What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-09 · 228 added, 264 removed, 207 unchanged (70% of the section changed)

8 unchanged sentences

Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to:

• the effect of the novel coronavirus disease 2019 (“COVID-19”) pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S.

and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;

• potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations, or financial markets, generally, resulting from the COVID-19 pandemic, and any governmental or societal responses thereto;

• changes in consumer spending, borrowing and savings habits;

6 unchanged sentences

• our ability to access cost-effective funding;

• the potential transition away from LIBOR toward new interest rate benchmarks;

• the future of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest-rate benchmarks;

• our ability to control operating costs and expenses;

8 unchanged sentences

• our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions;

• changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods, including as a result of the Coronavirus Aid, Relief, and Economic Securities Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 ("CAA 2021");

• legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations that adversely affect our business, and the availability of resources to address such changes;

• changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board;

• legislative or regulatory changes that adversely affect our business, including as a result of COVID-19, and the availability of resources to address such changes;

• our ability to retain or attract key employees or members of our senior management team;

4 unchanged sentences

• the possibility of other-than-temporary impairments of securities held in our securities portfolio;

• other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including the CARES Act, CAA 2021 and recent COVID 19 vaccination and stimulus efforts, and

• other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;

• the other risks described from time to time in our filings with the U.S.

8 unchanged sentences

Sound Community Bank’s deposits are insured up to applicable limits by the FDIC.

At September 30, 2021, Sound Financial Bancorp, on a consolidated basis, had assets of $928.1 million, net loans held-for-portfolio of $661.2 million, deposits of $807.7 million and stockholders’ equity of $91.9 million.

At March 31, 2022, Sound Financial Bancorp, on a consolidated basis, had assets of $958.9 million, net loans held-for-portfolio of $703.1 million, deposits of $836.1 million and stockholders’ equity of $93.9 million.

The shares of Sound Financial Bancorp are traded on NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121.

12 unchanged sentences

Our methodologies for analyzing the allowance for loan losses, other-than-temporary impairment, mortgage servicing rights, other real estate owned and deferred tax asset accounts are described in our 2021 Form 10-K.

COVID-19 Response

Paycheck Protection Program ("PPP") Participation.

The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a loan program called the Paycheck Protection Program, or PPP.

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020.

PPP loans have:

(a) an interest rate of 1.0%, (b) a two-year loan term to maturity;

and (c) principal and interest payments deferred for six months from the date of disbursement.

The SBA guarantees 100% of the PPP loans made to eligible borrowers.

The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA.

The first round of the program expired on August 8, 2020, and a second round reopened the program beginning January 1, 2021 through May 31, 2021.

As of September 30, 2021, we had received SBA forgiveness for 899 PPP loans totaling $74.7 million out of the $76.4 million in PPP loans funded during the first PPP.

During the nine months ended September 30, 2021, we began accepting and processing loan applications under the second PPP enacted in December 2020.

As of September 30, 2021, we had funded 599 PPP loans totaling $42.8 million and had received SBA forgiveness for 550 PPP loans totaling $32.7 million under the second PPP.

We had 66 PPP loans outstanding totaling $11.8 million as of September 30, 2021.

The following table summarizes our PPP participation as of September 30, 2021 (dollars in thousands):

Funded At September 30, 2021

Total Number of Loans Average Loan Amount Outstanding Number of Loans

First PPP $ 76,384 916 $ 83,389 $ 1,674 17

Second PPP 42,787 599 71,431 10,115 49

Total PPP loans $ 119,171 1,515 $ 78,661 $ 11,789 66

During the three and nine months ended September 30, 2021, we recorded in interest income SBA processing fees of $1.0 million and $2.5 million, respectively, and $473 thousand and $521 thousand for the three and nine months ended September 30, 2020.

In addition, interest income earned on PPP loans totaled $46 thousand and $323 thousand for the three and nine months ended September 30, 2021 and $49 thousand and $318 thousand for the three and nine months ended September 30, 2020.

Loan Modifications.

We are continuing to provide payment relief for both consumer and business clients, most of which relief involves interest only or payment deferrals that range from 90 to 180 days.

Deferred loans are re-evaluated at the end of the deferral period and will either return to the original loan terms or be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

All of these loan modifications have been made in response to the COVID-19 pandemic.

The following table summarizes our loans under payment relief related to COVID-19 as of September 30, 2021 (dollars in thousands):

Second Request Third Request Fourth Request Total

# of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount

Residential loans (1)

1 $ 67 2 $ 189 3 $ 677 6 $ 933

(1) Entered into a forbearance agreement with a weighted-average loan-to-value of 75%, 37% and 72% for loans under their second, third or fourth request, respectively.

The weighted-average loan-to-values are based on appraisals obtained at the time of loan origination and the current loan amount.

Of the six total loans presented above, five of these loans, or $777 thousand of the $933 thousand, are not classified as troubled debt restructurings (“TDRs”) pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022.

We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

Support for Clients, Employees and Community during Pandemic.

We remain focused on keeping our employees safe and the Bank running effectively to serve its clients.

The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and considering public health authority guidelines, and encouraging remote work and supporting employees with paid time off.

As of September 30, 2021, all of our branch lobbies were open.

The Company is aware of the surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore other protocols, as may prove to be necessary.

We continue to work closely with our borrowers to evaluate pandemic related challenges.

We also continue to support our not-for-profit organizations with volunteering, donations and support of both virtual and live fund raising activities.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets increased $66.7 million, or 7.7%, to $928.1 million at September 30, 2021 from $861.4 million at December 31, 2020.

The increase was primarily a result of higher balances in loans held-for-portfolio and cash and cash equivalents, partially offset by a decrease in loans held-for-sale.

COVID-19 Impact to the Company

The Company is actively monitoring and responding to the effects of the rapidly-changing COVID 19 pandemic.

The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers.

As of March 31, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments.

The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guideline.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total assets increased $39.2 million, or 4.3%, to $958.9 million at March 31, 2022 from $919.7 million at December 31, 2021.

The increase was primarily a result of increases in cash and cash equivalents, investment securities, and loans held-for-portfolio.

Cash and Securities.

Cash and cash equivalents increased $12.9 million, or 6.6%, to $206.7 million at September 30, 2021 from $193.8 million at December 31, 2020 primarily due to significant deposit growth due to new PPP relationships and growth of existing client balances.

Available-for-sale securities, which consist of municipal bonds and agency mortgage-backed securities decreased $3.2 million, or 30.9%, to $7.1 million at September 30, 2021 from $10.2 million at December 31, 2020 as a result of normal pay downs in investment securities during the nine months ended September 30, 2021 and the call of a municipal bond for $950 thousand during the second quarter of 2021.

Loans held-for-portfolio, net, increased $53.9 million, or 8.9%, to $661.2 million at September 30, 2021 from $607.4 million at December 31, 2020, driven by a $63.7 million, or 48.7%, increase in one-to-four family loans, an $18.8 million increase in construction and land loans and an $18.5 million increase in loans for floating homes during 2021, partially offset by a $27.6 million decrease in commercial business loans, resulting from the forgiveness by the SBA of $75.9 million of PPP loans, and a $19.0 million decrease in commercial and multifamily loans during the period.

The following table reflects the changes in the loan mix of our loan portfolio at September 30, 2021, as compared to December 31, 2020 (dollars in thousands):

September 30,

Cash and cash equivalents increased $13.5 million, or 7.4%, to $197.1 million at March 31, 2022 from $183.6 million at December 31, 2021 primarily due to increases in noninterest-bearing and interest-bearing deposits, partially related to temporary increases in lawyer trust accounts.

These increases were partially offset by the redeployment of excess liquidity into higher earning loans and investments.

Investment securities increased $4.0 million, or 47.8%, to $12.4 million at March 31, 2022, compared to $8.4 million at December 31, 2021.

Held-to-maturity securities totaled $2.2 million at March 31, 2022, compared to none at December 31, 2021, due to the purchase of $2.2 million in municipal bonds and agency mortgage-backed securities.

Available-for-sale securities totaled $10.2 million at March 31, 2022, compared to $8.4 million at December 31, 2021, and $9.1 million at March 31, 2021.

The increase in available-for-sale securities was primarily due the purchase of $2.8 million in municipal bonds and agency mortgage-backed securities, partially offset by regularly scheduled payments and maturities.

Loans held-for-portfolio, net, increased $23.0 million, or 3.4%, to $703.1 million at March 31, 2022 from $680.1 million at December 31, 2021, driven by increases across all loan classes, excluding commercial business loans.

The increases primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and the addition of experienced lending staff during 2021.

These increases were partially offset by the decrease in commercial business loans resulting from the forgiveness by the SBA.

The following table reflects the changes in the loan mix of our loan portfolio at March 31, 2022, as compared to December 31, 2021 (dollars in thousands):

2022 December 31,

8 unchanged sentences

Commercial business 24,452 28,026 (3,574) (12.8)

Premiums for purchased loans 788 897 (109) (12.1)

Deferred loan fees (2,012) (2,367) 355 (15.0)

2 unchanged sentences

Total loans held-for-portfolio, net $ 703,078 $ 680,092 $ 22,986 3.4 %

The increase in one-to-four family loans was driven primarily by the purchase of $24.1 million in jumbo loans during the second quarter of 2021 and the origination of $48.6 million of conforming and non-conforming jumbo loans in our portfolio.

The increase in construction and land loans during the period was primarily due to new originations and disbursement of advances on previously originated loans and the increase in loans on floating homes was primarily a result of larger loan sizes, seasonal activity and a small competitive market for these types of loans.

The decrease in commercial and multifamily loans was primarily due to increased payoff activity.

The decrease in our commercial business loan portfolio was primarily due to SBA loan forgiveness, partially offset by our origination of 599 PPP loans totaling $42.8 million during the nine months ended September 30, 2021.

At September 30, 2021, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 36.9% of total loans, one-to-four family loans, including home equity loans accounted for 31.2% of total loans, commercial business loans accounted for 5.6% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 14.3% of total loans at

September 30, 2021.

Construction and land loans accounted for 12.2% of total loans at September 30, 2021.

The increase in one-to-four family loans was driven primarily by the origination of $13.0 million in conforming and non-conforming jumbo loans during the first quarter of 2022 and the origination of $8.5 million of conforming and non-conforming conventional loans in our portfolio.

The increase in construction and land loans during the period was primarily due to disbursement of advances on previously originated loans and the increase in other consumer loans was primarily a result of larger loan sizes.

The decrease in our commercial business loan portfolio was primarily due to SBA loan forgiveness.

At March 31, 2022, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 39.4% of total loans, one-to-four family loans, including home equity loans accounted for 33.1% of total

loans, commercial business loans accounted for 3.4% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 14.2% of total loans at March 31, 2022.

Construction and land loans accounted for 9.9% of total loans at March 31, 2022.

Loans held-for-sale totaled $1.3 million at March 31, 2022, compared to $3.1 million at December 31, 2021.

The decrease was primarily due to a decline in mortgage originations reflecting reduced refinance activity.

Allowance for Loan Losses.

3 unchanged sentences

The following table reflects the adjustments in our allowance during the periods indicated (dollars in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Balance at beginning of period $ 6,306 $ 6,000

4 unchanged sentences

Balance at end of period $ 6,407 $ 5,935

Ratio of net charge-offs during the period to average loans outstanding during the period — % (0.18) % (0.02) % (0.12) %

September 30,

Our allowance for loan losses increased $101 thousand, or 1.6%, to $6.4 million at March 31, 2022, from $6.3 million at December 31, 2021.

Specific loan loss reserves decreased to $261 thousand at March 31, 2022, compared to $293 thousand at December 31, 2021, while general loan loss reserves remained mostly flat at $5.6 million at both March 31, 2022 and December 31, 2021 and the unallocated reserve increased to $517 thousand at March 31, 2022, compared to $395 thousand at December 31, 2021.

The increase in the unallocated reserve was primarily a result of the increase in the loan portfolio at March 31, 2022.

The $2.1 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at March 31, 2022, as these loans are 100% guaranteed by the SBA and management expects that the majority of the remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven.

Net charge-offs for the three months ended March 31, 2022 totaled $24 thousand compared to net charge-offs of $65 thousand for the three months ended March 31, 2021.

At March 31, 2022, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.90% and 134.97%, respectively, compared to 0.92% and 113.58%, respectively, at December 31, 2021.

See “Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021 — Provision for Loan Losses.”

The following tables show certain credit ratios at and for the periods indicated and each component of the ratio's calculations.

2022 December 31,

Allowance as a percentage of nonperforming loans (end of period) 206.16 % 208.04 %

Allowance as a percentage of total loans (end of period) 0.95 % 0.98 %

Our allowance for loan losses increased $327 thousand, or 5.5%, to $6.3 million at September 30, 2021, from $6.0 million at December 31, 2020.

Specific loan loss reserves decreased to $281 thousand at September 30, 2021, compared to $378 thousand at December 31, 2020, while general loan loss reserves decreased to $5.1 million at September 30, 2021, compared to $5.2 million at December 31, 2020 and the unallocated reserve increased to $962 thousand at September 30, 2021, compared to $406 thousand at December 31, 2020.

The increase in the unallocated reserve was primarily a result of the increase in the loan portfolio at September 30, 2021, partially offset by a positive adjustment in the qualitative factors applied to real estate related loans as a result of the improvement in economic conditions related to the strong housing market.

The $11.8 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at September 30, 2021, as these loans are 100% guaranteed by the SBA and management expects that the majority of the remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven.

Net charge-offs for the three and nine months ended September 30, 2021 totaled $5 thousand and $98 thousand, respectively, compared to net charge-offs of $318 thousand and $577 thousand for the three and nine months ended September 30, 2020, respectively.

At September 30, 2021, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.95% and 206.16%, respectively, compared to 0.98% and 208.04%, respectively, at December 31, 2020.

See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 — Provision for Loan Losses.”

Allowance for loan losses as a percentage of total loans outstanding at period end 0.90 % 0.92 %

Allowance for loan losses 6,407 6,306

Total loans outstanding 710,709 687,868

Non-accrual loans as a percentage of total loans outstanding at period end

0.67 % 0.81 %

Total nonaccrual loans 4,747 5,552

Total loans outstanding 710,709 687,868

Allowance for loan losses as a percentage of non-accrual loans at period end

134.96 % 113.58 %

Allowance for loan losses 6,407 6,306

Total nonaccrual loans 4,747 5,552

Three Months Ended March 31,

($ in thousands)

Net charge-offs during period to average loans outstanding:

One-to-four family:

Net charge-offs

Average loans outstanding

211,315 130,521

Net (recoveries)

Average loans outstanding

13,449 14,532

Commercial and multifamily real estate:

Net charge-offs

Average loans outstanding

279,237 256,478

Construction and land:

Net charge-offs

Average loans outstanding

65,314 63,906

Manufactured homes:

Net (recoveries)

Average loans outstanding

21,896 20,692

Floating homes:

Net charge-offs

Average loans outstanding

59,797 39,692

Other consumer:

0.49 % 0.16 %

Net charge-offs

Average loans outstanding

16,892 14,804

Commercial business:

0.09 % (0.01) %

Net charge-offs/(recoveries)

Average loans outstanding

25,657 75,108

0.01 % 0.04 %

Net charge-offs

Average loans outstanding

693,556 615,735

Mortgage Servicing Rights.

The fair value of mortgage servicing rights was $4.2 million at September 30, 2021, an increase of $431 thousand, or 11.4%, from $3.8 million at December 31, 2020.

The fair value of mortgage servicing rights was $4.7 million at March 31, 2022, an increase of $395 thousand, or 9.2%, from $4.3 million at December 31, 2021.

We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio.

2 unchanged sentences

Nonperforming Assets.

At September 30, 2021, nonperforming assets totaled $3.7 million, or 0.40% of total assets, compared to $3.5 million, or 0.40% of total assets at December 31, 2020.

At March 31, 2022, nonperforming assets totaled $5.4 million, or 0.56% of total assets, compared to $6.2 million, or 0.68% of total assets at December 31, 2021.

The table below sets forth the amounts and categories of nonperforming assets at the dates indicated (dollars in thousands):

Nonperforming Assets

September 30, 2021 December 31, 2020 Amount

March 31, 2022 December 31, 2021 Amount

Change Percent

4 unchanged sentences

Total nonperforming assets $ 5,406 $ 6,211 $ (805) (13.0) %

Nonperforming loans increased $185 thousand, or 6.4%, to $3.1 million at September 30, 2021 from $2.9 million at December 31, 2020.

The percentage of nonperforming loans to total loans was 0.46% at September 30, 2021, compared to 0.47% of total loans at December 31, 2020.

Total deposits increased $59.7 million, or 8.0%, to $807.7 million at September 30, 2021 from $748.0 million at December 31, 2020.

The increase was due primarily to stimulus funds deposited, developing further relationships with PPP borrowers who were not previously clients, as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic.

We continue our efforts to grow noninterest-bearing deposits, which increased $62.4 million, or 47.1%, to $194.8 million at September 30, 2021, compared to $132.5 million at December 31, 2020.

Noninterest-bearing deposits represented 24.1% of total deposits at September 30, 2021, compared to 17.7% at December 31, 2020.

Nonperforming loans decreased $805 thousand, or 14.5%, to $4.7 million at March 31, 2022 from $5.6 million at December 31, 2021.

The decrease in nonperforming assets primarily was due to decreases in one-to-four family loans and floating homes.

The percentage of nonperforming loans to total loans was 0.67% at March 31, 2022, compared to 0.81% of total loans at December 31, 2021.

Deposits and Borrowings.

Total deposits increased $37.8 million, or 4.7%, to $836.1 million at March 31, 2022 from $798.3 million at December 31, 2021.

The increase was primarily a result of deposit growth from specialty business relationships and temporary increases in lawyer trust accounts, partially offset by a managed run-off of higher costing maturing certificates of deposits.

We continue our efforts to grow noninterest-bearing deposits, which increased $18.3 million, or 9.6%, to $208.8 million at March 31, 2022, compared to $190.5 million at December 31, 2021.

Noninterest-bearing deposits represented 25.0% of total deposits at March 31, 2022, compared to 23.9% at December 31, 2021.

A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands):

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Rate Amount Wtd.

7 unchanged sentences

(1) Escrow balances shown in noninterest-bearing deposits on the consolidated balance sheets.

Scheduled maturities of time deposits at September 30, 2021, are as follows (in thousands):

Scheduled maturities of time deposits at March 31, 2022, are as follows (in thousands):

Year Ending December 31, Amount

3 unchanged sentences

Certificates of deposit have maturities of five years or less.

The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2021 and December 31, 2020, totaled $25.5 million and $79.9 million, respectively.

Deposits in excess of $250,000 are not federally insured.

The aggregate amount of time deposits in denominations of more than $250,000 at March 31, 2022 and December 31, 2021, totaled $18.7 million and $19.1 million, respectively.

Deposit amounts in excess of $250,000 are not federally insured.

There were no outstanding FHLB advances at March 31, 2022 and December 31, 2021.

Subordinated notes, net totaled $11.6 million at March 31, 2022 and December 31, 2021.

Stockholders’ Equity.

Total stockholders’ equity increased $6.4 million, or 7.5%, to $91.9 million at September 30, 2021, from $85.5 million at December 31, 2020.

This increase primarily reflects $7.3 million in net income for the nine months ended September 30, 2021, partially offset by the payment of cash dividends of $1.6 million to common stockholders during the nine months ended September 30, 2021.

Total stockholders’ equity increased $492 thousand, or 0.5%, to $93.9 million at March 31, 2022, from $93.4 million at December 31, 2021.

This increase primarily reflects $1.7 million in net income for the three months ended March 31, 2022, partially offset by the payment of cash dividends of $709 thousand in dividends to common stockholders during the three months ended March 31, 2022 and an unrealized loss, net of tax, of $608 thousand on our available-for-sale securities as a result of declining market values.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

3 unchanged sentences

Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).

Three Months Ended September 30,

Balance Interest

Rate Annualized Average

Balance Interest

Rate Annualized

Interest-earning assets:

Loans receivable $ 652,251 $ 8,967 5.45 % $ 693,524 $ 8,422 4.83 %

Investments, cash and cash equivalents 229,802 135 0.23 117,660 86 0.29

Total interest-earning assets (1)

882,053 9,102 4.09 811,184 8,508 4.17

Interest-bearing liabilities:

Savings and money market accounts 179,164 42 0.09 132,271 85 0.26

Demand and NOW accounts 311,273 141 0.18 199,021 242 0.48

Certificate accounts 135,757 434 1.27 239,296 1,411 2.35

Subordinated notes 11,616 168 5.74 1,692 23 5.41

Borrowings 2 — — 40,527 87 0.85

Total interest-bearing liabilities 637,812 785 0.49 % 612,807 1,848 1.20 %

Net interest income $ 8,317 $ 6,660

Net interest rate spread 3.61 % 2.97 %

Net earning assets $ 244,241 $ 198,377

Net interest margin 3.74 % 3.27 %

Average interest-earning assets to average interest-bearing liabilities 138.29 % 132.37 %

Total deposits 808,697 617 0.30 % 715,231 1,738 0.97 %

Total funding (2)

820,315 785 0.38 % 757,450 1,848 0.97 %

(1) Calculated net of deferred loan fees, loan discounts and loans in process.

(2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits.

The cost of total funding is calculated as annualized total interest expense divided by average total funding.

Nine Months Ended September 30,

Three Months Ended March 31,

Balance Interest

12 unchanged sentences

Subordinated notes 11,637 168 5.85 11,596 168 5.88

Borrowings 1 — — 20,244 209 1.38

Total interest-bearing liabilities 625,261 595 0.39 % 630,854 1,463 0.94 %

15 unchanged sentences

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands).

Three Months Ended September 30, 2021 vs.

Nine Months Ended September 30, 2021 vs.

Three Months Ended March 31, 2022 vs.

Increase (Decrease) due to Total

Increase (Decrease) Increase (Decrease) due to Total

Increase (Decrease)

Volume Rate Volume Rate

Interest-earning assets:

7 unchanged sentences

Subordinated notes 1 (1) —

Borrowings — (87) (87) — (209) (209)

Total interest-bearing liabilities $ (269) $ (599) $ (868)

Change in net interest income $ 1,082

Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2021 and 2020

Comparison of Results of Operation for the Three Months Ended March 31, 2022 and 2021

Q1 2022 vs Q1 2021 .

Net income increased $257 thousand, or 11.0%, to $2.6 million, or $0.98 per diluted common share, for the three months ended September 30, 2021, compared to $2.3 million, or $0.90 per diluted common share, for the three months ended September 30, 2020.

The increase in net income was primarily the result of higher interest income, lower interest expense paid on deposits and a lower provision for loan losses, partially offset by a decrease in noninterest income, higher interest expense paid on subordinated notes, and an increase in noninterest expense.

Net income increased $1.9 million, or 34.0%, to $7.3 million, or $2.76 per diluted common share, for the nine months ended September 30, 2021, compared to $5.4 million, or $2.09 per diluted common share, for the nine months ended September 30, 2020.

The increase was primarily a result of a $2.3 million decrease in interest expense, an increase in noninterest income of $1.5 million and a $500 thousand decrease in the provision for loan losses for the nine months ended September 30, 2021, partially offset by a $1.6 million increase in noninterest expense.

Net income decreased $728 thousand, or 29.7%, to $1.7 million, or $0.65 per diluted common share, for the three months ended March 31, 2022, compared to $2.5 million, or $0.93 per diluted common share, for the three months ended March 31, 2021.

The decrease in net income was primarily the result of lower interest income earned on loans, coupled with lower noninterest income and higher noninterest expense, partially offset by lower interest expense paid on deposits.

Interest Income

Q1 2022 vs Q1 2021 .

Interest income increased $594 thousand, or 7.0%, to $9.1 million for the three months ended September 30, 2021, from $8.5 million for the three months ended September 30, 2020, primarily due to a 62 basis point increase in the average loan yield, partially offset by lower average loan balances.

Interest income on loans increased $545 thousand, or 6.5%, to $9.0 million for the three months ended September 30, 2021, compared to $8.4 million for the three months ended September 30, 2020.

The average balance of total loans was $652.3 million for the three months ended September 30, 2021, compared to $693.5 million for the three months ended September 30, 2020 resulting primarily from the decline in commercial and multifamily loans and commercial business loans.

The average yield on total loans was 5.45% for three months ended September 30, 2021, compared to 4.83% for the three months ended September 30, 2020.

The average yield on loans increased primarily due to the recognition of net deferred fees from SBA’s forgiveness of PPP loans during the period, partially offset by adjustable rate loans resetting downward.

For the three months ended September 30, 2021, the average balance of PPP loans was $19.0 million and the average yield on PPP loans was 22.37%, including the recognition of the net deferred fees, with a positive impact on loan yield of 51 basis points.

For the three months ended September 30, 2020, the average balance of PPP loans was $74.3 million and the average yield on PPP loans was 2.80%, including the recognition of deferred fees, with a negative impact on loan yield of 24 basis points.

Interest income included $1.1 million in fees earned related to PPP loans in the three months ended September 30, 2021, compared to $522 thousand in the same period a year ago.

At September 30, 2021, PPP deferred loan origination fees of $300 thousand remain to be accreted into interest income during the remaining life of the loans.

The impact of PPP loans on loan yields will change during any period based on the volume of

prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two- or five-year maturity of the loans.

Interest income on the investment portfolio and cash and cash equivalents increased $49 thousand, or 57.0%, to $135 thousand for the three months ended September 30, 2021, compared to $86 thousand for the three months ended September 30, 2020.

The increase in the interest income on investment securities and cash and cash equivalents was due to significantly higher average balances, partially offset by lower average yields.

The average balance on investments and cash and cash equivalents was $229.8 million for the three months ended September 30, 2021, compared to $117.7 million for the three months ended September 30, 2020.

The substantial increase was due to higher average cash balances primarily due to the increase in deposit balances related to new and existing clients increasing their deposit balances.

This excess liquidity negatively impacted the average yield on investments and cash and cash equivalents, which decreased to 0.23% for the three months ended September 30, 2021, compared to 0.29% for the three months ended September 30, 2020.

Interest income decreased $346 thousand, or 1.3%, to $25.5 million for the nine months ended September 30, 2021, from $25.9 million for the nine months ended September 30, 2020.

The decrease was primarily due to a 69 basis point decline in average yield on interest-earning assets.

Interest income on loans decreased $311 thousand, or 1.2%, to $25.2 million for the nine months ended September 30, 2021, compared to $25.5 million for the nine months ended September 30, 2020, driven by lower average total loans resulting primarily from the decline in commercial and multifamily loans and commercial business loans, partially offset a 19 basis points increase in the average yield on loans.

The average balance of total loans was $636.4 million for the nine months ended September 30, 2021, compared to $666.1 million for the nine months ended September 30, 2020.

The average yield on total loans was 5.28% for the nine months ended September 30, 2021, compared to 5.09% for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, the average balance of PPP loans was $44.2 million and the average yield on PPP loans was 8.55%, including the recognition of the net deferred fees, with a positive impact on average loan yield of 24 basis points.

For the nine months ended September 30, 2020, the average balance of PPP loans was $42.4 million and the average yield on PPP loans was 2.64%, including the recognition of deferred fees, with a negative impact on average loan yield of 17 basis points.

Interest income included $2.8 million in fees earned related to PPP loans in the nine months ended September 30, 2021, compared to $840 thousand in the same period a year ago.

Interest income on the investment portfolio and cash and cash equivalents decreased $35 thousand, or 8.8%, to $365 thousand for the nine months ended September 30, 2021, compared to $400 thousand for the nine months ended September 30, 2020.

The decrease in the interest income on investment securities and cash and cash equivalents was due to lower average yields, partially offset by higher average balances.

The average yield on investments and cash and cash equivalents was 0.21% for the nine months ended September 30, 2021, compared to 0.64% for the nine months ended September 30, 2020, primarily due to the substantial increase in cash and cash equivalents earning a nominal yield.

Interest income increased $214 thousand, or 2.7%, to $8.2 million for the three months ended March 31, 2022, from $8.0 million for the three months ended March 31, 2021, primarily due to higher average loan balances, partially offset by a 38 basis point decline in the average loan yield.

Interest income on loans increased $189 thousand, or 2.4%, to $8.1 million for the three months ended March 31, 2022, compared to $7.9 million for the three months ended March 31, 2021.

The average balance of total loans was $694.9 million for the three months ended March 31, 2022, compared to $628.4 million for the three months ended March 31, 2021 resulting from increased balances in all loan categories, except for commercial business loans which declined as a result of the SBA’s repayment of PPP loans.

The average yield on total loans was 4.71% for three months ended March 31, 2022, compared to 5.09% for the three months ended March 31, 2021.

The average yield on total loans decreased primarily due to the decrease in the recognition of net deferred fees due to loan repayments from SBA loan forgiveness of PPP loans during the period and lower rates on new originations.

Interest income included $84 thousand in fees earned related to PPP loans in the three months ended March 31, 2022, compared to $768 thousand in the same period a year ago.

For the three months ended March 31, 2022, the average balance of PPP loans was $3.1 million and the average yield on PPP loans was 11.05%, including the recognition of the net deferred fees, with a positive impact on loan yield of three basis points.

For the three months ended March 31, 2021, the average balance of PPP loans was $53.9 million and the average yield on PPP loans was 5.78%, including the recognition of deferred fees, with a positive impact on loan yield of six basis points.

At March 31, 2022, PPP deferred loan origination fees of $60 thousand remain to be accreted into interest income during the remaining life of the loans.

The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two- or five-year maturity of the loans.

Interest income on the investment portfolio and cash and cash equivalents increased $25 thousand, or 22.1%, to $138 thousand for the three months ended March 31, 2022, compared to $113 thousand for the three months ended March 31, 2021.

The increase in the interest income on investment securities and cash and cash equivalents was due to higher average yields, partially offset by lower average balances.

The average balance on investments and cash and cash equivalents was $189.6 million for the three months ended March 31, 2022, compared to $228.8 million for the three months ended March 31, 2021.

The decrease was due to lower average cash balances as we redeployed funds into higher interest-earning assets.

The average yield on investments and cash and cash equivalents increased to 0.30% for the three months ended March 31, 2022, compared

to 0.20% for the three months ended March 31, 2021, as a result of the rising interest rate environment and the increase in the average balance of our investment securities portfolio.

Interest Expense

Q1 2022 vs Q1 2021 .

Interest expense decreased $1.1 million, or 57.5%, to $785 thousand for the three months ended September 30, 2021, from $1.8 million for the three months ended September 30, 2020, primarily as a result of declining deposit costs, a higher percentage of noninterest bearing deposits to total deposits and repayment of FHLB advances, partially offset by the interest expense on subordinated notes issued in the third quarter of 2020.

Interest expense on deposits decreased $1.1 million, or 64.5%, to $617 thousand for the three months ended September 30, 2021, compared to $1.7 million for the same period a year ago.

The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced rates paid on all deposits and a $103.5 million or 43.3% decline in the average balance of higher cost certificate accounts.

In addition, deposit costs were favorably impacted by a $37.9 million increase in average noninterest bearing deposits to $182.5 million for the three months ended September 30, 2021, compared to $144.6 million for the same period last year.

The average cost of total deposits decreased 67 basis points to 0.30% for the quarter ended September 30, 2021, from 0.97% for the quarter ended September 30, 2020.

Interest expense on borrowings and subordinated notes increased $58 thousand, or 52.7%, to $168 thousand for the three months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $110 thousand for the three months ended September 30, 2020, comprised primarily of interest expense on our FHLB advances.

Average borrowings and subordinated notes decreased $30.6 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $42.2 million at September 30, 2020, which consisted primarily of FHLB advances.

The average cost of subordinated notes was 5.74% for the three months ended September 30, 2021, and the average cost of the subordinated notes and FHLB advances was 1.04% for the three months ended September 30, 2020.

Interest expense decreased $2.3 million, or 40.6%, to $3.3 million for the nine months ended September 30, 2021, from $5.6 million for the nine months ended September 30, 2020, primarily as a result of declining deposit costs and a higher percentage of noninterest bearing deposits to total deposits.

Interest expense on deposits decreased $2.5 million, or 47.5%, to $2.8 million for the nine months ended September 30, 2021, compared to $5.3 million for the same period a year ago.

The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced market rates paid on deposits.

The average cost of total deposits decreased 59 basis points to 0.47% for the nine months ended September 30, 2021, from 1.06% for the nine months ended September 30, 2020.

Interest expense on borrowings and subordinated notes increased $272 thousand, or 117.2%, to $504 thousand for the nine months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $232 thousand for the nine months ended September 30, 2020, which was related primarily to FHLB advances.

Average borrowings and subordinated notes decreased $9.2 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $20.8 million at September 30, 2020, which consisted primarily of FHLB advances.

The average cost of the subordinated notes and FHLB advances was 5.81% for the nine months ended September 30, 2021, compared to 1.48% for the nine months ended September 30, 2020.

Interest expense decreased $868 thousand, or 59.3%, to $595 thousand for the three months ended March 31, 2022, from $1.5 million for the three months ended March 31, 2021.

Interest expense on deposits decreased $868 thousand, or 67.0%, to $427 thousand for the three months ended March 31, 2022, compared to $1.3 million for the same period a year ago.

The decrease was primarily the result of a 46 basis point decline in the average cost of deposits reflecting reduced rates paid on all deposits and a $112.2 million, or 52.3%, decline in the average balance of certificate accounts, partially offset by a $106.6 million, or 26.3%, increase in the average balance of interest-bearing deposits other than certificate accounts.

In addition, total deposit costs were favorably impacted by a $33.4 million increase in the average balance of noninterest bearing deposits to $194.6 million for the three months ended March 31, 2022, compared to $161.1 million for the same period last year.

The increase in the average balance of noninterest bearing deposits contributed to the 46 basis point decrease in the average cost of total deposits to 0.21% for the quarter ended March 31, 2022, from 0.67% for the quarter ended March 31, 2021.

Net Interest Income.

Q1 2022 vs Q1 2021 .

Net interest income increased $1.7 million, or 24.9%, to $8.3 million for the three months ended September 30, 2021, from $6.7 million for the three months ended September 30, 2020.

Our net interest margin was 3.74% and 3.27% for the three months ended September 30, 2021 and 2020, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits and higher interest income.

The increase in net interest margin was primarily due to decline in rates paid on interest-bearing liabilities following decreases in the short-term market rates in the second quarter of 2020 exceeding the decline in yields earned on interest-earning assets.

During the third quarter of 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 41 basis points, compared to a negative impact of five basis points from our origination of low yielding PPP loans during the quarter ended September 30, 2020.

Net interest income increased $1.9 million, or 9.5%, to $22.2 million for the nine months ended September 30, 2021, from $20.3 million for the nine months ended September 30, 2020.

Our net interest margin was 3.40% and 3.61% for the nine months ended September 30, 2021, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits, partially offset by a decline in the average loan balance.

The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities as changes in the average rate paid on interest-bearing deposits tend to lag changes in market interest rate.

During the nine months ended September 30, 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 27 basis points, compared to a negative impact of six basis points from our origination of low yielding PPP loans during the same period in 2020.

Net interest income increased $1.1 million, or 16.6%, to $7.6 million for the three months ended March 31, 2022, from $6.5 million for the three months ended March 31, 2021.

Our net interest margin was 3.49% and 3.09% for the three months ended March 31, 2022 and 2021, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits and, to a lesser extent, higher interest income.

The increase in net interest margin was primarily due to the decline in rates paid on interest-bearing liabilities as a result of the managed runoff of higher costing deposits.

During the first quarter of 2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of three basis points, compared to a positive impact of 18 basis points during the quarter ended March 31, 2021.

Provision for Loan Losse s.

3 unchanged sentences

Loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually and specific loss allocations are provided for these loans when necessary.

A provision for loan losses of $175 thousand and $425 thousand was recorded for the three and nine months ended September 30, 2021, as compared to $275 thousand and $925 thousand for the three and nine months ended September 30, 2020, respectively.

The decrease in the provision for loan losses in the current quarter and nine-month period compared to the comparable periods in 2020 was primarily due to a decrease in the average balance of loans held-for-portfolio between the periods, a positive adjustment to the qualitative factors applied to real estate related loans as a result of improvement in economic conditions related to the strong housing market, and to a lesser extent a $247 thousand decrease in non-performing loans from September 30, 2020.

Our allowance for loan losses as of September 30, 2021, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of September 30, 2021, but also reflects the inherent economic improvements in our markets as initial COVID-19 restrictions implemented in the second quarter of last year have

A provision for loan losses of $125 thousand was recorded for the three months ended March 31, 2022, as compared to no provision for loan losses for the three months ended March 31, 2021.

The increase in the provision for loan losses resulted primarily from the increase in our loan portfolio, partially offset by a shift in the loan portfolio composition to loan types requiring a lower general loan allowance.

Our allowance for loan losses as of March 31, 2022, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of March 31, 2022, but also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Net charge-offs for the three months ended March 31, 2022 totaled $24 thousand, compared to net charge-offs of $65 thousand for the three months ended March 31, 2021.

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.

Recently, we have seen most of our market areas reporting a fairly significant increase in COVID transmissions, which we understand from our public health authorities is largely attributed to lagging vaccination rates and an increase in cases related to the Delta variant.

To date, we are not seeing renewed business activity restrictions in our primary markets.

To the extent business activity restrictions are renewed, due to COVID-19 or otherwise, this will likely affect our business operations which may, in turn, result in a material increase our provision for loan and lease losses which would adversely affect the Company’s financial condition and results of operations.

In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.

Noninterest Income.

Noninterest income decreased $637 thousand, or 30.8%, to $1.4 million for the three months ended September 30, 2021, as compared to $2.1 million for the three months ended September 30, 2020, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Noninterest income decreased $1.2 million, or 43.7%, to $1.5 million for the three months ended March 31, 2022, as compared to $2.7 million for the three months ended March 31, 2021, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Change Percent

5 unchanged sentences

Total noninterest income $ 1,523 $ 2,704 $ (1,181) (43.7) %

The decrease in noninterest income during the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to the decrease in our net gain on sale of loans, partially offset by a $498 thousand improvement in the fair value adjustment on mortgage servicing rights and increases in both our mortgage servicing income of $68 thousand and service charges and fee income of $46 thousand.

As a result of refinance activity slowing over the past six months, our residential loans originated for sale decreased.

Loans sold during the quarter ended September 30, 2021, totaled $20.3 million, compared to $89.5 million during the quarter ended September 30, 2020.

The decrease in noninterest income during the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to a $1.7 million decrease in net gain on sale of loans due to a decline in both the amount of loans originated for sale and gross margins for loans sold, partially offset by a $543 thousand improvement in the fair value adjustment on mortgage servicing rights.

Loans sold during the quarter ended March 31, 2022, totaled $12.2 million, compared to $68.1 million during the quarter ended March 31, 2021.

The improvement in the fair value adjustment on mortgage servicing rights resulted from loan prepayment speeds slowing during the quarter as mortgage interest rates moved slightly higher.

The increase in the service charges and fee income primarily resulted from an increase in the number of checking accounts and an increase in debit card interchange fees.

Noninterest income increased $1.5 million, or 34.2%, to $5.8 million for the nine months ended September 30, 2021, as compared to $4.4 million for the nine months ended September 30, 2020, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

Service charges and fee income $ 1,615 $ 1,433 $ 182 12.7 %

Earnings on cash surrender value of BOLI 281 207 74 35.7

Mortgage servicing income 961 739 222 30.0

Fair value adjustment on mortgage servicing rights (694) (1,423) 729 (51.2)

Net gain on sale of loans 3,683 3,399 284 8.4

Total noninterest income $ 5,846 $ 4,355 $ 1,491 34.2 %

The increase in noninterest income during the nine months ended September 30, 2021, compared to the same period in 2020 was primarily due to improvement in the fair value adjustment on mortgage servicing rights, and increases in both gain on sale of loans and in mortgage servicing income.

Net gain on sale of loans increased due to higher margins on our sales offsetting the

decrease in sales volume.

Loans sold during the nine months ended September 30, 2021, totaled $128.3 million, compared to $176.0 million during the nine months ended September 30, 2020.

Mortgage servicing income was higher as a result of our mortgage servicing portfolio increasing to $514.0 million at September 30, 2021 compared to $444.3 million at September 30, 2020.

Noninterest Expense.

Noninterest expense increased $788 thousand, or 14.2%, to $6.3 million during the three months ended September 30, 2021, compared to $5.5 million during the three months ended September 30, 2020, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

Salaries and benefits $ 3,512 $ 2,880 $ 632 21.9 %

Operations 1,466 1,390 76 5.5

Regulatory assessments 91 111 (20) (18.0)

Occupancy 441 442 (1) (0.2)

Data processing 808 707 101 14.3

Total noninterest expense $ 6,318 $ 5,530 $ 788 14.2 %

The increase in noninterest expense during the three months ended September 30, 2021 compared to the same period in 2020 was due to an increase in salaries and benefits of $632 thousand primarily due to higher wages and incentive compensation and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in third quarter of 2021 as compared to the same period in 2020.

Data processing expense also increased $101 thousand due to technology investments.

Noninterest expense increased $1.6 million, or 9.4%, to $18.5 million during the nine months ended September 30, 2021, compared to $16.9 million during the nine months ended September 30, 2020, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Noninterest expense increased $673 thousand, or 10.9%, to $6.8 million during the three months ended March 31, 2022, compared to $6.2 million during the three months ended March 31, 2021, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Change Percent

6 unchanged sentences

Total noninterest expense $ 6,835 $ 6,162 $ 673 10.9 %

The increase in noninterest expense during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increases of $1.5 million in salaries and benefits and $477 thousand in data processing expense, partially offset by a $76 thousand decrease in operations expense, a $197 thousand decrease in regulatory assessments and a $139 thousand decrease in occupancy expense.

Salaries and benefits increased primarily due to discretionary bonuses paid for added efforts associated with the Company's COVID-19 response, higher wages, lower deferred compensation and higher medical expenses during 2021 as compared to 2020.

Data processing expense increased due to technology investments and variable costs associated with increased loan originations.

Operations expense decreased primarily due to lower loan expenses and office operations, and regulatory assessments decreased as the nine months ended September 30, 2020 included regulatory examination costs.

Occupancy expense decreased due to the closure of one branch location in June 2020.

The efficiency ratio for the quarter ended September 30, 2021 was 64.81%, compared to 63.36% for the quarter ended September 30, 2020, and was 65.83% for the nine months ended September 30, 2021, compared to 68.51% for the nine months ended September 30, 2020.

The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense, partially offset by slightly higher revenues.

The improvement in the efficiency ratio for the nine months ended September 30, 2021 was primarily due to higher revenues, partially offset by higher noninterest expense.

The increase in noninterest expense during the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to an increase in salaries and benefits of $523 thousand as a result of higher wages and incentive compensation, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in first quarter of 2022 as compared to the same period in 2021.

Operations expense also increased $108 thousand due to increases in various accounts including marketing expenses, office related expenses, and professional fees.

The efficiency ratio for the quarter ended March 31, 2022 was 74.77%, compared to 66.69% for the quarter ended March 31, 2021.

The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense and lower revenues.

Income Tax Expense .

We incurred income tax expense of $663 thousand and $1.9 million for the three and nine months ended September 30, 2021, respectively, as compared $588 thousand and $1.4 million for the same periods in 2020.

The effective tax rates for the three and nine months ended September 30, 2021 were 20.37% and 20.36%, respectively.

The effective tax rates for the three and nine months ended September 30, 2020 were 20.12% and 20.34%, respectively.

Liquidity and Capital Resources

Income tax expense declined to $458 thousand from $627 thousand for the three months ended March 31, 2022 and March 31, 2021, respectively, primarily due to lower pre-tax income.

The effective tax rate for both the three months ended March 31, 2022 and 2021 was 21.0% and 20.4%.

Capital and Liquidity

The Management Discussion and Analysis in Item 7 of the Company’s 2021 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows.

This discussion updates that disclosure for the nine months ended September 30, 2021.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and borrowings.

While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank’s primary investing activity is loan originations.

The Bank maintains liquidity levels it believes to be adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments.

At September 30, 2021, the Bank had $213.8 million in cash and investment securities available-for-sale and $3.9 million in loans held-for-sale generally available for its cash needs.

Also, at September 30, 2021, the Bank had the ability to borrow an additional $121.6 million in FHLB advances based on existing collateral pledged, and could access $22.6 million through the Federal Reserve’s Discount Window.

At September 30, 2021, we also had available a total of $20.0 million in credit facilities with other financial institutions, with no balance outstanding.

The Bank uses these sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals and loan commitments.

At September 30, 2021, outstanding loan commitments totaled $84.5 million, including unused lines and letters of credit of $34.5 million and undisbursed construction and land loans of $43.1 million.

Certificates of deposit scheduled to mature in one year or less at September 30, 2021, totaled $57.8 million.

Cash and cash equivalents increased $12.9 million to $206.7 million as of September 30, 2021, from $193.8 million as of December 31, 2020.

Net cash provided by operating activities was $12.0 million for the nine months ended September 30, 2021.

Net cash used in investing activities totaled $57.6 million during the nine months ended September 30, 2021 and consisted primarily of increases in loans and the purchase of BOLI, partially offset by principal payments on and maturities of investment securities.

The $58.4 million of net cash provided by financing activities during the nine months ended September 30, 2021 primarily was the result of a $59.7 million net increase in deposits, partially offset by the payment of $1.6 million of dividends on our common stock.

At September 30, 2021, the Company, on an unconsolidated basis, had $4.6 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

The Company’s principal source of liquidity is dividends and ESOP loan repayments from the Bank.

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company.

As long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), as discussed below, and operates in a safe and sound manner, it is management's belief that its banking regulators will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements.

These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks.

These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

A summary of our off-balance sheet loan commitments at September 30, 2021, is as follows (in thousands):

September 30, 2021

Commitments to make loans $ 6,774

This discussion updates that disclosure for the three months ended March 31, 2022.

Shareholders’ equity totaled $93.9 million at March 31, 2022 and $93.4 million at December 31, 2021.

In addition to net income of $1.7 million, other sources of capital during the three months ended March 31, 2022 included $43 thousand in proceeds from stock option exercises and $203 thousand related to stock-based compensation.

Uses of capital during the three months ended March 31, 2022 included $709 thousand of dividends paid on common stock, other comprehensive loss, net of tax, of $608 thousand and $160 thousand of stock repurchases.

We paid regular quarterly dividends of $0.17 per common share and a special dividend of $0.10 per common share during the three months ended March 31, 2022 and 2021, which equates to a dividend payout ratio of 41.15% in 2022 and 28.64% in 2021.

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.

Assuming continued payment of the regular quarterly cash dividend during the remainder of 2022 at this rate of $0.17 per share, our average total dividend paid each quarter would be approximately $445 thousand based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

The dividends, if any, we may pay may be limited as more fully discussed under “Business—How We Are Regulated—Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2021 Form 10-K.

Stock Repurchase Plans.

From time to time, our board of directors has authorized stock repurchase plans.

In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders.

Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

The Company’s current stock repurchase program authorizes the Company to repurchase, during the period ending October 29, 2022, up to $2.0 million of the Company’s outstanding shares in the open market, based on prevailing market prices, or in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.

The timing, volume and price of purchases are made at our discretion, and are contingent upon our overall financial condition, as well as general market conditions.

As of May 6, 2022, approximately $1.5 million of our common stock remains available for repurchase under this program.

See “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Item 2, Part II of this Form 10-Q for additional information relating to stock repurchases.

Liquidity measures the ability to meet current and future cash flow needs as they become due.

The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities.

The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.

The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost.

We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.

Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.

Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future.

Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold.

Liability liquidity generally is provided by access to funding sources which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate.

Liquidity risk management is an important element in our asset/liability management process.

We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.

As of March 31, 2022, we had $207.3 million in cash and available-for-sale investment securities and $1.3 million in loans held-for-sale.

At March 31, 2022, we had the ability to borrow $95.8 million in FHLB advances and access to additional borrowings of $20.5 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had no outstanding advances or borrowings with the FHLB or Federal Reserve at March 31, 2022.

In addition, we also had available $20.0 million of credit facilities with PCBB, with no balance outstanding at March 31, 2022.

Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

As of March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

For additional details, see “Note 8—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in "Item 1.

Financial Statements and Supplementary Data" of this Form 10-Q.

In the ordinary course of business, we have entered into contractual obligations and have made other commitments to make future payments.

Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of March 31, 2022.

These include payments related to (i) long-term borrowings (Note 8—Borrowings, FHLB Stock and Subordinated Notes) and (ii) operating leases (Note 11—Leases).

Refer to the Financial Condition discussion within this Item 2 for the expected timing of such payments as of March 31, 2022 related to time deposits with stated maturity dates and the discussion below for commitments to extend credit and standby letters of credit.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients.

These financial instruments generally represent a commitment to extend credit in the form of loans.

The instruments involve, to varying degrees, elements of credit- and interest-rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments.

The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established by the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

These commitments are not reflected in the consolidated financial statements.

The Company evaluates each client's creditworthiness on a case-by-case basis.

The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the client.

Financial instruments whose contract amount represents credit risk were as follow (in thousands):

March 31, 2022 December 31, 2021

Residential mortgage commitments $ 10,248 $ 6,663

Unfunded construction commitments 90,619 89,797

2 unchanged sentences

Total loan commitments $ 138,673 $ 131,647

Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity.

In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses.

Sound Financial Bancorp is a holding company and does not conduct operations;

its sources of liquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources.

Banking regulations may limit the dividends that may be paid to us by Sound Community Bank.

See, “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2021 Form 10-K.

At March 31, 2022 Sound Financial Bancorp, on an unconsolidated basis, had $3.1 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

See also the "Consolidated Statements of Cash Flows" included in “Item 1.

Financial Statements and Supplementary Data” of this Form 10-Q, for further information.

Regulatory Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action (“PCA”).

Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework.

As of September 30, 2021, the Bank and Company’s CBLR was 10.56% and 9.80%, respectively, which exceeded the minimum requirements.

Qualifying institutions that elect to use the Community Bank Leverage Ratio, or CBLR, framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework.

As of March 31, 2022, the Bank and Company’s CBLR was 10.96% and 10.05%, respectively, which exceeded the minimum requirements.

See "Part I, Item 1.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis