What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-14 compared with 2023-11-14 · 142 added, 238 removed, 321 unchanged (54% of the section changed)

21 unchanged sentences

• the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;

• the transition from the London Interbank Offered Rate (“LIBOR”) to new interest-rate benchmarks;

• our ability to control operating costs and expenses;

18 unchanged sentences

• 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;

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

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

8 unchanged sentences

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

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.

At March 31, 2024, Sound Financial Bancorp, on a consolidated basis, had assets of $1.09 billion, net loans held-for-portfolio of $889.3 million, deposits of $916.9 million and stockholders’ equity of $101.0 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.

Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds in loans secured by first and second mortgages on one-to-four family residences (including home equity loans and lines of credit), loans secured by commercial and multifamily real estate, construction and land loans, consumer loans and commercial business loans.

Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds, along with borrowed funds, in loans secured by first and second mortgages on one-to-four family residences (including home equity loans and lines of credit), commercial and multifamily real estate, construction and land, and consumer and commercial business loans.

Our commercial business loans include unsecured lines of credit and secured term loans and lines of credit secured by inventory, equipment and accounts receivable.

We also offer a variety of secured and unsecured consumer loan products, including manufactured home loans, floating home loans, automobile loans, boat loans and recreational vehicle loans.

As part of our business, we focus on the origination of residential mortgage loans, a significant portion of which we sell to Fannie Mae and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives.

We sell loans that conform to the underwriting standards of Fannie Mae (“conforming”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income.

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.

As part of our business, we focus on residential mortgage loan originations, a portion of which we sell to Fannie Mae and other investors and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives.

We sell loans which conform to the underwriting standards of Fannie Mae (“conforming”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income.

Residential loans which do not conform to the underwriting standards of Fannie Mae (“non-conforming”), are either held in our loan portfolio or sold with servicing released.

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, and construction and land development loans.

Critical Accounting Estimates

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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 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 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.

Management believes that its critical accounting estimates include determining the allowance for credit losses and accounting for mortgage servicing rights.

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K.

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

Total assets increased $91.5 million, or 9.2%, to $1.09 billion at March 31, 2024 from $995.2 million at December 31, 2023.

The increase primarily was a result of an increase in cash and cash equivalents reflecting increased deposits and, to a lesser extent, an increase in loans held-for-portfolio.

Cash and Securities, and Investment Securities.

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, 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,

Cash and cash equivalents increased $88.3 million, or 177.7%, to $138.0 million at March 31, 2024 from $49.7 million at December 31, 2023.

The increase was primarily due to the strategic decision to sell reciprocal deposits at the end of 2023, which reduced our cash balances.

These reciprocal deposits returned to our balance sheet in the first quarter of 2024, which included deposits that had been generated during the fourth quarter of 2023 and subsequently sold.

Investment securities decreased $181 thousand, or 1.7%, to $10.3 million at March 31, 2024, compared to $10.5 million at December 31, 2023.

Held-to-maturity securities totaled $2.2 million at both March 31, 2024 and December 31, 2023.

Available-for-sale securities totaled $8.1 million at March 31, 2024, compared to $8.3 million at December 31, 2023.

The decrease in available-for-sale securities was primarily due to higher net unrealized losses resulting from an increase in municipal bond yields during the current quarter, offset by regularly scheduled payments.

Loans held-for-portfolio, net, increased $3.6 million, or 0.4%, to $889.3 million at March 31, 2024 from $885.7 million at December 31, 2023.

The following table reflects the changes in the mix of our loan portfolio at March 31, 2024, as compared to December 31, 2023 (dollars in thousands):

2024 December 31,

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Total loans held-for-portfolio, net $ 889,279 $ 885,718 $ 3,561 0.4 %

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.

As noted in the table above, increases in the loan portfolio were driven primarily by increases in commercial and multifamily and floating home loans and, to a lesser extent, increases in home equity and manufactured home loans.

The increase in commercial and multifamily loans was primarily due to the conversion of construction projects to permanent financing, while the increase in floating home loans was due to the funding of a large portfolio of individual loans that had been delayed in our pipeline.

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.

These increases were partially offset by decreases in construction and land loans, which was primarily due to projects completing and either paying off or converting to permanent financing, and decreases in other consumer and commercial business loans, which were primarily due to payoffs and paydowns, including the payoff of $2.1 million related to one commercial business loan that was previously on nonaccrual.

At March 31, 2024, our loan portfolio, net of deferred loan fees, remained well-diversified.

At that date, commercial and multifamily real estate loans accounted for 36.1% of total loans, one-to-four family loans, including home equity loans, accounted for 33.7% of total loans, commercial business loans accounted for 2.1% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 15.7% of total loans.

Construction and land loans accounted for 12.4% of total loans at March 31, 2024.

Loans held-for-sale totaled $351 thousand at March 31, 2024, compared to $603 thousand at December 31, 2023.

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

Allowance for Credit Losses.

The following table reflects the adjustments in our allowance for credit losses (“ACL”) during the periods indicated (dollars in thousands):

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

2023 2022 2023 2022

The following table reflects the activity in our allowance for credit losses (“ACL”) during the periods indicated (dollars in thousands):

Three Months Ended March 31,

Allowance for Credit Losses — Loans:

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Net charge-offs (56) (72)

Provision for credit losses 224 375 227 1,101

(Release of) provision for credit losses (106) 245

Balance at end of period 8,598 8,532

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Impact of Adoption of ASU 2016-13 — 695

(Release of) provision for credit losses (149) (29) (473) (22)

Provision for (release of) credit losses 73 (235)

Balance at end of period 266 795

1 unchanged sentence

Ratio of net charge-offs during the period to average loans outstanding during the period (0.03) % (0.03) %

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.”

Our ACL — loans decreased $162 thousand, or 1.8%, to $8.6 million at March 31, 2024, from $8.8 million at December 31, 2023.

The decrease in the ACL - loans from December 31, 2023 to March 31, 2024 was primarily a result of lower reserves on our other consumer loan portfolio and residential loan portfolios due to qualitative adjustments for changes in concentration and market conditions, partially offset by the increase in the allowance for credit losses on loans due to portfolio growth, and an increase in nonaccrual loans and the weighted average life of the portfolio.

See “Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023 — 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 September 30, 2023 At December 31, 2022

At March 31, 2024 At December 31, 2023

Allowance for credit losses - loans as a percentage of total loans outstanding 0.96 % 0.98 %

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Total nonaccrual loans $ 9,053 $ 3,556

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

2023 2022 2023 2022

Three Months Ended March 31,

($ in thousands)

1 unchanged sentence

One-to-four family:

— % — % — % 0.03 %

Net recoveries

Net (charge-offs)/recoveries

Average loans outstanding

$ 278,472 $ 274,261

— % — % (0.17) % 0.51 %

Net (charge-offs)/recoveries

$ — $ — (25) 58

Average loans outstanding

1 unchanged sentence

Commercial and multifamily real estate:

— % — % — % — %

Net (charge-offs)/recoveries

2 unchanged sentences

Construction and land:

— % — % — % — %

Net (charge-offs)/recoveries

2 unchanged sentences

Manufactured homes:

— % — % — % 0.07 %

Net recoveries

Net (charge-offs)/recoveries

Average loans outstanding

1 unchanged sentence

Floating homes:

— % — % — % — %

Net (charge-offs)/recoveries

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Commercial business:

— % — % — % — %

Net (charge-offs)/recoveries

2 unchanged sentences

(0.03) % (0.03) %

Net (charge-offs) recoveries

Net (charge-offs)

$ (56) $ (72)

2 unchanged sentences

Nonperforming Assets.

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 (“NPAs”), which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $5.6 million, or 135.9%, to $9.7 million, or 0.90% of total assets, at March 31, 2024 from $4.1 million, or 0.42% of total assets, at December 31, 2023.

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

Nonperforming Assets

September 30,

2024 December 31,

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Total nonperforming assets $ 9,743 $ 4,131 $ 5,612 135.9 %

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.

The increase in NPAs primarily was due to the addition of $8.0 million to nonaccrual status, which included a $3.7 million matured commercial real estate loan in process of securing financing from another lender, $3.2 million for two floating homes loans to a single borrower, and a $1.0 million commercial real estate loan, all of which are well secured, and one manufactured home loan of $115 thousand that was repossessed in the first quarter of 2024.

These increases in NPAs were partially offset by the payoff of one large commercial business loan totaling $2.1 million, the return of three loans to accrual status, and normal payment amortization.

The percentage of nonperforming loans to total loans was 1.01% at March 31, 2024, compared to 0.40% of total loans at December 31, 2023.

Mortgage Servicing Rights.

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

The fair value of mortgage servicing rights was $4.6 million at both March 31, 2024 and December 31, 2023.

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 $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.

Total deposits increased $90.3 million, or 10.9%, to $916.9 million at March 31, 2024 from $826.5 million at December 31, 2023.

The increase was largely a result of the movement of reciprocal deposits off balance sheet for strategic objectives at year-end, followed by the return of those deposits to our balance sheet in the first quarter of 2024.

Additionally, the increase related to higher balances for existing depositors and an increase in certificate accounts, partially offset by lower public funds accounts and brokered money market deposits.

Noninterest-bearing deposits increased $1.9 million, or 1.5%, to $128.7 million at March 31, 2024, compared to $126.7 million at December 31, 2023.

Noninterest-bearing deposits represented 14.0% of total deposits at March 31, 2024, compared to 15.3% at December 31, 2023.

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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 September 30, 2023, are as follows (in thousands):

Scheduled maturities of time deposits at March 31, 2024, 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 September 30, 2023 and December 31, 2022, totaled $87.4 million and $56.1 million, respectively.

The aggregate amount of time deposits in denominations of more than $250,000 at March 31, 2024 and December 31, 2023, totaled $94.0 million and $88.3 million, respectively.

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

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.

As of March 31, 2024, uninsured deposits totaled $166.7 million, which represented 18.2% of total deposits, as compared to uninsured deposits of $140.1 million, or 17.0% of total deposits as of December 31, 2023.

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 failures of some banks during 2023.

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.

The increase in uninsured deposits primarily related to jumbo tier pricing offered on some of our deposit products, as well as normal fluctuation within deposit accounts.

Borrowings, comprised of FHLB advances, remained flat at $40.0 million at both March 31, 2024 and December 31, 2023.

FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives.

FHLB advances outstanding at March 31, 2024 had maturities ranging from late 2024 through early 2028.

Subordinated notes, net totaled $11.7 million at both March 31, 2024 and December 31, 2023.

Stockholders’ Equity.

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.

Total stockholders’ equity increased $338 thousand, or 0.3%, to $101.0 million at March 31, 2024, from $100.7 million at December 31, 2023.

This increase primarily reflects $770 thousand of net income earned during the three months ended March 31, 2024 and a $62 thousand decrease in accumulated other comprehensive loss, net of tax, partially offset by the cash payment of $486 thousand in dividends to the Company’s stockholders.

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

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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 September 30,

Balance Interest

Rate Annualized Average

Balance Interest

Rate Annualized

Interest-earning assets:

Loans receivable $ 862,397 $ 11,505 5.29 % $ 833,195 $ 10,327 4.92 %

Investments, cash and cash equivalents 96,409 1,181 4.86 88,812 449 2.01

Total interest-earning assets (1)

958,806 12,686 5.25 922,007 10,776 4.64

Interest-bearing liabilities:

Savings and money market accounts 192,214 720 1.49 188,276 63 0.13

Demand and NOW accounts 194,561 173 0.35 290,106 164 0.22

Certificate accounts 293,820 2,984 4.03 130,541 503 1.53

Subordinated notes 11,703 168 5.70 11,658 168 5.72

Borrowings 42,815 473 4.38 46,462 281 2.40

Total interest-bearing liabilities 735,113 4,518 2.44 % 667,043 1,179 0.70 %

Net interest income $ 8,168 $ 9,597

Net interest rate spread 2.81 % 3.94 %

Net earning assets $ 223,693 $ 254,964

Net interest margin 3.38 % 4.13 %

Average interest-earning assets to average interest-bearing liabilities 130.43 % 138.22 %

Noninterest-bearing deposits $ 151,298 $ 189,379

Total deposits 831,893 3,877 1.85 % 798,302 730 0.36 %

Total funding (2)

886,411 4,518 2.02 % 856,422 1,179 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.

Nine Months Ended September 30,

Three Months Ended March 31,

Balance Interest

4 unchanged sentences

Loans receivable $ 895,430 $ 12,233 5.49 % $ 867,724 $ 11,381 5.32 %

Investments, cash and cash equivalents 84,056 2,836 4.51 136,899 876 0.86

Investments 14,038 111 3.18 15,637 122 3.16

Cash and cash equivalents 107,361 1,416 5.30 64,607 671 4.21

Total interest-earning assets (1)

24 unchanged sentences

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

Three Months Ended September 30, 2023 vs.

Nine Months Ended September 30, 2023 vs.

Three Months Ended March 31, 2024 vs.

Increase (Decrease) due to Total

Increase (Decrease) Increase (Decrease) due to Total

Increase (Decrease)

Volume Rate Volume Rate

Interest-earning assets:

Loans receivable $ 379 $ 473 $ 852

Investments, cash and cash equivalents 93 639 732 (1,783) 3,743 1,960

Investments (13) 2 (11)

Cash and cash equivalents 564 181 745

Total interest-earning assets 930 656 1,586

7 unchanged sentences

Change in net interest income $ (1,911)

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

Comparison of Results of Operation for the Three Months Ended March 31, 2024 and 2023

Q1 2024 vs Q1 2023 .

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.

Net income decreased $1.4 million, or 64.5%, to $770 thousand, or $0.30 per diluted common share, for the three months ended March 31, 2024, compared to $2.2 million, or $0.83 per diluted common share, for the three months ended March 31, 2023.

The decrease was the result of a $1.9 million decrease in net interest income and a $41 thousand increase in noninterest expense, partially offset by a $43 thousand decrease in the provision for credit losses, a $127 thousand increase in noninterest income and a $384 thousand decrease in the provision for income taxes.

Interest Income

Q1 2024 vs Q1 2023 .

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 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.

Interest income increased $1.6 million, or 13.0%, to $13.8 million for the three months ended March 31, 2024, from $12.2 million for the three months ended March 31, 2023, primarily due to higher average balances of loans and interest-bearing cash, a 17 basis point increase in the average yield on loans, a 109 basis point increase in the average yield on interest-bearing cash, and a two basis point increase in the average yield on investments, partially offset by a decline in the average balance of investments.

Interest income on loans increased $852 thousand, or 7.5%, to $12.2 million for the three months ended March 31, 2024, compared to $11.4 million for the three months ended March 31, 2023.

The average balance of total loans was $895.4 million for the three months ended March 31, 2024, compared to $867.7 million for the three months ended March 31, 2023, resulting from increased balances in all loan categories, except commercial business loans.

The average yield on total loans was 5.49% for three months ended March 31, 2024, compared to 5.32% for the three months ended March 31, 2023.

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 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 income on the investment portfolio decreased $11 thousand, or 9.0%, to $111 thousand for the three months ended March 31, 2024, compared to $122 thousand for the three months ended March 31, 2023.

The decrease was primarily due to lower average balances, slightly offset by an increase in the average yield.

The average balance of investments was $14.0 million for the three months ended March 31, 2024, compared to $15.6 million for the three months ended March 31, 2023, while the average yield on investments increased two basis points to 3.18% for the three months ended March 31, 2024, compared to 3.16% for the three months ended March 31, 2023.

Interest income on cash and cash equivalents increased $745 thousand, or 111.0% to $1.4 million for the three months ended March 31, 2024, compared to $671 thousand for the three months ended March 31, 2023.

The increase was due to higher average balances of and yields on our cash and cash equivalents.

The average yield on cash and cash equivalents increased to 5.30% for the three months ended March 31, 2024, compared to 4.21% for the three months ended March 31, 2023, as a result of the high interest rate environment.

The average balance of cash and cash equivalents was $107.4 million for the three months ended March 31, 2024, compared to $64.6 million for the three months ended March 31, 2023.

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 Expense

Q1 2024 vs Q1 2023 .

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 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.

Interest expense increased $3.5 million, or 124.8%, to $6.3 million for the three months ended March 31, 2024, from $2.8 million for the three months ended March 31, 2023.

The increase was primarily the result of a $68.9 million increase in the average balance of certificate accounts and an $120.2 million increase in the average balance of savings and money market accounts, as well as higher average rates paid on all interest-bearing liabilities (excluding subordinated notes), partially offset by a $81.3 million decrease in the average balance of demand and NOW accounts and a $4.9 million decrease in the average balance of FHLB advances.

The 179 basis point increase in the rate paid on certificate accounts and the 233 basis point increase in the rate paid on savings and money market accounts contributed to an overall 152 basis point increase in the average cost of total deposits to 2.57% for the quarter ended March 31, 2024, from 1.05% for the quarter ended March 31, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $429 thousand for the three months ended March 31, 2024, compared to $499 thousand for the three months ended March 31, 2023, primarily due to a 20 basis point decline in the average cost of FHLB advances to 4.31% for the quarter ended March 31, 2024, compared to 4.51% for the same quarter in 2023.

The average balance of FHLB advances was $40.0 million for the three months ended March 31, 2024, compared to $44.9 million for the three months ended March 31, 2023.

Interest expense on subordinated notes was $168 thousand for both the three months ended March 31, 2024 and 2023.

Net Interest Income.

Q1 2024 vs Q1 2023 .

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 $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.

Net interest income decreased $1.9 million, or 20.4%, to $7.5 million for the three months ended March 31, 2024, from $9.4 million for the three months ended March 31, 2023.

The decrease in net interest income was primarily the result of increased funding costs, primarily the rates paid on and balances of money market and certificate accounts, partially offset by an increase in the average balance of and yield earned on interest-earning assets.

Net interest margin (annualized) was 2.95% and 4.01% for the three months ended March 31,2024 and 2023, respectively.

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 savings and money market accounts and certificates of deposits, partially offset by higher interest income earned on interest-earning assets.

During 2023, in response to inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate by 100 basis points, to a range of 5.25% to 5.50% as of March 31, 2024.

Provision for Credit Losse s.

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

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)

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

Three Months Ended March 31,

(Release of) provision for credit losses on loans $ (106) $ 245

Provision for (release of) credit losses on unfunded loan commitments 73 (235)

(Release of) provision for credit losses $ (33) $ 10

During the three months ended March 31, 2024, the provision for credit losses on loans primarily related to lower reserves on our other consumer loan portfolio and residential loan portfolios due to qualitative adjustments for changes in concentration and market conditions, partially offset by the increase in the allowance for credit losses on loans due to portfolio growth, and an increase in nonaccrual loans and the weighted average life of the portfolio.

The provision for credit losses on unfunded loan commitments during the current period related to new originations in our construction and land portfolios as of March 31, 2024.

Net charge-offs for the three months ended March 31, 2024 totaled $56 thousand, compared to net charge-offs of $72 thousand for the three months ended March 31, 2023.

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.

A further decline in national and local economic conditions, as a result of the effects of inflation, and a potential recession or slowed economic growth, among other factors, could result in a material increase in the ACL and have a material adverse impact on our financial condition and results of operations.

A further decline in national and local economic conditions, as a result of the effects of inflation, and a potential recession or slowed economic growth, among other

factors, could result in a material increase in the ACL and have a material adverse impact on our financial condition and results of operations.

In addition, the determination of the amount of our ACL 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 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

Service charges and fee income $ 700 $ 604 $ 96 15.9 %

Earnings on BOLI 88 59 29 49.2

Mortgage servicing income 295 306 (11) (3.6)

Fair value adjustment on mortgage servicing rights (78) 9 (87) (966.7)

Net gain on sale of loans 76 48 28 58.3

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

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

Noninterest income increased $127 thousand, or 13.1%, to $1.1 million for the three months ended March 31, 2024, as compared to $1.0 million for the three months ended March 31, 2023, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Change Percent

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Total noninterest income $ 1,096 $ 969 $ 127 13.1 %

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.

The increase in noninterest income was due to a $31 thousand increase in service charges and fee income, a $26 thousand increase in the cash surrender value of BOLI due to higher market rates, a $75 thousand improvement in the fair value adjustment on mortgage servicing rights due to higher market rates and a $12 thousand increase in net gain on sale of loans as a result of increased sales volume, partially offset by a decrease in mortgage servicing income as a result of the portfolio paying down at a faster speed than we are replacing the loans.

Loans sold during the quarter ended March 31, 2024, totaled $4.2 million, compared to $3.9 million during the quarter ended March 31, 2023.

Noninterest Expense.

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

Salaries and benefits $ 4,148 $ 4,044 $ 104 2.6 %

Operations 1,625 1,610 15 0.9

Regulatory assessments 183 116 67 57.8

Occupancy 458 447 11 2.5

Data processing 1,296 848 448 52.8

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

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

Noninterest expense increased $41 thousand, or 0.5%, to $7.7 million during the three months ended March 31, 2024, compared to $7.6 million during the three months ended March 31, 2023, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Change Percent

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Data processing 1,017 993 24 2.4

Net loss on OREO and repossessed assets 13 — 13 (100.0)

Net gain on OREO and repossessed assets 6 84 (78) (92.9)

Total noninterest expense $ 7,656 $ 7,615 $ 41 0.5 %

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.

The increase in noninterest expense was mainly attributable to an increase in salaries and benefits of $58 thousand, reflecting an increase in incentive compensation as a result of deposit and loan production, and higher medical expense, partially offset by lower salaries due to the restructuring of positions at the Bank, lower deferred compensation, lower stock compensation and higher deferred salaries.

Data processing expenses increased due to software-related costs for new technology being implemented at the Bank and higher processing charges related to a higher volume of transactional activity and regulatory assessments increased $36 thousand due to the change in the assessment rate during 2023.

These increases were partially offset by a decrease in net (gain) loss on OREO and repossessed assets as a result of the write-off of one OREO property in the first quarter of 2023.

The efficiency ratio for the quarter ended March 31, 2024 was 89.48%, compared to 73.65% for the quarter ended March 31, 2023.

The deterioration in the efficiency ratio was primarily due to lower net interest income resulting from a faster increase in interest expense compared to interest income, and a slight increase in noninterest expense, partially offset by a slight increase in noninterest income.

Income Tax Expense .

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.

The provision for income taxes was $163 thousand and $547 thousand for the three months ended March 31, 2024 and March 31, 2023, respectively.

The effective tax rates for the three months ended March 31, 2024 and March 31, 2023 were 17.47% and 20.15%, respectively.

The effective tax rate for the three months ended March 31, 2024 was lower than the same period the prior year as a result of a higher portion of nontaxable income related to earnings on BOLI and nontaxable AFS securities during the current period in 2024 as compared to the same period in 2023.

Capital and Liquidity

The Management’s Discussion and Analysis in Item 7 of the Company’s 2023 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 nine months ended September 30, 2023.

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 $0.55 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.

Although there have been no material changes in our liquidity management, sources of liquidity and cash flows since our 2023 Form 10-K, this discussion updates that disclosure for the three months ended March 31, 2024.

Stockholders’ equity totaled $101.0 million at March 31, 2024 and $100.7 million at December 31, 2023.

In addition to net income of $770 thousand, other sources of capital during the three months ended March 31, 2024 primarily included $26 thousand in proceeds from stock option exercises.

Uses of capital during the three months ended March 31, 2024 primarily included $486 thousand of dividends paid on common stock.

We paid a quarterly dividend of $0.19 per common share during the three months ended March 31, 2024 and $0.17 per common share during the three months ended March 31, 2023, which equates to a dividend payout ratio of 63.12% and 20.39%, respectively.

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 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.

Assuming continued payment of the regular quarterly cash dividend during the remainder of 2024 at the rate of $0.19 per share, our average total dividend paid each quarter would be approximately $486 thousand based on the number of outstanding shares as of March 31, 2024.

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 2023 Form 10-K.

3 unchanged sentences

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

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

As of March 31, 2024, approximately $1.5 million 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.

13 unchanged sentences

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

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

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

As of 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.

As of March 31, 2024, we had $146.1 million in cash and cash equivalents and available-for-sale investment securities, and $351 thousand in loans held-for-sale.

At March 31, 2024, we had the ability to borrow $180.9 million in FHLB advances and access to additional borrowings of $19.5 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 FHLB and none from the Federal Reserve at March 31, 2024.

We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding at March 31, 2024.

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 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.

As of March 31, 2024, 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.

2 unchanged sentences

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.

Refer to the accompanying Notes to Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of March 31, 2024.

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 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

At March 31, 2024 and December 31, 2023, financial instrument contract amounts representing credit risk were as follows (in thousands):

March 31, 2024 December 31, 2023

Residential mortgage commitments $ 11,396 $ 10,465

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 2023 Form 10-K.

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.

At March 31, 2024 Sound Financial Bancorp, on an unconsolidated basis, had $1.9 million 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 September 30, 2023, the Bank and Company’s CBLR was 11.23% and 10.05%, respectively, which exceeded the minimum requirement of 9%.

As of March 31, 2024, the Bank and Company’s CBLR was 10.55% and 9.55%, 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