Sound Financial Bancorp, Inc. 10-Q

Item 1. Financial Statements SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets (unaudited) (In thousands, except share and per share amounts) June 30, 2022 December 31, 2021 ASSETS Cash and cash equivalents $ 80,051 $ 183,590 Available-for-sale securities, at fair value 9,382 8,419 Held-to-maturity securities, at amortized cost 2,215 — Loans held-for-sale 100 3,094 Loans held-for-portfolio 806,078 686,398 Allowance for loan losses ( 7,117 ) ( 6,306 ) Total loans held-for-portfolio, net 798,961 680,092 Accrued interest receivable 2,350 2,217 Bank-owned life insurance (“BOLI”), net 21,081 21,095 Other real estate owned (“OREO”) and repossessed assets, net 659 659 Mortgage servicing rights, at fair value 4,754 4,273 Federal Home Loan Bank (“FHLB”) stock, at cost 2,317 1,046 Premises and equipment, net 5,632 5,819 Right of use assets 5,548 5,811 Other assets 3,954 3,576 Total assets $ 937,004 $ 919,691 LIABILITIES Deposits Interest-bearing $ 599,377 $ 607,854 Noninterest-bearing demand 186,609 190,466 Total deposits 785,986 798,320 Borrowings 30,000 — Accrued interest payable 194 200 Lease liabilities 5,980 6,242 Other liabilities 9,210 8,571 Advance payments from borrowers for taxes and insurance 922 1,366 Subordinated notes, net 11,655 11,634 Total liabilities 843,947 826,333 COMMITMENTS AND CONTINGENCIES (NOTE 7) — — STOCKHOLDERS’ EQUITY Preferred stock, $ 0.01 par value, 10,000,000 shares authorized, none issued or outstanding — — Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,578,595 and 2,613,768 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively 26 26 Additional paid-in capital 27,777 27,956 Retained earnings 66,203 65,237 Accumulated other comprehensive (loss) income, net of tax ( 949 ) 139 Total stockholders’ equity 93,057 93,358 Total liabilities and stockholders’ equity $ 937,004 $ 919,691 See notes to condensed consolidated financial statements 3 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Income (unaudited) (In thousands, except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 INTEREST INCOME Loans, including fees $ 8,697 $ 8,299 $ 16,772 $ 16,184 Interest and dividends on investments, cash and cash equivalents 289 116 427 229 Total interest income 8,986 8,415 17,199 16,413 INTEREST EXPENSE Deposits 414 896 841 2,190 Borrowings 12 — 12 — Subordinated notes 168 168 336 336 Total interest expense 594 1,064 1,189 2,526 Net interest income 8,392 7,351 16,010 13,887 PROVISION FOR LOAN LOSSES 600 250 725 250 Net interest income after provision for loan losses 7,792 7,101 15,285 13,637 NONINTEREST INCOME Service charges and fee income 596 526 1,146 1,059 (Loss) earnings on cash surrender value of bank-owned life insurance ( 35 ) 96 ( 14 ) 178 Mortgage servicing income 313 321 633 633 Fair value adjustment on mortgage servicing rights 57 ( 294 ) 325 ( 569 ) Net gain on sale of loans 84 1,063 450 3,116 Total noninterest income 1,015 1,712 2,540 4,417 NONINTEREST EXPENSE Salaries and benefits 3,969 3,314 8,137 6,958 Operations 1,428 1,361 2,743 2,567 Regulatory assessments 99 91 200 192 Occupancy 439 409 872 857 Data processing 849 813 1,670 1,593 Net gain on OREO and repossessed assets — — — ( 16 ) Total noninterest expense 6,784 5,988 13,622 12,151 Income before provision for income taxes 2,023 2,825 4,203 5,903 Provision for income taxes 409 574 867 1,201 Net income $ 1,614 $ 2,251 $ 3,336 $ 4,702 Earnings per common share: Basic $ 0.62 $ 0.87 $ 1.28 $ 1.81 Diluted $ 0.61 $ 0.85 $ 1.26 $ 1.78 Weighted-average number of common shares outstanding: Basic 2,584,179 2,582,937 2,593,173 2,578,763 Diluted 2,615,299 2,627,621 2,627,789 2,619,736 See notes to condensed consolidated financial statements 4 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Comprehensive Income (unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 1,614 $ 2,251 $ 3,336 $ 4,702 Available for sale securities: Unrealized (losses) gains arising during the period ( 607 ) 3 ( 1,377 ) ( 57 ) Income tax benefit (expense) related to unrealized (losses)/gains 127 ( 1 ) 289 12 Other comprehensive (loss) gain, net of tax ( 480 ) 2 ( 1,088 ) ( 45 ) Comprehensive income $ 1,134 $ 2,253 $ 2,248 $ 4,657 See notes to condensed consolidated financial statements 5 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Stockholders’ Equity For the Three and Six Months Ended June 30, 2022 and 2021 (unaudited) (In thousands, except share and per share amounts) Shares Common Stock Additional Paid -in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss), net of tax Total Stockholders’ Equity Balance, at March 31, 2022 2,621,531 $ 26 $ 28,154 $ 66,139 $ ( 469 ) $ 93,850 Net income — — — 1,614 — 1,614 Other comprehensive loss, net of tax — — — — ( 480 ) ( 480 ) Share-based compensation — — 91 — — 91 Cash dividends paid on common stock ($ 0.17 per share) — — — ( 444 ) — ( 444 ) Common stock repurchased ( 42,791 ) — ( 468 ) ( 1,106 ) — ( 1,574 ) Common stock surrendered ( 1,010 ) — ( 38 ) — — ( 38 ) Restricted shares forfeited ( 585 ) — — — — — Common stock options exercised 1,450 — 38 — — 38 Balance, at June 30, 2022 2,578,595 $ 26 $ 27,777 $ 66,203 $ ( 949 ) $ 93,057 Balance, at December 31, 2021 2,613,768 $ 26 $ 27,956 $ 65,237 $ 139 $ 93,358 Net income — — — 3,336 — 3,336 Other comprehensive loss, net of tax — — — — ( 1,088 ) ( 1,088 ) Share-based compensation — — 294 — — 294 Restricted stock awards issued 9,700 — — — — — Cash dividends paid on common stock ($ 0.44 per share) — — — ( 1,152 ) — ( 1,152 ) Common stock repurchased ( 46,799 ) — ( 516 ) ( 1,218 ) — ( 1,734 ) Common stock surrendered ( 1,110 ) — ( 38 ) — — ( 38 ) Restricted shares forfeited ( 835 ) — — — — — Common stock options exercised 3,871 — 81 — — 81 Balance, at June 30, 2022 2,578,595 $ 26 $ 27,777 $ 66,203 $ ( 949 ) $ 93,057 6 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Stockholders’ Equity (unaudited) (In thousands, except share and per share amounts) Shares Common Stock Additional Paid -in Capital Unearned ESOP Shares Retained Earnings Accumulated Other Comprehensive Income/(Loss), net of tax Total Stockholders’ Equity Balance, at March 31, 2021 2,609,806 $ 26 $ 27,447 $ ( 85 ) $ 59,975 $ 193 $ 87,556 Net income — — — — 2,251 — 2,251 Other comprehensive gain, net of tax — — — — — 2 2 Share-based compensation — — 65 — — — 65 Common stock surrendered ( 962 ) — ( 9 ) — ( 21 ) — ( 30 ) Cash dividends paid on common stock ($ 0.17 per share) — — — — ( 447 ) — ( 447 ) Common stock options exercised 5,485 — 18 — — — 18 Allocation of ESOP shares — — 92 28 — — 120 Balance, at June 30, 2021 2,614,329 $ 26 $ 27,613 $ ( 57 ) $ 61,758 $ 195 $ 89,535 Balance, at December 31, 2020 2,592,587 $ 25 $ 27,106 $ ( 113 ) $ 58,226 $ 240 $ 85,484 Net income — — — — 4,702 — 4,702 Other comprehensive loss, net of tax — — — — — ( 45 ) ( 45 ) Share-based compensation — — 231 — — — 231 Common stock surrendered ( 3,991 ) — ( 9 ) — ( 21 ) — ( 30 ) Cash dividends paid on common stock ($ 0.44 per share) — — — — ( 1,149 ) — ( 1,149 ) Restricted stock forfeited ( 1,470 ) — — — — — — Restricted stock awards issued 10,168 — — — — — — Common stock options exercised 17,035 1 121 — — — 122 Allocation of ESOP shares — — 164 56 — — 220 Balance, at June 30, 2021 2,614,329 $ 26 $ 27,613 $ ( 57 ) $ 61,758 $ 195 $ 89,535 See notes to condensed consolidated financial statements 7 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (unaudited) (In thousands) Six Months Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,336 $ 4,702 Adjustments to reconcile net income to net cash from operating activities: Amortization of net discounts on investments 47 81 Provision for loan losses 725 250 Depreciation and amortization 354 337 Compensation expense related to stock options and restricted stock 294 231 Fair value adjustment on mortgage servicing rights ( 325 ) 569 Right of use assets amortization 263 467 Change in lease liabilities ( 262 ) ( 453 ) Change in cash surrender value of BOLI 14 ( 178 ) Net change in advances from borrowers for taxes and insurance ( 444 ) ( 230 ) Net gain on sale of loans ( 450 ) ( 3,116 ) Proceeds from sale of loans held-for-sale 15,412 110,213 Originations of loans held-for-sale ( 13,856 ) ( 100,107 ) Net gain on OREO and repossessed assets — ( 16 ) Change in operating assets and liabilities: Accrued interest receivable ( 133 ) 176 Other assets ( 88 ) ( 312 ) Accrued interest payable ( 6 ) ( 131 ) Other liabilities 639 1,780 Net cash provided by operating activities 5,520 14,263 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities ( 2,803 ) — Proceeds from principal payments, maturities and sales of available-for-sale securities 437 2,576 Purchase of held-to-maturity securities ( 2,226 ) — Proceeds from principal payments of held-to-maturity securities 10 — Net increase in loans ( 117,862 ) ( 26,447 ) Purchase of BOLI — ( 3,057 ) Purchases of premises and equipment, net ( 167 ) ( 110 ) Proceeds from sale of OREO and other repossessed assets — 35 Net cash used in investing activities ( 122,611 ) ( 27,003 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits ( 12,334 ) 56,739 Proceeds from borrowings 30,000 — FHLB stock purchased ( 1,271 ) ( 175 ) Common stock repurchases ( 1,734 ) ( 30 ) Purchase of stock surrendered to pay tax liability ( 38 ) — Allocation of ESOP shares — 220 Dividends paid on common stock ( 1,152 ) ( 1,149 ) Proceeds from common stock option exercises 81 122 Net cash provided by financing activities 13,552 55,727 Net change in cash and cash equivalents ( 103,539 ) 42,987 Cash and cash equivalents, beginning of period 183,590 193,828 Cash and cash equivalents, end of period $ 80,051 $ 236,815 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes $ 910 $ 1,670 Interest paid on deposits and borrowings 1,195 2,657 See notes to condensed consolidated financial statements 8 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc. References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022 (“2021 Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full year or any other future period. Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation. These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share. Note 2 – Accounting Pronouncements Recently Issued or Adopted On March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, " Reference Rate Reform" ("Topic 848"). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives. In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification. The amendments in this ASU have differing effective dates, beginning with interim period including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02, and March 2020, ASU 2020-03, all of which clarifies codification and corrects unintended application of the guidance. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The 9 income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The new guidance may result in an increase in the allowance for loan losses; however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements. The FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326) , delaying implementation of ASU No. 2016-13 for SEC smaller reporting company filers until fiscal years beginning after December 15, 2022. The Bank meets the requirements of a smaller reporting company and will delay implementation of ASU No. 2016-13. In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology. Note 3 – Investments The Company classifies its debt investment securities in two categories: held-to-maturity (“HTM”) or available-for-sale (“AFS”). Unrealized holding gains or losses, net of the related tax effect, on AFS securities are excluded from income and are reported as a separate component of shareholders’ equity as accumulated other comprehensive income (loss) net of applicable taxes until realized. Recognized gains and losses from the sale of AFS securities are determined on a specific-identification basis. These securities are adjusted for the amortization or accretion of premiums or discounts. Securities classified as HTM are those that the Company has the positive intent and ability to hold until maturity. These securities are carried at amortized cost, adjusted for the amortization or accretion of premiums or discounts. The Company does not own any debt securities classified as trading or equity securities. The amortized cost and fair value of our AFS securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2022 Municipal bonds $ 6,715 $ 42 $ ( 991 ) $ 5,766 Agency mortgage-backed securities 3,869 6 ( 259 ) 3,616 Total $ 10,584 $ 48 $ ( 1,250 ) $ 9,382 December 31, 2021 Municipal bonds $ 5,931 $ 148 $ ( 13 ) $ 6,066 Agency mortgage-backed securities 2,312 53 ( 12 ) 2,353 Total $ 8,243 $ 201 $ ( 25 ) $ 8,419 The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands): 10 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2022 Municipal bonds $ 705 $ — $ ( 164 ) $ 541 Agency mortgage-backed securities 1,510 — ( 161 ) 1,349 Total $ 2,215 $ — $ ( 325 ) $ 1,890 December 31, 2021 Municipal bonds $ — $ — $ — $ — Agency mortgage-backed securities — — — — Total $ — $ — $ — $ — The amortized cost and fair value of AFS and HTM securities at June 30, 2022, by contractual maturity, are shown below (in thousands). Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately. June 30, 2022 Available-for-sale Held-to-maturity Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ 260 $ 261 $ — $ — Due after one year through five years 151 153 — — Due after five years through ten years 1,226 1,256 — — Due after ten years 5,078 4,096 705 541 Agency mortgage-backed securities 3,869 3,616 1,510 1,349 Total $ 10,584 $ 9,382 $ 2,215 $ 1,890 There were no pledged securities at June 30, 2022 or December 31, 2021. 11 There were no sales of AFS securities during the three and six months ended June 30, 2022 or 2021. There were no sales of HTM securities during the three and six months ended June 30, 2022. The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at the dates indicated (in thousands): June 30, 2022 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Available-for-sale securities Municipal bonds $ 3,810 $ ( 991 ) $ — $ — $ 3,810 $ ( 991 ) Agency mortgage-backed securities 2,871 ( 188 ) 319 ( 71 ) 3,190 ( 259 ) Total available-for-sale securities $ 6,681 $ ( 1,179 ) $ 319 $ ( 71 ) $ 7,000 $ ( 1,250 ) Held-to-maturity securities Municipal bonds $ 541 $ ( 164 ) $ — $ — $ 541 $ ( 164 ) Agency mortgage-backed securities 1,349 ( 161 ) — — 1,349 ( 161 ) Total held-to-maturity securities $ 1,890 $ ( 325 ) $ — $ — $ 1,890 $ ( 325 ) December 31, 2021 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Available-for-sale securities Municipal bonds $ 1,632 $ ( 13 ) $ — $ — $ 1,632 $ ( 13 ) Agency mortgage-backed securities — — 402 ( 12 ) 402 ( 12 ) Total $ 1,632 $ ( 13 ) $ 402 $ ( 12 ) $ 2,034 $ ( 25 ) There were no credit losses recognized in earnings related to other than temporary impairments during the three and six months ended June 30, 2022 or 2021. At June 30, 2022, the total securities portfolio consisted of 12 agency mortgage-backed securities and 12 municipal bonds with a total portfolio fair value of $ 11.3 million. At December 31, 2021, the securities portfolio consisted of 10 agency mortgage-backed securities and 10 municipal bonds with a fair value of $ 8.4 million. At June 30, 2022, there were 15 securities in an unrealized loss position for less than 12 months, and one security in an unrealized loss position for more than 12 months. Of the 15 securities in an unrealized loss position for less than 12 months, two securities were classified as HTM. At December 31, 2021, there were two securities in an unrealized loss position for less than 12 months, and one security in an unrealized loss position for more than 12 months. The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of June 30, 2022, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis . 12 Note 4 – Loans The composition of the loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands): June 30, 2022 December 31, 2021 Real estate loans: One-to-four family $ 250,295 $ 207,660 Home equity 16,374 13,250 Commercial and multifamily 307,462 278,175 Construction and land 101,394 63,105 Total real estate loans 675,525 562,190 Consumer loans: Manufactured homes 23,264 21,636 Floating homes 66,573 59,268 Other consumer 18,076 16,748 Total consumer loans 107,913 97,652 Commercial business loans 24,302 28,026 Total loans held-for-portfolio 807,740 687,868 Premiums for purchased loans (1) 1,010 897 Deferred fees, net ( 2,672 ) ( 2,367 ) Total loans held-for-portfolio, gross 806,078 686,398 Allowance for loan losses ( 7,117 ) ( 6,306 ) Total loans held-for-portfolio, net $ 798,961 $ 680,092 (1) Includes premiums resulting from purchased loans of $ 521 thousand related to one-to-four family loans, $ 324 thousand related to commercial and multifamily loans, and $ 165 thousand related to commercial business loans as of June 30, 2022. Includes premiums resulting from purchased loans of $ 556 thousand related to one-to-four family loans, $ 181 thousand related to commercial and multifamily loans, and $ 160 thousand related to commercial business loans as of December 31, 2021. The Company was automatically authorized to participate in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), as a qualified lender since the inception of the program. As of June 30, 2022, the Bank had funded PPP loans totaling $ 119.2 million, $ 429 thousand of which remained outstanding and are included in commercial business loans above. PPP loans are 100% guaranteed by the SBA. 13 The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of the dates indicated (in thousands): June 30, 2022 Allowance: Individually evaluated for impairment Allowance: Collectively evaluated for impairment Allowance: Ending balance Loans held for portfolio: Individually evaluated for impairment Loans held for portfolio: Collectively evaluated for impairment Loans held for portfolio: Ending balance One-to-four family $ 109 $ 1,529 $ 1,638 $ 3,297 $ 246,998 $ 250,295 Home equity 6 107 113 224 16,150 16,374 Commercial and multifamily — 2,312 2,312 2,307 305,155 307,462 Construction and land 4 1,020 1,024 65 101,329 101,394 Manufactured homes 99 345 444 192 23,072 23,264 Floating homes — 410 410 — 66,573 66,573 Other consumer 23 308 331 335 17,741 18,076 Commercial business — 240 240 — 24,302 24,302 Unallocated — 605 605 — — — Total $ 241 $ 6,876 $ 7,117 $ 6,420 $ 801,320 $ 807,740 December 31, 2021 Allowance: Individually evaluated for impairment Allowance: Collectively evaluated for impairment Allowance: Ending balance Loans held for portfolio: Individually evaluated for impairment Loans held for portfolio: Collectively evaluated for impairment Loans held for portfolio: Ending balance One-to-four family $ 112 $ 1,290 $ 1,402 $ 4,066 $ 203,594 $ 207,660 Home equity 7 86 93 215 13,035 13,250 Commercial and multifamily — 2,340 2,340 2,380 275,795 278,175 Construction and land 4 646 650 68 63,037 63,105 Manufactured homes 144 331 475 221 21,415 21,636 Floating homes — 372 372 493 58,775 59,268 Other consumer 26 284 310 106 16,642 16,748 Commercial business — 269 269 176 27,850 28,026 Unallocated — 395 395 — — — Total $ 293 $ 6,013 $ 6,306 $ 7,725 $ 680,143 $ 687,868 14 The following tables summarize the activity in the allowance for loan losses for the periods indicated (in thousands): Three Months Ended June 30, 2022 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,474 $ — $ 45 $ 119 $ 1,638 Home equity 96 — 57 ( 40 ) 113 Commercial and multifamily 2,227 — — 85 2,312 Construction and land 698 — — 326 1,024 Manufactured homes 448 — 12 ( 16 ) 444 Floating homes 376 — — 34 410 Other consumer 333 ( 11 ) 1 8 331 Commercial business 238 — 6 ( 4 ) 240 Unallocated 517 — — 88 605 Total $ 6,407 $ ( 11 ) $ 121 $ 600 $ 7,117 Six Months Ended June 30, 2022 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,402 $ — $ 45 $ 191 $ 1,638 Home equity 93 — 58 ( 38 ) 113 Commercial and multifamily 2,340 — — ( 28 ) 2,312 Construction and land 650 — — 374 1,024 Manufactured homes 475 — 12 ( 43 ) 444 Floating homes 372 — — 38 410 Other consumer 310 ( 35 ) 6 50 331 Commercial business 269 ( 6 ) 6 ( 29 ) 240 Unallocated 395 — — 210 605 Total $ 6,306 $ ( 41 ) $ 127 $ 725 $ 7,117 Three Months Ended June 30, 2021 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 980 $ ( 15 ) $ — $ 327 $ 1,292 Home equity 111 ( 8 ) 2 6 111 Commercial and multifamily 2,109 — — ( 122 ) 1,987 Construction and land 595 — — 105 700 Manufactured homes 371 — 1 ( 5 ) 367 Floating homes 291 — — 27 318 Other consumer 187 ( 10 ) 1 23 201 Commercial business 720 — 1 ( 28 ) 693 Unallocated 571 — — ( 83 ) 488 Total $ 5,935 $ ( 33 ) $ 5 $ 250 $ 6,157 15 Six Months Ended June 30, 2021 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,063 $ ( 76 ) $ — $ 305 $ 1,292 Home equity 147 ( 8 ) 2 ( 30 ) 111 Commercial and multifamily 2,370 — — ( 383 ) 1,987 Construction and land 578 — — 122 700 Manufactured homes 529 ( 2 ) 2 ( 162 ) 367 Floating homes 328 — — ( 10 ) 318 Other consumer 288 ( 19 ) 6 ( 74 ) 201 Commercial business 291 — 2 400 693 Unallocated 406 — — 82 488 Total $ 6,000 $ ( 105 ) $ 12 $ 250 $ 6,157 Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address specific impairments. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank's federal regulator, and, since our conversion to a Washington-chartered commercial bank, the Washington Department of Financial Institutions, the Bank's state banking regulator, which can order the establishment of additional loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. The following tables present the internally assigned grades as of the dates indicated, by type of loan (in thousands): June 30, 2022 One-to- four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Grade: Pass $ 247,190 $ 16,041 $ 281,790 $ 96,405 $ 22,881 $ 66,573 $ 17,826 $ 24,173 $ 772,879 Watch 401 21 17,003 4,191 209 — — 128 21,953 Special Mention — — 4,127 — — — — — 4,127 Substandard 2,704 312 4,542 798 174 — 250 1 8,781 Total $ 250,295 $ 16,374 $ 307,462 $ 101,394 $ 23,264 $ 66,573 $ 18,076 $ 24,302 $ 807,740 16 December 31, 2021 One-to- four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Grade: Pass $ 203,883 $ 12,904 $ 233,300 $ 56,310 $ 21,137 $ 58,171 $ 16,728 $ 23,713 $ 626,146 Watch 363 23 32,770 4,347 305 — — 3,561 41,369 Special Mention — — 4,553 830 — 604 — 211 6,198 Substandard 3,414 323 7,552 1,618 194 493 20 541 14,155 Total $ 207,660 $ 13,250 $ 278,175 $ 63,105 $ 21,636 $ 59,268 $ 16,748 $ 28,026 $ 687,868 Nonaccrual and Past Due Loans . Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual once the loan is 90 days past due or sooner if, in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions. The following table presents the recorded investment in nonaccrual loans as of the dates indicated, by type of loan (in thousands): June 30, 2022 December 31, 2021 One-to-four family $ 1,669 $ 2,207 Home equity 152 140 Commercial and multifamily 2,307 2,380 Construction and land 30 33 Manufactured homes 117 122 Floating homes — 493 Other consumer 233 — Commercial business — 176 Total $ 4,509 $ 5,552 17 The following tables present the aging of the recorded investment in past due loans as of the dates indicated, by type of loan (in thousands): June 30, 2022 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due > 90 Days and Accruing Total Past Due Current Total Loans One-to-four family $ — $ 57 $ 1,535 $ — $ 1,592 $ 248,703 $ 250,295 Home equity — 13 120 — 133 16,241 16,374 Commercial and multifamily 2,307 — — — 2,307 305,155 307,462 Construction and land — — — — — 101,394 101,394 Manufactured homes — — 180 — 180 23,084 23,264 Floating homes — — — — — 66,573 66,573 Other consumer 2 3 — — 5 18,071 18,076 Commercial business 410 — — — 410 23,892 24,302 Total $ 2,719 $ 73 $ 1,835 $ — $ 4,628 $ 803,112 $ 807,740 December 31, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due > 90 Days and Accruing Total Past Due Current Total Loans One-to-four family $ 1,805 $ 58 $ 87 $ — $ 1,950 $ 205,710 $ 207,660 Home equity — — 140 — 140 13,110 13,250 Commercial and multifamily — — — — — 278,175 278,175 Construction and land 837 — — — 837 62,268 63,105 Manufactured homes 123 — 59 — 182 21,454 21,636 Floating homes — — 244 — 244 59,024 59,268 Other consumer 2 76 — — 78 16,670 16,748 Commercial business 6 — 176 — 182 27,844 28,026 Total $ 2,773 $ 134 $ 706 $ — $ 3,613 $ 684,255 $ 687,868 Nonperforming Loans. Loans are considered nonperforming when they are placed on nonaccrual. 18 The following tables present the credit risk profile of our loan portfolio based on payment activity as of the dates indicated, by type of loan (in thousands): June 30, 2022 One-to-four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Performing $ 248,626 $ 16,222 $ 305,155 $ 101,364 $ 23,147 $ 66,573 $ 17,843 $ 24,302 $ 803,231 Nonperforming 1,669 152 2,307 30 117 — 233 — 4,509 Total $ 250,295 $ 16,374 $ 307,462 $ 101,394 $ 23,264 $ 66,573 $ 18,076 $ 24,302 $ 807,740 December 31, 2021 One-to-four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Performing $ 205,453 $ 13,110 $ 275,795 $ 63,072 $ 21,514 $ 58,775 $ 16,748 $ 27,850 $ 682,316 Nonperforming 2,207 140 2,380 33 122 493 — 176 5,552 Total $ 207,660 $ 13,250 $ 278,175 $ 63,105 $ 21,636 $ 59,268 $ 16,748 $ 28,026 $ 687,868 Impaired Loans. A loan is considered impaired when we determine that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, including payment history. Impairment is measured on a loan by loan basis for all loans in the portfolio. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses. 19 Impaired loans at the dates indicated, by type of loan were as follows (in thousands): June 30, 2022 Recorded Investment Unpaid Principal Balance Without Allowance With Allowance Total Recorded Investment Related Allowance One-to-four family $ 3,359 $ 2,429 $ 868 $ 3,297 $ 109 Home equity 223 152 72 224 6 Commercial and multifamily 2,307 2,307 — 2,307 — Construction and land 65 30 35 65 4 Manufactured homes 193 66 126 192 99 Floating homes — — — — — Other consumer 335 233 102 335 23 Commercial business — — — — — Total $ 6,482 $ 5,217 $ 1,203 $ 6,420 $ 241 December 31, 2021 Recorded Investment Unpaid Principal Balance Without Allowance With Allowance Total Recorded Investment Related Allowance One-to-four family $ 4,177 $ 3,109 $ 957 $ 4,066 $ 112 Home equity 215 140 75 215 7 Commercial and multifamily 2,380 2,380 — 2,380 — Construction and land 68 33 35 68 4 Manufactured homes 221 44 177 221 144 Floating homes 493 493 — 493 — Other consumer 106 — 106 106 26 Commercial business 176 176 — 176 — Total $ 7,836 $ 6,375 $ 1,350 $ 7,725 $ 293 20 The following tables present the average recorded investment and interest income recognized on impaired loans for the periods indicated, by loan types (in thousands): Three Months Ended June 30, 2022 2021 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized One-to-four family $ 3,377 $ 19 $ 2,882 $ 29 Home equity 226 3 260 3 Commercial and multifamily 2,322 22 176 — Construction and land 65 1 76 1 Manufactured homes 204 4 254 4 Floating homes — — 512 4 Other consumer 341 6 111 1 Commercial business 85 ( 1 ) 400 ( 5 ) Total $ 6,620 $ 54 $ 4,671 $ 37 Six Months Ended June 30, 2022 2021 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized One-to-four family $ 3,607 $ 44 $ 3,166 $ 58 Home equity 222 7 271 8 Commercial and multifamily 2,341 51 235 — Construction and land 67 2 76 1 Manufactured homes 210 8 258 8 Floating homes 164 — 514 7 Other consumer 263 10 112 2 Commercial business 115 — 471 — Total $ 6,989 $ 122 $ 5,103 $ 84 Forgone interest on nonaccrual loans was $ 60 thousand and $ 8 thousand for the three months ended June 30, 2022 and 2021, respectively. Forgone interest on nonaccrual loans was $ 123 thousand and $ 49 thousand for the six months ended June 30, 2022 and 2021, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at June 30, 2022. Troubled debt restructurings. Loans classified as TDRs totaled $ 2.0 million and $ 2.6 million at June 30, 2022 and December 31, 2021, respectively, and are included in impaired loans. The Company has granted, in its TDRs, a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories: Rate Modification : A modification in which the interest rate is changed. Term Modification : A modification in which the maturity date, timing of payments or frequency of payments is changed. Payment Modification : A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category. Combination Modification : Any other type of modification, including the use of multiple categories above. There were no loans modified as a TDR during the three and six months ended June 30, 2022 and June 30, 2021. There were three and two TDRs that were paid off during the six months ended June 30, 2022 and June 30, 2021, respectively. 21 There were no post-modification changes for the unpaid principal balance in loans, net of partial charge-offs, that were recorded as a result of the TDRs for the three and six months ended June 30, 2022 and June 30, 2021. There were no loans modified as a TDR for which there was a payment default within the first 12 months of modification during the six months ended June 30, 2022 and June 30, 2021. The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified into TDRs at June 30, 2022. As of June 30, 2022, there was one one-to-four family loan totaling $ 38 thousand that was in process of foreclosure. Note 5 – Fair Value Measurements The Company determines the fair values of its financial instruments based on the requirements established in ASC 820 , Fair Value Measurements (“ASC 820”), which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The Company’s fair values for financial instruments at June 30, 2022 and December 31, 2021 were determined based on these requirements. The following methods and assumptions were used to estimate the fair value of other financial instruments: Cash and cash equivalents - The estimated fair value is equal to the carrying amount. Available-for-sale securities – AFS securities are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities. Held-to-maturity securities – HTM securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. The fair value is based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities. Loans held-for-sale - One-to-four family mortgage loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate one-to-four family loans is based on whole loan forward prices obtained from government sponsored enterprises. At June 30, 2022 and December 31, 2021, loans held-for-sale were carried at cost, as no impairment was required. Loans held-for-portfolio - The estimated fair value of loans-held-for portfolio consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment, to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and estimated current market rate yields on loans with similar characteristics. The estimated fair values of loans held for portfolio reflect exit price assumptions. The liquidity premium/discounts are part of the valuation for exit pricing. Mortgage servicing rights –The fair value of mortgage servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. FHLB stock - The estimated fair value is equal to the par value of the stock. Non-maturity deposits - The estimated fair value is equal to the carrying amount. Time deposits - The estimated fair value of time deposits is based on the difference between interest costs paid on the Company’s time deposits and current market rates for time deposits with comparable characteristics. Borrowings - The fair value of borrowings are estimated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Subordinated notes - The fair value of subordinated notes is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity. A description of the valuation methodologies used for impaired loans and OREO is as follows: Impaired loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell, or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions. 22 OREO and repossessed assets – The fair value of OREO and repossessed assets is based on the current appraised value of the collateral less estimated costs to sell. Off-balance sheet financial instruments - The fair value for the Company’s off-balance sheet loan commitments is estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s clients. The estimated fair value of these commitments is not significant. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. There were no transfers between levels during the three and six months ended June 30, 2022 and 2021. The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of the dates indicated (in thousands): June 30, 2022 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 80,051 $ 80,051 $ 80,051 $ — $ — Available-for-sale securities 9,382 9,382 — 9,382 — Held-to-maturity securities 2,215 1,890 — 1,890 — Loans held-for-sale 100 100 — 100 — Loans held-for-portfolio, net 798,961 761,243 — — 761,243 Mortgage servicing rights 4,754 4,754 — — 4,754 FHLB stock 2,317 2,317 — 2,317 — FINANCIAL LIABILITIES: Non-maturity deposits 690,031 690,031 — 690,031 — Time deposits 95,955 96,441 — 96,441 — Borrowings 30,000 — — — — Subordinated notes 11,655 11,655 — 11,655 — December 31, 2021 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 183,590 $ 183,590 $ 183,590 $ — $ — Available-for-sale securities 8,419 8,419 — 8,419 — Loans held-for-sale 3,094 3,094 — 3,094 — Loans held-for-portfolio, net 680,092 675,154 — — 675,154 Mortgage servicing rights 4,273 4,273 — — 4,273 FHLB stock 1,046 1,046 — 1,046 — FINANCIAL LIABILITIES: Non-maturity deposits 692,598 692,598 — 692,598 — Time deposits 105,722 106,834 — 106,834 — Subordinated notes 11,634 11,634 — 11,634 — 23 The following tables present the balance of assets measured at fair value on a recurring basis as of the dates indicated (in thousands): Fair Value at June 30, 2022 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 5,766 $ — $ 5,766 $ — Agency mortgage-backed securities 3,616 — 3,616 — Mortgage servicing rights 4,754 — — 4,754 Fair Value at December 31, 2021 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 6,066 $ — $ 6,066 $ — Agency mortgage-backed securities 2,353 — 2,353 — Mortgage servicing rights 4,273 — — 4,273 The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis as of the dates indicated: June 30, 2022 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 132 %- 479 % ( 144 %) Discount rate 10.5 %- 14.5 % ( 12.5 %) December 31, 2021 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 204 %- 344 % ( 205 %) Discount rate 10.5 %- 14.5 % ( 12.5 %) Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted-average life will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate. There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2022 and 2021. Mortgage servicing rights are measured at fair value using a significant unobservable input (Level 3) on a recurring basis - additional information is included in “Note 6—Mortgage Servicing Rights.” 24 The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands): Fair Value at June 30, 2022 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 659 $ — $ — $ 659 Impaired loans 6,420 — — 6,420 Fair Value at December 31, 2021 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 659 $ — $ — $ 659 Impaired loans 7,725 — — 7,725 There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at both June 30, 2022 and December 31, 2021. The following tables provide a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated: June 30, 2022 Financial Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) OREO Third Party Appraisals No discounts N/A Impaired loans (1) Discounted Cash Flow Discount Rate 0 - 12.75 % ( 10 %) Impaired loans (2) Third Party Appraisals No discounts N/A (1) Represents TDRs included within impaired loans. (2) Excludes TDRs. December 31, 2021 Financial Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) OREO Third Party Appraisals No discounts N/A Impaired loans (1) Discounted Cash Flow Discount Rate 0 - 10 % ( 4 %) Impaired loans (2) Third Party Appraisals No discounts N/A (1) Represents TDRs included within impaired loans. (2) Excludes TDRs. Note 6 – Mortgage Servicing Rights The Company’s mortgage servicing rights portfolio totaled $ 489.9 million at June 30, 2022 compared to $ 508.1 million at December 31, 2021. Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at June 30, 2022 and December 31, 2021 were $ 487.5 million and $ 504.1 million, respectively. The unpaid principal balance of loans serviced for other financial institutions at June 30, 2022 and December 31, 2021, totaled $ 2.4 million and $ 4.0 million, respectively. Loans serviced for others are not included in the Company’s financial statements as they are not assets of the Company. 25 A summary of the change in the balance of mortgage servicing assets during the periods indicated were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Beginning balance, at fair value $ 4,668 $ 4,109 $ 4,273 $ 3,780 Servicing rights that result from transfers and sale of financial assets 29 336 156 940 Changes in fair value: Due to changes in model inputs or assumptions and other (1) 57 ( 294 ) 325 ( 569 ) Ending balance, at fair value $ 4,754 $ 4,151 $ 4,754 $ 4,151 (1) Represents changes due to collection/realization of expected cash flows and curtailments. The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows: June 30, 2022 December 31, 2021 Prepayment speed (Public Securities Association “PSA” model) 144 % 205 % Weighted-average life 7.2 years 5.8 years Discount rate 12.5 % 12.5 % The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 313 thousand and $ 633 thousand for the three and six months ended June 30, 2022 and $ 321 thousand and $ 633 thousand for the three and six months ended June 30, 2021, respectively. Note 7 – Commitments and Contingencies In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments and lines of credit. Note 8 – Borrowings, FHLB Stock and Subordinated Notes The Company has a loan agreement with the FHLB of Des Moines. The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance. At June 30, 2022 and December 31, 2021, the amount available to borrow under this credit facility was $ 431.5 million and $ 417.7 million, respectively, subject to eligible pledged collateral. At June 30, 2022, the credit facility was collateralized as follows: one-to-four family mortgage loans with an advance equivalent of $ 170.0 million, commercial and multifamily mortgage loans with an advance equivalent of $ 51.0 million and home equity loans with an advance equivalent of $ 525 thousand. At December 31, 2021, the credit facility was collateralized as follows: one-to-four family mortgage loans with an advance equivalent of $ 59.7 million, commercial and multifamily mortgage loans with an advance equivalent of $ 52.9 million and home equity loans with an advance equivalent of $ 482 thousand. The Company had $ 30.0 million outstanding borrowings under this arrangement at June 30, 2022 and no borrowings as of December 31, 2021. Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 13.0 million and $ 11.5 million at June 30, 2022 and December 31, 2021, respectively, to secure public deposits. The remaining amount available to borrow as of June 30, 2022 and December 31, 2021, was $ 178.5 million and $ 101.5 million, respectively. As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances. At June 30, 2022 and December 31, 2021, the Company had an investment of $ 2.3 million and $ 1.0 million, respectively in FHLB of Des Moines stock. The Company has a borrowing agreement with the Federal Reserve Bank of San Francisco. The terms of the agreement call for a blanket pledge of a portion of the Company’s consumer and commercial business loans based on the outstanding balance. At 26 June 30, 2022 and December 31, 2021, the amount available to borrow under this credit facility was $ 21.9 million and $ 22.4 million, respectively, subject to eligible pledged collateral. The Company had no outstanding borrowings under this arrangement at June 30, 2022 and December 31, 2021. The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank (“PCBB”). The line has a one year term maturing on June 30, 2023 and is renewable annually. As of June 30, 2022, the amount available under this line of credit was $ 20.0 million. There was no balance on this line of credit as of June 30, 2022 and December 31, 2021, respectively. In September 2020, the Company issued $ 12.0 million of fixed to floating rate subordinated notes that mature in 2030. The subordinated notes have an initial fixed interest rate of 5.25 % to, but excluding, October 1, 2025, payable semi-annually in arrears. From, and including, October 1, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030. Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes and are redeemable by the Company in whole or in part beginning with the interest payment date of October 1, 2025. As of June 30, 2022 and December 31, 2021, the balance of the subordinated notes was $ 11.7 million and $ 11.6 million, respectively. Note 9 – Earnings Per Common Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested share-based awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share. Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company's stock for the period. The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 1,614 $ 2,251 $ 3,336 $ 4,702 Weighted-average number of shares outstanding, basic 2,584 2,583 2,593 2,579 Effect of potentially dilutive common shares 31 45 35 41 Weighted-average number of shares outstanding, diluted 2,615 2,628 2,628 2,620 Earnings per share, basic (1)(2) $ 0.62 $ 0.87 $ 1.28 $ 1.81 Earnings per share, diluted (1)(2) $ 0.61 $ 0.85 $ 1.26 $ 1.78 (1) The basic and diluted earnings per share amounts include the impact of income allocated to participating securities of $ 11 thousand and $ 23 thousand, for the three and six months ended June 30, 2022, and $ 15 thousand and $ 33 thousand for the three and six months ended June 30, 2021, respectively. (2) The difference between the basic and diluted earnings per share amounts for the three and six months ended June 30, 2022 and 2021 under the Treasury Stock Method and the Two-Class Method, as prescribed in FASB ASC 260-10, Earnings Per Share, is immaterial. There were 2,656 anti-dilutive securities at June 30, 2022 and zero anti-dilutive securities at June 30, 2021. 27 Note 10 – Stock-based Compensation Stock Options and Restricted Stock The Company currently has one active shareholder approved stock-based compensation plan, the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan"). The 2013 Plan permits the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. The equity incentive plan approved by stockholders in 2008 (the"2008 Plan") expired in November 2018 and no further awards may be made under the 2008 Plan; provided, however, all awards outstanding under the 2008 Plan remain outstanding in accordance with their terms. Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units. As of June 30, 2022, on an adjusted basis, awards for stock options totaling 283,628 shares and awards for restricted stock totaling 151,066 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan. Share-based compensation expense was $ 91 thousand and $ 294 thousand for the three and six months ended June 30, 2022, and $ 65 thousand and $ 231 thousand for the three and six months ended June 30, 2021, respectively. Stock Option Awards All stock option awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan. The stock option awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company. All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting. The following is a summary of the Company’s stock option award activity during the three months ended June 30, 2022 (dollars in thousands, except per share amounts): Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Outstanding at April 1, 2022 101,243 $ 26.98 5.21 $ 1,186 Granted — — Exercised ( 1,450 ) 25.98 Forfeited ( 446 ) 37.40 Expired ( 128 ) 33.50 Outstanding at June 30, 2022 99,219 26.94 4.93 1,154 Exercisable 77,753 23.91 3.89 1,105 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 99,219 $ 26.94 4.93 $ 1,154 28 The following is a summary of the Company’s stock option award activity during the six months ended June 30, 2022 (dollars in thousands, except per share amounts): Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Outstanding at January 1, 2022 91,316 $ 24.59 4.77 $ 1,773 Granted 12,800 42.85 Exercised ( 3,871 ) 21.92 Forfeited ( 898 ) 34.95 Expired ( 128 ) 33.50 Outstanding at June 30, 2022 99,219 26.94 4.93 1,154 Exercisable 77,753 23.91 3.89 1,105 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 99,219 $ 26.94 4.93 $ 1,154 As of June 30, 2022, there was $ 145 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.8 years. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The fair value of options granted for the six months ended June 30, 2022 and 2021 were determined using the following weighted-average assumptions as of the grant date. Six Months Ended June 30, 2022 2021 Annual dividend yield 1.59 % 1.60 % Expected volatility 26.48 % 21.67 % Risk-free interest rate 1.64 % 0.60 % Expected term 6.00 years 6.50 years Weighted-average grant date fair value per option granted $ 9.95 $ 5.64 There were zero and 12,800 options granted during the three and six months ended June 30, 2022, and zero and 12,250 options granted during the three and six months ended June 30, 2021, respectively. Restricted Stock Awards The fair value of the restricted stock awards is equal to the fair value of the Company's stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. The restricted stock awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date. The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each of the grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company. 29 The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended June 30, 2022: Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at April 1, 2022 18,604 $ 37.59 Granted — — Vested — — Forfeited ( 585 ) 37.32 Non-Vested at June 30, 2022 18,019 37.60 37.95 Expected to vest assuming a 0 % forfeiture rate over the vesting term 18,019 $ 37.60 $ 37.95 The following is a summary of the Company’s non-vested restricted stock award activity during the six months ended June 30, 2022: Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at January 1, 2022 17,586 $ 34.02 Granted 9,700 42.85 Vested ( 8,432 ) 36.34 Forfeited ( 835 ) 35.91 Non-Vested at June 30, 2022 18,019 37.60 37.95 Expected to vest assuming a 0 % forfeiture rate over the vesting term 18,019 $ 37.60 $ 37.95 As of June 30, 2022, there was $ 553 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans. The cost is expected to be recognized over the weighted-average vesting period of 2.6 years. The total fair value of shares vested for the six months ended June 30, 2022 and 2021 was $ 306 thousand and $ 264 thousand, respectively. Employee Stock Ownership Plan In January 2008, the ESOP borrowed $ 1.2 million from the Company to purchase common stock of the Company which was paid in full in 2017. In August 2012, in conjunction with the Company’s conversion to a full stock company from the mutual holding company structure, the ESOP borrowed an additional $ 1.1 million from the Company to purchase common stock of the Company. The loan was being repaid principally by the Bank through contributions to the ESOP over a period of ten years . The interest rate on the loan was fixed at 2.25 % per annum. As of June 30, 2022, the ESOP loan was repaid in full. Neither the loan balance nor the related interest expense was reflected on the condensed consolidated financial statements. The fair value of the 140,713 shares held by the ESOP trust was $ 5.3 million at June 30, 2022. ESOP compensation expense included in salaries and benefits was $ 170 thousand and $ 375 thousand for the three and six months ended June 30, 2022 and $ 180 thousand and $ 350 thousand for the three and six months ended June 30, 2021, respectively. Note 11 – Leases We have operating leases for branch locations, a loan production office, our corporate office and in the past, for certain equipment. The lease term for our leases begins on the date we become legally obligated for the rent payments or we take possession of the building, whichever is earlier. Generally, our real estate leases have initial terms of three to ten years and typically include one renewal option. Our leases have remaining lease terms of one year to seven years . The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties. 30 The following table presents the lease right-of-use assets and lease liabilities recorded on the condensed consolidated balance sheet at the dates indicated (in thousands): June 30, 2022 December 31, 2021 Operating lease right-of-use assets $ 5,548 $ 5,811 Operating lease liabilities $ 5,980 $ 6,242 The following table presents the components of lease expense for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating lease expense Office leases $ 279 $ 272 $ 562 $ 545 Sublease income ( 3 ) ( 3 ) ( 6 ) ( 6 ) Net lease expense $ 276 $ 269 $ 556 $ 539 The following table presents the maturity of lease liabilities at the date indicated (in thousands): June 30, 2022 Remainder of 2022 $ 535 2023 1,054 2024 1,035 2025 896 2026 862 Thereafter 2,150 Total lease payments 6,532 Less: Present value discount 552 Present value of lease liabilities $ 5,980 Lease term and discount rate by lease type consist of the following at the dates indicated: June 30, 2022 December 31, 2021 Weighted-average remaining lease term: Office leases 6.5 years 7.0 years Weighted-average discount rate (annualized): Office leases 2.65 % 2.67 % Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cash paid for amounts included in the measurement of lease liabilities for operating leases: Operating cash flows Office leases $ 265 $ 258 $ 530 $ 516 31 Table of Contents Note 12 – Subsequent Events On July 26, 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.17 per common share, payable on August 23, 2022 to stockholders of record at the close of business on August 09, 2022. On July 26, 2022, the Company announced that its Board of Directors amended its existing stock repurchase program to increase the authorized repurchase amount to $ 4.0 million from $ 2.0 million effective immediately and to extend the stock repurchase program’s expiration date to January 31, 2023. The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified in the Rule 10b5-1 plan, price, general business and market conditions, and alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time. 32 Table of Contents