Sound Financial Bancorp, Inc.

Previous wording

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. Item 8. 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.

Current wording

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 notes thereto that appear in "Part II. Item 8. 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 notes and the business and financial information provided in this Form 10-K.

Previous wording

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.

Current wording

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.

Previous wording

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. 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. Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, increased to $130.9 million or 14.6% of our loan portfolio at December 31, 2023, from $119.3 million or 13.8% of our loan portfolio at December 31, 2022.

Current wording

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.

Previous wording

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. 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.

Current wording

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 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.

Previous wording

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. 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.

Current wording

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 $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.

Previous wording

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. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts. 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.

Current wording

Allowance for Credit Losses. 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. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts. The ACL consists of two elements: (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.

Previous wording

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.

Current wording

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. 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.

Previous wording

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

Current wording

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.

Previous wording

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. 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.

Current wording

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.

Previous wording

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. If all qualitative factors were adjusted from the base model to the High Watermark, the estimated ACL on loans would increase to $32.8 million (3.28%). 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.

Current wording

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, 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.

Previous wording

Mortgage Servicing Rights. We record MSRs on loans sold to Fannie Mae with servicing retained as well as for acquired servicing rights. We stratify our capitalized MSRs based on the type, term and interest rates of the underlying loans. 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. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our MSRs could be negatively impacted. We use a third party to assist us in the preparation of the analysis of the market value each quarter.

Current wording

Mortgage Servicing Rights. We record MSRs on loans sold to Fannie Mae with servicing retained as well as for acquired servicing rights. We stratify our capitalized MSRs based on the type, term and interest rates of the underlying loans. MSRs are carried at fair value. 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. If our assumptions prove to be incorrect, the value of our MSRs could be negatively impacted. We use a third party to assist us in the preparation of the analysis of the market value each quarter.

Previous wording

Focusing on Asset Quality. We believe that strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans, resolving nonperforming assets and selling foreclosed assets. Nonperforming assets were $4.1 million, or 0.42% of total assets, at December 31, 2023 compared to $3.6 million or 0.37% of total assets, at December 31, 2022. We continually seek to reduce the level of nonperforming assets through collections, modifications and sales of OREO. 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.

Current wording

Focusing on Asset Quality. We believe that strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans, resolving nonperforming assets and selling foreclosed assets. Nonperforming assets were $7.5 million, or 0.75% of total assets, at December 31, 2024 compared to $4.1 million or 0.42% of total assets, at December 31, 2023. We continually seek to reduce the level of nonperforming assets through collections, modifications and sales of OREO. 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.

Previous wording

Emphasizing Lower Cost Core Deposits to Manage the Funding Costs of Our Loan Growth. Our strategic focus is to emphasize total relationship banking with our clients to internally fund our loan growth. We also emphasize reducing wholesale funding sources, including FHLB advances, through the continued growth of core deposits. We believe that a continued focus on client relationships will help increase the level of core deposits and retail certificates of deposit from consumers and businesses in our market area. We intend to increase demand deposits by growing retail and business banking relationships. New technology and services are generally reviewed for business development and cost saving opportunities. 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.

Current wording

Emphasizing Lower Cost Core Deposits to Manage the Funding Costs of Our Loan Growth. Our strategic focus is to emphasize total relationship banking with our clients to internally fund our loan growth. We also emphasize reducing wholesale funding sources, including FHLB advances, through the continued growth of core deposits. We believe that a continued focus on client relationships will help increase the level of core deposits and retail certificates of deposit from consumers and businesses in our market area. We intend to increase demand deposits by growing retail and business banking relationships. New technology and services are generally reviewed for business development and cost saving opportunities. 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 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.

Previous wording

Expanding Our Presence, Including Through Digital Channels and Streamlining Operations, Within Our Existing and Contiguous Market Areas and by Capturing Business Opportunities Resulting from Changes in the Competitive Environment. 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. 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. We continue to be disciplined as it pertains to future expansion, acquisitions and de novo branching focusing on the markets in Western Washington, which we know and understand.

Current wording

Expanding Our Presence, Including Through Digital Channels and Streamlining Operations, Within Our Existing and Contiguous Market Areas and by Capturing Business Opportunities Resulting from Changes in the Competitive Environment. 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 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. We continue to be disciplined as it pertains to future expansion, acquisitions and de novo branching focusing on the markets in Western Washington, which we know and understand.

Previous wording

General. 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.

Current wording

General. 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.

Previous wording

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. HTM securities totaled $2.2 million at December 31, 2023 and 2022, and consisted of municipal bonds and agency mortgage-backed securities.

Current wording

Cash and Securities. 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.

Previous wording

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.

Current wording

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.

Previous wording

The loan portfolio remains well-diversified with commercial and multifamily real estate loans accounting for 35.2% of the portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 33.8% of the portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 14.6% of the total loan portfolio at December 31, 2023. Construction and land loans accounted for 14.1% of the portfolio and commercial business loans accounted for the remaining 2.3% of the portfolio at December 31, 2023.

Current wording

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. Construction and land loans accounted for 8.1% of the portfolio and commercial business loans accounted for the remaining 1.7% of the portfolio at December 31, 2024.

Previous wording

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.

Current wording

Nonperforming Assets. 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.

Previous wording

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. Nonperforming loans were 0.40% of total loans at December 31, 2023, compared to 0.34% of total loans at December 31, 2022. We had no loans delinquent 90 days or more and still accruing at December 31, 2023 and 2022.

Current wording

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. We had no loans delinquent 90 days or more and still accruing at December 31, 2024 and 2023.

Previous wording

Mortgage Servicing Rights. The fair value of MSRs was $4.6 million at December 31, 2023, compared to $4.7 million at December 31, 2022. We record MSRs on loans sold with servicing retained and upon acquisition of a servicing portfolio. MSRs are carried at fair value. If the fair value of our MSRs fluctuates significantly, our financial results could be materially impacted.

Current wording

Mortgage Servicing Rights. The fair value of MSRs was $4.8 million at December 31, 2024, compared to $4.6 million at December 31, 2023. We record MSRs on loans sold with servicing retained and upon acquisition of a servicing portfolio. MSRs are carried at fair value. If the fair value of our MSRs fluctuates significantly, our financial results could be materially impacted.

Previous wording

Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less.

Current wording

Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five or less.

Previous wording

Deposit amounts in excess of $250,000 are not federally insured. As of December 31, 2023, uninsured deposits totaled $140.1 million, which represented 17.0% of total deposits, as compared to uninsured deposits of $161.9 million, or 20.0% of total deposits as of December 31, 2022. The aggregate amount of time deposits in denominations of more than $250,000 at December 31, 2023 and December 31, 2022, totaled $88.3 million and $56.1 million, respectively. 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.

Current wording

Deposit amounts in excess of $250,000 are not federally insured. As of December 31, 2024, uninsured deposits totaled $167.3 million, which represented 20.0% of total deposits, as compared to uninsured deposits of $140.1 million, or 17.0% of total deposits as of December 31, 2023. The aggregate amount of time deposits in denominations of more than $250,000 at December 31, 2024 and December 31, 2023, totaled $90.9 million and $88.3 million, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Previous wording

Borrowings. 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 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. Subordinated notes, net totaled $11.7 million at December 31, 2023 and 2022. For additional information regarding our borrowings, see “Note 10—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.

Current wording

Borrowings. 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, 2024 had maturities ranging from early 2026 through early 2028. Subordinated notes, net totaled $11.8 million at December 31, 2024 and 2023. For additional information regarding our borrowings, see “Note 10—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.

Previous wording

Stockholders' Equity. Total stockholders’ equity increased $2.9 million, or 3.0%, to $100.7 million at December 31, 2023, from $97.7 million at December 31, 2022. 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.

Current wording

Stockholders' Equity. 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 $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.

Previous wording

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. It distinguishes between changes related to outstanding balances and changes due to interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). 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).

Current wording

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. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). 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).

Previous wording

General. Net income decreased $1.4 million, or 15.5%, to $7.4 million, or $2.86 per diluted common share, for the year ended December 31, 2023, compared to $8.8 million, or $3.35 per diluted common share, for the year ended December 31, 2022. 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.

Current wording

General. 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 $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.

Previous wording

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. The average yield on total loans was 5.34% for the year ended December 31, 2023, compared to 4.87% for the year ended December 31, 2022. The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.

Current wording

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.

Previous wording

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. The average yield on investments was 3.79% for the year ended December 31, 2023, compared to 2.74% for the year ended December 31, 2022, primarily due to the impact of rising rates.

Current wording

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.

Previous wording

Interest income on cash and cash equivalents increased $2.4 million, or 193.2%, to $3.6 million for the year ended December 31, 2023, compared to $1.2 million for the year ended December 31, 2022. 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.

Current wording

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 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 year. 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.

Previous wording

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

Current wording

Interest Expense. 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.

Previous wording

Interest expense on deposits increased $11.2 million, or 379.2%, to $14.1 million for the year ended December 31, 2023, compared to $3.0 million for the year ended December 31, 2022. The increase was primarily the result of an increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $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.

Current wording

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 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.

Previous wording

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 average balance of FHLB advances was $44.0 million for the year ended December 31, 2023, compared to $27.3 million for the year ended December 31, 2022. Interest expense on subordinated notes was $672 thousand for both the year ended December 31, 2023 and the year ended December 31, 2022.

Current wording

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. Interest expense on subordinated notes was $672 thousand for both the year ended December 31, 2024 and the year ended December 31, 2023.

Previous wording

Net Interest Income. Net interest income decreased $1.4 million, or 4.1%, to $33.9 million for the year ended December 31, 2023, from $35.3 million for the year ended December 31, 2022. Net interest margin was 3.53% and 3.89% for the year ended December 31, 2023 and 2022, respectively. The decrease in net interest income primarily resulted from an increase in the average balances of and rates paid on deposits and borrowings, partially offset by higher average balances and yields earned on interest-earning assets. 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.

Current wording

Net Interest Income. Net interest income decreased $2.8 million, or 8.4%, to $31.0 million for the year ended December 31, 2024, from $33.9 million for the year ended December 31, 2023. Net interest margin was 3.00% and 3.53% for the year ended December 31, 2024 and 2023, respectively. The decrease in net interest income primarily resulted from an increase in the average balances of and rates paid on deposits and borrowings, partially offset by higher average balances and yields earned on interest-earning assets. 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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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):

Current wording

Noninterest Income. 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):

Previous wording

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.

Current wording

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.

Previous wording

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):

Current wording

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

Previous wording

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.

Current wording

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.