What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-14 compared with 2023-08-14 · 171 added, 159 removed, 388 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, 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 supply chain disruptions;

• changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the Federal Reserve) benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;

• the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto;

• the effects of any federal government shutdown;

• changes in consumer spending, borrowing and savings habits;

• 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 credit losses;

• monetary and fiscal policies of the Board of Governors of the Federal Reserve System ("Federal Reserve") and the U.S.

• monetary and fiscal policies of the Federal Reserve and the U.S.

Government and other governmental initiatives affecting the financial services industry;

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• 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;

governmental initiatives affecting the financial services industry 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, the Financial Accounting Standards Board, the U.S.

Securities and Exchange Commission (the “SEC”), or the Public Company Accounting Oversight Board (“PCAOB”);

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

• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on third-party vendors who perform several of our critical processing functions;

• 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;

• the other risks described from time to time in our reports filed with or furnished to the U.S.

Securities and Exchange Commission (the "SEC"), including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”).

We caution readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and could cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance.

• the other risks described from time to time in our reports filed with or furnished to the SEC, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”).

We caution readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance.

We do not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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As a bank holding company, Sound Financial Bancorp is regulated by the Federal Reserve.

We also sell insurance products and services for clients through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank.

We also sell insurance products and services through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank.

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

At June 30, 2023, Sound Financial Bancorp, on a consolidated basis, had assets of $1.01 billion, net loans held-for-portfolio of $847.2 million, deposits of $822.3 million and stockholders’ equity of $99.9 million.

At September 30, 2023, Sound Financial Bancorp, on a consolidated basis, had assets of $1.03 billion, net loans held-for-portfolio of $867.0 million, deposits of $860.9 million and stockholders’ equity of $100.2 million.

The common stock of Sound Financial Bancorp is listed on the 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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Residential loans that do not conform to the underwriting standards of Fannie Mae (“non-conforming”) are held in our loan portfolio.

We originate and retain a significant amount of commercial real estate loans, including those secured by owner-occupied and nonowner-occupied commercial real estate, multifamily properties and mobile home parks, as well as construction and land development loans.

We originate and retain a significant amount of commercial real estate loans, including those secured by owner-occupied and

nonowner-occupied commercial real estate, multifamily properties and mobile home parks, as well as construction and land development loans.

Critical Accounting Estimates

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Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances.

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

Management believes that its critical accounting estimates include determining the allowance for credit 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.

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2022 Form 10-K, except as disclosed in “Note 1 —Basis of Presentation” in the Notes to Condensed Consolidated Financial Statements in this report.

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

Total assets increased $34.4 million, or 3.5%, to $1.01 billion at June 30, 2023 from $976.4 million at December 31, 2022.

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

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total assets increased $53.8 million, or 5.5%, to $1.03 billion at September 30, 2023 from $976.4 million at December 31, 2022.

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

Cash and Securities, and Investment Securities.

Cash and cash equivalents increased $42.3 million, or 73.2%, to $100.2 million at June 30, 2023 from $57.8 million at December 31, 2022, consistent with management’s strategy to increase liquidity in light of the continued volatility in the banking sector.

The increase was primarily from an increase in deposits, primarily certificate and money market accounts, and FHLB advances.

Investment securities decreased $1.8 million, or 14.7%, to $10.6 million at June 30, 2023, compared to $12.4 million at December 31, 2022.

Held-to-maturity securities totaled $2.2 million, both at June 30, 2023 and at December 31, 2022.

Available-for-sale securities totaled $8.4 million at June 30, 2023, compared to $10.2 million at December 31, 2022.

Cash and cash equivalents increased $44.1 million, or 76.2%, to $101.9 million at September 30, 2023 from $57.8 million at December 31, 2022.

The increase was primarily from an increase in deposits, primarily certificate and money market accounts.

Investment securities decreased $2.3 million, or 18.2%, to $10.2 million at September 30, 2023, compared to $12.4 million at December 31, 2022.

Held-to-maturity securities totaled $2.2 million, at both September 30, 2023 and December 31, 2022.

Available-for-sale securities totaled $8.0 million at September 30, 2023, compared to $10.2 million at December 31, 2022.

The decrease in available-for-sale securities was primarily due to the maturity of $1.6 million in treasury bills and regularly scheduled payments and maturities.

Loans held-for-portfolio, net, decreased $11.2 million, or 1.3%, to $847.2 million at June 30, 2023 from $858.4 million at December 31, 2022, driven by declines in commercial and multifamily real estate and floating home loans, partially offset by an increase in manufactured home loans.

The following table reflects the changes in the mix of our loan portfolio at June 30, 2023, as compared to December 31, 2022 (dollars in thousands):

Loans held-for-portfolio, net, increased $8.6 million, or 1.0%, to $867.0 million at September 30, 2023 from $858.4 million at December 31, 2022.

The following table reflects the changes in the mix of our loan portfolio at September 30, 2023, as compared to December 31, 2022 (dollars in thousands):

September 30,

2023 December 31,

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Total loans held-for-portfolio, net $ 866,996 $ 858,382 $ 8,614 1.0 %

The decrease in commercial and multifamily real estate and floating home loans was primarily due to payoffs and paydowns during the period, including the payoff of $10.0 million related to three multifamily loans and $3.7 million related to two floating homes loans.

These decreases were partially offset by the increase in manufactured home loans during the period as a result of high demand.

At June 30, 2023, our loan portfolio, net of deferred loan fees, remained well-diversified.

At that date, commercial and multifamily real estate loans accounted for 35.2% of total loans, one-to-four family loans, including home equity loans, accounted for 34.1% 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 14.0% of total loans.

Construction and land loans accounted for 13.7% of total loans at June 30, 2023.

Loans held-for-sale totaled $1.7 million at June 30, 2023, compared to none at December 31, 2022.

The increase in one-to-four family loans was partially driven by an increase in short-term bridge loans and related party loans, while the increase in home equity loans was primarily driven by homeowners utilizing the equity in their homes.

The increase in manufactured home loans was primarily the result of affordability of these homes in the current market and internal efficiencies in how we process these loans.

The increase in other consumer loans was a result of high demand attributable to successful marketing campaigns.

These increases were partially offset by decreases in commercial and multifamily real estate loans and floating home loans, which were primarily due to payoffs and paydowns, including the payoff of $10.0 million related to three multifamily loans and $3.7 million related to two floating homes loans.

At September 30, 2023, our loan portfolio, net of deferred loan fees, remained well-diversified.

At that date, commercial and multifamily real estate loans

accounted for 34.7% of total loans, one-to-four family loans, including home equity loans, accounted for 34.3% of total loans, commercial business loans accounted for 2.9% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 14.5% of total loans.

Construction and land loans accounted for 13.5% of total loans at September 30, 2023.

Loans held-for-sale totaled $1.2 million at September 30, 2023, compared to none at December 31, 2022.

The increase was primarily due to timing of mortgage originations and sales.

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The following table reflects the adjustments in our allowance for credit losses (“ACL”) 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,

2023 2022 2023 2022

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Net charge-offs (3) (3) (148) 82

(Release of) provision for credit losses (242) 600 3 725

Provision for credit losses 224 375 227 1,101

Balance at end of period 8,438 $ 7,489 $ 8,438 $ 7,489

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Ratio of net charge-offs during the period to average loans outstanding during the period — % — % (0.02) % 0.01 %

Our ACL — loans increased $618 thousand, or 8.1%, to $8.2 million at June 30, 2023, from $7.6 million at December 31, 2022.

The change in the ACL - loans from December 31, 2022 to June 30, 2023 was primarily a result of the adjustment for the adoption of ASU 2016-16.

The provision for credit losses had a minimal impact on the change in the ACL, as a result of the decline in the loan portfolio from the payoff of three large multifamily loans and the completion of construction projects decreasing the ACL - loans, partially offset by construction advances that were outstanding at December 31, 2022 and funded during the six months ended June 30, 2023, thus reducing the reserve for unfunded commitments and increasing the ACL - loans.

See “Comparison of Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022 — Provision for Credit Losses.”

Our ACL — loans increased $839 thousand, or 11.0%, to $8.4 million at September 30, 2023, from $7.6 million at December 31, 2022.

The increase in the ACL - loans from December 31, 2022 to September 30, 2023 was primarily a result of the adjustment for the adoption of ASU 2016-16.

The payoff of three large multifamily loans and the completion of construction projects resulted in a decrease in the ACL - loans, while construction advances that were outstanding at December 31, 2022 and funded during the nine months ended September 30, 2023 reduced the reserve for unfunded commitments and increased the ACL - loans.

Also contributing to the increase in the ACL- loans was an adjustment to our forecast related to the interest rate environment, which was applied to certain loan portfolios and resulted in a larger provision for credit losses.

See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 — Provision for Credit Losses.”

The following tables show certain credit ratios at and for the dates and periods indicated and the components of each ratio's calculation (dollars in thousands).

At June 30, 2023 At December 31, 2022

At September 30, 2023 At December 31, 2022

Allowance for credit losses - loans as a percentage of total loans outstanding 0.96 % 0.88 %

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Total nonaccrual loans $ 1,762 $ 2,959

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

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

2023 2022 2023 2022

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Net recoveries

$ — $ 45 — 45

Average loans outstanding

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Net recoveries

$ — $ 12 — 12

Average loans outstanding

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— % — % — % — %

Net recoveries

Net (charge-offs) recoveries

Average loans outstanding

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Nonperforming Assets.

At June 30, 2023, nonperforming assets, which are comprised of nonaccrual loans and other real estate owned (“OREO”), totaled $2.1 million, or 0.21% of total assets, compared to $3.6 million, or 0.37% of total assets at December 31, 2022.

Nonperforming assets, which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans) and other real estate owned (“OREO”) and repossessed assets, decreased $1.3 million, or 35.4%, to $2.3 million, or 0.23% of total assets, at September 30, 2023 from $3.6 million, or 0.37% of total assets, at December 31, 2022.

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

Nonperforming Assets

September 30,

2023 December 31,

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Total nonperforming assets $ 2,337 $ 3,617 $ (1,280) (35.4) %

Nonperforming assets, which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans) and other real estate owned (“OREO”) and repossessed assets, decreased $1.5 million, or 42.3%, to $2.1 million, or 0.21% of total assets, at June 30, 2023 from $3.6 million, or 0.37% of total assets, at December 31, 2022.

The decrease in nonperforming assets primarily was due to the payoff of $1.5 million in nonperforming one-to-four family loans related to a single borrower and the write-off of one residential property for $84 thousand.

The percentage of nonperforming loans to total loans was 0.18% at June 30, 2023, compared to 0.34% of total loans at December 31, 2022.

The decrease in nonperforming assets primarily was due to the payoff of $1.5 million in nonperforming one-to-four family loans related to a single borrower , a $262 thousand other co nsumer loan, a $296 thousand land loan and the write-off of one residential property for $84 thousand, partially offset by $1.1 million in additions, which included $654 thousand in one-to-four family real estate loans during the same period.

The percentage of nonperforming loans to total loans was 0.20% at September 30, 2023, compared to 0.34% of total loans at December 31, 2022.

Mortgage Servicing Rights.

The fair value of mortgage servicing rights was $4.7 million at June 30, 2023, an increase of $39 thousand, or 0.8%, from $4.7 million at December 31, 2022.

The fair value of mortgage servicing rights was $4.7 million at both September 30, 2023, and December 31, 2022.

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 increased $13.5 million, or 1.7%, to $822.3 million at June 30, 2023 from $808.8 million at December 31, 2022.

The increase was primarily a result of higher balances in certificate and money market accounts, partially offset by lower balances in all other deposit products, largely driven by consumer behavior to move funds from lower rate deposit products into higher rate deposit products.

Noninterest-bearing deposits decreased $14.7 million, or 8.5%, to $158.5 million at June 30, 2023, compared to $173.2 million at December 31, 2022.

Noninterest-bearing deposits represented 19.3% of total deposits at June 30, 2023, compared to 21.4% at December 31, 2022.

Total deposits increased $52.1 million, or 6.4%, to $860.9 million at September 30, 2023 from $808.8 million at December 31, 2022.

The overall increase was largely driven by one new related party depositor relationship for $32.6 million in the current quarter.

We also experienced a shift in deposits to certificate and money market accounts, from demand and savings accounts, largely driven by consumer behavior to move funds from lower rate deposit products into higher rate deposit products.

Noninterest-bearing deposits decreased $19.3 million, or 11.1%, to $153.9 million at September 30, 2023, compared to $173.2 million at December 31, 2022.

Noninterest-bearing deposits represented 17.9% of total deposits at September 30, 2023, compared to 21.4% at December 31, 2022.

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, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Rate Amount Wtd.

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(1) Escrow balances shown in noninterest-bearing deposits on the Condensed Consolidated Balance Sheets.

Scheduled maturities of time deposits at June 30, 2023, are as follows (in thousands):

Scheduled maturities of time deposits at September 30, 2023, 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, 2023 and December 31, 2022, totaled $80.4 million and $56.1 million, respectively.

The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2023 and December 31, 2022, totaled $87.4 million and $56.1 million, respectively.

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

As of June 30, 2023, uninsured deposits totaled $140.0 million, which represented 17.0% of total deposits, as compared to uninsured deposits of $161.9 million, or 20.0% of total deposits as of December 31, 2022.

As of September 30, 2023, uninsured deposits totaled $148.6 million, which represented 17.3% of total deposits, as compared to uninsured deposits of $161.9 million, or 20.0% of total deposits as of December 31, 2022.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

The decrease in uninsured deposits primarily related to the increased customer use of deposit insurance products, such as ICS® (Insured Cash Sweep) and CDARS® (Certificate of Deposit Registry Service), that reduced the level of uninsured deposits following the recent failures of some banks during 2023.

Borrowings, comprised of FHLB advances, increased $17.0 million to $60.0 million at June 30, 2023 from $43.0 million at December 31, 2022, consistent with management’s strategy to maintain higher liquidity levels.

Subordinated notes, net totaled $11.7 million at both June 30, 2023 and December 31, 2022.

Borrowings, comprised of FHLB advances, decreased $3.0 million to $40.0 million at September 30, 2023 from $43.0 million at December 31, 2022.

Subordinated notes, net totaled $11.7 million at both September 30, 2023 and December 31, 2022.

Stockholders’ Equity.

Total stockholders’ equity increased $2.2 million, or 2.3%, to $99.9 million at June 30, 2023, from $97.7 million at December 31, 2022.

This increase primarily reflects $5.1 million of net income earned during the six months ended June 30, 2023 and $303 thousand in proceeds from exercises of stock options, partially offset by $1.2 million in stock repurchases and the cash payment of $936 thousand in dividends to the Company’s stockholders.

Total stockholders’ equity increased $2.5 million, or 2.6%, to $100.2 million at September 30, 2023, from $97.7 million at December 31, 2022.

This increase primarily reflects $6.2 million of net income earned during the nine months ended September 30, 2023 and $320 thousand in proceeds from exercises of stock options, partially offset by $1.4 million in stock repurchases and the cash payment of $1.4 million in dividends to the Company’s stockholders.

In addition, stockholders' equity was negatively impacted by the adoption of CECL in the first quarter of 2023, which as of January 1, 2023, resulted in an after-tax decrease to opening retained earnings of $1.1 million.

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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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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

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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, 2023 vs.

Six Months Ended June 30, 2023 vs.

Three Months Ended September 30, 2023 vs.

Nine Months Ended September 30, 2023 vs.

Increase (Decrease) due to Total

14 unchanged sentences

Change in net interest income $ (1,429) $ 676

Comparison of Results of Operation for the Three and Six Months Ended June 30, 2023 and 2022

Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2023 and 2022

Q3 2023 vs Q3 2022 .

Net income increased $1.3 million, or 79.2%, to $2.9 million, or $1.11 per diluted common share, for the three months ended June 30, 2023, compared to $1.6 million, or $0.61 per diluted common share, for the three months ended June 30, 2022.

The increase was primarily the result of a $352 thousand increase in net interest income, a $923 thousand decrease in the provision for credit losses and a $876 thousand increase in noninterest income, partially offset by a $705 thousand increase in noninterest expense.

Net income increased $1.7 million, or 51.6%, to $5.1 million, or $1.94 per diluted common share, for the six months ended June 30, 2023, compared to $3.3 million, or $1.26 per diluted common share, for the six months ended June 30, 2022.

The increase was primarily a result of a $2.1 million increase in net interest income, a $1.1 million decrease in the provision for credit losses and a $318 thousand increase in noninterest income, partially offset by a $1.5 million increase in noninterest expense.

Net income decreased $1.4 million, or 54.1%, to $1.2 million, or $0.45 per diluted common share, for the three months ended September 30, 2023, compared to $2.5 million, or $0.97 per diluted common share, for the three months ended September 30, 2022.

The decrease was primarily the result of a $1.4 million decrease in net interest income and a $645 thousand increase in noninterest expense, partially offset by a $271 thousand decrease in the provision for credit losses and a $55 thousand increase in noninterest income.

Net income increased $347 thousand, or 5.9%, to $6.2 million, or $2.39 per diluted common share, for the nine months ended September 30, 2023, compared to $5.9 million, or $2.23 per diluted common share, for the nine months ended September 30, 2022.

The increase was primarily a result of a $676 thousand increase in net interest income, a $1.3 million decrease in the provision for credit losses and a $376 thousand increase in noninterest income, partially offset by a $2.1 million increase in noninterest expense.

Interest Income

Q3 2023 vs Q3 2022 .

Interest income increased $3.4 million, or 38.1%, to $12.4 million for the three months ended June 30, 2023, from $9.0 million for the three months ended June 30, 2022, primarily due to higher average loan balances, a 65 basis point increase in the average loan yield and a 354 basis point increase in the average yield on investments, cash and cash equivalents, partially offset by a lower average balance of investments, cash and cash equivalents.

Interest income on loans increased $2.9 million, or 32.8%, to $11.6 million for the three months ended June 30, 2023, compared to $8.7 million for the three months ended June 30, 2022.

The average balance of total loans was $866.0 million for the three months ended June 30, 2023, compared to $741.6 million for the three months ended June 30, 2022, primarily resulting from increased balances in all loan categories, excluding commercial business loans.

The average yield on total loans was 5.35% for three months ended June 30, 2023, compared to 4.70% for the three months ended June 30, 2022.

Interest income increased $1.9 million, or 17.7%, to $12.7 million for the three months ended September 30, 2023, from $10.8 million for the three months ended September 30, 2022, primarily due to a 38 basis point increase in the average loan yield and a 285 basis point increase in the average yield on investments, cash and cash equivalents and, to a lesser extent, higher average balance of loans, investments, and cash and cash equivalents.

Interest income on loans increased $1.2 million, or 11.4%, to $11.5 million for the three months ended September 30, 2023, compared to $10.3 million for the three months ended September 30, 2022.

The average balance of total loans was $862.4 million for the three months ended September 30, 2023, compared to $833.2 million for the three months ended September 30, 2022, resulting from increased balances in all loan categories, except commercial and multifamily loans and floating home loans.

The average yield on total loans was 5.29% for three months ended September 30, 2023, compared to 4.92% for the three months ended September 30, 2022.

The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.

Interest income on the investment portfolio and cash and cash equivalents increased $572 thousand, or 197.9%, to $861 thousand for the three months ended June 30, 2023, compared to $289 thousand for the three months ended June 30, 2022.

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 $79.0 million for the three months ended June 30, 2023, compared to $138.9 million for the three months ended June 30, 2022.

decrease in average balance was due to lower average cash balances as we redeployed funds into higher interest-earning assets, specifically loans.

The average yield on investments and cash and cash equivalents increased to 4.37% for the three months ended June 30, 2023, compared to 0.83% for the three months ended June 30, 2022, as a result of the rising interest rate environment.

Interest income increased $7.4 million, or 43.0%, to $24.6 million for the six months ended June 30, 2023, from $17.2 million for the six months ended June 30, 2022, primarily due to higher average loan balances, a 62 basis point increase in the average loan yield and a 372 basis point increase in the average yield earned on investments, cash and cash equivalents, partially offset by a lower average balance of investments, cash and cash equivalents.

Interest income on loans increased $6.2 million, or 36.7%, to $22.9 million for the six months ended June 30, 2023, compared to $16.8 million for the six months ended June 30, 2022, driven by higher average total loans and a 62 basis points increase in the average yield on loans.

The average balance of total loans was $866.9 million for the six months ended June 30, 2023, compared to $718.4 million for the six months ended June 30, 2022, primarily resulting from increased balances related to all loan categories, excluding other consumer and commercial business loans.

The average yield on total loans was 5.33% for the six months ended June 30, 2023, compared to 4.71% for the six months ended June 30, 2022.

Interest income on investments and cash and cash equivalents increased $732 thousand, or 163.0%, to $1.2 million for the three months ended September 30, 2023, compared to $449 thousand for the three months ended September 30, 2022.

The increase was due to higher average yields and, to a lesser extent, higher average balances.

The average yield on investments and cash and cash equivalents increased to 4.86% for the three months ended September 30, 2023, compared to 2.01% for the three months ended September 30, 2022, as a result of the rising interest rate environment.

The average balance of investments and

cash and cash equivalents was $96.4 million for the three months ended September 30, 2023, compared to $88.8 million for the three months ended September 30, 2022.

The increase in the average balance was due to higher average cash balances as deposits increased during the period at a faster pace than we were able to increase loans.

Interest income increased $9.3 million, or 33.2%, to $37.3 million for the nine months ended September 30, 2023, from $28.0 million for the nine months ended September 30, 2022, primarily due to higher average loan balances, a 53 basis point increase in the average loan yield and a 365 basis point increase in the average yield earned on investments, cash and cash equivalents, partially offset by a lower average balance of investments, cash and cash equivalents.

Interest income on loans increased $7.3 million, or 27.1%, to $34.4 million for the nine months ended September 30, 2023, compared to $27.1 million for the nine months ended September 30, 2022, driven by higher average total loans and a 53 basis points increase in the average yield on loans.

The average balance of total loans was $865.4 million for the nine months ended September 30, 2023, compared to $757.1 million for the nine months ended September 30, 2022, resulting from increased balances related to all loan categories, except commercial and multifamily loans and floating home loans.

The average yield on total loans was 5.32% for the nine months ended September 30, 2023, compared to 4.79% for the nine months ended September 30, 2022.

The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.

Interest income on the investment portfolio and cash and cash equivalents increased $1.2 million, or 287.4%, to $1.7 million for the six months ended June 30, 2023, compared to $427 thousand for the six months ended June 30, 2022.

The increase in 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 4.25% for the six months ended June 30, 2023, compared to 0.53% for the six months ended June 30, 2022, as a result of the rising interest rate environment.

Interest income on investments and cash and cash equivalents increased $2.0 million, or 223.7%, to $2.8 million for the nine months ended September 30, 2023, compared to $876 thousand for the nine months ended September 30, 2022.

The increase was due to higher average yields, partially offset by lower average balances.

The average yield on investments and cash and cash equivalents increased 365 basis points to 4.51% for the nine months ended September 30, 2023, compared to 0.86% for the nine months ended September 30, 2022, as a result of the rising interest rate environment.

Interest Expense

Q3 2023 vs Q3 2022 .

Interest expense increased $3.1 million, or 517.5%, to $3.7 million for the three months ended June 30, 2023, from $594 thousand for the three months ended June 30, 2022.

Interest expense on deposits increased $2.5 million, or 613.3%, to $3.0 million for the three months ended June 30, 2023, compared to $414 thousand for the same period a year ago.

Interest expense increased $3.3 million, or 283.2%, to $4.5 million for the three months ended September 30, 2023, from $1.2 million for the three months ended September 30, 2022.

Interest expense on deposits increased $3.1 million, or 431.1%, to $3.9 million for the three months ended September 30, 2023, compared to $730 thousand for the same period a year ago.

The increase was primarily the result of a $163.3 million increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $91.6 million decrease in the average balance of interest-bearing deposits other than certificate accounts.

The increase in the rate paid on certificate accounts contributed to a 124 basis point increase in the average cost of total deposits to 1.45% for the quarter ended June 30, 2023, from 0.21% for the quarter ended June 30, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $547 thousand for the three months ended June 30, 2023, compared to $12 thousand for the three months ended June 30, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.

Interest expense on subordinated notes was $168 thousand for both the three months ended June 30, 2023 and 2022.

Interest expense increased $5.3 million, or 444.2%, to $6.5 million for the six months ended June 30, 2023, from $1.2 million for the six months ended June 30, 2022.

Interest expense on deposits increased $4.2 million, or 505.0%, to $5.1 million for the six months ended June 30, 2023, compared to $841 thousand for the six months ended June 30, 2022.

The increase was primarily the result of an increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a decrease in the average balance of interest-bearing deposits other than certificate accounts.

The average cost of total deposits increased 104 basis points to 1.25% for the six months ended June 30, 2023, from 0.21% for the six months ended June 30, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $1.0 million for the six months ended June 30, 2023, compared to $12 thousand for the six months ended June 30, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.

Interest expense on subordinated notes was $336 thousand for both the six months ended June 30, 2023 and 2022.

The increase in the rate paid on certificate accounts contributed to a 149 basis point increase in the average cost of total deposits to 1.85% for the quarter ended September 30, 2023, from 0.36% for the quarter ended September 30, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $473 thousand for the three months ended September 30, 2023, compared to $281 thousand for the three months ended September 30, 2022, primarily due to a 198 basis point increase in the average cost of FHLB advances to 4.38% for the quarter ended September 30, 2023, compared to 2.40% for the same quarter in 2022.

Interest expense on subordinated notes was $168 thousand for both the three months ended September 30, 2023 and 2022.

Interest expense increased $8.6 million, or 364.1%, to $11.0 million for the nine months ended September 30, 2023, from $2.4 million for the nine months ended September 30, 2022.

Interest expense on deposits increased $7.4 million, or 470.7%, to $9.0 million for the nine months ended September 30, 2023, compared to $1.6 million for the nine months ended September 30, 2022.

The increase was primarily the result of an increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $108.8 million decrease in the average balance of interest-bearing deposits other than certificate accounts.

The average cost of total deposits increased 119 basis points to 1.45% for the nine months ended September 30, 2023, from 0.26% for the nine months ended September 30, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $1.5 million for the nine months ended September 30, 2023, compared to $293 thousand for the nine months ended September 30, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.

The cost of FHLB advances increased 211 basis points to 4.49% for the nine months ended September 30, 2023, compared to 2.38% for the same period in 2022.

The average balance of FHLB advances was $45.3 million for the nine months ended September 30, 2023, compared to $16.5 million for the nine months ended September 30, 2022.

Interest expense on subordinated notes was $504 thousand for both the nine months ended September 30, 2023 and 2022.

Net Interest Income.

Q3 2023 vs Q3 2022 .

Net interest income increased $352 thousand, or 4.2%, to $8.7 million for the three months ended June 30, 2023, from $8.4 million for the three months ended June 30, 2022.

Our net interest margin was 3.71% and 3.82% for the three months ended June 30, 2023 and 2022, respectively.

The increase in net interest income primarily was the result of a higher average balance of and yield earned on interest-earning assets, partially offset by a higher average balance of and rate paid on interest-bearing liabilities.

Net interest income decreased $1.4 million, or 14.9%, to $8.2 million for the three months ended September 30, 2023, from $9.6 million for the three months ended September 30, 2022.

Net interest margin was 3.38% and 4.13% for the three months ended September 30, 2023 and 2022, respectively.

The decrease in net interest income primarily

was the result of a higher average balance of and rate paid on interest-bearing liabilities, partially offset by a higher average balance of and yield earned on interest-earning assets.

The decrease in net interest margin primarily was due to the higher interest expense on interest-bearing liabilities, driven by the increase in rates paid on interest-bearing liabilities and the higher average balances of certificates of deposits and borrowings, partially offset by higher interest income earned on interest-earning assets.

Net interest income increased $2.1 million, or 13.2%, to $18.1 million for the six months ended June 30, 2023, from $16.0 million for the six months ended June 30, 2022.

Our net interest margin was 3.86% and 3.67% for the six months ended June 30, 2023 and 2022, respectively.

The increase in net interest income primarily resulted from higher average balances and yield earned on interest-earning assets, partially offset by an increase in the average balances of and rate paid on deposits and borrowings The increase in net interest margin primarily was due to average yields earned on interest-earning assets increasing at a faster pace than the average interest rates paid on interest-bearing liabilities, partially offset by an increase in average borrowings.

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 500 basis points, including 75 basis points during 2023, to a range of 5.00% to 5.25% as of June 30, 2023.

In July 2023, the FOMC increased the target range for the federal funds rate another 25 basis points to a range of 5.25% to 5.50%.

Net interest income increased $676 thousand, or 2.6%, to $26.3 million for the nine months ended September 30, 2023, from $25.6 million for the nine months ended September 30, 2022.

Net interest margin was 3.70% and 3.83% for the nine months ended September 30, 2023 and 2022, respectively.

The increase in net interest income primarily resulted from higher average balances and yield earned on interest-earning assets, partially offset by an increase in the average balances of and rate paid on deposits and borrowings The decrease in net interest margin primarily was due to average interest rates paid on interest-bearing liabilities increasing at a faster pace than the average yields earned on interest-earning assets and an increase in average borrowings.

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 525 basis points, including 100 basis points during 2023, to a range of 5.25% to 5.50% as of September 30, 2023.

Provision for Credit Losse s.

The following table reflects the components of the (release of) provision for credit losses during the periods indicated (dollars in thousands):

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

The following table reflects the components of the provision for (release of) credit losses during the periods indicated (dollars in thousands):

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

2023 2022 2023 2022

(Release of) provision for credit losses on loans $ (242) $ 600 $ 3 $ 725

Provision for credit losses on loans $ 224 $ 375 $ 227 $ 1,101

(Release of) provision for credit losses on unfunded loan commitments (149) (29) (473) (22)

(Release of) provision for credit losses $ (331) $ 592 $ (321) $ 732

The change in the provision for credit losses for both periods in 2023 from the comparable periods in 2022 resulted primarily from changes in methodology used to reserve for credit losses.

Provision for (release of) credit losses $ 75 $ 346 $ (246) $ 1,079

The change in the provision for (release of) credit losses for both periods in 2023 from the comparable periods in 2022 resulted primarily from changes in methodology used to reserve for credit losses.

The Company adopted the CECL standard as of January 1, 2023.

All amounts prior to January 1, 2023 were calculated using the previous incurred loss methodology to compute our allowance for loan losses, which is not directly comparable to the new current expected credit losses methodology.

During the three months ended June 30, 2023, the release of credit losses on loans resulted primarily from the decrease in our loans held-for-portfolio, with most of the decline occurring within our commercial construction portfolio as projects were completed, while the release of credit losses on unfunded loan commitments related to construction advances funding and moving into the ACL - loans.

During the six months ended June 30, 2023, the provision for credit losses on loans primarily relates to the mix of the loan portfolio, partially offset by the decline in the balance of the loan portfolio, while the release of credit losses on unfunded loan commitments occurred for the same reasons discussed above for the three months ended June 30, 2023.

Under CECL, the provision for credit losses for the three and six months ended June 30, 2023 reflects assumptions related to our forecast concerning the economic environment as a result of local, national and global events, including recent bank failures.

During the three months ended September 30, 2023, the provision for credit losses on loans resulted primarily from the increase in our loans held-for-portfolio and an additional adjustment to our forecast related to the interest rate environment.

The release of credit losses on unfunded loan commitments related to construction advances funding and moving into the ACL - loans.

The increase in construction advances in the loans held-for-portfolio balance were offset by declines in our commercial construction portfolio as projects were completed.

During the nine months ended September 30, 2023, the provision for credit losses on loans primarily relates to the mix of the loan portfolio and improved credit quality, partially offset by the increase in the balance of the loan portfolio and adjustments applied to certain loan portfolios within our forecast related to interest rate risk.

The release of credit losses on unfunded loan commitments occurred for the same reasons discussed above for the three months ended September 30, 2023.

Under CECL, the provision for credit losses for the three and nine months ended September 30, 2023 reflects assumptions related to our forecast concerning the economic environment as a result of local, national and global events, including recent bank failures.

In addition, expected loss estimates consider various factors, including customer-specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay.

Net charge-offs for the six months ended June 30, 2023 totaled $145 thousand, compared to net recoveries of $86 thousand for the six months ended June 30, 2022.

Net charge-offs for the nine months ended September 30, 2023 totaled $148 thousand, compared to net recoveries of $82 thousand for the nine months ended September 30, 2022.

While we believe the estimates and assumptions used in our determination of the adequacy of the ACL 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 have a material adverse impact on our financial condition and results of operations.

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Noninterest Income.

Noninterest income increased $876 thousand, or 86.3%, to $1.9 million for the three months ended June 30, 2023, as compared to $1.0 million for the three months ended June 30, 2022, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Noninterest income increased $55 thousand, or 5.4%, to $1.1 million for the three months ended September 30, 2023, as compared to $1.0 million for the three months ended September 30, 2022, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

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Total noninterest income $ 1,081 $ 1,026 $ 55 5.4 %

The increase in noninterest income during the three months ended June 30, 2023 compared to the same quarter in 2022 primarily was due to a $753 thousand increase in earnings on BOLI, reflecting $567 thousand in earnings on death benefits paid under our BOLI policies and an increase in the cash surrender value due to recent price increases in the securities market, an insurance settlement received during the current quarter on a prior OREO property included in service charges and fee income, a $26 thousand increase in net gain on sale of loans as a result of an increase in both the amount of loans originated for sale and gross margins earned on loans sold and a $39 thousand increase in the fair value adjustment on mortgage servicing rights due primarily to an increase in market values, partially offset by a decrease in mortgage servicing income as our servicing loan portfolio continues to pay down.

Loans sold during the quarter ended June 30, 2023, totaled $6.4 million, compared to $2.9 million during the quarter ended June 30, 2022.

Noninterest income increased $318 thousand, or 12.5%, to $2.9 million for the six months ended June 30, 2023, as compared to $2.5 million for the six months ended June 30, 2022, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

The increase in noninterest income during the three months ended September 30, 2023 compared to the same quarter in 2022 primarily was due to a $96 thousand increase in service charges and fee income primarily resulting from $70 thousand in miscellaneous income related to our co-branded credit card agreement with Mastercard, $29 thousand increase in earnings on BOLI, reflecting an increase in the cash surrender value due to fluctuating market rates, and a $28 thousand increase in net gain on sale of loans as a result of an increase in the rate earned on loans originated for sale, partially offset by a $87 thousand downward adjustment in the fair value of mortgage servicing rights and a decrease in mortgage servicing income due to the size of the servicing portfolio shrinking at a faster rate than we are replacing the loans due to the current interest rate environment.

Loans sold during the quarter ended September 30, 2023, totaled $4.4 million, compared to $2.3 million during the quarter ended September 30, 2022.

Noninterest income increased $376 thousand, or 10.5%, to $3.9 million for the nine months ended September 30, 2023, as compared to $3.6 million for the nine months ended September 30, 2022, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

5 unchanged sentences

Total noninterest income $ 3,940 $ 3,564 $ 376 10.5 %

The increase in noninterest income during the six months ended June 30, 2023, compared to the same period in 2022 primarily was due to a $882 thousand increase in earnings on BOLI, reflecting $567 thousand in earnings on death benefits paid under our BOLI policies and an increase in the cash surrender value due to recent price increases in the securities market and a $105 thousand increase in service fees and fee income for the same reasons discussed above for the three months ended June 30, 2023.

These increases were partially offset by a $369 thousand downward adjustment in the fair value of mortgage servicing rights, a $263 thousand decrease in net gain on sale of loans resulting from lower mortgage activity and a $37 thousand decline in mortgage servicing income for the same reasons discussed above for the three months ended June 30, 2023.

Loans sold during the six months ended June 30, 2023, totaled $10.3 million, compared to $15.1 million during the six months ended June 30, 2022.

The increase in noninterest income during the nine months ended September 30, 2023, compared to the same period in 2022 primarily was due to a $912 thousand increase in earnings on BOLI reflecting $567 thousand in earnings on death benefits paid under our BOLI policies and an increase in the cash surrender value due to recent price increases in the securities market and a $202 thousand increase in service fees and fee income which included $70 thousand in miscellaneous income related to an agreement with Mastercard and an insurance settlement received during the second quarter of 2023 on a prior OREO property.

These increases were partially offset by a $457 thousand downward adjustment in the fair value of mortgage servicing rights, a $233 thousand decrease in net gain on sale of loans resulting from lower mortgage activity and a $48 thousand decline in mortgage servicing income for the same reasons discussed above for the three months ended September 30, 2023.

Loans sold during the nine months ended September 30, 2023, totaled $14.7 million, compared to $17.4 million during the nine months ended September 30, 2022.

Noninterest Expense.

Noninterest expense increased $705 thousand, or 10.4%, to $7.5 million during the three months ended June 30, 2023, compared to $6.8 million during the three months ended June 30, 2022, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Noninterest expense increased $645 thousand, or 9.1%, to $7.7 million during the three months ended September 30, 2023, compared to $7.1 million during the three months ended September 30, 2022, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

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Data processing 1,296 848 448 52.8

Net gain on OREO and repossessed assets (71) — (71) (100.0)

Total noninterest expense $ 7,710 $ 7,065 $ 645 9.1 %

The increase in noninterest expense during the three months ended June 30, 2023 compared to the same quarter in 2022 was mainly attributable to an increase in salaries and benefits of $731 thousand, reflecting higher wages, lower deferred compensation and higher medical expense, partially offset by a decrease in incentive compensation as a result of a lower percentage earned on loans originated, changes to incentive compensation programs, such as the addition of non-production performance requirements, and lower commission expense related to a decline in mortgage originations.

Operations expense increased $55 thousand compared to the quarter ended June 30, 2022 due to increases in various accounts including loan origination costs, legal fees, audit fees, state and local taxes, charitable contributions and office expenses.

Regulatory assessments rose due to our increased asset size.

These increases were partially offset by decreases in various accounts, including marketing, travel and costs related to our deposit products, specifically debit card processing expenses.

Data processing expense decreased as a result of the recovery of expenses written off in the first quarter of 2023, partially offset by higher expenses as a result of increased data processing costs related to contract rate increases.

The net gain on OREO relates to the sale of a former OREO property that was charged off during the first quarter of 2023.

The efficiency ratio for the quarter ended June 30, 2023 was 70.49%, compared to 72.20% for the quarter ended June 30, 2022.

The improvement in the efficiency ratio for the current quarter compared to the prior quarter is primarily due to the increase in noninterest income, largely related to the death benefits paid on BOLI, and net interest income rising at a faster rate than the increase in noninterest expense.

Noninterest expense increased $1.5 million, or 11.1%, to $15.1 million during the six months ended June 30, 2023, compared to $13.6 million during the six months ended June 30, 2022, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

The increase in noninterest expense during the three months ended September 30, 2023 compared to the same quarter in 2022 was mainly attributable to an increase in data processing expense of $448 thousand reflecting $317 thousand in software costs related to new technology being implemented at the Bank and higher processing charges related to a higher volume of transactional activity.

Salaries and benefits expensed increased $104 thousand reflecting higher wages and lower deferred compensation, partially offset by a decrease in incentive compensation as a result of fewer loans originated, changes to incentive compensation programs, including the addition of non-production performance requirements, and lower commission expense related to a decline in mortgage originations.

Regulatory assessments rose due to an increase in our deposit insurance assessment rate and our increased asset size.

The efficiency ratio for the quarter ended September 30, 2023 was 83.36%, compared to 66.51% for the quarter ended September 30, 2022.

The change in the efficiency ratio for the current quarter compared to the same quarter the prior year was primarily due to lower net interest income as a result of interest expense rising at a faster rate than the yield on interest-earning assets and an increase in noninterest expense.

Noninterest expense increased $2.1 million, or 10.4%, to $22.8 million during the nine months ended September 30, 2023, compared to $20.7 million during the nine months ended September 30, 2022, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

6 unchanged sentences

Total noninterest expense $ 22,822 $ 20,678 $ 2,144 10.4 %

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 loan origination activity in 2023 as compared to the same period in 2022.

Operations expense increased primarily due to increases in various accounts including legal fees, audit fees, state and local taxes, charitable contributions and office expenses, partially offset by marketing costs and professional fees.

Regulatory assessments increased due to our increased asset size.

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

Salaries and benefits increased primarily due to higher wages, hiring for strategic initiatives, higher medical expenses and lower deferred compensation, partially offset by a decrease in incentive compensation and commission expense related to a decline in loan origination activity in 2023 as compared to the same period in 2022.

Operations expense increased primarily due to increases in various accounts including legal fees, audit fees, state and local taxes, charitable contributions, office expenses and costs related to our deposit products, specifically debit card processing expenses, partially offset by lower marketing costs, professional fees and loan origination fees.

Regulatory assessments rose due to an increase in our deposit insurance assessment rate and our increased asset size.

Data processing expense increased due to $317 thousand in software costs related to new technology being implemented at the Bank and higher processing charges related to a higher volume of transactional activity.

The net loss on OREO relates to the sale of a former OREO property that was charged off during the first quarter of 2023.

Income Tax Expense .

We incurred income tax expense of $577 thousand and $1.1 million for the three and six months ended June 30, 2023, compared to $409 thousand and $867 thousand for the same periods in 2022, respectively.

The effective tax rates for the three and six months ended June 30, 2023 were 16.63% and 18.18%, respectively.

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

We incurred income tax expense of $295 thousand and $1.4 million for the three and nine months ended September 30, 2023, compared to $666 thousand and $1.5 million for the same periods in 2022, respectively.

The effective tax rates for the three and nine months ended September 30, 2023 were 20.15% and 18.56%, 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 rate for the nine months ended September 30, 2023 was lower than the same period the prior year as a result of nontaxable income related to the BOLI death benefit received during 2023.

Capital and Liquidity

The Management’s Discussion and Analysis in Item 7 of the Company’s 2022 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows.

Although there have been no material changes in our liquidity management, sources of liquidity and cash flows since our 2022 Form 10-K, this discussion updates that disclosure for the six months ended June 30, 2023.

Stockholders’ equity totaled $99.9 million at June 30, 2023 and $97.7 million at December 31, 2022.

In addition to net income of $5.1 million, other sources of capital during the six months ended June 30, 2023 included $303 thousand in proceeds from stock option exercises and other comprehensive income, net of tax, of $23 thousand.

Uses of capital during the six months ended June 30, 2023 primarily included $936 thousand of dividends paid on common stock and $1.2 million of stock repurchases.

Stockholders’ equity totaled $100.2 million at September 30, 2023 and $97.7 million at December 31, 2022.

In addition to net income of $6.2 million, other sources of capital during the nine months ended September 30, 2023 primarily included $320 thousand in proceeds from stock option exercises.

Uses of capital during the nine months ended September 30, 2023 primarily included $1.4 million of dividends paid on common stock and $1.4 million of stock repurchases.

We paid regular quarterly dividends of $0.36 per common share during the six months ended June 30, 2023 and regular quarterly dividends of $0.34 per common share and a special dividend of $0.10 per common share during the six months ended June 30, 2022, which equates to a dividend payout ratio of 18.50% in the first half of 2023 and 34.53% in the first half of 2022.

We paid regular quarterly dividends of $0.55 per common share during the nine months ended September 30, 2023 and regular quarterly dividends of $0.51 per common share and a special dividend of $0.10 per common share during the nine months ended September 30, 2022, which equates to a dividend payout ratio of 22.88% in the first nine months of 2023 and 27.05% in the first nine months of 2022.

The Company expects to continue paying quarterly cash dividends on its common stock, subject to the Board of Directors' discretion to change 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 2023 at the new rate of $0.19 per share, which the Company announced in April 2023, our average total dividend paid each quarter would be approximately $489 thousand based on the number of outstanding shares as of June 30, 2023.

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 2022 Form 10-K.

Assuming continued payment of the regular quarterly cash dividend during the remainder of 2023 at the rate of $0.19 per share, which the Company announced in April 2023, our average total dividend paid each quarter would be approximately $488 thousand based on the number of outstanding shares as of September 30, 2023.

The dividends, if any, we 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 2022 Form 10-K.

Stock Repurchase Programs.

2 unchanged sentences

Stock repurchases may also offset the dilutive effects of stock compensation awards.

As of June 30, 2023, approximately $969 thousand of our common stock remained available for repurchase under our existing stock repurchase program.

As of September 30, 2023, approximately $741 thousand of our common stock remained available for repurchase under our existing stock repurchase program.

Purchases under the Company’s existing stock repurchase program may be made through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as well as any constraints specified in any trading plan that may be adopted in accordance with SEC Rule 10b5-1.

2 unchanged sentences

For additional details on our stock repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II, Item 2 of this Form 10-Q.

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

Liquidity measures the ability to meet current and future cash flow needs.

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.

10 unchanged sentences

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

As of June 30, 2023, we had $110.7 million in cash and cash equivalents and available-for-sale investment securities, and $1.7 million in loans held-for-sale.

At June 30, 2023, we had the ability to borrow $169.3 million in FHLB advances and access to additional borrowings of $18.4 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $60.0 million in outstanding advances from the FHL B and none from the Federal Reserve at June 30, 2023.

We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding at June 30, 2023.

As of September 30, 2023, we had $112.0 million in cash and cash equivalents and available-for-sale investment securities, and $1.2 million in loans held-for-sale.

At September 30, 2023, we had the ability to borrow $178.5 million in FHLB advances and access to additional borrowings of $17.5 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $40.0 million in outstanding advances from the FHL B and none from the Federal Reserve at September 30, 2023.

We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding at September 30, 2023.

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, 2023, management was not aware of any events reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

As of September 30, 2023, management was not aware of any events 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.

1 unchanged sentence

Financial Statements" 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 Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of June 30, 2023.

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

Refer to the accompanying Notes to Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of September 30, 2023.

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

11 unchanged sentences

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

At June 30, 2023 and December 31, 2022, financial instrument contract amounts representing credit risk were as follows (in thousands):

June 30, 2023 December 31, 2022

At September 30, 2023 and December 31, 2022, financial instrument contract amounts representing credit risk were as follows (in thousands):

September 30, 2023 December 31, 2022

Residential mortgage commitments $ 5,081 $ 3,184

9 unchanged sentences

See “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2022 Form 10-K.

At June 30, 2023 Sound Financial Bancorp, on an unconsolidated basis, had $603 thousand in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At September 30, 2023 Sound Financial Bancorp, on an unconsolidated basis, had $433 thousand in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

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

3 unchanged sentences

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, 2023, the Bank and Company’s CBLR was 11.31% and 10.11%, respectively, which exceeded the minimum requirement of 9%.

As of September 30, 2023, the Bank and Company’s CBLR was 11.23% and 10.05%, respectively, which exceeded the minimum requirement of 9%.

In February 2019, the U.S.

9 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