have become due and payable without, in the case of
clause (i), such indebtedness having been A-15

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discharged or, in the case of clause (ii), without such indebtedness having been
discharged or such acceleration having been rescinded or annulled. Unless the
principal of this Subordinated Note already shall have become due and payable,
if an Event of Default described in Section 5(a) or Section 5(b) shall have
occurred and be continuing, Noteholders holding not less than twenty-five
percent (25%) in aggregate principal amount of the Subordinated Notes at the
time outstanding, by notice in writing to Company, may declare the principal
amount of all outstanding Subordinated Notes to be due and payable immediately
and, upon any such declaration, the same shall become and shall be immediately
due and payable. The Company waives demand, presentment for payment, notice of
nonpayment, notice of protest, and all other notices. Notwithstanding the
foregoing, because the Subordinated Notes are intended to qualify as Tier 2
Capital, upon the occurrence of an Event of Default other than an Event of
Default described in Section 5(a) or Section 5(b), the Noteholders may not
accelerate the Stated Maturity of the Subordinated Notes and make the principal
of, and any accrued and unpaid interest on, the Subordinated Notes, immediately
due and payable. The Company, within 30 calendar days after the receipt of
written notice from any Noteholder of the occurrence of an Event of Default with
respect to this Subordinated Note, shall notify all Noteholders, at their
addresses shown on the Security Register (as defined in Section 14 below), of
such written notice of Event of Default, unless such Event of Default shall have
been cured or waived before the giving of such notice as certified by the
Company in writing to the Noteholder or Noteholders who provided written notice
of such Event of Default. Prior to any acceleration of this Subordinated Note, a
Noteholder may waive pursuant to Section 17 below any past Event of Default. In
addition, a Noteholder may rescind a declaration of acceleration of this
Subordinated Note as a result of the occurrence of an Event of Default before
any judgment has been obtained if (i) the Company pays all matured installments
of principal of and interest on this Subordinated Note (other than installments
due by reason of acceleration) and interest on the overdue installments; and
(ii) all other Events of Default with respect to this Subordinated Note have
been cured or waived. 6. Failure to Make Payments. In the event of any failure
by the Company to make any required payment of principal or interest on this
Subordinated Note (and in the case of payment of interest, such failure to pay
shall have continued for 30 calendar days), the Company will, upon demand of the
Noteholders, pay to the Noteholders the amount then due and payable on this
Subordinated Note for principal and interest (without acceleration of this
Subordinated Note in any manner), with interest on the overdue principal and
interest at the rate borne by this Subordinated Note, to the extent permitted by
applicable law. If the Company fails to pay such amount upon such demand, the
Noteholders may, among other things, institute a judicial proceeding for the
collection of the sums so due and unpaid, may prosecute such proceeding to
judgment or final decree and may enforce the same against the Company and
collect the amounts adjudged or decreed to be payable in the manner provided by
law out of the property of the Company. Upon the occurrence of a failure by the
Company to make any required payment of principal or interest on this
Subordinated Note, or an Event of Default until such Event of Default is cured
by the Company or waived by the Noteholders in accordance with Section 17
hereof, the Company shall not, except as required by any federal or state
governmental agency: (a) declare or A-16

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pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company’s capital stock; (b)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any indebtedness of the Company that ranks equal with or
junior to the Subordinated Notes; or (c) make any payments under any guarantee
that ranks equal with or junior to the Subordinated Notes, other than (i) any
dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, any class of the Company’s common stock;
(ii) any declaration of a non-cash dividend in connection with the
implementation of a shareholders’ rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto; (iii) as a result of a reclassification of the Company’s
capital stock or the exchange or conversion of one class or series of the
Company’s capital stock for another class or series of the Company’s capital
stock; (iv) the purchase of fractional interests in shares of the Company’s
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged; or (v) purchases of any
class of the Company’s common stock related to or from any benefit plans for the
Company’s directors, officers or employees or any of the Company’s dividend
reinvestment plans. 7. Affirmative Covenants of the Company. (a) Notice of
Certain Events. To the extent permitted by applicable statute, rule or
regulation, the Company shall provide written notice to the Noteholder of the
occurrence of any of the following events as soon as practicable, but in no
event later than fifteen (15) Business Days following the Company becoming aware
of the occurrence of such event: (i) The Bank (as defined in the Purchase
Agreement) is no longer “adequately capitalized” as contemplated by applicable
federal banking laws and regulations; or (ii) The Company, or any officer of the
Company (in such capacity), becomes subject to any formal, written regulatory
enforcement action (as defined by the applicable regulatory agency). (b) Payment
of Principal and Interest. The Company covenants and agrees for the benefit of
the Noteholders that it will duly and punctually pay the principal of, and
interest on, this Subordinated Note, in accordance with the terms hereof. (c)
Maintenance of Office. The Company will maintain an office or agency in the city
of Seattle, Washington, where Subordinated Notes may be surrendered for
registration of transfer or for exchange and where notices and demands to or
upon the Company in respect of the Subordinated Notes may be served. The Company
may also from time to time designate one or more other offices or agencies where
the Subordinated Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided that no
such designation or rescission will in any manner relieve the Company of its
obligation to maintain an office or agency in city of Seattle, Washington. The
Company will give prompt written notice to the Noteholders of any such
designation or rescission and of any change in the location of any such other
office or agency. A-17

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(d) Corporate Existence. The Company will do or cause to be done all things
necessary to preserve and keep in full force and effect: (i) the corporate
existence of the Company; (ii) the existence (corporate or other) of each
subsidiary; and (iii) the rights (charter and statutory), licenses and
franchises of the Company and each of its subsidiaries; provided, however, that
the Company will not be required to preserve the existence (corporate or other)
of any of its subsidiaries or any such right, license or franchise of the
Company or any of its subsidiaries if the Board of Directors of the Company
determines that the preservation thereof is no longer desirable in the conduct
of the business of the Company and its subsidiaries taken as a whole and that
the loss thereof will not be disadvantageous in any material respect to the
Noteholders; provided, however, that the Company may consummate a merger in
which the Company is the surviving entity. (e) Maintenance of Properties. The
Company will, and will cause each subsidiary to, cause all its properties used
or useful in the conduct of its business to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section will prevent the Company or any subsidiary from
discontinuing the operation and maintenance of any of their respective
properties if such discontinuance is, in the judgment of the Board of Directors
of the Company or of any subsidiary, as the case may be, desirable in the
conduct of its business. (f) Compliance Certificate. The Company will deliver to
the Noteholders, within 120 days after the end of each fiscal year, an Officer’s
Certificate covering the preceding fiscal year, stating whether or not, to the
best of his or her knowledge, the Company is in default in the performance and
observance of any of the terms, provisions and conditions of this Subordinated
Note (without regard to notice requirements or periods of grace) and if the
Company will be in default, specifying all such defaults and the nature and
status thereof of which he or she may have knowledge. (g) Compliance with Laws.
The Company shall comply with the requirements of all laws, regulations, orders
and decrees applicable to it or its properties, except for such noncompliance
that would not reasonably be expected to have a Material Adverse Effect (as such
term is defined in the Purchase Agreement) on the Company and its Subsidiaries
taken as a whole. (h) Taxes and Assessments. The Company shall punctually pay
and discharge all material taxes, assessments, and other governmental charges or
levies imposed upon it or upon its income or upon any of its properties;
provided, that no such taxes, assessments or other governmental charges need be
paid if they are being contested in good faith by the Company. 8. Negative
Covenants of the Company. (a) Limitation on Dividends. The Company shall not
declare or pay any dividend or make any distribution on capital stock or other
equity securities of any kind of the Company if the Company is not “well
capitalized” for regulatory capital purposes under Section 225.2(r) of A-18

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Regulation Y (or any successor thereto immediately prior to the declaration of
such dividend or distribution, except for dividends payable solely in shares of
common stock of the Company. (b) Merger or Sale of Assets. The Company shall not
merge with and into another entity (in which it is not the surviving entity),
effect a Change in Bank Control (as defined below), or convey, transfer or lease
all or substantially all of its properties and assets to any person, unless: (i)
the continuing entity into which the Company is merged or the person which
acquires by conveyance or transfer or which leases all or substantially all of
the properties and assets of the Company shall be a corporation, association or
other legal entity organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and expressly assumes the
due and punctual payment of the principal of and any premium and interest on the
Subordinated Notes according to their terms, and the due and punctual
performance of all covenants and conditions hereof on the part of the Company to
be performed or observed; and (ii) immediately after giving effect to such
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have happened and be
continuing. “Change in Bank Control” means the sale, transfer, lease or
conveyance by the Company, or an issuance of stock by the Bank, in either case
resulting in ownership by the Company of less than 80% of the Bank. 9. Global
Subordinated Notes. (a) The Company shall use its commercially reasonable
efforts to provide that the Subordinated Notes owned by Noteholders that are
Qualified Institutional Buyers shall be issued in the form of one or more Global
Subordinated Notes (each a “Global Subordinated Note”) registered in the name of
The Depository Trust Company or another organization registered as a clearing
agency under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and designated as Depositary by the Company or any successor thereto (the
“Depositary”) or a nominee thereof and delivered to such Depositary or a nominee
thereof. (b) Notwithstanding any other provision herein, no Global Subordinated
Note may be exchanged in whole or in part for Subordinated Notes registered, and
no transfer of a Global Subordinated Note in whole or in part may be registered,
in the name of any person other than the Depositary for such Global Subordinated
Note or a nominee thereof unless (i) such Depositary advises the Company in
writing that such Depositary is no longer willing or able to properly discharge
its responsibilities as Depositary with respect to such Global Subordinated
Note, and no qualified successor is appointed by the Company within 90 days of
receipt by the Company of such notice, (ii) such Depositary ceases to be a
clearing agency registered under the Exchange Act and no successor is appointed
by the Company within 90 days after obtaining knowledge of such event, (iii) the
Company elects to terminate the book-entry system through the Depositary or (iv)
an Event of Default shall have occurred and be continuing. Upon the occurrence
of any event specified in clause (i), (ii), (iii) or (iv) of this Section 9(b),
the Company or its agent shall notify the Depositary and instruct the Depositary
to notify all owners of beneficial interests in such Global A-19

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Subordinated Note of the occurrence of such event and of the availability of
Subordinated Notes to such owners of beneficial interests requesting the same.
(c) If any Global Subordinated Note is to be exchanged for other Subordinated
Notes or canceled in part, or if another Subordinated Note is to be exchanged in
whole or in part for a beneficial interest in any Global Subordinated Note, then
either (i) such Global Subordinated Note shall be so surrendered for exchange or
cancellation as provided in this Section 9 or (ii) the principal amount thereof
shall be reduced or increased by an amount equal to the portion thereof to be so
exchanged or canceled, or equal to the principal amount of such other
Subordinated Note to be so exchanged for a beneficial interest therein, as the
case may be, by means of an appropriate adjustment made on the records of the
Company or, if applicable, the Company’s registrar and transfer agent
(“Registrar”), whereupon the Company or, if applicable, the Registrar, in
accordance with the applicable rules and procedures of the Depositary
(“Applicable Depositary Procedures”), shall instruct the Depositary or its
authorized representative to make a corresponding adjustment to its records.
Upon any such surrender or adjustment of a Global Subordinated Note by the
Depositary, accompanied by registration instructions, the Company shall execute
and deliver any Subordinated Notes issuable in exchange for such Global
Subordinated Note (or any portion thereof) in accordance with the instructions
of the Depositary. (d) Every Subordinated Note executed and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global
Subordinated Note or any portion thereof shall be executed and delivered in the
form of, and shall be, a Global Subordinated Note, unless such Subordinated Note
is registered in the name of a person other than the Depositary for such Global
Subordinated Note or a nominee thereof. (e) The Depositary or its nominee, as
the registered owner of a Global Subordinated Note, shall be the holder of such
Global Subordinated Note for all purposes under this Subordinated Note, and
owners of beneficial interests in a Global Subordinated Note shall hold such
interests pursuant to Applicable Depositary Procedures. Accordingly, any such
owner’s beneficial interest in a Global Subordinated Note shall be shown only
on, and the transfer of such interest shall be effected only through, records
maintained by the Depositary or its nominee or its Depositary participants. If
applicable, the Registrar shall be entitled to deal with the Depositary for all
purposes relating to a Global Subordinated Note (including the payment of
principal and interest thereon and the giving of instructions or directions by
owners of beneficial interests therein and the giving of notices) as the sole
holder of the Subordinated Note and shall have no obligations to the owners of
beneficial interests therein. The Registrar shall have no liability in respect
of any transfers effected by the Depositary. (f) The rights of owners of
beneficial interests in a Global Subordinated Note shall be exercised only
through the Depositary and shall be limited to those established by law and
agreements between such owners and the Depositary and/or its participants. (g)
No holder of any beneficial interest in any Global Subordinated Note held on its
behalf by a Depositary shall have any rights with respect to such Global
Subordinated Note, and such Depositary may be treated by the Company and any
agent of the Company as the owner of such Global Subordinated Note for all
purposes whatsoever. Neither the Company nor any agent of the Company will have
any responsibility or liability for any aspect of the records relating to or
A-20

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payments made on account of beneficial ownership interests of a Global
Subordinated Note or maintaining, supervising or reviewing any records relating
to such beneficial ownership interests. Notwithstanding the foregoing, nothing
herein shall prevent the Company or any agent of the Company from giving effect
to any written certification, proxy or other authorization furnished by a
Depositary or impair, as between a Depositary and such holders of beneficial
interests, the operation of customary practices governing the exercise of the
rights of the Depositary (or its nominee) as holder of any Subordinated Note.
(h) The Company, within 30 calendar days after the receipt of written notice
from the Noteholder or any other holder of the Subordinated Notes of the
occurrence of an Event of Default with respect to this Subordinated Note, shall
notify all the Noteholders, at their addresses shown on the Security Register
(as defined in Section 14 below), such written notice of Event of Default,
unless such Event of Default shall have been cured or waived before the giving
of such notice as certified by the Company in writing. 10. Denominations. The
Subordinated Notes are issuable only in registered form without interest coupons
in minimum denominations of $250,000 and integral multiples of $1,000 in excess
thereof. 11. Charges and Transfer Taxes. No service charge will be made for any
registration of transfer or exchange of this Subordinated Note, or any
redemption or repayment of this Subordinated Note, or any conversion or exchange
of this Subordinated Note for other types of securities or property, but the
Company may require payment of a sum sufficient to pay all taxes, assessments or
other governmental charges that may be imposed in connection with the transfer
or exchange of this Subordinated Note from the Noteholder requesting such
transfer or exchange. 12. Payment Procedures. Payment of the principal and
interest payable on the Stated Maturity will be made by check, by wire transfer
or by Automated Clearing House (ACH) transfer in immediately available funds to
a bank account in the United States designated by the Noteholder if such
Noteholder shall have previously provided wire instructions to the Company, upon
presentation and surrender of this Subordinated Note at the Payment Office (as
defined in Section 22 below) or at such other place or places as the Company
shall designate by notice to the Noteholders as the Payment Office, provided
that this Subordinated Note is presented to the Company in time for the Company
to make such payments in such funds in accordance with its normal procedures.
Payments of interest (other than interest payable on the Stated Maturity) shall
be made by wire transfer in immediately available funds or check mailed to the
registered Noteholder, as such person’s address appears on the Security Register
(as defined below). Interest payable on any Interest Payment Date shall be
payable to the Noteholder in whose name this Subordinated Note is registered at
the close of business on the fifteenth calendar day prior to the applicable
Interest Payment Date, without regard to whether such date is a Business Day,
except that interest not paid on the Interest Payment Date, if any, will be paid
to the Noteholder in whose name this Subordinated Note is registered at the
close of business on a special record date fixed by the Company (a “Special
Record Date”), notice of which shall be given to the Noteholder not less than 10
calendar days prior to such Special Record Date. To the extent permitted by
applicable law, interest shall accrue, at the rate at which interest accrues on
the principal of this Subordinated Note, on any amount of principal or interest
on this Subordinated Note not paid when due. All payments on this Subordinated
Note shall be applied first against interest due hereunder; and then A-21

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against principal due hereunder. The Noteholder acknowledges and agrees that the
payment of all or any portion of the outstanding principal amount of this
Subordinated Note and all interest hereon shall be pari passu in right of
payment and in all other respects to the other Subordinated Notes. In the event
that the Noteholder receives payments in excess of its pro rata share of the
Company’s payments to the Noteholders of all of the Subordinated Notes, then the
Noteholder shall hold in trust all such excess payments for the benefit of the
holders of the other Subordinated Notes and shall pay such amounts held in trust
to such other Noteholders upon demand by such Noteholders. 13. Form of Payment.
Payments of principal and interest on this Subordinated Note shall be made in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts. 14.
Registration of Transfer, Security Register. Except as otherwise provided
herein, this Subordinated Note is transferable in whole or in part, and may be
exchanged for a like aggregate principal amount of Subordinated Notes of other
authorized denominations, by the Noteholder in person, or by its attorney duly
authorized in writing, at the Payment Office or the office of the Registrar. The
Company or its agent (the “Registrar”) shall maintain a register providing for
the registration of the Subordinated Notes and any exchange or transfer thereof
(the “Security Register”). Upon surrender or presentation of this Subordinated
Note for exchange or registration of transfer, the Company or the Registrar
shall execute and deliver in exchange therefor a Subordinated Note or
Subordinated Notes of like aggregate principal amount, each in a minimum
denomination of $250,000 or any amount in excess thereof which is an integral
multiple of $1,000 (and, in the absence of an opinion of counsel satisfactory to
the Company to the contrary, bearing the restrictive legend(s) set forth
hereinabove) and that is or are registered in such name or names requested by
the Noteholder. Any Subordinated Note presented or surrendered for registration
of transfer or for exchange shall be duly endorsed and accompanied by a written
instrument of transfer in such form as is attached hereto and incorporated
herein, duly executed by the Noteholder or its attorney duly authorized in
writing, with such tax identification number or other information for each
person in whose name a Subordinated Note is to be issued, and accompanied by
evidence of compliance with any restrictive legend(s) appearing on such
Subordinated Note or Subordinated Notes as the Company may reasonably request to
comply with applicable law. No exchange or registration of transfer of this
Subordinated Note shall be made on or after (i) the fifteenth (15th) day
immediately preceding the Stated Maturity or (ii) the due delivery of notice of
redemption. 15. Priority. The Subordinated Notes rank pari passu among
themselves and pari passu, in the event of any insolvency proceeding,
dissolution, assignment for the benefit of creditors, reorganization,
restructuring of debt, marshaling of assets and liabilities or similar
proceeding or any liquidation or winding up of the Company with all other
present or future unsecured subordinated debt obligations of the Company, except
any unsecured subordinated debt that, pursuant to its express terms, is senior
or subordinate in right of payment to the Subordinated Notes and all Senior
Indebtedness. 16. Ownership. Prior to due presentment of this Subordinated Note
for registration of transfer, the Company may treat the Noteholder in whose name
this Subordinated Note is registered in the Security Register as the absolute
owner of this Subordinated Note for receiving payments of principal and interest
on this Subordinated Note and for all other purposes whatsoever, A-22

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whether or not this Subordinated Note be overdue, and the Company shall not be
affected by any notice to the contrary. 17. Waiver and Consent. (a) Any consent
or waiver given by the holder of this Subordinated Note shall be conclusive and
binding upon such Noteholder and upon all future holders of this Subordinated
Note and of any Subordinated Note issued upon the registration of transfer
hereof or in exchange therefor or in lieu hereof, whether or not notation of
such consent or waiver is made upon this Subordinated Note. This Subordinated
Note may also be amended or waived pursuant to, and in accordance with, the
provisions of Section 7.3 of the Purchase Agreement. No delay or omission of the
holder of this Subordinated Note to exercise any right or remedy accruing upon
any Event of Default shall impair such right or remedy or constitute a waiver of
any such Event of Default or an acquiescence therein. Any insured depository
institution which shall be a holder of this Subordinated Note or which otherwise
shall have any beneficial ownership interest in this Subordinated Note shall, by
its acceptance of such Subordinated Note (or beneficial interest therein), be
deemed to have waived any right of offset with respect to the repayment of the
indebtedness evidenced thereby. (b) No waiver or amendment of any term,
provision, condition, covenant or agreement in the Subordinated Notes shall be
effective except with the consent of the Noteholders holding at least fifty
percent (50%) in aggregate principal amount (excluding any Subordinated Notes
held by the Company or any of its Affiliates) of the Subordinated Notes at the
time outstanding; provided, however, that without the consent of each Noteholder
of an affected Subordinated Note, no such amendment or waiver may: (i) reduce
the principal amount of any Subordinated Note; (ii) reduce the rate of or change
the time for payment of interest on any Subordinated Note; (iii) extend the
maturity of any Subordinated Note; (iv) change the currency in which payment of
the obligations of the Company under the Subordinated Notes are to be made; (v)
lower the percentage of aggregate principal amount of outstanding Subordinated
Notes required to approve any amendment of the Subordinated Notes; (vi) make any
changes to Section 5 (Events of Default; Acceleration); Section 6 (Failure to
Make Payments); Section 7 (Affirmative Covenants of the Company); Section 8
(Negative Covenants of the Company) or Section 17 (Waiver and Consent) of the
Subordinated Notes that adversely affects the rights of any Noteholder; or (vii)
disproportionately affect any of the Noteholders of the then outstanding
Subordinated Notes. Notwithstanding the foregoing, the Company may amend or
supplement the Subordinated Notes without the consent of the Noteholders to cure
any ambiguity, defect or inconsistency or to provide for uncertificated
Subordinated Notes in addition to or in place of certificated Subordinated
Notes, or to make any change that does not adversely affect the rights of any
Noteholder of any of the Subordinated Notes. No failure to exercise or delay in
exercising, by any Noteholder of the Subordinated Notes, of any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege preclude any other or further
exercise thereof, or the exercise of any other right or remedy provided by law,
except as restricted hereby. The rights and remedies provided in this
Subordinated Note are cumulative and not exclusive of any right or remedy
provided by law or equity. No notice or demand on the Company in any case shall,
in itself, entitle the Company to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of the
Noteholders to any other or further action in any circumstances without notice
or demand. No consent or waiver, expressed or A-23

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implied, by the Noteholders to or of any breach or default by the Company in the
performance of its obligations hereunder shall be deemed or construed to be a
consent or waiver to or of any other breach or default in the performance of the
same or any other obligations of the Company hereunder. Failure on the part of
the Noteholders to complain of any acts or failure to act or to declare an Event
of Default, irrespective of how long such failure continues, shall not
constitute a waiver by the Noteholders of their rights hereunder or impair any
rights, powers or remedies on account of any breach or default by the Company.
18. Absolute and Unconditional Obligation of the Company. No provisions of this
Subordinated Note shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal and interest on this
Subordinated Note at the times, places and rate, and in the coin or currency,
herein prescribed. 19. Successors and Assigns. This Subordinated Note shall be
binding upon the Company and inure to the benefit of the Noteholder and its
respective successors and permitted assigns. The Noteholder may assign all, or
any part of, or any interest in, the Noteholder’s rights and benefits hereunder.
To the extent of any such assignment, such assignee shall have the same rights
and benefits against the Company and shall agree to be bound by and to comply
with the terms and conditions of the Purchase Agreement as it would have had if
it were the Noteholder hereunder. 20. No Sinking Fund; Convertibility. This
Subordinated Note is not entitled to the benefit of any sinking fund. This
Subordinated Note is not convertible into or exchangeable for any of the equity
securities, other securities or assets of the Company or any subsidiary. 21. No
Recourse Against Others. No recourse under or upon any obligation, covenant or
agreement contained in this Subordinated Note, or for any claim based thereon or
otherwise in respect thereof, will be had against any past, present or future
shareholder, employee, officer, or director, as such, of the Company or of any
predecessor or successor, either directly or through the Company or any
predecessor or successor, under any rule of law, statute or constitutional
provision or by the enforcement of any assessment or by any legal or equitable
proceeding or otherwise, all such liability being expressly waived and released
by the acceptance of this Subordinated Note by the holder of this Subordinated
Note and as part of the consideration for the issuance of this Subordinated
Note. 22. Notices. All notices to the Company under this Subordinated Note shall
be in writing and addressed to the Company at 2400 Third Avenue, Suite 100,
Seattle, Washington 98121, Attention: Laura Lee Stewart (President and Chief
Executive Officer), or to such other address as the Company may provide to the
Noteholders (the “Payment Office”). All notices to the Noteholders shall be
deemed to have been given if in writing and if delivered personally, or if
mailed, postage prepaid, by United States registered or certified mail, return
receipt requested, or if delivered by a responsible overnight commercial courier
promising next business day delivery. Any notice given in accordance with the
foregoing shall be deemed given when delivered personally or, if mailed, three
(3) Business Days after it shall have been deposited in the United States mails
as aforesaid or, if sent by overnight courier, the Business Day following the
date of delivery to such courier (provided next business day delivery was
requested). A-24

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23. Further Issues. The Company may, without the consent of the Noteholders,
create and issue additional notes having the same terms and conditions of the
Subordinated Notes (except for the Issue Date) so that such further notes shall
be consolidated and form a single series with the Subordinated Notes. 24.
Governing Law; Interpretation. THIS SUBORDINATED NOTE WILL BE DEEMED TO BE A
CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND WILL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. THIS SUBORDINATED NOTE IS INTENDED
TO MEET THE CRITERIA FOR QUALIFICATION OF THE OUTSTANDING PRINCIPAL AS TIER 2
CAPITAL UNDER THE REGULATORY GUIDELINES OF THE FEDERAL RESERVE, AND THE TERMS
HEREOF SHALL BE INTERPRETED IN A MANNER TO SATISFY SUCH INTENT. A-25

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IN WITNESS WHEREOF, the undersigned has caused this Subordinated Note to be duly
executed and attested. SOUND FINANCIAL BANCORP, INC. By: Name: Laura Lee Stewart
Title: President and Chief Executive Officer ATTEST: Name: Daphne D. Kelley
Title: Executive Vice President and Chief Financial Officer [Signature Page to
Subordinated Note] A-26

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ASSIGNMENT FORM To assign this Subordinated Note, fill in the form below: (I) or
(we) assign and transfer this Subordinated Note to: (Print or type assignee’s
name, address and zip code) (Insert assignee’s social security or tax I.D. No.)
and irrevocably appoint _______________________ as agent to transfer this
Subordinated Note on the books of the Company. The agent may substitute another
to act for it. Date: Your signature: (Sign exactly as your name appears on the
face of this Subordinated Note) Tax Identification No: Signature Guarantee:
(Signatures must be guaranteed by an eligible guarantor institution (banks,
stockbrokers, savings and loan associations and credit unions with membership in
an approved signature guarantee medallion program), pursuant to Rule 17Ad-15
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)). The undersigned certifies that it [is / is not] an Affiliate of the
Company and that, to its knowledge, the proposed transferee [is / is not] an
Affiliate of the Company. In connection with any transfer or exchange of this
Subordinated Note occurring prior to the date that is one year after the later
of the date of original issuance of this Subordinated Note and the last date, if
any, on which this Subordinated Note was owned by the Company or any Affiliate
of the Company, the undersigned confirms that this Subordinated Note is being:
CHECK ONE BOX BELOW:  (1) acquired for the undersigned’s own account, without
transfer;  (2) transferred to the Company;  (3) transferred in accordance and
in compliance with Rule 144A under the Securities Act of 1933, as amended (the
“Securities Act”);  (4) transferred under an effective registration statement
under the Securities Act; A-27

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 (5) transferred in accordance with and in compliance with Regulation S under
the Securities Act;  (6) transferred to an institutional “accredited investor”
(as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act);  (7)
transferred to an “accredited investor” (as defined in Rule 501(a)(4) under the
Securities Act), not referred to in item (6) that has been provided with the
information designated under Section 4(d) of the Securities Act of 1933; or 
(7) transferred in accordance with another available exemption from the
registration requirements of the Securities Act. Unless one of the boxes is
checked, the Company will refuse to register this Subordinated Note in the name
of any person other than the registered holder thereof; provided, however, that
if box (5), (6), (7) or (8) is checked, the Company may require, prior to
registering any such transfer of this Subordinated Note, in its sole discretion,
such legal opinions, certifications and other information as the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act such as the exemption provided by Rule 144 of
the Securities Act. Assignee’s Signature: Signature Guarantee: (Signatures must
be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with membership in an approved signature
guarantee medallion program), pursuant to Exchange Act Rule 17Ad-l5). TO BE
COMPLETED BY PURCHASER IF BOX (1) OR (3) ABOVE IS CHECKED. The undersigned
represents and warrants that it is purchasing this Subordinated Note for its own
account or an account with respect to which it exercises sole investment
discretion and that it and any such account is a “qualified institutional buyer”
within the meaning of Rule 144A under the Securities Act and is aware that the
sale to it is being made in reliance on Rule 144A and acknowledges that it has
received such information regarding the Company as the undersigned has requested
pursuant to Rule 144A or has determined not to request such information and that
it is aware that the transferor is relying upon the undersigned’s foregoing
representations in order to claim the exemption from registration provided by
Rule 144A. Date: Assignee’s Signature: A-28

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EXHIBIT B OPINION OF COUNSEL 1. Each of the Company and the Bank is validly
existing and is in good standing under the laws of its jurisdiction of
organization. Each of the Company and the Bank (i) has all requisite corporate
or similar power and authority to carry on its business as described in the
Company Reports and (ii) is duly qualified to do business and is in good
standing as a foreign corporation or bank in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to be so qualified
or in good standing would not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect. 2. The Company has all requisite
corporate power and authority to execute, deliver and perform its obligations
under the Transaction Documents to which it is a party and to consummate the
transactions contemplated by the Transaction Documents. 3. The Company is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended. 4. The deposit accounts of the Bank are insured by the Federal Deposit
Insurance Corporation under the provisions of the Federal Deposit Insurance Act.
5. The Agreement has been duly and validly authorized, executed and delivered by
the Company. The Agreement constitutes a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except that the enforcement thereof may be subject to (i) bankruptcy,
insolvency, reorganization, receivership, moratorium, fraudulent conveyance,
fraudulent transfer or other similar laws now or hereafter in effect relating to
creditors’ rights generally and (ii) general principles of equity (whether
applied by a court of law or equity) and the discretion of the court before
which any proceeding therefor may be brought. 6. The execution and delivery by
the Company of, and the performance by the Company on the date hereof of its
agreements and obligations under, the Transaction Documents do not (i) to such
counsel’s knowledge, violate any applicable provisions of the Maryland General
Corporation Law, (ii) to such counsel’s knowledge, violate any court order or
judgment of any agency or court of the State of Maryland having jurisdiction
over the Company and known to such counsel or (iii) violate the Charter or
Bylaws, each as currently in effect. 7. The Subordinated Notes have been duly
and validly authorized by the Company and when duly executed issued and
delivered to and paid for by the Purchasers in accordance with the terms of the
Agreement, will constitute legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except that the
enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, receivership, moratorium, fraudulent conveyance, fraudulent
transfer or other similar laws now or hereafter in effect relating to creditors’
rights generally and (ii) general principles of equity (whether applied by a
court of law or equity) and the discretion of the court before which any
proceeding therefor may be brought. B-1

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8. Assuming the accuracy of the representations and warranties of each of the
Purchasers and the Company set forth in the Agreement, the Subordinated Notes to
be issued and sold by the Company to the Purchasers in accordance with the
Agreement will be issued in a transaction exempt from the registration
requirements of the Securities Act, it being understood that counsel expresses
no opinion as to any subsequent transfer, sale or conveyance of the Subordinated
Notes. B-2

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EXHIBIT C RISK FACTORS Risk Factors Related to the Proposed Subordinated Notes
(the “Notes”) An investment in the securities of the Company is subject to
certain risks related to the type of security and risks inherent in the
Company’s business. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with the risk
factors and other information included in the Company Reports and in other
documents that the Company files with the SEC. Additional risks and
uncertainties that management is not aware of or that management currently deems
immaterial may also impair the Company’s business operations. If any of these
risks actually occurs, the Company’s financial condition and results of
operations could be materially and adversely affected. If this were to happen,
the value of the Company’s securities could decline significantly, and you could
lose all or part of your investment. The terms “Company,” “we,” “our” and “us”
used herein refer to Sound Financial Bancorp, Inc. and its subsidiaries. The
Notes will be unsecured and subordinated to any existing and future senior
indebtedness. The Notes will be subordinated obligations of the Company.
Accordingly, they will be junior in right of payment to any existing and all
future senior indebtedness, and in certain events of insolvency, to other
financial obligations. Our senior indebtedness includes all indebtedness, except
indebtedness that is expressly subordinated to or ranked pari passu with the
Notes, subject to certain exceptions. In addition, the Notes will be
structurally subordinated to all existing and future indebtedness, liabilities
and other obligations, including deposits, of our subsidiaries, including Sound
Community Bank (the “Bank”). In addition, the Notes will not be secured by any
of our assets. As a result, the Notes will be effectively subordinated to all of
our secured indebtedness to the extent of the value of the assets securing such
indebtedness. The Company will not be limited in the amount of senior
indebtedness and other financial obligations or secured obligations that we or
our subsidiaries may incur. As a result of the subordination provisions
described above, holders of the Notes may not be fully repaid in the event of
our bankruptcy, liquidation or reorganization. The Notes will not be insured or
guaranteed by the Federal Deposit Insurance Corporation (“FDIC”), any other
governmental agency or any of our subsidiaries. The Notes will be structurally
subordinated to the indebtedness and other liabilities of our subsidiaries,
which means that creditors of our subsidiaries generally will be paid from those
subsidiaries’ assets before holders of the Notes would have any claims to those
assets. The Notes are not savings accounts, deposits or other obligations of the
Bank or any of our non-bank subsidiaries and are not insured or guaranteed by
the FDIC or any other governmental agency or public or private insurer. The
Notes are obligations of the Company only and are neither obligations of, nor
guaranteed by, any of our subsidiaries. The Notes are ineligible and may not be
used as collateral for loans made by the Company or the Bank. The Notes will be
structurally C-1

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subordinated to all existing and future indebtedness and other liabilities of
our subsidiaries, which means that creditors of our subsidiaries (including, in
the case of the Bank, its depositors) generally will be paid from those
subsidiaries’ assets before holders of the Notes would have any claims to those
assets. Even if we become a creditor of any of our subsidiaries, our rights as a
creditor would be subordinate to any security interest in the assets of that
subsidiary and any debt of that subsidiary senior to that held by us, and our
rights could otherwise be subordinated to the rights of other creditors and
depositors of that subsidiary. Furthermore, none of our subsidiaries is under
any obligation to make payments to us, and any payments to us would depend on
the earnings or financial condition of our subsidiaries and various business
considerations. Statutory, contractual or other restrictions also limit our
subsidiaries’ ability to pay dividends or make distributions, loans or advances
to us. For these reasons, we may not have access to any assets or cash flows of
our subsidiaries to make interest and principal payments on the Notes. The Notes
include limited covenants and do not restrict our ability to incur additional
debt. The Notes do not contain any financial covenants that would require us to
achieve or maintain any minimum financial results relating to our financial
condition, liquidity or results of operations or meet or exceed certain
financial ratios as a general matter or to incur additional indebtedness or
obligations or to maintain any reserves. Moreover, the Notes do not contain any
covenants prohibiting or limiting us or our subsidiaries from granting liens on
assets to secure indebtedness or other obligations. The Notes do not contain any
provision that would provide protection to the holders of the Notes against a
material decline in our credit quality. In addition, the Notes do not limit the
amount of additional indebtedness of the Company, the Bank or any of our other
subsidiaries may incur or the amount of other obligations that the Company or
the Bank may incur ranking senior or equal to the indebtedness evidenced by the
Notes. The issuance or guarantee of any such securities or the incurrence of any
such other liabilities may reduce the amount, if any, recoverable by holders of
the Notes in the event of our insolvency, bankruptcy, liquidation, dissolution,
winding up or similar proceeding, and may limit our ability to meet our
obligations under the Notes. Payments on the Notes will depend on receipt of
dividends and distributions from our subsidiaries. We are a bank holding
company, and we conduct substantially all of our operations through
subsidiaries, including the Bank. We depend on dividends, distributions and
other payments from our subsidiaries to meet our obligations, including to fund
payments on the Notes. Our primary source of funds to make payments of principal
and interest on the Notes and to satisfy any other financial obligations are
dividends from the Bank. Our ability to receive dividends from the Bank is
contingent on a number of factors, including the Bank’s ability to meet
applicable regulatory capital requirements, the Bank’s profitability and
earnings, and the general strength of its balance sheet. Various federal and
state laws and regulations limit the amount of dividends that the Bank may pay
to the Company. Under Washington law, dividends on the Bank capital stock may
not be paid in an aggregate amount greater than the aggregate retained earnings
of the Bank without the approval of the Washington Department of Financial
Institutions. In addition, the Bank may not C-2

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declare or pay a cash dividend on its capital stock if the payment would cause
its net worth to be reduced below the amount required for its liquidation
account. Furthermore, the Federal Reserve and the FDIC have issued policy
statements stating that insured banks and financial and bank holding companies
generally should pay dividends only out of current operating earnings. Also, the
Company’s right to participate in a distribution of assets upon a subsidiary’s
liquidation or reorganization is subject to the prior claims of the subsidiary’s
creditors. In the event the Bank is unable to pay dividends to us, we may not be
able to service any debt we may incur, which could have a material adverse
effect on our business, financial condition, results of operations and growth
prospects. See the information under “How We Are Regulated —Limitations on
Dividends and Stock Repurchases” in Item 1, “Business,” in our annual report on
Form 10-K for the year ended December 31, 2019. In addition, state and federal
banking regulators have broad authority to restrict the payment of dividends,
including in circumstances where a bank under such regulator’s jurisdiction
engages in (or is about to engage in) unsafe or unsound practices. Such
regulators have the authority to require that the bank cease and desist from
unsafe and unsound practices and to prevent a bank from paying a dividend if its
financial condition is such that the regulator views the payment of a dividend
to constitute an unsafe or unsound practice. For these reasons, we may not have
access to any assets or cash flow of our subsidiaries to make principal or
interest payments on the Notes. We may not be able to generate sufficient cash
to service all of our debt, including the Notes. Our ability to make scheduled
payments of principal and interest, or to satisfy our obligations in respect of
our debt or to refinance our debt, will depend on the future performance of the
Bank. Prevailing economic conditions (including interest rates), regulatory
constraints, including, without limitation, limiting distributions to us from
the Bank and required capital levels with respect to the Bank and financial,
business and other factors, many of which are beyond our control, will also
affect our ability to meet these needs. Our subsidiaries may not be able to
generate sufficient cash flows from operations, or we may be unable to obtain
future borrowings in an amount sufficient to enable us to pay our debt, or to
fund our other liquidity needs. We may need to refinance all or a portion of our
debt on or before maturity. We may not be able to refinance any of our debt when
needed (including, without limitation, upon commencement of the floating rate
period) on commercially reasonable terms or at all. Regulatory guidelines may
restrict our ability to pay the principal of, and accrued and unpaid interest
on, the Notes, regardless of whether we are the subject of an insolvency
proceeding. As a bank holding company, our ability to pay the principal of, and
interest on, the Notes is subject to the rules and guidelines of the Federal
Reserve regarding capital adequacy. We intend to treat the Notes as “Tier 2
capital” under these rules and guidelines. The Federal Reserve guidelines
generally require us to review the effects of the cash payment of Tier 2 capital
C-3

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instruments, such as the Notes, on our overall financial condition. The
guidelines also require that we review our net income for the current and past
four quarters, and the amounts we have paid on Tier 2 capital instruments for
those periods, as well as our projected rate of earnings retention. Moreover,
pursuant to federal law and Federal Reserve regulations, as a bank holding
company, we are required to act as a source of financial and managerial strength
to the Bank and commit resources to its support, including, without limitation,
the guarantee of its capital plans if it is undercapitalized. Such support may
be required at times when we may not otherwise be inclined or able to provide
it. As a result of the foregoing, we may be unable to pay accrued interest on
the Notes on one or more of the scheduled interest payment dates, or at any
other time, or the principal of the Notes at the maturity of the Notes. If we
were to be the subject of a bankruptcy proceeding under Chapter 11 of the U.S.
Bankruptcy Code, then the bankruptcy trustee would be deemed to have assumed,
and would be required to cure, immediately any deficit under any commitment we
have to any of the federal banking agencies to maintain the capital of the Bank,
and any other insured depository institution for which we have such a
responsibility, and any claim for breach of such obligation would generally have
priority over most other unsecured claims. The Notes are subject to limited
rights of acceleration. Payment of principal of the Notes may be accelerated
only in the case of certain bankruptcy-related events with respect to us. As a
result, you have no right to accelerate the payment of principal of the Notes if
we fail to pay principal of or interest on the Notes or if we fail in the
performance of any of our other obligations under the Notes. Our regulators can,
in the event we or the Bank become subject to an enforcement action, prohibit
the Bank from paying dividends to us, and prevent our payment of interest or
principal on the Notes and any dividends on our capital stock, but such limits
will not permit acceleration of the Notes. An active trading market for the
Notes may not develop. The Notes constitute a new issue of securities for which
there is no existing trading market. We do not intend to apply for listing of
the Notes on any securities exchange or for quotation of the Notes in any
automated dealer quotation system. We cannot provide you with any assurance
regarding whether a trading market for the Notes will develop, the ability of
holders of the Notes to sell their Notes or the prices at which holders may be
able to sell their Notes. You should also be aware that there may be a limited
number of buyers if you decide to sell your Notes. This may affect the price you
receive for your Notes or your ability to sell your Notes at all. Investors in
the Notes may not be able to sell the Notes at all or may not be able to sell
the Notes at prices that will provide them with a yield comparable to similar
investments that have a developed secondary market, and may consequently suffer
from increased pricing volatility and market risk. In addition, the liquidity of
the trading market in the Notes and the market price quoted for the Notes may be
adversely affected by changes in the overall market for this type of security
and by changes in our financial performance or prospects or in the prospects for
companies in our industry generally. C-4

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If a trading market for the Notes develops, changes in the debt markets, among
others, could adversely affect your ability to liquidate your investment in the
Notes and the market price of the Notes. Many factors could affect the trading
market for, and the trading value of, the Notes. These factors include: the
method of calculating the principal, premium, if any, interest or other amounts
payable, if any, on the Notes; the time remaining to the maturity of the Notes;
the ranking of the Notes; the redemption features of the Notes; the outstanding
amount of subordinated notes with terms identical to the Notes offered hereby;
the prevailing interest rates being paid by other companies similar to us;
changes in U.S. interest rates; whether the ratings on the Notes or us provided
by any rating agency have changed; our financial condition, financial
performance and future prospects; the level, direction and volatility of market
interest rates generally; general economic conditions of the capital markets in
the United States; and geopolitical conditions and other financial, political,
regulatory, and judicial events that affect the capital markets generally. The
condition of the financial markets and prevailing interest rates have fluctuated
significantly in the past and are likely to fluctuate in the future. Such
fluctuations could adversely affect the trading market (if any) for, and the
market price of, the Notes. Beginning on October 1, 2025, or at any time in the
case of certain events, the Notes may be redeemed at our option, which limits
the ability of holders of the Notes to accrue interest over the full stated term
of the Notes. We may, at our option, redeem the Notes (i) in whole or in part,
beginning on October 1, 2025 and on any interest payment date thereafter and
(ii) in whole but not in part, at any time upon the occurrence of: • a “Tier 2
Capital Event,” which is defined in the Note to mean the receipt by us of an
opinion of counsel to us to the effect that there is a material risk that the
Note no longer qualifies to be eligible for treatment as “Tier 2” Capital (as
defined by the Federal Reserve) (or its then equivalent) as a result of a change
in law or regulation, or interpretation or application of law or regulation by
any judicial, legislative or regulatory authority that becomes effective after
the Issue Date; • a “Tax Event,” which is defined in the Note to mean the
receipt by us of an opinion of independent tax counsel experienced in such
matters to the effect that as a result of any amendment to, or change (including
any final and adopted (or enacted) prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, there is a material risk that interest payable by us on the
Notes is not, or within 120 days after the receipt of such opinion will not be,
deductible by us, in whole or in part, for United States federal income tax
purposes; or • an “Investment Company Event,” which is defined in the Note to
mean receipt by us of an opinion from counsel experienced in such matters to the
effect that there is a material risk that the Company is or, within 120 days
after the receipt of such C-5

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opinion will be, required to register as an investment company pursuant to the
Investment Company Act of 1940, as amended, in each case at a redemption price
equal to 100% of the principal amount of the Notes to be redeemed plus accrued
and unpaid interest to, but not including, the date of redemption. Any
redemption of the Notes will be subject to prior approval of the Federal
Reserve, to the extent such approval is then required. There can be no assurance
that the Federal Reserve will approve any redemption of the Notes that we may
propose. In addition, the redemption of the Notes may be subject to prior
approval of the holders of our senior indebtedness, and there is no assurance
that such holders of our senior indebtedness will approve any redemption of the
Notes. Furthermore, you should not expect us to redeem any Notes when they first
become redeemable or on any particular date thereafter. If we redeem the Notes
for any reason, you will not have the opportunity to continue to accrue and be
paid interest to the stated maturity date and you may not be able to reinvest
the redemption proceeds you receive in a similar security or in securities
bearing similar interest rates or yields. The amount of interest payable on the
Notes will vary after October 1, 2025. During the fixed rate period, the Notes
will bear interest at a fixed interest rate. Thereafter, the Notes will bear
interest at a floating rate per annum equal to a floating interest rate (which
is expected to be Three-Month Term SOFR) plus a spread, subject to certain
provisions of the Notes. The per annum interest rate that is determined at the
reference time for each interest period will apply to the entire quarterly
interest period following such determination date even if the floating interest
rate increases during that period. Floating rate notes bear additional
significant risks not associated with fixed rate debt securities. These risks
include fluctuation of the interest rates and the possibility that you will
receive an amount of interest that is lower than expected. We have no control
over a number of matters, including, without limitation, economic, financial,
and political events, that are important in determining the existence,
magnitude, and longevity of market volatility and other risks and their impact
on the value of, or payments made on, the Notes. In recent years, interest rates
have been volatile, and that volatility may be expected in the future. The level
of the Benchmark rate (which is expected to be the Three-Month Term SOFR) may
affect our decision to redeem the Notes. The Company is more likely to redeem
the Notes on or after October 1, 2025 if the interest rate on them is higher
than that which would be payable on one or more other forms of borrowing. If the
Company redeems the Notes prior to their maturity date, holders may not be able
to invest in other securities that yield as much interest as the Notes. Holders
of the Notes will have no rights against the publishers of the Benchmark rate
(which is expected to be the Three-Month Term SOFR). Holders of the Notes will
have no rights against the publishers of the Benchmark rate, even though the
amount they receive on each interest payment date after October 1, 2025 will
depend upon the level of the Benchmark rate (which is expected to be the
Three-Month Term SOFR). The C-6

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publishers of the Benchmark rate are not in any way involved in the offering of
the Notes and have no obligations relating to the Notes or the holders of the
Notes. Our published credit ratings may not reflect all risks of an investment
in the Notes. The published credit ratings of us or our indebtedness are an
assessment by rating agencies of our ability to pay our debts when due. These
ratings are not recommendations to purchase, hold or sell the Notes, inasmuch as
the ratings do not comment as to market price or suitability for a particular
investor, are limited in scope, and do not address all material risks relating
to an investment in the Notes, but rather reflect only the view of each rating
agency at the time the rating is issued. The published credit ratings assigned
to the Notes may not reflect the potential impact of all risks related to
structure and other factors on any trading market for, or trading value of, the
Notes. Accordingly, you should consult your own financial and legal advisors as
to the risks entailed by an investment in the Notes and the suitability of
investing in the Notes in light of your particular circumstances. A downgrade in
our credit ratings or the ratings of our subsidiaries could have a material
adverse impact on us. Rating agencies continuously evaluate us and our
subsidiaries, and their ratings of our long-term and short-term debt are based
on a number of factors, including financial strength, as well as factors not
entirely within our control, such as conditions affecting the financial services
industry generally. In light of these reviews and the continued focus on the
financial services industry generally, we and our subsidiaries may not be able
to maintain our current credit ratings. Ratings downgrades by a rating agency
could have a significant and immediate impact on our funding and liquidity
through cash obligations, reduced funding capacity and collateral triggers. A
reduction in our or our subsidiaries’ credit ratings could also increase our
borrowing costs and limit access to the capital markets. Downgrades in the
credit or financial strength ratings assigned to the counterparties with whom we
transact could create the perception that our financial condition will be
adversely impacted as a result of potential future defaults by such
counterparties. Additionally, we could be adversely affected by a general,
negative perception of financial institutions caused by the downgrade of other
financial institutions. Accordingly, ratings downgrades for other financial
institutions could affect the market price of our stock and could limit our
access to or increase our cost of capital. The Notes have not been registered
under the Securities Act of 1933, as amended (the “Securities Act”). The Notes
have not been registered with the SEC under the Securities Act. The Notes are
being offered and sold in reliance upon an exemption from registration provided
in Rule 506 of Regulation D promulgated under and Section 4(a)(2) of the
Securities Act. Accordingly, the Notes may not be offered or sold absent
registration with the SEC or a valid exemption under the Securities Act, and are
subject to certain transfer restrictions set forth in the Notes. C-7

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Investors should not rely on indicative or historical data concerning SOFR. The
interest rate during the floating rate period will be determined using
Three-Month Term SOFR (unless a Benchmark Transition Event and its related
Benchmark Replacement Date occur with respect to Three-Month Term SOFR, in which
case the rate of interest will be based on the next-available Benchmark
Replacement, which is Compounded SOFR). In the following discussion of SOFR,
when we refer to the Notes, we mean the Notes at any time during the floating
rate period when the interest rate on the Notes is or will be determined based
on SOFR, including Three-Month Term SOFR. SOFR is published by the Federal
Reserve Bank of New York (“FRBNY”) and is intended to be a broad measure of the
cost of borrowing cash overnight collateralized by U.S. Treasury securities.
FRBNY reports that SOFR includes all trades in the Broad General Collateral
Rate, plus bilateral U.S. Treasury repurchase agreement (“repo”) transactions
cleared through the delivery-versus-payment service offered by the Fixed Income
Clearing Corporation (the “FICC”), a subsidiary of DTC. SOFR is filtered by
FRBNY to remove a portion of the foregoing transactions considered to be
“specials.” According to FRBNY, “specials” are repos for specific-issue
collateral which take place at cash-lending rates below those for general
collateral repos because cash providers are willing to accept a lesser return on
their cash in order to obtain a particular security. FRBNY reports that SOFR is
calculated as a volume-weighted median of transaction-level tri-party repo data
collected from The Bank of New York Mellon, which currently acts as the clearing
bank for the tri-party repo market, as well as General Collateral Finance Repo
transaction data and data on bilateral U.S. Treasury repo transactions cleared
through the FICC’s delivery-versus-payment service. FRBNY states that it obtains
information from DTCC Solutions LLC, an affiliate of DTC. FRBNY currently
publishes SOFR daily on its website at
https://apps.newyorkfed.org/markets/autorates/sofr. FRBNY states on its
publication page for SOFR that use of SOFR is subject to important disclaimers,
limitations and indemnification obligations, including that FRBNY may alter the
methods of calculation, publication schedule, rate revision practices or
availability of SOFR at any time without notice. The foregoing Internet website
is an inactive textual reference only, meaning that the information contained on
the website is not part of this document or incorporated by reference herein or
therein. FRBNY started publishing SOFR in April of 2018. FRBNY has also started
publishing historical indicative SOFRs dating back to 2014, although such
historical indicative data inherently involves assumptions, estimates and
approximations. Investors should not rely on such historical indicative data or
on any historical changes or trends in SOFR as an indicator of the future
performance of SOFR. Since the initial publication of SOFR, daily changes in the
rate have, on occasion, been more volatile than daily changes in comparable
benchmark or market rates, and SOFR over time may bear little or no relation to
the historical actual or historical indicative data. In addition, the return on
and value of the Notes may fluctuate more than floating rate securities that are
linked to less volatile rates. C-8

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Changes in SOFR could adversely affect holders of the Notes. Because SOFR is
published by FRBNY based on data received from other sources, we have no control
over its determination, calculation or publication. There is no assurance that
SOFR will not be discontinued or fundamentally altered in a manner that is
materially adverse to the interests of investors in the Notes. If the manner in
which SOFR is calculated is changed, that change may result in a reduction in
the amount of interest that accrues on the Notes during the floating rate
period, which may adversely affect the trading prices of the Notes. Further, if
the Benchmark rate on the Notes during the floating rate period on any
determination date declines to zero or becomes negative, the Benchmark rate will
be deemed to equal zero. In addition, once the Benchmark rate for the Notes for
each interest period during the floating rate period is determined by the
calculation agent on the determination date, interest on the Notes shall accrue
at such Benchmark rate for the applicable interest period and will not be
subject to change during such interest period. There is no assurance that
changes in SOFR could not have a material adverse effect on the yield on, value
of and market for the Notes. SOFR may be more volatile than other benchmark or
market rates. Since the initial publication of SOFR, daily changes in the rate
have, on occasion, been more volatile than daily changes in comparable benchmark
or market rates, and SOFR over time may bear little or no relation to the
historical actual or historical indicative data. In addition, the return on and
value of the SOFR-linked Notes may fluctuate more than floating rate securities
that are linked to less volatile rates. SOFR differs fundamentally from, and may
not be a comparable substitute for, U.S. dollar LIBOR. In June 2017, the
Alternative Reference Rates Committee (“ARRC”) convened by the Federal Reserve
and FRBNY announced SOFR as its recommended alternative to the London interbank
offered rate (“LIBOR”) for U.S. dollar obligations. However, because SOFR is a
broad U.S. Treasury repo financing rate that represents overnight secured
funding transactions, it differs fundamentally from LIBOR. For example, SOFR is
a secured overnight rate, while LIBOR is an unsecured rate that represents
interbank funding over different maturities. In addition, because SOFR is a
transaction-based rate, it is backward-looking, whereas LIBOR is
forward-looking. Because of these and other differences, there is no assurance
that SOFR will perform in the same way as LIBOR would have performed at any
time, and there is no guarantee that it is a comparable substitute for LIBOR.
Any failure of SOFR to gain market acceptance could adversely affect holders of
the Notes. SOFR may fail to gain market acceptance. SOFR was developed for use
in certain U.S. dollar derivatives and other financial contracts as an
alternative to LIBOR in part because it is considered to be a good
representation of general funding conditions in the overnight U.S. Treasury repo
market. However, as a rate based on transactions secured by U.S. Treasury
securities, it does not measure bank-specific credit risk and, as a result, is
less likely to correlate with the unsecured short-term funding costs of banks.
This may mean that market participants would not consider SOFR to be a
comparable substitute or successor for all of the purposes for C-9

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which LIBOR historically has been used (including, without limitation, as a
representation of the unsecured short-term funding costs of banks), which may,
in turn, lessen its market acceptance. Any failure of SOFR to gain market
acceptance could adversely affect the yield on, value of and market for the
Notes. Any market for the SOFR-linked Notes may be illiquid or unpredictable.
Since SOFR is a relatively new market index, SOFR-linked debt securities likely
will have no established trading market when issued, and an established trading
market for the SOFR-linked Notes may never develop or may not be very liquid.
Market terms for securities that are linked to SOFR, such as the spread over the
base rate reflected in the interest rate provisions, may evolve over time, and
as a result, trading prices of the SOFR-linked Notes may be lower than those of
later-issued securities that are linked to SOFR. Similarly, if SOFR does not
prove to be widely used in securities that are similar or comparable to the
SOFR-linked Notes, the trading price of the SOFR-linked Notes may be lower than
those of securities that are linked to rates that are more widely used.
Investors may not be able to sell the SOFR-linked Notes at all or may not be
able to sell the SOFR-linked Notes at prices that will provide them with a yield
comparable to similar investments that have a developed secondary market, and
may consequently suffer from increased pricing volatility and market risk. The
manner of adoption or application of reference rates based on SOFR in the bond
and equity markets may differ materially compared with the application and
adoption of SOFR in other markets, such as the derivatives and loan markets.
Investors should carefully consider how any potential inconsistencies between
the adoption of reference rates based on SOFR across these markets may impact
any hedging or other financial arrangements that they may put in place in
connection with any acquisition, holding or disposal of the SOFR-linked Notes.
The interest rate for the Notes during the applicable floating rate period may
be determined based on a rate other than Three-Month Term SOFR. Under the terms
of the Notes, the interest rate on the Notes for each interest period during the
applicable floating rate period will be based on Three-Month Term SOFR, a
forward-looking term rate for a tenor of three months that will be based on
SOFR. Three-Month Term SOFR does not currently exist and is currently being
developed under the sponsorship of the ARRC. There is no assurance that the
development of Three-Month Term SOFR, or any other forward-looking term rate
based on SOFR, will be completed. Uncertainty surrounding the development of
forward-looking term rates based on SOFR could have a material adverse effect on
the return on, value of and market for the Notes. If, at the commencement of the
applicable floating rate period for the Notes, the Federal Reserve and/or FRBNY,
or a committee officially endorsed or convened by the Federal Reserve and/or
FRBNY or any successor thereto (the “Relevant Governmental Body”) has not
selected or recommended a forward-looking term rate for a tenor of three months
based on SOFR, the development of a forward-looking term rate for a tenor of
three months based on SOFR that has been recommended or selected by the Relevant
Governmental Body is not complete or we determine that the use of a
forward-looking rate for a tenor of three months based on SOFR is not
administratively feasible, then the next-available Benchmark Replacement under
the benchmark transition provisions will be used to determine the interest rate
on the Notes during the applicable floating rate period (unless a Benchmark
Transition Event and its related Benchmark Replacement Date occur with respect
to that next-available Benchmark Replacement). C-10

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Under the terms of the Notes, we are expressly authorized to make
determinations, decisions or elections with respect to technical, administrative
or operational matters that we decide are appropriate to reflect the use of
Three-Month Term SOFR as the interest rate basis for the Notes, which are
defined in the terms of the Notes as “Three-Month Term SOFR Conventions.” For
example, assuming that a form of Three-Month Term SOFR is developed, it is not
currently known how or by whom rates for Three-Month Term SOFR will be
published. Accordingly, we will need to determine and to instruct the
calculation agent concerning the manner and timing for its determination of the
applicable Three-Month Term SOFR during the applicable floating rate period. Our
determination and implementation of any Three-Month Term SOFR Conventions could
result in adverse consequences to the amount of interest that accrues on the
Notes during the applicable floating rate period, which could adversely affect
the return on, value of and market for the Notes. Any Benchmark Replacement may
not be the economic equivalent of Three-Month Term SOFR. Under the benchmark
transition provisions of the Notes, if the calculation agent determines that a
Benchmark Transition Event and its related Benchmark Replacement Date have
occurred with respect to Three-Month Term SOFR, then the floating interest rate
on the Notes for each interest period during the floating rate period will be
determined using the next-available Benchmark Replacement (which may include a
related Benchmark Replacement Adjustment). However, the Benchmark Replacement
may not be the economic equivalent of Three-Month Term SOFR. For example,
Compounded SOFR, the first-available Benchmark Replacement, is the compounded
average of the daily SOFR calculated in arrears, while Three-Month Term SOFR is
intended to be a forward-looking rate with a tenor of three months. In addition,
very limited market precedent exists for securities that use Compounded SOFR as
the rate basis, and the method for calculating Compounded SOFR in those
precedents varies. Further, the ISDA Fallback Rate, which is another Benchmark
Replacement, has not yet been established and may change over time. The
implementation of Benchmark Replacement Conforming Changes could adversely
affect holders of the Notes. Under the benchmark transition provisions of the
Notes, if Three-Month Term SOFR has been discontinued or if a particular
Benchmark Replacement or Benchmark Replacement Adjustment cannot be determined,
then the next-available Benchmark Replacement or Benchmark Replacement
Adjustment will apply. These replacement rates and adjustments may be selected
or formulated by: (i) the Relevant Governmental Body (such as the ARRC); (ii)
the International Swaps and Derivatives Association, Inc.; or (iii) in certain
circumstances, us. In addition, the benchmark transition provisions expressly
authorize us to make certain changes, which are defined in the terms of the
Notes as “Benchmark Replacement Conforming Changes,” with respect to, among
other things, the determination of interest periods, and the timing and
frequency of determining rates and making payments of interest. The application
of a Benchmark Replacement and Benchmark Replacement Adjustment, and any
implementation of Benchmark Replacement Conforming Changes, could result in
adverse consequences to the amount of interest that accrues on the Notes during
any interest period during the floating rate period, which could adversely
affect the yield on, value of and market for the Notes. Further, there is no
assurance that the characteristics of any Benchmark Replacement will be similar
to the then-current Benchmark rate C-11

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that it is replacing, or that any Benchmark Replacement will produce the
economic equivalent of the then-current Benchmark rate that it is replacing.
Also, since SOFR is a relatively new market index, SOFR-linked debt securities
likely will have no established trading market when issued, and an established
trading market may never develop or may not be very liquid. Market terms for
debt securities indexed to SOFR, such as the spread over the index reflected in
interest rate provisions, may evolve over time, and trading prices of the Notes
may be lower than those of later-issued SOFR-linked debt securities as a result.
Similarly, if SOFR does not prove to be widely used in securities similar to the
Notes, the trading price of the Notes may be lower than those of debt securities
linked to such rates that are more widely used. Debt securities indexed to SOFR
(as the Notes will be) may not be able to be sold at all or may not be able to
be sold at prices that will provide a yield comparable to similar investments
that have a developed secondary market, and may consequently suffer from
increased pricing volatility and market risk. We or an affiliate of ours will or
could have authority to make determinations and elections that could affect the
return on, value of and market for the Notes. Under the terms of the Notes, we
may make certain determinations, decisions and elections with respect to the
Benchmark rate on the Notes during the floating rate period, including, without
limitation, any determination, decision or election required to be made by the
calculation agent that the calculation agent fails to make. We will make any
such determination, decision or election in our sole discretion, and any such
determination, decision or election that we make could affect the amount of
interest that accrues on the Notes during any interest period in the floating
rate period. If the calculation agent fails, when required, to make a
determination that a Benchmark Transition Event and its related Benchmark
Replacement Date have occurred, or fails, when required, to determine the
Benchmark Replacement and Benchmark Replacement Adjustment, then we will make
those determinations in our sole discretion. Furthermore, we or an affiliate of
ours may assume the duties of calculation agent. We will act as the initial
calculation agent and we cannot assure you that we will appoint an independent
third-party calculation agent at any time. Any exercise of discretion by us
under the terms of the Notes, including, without limitation, any discretion
exercised by us or by an affiliate acting as calculation agent, could present a
conflict of interest. In making the required determinations, decisions and
elections, we or an affiliate of ours acting as calculation agent may have
economic interests that are adverse to the interest of the holders of the Notes,
and those determinations, decisions or elections could have a material adverse
effect on the yield on, value of and market for the Notes. All determinations,
decisions or elections by us, or by us or an affiliate acting as calculation
agent, under the terms of the Notes will be conclusive and binding absent
manifest error. C-12

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SCHEDULE A DIRECT AND INDIRECT SUBSIDIARIES 1. Sound Community Bank (100% owned
by the Company) 2. Sound Community Insurance Agency, Inc. (100% owned by Sound
Community Bank)

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APPENDIX A Required Waiver Disclosure Stifel, Nicolaus & Company, Incorporated
(“Stifel”) is a broker dealer affiliate of KBW. On December 6, 2016, a final
judgment (the “Judgment”) was entered against Stifel by the United States
District Court for the Eastern District of Wisconsin (Civil Action No.
2:11-cv-00755) resolving a civil lawsuit filed by the U.S. Securities & Exchange
Commission (the “SEC”) in 2011 involving violations of several antifraud
provisions of the federal securities laws in connection with the sale of
synthetic collateralized debt obligations to five Wisconsin school districts in
2006. As a result of the Judgment: (i) Stifel is required to cease and desist
from committing or causing any violations and any future violations of Section
17(a)(2) and 17(a)(3) of the Securities Act; and (ii) Stifel and a former
employee were jointly liable to pay disgorgement and prejudgment interest of
$2.5 million. Stifel was also required to pay a civil penalty of $22.0 million,
of which disgorgement and civil penalty Stifel was required to pay $12.5 million
to the school districts involved in this matter. Simultaneously with the entry
of the Judgment, the SEC issued an Order granting Stifel a waiver from, among
other things, the application of the disqualification provisions of Rule
506(d)(1)(iv) of Regulation D under the Securities Act. A copy of the Judgment
is available on the SEC’s website at:
https://www.sec.gov/litigation/litreleases/2016/lr23700-final-judgment.pdf.

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