What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-11-13 compared with 2024-08-13 · 179 added, 167 removed, 406 unchanged (46% of the section changed)

5 unchanged sentences

These statements relate to our financial condition, results of operations, plans, objectives, future performance or business.

Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision.

Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit loss experience, and statements regarding our mission and vision.

These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties.

2 unchanged sentences

• 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;

• changes in the interest rate environment, including increases and decreases in the Board of Governors of the Federal Reserve System (the “Federal Reserve”) benchmark rate and duration of such rates, 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’s monetary policy decisions;

• the effects of any federal government shutdown;

25 unchanged sentences

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

• our ability to pay dividends on our common stock;

• our ability to pay dividends on and repurchase 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 our third-party vendors;

• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on those of 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;

9 unchanged sentences

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

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.

At September 30, 2024, Sound Financial Bancorp, on a consolidated basis, had assets of $1.10 billion, net loans held-for-portfolio of $893.1 million, deposits of $930.2 million and stockholders’ equity of $102.2 million.

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

12 unchanged sentences

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 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.

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

Total assets increased $105.7 million, or 10.6%, to $1.10 billion at September 30, 2024 from $995.2 million at December 31, 2023.

The increase primarily was a result of an increase in cash and cash equivalents and loans held-for-portfolio.

Cash and Securities, and Investment Securities.

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.

Cash and cash equivalents increased $99.2 million, or 199.7%, to $148.9 million at September 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.

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):

In addition, balances of cash and cash equivalents increased as a result of higher overall deposit balances.

Investment securities decreased $282 thousand, or 2.7%, to $10.2 million at September 30, 2024, compared to $10.5 million at December 31, 2023.

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

Available-for-sale securities totaled $8.0 million at September 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, partially offset by lower net unrealized losses resulting from an increase in yields on our agency mortgage backed securities during 2024.

Loans held-for-portfolio, net, increased $7.4 million, or 0.8%, to $893.1 million at September 30, 2024 from $885.7 million at December 31, 2023.

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

September 30,

2024 December 31,

13 unchanged sentences

Total loans held-for-portfolio, net $ 893,148 $ 885,718 $ 7,430 0.8 %

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.

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

1 unchanged sentence

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.

These increases were partially offset by decreases in construction and land loans, which were primarily due to project completions and reduced demand caused by higher interest rates, which limited new financing opportunities, 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 because of payoffs and paydowns, including the payoff of a $2.1 million commercial business loan that was previously on nonaccrual.

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

At that date, commercial and multifamily real estate loans accounted for 39.7% of total loans, one-to-four family loans, including home equity loans, accounted for 32.9% of total loans, commercial business loans accounted for 1.9% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 16.0% of total loans.

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.

Construction and land loans accounted for 9.5% of total loans at September 30, 2024.

Loans held-for-sale totaled $65 thousand at September 30, 2024, compared to $603 thousand at December 31, 2023.

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

1 unchanged sentence

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

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

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

2024 2023 2024 2023

13 unchanged sentences

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

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.”

Our ACL — loans decreased $175 thousand, or 2.0%, to $8.6 million at September 30, 2024, from $8.8 million at December 31, 2023.

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

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

At September 30, 2024 At December 31, 2023

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

15 unchanged sentences

Total nonaccrual loans $ 8,489 $ 3,556

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

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

2024 2023 2024 2023

53 unchanged sentences

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 $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.

Nonperforming assets (“NPAs”), which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $4.5 million, or 108.3%, to $8.6 million, or 0.78% of total assets, at September 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):

Nonperforming Assets

September 30,

2024 December 31,

3 unchanged sentences

Total nonperforming assets $ 8,604 $ 4,131 $ 4,473 108.3 %

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.

The increase in NPAs primarily was due to the addition of $9.0 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 a $2.1 million commercial business loan, 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 five loans to accrual status, and normal payment amortization.

Subsequent to September 30, 2024, the repossessed manufactured home noted above was sold for a small gain on sale.

The percentage of nonperforming loans to total loans was 0.94% at September 30, 2024, compared to 0.40% at December 31, 2023.

Mortgage Servicing Rights.

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.

The fair value of mortgage servicing rights increased $33 thousand or 0.7%, to $4.7 million at September 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.

2 unchanged sentences

Deposits and Borrowings.

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.

Total deposits increased $103.7 million, or 12.5%, to $930.2 million at September 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.

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

Noninterest-bearing deposits increased $3.0 million, or 2.4%, to $129.7 million at September 30, 2024, compared to $126.7 million at December 31, 2023.

Noninterest-bearing deposits represented 13.9% of total deposits at September 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):

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Rate Amount Wtd.

7 unchanged sentences

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

Scheduled maturities of time deposits at June 30, 2024, are as follows (in thousands):

Scheduled maturities of time deposits at September 30, 2024, are as follows (in thousands):

Year Ending December 31, Amount

3 unchanged sentences

Certificates of deposit have maturities of five years or less.

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

The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2024 and December 31, 2023, totaled $88.1 million and $88.3 million, respectively.

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

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.

As of September 30, 2024, uninsured deposits totaled $148.1 million, which represented 15.9% 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, were $40.0 million at both June 30, 2024 and December 31, 2023.

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, were $40.0 million at both September 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 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.

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

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

Stockholders’ Equity.

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.

Total stockholders’ equity increased $1.6 million, or 1.6%, to $102.2 million at September 30, 2024, from $100.7 million at December 31, 2023.

This increase primarily reflects $2.7 million of net income earned during the nine months ended September 30, 2024 and $251 thousand in proceeds from exercises of stock options, partially offset by the cash payment of $1.5 million 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 June 30,

Three Months Ended September 30,

Balance Interest

27 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

Balance Interest

32 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 June 30, 2024 vs.

Six Months Ended June 30, 2024 vs.

Three Months Ended September 30, 2024 vs.

Nine Months Ended September 30, 2024 vs.

Increase (Decrease) due to Total

15 unchanged sentences

Change in net interest income $ (295) $ (3,501)

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

Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2024 and 2023

Q3 2024 vs Q3 2023 .

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.

Net income decreased $15 thousand, or 1.3%, to $1.2 million, or $0.45 per diluted common share, for the three months ended September 30, 2024, from the three months ended September 30, 2023.

The decrease was the result of a $295 thousand decrease in net interest income, offset by a $154 thousand increase in noninterest income, a $31 thousand decrease in noninterest expense, a $67 thousand decrease in the release of credit losses, and a $28 thousand decrease in the provision for income taxes.

Net income decreased $3.5 million, or 56.3%, to $2.7 million, or $1.05 per diluted common share, for the nine months ended September 30, 2024, compared to $6.2 million, or $2.39 per diluted common share, for the nine months ended September 30, 2023.

The decrease was primarily a result of a $3.5 million decrease in net interest income, a $112 thousand decrease in the release of credit losses, a $446 thousand decrease in noninterest income and a $252 thousand increase in noninterest expense, partially offset by a $802 thousand decrease in the provision for income taxes.

1 unchanged sentence

Q3 2024 vs Q3 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 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.

Interest income increased $2.2 million, or 17.0%, to $14.8 million for the three months ended September 30, 2024, from $12.7 million for the three months ended September 30, 2023, primarily due to higher average balances of loans and interest-bearing cash, a 41 basis point increase in the average yield on loans, a 20 basis point increase in the average yield on interest-bearing cash, and an eight 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 $1.4 million, or 11.9%, to $12.9 million for the three months ended September 30, 2024, from $11.5 million for the three months ended September 30, 2023.

The average balance of total loans was $898.6 million for the three months ended September 30, 2024, compared to $862.4 million for the three months ended September 30, 2023.

The average yield on total loans was 5.70% for the three months ended September 30, 2024, compared to 5.29% for the three months ended September 30, 2023.

The increase in the average balance resulted primarily from growth in commercial and multifamily loans and floating home loans.

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

Interest income on the investment portfolio decreased $7 thousand, or 5.0%, to $132 thousand for the three months ended September 30, 2024, compared to $139 thousand for the three months ended September 30, 2023.

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

The average balance of investments was $13.8 million for the three months ended September 30, 2024, compared to $14.8 million for the three months ended September 30, 2023, while the average yield on investments increased seven basis points to 3.80% for the three months ended September 30, 2024, compared to 3.73% for the three months ended September 30, 2023.

Interest income on cash and cash equivalents increased $788 thousand, or 75.6% to $1.8 million for the three months ended September 30, 2024, compared to $1.0 million for the three months ended September 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 5.27% for the three months ended September 30, 2024, compared to 5.07% for the three months ended September 30, 2023, as a result of the higher interest rate environment.

The average balance of cash and cash equivalents was $138.2 million for the three months ended September 30, 2024, compared to $81.6 million for the three months ended September 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.

Interest income increased $5.4 million, or 14.4%, to $42.6 million for the nine months ended September 30, 2024, from $37.3 million for the nine months ended September 30, 2023, primarily due to a higher average balances of loans and interest-bearing cash, and increases in average yields on loans, investments and cash and cash equivalents of 26 basis points, 26 basis points, and 61 basis points, respectively, partially offset by a lower average balance of investments.

Interest income on loans increased $3.0 million, or 8.7%, to $37.4 million for the nine months ended September 30, 2024, compared to $34.4 million for the nine months ended September 30, 2023, driven by a higher average balance of total loans and a 26 basis point increase in the average yield on loans.

The average balance of total loans was $895.3 million for the nine months ended September 30, 2024, compared to $865.4 million for the nine months ended September 30, 2023.

The average yield on total loans was 5.58% for the nine months ended September 30, 2024, compared to 5.32% for the nine months ended September 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 cash and cash equivalents increased $2.4 million, or 130.19% to $4.8 million for the nine months ended September 30, 2024, compared to $2.4 million for the nine months ended September 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 nine months ended September 30, 2024, compared to 4.67% for the nine months ended September 30, 2023, as a result of the higher interest rate environment.

During September 2024 and November 2024, the Federal Reserve lowered the federal funds rate by 50 basis points and 25 basis points, respectively, which is expected to decrease the average yield on cash and cash equivalents in future periods.

The average balance of cash and cash equivalents was $122.2 million for the nine months ended September 30, 2024, compared to $70.1 million for the nine months ended September 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 Expense

Q3 2024 vs Q3 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.

Interest expense increased $2.4 million, or 54.2%, to $7.0 million for the three months ended September 30, 2024, from $4.5 million for the three months ended September 30, 2023.

The increase was primarily the result of a $9.8 million increase in the average balance of certificate accounts and a $148.1 million increase in the average balance of savings and money market accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $46.3 million decrease in the average balance of demand and NOW accounts and a $2.8 million decrease in the average balance of FHLB advances.

The 59 basis point increase in the rate paid on certificate accounts and the 165 basis point increase in the rate paid on savings and money market accounts contributed to an overall 89 basis point increase in the average cost of total deposits to 2.74% for the quarter ended September 30, 2024, from 1.85% for the quarter ended September 30, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $434 thousand for the three months ended September 30, 2024, compared to $473 thousand for the three months ended September 30, 2023, primarily due to a six basis point decline in the average cost of FHLB advances to 4.32% for the quarter ended September 30, 2024, compared to 4.38% for the same quarter in 2023.

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

The average balance of FHLB advances was $40.0 million for the three months ended September 30, 2024, compared to $42.8 million for the three months ended September 30, 2023.

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

Interest expense increased $8.9 million, or 80.7%, to $19.9 million for the nine months ended September 30, 2024, from $11.0 million for the nine months ended September 30, 2023.

Interest expense on deposits increased $9.1 million, or 101.4%, to $18.1 million for the nine months ended September 30, 2024, compared to $9.0 million for the nine months ended September 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 these accounts, partially offset by a decrease in the average balance of demand and NOW accounts.

The average cost of total deposits increased 121 basis points to 2.66% for the nine months ended September 30, 2024, from 1.45% for the nine months ended September 30, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $1.3 million for the nine months ended September 30, 2024, compared to $1.5 million for the nine months ended September 30, 2023, reflecting the decreased use of

FHLB advances to supplement our liquidity needs.

The average cost of FHLB advances decreased 17 basis points to 4.32% for the nine months ended September 30, 2024, compared to 4.49% for the same period in 2023.

The average cost of FHLB advances declined due to no overnight borrowings being utilized in the 2024 nine-month period as compared to utilization of overnight borrowings in the 2023 nine-month period.

The average balance of FHLB advances was $40.0 million for the nine months ended September 30, 2024, compared to $45.3 million for the nine months ended September 30, 2023.

Interest expense on subordinated notes was $504 thousand for both the nine months ended September 30, 2024 and 2023.

Net Interest Income.

Q3 2024 vs Q3 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.

Net interest income decreased $295 thousand, or 3.6%, to $7.9 million for the three months ended September 30, 2024, from $8.2 million for the three months ended September 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 2.92% 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 .

Net interest margin (annualized) was 2.98% and 3.38% for the three months ended September 30, 2024 and 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 $3.5 million, or 13.3%, to $22.8 million for the nine months ended September 30, 2024, from $26.3 million for the nine months ended September 30, 2023.

Net interest margin (annualized) was 2.95% and 3.70% for the nine months ended September 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, partially 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.

During 2023, in response to inflation, the Federal Open Market Committee of the Federal Reserve (“FOMC”) 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 until September 18, 2024.

In light of the progress on reducing inflation and after considering the balance of risks, the FOMC decided to lower the target range 50 basis points to 4.75% to 5.00%.

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 June 30, Six Months Ended June 30,

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

2024 2023 2024 2023

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

Provision for (release of) credit losses on loans $ 106 $ 224 $ (88) $ 227

(Release of) provision for credit losses on unfunded loan commitments (98) (149) (46) (473)

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.

Provision for (release of) credit losses $ 8 $ 75 $ (134) $ (246)

During the three months ended September 30, 2024, the provision for credit losses on loans was primarily due to growth in the loan portfolio and higher quantitative loss rates, which were influenced by a forecast of higher unemployment in the current quarter.

The current quarter also included enhancements to the loss model, including an additional qualitative adjustment related to loan review.

The release of credit losses on unfunded loan commitments related to overall fewer loan commitments.

During the nine months ended September 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, the value of underlying collateral, and market conditions, partially offset by growth in the loan portfolio, an increase in nonaccrual loans and the weighted average life of the portfolio, and enhancements to the loss model as noted above.

The release of provision for credit losses on unfunded loan commitments during the current nine-month period related to overall fewer loan commitments.

Net charge-offs for the three months ended September 30, 2024 totaled $14 thousand, compared to $3 thousand for three months ended September 30, 2023.

Net charge-offs for the nine months ended September 30, 2024 totaled $87 thousand, compared to net charge-offs of $148 thousand for the nine months ended September 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, 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.

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 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

Noninterest income increased $154 thousand, or 14.2%, to $1.2 million for the three months ended September 30, 2024, as compared to $1.1 million for the three months ended September 30, 2023, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

4 unchanged sentences

Net gain on sale of loans 40 76 (36) (47.4)

Other income 30 — 30 100.0

Total noninterest income $ 1,235 $ 1,081 $ 154 14.2 %

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

The increase in noninterest income was due to a $98 thousand increase in earnings on BOLI due to market rate fluctuations, and an $179 thousand increase in the fair value adjustment on mortgage servicing rights due to changes in prepayment speeds, servicing costs, and discount rate.

These increases were partially offset by a $72 thousand decrease in service charges and fee income, primarily due to a volume incentive paid by Mastercard in the quarter ended September 30, 2023, a $36 thousand decrease in net gain on sale of loans resulting from lower mortgage activity, and a decrease in mortgage servicing income as a result of the portfolio paying down at a faster rate than we are replacing the loans.

Additionally, mortgage servicing income decreased by $15 thousand compared to the third quarter of 2023.

Loans sold during the quarter ended September 30, 2024, totaled $2.4 million, compared to $4.4 million during the quarter ended September 30, 2023.

Noninterest income decreased $446 thousand, or 11.3%, to $3.5 million for the nine months ended September 30, 2024, as compared to $3.9 million for the nine months ended September 30, 2023, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

6 unchanged sentences

Total noninterest income $ 3,494 $ 3,940 $ (446) (11.3) %

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.

The decrease in noninterest income during the nine months ended September 30, 2024, compared to the same period in 2023 primarily resulted from a $459 thousand decrease in earnings on BOLI due to a death benefit received in the second quarter of 2023, a $59 thousand decrease in net gain on sale of loans resulting from lower mortgage activity and a $50 thousand decline in mortgage servicing income for the same reasons discussed above for the three months ended September 30, 2024.

These decreases were partially offset by a $50 thousand increase in service charges and fee income due to the recovery of potential future lost fee income due to vendor error, a $42 thousand upward adjustment in the fair value of mortgage servicing rights due to changes in prepayment speeds, servicing costs, and discount rate, and a $30 thousand gain on disposal of assets due to insurance claims on loss of fully depreciated assets.

Loans sold during the nine months ended September 30, 2024, totaled $10.6 million, compared to $14.7 million during the nine months ended September 30, 2023.

Noninterest Expense.

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

Noninterest expense decreased $31 thousand, or 0.4%, to $7.7 million during the three months ended September 30, 2024, compared to $7.7 million during the three months ended September 30, 2023, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

6 unchanged sentences

Total noninterest expense $ 7,679 $ 7,710 $ (31) (0.4) %

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

The decrease in noninterest expense was primarily due to a decrease in data processing expenses of $229 thousand, due to one-time costs related to new technology implemented in 2023.

Operations expense decreased $85 thousand due to reductions in loan origination costs, office expenses, marketing costs, legal fees, and charitable contributions, partially offset by an operational loss from a fraudulently obtained loan charged off in the third quarter of 2024.

Occupancy expenses decreased $44 thousand, primarily due to fully amortized leasehold improvements.

Salaries and benefits increased $321 thousand, reflecting higher incentive compensation, medical expenses, retirement plan costs, and directors' fees (due to the addition of a new director), partially offset by lower salaries from a restructuring of positions at the end of 2023.

The efficiency ratio for the quarter ended September 30, 2024 was 84.31%, compared to 83.36% for the quarter ended September 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.

Noninterest expense increased $252 thousand, or 1.1%, to $23.1 million during the nine months ended September 30, 2024, compared to $22.8 million during the nine months ended September 30, 2023, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

6 unchanged sentences

Total noninterest expense $ 23,074 $ 22,822 $ 252 1.1 %

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.

Salaries and benefits increased for the reasons noted above.

Regulatory assessments increased primarily due to higher regulatory exam costs paid in the 2024 nine-month period 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.

These increases were partially offset by decreases in occupancy expense, data processing expense, and net (gain) loss on OREO and repossessed assets.

Occupancy expenses decreased from the prior year nine-month period as a result of the release of an accrual for property taxes due to lower than expected payments and fully amortized leasehold improvements in the 2024 nine-month period.

Data processing expense decreased due to costs related to new technology implemented in 2023, partially offset by a higher volume of transaction activity in the 2024 nine-month period.

The net gain on OREO and repossessed assets in the current year nine-month period relates to the sale of a longtime OREO property at a gain, 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 nine-month period 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 sale of that property at a gain in the second quarter of 2023.

Income Tax Expense .

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.

The provision for income taxes was $267 thousand and $617 thousand for the three and nine months ended September 30, 2024, compared to $295 thousand and $1.4 million for the three and nine months ended September 30, 2023, respectively.

The effective tax rates for the three and nine months ended September 30, 2024 were 18.79% and 18.50%, 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 rate for the three months ended September 30, 2024 was lower than the same period in the prior year as a result of higher earnings on our BOLI in the current quarter, 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 six months ended June 30, 2024.

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.

Stockholders’ equity totaled $102.2 million at September 30, 2024 and $100.7 million at December 31, 2023.

In addition to net income of $2.7 million, other sources of capital during the nine months ended September 30, 2024 primarily included $251 thousand in proceeds from stock option exercises, and $291 thousand related to stock-based compensation, and $66 thousand of other comprehensive income, net of tax, primarily resulting from unrealized gains on available for sale securities.

Uses of capital during the nine months ended September 30, 2024 primarily included $1.5 million of dividends paid on common stock, $65 thousand in common stock repurchases and $218 thousand in common stock surrendered to pay the exercise price of stock option exercises.

We paid cash dividends of $0.57 per common share during the nine months ended September 30, 2024 and $0.55 per common share during the nine months ended September 30, 2023, which equates to a dividend payout ratio of 53.66% and 22.88%, 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 June 30, 2024.

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 $487 thousand based on the number of outstanding shares as of September 30, 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 June 30, 2024, approximately $1.4 million of our common stock remained available for repurchase under our existing stock repurchase program.

As of September 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.

3 unchanged sentences

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

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

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

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

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

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

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

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

4 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.

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 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.

As of September 30, 2024, we had $157.0 million in cash and cash equivalents and available-for-sale investment securities, and $65 thousand in loans held-for-sale.

At September 30, 2024, we had the ability to borrow $168.1 million in FHLB advances and access to additional borrowings of $21.9 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $40.0 million in outstanding advances from the FHLB and none from the Federal Reserve at September 30, 2024.

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

As of September 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.

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 June 30, 2024.

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, 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).

See the discussion below for commitments to extend credit and standby letters of credit.

See the discussion below for information regarding commitments to extend credit and standby letters of credit.

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

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

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

The instruments involve, to varying degrees, elements of credit- and interest-rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets.

2 unchanged sentences

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

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

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

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

2 unchanged sentences

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

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

June 30, 2024 December 31, 2023

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

September 30, 2024 December 31, 2023

Residential mortgage commitments $ 2,766 $ 10,465

8 unchanged sentences

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

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

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 “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, 2024 Sound Financial Bancorp, on an unconsolidated basis, had $1.3 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 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%.

As of September 30, 2024, the Bank’s and the Company’s CBLRs were 10.40% and 9.36%, 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