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Item 7. Management’s Discussion and Analysis

2025-03-18 compared with 2024-03-22 · 150 added, 139 removed, 359 unchanged (45% of the section changed)

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This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations.

The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in "Part II.

The information in this section has been derived from the Consolidated Financial Statements and notes thereto that appear in "Part II.

Financial Statements and Supplementary Data" of this Form 10-K.

The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K.

The information contained in this section should be read in conjunction with these Consolidated Financial Statements and notes and the business and financial information provided in this Form 10-K.

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

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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 originated $53.1 million and $125.6 million of one-to-four family residential mortgage loans during the years ended December 31, 2023 and 2022, respectively.

We had no purchases of one-to-four family residential mortgage loans during the years ended December 31, 2023 and 2022.

During those two years, we sold $17.1 million and $20.3 million, respectively, of one-to-four family residential mortgage loans.

Our strategic plan targets consumers, small- and medium-size businesses, and professionals in our market area for loans and deposits.

In managing the size of, and concentrations within, our loan portfolio we typically focus on including a significant amount of commercial business and commercial and multifamily real estate loans.

We originated $39.9 million and $53.1 million of one-to-four family loans during the years ended December 31, 2024 and 2023, respectively.

We had no purchases of one-to-four family loans during the years ended December 31, 2024 and 2023.

During those two years, we sold $14.2 million and $17.1 million, respectively, of one-to-four family loans.

Our strategic plan targets consumers, small- and medium-sized businesses, and professionals within our market area for loans and deposits.

In managing the size and concentrations of our loan portfolio, we focus on including a significant amount of commercial business and commercial and multifamily real estate loans.

A significant portion of our commercial business and commercial and multifamily real estate loans have adjustable rates, higher yields and shorter terms, and higher credit risk than traditional residential fixed-rate mortgage loans.

During 2022 and continuing through 2023, however, due to a generally illiquid jumbo loan market for residential mortgage loans, we retained a higher proportion of these jumbo loans than we have historically, resulting in commercial business and commercial and multifamily real estate loans making up a lower percentage of our overall portfolio.

Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) totaled $336.0 million or 37.5% of our loan portfolio at December 31, 2023, down slightly from $337.2 million or 38.9% of our loan portfolio at December 31, 2022.

In 2022 and continuing into 2023, due to a generally illiquid jumbo loan market for residential mortgage loans, we retained a higher proportion of these jumbo loans than historically, resulting in commercial business and commercial and multifamily real estate loans making up a lower percentage of our overall portfolio.

Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) totaled $387.1 million or 42.9% of our loan portfolio at December 31, 2024, up slightly from $336.0 million or 37.5% of our loan portfolio at December 31, 2023.

Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, increased to $145.3 million or 16.2% of our loan portfolio at December 31, 2024, from $130.9 million or 14.6% of our loan portfolio at December 31, 2023.

Our operating revenues are derived principally from earnings on interest-earning assets, service charges and fees, and gains on the sale of loans.

The ongoing high interest rate environment is expected to continue to exert downward pressure on our net gain on sale of loans, as well as keep borrowing costs elevated, which may adversely affect our net interest income and net interest margin in 2024.

To meet our funding requirements, we rely on various sources, including deposits (both retail and brokered), advances from the Federal Home Loan Bank (“FHLB”), borrowings through the Federal Reserve, and payments received on loans and securities.

The ongoing high interest rate environment is expected to continue exerting downward pressure on our net gain on sale of loans, and keeping borrowing costs elevated.

This may adversely affect our net interest income and net interest margin in 2025.

While the high interest rate environment also impacts the interest expense paid on our deposits, potentially reducing net interest margin as deposit rates rise, we expect the rates earned on our loan portfolio to continue repricing at higher yields.

To meet our funding requirements, we rely on various sources, including deposits (both retail and brokered), FHLB advances, borrowings through the Federal Reserve, and payments received on loans and securities.

We offer a diverse range of deposit accounts to our customers, including savings, money market, NOW (negotiable order of withdrawal), interest-bearing and noninterest-bearing demand accounts, as well as certificates of deposit.

This variety of deposit accounts provides customers with flexibility in terms of interest rates and terms to suit their financial preferences.

The provision for credit losses, or the release of such provision, is essential for establishing the ACL at a level sufficient to cover estimated lifetime credit losses in our loan portfolio, including unfunded loan commitments.

The provision for credit losses, or the release of such provision, is essential for maintaining the ACL at a level sufficient to cover estimated lifetime credit losses in our loan portfolio, including unfunded loan commitments.

An increase in our loan portfolio or a rise in estimated lifetime credit losses may result in additional provisions for credit losses, thereby decreasing net income.

However, improvements in loan risk ratings, increased property values, or recoveries of previously charged-off amounts may partially or fully offset the required increase in the ACL due to factors such as loan growth or an increase in estimated lifetime losses on loans and unfunded loan commitments.

We recorded a release of provision for credit losses of $273 thousand for the year ended December 31, 2023, consisting of a provision for credit losses on loans of $564 thousand and a release of credit losses on unfunded commitments of $837 thousand, compared to a provision of $1.2 million for the year ended December 31, 2022.

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

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

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

estimated lifetime losses on loans and unfunded loan commitments.

We recorded a release of provision for credit losses of $120 thousand for the year ended December 31, 2024, consisting of a release of provision for credit losses on loans of $161 thousand and a provision for credit losses on unfunded commitments of $41 thousand, compared to a release of provision for credit losses of $273 thousand for the year ended December 31, 2023, consisting of a provision for credit losses on loans of $564 thousand and a release of the provision for credit losses on unfunded commitments of $837 thousand.

Effective January 1, 2023, the Company adopted ASU No.

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Allowance for Credit Losses.

Effective January 1, 2023, we maintain an ACL in accordance with ASC 326.

The ACL is measured using the CECL approach for financial instruments measured at amortized cost and other commitments to extend credit.

The level of the ACL is established using the CECL approach for financial instruments measured at amortized cost and other commitments to extend credit.

CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset.

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The ACL consists of two elements:

(1) identification of loans that do not share risk characteristics with collectively evaluated loan pools are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics.

(1) identification of loans that do not share risk characteristics with collectively evaluated loan pools, which are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics.

We estimate the ACL using relevant and reliable information from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast.

The ACL is measured on a collective (segment) basis when similar risk characteristics exist.

Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimate of expected credit losses.

Segments are based upon federal call report segmentation.

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions.

As part of our continuous enhancement to the ACL methodology, during the year ended December 31, 2023, an assessment of the loss rates utilized for each segment was performed and updated to use peer loss rates.

Additionally, we enhanced the inputs related to our reasonable and supportable forecast through the inclusion of a quantitative model as part of our forecast which replaced a previous qualitative method.

We continuously evaluate and update our critical accounting estimates and judgments based on changing conditions.

As part of our ongoing enhancement of the ACL methodology, during the year ended December 31, 2024, we made additional improvements to the loss model.

This included a qualitative adjustment related to our loan review process and how we adjust

for the qualitative component using a scorecard to guide management’s analysis.

This change in the ACL is considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively.

While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported in the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise.

While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported on the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise.

There are factors beyond our control, such as changes in projected economic conditions, real estate markets or particular industry conditions, which may materially impact asset quality and the adequacy of the ACL and thus the resulting provision for credit losses.

This analysis is prepared utilizing a qualitative scorecard framework, which establishes bounds for the estimation of loss between zero (“Low Watermark”) and a maximum loss rate (“High Watermark”) for each segment.

The Low Watermark is indicative of zero credit losses.

The High Watermark is established by utilizing the same historical loss rate model used to establish modified loss rates, which included assuming a worse-case economic environment into the existing model.

Risk levels categorized as minor, moderate, major, no change, and improvement, segment the gap between the Low Watermark and High Watermark.

In evaluating the results from the sensitivity analysis, the sensitivity by qualitative factor adjustment provided the largest change in the ACL.

Our ACL analysis is prepared utilizing a qualitative scorecard framework, which establishes bounds for the estimation of loss between a minimum (“Low Watermark”) and a maximum (“High Watermark”) for each segment.

The Low Watermark indicates zero credit losses.

The High Watermark is established by utilizing the same historical loss rate model used to establish modified loss rates, assuming a worse-case economic scenario.

Risk levels are categorized as minor, moderate, major, no change, and improvement, segmenting the gap between the Low Watermark and High Watermark.

In evaluating the results of the sensitivity analysis, the qualitative factor adjustment provided the largest change in the ACL.

If all qualitative factors were adjusted from the base model to the High Watermark, the estimated ACL on loans would increase to $25.2 million (2.82%).

However, after thorough consideration of all relevant information, management assessed our current and forecasted conditions to estimate pooled loan losses to fall between the base model of $6.7 million (0.75%) and if all qualitative factors were assigned a minor risk level of $15.4 million (1.72%).

This evaluation included an assessment of changes to business risks and alignment with the Company’s strategy and objectives.

Management determined that the overall strategy and objectives of the Company did not deviate during the quarter compared to the look-back period.

The historical look-back period and loss rate serve as the foundation of the ACL methodology, considering both our loss history and a group of peers’ loss rate.

There is no historical or recent experience indicating notable variances from management’s assessments.

However, considering all relevant information, management estimated pooled loan losses to range between the base model of $6.1 million (0.69%) and, with all qualitative factors assigned a minor risk level, $12.5 million (1.40%).

This evaluation included an assessment of changes to business risks and alignment with the Company’s overall strategy and objectives.

Management determined that the Company’s overall strategy and objectives remained constant during the quarter compared to the look-back period.

The historical look-back period and loss rate serve as the foundation of the ACL methodology, considering both our loss history and peer loss rates.

No historical or recent experience has indicated notable deviations from management’s assessments.

Mortgage Servicing Rights .

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MSRs are carried at fair value.

The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs.

The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, weighted average life and delinquency rate assumptions as inputs.

All of these assumptions require a significant degree of management judgment.

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We use a third party to assist us in the preparation of the analysis of the market value each quarter.

This analysis is prepared utilizing an interest rate shock of +/- 300 basis points to determine the sensitivity of the prepayment speeds and the change in market value as a result of changes to the weighted average life.

If interest rates were to decrease by 300 basis points the prepayment speed of our variable rate portfolio would increase at a faster pace than if interest rates were to increase 300 basis points, while our fixed portfolio would have a smaller change in the prepayment speeds with the same change in rates.

In a +/- 300 basis point rate shock, the weighted average life would fluctuate between 7.98 years and 6.12 years, respectively.

Additionally, the model utilizes a High Value, Medium Value and Low Value to determine the discount rate used in to the estimate of fair value of the MSR portfolio.

Management elected to apply the High Value based on prior comparison of separate third-party pricing services that closely aligned with that valuation.

If the entire portfolio were estimated using the Low Value, the fair value of the MSR portfolio would decrease by approximately $663 thousand.

There is no historical or recent experience indicating notable variances from management’s assumptions.

This analysis is conducted using a secondary valuation to assess the sensitivity of prepayment speeds and changes in market value due to fluctuations in the weighted average life.

If interest rates were to increase, the prepayment speed of our MSR portfolio would decrease which would also lead to an increase in the weighted average life.

Conversely, if interest rates were to decrease, the prepayment speed would increase and the weighted average life would decrease.

We performed a sensitivity analysis utilizing two third-party valuations where we compared the assumptions within the models.

Under a scenario of a decrease in the prepayment speed, an increase in the discount rate, and a decrease in the weighted average life of the MSR portfolio, the fair value of the MSR portfolio would decrease by approximately $420 thousand.

No historical or recent experience has indicated notable deviations from management’s assessments.

Business and Operating Strategies and Goals

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We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions on delinquent loans when such actions have been deemed appropriate.

Our goal is to

maintain or improve upon our level of nonperforming assets by managing all segments of our loan portfolio in order to proactively identify and mitigate risk.

Our goal is to maintain or improve upon our level of nonperforming assets by managing all segments of our loan portfolio in order to proactively identify and mitigate risk.

Improving Earnings by Expanding Product Offerings.

We intend to prudently maintain the percentage of our assets consisting of higher-yielding commercial and multifamily real estate and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest-rate fluctuations than one-to-four family mortgage loans, while maintaining our focus on residential lending.

maintaining our focus on residential lending.

In addition, we continue to focus on consumer products, such as floating and manufactured home loans.

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We continue to experience growth in client use of our online and mobile banking services, which allow clients to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying, while providing our clients greater flexibility and convenience in conducting their banking.

In addition to our retail branches, we maintain state of the art technology-based products, such as business cash management, business remote deposit products, business and consumer mobile banking applications and consumer remote deposit products.

Total deposits increased to $826.5 million at December 31, 2023, from $808.8 million at December 31, 2022.

However, core deposits, which we define as our non-time deposit accounts and time deposit accounts of less than $250 thousand, decreased $30.0 million to $715.7 million at December 31, 2023, from $745.7 million at December 31, 2022.

As a result of the decreased liquidity from core deposits, we increased our rates paid on certificates of deposit and borrowed against our FHLB lines of credit.

In addition to our retail branches, we believe we maintain state of the art technology-based products, such as business cash management, business remote deposit products, business and consumer mobile banking applications and consumer remote deposit products.

Total deposits increased to $837.8 million at December 31, 2024, from $826.5 million at December 31, 2023, with core deposits, which we define as our non-time deposit accounts and time deposit accounts of less than $250 thousand, increasing $15.3 million to $731.0 million at December 31, 2024, from $715.7 million at December 31, 2023.

Maintaining Our Client Service Focus.

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We believe that opportunities currently exist within our market area to grow our franchise.

We anticipate continued organic growth as the local economy and loan demand remains strong, through our marketing efforts and as a result of the opportunities created from the consolidation of financial institutions occurring in our market area.

We anticipate continued organic growth as the local economy and loan demand remain strong, through our marketing efforts and as a result of the opportunities created from the consolidation of financial institutions occurring in our market area.

In addition, by delivering high-quality, client-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation.

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Stockholders' equity 103,666 100,654

Total assets increased by $18.9 million, or 1.9%, to $995.2 million at December 31, 2023, from $976.4 million at December 31, 2022.

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

Total assets decreased by $1.6 million, or 0.2%, to $993.6 million at December 31, 2024, from $995.2 million at December 31, 2023.

This decrease was primarily a result of lower balances of cash and cash equivalents and investment securities, offset by an increase in loans held-for-portfolio.

Cash and Securities.

Cash, cash equivalents, AFS securities and HTM securities decreased by $10.1 million, or 14.4%, to $60.1 million at December 31, 2023 compared to the prior year.

Cash and cash equivalents decreased $8.1 million, or 14.1%, to $49.7 million at December 31, 2023 compared to the prior year-end due to the increase in loans held-for-portfolio exceeding increases in deposits and the deployment of excess cash earning a nominal yield into higher earning loans and investments.

AFS securities decreased $1.9 million, or 18.8%, to $8.3 million at December 31, 2023 from the year end 2022, primarily due to the maturity of $1.6 million in treasury securities in the first quarter of 2023, regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months.

Cash, cash equivalents, AFS securities and HTM securities decreased by $6.6 million, or 10.9%, to $53.6 million at December 31, 2024 compared to the prior year-end.

Cash and cash equivalents decreased $6.0 million, or 12.2%, to $43.6 million at December 31, 2024 compared to the prior year-end due to the increase in loans held-for-portfolio and the payoff of FHLB advances, partially offset by an increase in deposits.

AFS securities decreased $497 thousand, or 6.0%, to $7.8 million at December 31, 2024 from the 2023 year end, primarily due to regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months.

HTM securities totaled $2.1 million at December 31, 2024 and 2023, and consisted of municipal bonds and agency mortgage-backed securities.

Loans held-for-portfolio increased $28.6 million, or 3.3%, to $896.2 million at December 31, 2023 from $867.6 million at December 31, 2022, with increases across all loan categories, excluding commercial business loans.

The increase in loans held-for-portfolio primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and the addition of experienced lending staff, which resulted in continued strong loan demand, as well as slower prepayments.

Loans held-for-sale increased to $603 thousand at December 31, 2023 from zero at December 31, 2022 primarily due to timing of originations.

Loans held-for-portfolio increased $5.7 million, or 0.6%, to $901.8 million at December 31, 2024 from $896.2 million at December 31, 2023.

Loans held-for-sale decreased to $487 thousand at December 31, 2024 from $603 thousand at December 31, 2023 primarily due to timing of originations.

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

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Total loans $ 901,827 $ 896,160 $ 5,667 0.6

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

The increase in manufactured home loans can be attributed to the affordability of these homes in the current market, coupled with internal efficiencies in how we process these loans.

The increase in other consumer loans was a result of high demand attributable to successful marketing campaigns.We also experienced increases in our commercial and multifamily real estate and floating homes loan portfolios.

These increases were partially offset by a decrease in commercial business loans, which decreased $3.1 million or 13.1% to $20.7 million, primarily from lower outstanding balances on lines of credit and paydowns exceeding new originations.

Commercial and multifamily loans saw the largest increase, rising by $56.2 million, or 17.8%, primarily due to the conversion of completed construction loans to permanent financing.

Floating home loans increased by $11.3 million, or 15.0%, while home equity loans grew by $3.6 million, or 15.7%, as homeowners utilized the equity in their homes.

Manufactured home loans rose by $4.9 million, or 13.6%, reflecting affordability in the current market, internal efficiencies in loan processing, and successful

marketing efforts.

These increases were partially offset by declines in other loan categories.

Construction and land loans experienced the largest decrease, declining by $53.7 million, or 42.3%, as completed construction loans paid off or converted to permanent financing, while new construction loans have not yet fully advanced.

Commercial business loans decreased by $5.1 million, or 24.6%, due to lower outstanding balances on lines of credit and paydowns exceeding new originations.

One-to-four family loans declined by $9.8 million, or 3.5%, as a result of elevated mortgage interest rates and a lower supply of housing.

Additionally, other consumer loans decreased by $1.9 million, or 9.6%.

The increase in home equity loans was primarily driven by homeowners utilizing the equity in their homes, while the increase in commercial and multifamily loans was primarily due to the conversion of completed construction loans to permanent financing.

The increase in manufactured and floating home loans can be attributed to the affordability of these homes in the current market, coupled with internal efficiencies in how we process these loans and successful marketing campaigns.These increases were partially offset by decreases in one-to-four family, construction and land, and commercial business loans.

The decrease in construction and land loans was due to construction loans completing and paying off or converting to permanent financing, while new construction loans have not fully advanced.

The decrease in commercial business loans were primarily from lower outstanding balances on lines of credit and paydowns exceeding new originations.

The loan portfolio remains well-diversified with commercial and multifamily real estate loans accounting for 41.2% of the portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 32.9% of the portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 16.2% of the total loan portfolio at December 31, 2024.

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Nonperforming Assets.

Nonperforming assets, which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans to troubled borrowers) and OREO and repossessed assets, increased $514 thousand, or 14.2%, to $4.1 million, or 0.42% of total assets, at December 31, 2023 from $3.6 million, or 0.37% of total assets, at December 31, 2022.

Nonperforming assets, comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans to troubled borrowers) and OREO and repossessed assets, increased $3.4 million, or 81.3%, to $7.5 million, or 0.75% of total assets, at December 31, 2024 from $4.1 million, or 0.42% of total assets, at December 31, 2023.

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

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Total nonperforming assets $ 7,491 $ 4,131 $ 3,360 81.3 %

The increase in nonperforming assets primarily was due to a $2.1 million business term loan, $649 thousand in four one-to-four family real estate loans, and $142 thousand in two manufactured home loans being placed on nonaccrual status, partially offset by the payoff of $1.5 million in nonperforming one-to-four family real estate loans related to a single borrower, the write-off of one residential property for $84 thousand, and other payoffs and normal amortization.

Our largest nonperforming loan relationship at December 31, 2023 consisted of one business term loan totaling $2.1 million, which was well secured by collateral currently listed for sale and we expect to be repaid in full.

In addition, there were five manufactured home loans, two home equity loans, two other consumer loans, and nine additional one-to-four family loans classified as nonperforming at December 31, 2023.

The increase in nonperforming assets primarily was due to the placement of an additional $9.3 million of loans on nonaccrual status, including a $3.7 million matured commercial real estate loan where the borrower is in the process of securing alternative financing, and a $2.4 million floating home loan, all of which are well secured.

These additions were partially offset by payoffs totaling $4.2 million, the return of $784 thousand of loans to accrual status, charge-offs of $142 thousand, the sale of two OREO properties for $690 thousand, and regular loan payments.

Our largest nonperforming loan relationship at December 31, 2024 was the $3.7 million commercial real estate loan noted above.

In addition, there were eight manufactured home loans, one floating home loan, one business term, one commercial real estate, one home equity loan, one land loan, and five other consumer loans classified as nonperforming at December 31, 2024.

Nonperforming loans were 0.83% of total loans at December 31, 2024, compared to 0.40% of total loans at December 31, 2023.

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Recoveries 22 41

Net (charge-offs) recoveries

Provision for credit losses 564 1,225

Net charge-offs

(Release of) provision for credit losses

Balance at end of period $ 8,499 $ 8,760

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Impact of adoption of ASU 2016-13

Release of credit losses

Provision for (release of) credit losses

Balance at end of period 234 193

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

The ACL for loans increased $1.2 million, or 15.3%, to $8.8 million at December 31, 2023, from $7.6 million at December 31, 2022, while the ACL for unfunded loan commitments decreased $143 thousand, or 42.4% to $193 thousand at December 31, 2023, from $335 thousand at December 31, 2022.

The change in methodology from the incurred loss model to the CECL model on January 1, 2023, resulted in a one-time upward adjustment to the ACL for loans of $760 thousand and an ACL for unfunded loan commitments of $695 thousand.

Furthermore, construction advances outstanding at December 31, 2022, and funded during the year ended December 31, 2023, led to a reduction in the ACL for unfunded loan commitments and an increase in the ACL for loans.

As we continued to refine our model for calculating the ACL, the loss rates utilized in the model standardized through the use of additional peer group data, with the largest adjustments seen in the construction segments.

The model incorporates economic variables, the impact of inflation and adjustments to the forecast related to the interest rate environment, applied to certain loan portfolios, which contributed to the change in the provision for credit losses from December 31, 2022.

The ACL for loans decreased $261 thousand, or 3.0%, to $8.5 million at December 31, 2024, from $8.8 million at December 31, 2023, while the ACL for unfunded loan commitments increased $41 thousand, or 21.2% to $234 thousand at December 31, 2024, from $193 thousand at December 31, 2023.

The changes in the balances were primarily due to changes in the mix of the loan portfolio, enhancements to the loss model related to how we adjust for the qualitative component, including the utilization of a scorecard to drive managements analysis, and growth in our unfunded construction loan portfolio, which has a higher loss rate than our other loan portfolios.

Expected loss estimates consider various factors, such as market conditions, borrower-specific information, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay.

See “Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023 — Provision for Credit Losses.”

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If the fair value of our MSRs fluctuates significantly, our financial results could be materially impacted.

Total deposits increased $17.8 million, or 2.2%, to $826.5 million at December 31, 2023 from $808.8 million at December 31, 2022.

The increase in deposits was a result of an increase in certificate accounts and money market accounts, including $5.0 million of brokered deposits.

These funds were primarily used to fund organic loan growth.

However, this increase was partially offset by decreases in noninterest-bearing and interest-bearing demand accounts and savings accounts 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 demand balances (including escrow accounts) decreased $46.5 million, or 26.8%, to $126.7 million at December 31, 2023, compared to $173.2 million at December 31, 2022.

Noninterest-bearing (including escrow accounts) deposits represented 15.3% of total deposits at December 31, 2023, compared to 21.4% at December 31, 2022.

Total deposits increased $11.3 million to $837.8 million at December 31, 2024, compared to the prior year-end.

The increase in total deposits primarily was the result of a $52.0 million, or 33.8%, increase in money market accounts.

Management attributes this increase primarily to interest rate sensitive clients moving a portion of their non-operating deposit balances from lower interest-bearing demand and savings accounts into higher interest-bearing money market accounts.

Interest-bearing demand and saving accounts decreased $26.2 million, or 15.6%, and $8.2 million, or 11.8%, respectively, from December 31, 2023 to December 31, 2024.

Certificate accounts decreased $12.1 million, or 3.9%, to $295.8 million at December 31, 2024, compared to the 2023 year-end, primarily due to a strategic decision to pay higher rates on money market accounts as opposed to certificate accounts.

Noninterest-bearing demand accounts (excluding escrow accounts) increased $6.0 million, or 4.8%, in 2024, compared to 2023.

A summary of deposit accounts with the corresponding weighted-average cost at December 31, 2024 and 2023 is presented below (dollars in thousands):

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Savings, demand, and money market accounts have no contractual maturity.

Certificates of deposit have maturities of five years or less.

Certificates of deposit have maturities of five or less.

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

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

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

FHLB advances decreased to $40.0 million at December 31, 2023, while reaching a high of $92.0 million during 2023, as we utilized our FHLB line of credit to offset fluctuations in deposits for funding needs.

There were $43.0 million of FHLB advances at December 31, 2022.

FHLB advances totaled $25.0 million at December 31, 2024, compared to $40.0 million at December 31, 2023.

The decrease was due to the repayment of a $15.0 million FHLB advance that matured in November 2024.

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 December 31, 2023 had maturities ranging from late 2024 through early 2028.

FHLB advances outstanding at December 31, 2024 had maturities ranging from early 2026 through early 2028.

Subordinated notes, net totaled $11.8 million at December 31, 2024 and 2023.

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Total stockholders’ equity increased $3.0 million, or 3.0%, to $103.7 million at December 31, 2024, from $100.7 million at December 31, 2023.

This increase primarily reflects $7.4 million in net income for the year ended December 31, 2023 and unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, of $129 thousand, partially offset by the payment of cash dividends of $1.9 million to common stockholders and the repurchase of $2.1 million of common stock during the year ended December 31, 2023.

In addition, stockholders’ equity at December 31, 2023 was negatively impacted by the adoption of CECL in the first quarter of 2023, which resulted in an after-tax decrease to opening retained earnings of $1.1 million.

This increase primarily reflects $4.6 million in net income for the year ended December 31, 2024, $390 thousand in share-based compensation, and $269 thousand in common stock options exercised, partially offset by the payment of cash dividends of $1.9 million to common stockholders, as well as unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, of $56 thousand, the repurchase of $65 thousand of common stock, and stock surrendered of $218 thousand to satisfy tax withholding obligations upon the vesting of restricted stock during the year ended December 31, 2024.

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

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Rate/Volume Analysis

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

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

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

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Net gain on sale of loans 258 340

Other income 38 —

Total noninterest income 4,655 5,006

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Net income decreased $2.8 million, or 37.6%, to $4.6 million, or $1.80 per diluted common share, for the year ended December 31, 2024, compared to $7.4 million, or $2.86 per diluted common share, for the year ended December 31, 2023.

The decrease was primarily a result of a $1.4 million decrease in net interest income and a $2.3 million increase in noninterest expense, partially offset by a $1.4 million decrease in provision for credit losses and a $424 thousand increase in noninterest income.

The decrease was primarily a result of a $2.8 million decrease in net interest income, a $351 thousand decrease in noninterest income and a $153 thousand decrease in the release of credit losses, partially offset by a $555 thousand decrease in provision for income taxes.

Interest Income.

Interest income increased $10.8 million, or 27.2%, to $50.6 million for the year ended December 31, 2023, from $39.8 million for the year ended December 31, 2022, primarily due to higher average loan balances, a 47 basis point increase in the average loan yield, a 105 basis point increase in the average yield earned on investments, and a 373 basis point increase in cash and cash equivalents, partially offset by a lower average balance of investments, cash and cash equivalents.

Interest income on loans increased $8.3 million, or 21.7%, to $46.5 million for the year ended December 31, 2023, compared to $38.2 million for the year ended December 31, 2022, driven by higher average total loans and a 47 basis points increase in the average yield on loans.

The average balance of total loans was $870.2 million for the year ended December 31, 2023, compared to $783.4 million for the year ended December 31, 2022, resulting from increased average balances related to all loan categories, except commercial business loans.

Interest income increased $6.8 million, or 13.4%, to $57.4 million for the year ended December 31, 2024, from $50.6 million for the year ended December 31, 2023, due to an increase in both the average balance of and yield earned on interest earning assets.

Interest income on loans increased $4.0 million, or 8.7%, to $50.5 million for the year ended December 31, 2024, compared to $46.5 million for the year ended December 31, 2023, driven by a higher average balance of total loans and a 29 basis points increase in the average yield on loans.

The average balance of total loans was $896.7 million for the year ended December 31, 2024, compared to $870.2 million for the year ended December 31, 2023, resulting primarily from increased average balances in commercial and multifamily, home equity, and consumer loans.

The average yield on total loans was 5.63% for the year ended December 31, 2024, compared to 5.34% for the year ended December 31, 2023.

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

Interest income on the investment portfolio increased $135 thousand, or 35.25%, to $518 thousand for the year ended December 31, 2023, compared to $383 thousand for the year ended December 31, 2022.

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

Interest income on the investment portfolio decreased $10 thousand, or 1.93%, to $508 thousand for the year ended December 31, 2024, compared to $518 thousand for the year ended December 31, 2023.

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

The average yield on investments was 4.07% for the year ended December 31, 2024, compared to 3.79% for the year ended December 31, 2023, primarily due to the impact of rising rates.

Interest income on cash and cash equivalents increased $2.7 million, or 75.8%, to $6.4 million for the year ended December 31, 2024, compared to $3.6 million for the year ended December 31, 2023.

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

The average yield on cash and cash equivalents was 4.85% for the year ended December 31, 2023, compared to 1.12% for the year ended December 31, 2022, primarily due to the impact of rising rates.

The increase was due to higher average yields and higher average balances.

The average yield on cash and cash equivalents was 5.12% for the year ended December 31, 2024, compared to 4.85% for the year ended December 31, 2023, primarily due to the impact of higher market interest rates during

The average balance of cash and cash equivalents was $124.3 million for the year ended December 31, 2024, compared to $74.7 million for the year ended December 31, 2023 .

The increase in cash and cash equivalents was primarily due to the increase in deposits, offset by an increase in loans held-for-portfolio and the payoff of one FHLB borrowing.

Interest Expense.

Interest expense increased $12.3 million, or 272.4%, to $16.8 million for the year ended December 31, 2023, from $4.5 million for the year ended December 31, 2022, primarily as a result of an increase in the average balances and costs of deposits and borrowings

Interest expense increased $9.6 million, or 57.4%, to $26.4 million for the year ended December 31, 2024, from $16.8 million for the year ended December 31, 2023, as a result of an increase in the overall average balances and costs of deposits and borrowings.

Interest expense on deposits increased $9.9 million, or 70.3%, to $24.1 million for the year ended December 31, 2024, compared to $14.1 million for the year ended December 31, 2023.

The increase was primarily the result of an increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $84.7 million decrease in the average balance of interest-bearing deposits other than certificate accounts.

The average cost of total deposits increased 132 basis points to 1.69% for the year ended December 31, 2023, from 0.37% for the year ended December 31, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $2.0 million for the year ended December 31, 2023, compared to $878 thousand for the year ended December 31, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.

The cost of FHLB advances increased 122 basis points to 4.44% for the year ended December 31, 2023, compared to 3.22% for the year ended December 31, 2022.

The increase was the result of an increase in the average balance of and rates paid on certificate accounts and savings and money market accounts, offset slightly by a $53.4 million decrease in the average balance of demand and NOW accounts.

The average cost of total deposits, including noninterest bearing deposits, increased 95 basis points to 2.64% for the year ended December 31, 2024, from 1.69% for the year ended December 31, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $1.6 million for the year ended December 31, 2024, compared to $2.0 million for the year ended December 31, 2023, reflecting the decreased use of FHLB advances to supplement our liquidity needs.

The cost of FHLB advances decreased 12 basis points to 4.32% for the year ended December 31, 2024, compared to 4.44% for the year ended December 31, 2023.

The average balance of FHLB advances was $37.6 million for the year ended December 31, 2024, compared to $44.0 million for the year ended December 31, 2023.

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The decrease in net interest margin primarily was due to funding costs increasing at a faster pace than the average yields earned on interest-earning assets and an increase in the average balance of interest earning assets.

Since March 2022, in response to inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, including 100 basis points during 2023, to a range of 5.25% to 5.50% as of December 31, 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 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% during 2024.

The FOMC further lowered the target range by an additional 50 basis points, to 4.25% to 4.50%, in November of 2024.

Provision for Credit Losses.

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Year Ended December 31,

Provision for credit losses on loans $ 564 $ 1,225

(Release of) provision for credit losses on unfunded loan commitments (837) (69)

(Release of) provision for credit losses on loans

$ (161) $ 564

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

Release of provision for credit losses

$ (120) $ (273)

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

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

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

During the year ended December 31, 2023, the provision for credit losses on loans primarily relates to the mix of the loan portfolio and improved credit quality, partially offset by the increase in the balance of the loan portfolio and adjustments applied to certain loan portfolios within our forecast related to interest rate risk.

The release of credit losses on unfunded loan commitments resulted from a decrease in unfunded loan commitments at December 31, 2023, compared to the prior year-end.

Net charge-offs for the year ended December 31, 2023 totaled $163 thousand, compared to net recoveries of $68 thousand for the year ended December 31, 2022.

The change in the (release of) provision for credit losses for 2024 from 2023 resulted primarily from changes in methodology used to reserve for credit losses.

During the year ended December 31, 2024, the release of credit losses on loans primarily related to lower reserves on our residential loan portfolio due to qualitative adjustments for changes in concentration, the value of underlying collateral, and market conditions, as well as lower reserves in our floating home sub-segment of other consumer loans within our quantitative analysis and in our qualitative analysis related to market conditions and value of underlying collateral, as economic conditions have improved.

These decreases were 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 related to how we adjust for the qualitative component.

The provision for credit losses on unfunded loan commitments during the year related to an increase in the reserve rate due to model enhancements, partially offset by a decrease in unfunded loan commitments at December 31, 2024, compared to the prior year-end.

Net charge-offs for the year ended December 31, 2024 totaled $100 thousand, compared to net charge-offs of $163 thousand for the year ended December 31, 2023.

Under CECL, the provision for credit losses for the year ended December 31, 2024 reflects assumptions related to our forecast concerning the economic environment as a result of local, national and global events.

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

In addition, expected loss estimates

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

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 deterioration in national and local economic conditions due to such factors as inflation, a recession or slowed economic growth, among others, may lead to a

material increase in the provision for credit losses, which could have a material adverse impact on our financial condition and results of operations.

A deterioration in national and local economic conditions due to such factors as inflation, a recession or slowed economic growth, among others, may lead to a material increase in the provision for credit losses, which could 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 to the ACL based upon their judgment of information available to them at the time of their examination.

Noninterest Income.

Noninterest income increased $424 thousand, or 9.3%, to $5.0 million for the year ended December 31, 2023, as compared to $4.6 million for the year ended December 31, 2022, as reflected below (dollars in thousands):

Noninterest income decreased $351 thousand, or 7.0%, to $4.7 million for the year ended December 31, 2024, compared to $5.0 million for the year ended December 31, 2023, as reflected below (dollars in thousands):

Year Ended December 31, Amount

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Net gain on sale of loans 258 340 (82) (24.1)

$ 38 $ — $ 38 100.0 %

Total noninterest income $ 4,655 $ 5,006 $ (351) (7.0) %

The increase in noninterest income during the year ended December 31, 2023, compared to 2022 primarily was due to a $960 thousand increase in earnings on BOLI reflecting $567 thousand in death benefits paid under our BOLI policies and an increase in the cash surrender value due to recent price increases in the securities markets.

Additionally, service fees and fee income increased $159 thousand, which included $66 thousand in miscellaneous income related to an agreement with Mastercard and an insurance settlement received during the second quarter of 2023 on a prior OREO property.

These increases were partially offset by a $426 thousand downward adjustment in the fair value of MSRs due to higher market interest rates, a $206 thousand decrease in net gain on sale of loans resulting from lower mortgage activity and a $63 thousand decline in mortgage servicing income due to the size of the servicing portfolio shrinking at a faster rate than we are replacing the loans due to the current interest rate environment.

Loans sold during the year ended December 31, 2023, totaled $19.2 million, compared to $20.9 million during the year ended December 31, 2022.

The decrease in noninterest income during the year ended December 31, 2024, compared to 2023 primarily was due to a $554 thousand decrease in earnings on BOLI, reflecting death benefits paid under our BOLI policies in the prior year.

Additionally, an $82 thousand decrease in net gain on sale of loans resulted from lower mortgage activity, with loans sold during 2024 totaling $14.2 million compared to $19.2 million sold during 2023, and a $61 thousand decline in mortgage servicing income was due to the servicing portfolio shrinking at a faster rate than we were able to replace loans, due to the current interest rate environment.

These decreases were partially offset by a $93 thousand increase in service charges and fee income resulting from increases in late fees on loans, interchange income and income related to a new, multi-year agreement with our debit card provider that was effective in 2024.

Further, a $215 thousand upward adjustment in the fair value of MSRs was due to a change in prepayment speeds, servicing costs, and discount rate.

Finally, other income increased $38 thousand due to an insurance claim on equipment in 2024.

Noninterest Expense .

Noninterest expense increased $2.3 million, or 8.2%, to $30.1 million during the year ended December 31, 2023, compared to $27.8 million during the year ended December 31, 2022, as reflected below (dollars in thousands):

Noninterest expense was $30.1 million during the years ended December 31, 2024 and 2023, as reflected below (dollars in thousands):

Year Ended December 31, Amount

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Total noninterest expense $ 30,131 $ 30,129 $ 2 — %

Salaries and benefits increased primarily due to higher wages, hiring for strategic initiatives, higher medical expenses and lower deferred compensation, partially offset by a decrease in incentive compensation and commissions related to a decline in loan origination activity during the year ended December 31, 2023 as compared to 2022.

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

Regulatory assessments rose due to an increase in our deposit insurance assessment rate at the beginning of 2023 and our increased asset size.

Data processing expense 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.

The efficiency ratio for the year ended December 31, 2023 was 77.54%, compared to 69.83% for the year ended December 31, 2022, due to higher noninterest expense and lower overall revenue in 2023.

The increase in noninterest expenses during the year ended December 31, 2024 compared to the year ended December 31, 2023, was primarily driven by a $455 thousand increase in salaries and benefits, largely due to higher incentive compensation expenses, increased medical expenses, and higher commission expenses.

This increase was partially offset by a decrease in salaries and contractor expenses.

In addition, regulatory assessments increased $99 thousand as a result of a higher deposit insurance assessment rate introduced at the beginning of 2023 and the Company’s increased asset size.

Partially offsetting these increases were several decreases in noninterest expenses.

Operations expenses decreased by $201 thousand mainly due to reductions in office expenses, loan origination fees, travel expenses, state and local taxes, and charitable contributions, partially offset by higher professional fees (tax and consulting) and increased costs related to deposit products, especially debit card processing expenses.

Data processing expenses decreased $162 thousand due to lower costs associated with the Company’s core processor and occupancy expenses decreased by 145 thousand primarily because of fully amortized leasehold improvements.

The efficiency ratio for the year ended December 31, 2024 was 84.50%, compared to 77.54% for the year ended December 31, 2023.

The deterioration in the efficiency ratio was due to lower interest income and noninterest income in 2024.

Income Tax Expense .

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The effective tax rates for the years ended December 31, 2024 and 2023 were 17.8% and 17.3%, respectively.

The effective tax rate was lower in 2023 as a result of nontaxable income related to the BOLI death benefit received during 2023.

The effective tax rate was higher in 2024 as a result of nontaxable income related to the BOLI death benefit received in prior year.

Capital and Liquidity

Stockholders’ equity totaled $103.7 million at December 31, 2024 and $100.7 million at December 31, 2023.

In addition to net income of $7.4 million, other sources of capital during 2023 included $129 thousand of other comprehensive income, net of tax, $395 thousand in proceeds from stock option exercises and $450 thousand related to stock-based compensation.

Uses of capital during 2023 included $1.9 million of dividends paid on common stock, $2.1 million of stock repurchases and $265 thousand of stock surrendered.

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

We paid regular quarterly dividends aggregating $0.74 per common share during the year ended December 31, 2023 and regular quarterly dividends aggregating $0.68 per common share and a special dividend of $0.10 per common share during the year ended December 31, 2022.

In addition to net income of $4.6 million, other sources of capital during 2024 included $390 thousand related to stock-based compensation and $269 thousand in proceeds from stock option exercises.

Uses of capital during 2024 included $56 thousand of other comprehensive income, net of tax, $1.9 million of dividends paid on common stock, $65 thousand of stock repurchases and $218 thousand of stock surrendered to satisfy tax withholding obligations upon the vesting of restricted stock awards.

We paid quarterly dividends aggregating $0.76 per common share during the year ended December 31, 2024 and quarterly dividends aggregating $0.74 per common share during the year ended December 31, 2023.

This equates to a dividend payout ratio of 42.0% in 2024 and 25.7% in 2023.

The Company expects to continue its current practice of paying quarterly cash dividends on common stock, subject to the Board of Directors’ discretion to modify or terminate this practice at any time and for any reason.

The Company expects to continue its current practice of paying quarterly cash dividends on its common stock, subject to the Board of Directors’ discretion to modify or terminate this practice at any time and for any reason.

Assuming continued payment of cash dividends during 2025 at the current quarterly dividend rate of $0.19 per share, our total dividend paid each quarter would be approximately $488 thousand based on the number of our outstanding shares at December 31, 2024.

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

In January 2024, the Board of Directors approved a new stock repurchase program authorizing the Company to purchase up to $1.5 million of the Company’s issued and outstanding common stock over a period of 12 months expiring on January 26, 2025.

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

In January 2024, the Board of Directors approved a stock repurchase program authorizing the Company to purchase up to $1.5 million of the Company’s issued and outstanding common stock over a period of 12 months which expired on January 26, 2025.

The Board did not extend the stock repurchase plan that expired on January 26, 2025, nor did it adopt a new stock repurchase plan.

See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Item 5, Part II of this Form 10-K for additional information relating to stock repurchases.

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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.

The objective of our liquidity management is to manage cash flows 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.

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

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.

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.

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Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity.

In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses.

Sound Financial Bancorp is a holding company and does not conduct operations;

its sources of liquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources.

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

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 this Form 10-K.

During the year ended December 31, 2020, the Company completed a private placement of $12.0 million in aggregate principal of subordinated notes resulting in net proceeds, after placement fees and offering expenses, of approximately $11.6 million.

In 2020, the Company completed a private placement of $12.0 million in aggregate principal of subordinated notes resulting in net proceeds, after placement fees and offering expenses, of approximately $11.6 million.

The Company contributed $5.5 million of the net proceeds from the sale of the subordinated notes to the Bank and retained the remaining net proceeds to be used for general corporate purposes.

At December 31, 2023, Sound Financial Bancorp, on an unconsolidated basis, had $156 thousand in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At December 31, 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 “Consolidated Statements of Cash Flows” included in “Item 8.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis