What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-13 compared with 2024-05-14 · 252 added, 142 removed, 321 unchanged (55% 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;

• 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;

• adverse economic conditions in our market areas and other markets where we have lending relationships;

• effects of employment levels, labor shortages, inflation, a recession, or slowed economic growth;

• changes in the interest rate environment, including past increases in the Board of Governors of the Federal Reserve System (the Federal Reserve) benchmark rate and duration of such increased levels, 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 inflation and the Federal Reserve monetary policy;

• 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;

• the risks of lending and investing activities, including delinquencies write-offs and changes in our allowance for credit losses and provision for credit losses;

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

Government and other governmental initiatives affecting the financial services industry;

• the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

• fluctuations in the demand for loans, the number of unsold homes, land and other properties;

• bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

• fluctuations in the demand for loans, unsold homes, land and other properties;

• fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area;

3 unchanged sentences

• secondary market conditions for loans and our ability to sell loans in the secondary market;

• fluctuations in interest rates;

• results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for credit losses or to write-down assets, change Sound Community Bank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

• the inability of key third-party providers to perform their obligations to us;

• results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to increase our allowance for credit losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits;

• the inability of key third-party providers to perform their obligations;

• our ability to attract and retain deposits;

1 unchanged sentence

• our ability to successfully integrate into our operations any assets, liabilities, clients, systems, and management personnel we may acquire and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all;

• the use of estimates in determining the fair values of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

• 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;

• use of estimates in determining the fair values of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

• our ability to keep pace with technological 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.

3 unchanged sentences

• costs and effects of litigation, including settlements and judgments;

• our ability to implement our business strategies;

• staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

• our ability to implement our business strategies, including expectations regarding key growth initiatives and strategic priorities;

• environmental, social and governance goals;

• staffing fluctuations in response to product demand or corporate implementation strategies;

• our ability to pay dividends on our common stock;

• 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, civil unrest and other external events on our business;

• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on our third-party vendors;

• 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;

• 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 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.

At June 30, 2024, Sound Financial Bancorp, on a consolidated basis, had assets of $1.07 billion, net loans held-for-portfolio of $880.8 million, deposits of $906.8 million and stockholders’ equity of $101.3 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.

5 unchanged sentences

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.

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

1 unchanged sentence

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 borrowers.

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.

Comparison of Financial Condition at June 30, 2024 and December 31, 2023

Total assets increased $79.6 million, or 8.0%, to $1.07 billion at June 30, 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, partially offset by a decrease in loans held-for-portfolio.

Cash and Securities, and Investment Securities.

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.

Cash and cash equivalents increased $85.4 million, or 171.9%, to $135.1 million at June 30, 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):

In addition, balances of cash and cash equivalents increased as a result of a decrease in our loan portfolio and higher overall deposit balances.

Investment securities decreased $310 thousand, or 3.0%, to $10.1 million at June 30, 2024, compared to $10.5 million at December 31, 2023.

Held-to-maturity securities totaled $2.1 million at June 30, 2024, compared to $2.2 million at December 31, 2023.

Available-for-sale securities totaled $8.0 million at June 30, 2024, compared to $8.3 million at December 31, 2023.

The decrease in available-for-sale securities was primarily due to regularly scheduled payments and higher net unrealized losses resulting from an increase in municipal bond yields during the first half of 2024.

Loans held-for-portfolio, net, decreased $4.9 million, or 0.6%, to $880.8 million at June 30, 2024 from $885.7 million at December 31, 2023.

The following table reflects the changes in the mix of our loan portfolio at June 30, 2024, as compared to December 31, 2023 (dollars in thousands):

2024 December 31,

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Total loans held-for-portfolio, net $ 880,781 $ 885,718 $ (4,937) (0.6) %

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.

As noted in the table above, decreases in the loan portfolio were driven primarily 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 one-to-four-family loans, which was primarily due to one low yielding jumbo mortgage loan that the borrower paid off early and normal loan payments exceeding loan originations.

In addition, other consumer and commercial business loans, decreased due to because of payoffs and paydowns, including the payoff of $2.1 million related to one commercial business loan that was previously on nonaccrual.

These decreases were partially offset 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.

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.

At June 30, 2024, our loan portfolio, net of deferred loan fees, remained well-diversified.

At that date, commercial and multifamily real estate loans accounted for 38.4% of total loans, one-to-four family loans, including home equity loans, accounted for 33.0% of total loans, commercial business loans accounted for 2.0% 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.

Construction and land loans accounted for 10.9% of total loans at June 30, 2024.

Loans held-for-sale totaled $257 thousand at June 30, 2024, compared to $603 thousand at December 31, 2023.

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

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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:

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

2024 2023 2024 2023

Balance at beginning of period $ 8,598 $ 8,532 $ 8,760 $ 7,599

8 unchanged sentences

Impact of Adoption of ASU 2016-13 — — 695

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

(Release of) provision for credit losses (21) (89) 52 (324)

Balance at end of period 245 706 245 706

Allowance for credit losses $ 8,864 $ 9,327

ACL $ 8,738 $ 8,923 $ 8,738 $ 8,923

Ratio of net charge-offs during the period to average loans outstanding during the period (0.01) % (0.03) % (0.02) % (0.03) %

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.”

Our ACL — loans decreased $267 thousand, or 3.0%, to $8.5 million at June 30, 2024, from $8.8 million at December 31, 2023.

The decrease in the ACL - loans from December 31, 2023 to June 30, 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 and a decrease in the ACL- loans due to portfolio shrinkage, partially offset by an increase in nonaccrual loans and the weighted average life of the portfolio.

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

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

Allowance for credit losses — loans $ 8,598 $ 8,760

At June 30, 2024 At December 31, 2023

ACL - loans as a percentage of total loans outstanding 0.95 % 0.98 %

ACL — loans $ 8,493 $ 8,760

Total loans outstanding $ 891,124 $ 896,160

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Total loans outstanding $ 891,124 $ 896,160

Allowance for credit losses - loans as a percentage of nonaccrual loans

ACL - loans as a percentage of nonaccrual loans

95.33 % 246.34 %

Allowance for credit losses — loans $ 8,598 $ 8,760

ACL — loans $ 8,493 $ 8,760

Total nonaccrual loans $ 8,909 $ 3,556

Allowance for credit losses as a percentage of total loans outstanding 0.99 % 1.00 %

Allowance for credit losses $ 8,864 $ 8,953

ACL as a percentage of total loans outstanding 0.98 % 1.00 %

ACL $ 8,738 $ 8,953

Total loans outstanding $ 891,124 $ 896,160

Allowance for credit losses as a percentage of nonaccrual loans 97.91 % 251.77 %

Allowance for credit losses $ 8,864 $ 8,953

ACL as a percentage of nonaccrual loans 98.08 % 251.77 %

ACL $ 8,738 $ 8,953

Total nonaccrual loans $ 8,909 $ 3,556

Three Months Ended March 31,

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

2024 2023 2024 2023

($ in thousands)

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One-to-four family:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

$ 273,597 $ 274,066 $ 276,034 $ 274,163

— % (0.51) % — % (0.26) %

Net (charge-offs)/recoveries

$ — $ (25) $ — $ (25)

Average loans outstanding

1 unchanged sentence

Commercial and multifamily real estate:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

1 unchanged sentence

Construction and land:

— % — % — % — %

Net (charge-offs)/recoveries

2 unchanged sentences

Manufactured homes:

— % — % (0.12) % — %

Net (charge-offs)/recoveries

$ — $ — $ (23) $ —

Average loans outstanding

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Floating homes:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

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Commercial business:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

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Nonperforming Assets.

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.

Nonperforming assets (“NPAs”), which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $4.9 million, or 118.4%, to $9.0 million, or 0.84% of total assets, at June 30, 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):

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Total nonperforming assets $ 9,024 $ 4,131 $ 4,893 118.4 %

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.

The increase in NPAs primarily was due to the addition of $8.7 million of loans 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 payoff of one floating home loan of $722 thousand that was new in the first quarter of 2024 (included above in additions), the return of four loans to accrual status, and normal payment amortization.

The percentage of nonperforming loans to total loans was 1.00% at June 30, 2024, compared to 0.40% of total loans at December 31, 2023.

Mortgage Servicing Rights.

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

The fair value of mortgage servicing rights decreased $92 thousand or 2.0%, to $4.5 million at June 30, 2024 from $4.6 million at 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 $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.

Total deposits increased $80.2 million, or 9.7%, to $906.8 million at June 30, 2024 from $826.5 million at December 31, 2023.

The increase was largely a result of the strategic movement of reciprocal deposits off balance sheet at year-end, which then returned in the first quarter of 2024.

Additionally, there was an increase in money market and time deposits, which was partially offset by decreases in public funds accounts, noninterest-bearing and interest-bearing demand accounts, and savings accounts.

The shift occurred as interest rate sensitive clients moved a portion of their non-operating deposit balances from lower costing deposits, including noninterest-bearing deposits, into higher costing money market and time deposits.

Noninterest-bearing deposits decreased $1.8 million, or 1.4%, to $124.9 million at June 30, 2024, compared to $126.7 million at December 31, 2023.

Noninterest-bearing deposits represented 13.8% of total deposits at June 30, 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):

March 31, 2024 December 31, 2023

June 30, 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 March 31, 2024, are as follows (in thousands):

Scheduled maturities of time deposits at June 30, 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 March 31, 2024 and December 31, 2023, totaled $94.0 million and $88.3 million, respectively.

The aggregate amount of time deposits in denominations of more than $250,000 at June 30, 2024 and December 31, 2023, totaled $89.6 million and $88.3 million, respectively.

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

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.

As of June 30, 2024, uninsured deposits totaled $148.9 million, which represented 16.4% 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 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.

Borrowings, comprised of FHLB advances, were $40.0 million at both June 30, 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.

FHLB advances outstanding at June 30, 2024 had maturities ranging from late 2024 through early 2028.

Subordinated notes, net totaled $11.7 million at both June 30, 2024 and December 31, 2023.

Stockholders’ Equity.

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.

Total stockholders’ equity increased $693 thousand, or 0.7%, to $101.3 million at June 30, 2024, from $100.7 million at December 31, 2023.

This increase primarily reflects $1.6 million of net income earned during the six months ended June 30, 2024 and $33 thousand in proceeds from exercises of stock options, partially offset by the cash payment of $972 thousand in dividends to the Company’s stockholders.

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

3 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 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,

Balance Interest

Rate Annualized Average

Balance Interest

Rate Annualized

Interest-earning assets:

Loans receivable $ 893,646 $ 24,553 5.53 % $ 866,862 $ 22,932 5.33 %

Investments 12,633 244 3.88 14,263 249 3.52

Cash and cash equivalents 114,082 3,002 5.29 64,236 1,405 4.41

Total interest-earning assets (1)

1,020,361 27,799 5.48 945,361 24,586 5.24

Interest-bearing liabilities:

Savings and money market accounts 292,954 3,981 2.73 163,714 477 0.59

Demand and NOW accounts 156,751 289 0.37 228,032 414 0.37

Certificate accounts 316,495 7,426 4.72 263,268 4,197 3.21

Subordinated notes 11,730 336 5.76 11,688 336 5.80

Borrowings 40,000 859 4.32 46,533 1,046 4.53

Total interest-bearing liabilities 817,930 12,891 3.17 % 713,235 6,470 1.83 %

Net interest income $ 14,908 $ 18,116

Net interest rate spread 2.31 % 3.42 %

Net earning assets $ 202,431 $ 232,126

Net interest margin 2.94 % 3.86 %

Average interest-earning assets to average interest-bearing liabilities 124.75 % 132.55 %

Noninterest-bearing deposits $ 130,658 $ 166,007

Total deposits $ 896,858 $ 11,696 2.62 % $ 821,021 $ 5,088 1.25 %

Total funding (2)

$ 948,588 $ 12,891 2.73 % $ 879,242 $ 6,470 1.48 %

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

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

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

Rate/Volume Analysis

3 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 March 31, 2024 vs.

Three Months Ended June 30, 2024 vs.

Six Months Ended June 30, 2024 vs.

Increase (Decrease) due to Total

Increase (Decrease) Increase (Decrease) due to Total

Increase (Decrease)

Volume Rate Volume Rate

Interest-earning assets:

11 unchanged sentences

Change in net interest income $ (1,296) $ (3,208)

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

Comparison of Results of Operation for the Three and Six Months Ended June 30, 2024 and 2023

Q2 2024 vs Q2 2023 .

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.

Net income decreased $2.1 million, or 72.5%, to $795 thousand, or $0.31 per diluted common share, for the three months ended June 30, 2024, compared to $2.9 million, or $1.11 per diluted common share, for the three months ended June 30, 2023.

The decrease was the result of a $1.3 million decrease in net interest income, a $729 thousand decrease in noninterest income, a $240 thousand increase in noninterest expense, and a $222 thousand decrease in the release for credit losses, partially offset by a $390 thousand decrease in the provision for income taxes.

Net income decreased $3.5 million, or 69.1%, to $1.6 million, or $0.61 per diluted common share, for the six months ended June 30, 2024, compared to $5.1 million, or $1.94 per diluted common share, for the six months ended June 30, 2023.

The decrease was primarily a result of a $3.2 million decrease in net interest income, a $179 thousand decrease in the release of credit losses, a $600 thousand decrease in noninterest income and a $282 thousand increase in noninterest expense, partially offset by a $774 thousand decrease in the provision for income taxes.

Interest Income

Q2 2024 vs Q2 2023 .

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.

Interest income increased $1.6 million, or 13.1%, to $14.0 million for the three months ended June 30, 2024, from $12.4 million for the three months ended June 30, 2023, primarily due to higher average balances of loans and interest-bearing cash, a 21 basis point increase in the average yield on loans, a 68 basis point increase in the average yield on interest-bearing cash, and a 45 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 $769 thousand, or 6.7%, to $12.3 million for the three months ended June 30, 2024, compared to $11.6 million for the three months ended June 30, 2023.

The average balance of total loans was $891.9 million for the three months ended June 30, 2024, compared to $866.0 million for the three months ended June 30, 2023.

The average yield on total loans was 5.56% for the three months ended June 30, 2024, compared to 5.35% for the three months ended June 30, 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 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 income on the investment portfolio increased $5 thousand, or 3.9%, to $133 thousand for the three months ended June 30, 2024, compared to $128 thousand for the three months ended June 30, 2023.

The increase was due to a higher average yield, partially offset by a decrease in the average balance.

The average balance of investments was $13.9 million for the three months ended June 30, 2024, compared to $15.1 million for the three months ended June 30, 2023, while the average yield on investments increased 45 basis points to 3.84% for the three months ended June 30, 2024, compared to 3.39% for the three months ended June 30, 2023.

Interest income on cash and cash equivalents increased $853 thousand, or 116.4% to $1.6 million for the three months ended June 30, 2024, compared to $733 thousand for the three months ended June 30, 2023.

The increase was due to a higher average

balance of and yield on cash and cash equivalents.

The average yield on cash and cash equivalents increased to 5.28% for the three months ended June 30, 2024, compared to 4.60% for the three months ended June 30, 2023, as a result of the higher interest rate environment.

The average balance of cash and cash equivalents was $120.8 million for the three months ended June 30, 2024, compared to $63.9 million for the three months ended June 30, 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 income increased $3.2 million, or 13.1%, to $27.8 million for the six months ended June 30, 2024, from $24.6 million for the six months ended June 30, 2023, primarily due to higher average loan balances, and increased yields on loans, investments and cash and cash equivalents of 20 basis point, 36 basis point, and 88 basis point, respectively, partially offset by a lower average balance of investments.

Interest income on loans increased $1.6 million, or 7.1%, to $24.6 million for the six months ended June 30, 2024, compared to $22.9 million for the six months ended June 30, 2023, driven by higher average balance of total loans and a 20 basis points increase in the average yield on loans.

The average balance of total loans was $893.6 million for the six months ended June 30, 2024, compared to $866.9 million for the six months ended June 30, 2023.

The average yield on total loans was 5.53% for the six months ended June 30, 2024, compared to 5.33% for the six months ended June 30, 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 Expense

Q2 2024 vs Q2 2023 .

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.

Interest expense increased $2.9 million, or 79.7%, to $6.6 million for the three months ended June 30, 2024, from $3.7 million for the three months ended June 30, 2023.

The increase was primarily the result of a $37.7 million increase in the average balance of certificate accounts and a $138.3 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 $61.4 million decrease in the average balance of demand and NOW accounts and a $8.1 million decrease in the average balance of FHLB advances.

The 126 basis point increase in the rate paid on certificate accounts and the 196 basis point increase in the rate paid on savings and money market accounts contributed to an overall 122 basis point increase in the average cost of total deposits to 2.67% for the quarter ended June 30, 2024, from 1.45% for the quarter ended June 30, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $429 thousand for the three months ended June 30, 2024, compared to $547 thousand for the three months ended June 30, 2023, primarily due to a 25 basis point decline in the average cost of FHLB advances to 4.31% for the quarter ended June 30, 2024, compared to 4.56% for the same quarter in 2023.

The average cost of FHLB advances declined due to no overnight borrowings utilized in the current quarter as compared to utilization of overnight borrowings in 2023.

The average balance of FHLB advances was $40.0 million for the three months ended June 30, 2024, compared to $48.1 million for the three months ended June 30, 2023.

Interest expense on subordinated notes was $168 thousand for both the three months ended June 30, 2024 and 2023.

Interest expense increased $6.4 million, or 99.2%, to $12.9 million for the six months ended June 30, 2024, from $6.5 million for the six months ended June 30, 2023.

Interest expense on deposits increased $6.6 million, or 129.9%, to $11.7 million for the six months ended June 30, 2024, compared to $5.1 million for the six months ended June 30, 2023.

The increase was primarily the result of an increase in the average balance of savings and money market accounts and certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a decrease in the average balance of demand and now accounts.

The average cost of total deposits increased 137 basis points to 2.62% for the six months ended June 30, 2024, from 1.25% for the six months ended June 30, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $859 thousand for the six months ended June 30, 2024, compared to $1.0 million for the six months ended June 30, 2023, reflecting the decreased use of FHLB advances to supplement our liquidity needs.

The average cost of FHLB advances decreased 21 basis points to 4.32% for the six months ended June 30, 2024, compared to 4.53% for the same period in 2023.

The averages cost of FHLB advances declined due to no overnight borrowings utilized in 2024 as compared to utilization of overnight borrowings in 2023.

The average balance of FHLB advances was $40.0 million for the six months ended June 30, 2024, compared to $46.5 million for the six months ended June 30, 2023.

Interest expense on subordinated notes was $336 thousand for both the six months ended June 30, 2024 and 2023.

Net Interest Income.

Q2 2024 vs Q2 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.

Net interest income decreased $1.3 million, or 14.8%, to $7.4 million for the three months ended June 30, 2024, from $8.7 million for the three months ended June 30, 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.

Net interest margin (annualized) was 2.92% and 3.71% for the three months ended June 30, 2024 and June 30, 2023, respectively.

The decrease in net interest margin

primarily was due to the cost of funding increasing at a faster pace than the yield earning on interest-earning assets, driven by the higher average balance of higher costing money market and certificate accounts.

Net interest income decreased $3.2 million, or 17.7%, to $14.9 million for the six months ended June 30, 2024, from $18.1 million for the six months ended June 30, 2023.

Net interest margin was 2.94% and 3.86% for the six months ended June 30, 2024 and 2023, respectively.

The decrease in net interest income primarily resulted from an increase in the average balances of and rate paid on deposits, offset by higher average balances and yield earned on interest-earning assets and lower average balances and rate paid on 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.

During 2023, in response to inflation, the Federal Open Market Committee of the Federal Reserve increased the target range for the federal funds rate by 100 basis points to a range of 5.25% to 5.50%, where it remained as of June 30, 2024.

There have been no federal funds rate increases subsequent to July 2023.

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 March 31,

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

2024 2023 2024 2023

(Release of) Provision for credit losses on loans $ (88) $ (242) $ (194) $ 3

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.

(Release of) Provision for credit losses on unfunded loan commitments (21) (89) 52 (324)

Release of credit losses $ (109) $ (331) $ (142) $ (321)

During the three months ended June 30, 2024, the release of credit losses on loans resulted primarily from the decrease in our loans held-for-portfolio, as well as lower expected loss estimates in the current quarter, while the release of credit losses on unfunded loan commitments related to overall fewer loan commitments.

During the six months ended June 30, 2024, the release of 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, as well as a smaller loan portfolio, partially offset by 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 June 30, 2024.

Net charge-offs for the three months ended June 30, 2024 totaled $17 thousand, compared to $73 thousand for three months ended June 30, 2023.

Net charge-offs for the six months ended June 30, 2024 totaled $73 thousand, compared to net charge-offs of $145 thousand for the six months ended June 30, 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 $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

Noninterest income decreased $729 thousand, or 38.6%, to $1.2 million for the three months ended June 30, 2024, as compared to $1.9 million for the three months ended June 30, 2023, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

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Net gain on sale of loans 74 110 (36) (32.7)

Other income 30 — 30 100.0

Total noninterest income $ 1,162 $ 1,891 $ (729) (38.6) %

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.

The decrease in noninterest income was due to a $584 thousand decrease in earnings on BOLI due to a death benefit received in the second quarter of 2023, a $212 thousand decrease in the fair value adjustment on mortgage servicing rights due to faster prepayment speeds, a $36 thousand decrease in net gain on sale of loans as a result of a lower valuation of servicing rights of newly originated loans and a $18 thousand decrease in mortgage servicing income as a result of the portfolio paying down at a faster speed than new originations, partially offset by a $91 thousand increase in service charges and fee income due to a recovery of potential future lost fee income due to a vendor error and a $30 thousand gain on disposal of assets due to insurance claims on loss of fully depreciated assets.

Loans sold during the quarter ended June 30, 2024, totaled $4.0 million, compared to $6.4 million during the quarter ended June 30, 2023.

Noninterest income decreased $600 thousand, or 21.0%, to $2.3 million for the six months ended June 30, 2024, as compared to $2.9 million for the six months ended June 30, 2023, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Service charges and fee income $ 1,373 $ 1,251 $ 122 9.8 %

Earnings on BOLI 311 868 (557) (64.2)

Mortgage servicing income 561 596 (35) (5.9)

Fair value adjustment on mortgage servicing rights (181) (44) (137) 311.4

Net gain on sale of loans 164 187 (23) (12.3)

Other income 30 — 30 100.0

Total noninterest income $ 2,258 $ 2,858 $ (600) (21.0) %

The decrease in noninterest income during the six months ended June 30, 2024, compared to the same period in 2023 primarily was due to a $557 thousand decrease in earnings on BOLI due to death benefit received in the second quarter of 2023, a $137 thousand downward adjustment in the fair value of mortgage servicing rights due to faster prepayment speeds, a $23 thousand decrease in net gain on sale of loans resulting from lower mortgage activity and a $35 thousand decline in mortgage servicing income for the same reasons discussed above for the three months ended June 30, 2024.

These decreases were partially offset by a $122 thousand increase in service charges and fee income and a $30 thousand gain on disposal of assets due to the reasons noted above.

Loans sold during the six months ended June 30, 2024, totaled $8.2 million, compared to $10.3 million during the six months ended June 30, 2023.

Noninterest Expense.

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

Noninterest expense increased $240 thousand, or 3.2%, to $7.7 million during the three months ended June 30, 2024, compared to $7.5 million during the three months ended June 30, 2023, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

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Total noninterest expense $ 7,737 $ 7,497 $ 240 3.2 %

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.

The increase in noninterest expense was primarily due to an increase in data processing expenses of $122 thousand, reflecting software-related costs for new technology being implemented at the Bank and higher processing charges related to a higher volume of transactional activity.

Operations expense increased $78 thousand due to higher loan origination costs, higher investor relations expenses and operational losses due to one large check fraud issue in the second quarter of 2024, and charitable contributions due to timing of transactions, partially offset by lower office expenses due to expense management strategies.

Regulatory assessments increased $66 thousand due to higher regulatory exam costs paid in the second quarter of 2024 and an increase in regulatory assessments due to the change in the assessment rate in the prior year not being adjusted for until later in 2023.

Net gain on OREO and repossessed assets expense decreased $54 thousand due to recoveries of a former OREO property charged off during the second quarter of 2023.

These increases were partially offset by a decrease of $42 thousand in salaries and benefits, reflecting lower salaries due to the restructuring of positions at the Bank, lower deferred compensation, lower medical expense, lower stock compensation and higher deferred salaries, partially offset by an increase in incentive compensation as a result of performance incentives and overall Bank performance.

Occupancy expenses decreased from the prior quarter primarily due to the release of an accrual for property taxes due to lower than expected payments.

The efficiency ratio for the quarter ended June 30, 2024 was 89.86%, compared to 70.49% for the quarter ended June 30, 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, a decrease in noninterest income, and an increase in noninterest expense.

Noninterest expense increased $282 thousand, or 1.9%, to $15.4 million during the six months ended June 30, 2024, compared to $15.1 million during the six months ended June 30, 2023, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Salaries and benefits $ 9,201 $ 9,185 $ 16 0.2 %

Operations 3,026 2,933 93 3.2

Regulatory assessments 409 307 102 33.2

Occupancy 841 894 (53) (5.9)

Data processing 1,928 1,780 148 8.3

Net (gain) loss on OREO and repossessed assets (11) 13 (24) (184.6)

Total noninterest expense $ 15,394 $ 15,112 $ 282 1.9 %

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

The increases in these accounts primarily relate to annual price increases, as well as consulting fees for projects not able to be capitalized.

The decrease in office costs reflects our strategic commitment to reducing expenses as we recognized over $100 thousand of operations expense savings.

Regulatory assessments and data processing expenses rose due to the reasons noted above.

The net gain on OREO and repossessed assets in the current year relates to the sale of a longtime OREO property for a gain on sale partially offset by expenses related to the foreclosure of one manufactured home loan in the first quarter of 2024.

The net loss on OREO and repossessed assets in the prior year relates to the expenses associated with, and the charge-off of, a former OREO property during the first quarter of 2023 which was partially offset by the subsequent sale of that property in the second quarter of 2023.

Occupancy expenses decreased for the reason noted above.

Income Tax Expense .

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.

The provision for income taxes was $187 thousand and $350 thousand for the three and six months ended June 30, 2024, compared to $577 thousand and $1.1 million for the three and six months ended June 30, 2023, respectively.

The effective tax rates for the three and six months ended June 30, 2024 were 19.04% and 18.29%, 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 rate for the three months ended June 30, 2024 was higher than the same period in the prior year as a result of the BOLI death benefit received in the second quarter of 2023, which was nontaxable income.

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 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.

Stockholders’ equity totaled $101.3 million at June 30, 2024 and $100.7 million at December 31, 2023.

In addition to net income of $1.6 million, other sources of capital during the six months ended June 30, 2024 primarily included $33 thousand in proceeds from stock option exercises and $193 thousand related to stock-based compensation.

Uses of capital during the six months ended June 30, 2024 primarily included $972 thousand of dividends paid on common stock, $64 thousand in stock repurchases, and $61 thousand of other comprehensive loss, net of tax, primarily resulting from unrealized losses on available for sale securities.

We paid cash dividends of $0.38 per common share during the six months ended June 30, 2024 and $0.36 per common share during the six months ended June 30, 2023, which equates to a dividend payout ratio of 62.15% and 18.50%, 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 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 March 31, 2024, approximately $1.5 million of our common stock remained available for repurchase under our existing stock repurchase program.

As of June 30, 2024, approximately $1.4 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.

9 unchanged sentences

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

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

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

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

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

We continuously monitor our liquidity position and adjust the balance between sources and uses of funds as we deem appropriate.

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

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

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 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.

As of June 30, 2024, we had $143.1 million in cash and cash equivalents and available-for-sale investment securities, and $257 thousand in loans held-for-sale.

At June 30, 2024, we had the ability to borrow $175.0 million in FHLB advances and access to additional borrowings of $22.5 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 June 30, 2024.

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

As of June 30, 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.

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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 March 31, 2024.

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, 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).

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

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

At June 30, 2024 and December 31, 2023, financial instrument contract amounts representing credit risk were as follows (in thousands):

June 30, 2024 December 31, 2023

Residential mortgage commitments $ 11,582 $ 10,465

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See “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2023 Form 10-K.

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.

At June 30, 2024 Sound Financial Bancorp, on an unconsolidated basis, had $1.2 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.

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

As of March 31, 2024, the Bank and Company’s CBLR was 10.55% and 9.55%, respectively, which exceeded the minimum requirement of 9%.

As of June 30, 2024, the Bank’s and the Company’s CBLRs were 10.58% and 9.51%, 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