What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-12 · 164 added, 153 removed, 369 unchanged (46% 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:

• 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;

• 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, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses to the novel coronavirus disease 2019 (“COVID-19”) pandemic, including the possibility of new COVID-19 variants;

• changes in consumer spending, borrowing and savings habits;

• changes in economic conditions, either nationally or in our market area, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions;

• the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of our allowance for loan losses;

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• 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;

• legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other

governmental initiatives affecting the financial services industry and the availability of resources to address such changes;

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

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• our ability to pay dividends on our common stock;

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

• the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;

• the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

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

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

At June 30, 2022, Sound Financial Bancorp, on a consolidated basis, had assets of $937.0 million, net loans held-for-portfolio of $799.0 million, deposits of $786.0 million and stockholders’ equity of $93.1 million.

At September 30, 2022, Sound Financial Bancorp, on a consolidated basis, had assets of $982.2 million, net loans held-for-portfolio of $844.0 million, deposits of $815.4 million and stockholders’ equity of $95.0 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.

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Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.

Management believes that its critical accounting policies include determining the allowance for loan losses, accounting for other-than-temporary impairment of securities, accounting for mortgage servicing rights, accounting for other real estate owned and accounting for deferred income taxes.

real estate owned and accounting for deferred income taxes.

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2021 Form 10-K

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Total assets increased $17.3 million, or 1.9%, to $937.0 million at June 30, 2022 from $919.7 million at December 31, 2021.

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

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total assets increased $62.6 million, or 6.8%, to $982.2 million at September 30, 2022 from $919.7 million at December 31, 2021.

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

Cash and Securities.

Cash and cash equivalents decreased $103.5 million, or 56.4%, to $80.1 million at June 30, 2022 from $183.6 million at December 31, 2021, primarily due to the redeployment of excess liquidity into higher earning loans and investments.

Investment securities increased $3.2 million, or 37.7%, to $11.6 million at June 30, 2022, compared to $8.4 million at December 31, 2021.

Held-to-maturity securities totaled $2.2 million at June 30, 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 $9.4 million at June 30, 2022, compared to $8.4 million at December 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 $118.9 million, or 17.5%, to $799.0 million at June 30, 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, as well as United States Department of Agriculture guaranteed loan purchases.

Cash and cash equivalents decreased $107.5 million, or 58.6%, to $76.1 million at September 30, 2022 from $183.6 million at December 31, 2021, primarily due to deploying cash earning a nominal yield into higher interest-earning loans and investments securities.

Investment securities increased $4.2 million, or 49.7%, to $12.6 million at September 30, 2022, compared to $8.4 million at December 31, 2021.

Held-to-maturity securities totaled $2.2 million at September 30, 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 $10.4 million at September 30, 2022, compared to $8.4 million at December 31, 2021.

The increase in available-for-sale securities was primarily due the purchase of $4.4 million in treasury bills, municipal bonds and agency mortgage-backed securities, partially offset by regularly scheduled payments and maturities.

Loans held-for-portfolio, net, increased $163.9 million, or 24.1%, to $844.0 million at September 30, 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 forgiveness by the U.S.

Small Business Administration (“SBA”) of loans originated under the Paycheck Protection Program (“PPP”).

The following table reflects the changes in the loan mix of our loan portfolio at June 30, 2022, as compared to December 31, 2021 (dollars in thousands):

The following table reflects the changes in the loan mix of our loan portfolio at September 30, 2022, as compared to December 31, 2021 (dollars in thousands):

September 30,

2022 December 31,

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Total loans held-for-portfolio, net $ 843,958 $ 680,092 $ 163,866 24.1 %

The increase in one-to-four family loans was driven primarily by the origination of $38.4 million in conforming and non-conforming jumbo loans during the first half of 2022 and the origination of $26.9 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 the origination of new commercial construction loans.

The increase in one-to-four family loans was driven primarily by the origination of $57.8 million in jumbo loans during 2022 and the origination of $33.4 million of conforming and non-conforming conventional loans in our portfolio.

The increase in commercial and multifamily loans during the period was primarily due to the origination of $45.7 million of multifamily loans and $30.2 million of commercial non-owner occupied loans.

The increase in construction and land loans during the period was primarily due to the origination and advances of new commercial construction loans.

These increases were partially offset by payoffs and paydowns during the period.

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

At June 30, 2022, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 38.1% of total loans, one-to-four family loans, including home equity loans accounted for 33.0% of total loans, commercial business loans accounted for 3.0% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 13.4% of total loans at June 30, 2022.

Construction and land loans accounted for 12.6% of total loans at June 30, 2022.

Loans held-for-sale totaled $100 thousand at June 30, 2022, compared to $3.1 million at December 31, 2021.

At September 30, 2022, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 37.0% of total loans, one-to-four family loans, including home equity loans accounted for 33.7% of total loans, commercial business loans accounted for 2.8% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 13.4% of total loans at September 30, 2022.

Construction and land loans accounted for 13.2% of total loans at September 30, 2022.

Loans held-for-sale totaled $1.9 million at September 30, 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.

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The allowance for loan losses is maintained to cover losses that are probable and can be estimated

on the date of evaluation in accordance with generally accepted accounting principles in the United States.

on the date of evaluation in accordance with generally accepted acco unting principles in the United States.

It is our best estimate of probable credit losses inherent in our loan portfolio.

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

Three Months Ended June 30, Six Months Ended June 30,

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

2022 2021 2022 2021

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Recoveries 3 3 130 15

Net recoveries (charge-offs) 110 (28) 86 (93)

Net (charge-offs) recoveries (3) (5) 82 (98)

Provision for loan losses during the period 375 175 1,101 425

Balance at end of period $ 7,489 $ 6,327 $ 7,489 $ 6,327

Our allowance for loan losses increased $811 thousand, or 12.9%, to $7.1 million at June 30, 2022, from $6.3 million at December 31, 2021.

Specific loan loss reserves decreased to $241 thousand at June 30, 2022, compared to $293 thousand at December 31, 2021, while general loan loss reserves increased to $6.3 million at June 30, 2022, compared to $5.6 million at December 31, 2021, and the unallocated reserve increased to $605 thousand at June 30, 2022, compared to $395 thousand at December 31, 2021.

The increase in general loss reserves and the unallocated reserve was primarily a result of the increase in the loan portfolio at June 30, 2022.

Net recoveries for the three and six months ended June 30, 2022 totaled $110 thousand and $86 thousand, compared to net charge-offs of $28 thousand and $93 thousand for the three and six months ended June 30, 2021, respectively.

At June 30, 2022, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.88% and 157.85%, compared to 0.92% and 113.58%, at December 31, 2021, respectively.

See “Comparison of Results of Operations for the Three and Six Months Ended June 30, 2022 and 2021 — Provision for Loan Losses.”

Our allowance for loan losses increased $1.2 million, or 18.8%, to $7.5 million at September 30, 2022, from $6.3 million at December 31, 2021.

Specific loan loss reserves decreased to $239 thousand at September 30, 2022, compared to $293 thousand at December 31, 2021, while general loan loss reserves increased to $6.6 million at September 30, 2022, compared to $5.6 million at December 31, 2021, and the unallocated reserve increased to $653 thousand at September 30, 2022, compared to $395 thousand at December 31, 2021.

The increase in general loss reserves and the unallocated reserve was primarily a result of the increase in the loan portfolio at September 30, 2022.

Net charge-offs for the three months ended September 30, 2022 totaled $3 thousand and net recoveries totaled $82 thousand for the nine months ended September 30, 2022, compared to net charge-offs of $5 thousand and $98 thousand for the three and nine months ended September 30, 2021, respectively.

At September 30, 2022, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.88% and 301.24%, compared to 0.92% and 113.58%, at December 31, 2021, respectively.

See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 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.

September 30,

2022 December 31,

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Total nonaccrual loans 2,486 5,552

Three Months Ended June 30, Six Months Ended June 30,

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

2022 2021 2022 2021

4 unchanged sentences

Net recoveries (charge-offs)

45 (15) 45 (76)

Average loans outstanding

2 unchanged sentences

Net recoveries (charge-offs)

57 (6) 58 (6)

Average loans outstanding

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— % — % 0.01 % (0.02) %

Net recoveries (charge-offs)

Net (charge-offs) recoveries

(3) (5) 82 (98)

2 unchanged sentences

Nonperforming Assets.

At June 30, 2022, nonperforming assets, which are comprised of nonaccrual loans including nonperforming troubled debt restructurings (“TDRs”), and other real estate owned (“OREO”), totaled $5.2 million, or 0.55% of total assets, compared to $6.2 million, or 0.68% of total assets at December 31, 2021.

At September 30, 2022, nonperforming assets, which are comprised of nonaccrual loans including nonperforming troubled debt restructurings (“TDRs”), and other real estate owned (“OREO”), totaled $3.1 million, or 0.32% 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,

2022 December 31,

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Total nonperforming assets $ 3,145 $ 6,211 $ (3,066) (49.4) %

Nonperforming loans, which are comprised of nonaccrual loans and nonperforming TDRs, decreased $1.0 million, or 18.8%, to $4.5 million at June 30, 2022 from $5.6 million at December 31, 2021.

The decrease in nonperforming loans primarily was due to decreases in nonperforming one-to-four family loans, floating homes and commercial business loans, partially offset by an increase in nonperforming other consumer loans.

The percentage of nonperforming loans to total loans was 0.56% at June 30, 2022, compared to 0.81% of total loans at December 31, 2021.

Loans classified as TDRs totaled $2.0 million and $2.6 million at June 30, 2022 and December 31, 2021, of which $128 thousand and $422 thousand were nonperforming pursuant to their contractual repayment terms at those dates, respectively.

Nonperforming loans, which are comprised of nonaccrual loans and nonperforming TDRs, decreased $3.1 million, or 55.2%, to $2.5 million at September 30, 2022 from $5.6 million at December 31, 2021.

The decrease in nonperforming loans primarily was due to the payoff of a $2.3 million nonperforming multifamily loan during the three months ended September 30, 2022.The percentage of nonperforming loans to total loans was 0.29% at September 30, 2022, compared to 0.81% of total loans at December 31, 2021.

Loans classified as TDRs totaled $2.0 million and $2.6 million at September 30, 2022 and December 31, 2021, of which $108 thousand and $422 thousand were nonperforming pursuant to their contractual repayment terms at those dates, respectively.

Mortgage Servicing Rights.

The fair value of mortgage servicing rights was $4.8 million at June 30, 2022, an increase of $481 thousand, or 11.3%, from $4.3 million at December 31, 2021.

The fair value of mortgage servicing rights was $4.8 million at September 30, 2022, an increase of $514 thousand, or 12.0%, 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.

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Deposits and Borrowings.

Total deposits decreased $12.3 million, or 1.5%, to $786.0 million at June 30, 2022 from $798.3 million at December 31, 2021.

The decrease was primarily a result of managed run-off of public funds.

Noninterest-bearing deposits decreased $3.9 million, or 2.0%, to $186.6 million at June 30, 2022, compared to $190.5 million at December 31, 2021.

Noninterest-bearing deposits represented 23.7% of total deposits at June 30, 2022, compared to 23.9% at December 31, 2021.

Total deposits increased $17.1 million, or 2.1%, to $815.4 million at September 30, 2022 from $798.3 million at December 31, 2021.

The increase was primarily a result of an increase in certificate accounts.

The increase in our certificate accounts was primarily used to fund organic loan growth.

Noninterest-bearing deposits increased $1.8 million, or 0.9%, to $192.3 million at September 30, 2022, compared to $190.5 million at December 31, 2021.

Noninterest-bearing deposits represented 23.6% of total deposits at September 30, 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):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Rate Amount Wtd.

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

Scheduled maturities of time deposits at June 30, 2022, are as follows (in thousands):

Scheduled maturities of time deposits at September 30, 2022, are as follows (in thousands):

Year Ending December 31, Amount

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Certificates of deposit have maturities of five years or less.

The aggregate amount of time deposits in denominations of more than $250,000 at June 30, 2022 and December 31, 2021, totaled $17.5 million and $19.1 million, respectively.

The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2022 and December 31, 2021, totaled $37.3 million and $19.1 million, respectively.

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

Borrowings comprised of FHLB advances increased $30.0 million at June 30, 2022 from zero at December 31, 2021, primarily due to funds needed to support loan growth.

Subordinated notes, net totaled $11.7 million and $11.6 million at June 30, 2022 and December 31, 2021.

Borrowings comprised of FHLB advances increased $44.5 million at September 30, 2022 from zero at December 31, 2021, primarily to support loan growth.

Subordinated notes, net totaled $11.7 million and $11.6 million at September 30, 2022 and December 31, 2021.

Stockholders’ Equity.

Total stockholders’ equity decreased $301 thousand, or 0.3%, to $93.1 million at June 30, 2022, from $93.4 million at December 31, 2021.

This decrease primarily reflects the payment of cash dividends of $1.2 million to common stockholders, repurchases of common stock of $1.7 million, and an unrealized loss, net of tax, of $1.1 million on our available-for-sale securities as a result of declining market values related to increases in market interest rates, offset by $3.3 million in net income for the six months ended June 30, 2022.

Total stockholders’ equity increased $1.6 million, or 1.7%, to $95.0 million at September 30, 2022, from $93.4 million at December 31, 2021.

This increase primarily reflects $5.9 million in net income for the nine months ended September 30, 2022 and $384 thousand related to stock-based compensation, partially offset by the payment of cash dividends of $1.6 million to common stockholders, repurchases of common stock of $1.7 million, and an unrealized loss, net of tax, of $1.4 million on our available-for-sale securities as a result of declining fair market values related to increases in market interest rates this year.

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

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.

The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.

Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis.

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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 June 30,

Three Months Ended September 30,

Balance Interest

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Average interest-earning assets to average interest-bearing liabilities 138.22 % 138.47 %

Noninterest-bearing deposits $ 189,379 $ 182,503

Total deposits 798,302 730 0.36 % 808,697 617 0.30 %

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

Six Months Ended June 30,

Nine Months Ended September 30,

Balance Interest

19 unchanged sentences

Average interest-earning assets to average interest-bearing liabilities 140.41 % 137.35 %

Noninterest-bearing deposits $ 192,240 $ 174,486

Total deposits 800,823 1,571 0.26 % 798,384 2,807 0.47 %

1 unchanged sentence

828,934 2,368 0.38 % 809,991 3,311 0.55 %

(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.

Rate/Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.

The following table presents, for the periods indicated, the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.

It distinguishes between changes related to outstanding balances and changes due to interest rates.

1 unchanged sentence

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 June 30, 2022 vs.

Six Months Ended June 30, 2022 vs.

Three Months Ended September 30, 2022 vs.

Nine Months Ended September 30, 2022 vs.

Increase (Decrease) due to Total

14 unchanged sentences

Change in net interest income $ 1,280 $ 3,401

Comparison of Results of Operation for the Three and Six Months Ended June 30, 2022 and 2021

Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2022 and 2021

Q3 2022 vs Q3 2021 .

Net income decreased $637 thousand, or 28.3%, to $1.6 million, or $0.61 per diluted common share, for the three months ended June 30, 2022, compared to $2.3 million, or $0.85 per diluted common share, for the three months ended June 30, 2021.

Net income decreased $46 thousand, or 1.8%, to $2.5 million, or $0.97 per diluted common share, for the three months ended September 30, 2022, compared to $2.6 million, or $0.98 per diluted common share, for the three months ended September 30, 2021.

The decrease was primarily the result of a $405 thousand decrease in noninterest income, a $718 thousand increase in noninterest expense, and a $200 thousand increase in the provision for loan losses, partially offset by a $1.3 million increase in net interest income.

Net income decreased $1.4 million, or 29.1%, to $3.3 million, or $1.26 per diluted common share, for the six months ended June 30, 2022, compared to $4.7 million, or $1.78 per diluted common share, for the six months ended June 30, 2021.

Net income decreased $1.4 million, or 19.4%, to $5.9 million, or $2.23 per diluted common share, for the nine months ended September 30, 2022, compared to $7.3 million, or $2.76 per diluted common share, for the nine months ended September 30, 2021.

The decrease was primarily a result of a $2.3 million decrease in noninterest income, a $2.2 million increase in noninterest expense and a $676 thousand increase in the provision for loan losses, partially offset by a $3.4 million increase in net interest income.

1 unchanged sentence

Q3 2022 vs Q3 2021 .

Interest income increased $571 thousand, or 6.8%, to $9.0 million for the three months ended June 30, 2022, from $8.4 million for the three months ended June 30, 2021, primarily due to higher average loan balances and a 66 basis point increase in the average yield earned on investments and cash balances, partially offset by a 60 basis point decline in the average loan yield and lower average investment and cash balances and the rising interest rate environment.

Interest income on loans increased $398 thousand, or 4.8%, to $8.7 million for the three months ended June 30, 2022, compared to $8.3 million for the three months ended June 30, 2021.

The average balance of total loans was $741.6 million for the three months ended June 30, 2022, compared to $628.1 million for the three months ended June 30, 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 4.70% for three months ended June 30, 2022, compared to 5.30% for the three months ended June 30, 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 quarter and new originations at lower rates, primarily related to fixed rate mortgage loans.

Interest income included $40 thousand in fees earned related to PPP loans in the three months ended June 30, 2022, compared to $1.0 million in the same quarter a year ago.

For the three months ended June 30, 2022, the average balance of PPP loans was $1.2 million and the average yield on PPP loans was 13.38%, including the recognition of the net deferred fees, with a positive impact on loan yield of one basis point.

For the three months ended June 30, 2021, the average balance of PPP loans was $60.0 million and the average yield on PPP loans was 6.68%, including the recognition of deferred fees, with a positive impact on loan yield of 15 basis points.

At June 30, 2022, PPP deferred loan origination fees of $23 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 $173 thousand, or 149.1%, to $289 thousand for the three months ended June 30, 2022, compared to $116 thousand for the three months ended June 30, 2021.

Interest income increased $1.7 million, or 18.4%, to $10.8 million for the three months ended September 30, 2022, from $9.1 million for the three months ended September 30, 2021, primarily due to higher average loan balances and a 177 basis point increase in average yield on investments and interest-bearing cash, partially offset by a 54 basis point decline in the average loan yield and a lower average balance of investments and interest-bearing cash.

Interest income on loans increased $1.4 million, or 15.2%, to $10.3 million for the three months ended September 30, 2022, compared to $9.0 million for the three months ended September 30, 2021.

The average balance of total loans was $833.2 million for the three months ended September 30, 2022, compared to $652.3 million for the three months ended September 30, 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 4.92% for three months ended September 30, 2022, compared to 5.45% for the three months ended September 30, 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 quarter.

Interest income included $24 thousand in fees earned related to PPP loans in the three months ended September 30, 2022, compared to $1.1 million in the same quarter a year ago.

For the three months ended September 30, 2022, the average balance of PPP loans was $157 thousand and the average yield on PPP loans was 60.68%, including the recognition of the net deferred fees, with a positive impact on loan yield of one basis point.

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

deferred fees, with a positive impact on loan yield of 51 basis points.

At September 30, 2022, no PPP deferred loan origination fees remain to be accreted into interest income.

Interest income on the investment portfolio and cash and cash equivalents increased $314 thousand, or 232.6%, to $449 thousand for the three months ended September 30, 2022, compared to $135 thousand for the three months ended September 30, 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 $136.7 million for the three months ended June 30, 2022, compared to $249.9 million for the three months ended June 30, 2021.

The average balance on investments and cash and cash equivalents was $88.8 million for the three months ended September 30, 2022, compared to $230.9 million for the three months ended September 30, 2021.

The decrease in average balances was due to lower average cash balances as we redeployed funds into higher interest-earning assets, specifically loans and, to a lesser extent, investment securities.

The average yield on investments and cash and cash equivalents increased to 0.85% for the three months ended June 30, 2022, compared to 0.19% for the three months ended June 30, 2021, as a result of the rising interest rate environment and the increase in the average balance of our investment securities portfolio.

Interest income increased $786 thousand, or 4.8%, to $17.2 million for the six months ended June 30, 2022, from $16.4 million for the six months ended June 30, 2021.

The average yield on investments and cash and cash equivalents increased to 2.01% for the three months ended September 30, 2022, compared to 0.23% for the three months ended September 30, 2021, as a result of the rising interest rate environment and the increase in the average balance of our investment securities portfolio.

Interest income increased $2.5 million, or 9.6%, to $28.0 million for the nine months ended September 30, 2022, from $25.5 million for the nine months ended September 30, 2021.

The increase primarily was due to higher average loan balances and a 65 basis point increase in the average yield earned on investments and cash balances, partially offset by a 49 basis point decline in the average loan yield and lower average investment and cash balances.

Interest income on loans increased $588 thousand, or 3.6%, to $16.8 million for the six months ended June 30, 2022, compared to $16.2 million for the six months ended June 30, 2021, driven by higher average total loans, partially offset a 48 basis points decline in the average yield on loans.

The average balance of total loans was $718.4 million for the six months ended June 30, 2022, compared to $628.3 million for the six months ended June 30, 2021.

The average yield on total loans was 4.71% for the six months ended June 30, 2022, compared to 5.19% for the six months ended June 30, 2021.

For the six months ended June 30, 2022, the average balance of PPP loans was $2.1 million and the average yield on PPP loans was 11.70%, including the

recognition of the net deferred fees, with a positive impact on average loan yield of two basis points.

For the six months ended June 30, 2021, the average balance of PPP loans was $57.0 million and the average yield on PPP loans was 6.21%, including the recognition of deferred fees, with a positive impact on average loan yield of 10 basis points.

Interest income included $124 thousand in fees earned related to PPP loans in the six months ended June 30, 2022, compared to $1.8 million in the same period a year ago.

Interest income on the investment portfolio and cash and cash equivalents increased $198 thousand, or 86.5%, to $427 thousand for the six months ended June 30, 2022, compared to $229 thousand for the six months ended June 30, 2021.

Interest income on loans increased $1.9 million, or 7.7%, to $27.1 million for the nine months ended September 30, 2022, compared to $25.2 million for the nine months ended September 30, 2021, driven by higher average total loans, partially offset a 49 basis points decline in the average yield on loans.

The average balance of total loans was $757.1 million for the nine months ended September 30, 2022, compared to $636.4 million for the nine months ended September 30, 2021.

The average yield on total loans was 4.79% for the nine months ended September 30, 2022, compared to 5.28% for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, the average balance of PPP loans was $1.5 million and the average yield on PPP loans was 12.83%, including the recognition of the net deferred fees, with a positive impact on average loan yield of two basis points.

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 deferred fees, with a positive impact on average loan yield of 24 basis points.

Interest income included $141 thousand in fees earned related to PPP loans in the nine months ended September 30, 2022, compared to $2.8 million in the same period a year ago.

Interest income on the investment portfolio and cash and cash equivalents increased $511 thousand, or 140.0%, to $876 thousand for the nine months ended September 30, 2022, compared to $365 thousand for the nine months ended September 30, 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 yield on investments and cash and cash equivalents was 0.53% for the six months ended June 30, 2022, compared to 0.19% for the six months ended June 30, 2021, primarily due to the deployment of cash balances into higher-yielding investment balances.

The average yield on investments and cash and cash equivalents was 0.86% for the nine months ended September 30, 2022, compared to 0.21% for the nine months ended September 30, 2021, primarily due to the deployment of cash balances into higher-yielding investment balances.

Interest Expense

Q3 2022 vs Q3 2021 .

Interest expense decreased $470 thousand, or 44.2%, to $594 thousand for the three months ended June 30, 2022, from $1.1 million for the three months ended June 30, 2021.

Interest expense on deposits decreased $482 thousand, or 53.8%, to $414 thousand for the three months ended June 30, 2022, compared to $896 thousand for the same period a year ago.

While rates paid on all categories of deposits declined, the decrease primarily was the result of a 51 b asis point decline in rates paid on certificates of deposit and a $78.8 million, or 45.1%, decline in the average balance of certificate accounts.

In addition, total deposit costs were favorably impacted by a $13.2 million increase in the average balance of noninterest bearing deposits to $192.8 million for the three months ended June 30, 2022, compared to $179.6 million for the same period last year.

The increase in the average balance of noninterest bearing deposits contributed to a 24 basis point decrease in the average cost of total deposits to 0.21% for the quarter ended June 30, 2022, from 0.45% for the quarter ended June 30, 2021.

Interest expense on borrowings, comprised solely of FHLB advances, was $12 thousand for the three months ended June 30, 2022, compared to zero for the three months ended June 30, 2021.

Interest expense on subordinated notes was $168 thousand for both the three months ended June 30, 2022 and 2021.

Interest expense decreased $1.3 million, or 52.9%, to $1.2 million for the six months ended June 30, 2022, from $2.5 million for the six months ended June 30, 2021, primarily as a result of declining deposit costs and a higher percentage of noninterest bearing deposits to total deposits.

Interest expense on deposits decreased $1.3 million, or 61.6%, to $841 thousand for the six months ended June 30, 2022, compared to $2.2 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 35 basis points to 0.21% for the six months ended June 30, 2022, from 0.56% for the six months ended June 30, 2021.

Interest expense increased $394 thousand, or 50.2%, to $1.2 million for the three months ended September 30, 2022, from $785 thousand for the three months ended September 30, 2021.

Interest expense on deposits increased $113 thousand, or 18.3%, to $730 thousand for the three months ended September 30, 2022, compared to $617 thousand for the same period a year ago.

The increase was primarily the result of a $46.5 million increase in the average balance of borrowings and higher rates paid on all interest-bearing deposits, partially offset by a $17.3 million decrease in the average balance of interest-bearing deposits.Compared to the same period last year, total deposit costs were negatively impacted by the higher rates paid on deposits and favorably impacted by the $6.9 million increase in the average balance of noninterest bearing deposits from $182.5 million at September 30, 2021.

The increase in the rate paid on certificate accounts contributed to a six basis point increase in the average cost of total deposits to 0.36% for the quarter ended September 30, 2022, from 0.30% for the quarter ended September 30, 2021.

Interest expense on borrowings, comprised solely of FHLB advances, was $281 thousand for the three months ended September 30, 2022, compared to none for the three months ended September 30, 2021, reflecting the increased use of lower cost FHLB advances during the third quarter of 2022 to supplement our liquidity needs.

Interest expense on subordinated notes was $168 thousand for both the three months ended September 30, 2022 and 2021.

Interest expense decreased $943 thousand, or 28.5%, to $2.4 million for the nine months ended September 30, 2022, from $3.3 million for the nine months ended September 30, 2021, primarily as a result of a decline in the average balance of certificate accounts and rates paid on all deposits, partially offset by a lower percentage of noninterest bearing deposits to total deposits and an increase in the average balance of borrowings.

Interest expense on deposits decreased $1.2 million, or 44.0%, to $1.6 million for the nine months ended September 30, 2022, compared to $2.8 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 for the majority of 2022.

The average cost of total deposits decreased 21 basis points to 0.26% for the nine months ended September 30, 2022, from 0.47% for the nine months ended September 30, 2021.

Net Interest Income.

Q3 2022 vs Q3 2021 .

Net interest income increased $1.0 million, or 14.2%, to $8.4 million for the three months ended June 30, 2022, from $7.4 million for the three months ended June 30, 2021.

Our net interest margin was 3.83% and 3.36% for the three months ended June 30, 2022 and 2021, respectively.

The increase in net interest income primarily was the result of lower interest expense paid on deposits and, higher interest income earned on loans, investments and interest-bearing cash.

During the second 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 one basis point, compared to a positive impact of 24 basis points during the quarter ended June 30, 2021.

Net interest income increased $2.1 million, or 15.3%, to $16.0 million for the six months ended June 30, 2022, from $13.9 million for the six months ended June 30, 2021.

Our net interest margin was 3.67% and 3.23% for the six months ended June 30, 2022 and 2021, respectively.

Net interest income increased $1.3 million, or 15.4%, to $9.6 million for the three months ended September 30, 2022, from $8.3 million for the three months ended September 30, 2021.

Our net interest margin was 4.13% and 3.74% for the three months ended September 30, 2022 and 2021, respectively.

The increase in net interest income primarily was the result of higher interest income earned on loans, investments and interest-bearing cash, partially offset by higher interest expense paid on deposits and borrowings.

The increase in net interest margin primarily was due to the higher interest income earned on interest-earning assets, driven by the higher average balance of loans and the higher average yield earned on investments and interest-bearing cash, partially offset by lower recognition of net deferred fees related to PPP loan repayments from SBA loan forgiveness, the increase in rates paid on interest-bearing liabilities and the higher average balance of borrowings.

During the third 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 one basis point, compared to a positive impact of 41 basis points during the quarter ended September 30, 2021.

Net interest income increased $3.4 million, or 15.3%, to $25.6 million for the nine months ended September 30, 2022, from $22.2 million for the nine months ended September 30, 2021.

Our net interest margin was 3.83% and 3.40% for the nine months ended September 30, 2022 and 2021, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits, higher average interest-earning assets balances, partially offset by a decline in the average loan yield.

The increase in net interest margin primarily was due to average yields earned on interest-earning assets increasing coupled with the declines in average interest rates paid on interest-bearing liabilities.

During the six months ended June 30, 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 two basis points, compared to a positive impact of 21 basis points for the six months ended June 30, 2021.

During the nine months ended September 30, 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 one basis points, compared to a positive impact of 27 basis points for the nine months ended September 30, 2021.

Since March 2022, in response to inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022.

In November 2022, the FOMC increased the target range for the federal funds rate another 75 basis points to a range of 3.75% to 4.00%.

Provision for Loan Losse s.

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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 $600 thousand and $725 thousand was recorded for the three and six months ended June 30, 2022, compared to $250 thousand and $250 thousand, for the three and six months ended June 30, 2021, respectively.

A provision for loan losses of $375 thousand and $1.1 million was recorded for the three and nine months ended September 30, 2022, compared to $175 thousand and $425 thousand, for the three and nine months ended September 30, 2021, respectively.

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 as balances of lower risk one-to-four family loans and multifamily residential loans increased, thereby reducing the related general loan allowance.

The allowance for loan losses as of June 30, 2022, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of June 30, 2022, but also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Net recoveries for the six months ended June 30, 2022 totaled $86 thousand, compared to net charge-offs of $93 thousand for the six months ended June 30, 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.

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.

The allowance for loan losses as of September 30, 2022, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of September 30, 2022, but also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Net recoveries for the nine months ended September 30, 2022 totaled $82 thousand, compared to net charge-offs of $98 thousand for the nine months ended September 30, 2021.

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses 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.

A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowed economic growth, and any governmental or societal responses to the COVID- 19 pandemic or, among other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

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 $697 thousand, or 40.7%, to $1.0 million for the three months ended June 30, 2022, as compared to $1.7 million for the three months ended June 30, 2021, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Noninterest income decreased $405 thousand, or 28.3%, to $1.0 million for the three months ended September 30, 2022, as compared to $1.4 million for the three months ended September 30, 2021, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

Service charges and fee income $ 604 $ 556 $ 48 8.6 %

(Loss) earnings on cash surrender value of BOLI (35) 96 (131) (136.5)

Earnings on cash surrender value of BOLI 59 104 (45) (43.3)

Mortgage servicing income 306 328 (22) (6.7)

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Total noninterest income $ 1,026 $ 1,431 $ (405) (28.3) %

The decrease in noninterest income during the three months ended June 30, 2022 compared to the same quarter in 2021 primarily was due to a $979 thousand decrease in net gain on sale of loans as a result of a decline in both the amount of loans originated for sale and gross margins earned on loans sold and a $131 thousand decline to a $35 thousand loss on earnings on cash surrender value of BOLI due to the recent higher market interest rates, partially offset by a $351 thousand increase in the fair value adjustment on mortgage servicing rights due primarily from the effects of recent higher market interest rates causing a reduction in prepayment speeds and a $70 thousand increase in service fees and income primarily resulting from higher commercial loan fees and consumer deposit activity fees .

Loans sold during the quarter ended June 30, 2022, totaled $2.9 million, compared to $39.9 million during the quarter ended June 30, 2021.

Noninterest income decreased $1.9 million, or 42.5%, to $2.5 million for the six months ended June 30, 2022, as compared to $4.4 million for the six months ended June 30, 2021, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

The decrease in noninterest income during the three months ended September 30, 2022 compared to the same quarter in 2021 primarily was due to a $520 thousand decrease in net gain on sale of loans as a result of a decline in both the amount of loans originated for sale and gross margins earned on loans sold and a $45 thousand decrease in earnings on cash surrender value of BOLI reflecting recent declines in the securities markets, partially offset by a $134 thousand increase in the fair value adjustment on mortgage servicing rights due primarily from recent higher market interest rates causing a reduction in prepayment speeds and a $48 thousand increase in service fees and income primarily resulting from higher commercial loan fees and consumer deposit activity fees .

Loans sold during the quarter ended September 30, 2022, totaled $2.3 million, compared to $20.3 million during the quarter ended September 30, 2021.

Noninterest income decreased $2.3 million, or 39.0%, to $3.6 million for the nine months ended September 30, 2022, as compared to $5.8 million for the nine months ended September 30, 2021, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

Service charges and fee income $ 1,749 $ 1,615 $ 134 8.3 %

(Loss) earnings on cash surrender value of BOLI (14) 178 (192) (107.9)

Earnings on cash surrender value of BOLI 45 281 (236) (84.0)

Mortgage servicing income 939 961 (22) (2.3)

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Total noninterest income $ 3,564 $ 5,846 $ (2,282) (39.0) %

The decrease in noninterest income during the six months ended June 30, 2022, compared to the same period in 2021 primarily was due to a $2.7 million decrease in net gain on sale of loans, and a $192 thousand decrease in earnings on cash surrender value of BOLI, partially offset by an $894 thousand improvement in the fair value adjustment on mortgage servicing rights for the same reasons as set forth for the three months ended June 30, 2022, discussed above.

Loans sold during the six months ended June 30, 2022, totaled $15.1 million, compared to $108.0 million during the six months ended June 30, 2021.

The decrease in noninterest income during the nine months ended September 30, 2022, compared to the same period in 2021 primarily was due to a $3.2 million decrease in net gain on sale of loans and a $236 thousand decrease in earnings on cash surrender value of BOLI, partially offset by an $1.0 million improvement in the fair value adjustment on mortgage servicing rights and a $134 thousand increase in service fees and fee income for the same reasons as set forth for the three months ended September 30, 2022, discussed above.

Loans sold during the nine months ended September 30, 2022, totaled $17.4 million, compared to $128.3 million during the nine months ended September 30, 2021.

Noninterest Expense.

Noninterest expense increased $796 thousand, or 13.3%, to $6.8 million during the three months ended June 30, 2022, compared to $6.0 million during the three months ended June 30, 2021, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Noninterest expense increased $718 thousand, or 11.4%, to $7.0 million during the three months ended September 30, 2022, compared to $6.3 million during the three months ended September 30, 2021, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

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Total noninterest expense $ 7,036 $ 6,318 $ 718 11.4 %

The increase in noninterest expense during the three months ended June 30, 2022 compared to the same quarter in 2021 primarily was due to an increase in salaries and benefits of $655 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 second quarter of 2022 as compared to the same quarter in 2021.

Operations expense increased $67 thousand due to increases in various accounts including marketing and travel expenses, legal fees associated with higher commercial loan volume, and debit card processing, partially offset by lower loan origination costs due to lower mortgage origination volume.

The efficiency ratio for the quarter ended June 30, 2022 was 72.12%, compared to 66.07% for the quarter ended June 30, 2021.

The weakening in the efficiency ratio for the current quarter compared to the same quarter in the prior year is primarily due to higher noninterest expense related to increased salaries and benefits and lower noninterest income primarily due to lower gain on sale of loans from mortgage banking, partially offset by higher net interest income primarily as a result of a higher average balance of loans held-for-portfolio at higher yields than prior investments and a reduction in the rate paid on interest bearing deposits.

Noninterest expense increased $1.5 million, or 12.1%, to $13.6 million during the six months ended June 30, 2022, compared to $12.2 million during the six months ended June 30, 2021, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

The increase in noninterest expense during the three months ended September 30, 2022 compared to the same quarter in 2021 primarily was due to an increase in salaries and benefits of $532 thousand as a result of upward market pressure on wages and increased medical expenses and lower deferred compensation as a result of a decline in mortgage originations, partially offset by a decrease in incentive compensation as a result of a lower percentage allocated and changes to the incentive compensation programs and lower commission expense related to a decline in mortgage originations.

Operations expense increased $115 thousand compared to the quarter ended September 30, 2021 due to increases in various accounts including marketing and travel expenses, legal fees associated with higher commercial loan volume, and debit card processing, partially offset by lower loan origination costs due to lower mortgage origination volume.

The efficiency ratio for the quarter ended September 30, 2022 was 66.23%, compared to 64.81% for the quarter ended September 30, 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 related to increased salaries and benefits and lower noninterest income primarily due to lower gain on sale of loans from mortgage banking, partially offset by higher net interest income primarily as a result of a higher average balance of loans held-for-portfolio at higher yields than prior investments.

Noninterest expense increased $2.2 million, or 11.8%, to $20.7 million during the nine months ended September 30, 2022, compared to $18.5 million during the nine months ended September 30, 2021, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

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Total noninterest expense $ 20,656 $ 18,468 $ 2,188 11.8 %

The increase in noninterest expense during the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to increases of $1.2 million in salaries and benefits, $176 thousand in operations expense and $77 thousand in data processing expense.

Salaries and benefits increased primarily due to higher wages and incentive compensation, hiring for strategic initiatives, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in the first half of 2022 as compared to the same period in 2021.

The increase in noninterest expense during the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to increases of $1.7 million in salaries and benefits, $290 thousand in operations expense and $118 thousand in data processing expense.

Operations expense increased primarily due to increases in various accounts including marketing expenses, travel related expenses, and professional fees.

Data processing expense increased due to technology investments and contract rate increases.

The efficiency ratio was 73.43% for the six months ended June 30, 2022, compared to 66.38% for the six months ended June 30, 2021.

The weakening in the efficiency ratio for the six months ended June 30, 2022 was primarily due to the increase in noninterest expense outpacing the increase in total revenues as described above.

The efficiency ratio was 70.81% for the nine months ended September 30, 2022, compared to 65.83% for the nine months ended September 30, 2021.

The weakening in the efficiency ratio for the nine months ended September 30, 2022 was primarily due to the increase in noninterest expense outpacing the increase in total revenues as described above.

Income Tax Expense .

We incurred income tax expense of $409 thousand and $867 thousand for the three and six months ended June 30, 2022, compared $574 thousand and $1.2 million for the same periods in 2021, respectively.

The effective tax rates for the three and six months ended June 30, 2022 were 20.22% and 20.63%, respectively.

The effective tax rates for the three and six months ended June 30, 2021 were 20.32% and 20.35%, respectively.

We incurred income tax expense of $666 thousand and $1.5 million for the three and nine months ended September 30, 2022, compared to $663 thousand and $1.9 million for the same periods in 2021, respectively.

The effective tax rates for the three and nine months ended September 30, 2022 were 20.73% and 20.68%, respectively.

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

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 six months ended June 30, 2022.

Shareholders’ equity totaled $93.1 million at June 30, 2022 and $93.4 million at December 31, 2021.

In addition to net income of $3.3 million, other sources of capital during the six months ended June 30, 2022 included $81 thousand in proceeds from stock option exercises and $294 thousand related to stock-based compensation.

Uses of capital during the six months ended June 30, 2022 primarily included $1.2 million of dividends paid on common stock, other comprehensive loss, net of tax, of $1.1 million and $1.7 million 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 six months ended June 30, 2022 and 2021, which equates to a dividend payout ratio of 34.53% in 2022 and 24.44% in 2021.

Although, there have been no material changes in our liquidity management, sources of liquidity and cash flows since our 2021 Form 10-K, this discussion updates that disclosure for the nine months ended September 30, 2022.

Shareholders’ equity totaled $95.0 million at September 30, 2022 and $93.4 million at December 31, 2021.

In addition to net income of $5.9 million, other sources of capital during the nine months ended September 30, 2022 included $195 thousand in proceeds from stock option exercises and $384 thousand related to stock-based compensation.

Uses of capital during the nine months ended September 30, 2022 primarily included $1.6 million of dividends paid on common stock, other comprehensive loss, net of tax, of $1.4 million and $1.7 million 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 nine months ended September 30, 2022 and 2021, which equates to a dividend payout ratio of 27.05% in 2022 and 21.85% 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.

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

As of June 30, 2022, the Company’s existing stock repurchase program authorized it 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.

On July 26, 2022, subsequent to quarter end, the Company announced that its Board of Directors amended its existing stock repurchase program to increase the authorized repurchase amount to $4.0 million effective immediately and to extend the program maturity to January 31, 2023.

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 August 10, 2022, approximately $2.1 million of our common stock remains available for repurchase under this program.

As of September 30, 2022, the Company’s existing stock repurchase program authorized it 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.

On July 26, 2022 the Company announced that its Board of Directors amended its existing stock repurchase program to increase the authorized repurchase amount to $4.0 million effective immediately and to extend the program maturity to January 31, 2023.

The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission, price, general business and market conditions, and alternative investment opportunities.

As of November 9, 2022, approximately $2.1 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.

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

As of June 30, 2022, we had $89.4 million in cash and available-for-sale investment securities and $100 thousand in loans held-for-sale.

At June 30, 2022, we had the ability to borrow $178.5 million in FHLB advances and access to additional borrowings of $21.9 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $30.0 million in outstanding advances with the FHL B and none with the Federal Reserve at June 30, 2022.

We also had a $20.0 million credit facility with PCBB available, with no balance outstanding at June 30, 2022.

As of September 30, 2022, we had $86.5 million in cash and available-for-sale investment securities and $1.9 million in loans held-for-sale.

At September 30, 2022, we had the ability to borrow $180.9 million in FHLB advances and access to additional borrowings of $21.2 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $44.5 million in outstanding advances with the FHL B and none with the Federal Reserve at September 30, 2022.

We also had a $20.0 million credit facility with PCBB available, with no balance outstanding at September 30, 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 June 30, 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.

As of September 30, 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.

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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 June 30, 2022.

Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of September 30, 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).

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Residential mortgage commitments $ 11,261 $ 6,663

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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 June 30, 2022 Sound Financial Bancorp, on an unconsolidated basis, had $1.1 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At September 30, 2022 Sound Financial Bancorp, on an unconsolidated basis, had $2.6 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.

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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 June 30, 2022, the Bank and Company’s CBLR was 11.31% and 10.13%, respectively, which exceeded the minimum requirements.

As of September 30, 2022, the Bank and Company’s CBLR was 10.79% and 9.87%, respectively, which exceeded the minimum requirement of 9%.

See "Part I, Item 1.

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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