What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-14 compared with 2022-03-15 · 257 added, 267 removed, 1143 unchanged (31% of the section changed)

20 unchanged sentences

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provides a reasonable basis for our opinion.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

4 unchanged sentences

The allowance for loan losses is maintained to provide for probable incurred losses in the loan portfolio based upon evaluating known and inherent risks in the loan portfolio.

The level of the allowance reflects the Company’s view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions.

The allowance is provided based upon management's ongoing assessments of the pertinent factors underlying the quality of the loan portfolio.

These factors include, but are not limited to, changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be

The Company uses internally assigned loan grades to stratify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses.

The Company includes an additional factor to the allowance to account for loans with certain assigned grades that represent a higher credit risk.

The Company incorporates historical loss rate factors, and then the historical loss rate factors are adjusted for qualitative factors.

Qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data and involve significant management judgement.

Qualitative factors include changes in lending standards, changes in economic conditions, changes in the nature and volume of loans, changes in lending management, changes in delinquencies, changes in the loan review system, changes in the value of collateral, the existence of concentrations, and the impact of other

external factors.

Finally, the Company uses internally assigned loan grades to differentiate inherent loss rates and applies additional qualitative factors based on the loan grades to account for loans that represent elevated credit risk.

We identified management’s internally assigned grades of loans and the estimation of qualitative factors, both of which are used in the allowance for loan losses calculation, as critical audit matters.

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The qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data and involves significant management judgement.

Auditing management’s judgments relating to the determination of internally assigned grades and qualitative factors involved a high degree of subjective auditor judgment.

The primary procedures we performed to address this critical audit matter included:

• Obtain an understanding of the design and implementation of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of assigned loan grades and the determination of the qualitative factors used.

• Testing a risk-based, targeted selection of loans to gain substantive evidence that the Company is appropriately grading these loans in accordance with its policies, and that the assigned loan grades are reasonable.

Auditing management’s judgments relating to the determination of internally assigned grades and qualitative factors involved significant audit effort as well as especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures.

The primary procedures we performed to address the critical audit matters included:

• Testing design, implementation, and operating effectiveness of internal controls over the accuracy of assigned loan grades.

• Testing a risk-based, targeted selection of loans to evaluate the Company’s loan grading in accordance with its policies, and that the assigned loan grades are reasonable based on current facts and circumstances.

• Obtaining management’s analysis and supporting documentation related to the qualitative factors and testing whether the qualitative factors used in the calculation of the allowance for loan losses are supported by the analysis provided by management.

• Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the assigned loan grades determined by management and used in the calculation, application of the qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance.

• Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, including completeness and accuracy of the data used in the calculation, application of the assigned loan grades, and application of the qualitative factors as determined by management and used in the calculation and recalculation of the allowance for loan losses balance.

/s/ Moss Adams LLP

8 unchanged sentences

Available-for-sale securities, at fair value 10,207 8,419

Held-to-maturity securities, at amortized cost (fair value of $ 1,810 at December 31, 2022)

Loans held-for-sale — 3,094

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Premises and equipment, net 5,513 5,819

Lease right of use assets, net 5,811 6,722

Operating lease right of use assets, net 5,102 5,811

Other assets 4,537 3,576

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Accrued interest payable 395 200

Lease liabilities 6,242 7,134

Operating lease liabilities 5,448 6,242

Other liabilities 8,318 8,571

7 unchanged sentences

Additional paid-in capital 28,004 27,956

Unearned shares - Employee Stock Ownership Plan ("ESOP") — ( 113 )

Retained earnings 70,792 65,237

Accumulated other comprehensive income, net of tax 139 240

Accumulated other comprehensive (loss) income, net of tax ( 1,117 ) 139

Total stockholders' equity 97,705 93,358

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Available for sale securities:

Unrealized (losses)/gains arising during the year ( 128 ) 82

Income tax benefit/(expense) related to unrealized losses/gains 27 ( 17 )

Other comprehensive (loss)/income, net of tax ( 101 ) 65

Unrealized losses arising during the year ( 1,590 ) ( 128 )

Income tax benefit related to unrealized losses 334 27

Other comprehensive loss, net of tax ( 1,256 ) ( 101 )

Comprehensive income $ 7,548 $ 9,055

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Earnings Accumulated Other Comprehensive

Income, net of tax Total

Income (Loss), net of tax Total

Stockholders' Equity

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Common stock options exercised 11,421 223 223

Allocation of ESOP shares 355 113 468

Balance at December 31, 2022

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Net income 9,156 9,156

Other comprehensive income, net of tax 65 65

Other comprehensive loss, net of tax ( 101 ) ( 101 )

Share-based compensation 360 360

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Right of use assets amortization 895 911

Change in lease liabilities ( 892 ) ( 876 )

Increase in cash surrender value of BOLI ( 219 ) ( 416 )

Net change in advances from borrowers for taxes and insurance 198 ( 137 )

Deferred income tax ( 149 ) ( 43 )

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Other assets ( 478 ) ( 202 )

Lease liabilities ( 980 ) ( 892 )

Advances from borrowers for taxes and insurance ( 320 ) 198

Accrued interest payable 195 ( 169 )

Other liabilities ( 253 ) 897

Net cash provided by (used in) operating activities 19,073 ( 484 )

Net cash provided by operating activities 10,054 19,073

CASH FLOWS FROM INVESTING ACTIVITIES:

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Proceeds from principal payments, maturities and sales of available-for-sale securities 972 3,529

Purchase of HTM investments ( 2,226 ) —

Proceeds from principal payments, maturities and sales of HTM securities 27 —

FHLB stock purchased ( 1,786 ) ( 169 )

Net increase in loans ( 177,784 ) ( 73,238 )

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Proceeds from sale of OREO and other repossessed assets — 35

Net cash (used in) provided by investing activities ( 77,940 ) 4,496

Net cash used in investing activities ( 185,575 ) ( 78,109 )

CASH FLOWS FROM FINANCING ACTIVITIES:

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Proceeds from borrowings 43,000 —

Repayment of borrowings — ( 181,791 )

Proceeds from subordinated notes, net — 11,582

FHLB stock purchased ( 169 ) 283

Common stock repurchases ( 1,734 ) ( 152 )

1 unchanged sentence

Dividends paid on common stock ( 2,031 ) ( 2,039 )

Purchase of stock surrendered to pay tax liability ( 134 ) —

Proceeds from common stock option exercises 223 182

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Loans transferred from loans held-for-portfolio to OREO and repossessed assets — 84

Noncash transfer from assets in process to premises and equipment 144 692

ROU assets obtained in exchange for new operating lease liabilities 186 —

See notes to consolidated financial statements

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Note 1— Organization and Significant Accounting Policies

Sound Financial Bancorp, a Maryland corporation ("Sound Financial Bancorp" or the "Company"), is the parent holding company for its wholly owned subsidiary, Sound Community Bank (the "Bank") and the Bank's wholly-owned subsidiary, Sound Community Insurance Agency, Inc.

Sound Financial Bancorp, a Maryland corporation (“Sound Financial Bancorp”), is the parent holding company for its wholly owned subsidiary, Sound Community Bank (the “Bank”) and the Bank's wholly-owned subsidiary, Sound Community Insurance Agency, Inc.

Substantially all of Sound Financial Bancorp's business is conducted through Sound Community Bank, a Washington state-chartered commercial bank.

As a Washington commercial bank, the Bank's regulators are the Washington State Department of Financial Institutions ("WDFI") and the Federal Deposit Insurance Corporation ("FDIC").

The Board of Governors of the Federal Reserve System ("Federal Reserve") is the primary federal regulator for Sound Financial Bancorp.

The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.

As a Washington commercial bank that is not a member of the Federal Reserve System, the Bank's regulators are the Washington State Department of Financial Institutions (“WDFI”) and the Federal Deposit Insurance Corporation (“FDIC”).

As a bank holding company, Sound Financial Bancorp is regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve").

Sound Financial Bancorp’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.

Accordingly, the information set forth in this report relates primarily to the Bank.

References to the “Company,” “we,” “us,” and “our” mean Sound Financial Bancorp and the Bank unless the context otherwise requires.

Subsequent events – The Company has evaluated subsequent events for potential recognition and disclosure.

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All have original maturities of three months or less and may exceed federally insured limits.

Investment securities – Investment securities are classified into one of three categories:

(1) held-to-maturity, (2) available-for-sale or (3) trading.

The Company had no held-to-maturity or trading securities at December 31, 2021 or 2020.

Available-for-sale securities consist of debt securities that the Company has the intent and ability to hold for an indefinite period, but not necessarily to maturity.

Such securities may be sold to implement the Company's asset/liability management strategies and/or in response to changes in interest rates and similar factors.

Available-for-sale securities are reported at fair value.

Dividend and interest income are recognized when earned.

Unrealized gains and losses, net of the related deferred tax effect, are reported as a net amount in accumulated other comprehensive income (loss) on available-for-sale securities in the consolidated balance sheets.

Realized gains and losses on available-for-sale securities, determined using the specific identification method, are included in earnings.

Investment securities – Investment securities are classified as either held-to-maturity (“HTM”) or available-for-sale (“AFS”).

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.

Securities not classified as HTM or trading are considered AFS securities.

AFS securities may be sold to implement the Company's asset/liability management strategies and/or in response to changes in interest rates and similar factors.

AFS securities are reported at fair value.

Dividend and interest income on investment securities are recognized when earned.

Unrealized gains and losses, net of the related deferred tax effect, are reported as a net amount in accumulated other comprehensive income (loss) on AFS securities in the consolidated balance sheets.

Realized gains and losses on AFS securities, determined using the specific identification method, are included in earnings.

Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the interest method over the period to the earlier of call date or maturity.

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The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and the fair value, is recognized as a charge to other comprehensive income.

The Company does not intend to sell

these securities and it is more likely than not that it will not be required to sell the securities before anticipated recovery of the remaining amortized cost basis.

The Company does not intend to sell these securities and it is more likely than not that it will not be required to sell the securities before anticipated recovery of the remaining amortized cost basis.

The Company closely monitors its investment securities for changes in credit risk.

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Gains or losses on sales of loans are recognized based on the difference between the selling price and the carrying value of the related loans sold based on the specific identification method.

Loans – The Company grants mortgage, commercial, and consumer loans to clients.

Loans held-for-portfolio – The Company originates mortgage, commercial, and consumer loans to clients.

A substantial portion of the loan portfolio is represented by loans secured by real estate located throughout the Puget Sound region, especially King, Snohomish and Pierce Counties, and in Clallam and Jefferson Counties of Washington State.

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All TDRs are reported and accounted for as impaired loans.

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the novel coronavirus disease 2019 ("COVID-19") pandemic.

The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") and related bank regulatory guidance provides that a short-term modification made in response to COVID-19 and which meets certain criteria does not need to be placed on nonaccrual status or accounted for as a TDR, pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022.

At December 31, 2021, there were two one-to-four family residential loans totaling $ 64 thousand operating under forbearance agreements due to COVID-19.

Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered TDRs pursuant to applicable accounting and regulatory guidance until January 1, 2022.

The Company continues to monitor these loans through its normal credit risk processes.

Allowance for loan losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense and represents management's best estimate of probable losses incurred within the existing loan portfolio as of the balance sheet date.

Allowance for loan losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense and represents management's best estimate of probable incurred losses within the existing loan portfolio as of the balance sheet date.

The level of the allowance reflects management's view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions.

2 unchanged sentences

The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans (or portions thereof) deemed to be uncollectible.

Loan charge-offs are recognized when management believes the collectability of the principal

balance outstanding is unlikely.

Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely.

Full or partial charge-offs on collateral dependent impaired loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

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These factors include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be assured.

The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment.

The detailed analysis includes techniques to estimate the fair value of

loan collateral and the existence of potential alternative sources of repayment.

The allowance consists of specific, general and unallocated components.

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As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances.

At December 31, 2021 and 2020, the Company's minimum required investment in FHLB stock was $ 1.0 million and $ 877 thousand, respectively.

At December 31, 2022 and 2021, the Company's minimum required investment in FHLB stock was $ 2.8 million and $ 1.0 million, respectively.

Typically, the Company may request redemption at par value of any stock in excess of the minimum required investment.

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Management estimates anticipated losses using historical data and utilization assumptions.

The allowance for off-balance sheet credit commitments totaled $ 405 thousand and $ 256 thousand at December 31, 2021 and 2020 and is included in other liabilities on the consolidated balance sheets.

The allowance for off-balance sheet credit commitments totaled $ 336 thousand and $ 405 thousand at December 31, 2022 and 2021, respectively, and is included in other liabilities on the consolidated balance sheets.

Advertising costs – The Company expenses advertising costs as they are incurred.

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These assets are amortized using the straight-line method over a period of eight to ten years and have a remaining weighted average life of 2.3 years.

Management reviews intangible assets for impairment on an annual basis.

Management reviews intangible assets for impairment on an annual basis, or whenever events occur or circumstances change indicating the carrying amount of the intangible asset may not be recoverable.

No impairment losses have been recognized in the periods presented.

Employee stock ownership plan – The Company sponsors a internally-leveraged ESOP.

Employee stock ownership plan – The Company sponsors an internally-leveraged ESOP.

As shares are committed to be released, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations.

6 unchanged sentences

Earnings Per Common Share – Earnings per share is computed using the two-class method.

Basic earnings per share is computed by dividing net income available to common shares by the weighted average number of common shares outstanding during the period, excluding any participating securities.

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, excluding any participating securities.

Participating securities include unvested restricted shares.

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The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted.

When determining the estimated fair value of stock options granted, the Company utilizes various assumptions regarding the expected volatility of the stock price, the risk-free interest rate for periods within the contractual life of the stock option, and the

expected dividend yield that the Company expects over the expected life of the options granted.

Reductions in compensation expense associated with forfeited options are expensed based on actual forfeiture experience.

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Note 2— Accounting Pronouncements Recently Issued or Adopted

The Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), signed into law on March 27, 2020, provides relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (“TDRs”) under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the novel coronavirus disease 2019 ("COVID-19") pandemic.

In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs.

The Interagency Statement was originally issued on March 22, 2020, but the banking agencies revised it to address the relationship between their TDR accounting and disclosure guidance and the TDR guidance in Section 4013 of the CARES Act.

Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan.

The Interagency Statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government.

Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR.

The Company adopted this guidance effective March 27, 2020.

On December 27, 2020, the Consolidated Appropriations Act 2021 (“CAA 2021”) was signed into law.

Among other purposes, CAA 2021 provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “ Receivables – Nonrefundable Fees and Other Costs ” (“ASU 2020-08”).

ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period.

ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

The Company adopted this ASU effective January 1, 2021.

The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.

On March 2020, the FASB issued ASU No.

On March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2020-04, " Reference Rate Reform" ("Topic 848").

This ASU applies to contracts, hedging relationships, and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform.

The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract re-measurement or reassessment of a previous accounting determination.

In January 2021, ASU 2021-01 clarifies 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.

A portion of the Bank’s commercial real estate loans and its interest rate swap-related transactions are the majority of the Company's LIBOR exposure.

Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc.

and recommended by the Alternative Reference Rates Committee.This ASU is effective for all entities as of March 12, 2020 through December 31, 2022.

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 modifications to eligible contracts (e.g., loans, debt securities, derivatives, borrowings) 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 December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-

period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.

This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

Disclosure requirements removed from FASB Subtopic 715-20 include the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and, for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits.

Disclosure requirements added to FASB Subtopic 715-20 include the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

This ASU is effective for fiscal years ending after December 15, 2020.

The Company adopted this ASU effective January 1, 2021.

The adoption of ASU No.

2018-14 did not have a material impact on the Company's 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 .

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.

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The 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.

Financial assets that this guidance will apply to include loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost.

Under this ASU, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment.

Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income.

The change in allowance recognized as a result of adoption will occur using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted.

The FASB issued ASU No.

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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.

The Company meets the requirements of a smaller reporting company and delayed implementation of ASU No.

This guidance became effective on January 1, 2023.

The Company currently intends to phase the impact of Topic 326 into regulatory capital over three years in accordance with a final ruling effective April 2019 adopted by the Federal Reserve and other U.S.

banking agencies.

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.

The Company adopted this standard on January 1, 2023.

Note 3— Restricted Cash

Federal Reserve System ("Federal Reserve") regulations require that the Company maintain certain minimum reserve balances either as cash on hand or on deposit with the Federal Reserve Bank, based on a percentage of deposits.

Federal Reserve System ("Federal Reserve") regulations previously required that the Company maintain certain minimum reserve balances either as cash on hand or on deposit with the Federal Reserve Bank, based on a percentage of deposits.

In March 2020, the Federal Reserve announced that it would be reducing the reserve requirement for all depository institutions to zero percent effective March 26, 2020;

The Company' reserve balances were zero at December 31, 2021 and 2020, respectively.

therefore, there was no reserve requirement at December 31, 2022 and 2021.

Note 4— Investments

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December 31, 2022

Treasury bills $ 1,596 $ — $ ( 2 ) $ 1,594

Municipal bonds 6,434 16 ( 1,029 ) 5,421

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Total available-for-sale securities $ 8,243 $ 201 $ ( 25 ) $ 8,419

The following table details the amortized cost and fair value of available-for-sale securities at December 31, 2021, by contractual maturity (in thousands).

Expected maturities of available-for-sale 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 securities, are shown separately.

The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at December 31, 2022 are shown in the table below (in thousands).

There were no HTM securities at December 31, 2021.

Losses Estimated

December 31, 2022

Municipal bonds $ 705 $ — $ ( 169 ) $ 536

Agency mortgage-backed securities 1,494 — ( 219 ) 1,274

Total $ 2,199 $ — $ ( 388 ) $ 1,810

The amortized cost and fair value of AFS and HTM securities at December 31, 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.

December 31, 2022

Available-for-sale Held-to-maturity

Value Weighted-Average Yield Amortized

Value Weighted-Average Yield

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There were no pledged securities at December 31, 2022 and 2021.

There were no sales of available-for-sale securities during the years ended December 31, 2021 and 2020.

There were no sales of AFS securities during the years ended December 31, 2022 and 2021.

There were no sales of HTM securities during the years ended December 31, 2022 and 2021.

The following tables summarize 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 December 31, 2022 and 2021 (in thousands).

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Value Unrealized

Available-for-sale securities

Treasury bills $ 1,594 $ ( 2 ) $ — $ — $ 1,594 $ ( 2 )

Municipal bonds 2,506 ( 641 ) 1,246 ( 388 ) 3,752 ( 1,029 )

Agency mortgage-backed securities 2,666 ( 314 ) 292 ( 86 ) 2,958 ( 400 )

Total $ 1,632 $ ( 13 ) $ 402 $ ( 12 ) $ 2,034 $ ( 25 )

Total available-for-sale securities $ 6,766 $ ( 957 ) $ 1,538 $ ( 474 ) $ 8,304 $ ( 1,431 )

Held-to-maturity securities

Municipal bonds $ 536 $ ( 169 ) $ — $ — $ 536 $ ( 169 )

Agency mortgage-backed securities 1,274 ( 219 ) — — 1,274 ( 219 )

Total held-to-maturity securities $ 1,810 $ ( 388 ) $ — $ — $ 1,810 $ ( 388 )

December 31, 2021

3 unchanged sentences

Value Unrealized

Municipal bonds $ 1,632 $ ( 13 ) $ — $ — $ 1,632 $ ( 13 )

Agency mortgage-backed securities — — 402 ( 12 ) 402 ( 12 )

1 unchanged sentence

There were no credit losses recognized in earnings during the years ended December 31, 2022 and 2021 relating to the Company's securities.

At December 31, 2021, the securities portfolio consisted of 10 agency mortgage-backed securities and 10 municipal securities with a fair value of $ 8.4 million.

At December 31, 2022, the total securities portfolio consisted of one treasury bill security, 11 municipal bonds and 12 agency mortgage-backed securities with a total portfolio fair value of $ 12.0 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 December 31, 2021, there were two securities in an unrealized loss position for less than 12 months, and there was one security in an unrealized loss position for more than 12 months.

At December 31, 2020, there were six securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months.

For both the 2021 and 2020 periods, 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.

At December 31, 2022, there were 16 securities in an unrealized loss position for less than 12 months, and three securities in an unrealized loss position for more than 12 months.

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.

For both the 2022 and 2021 periods, 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.

20 unchanged sentences

Total loans, net $ 858,382 $ 680,092

(1) Includes premiums 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 Small Business Administration's (“SBA”) Paycheck Protection Program (“PPP”) as a qualified U.S.

The Bank began originating PPP loans following the enactment of the CARES Act in April 2020.

PPP loans are fully guaranteed by the SBA, intended for businesses impacted by the COVID-19 pandemic and designed to provide near term relief to help small businesses sustain operations.

These loans have either a two-year or five-year maturity date and earn interest at 1%.

The Bank also earns a fee based on the size of the loan, which is recognized over the life of the loan.

Through December 31, 2021, the Bank had funded PPP loans totaling $ 119.2 million, $ 4.2 million of which remained outstanding at December 31, 2021.

(1) Includes premiums resulting from purchased loans of $ 507 thousand related to one-to-four family loans, $ 320 thousand related to commercial and multifamily loans, and $ 146 thousand related to commercial business loans as of December 31, 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 December 31, 2022, the Bank had funded PPP loans totaling $ 119.2 million, $ 17 thousand of which remained outstanding at December 31, 2022 compared to $ 4.2 million outstanding at December 31, 2021.

PPP loans are included in commercial business loans above.

During the year ended December 31, 2021, the Company purchased $ 24.1 million of one-to-four family real estate loans and $ 4.3 million of commercial business participations with the United States Department of Agriculture.

The Company purchased no loans during the year ended December 31, 2020.

The following table presents the balance in the allowance for loan losses and the unpaid principal balance in loans, net of partial charge-offs by portfolio segment and based on impairment method at December 31, 2021 (in thousands):

PPP loans are 100% guaranteed by the SBA.

The PPP ended May 31, 2021.

The Company purchased $ 2.6 million of commercial business loan participations with United States Department of Agriculture guarantees during the year ended December 31, 2022.

During the year ended December 31, 2021, the Company purchased $ 24.1 million of one-to-four family real estate loans and $ 4.3 million of commercial business loan participations with United States Department of Agriculture guarantees.

December 31, 2022

Individually Evaluated for Impairment Allowance:

12 unchanged sentences

Total $ 184 $ 7,415 $ 7,599 $ 4,844 $ 862,712 $ 867,556

December 31, 2021

Individually Evaluated for Impairment Allowance:

12 unchanged sentences

Total $ 293 $ 6,013 $ 6,306 $ 7,725 $ 680,143 $ 687,868

The following table summarizes the activity in the allowance for loan losses for the year ended December 31, 2021 (in thousands):

Allowance Charge-offs Recoveries (Recapture)/ Provision Ending

The following tables summarize the activity in the allowance for loan losses for the years ended December 31, 2022 and 2021 (in thousands):

Year ended December 31, 2022

Allowance Charge-offs Recoveries Provision/(Recapture) Ending

One-to-four family $ 1,402 $ — $ 99 $ 270 $ 1,771

8 unchanged sentences

$ 6,306 $ ( 124 ) $ 192 $ 1,225 $ 7,599

The following table summarizes the activity in the allowance for loan losses for the year ended December 31, 2020 (in thousands):

Allowance Charge-offs Recoveries (Recapture)/ Provision Ending

Year ended December 31, 2021

Allowance Charge-offs Recoveries Provision/(Recapture) Ending

One-to-four family $ 1,063 $ ( 76 ) $ — $ 415 $ 1,402

9 unchanged sentences

Credit Quality Indicators.

Federal regulations provide for the classification of lower quality assets as substandard, doubtful or loss.

An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Assets classified as doubtful have all the weaknesses inherent in assets classified substandard with the added characteristic that the weaknesses make collection or liquidation of the assets 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 establishment of a specific loss reserve is not warranted.

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 the Company classifies problem loans as either substandard or doubtful, it may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or it may allow the loss to be addressed in the general allowance (if the loan is not impaired).

4 unchanged sentences

Pass rated loans are loans that are not otherwise classified or criticized.

The following table represents the internally assigned grades at December 31, 2021, by type of loan (in thousands):

The following tables represent the internally assigned grades at December 31, 2022 and 2021, by type of loan (in thousands):

December 31, 2022

Equity Commercial

8 unchanged sentences

Substandard 3,064 316 10,047 3,357 236 — 262 801 18,083

Doubtful — — — — — — — — —

Loss — — — — — — — — —

Total $ 274,638 $ 19,548 $ 313,358 $ 116,878 $ 26,953 $ 74,443 $ 17,923 $ 23,815 $ 867,556

The following table represents the internally assigned grades at December 31, 2020, by type of loan (in thousands):

December 31, 2021

Equity Commercial

8 unchanged sentences

Substandard 3,414 323 7,552 1,618 194 493 20 541 14,155

Doubtful — — — — — — — — —

Loss — — — — — — — — —

Total $ 207,660 $ 13,250 $ 278,175 $ 63,105 $ 21,636 $ 59,268 $ 16,748 $ 28,026 $ 687,868

9 unchanged sentences

Floating homes — 493

Other consumer 262 —

Commercial business — 176

Total $ 2,959 $ 5,552

The following table represents the aging of the recorded investment in past due loans (excluding COVID-19 modified loans) at December 31, 2021, by type of loan (in thousands):

The following table represents the aging of the recorded investment in past due loans at December 31, 2022, by type of loan (in thousands):

Past Due 60-89 Days

12 unchanged sentences

Total $ 9,542 $ 449 $ 2,398 $ — $ 12,389 $ 855,167 $ 867,556

The following table represents the aging of the recorded investment in past due loans (excluding COVID-19 modified loans) at December 31, 2020, by type of loan (in thousands):

The following table represents the aging of the recorded investment in past due loans at December 31, 2021, by type of loan (in thousands):

Past Due 60-89 Days

13 unchanged sentences

Nonperforming Loans.

Loans are considered nonperforming when they are placed on nonaccrual.

The following table represents the credit risk profile based on payment activity at December 31, 2021, by type of loan (in thousands):

Loans are considered nonperforming when they are placed on nonaccrual, or are greater than 90 days past due and still accruing.

The following table represents the credit risk profile based on payment activity as of the dates indicated, by type of loan (in thousands):

December 31, 2022

Equity Commercial

7 unchanged sentences

Total $ 274,638 $ 19,548 $ 313,358 $ 116,878 $ 26,953 $ 74,443 $ 17,923 $ 23,815 $ 867,556

The following table represents the credit risk profile based on payment activity at December 31, 2020, by type of loan (in thousands):

December 31, 2021

Equity Commercial

24 unchanged sentences

Home equity 210 142 68 210 5

Commercial and multifamily 2,380 2,380 — 2,380 —

Construction and land 358 324 34 358 3

Manufactured homes 187 93 94 187 52

Floating homes 493 493 — 493 —

Other consumer 343 261 82 343 22

Commercial business 176 176 — 176 —

Total $ 4,856 $ 3,858 $ 986 $ 4,844 $ 184

47 unchanged sentences

Any other type of modification, including the use of multiple categories above.

There was one loan totaling $ 25 thousand that was modified as a TDR during the year ended December 31, 2021.

There were two loans totaling $ 155 thousand that were modified as a TDR during the year ended December 31, 2022.

The following TDR loans were paid off during the year ended December 31, 2022:

one commercial loans totaling $ 429 thousand and one home equity loan totaling $ 57 thousand.

There were no TDRs for which there was a payment default within the first 12 months of modification during the year ended December 31, 2021.

There was one TDR totaling $ 161 thousand for which there was a payment default within the first 12 months of modification during the year ended December 31, 2020.

There was one commercial business TDR loan totaling $ 45 thousand that was charged off during the year ended December 31, 2021 and one commercial business TDR loan totaling $ 97 thousand that was charged off during the year ended December 31, 2020.

two one-to-four family loans totaling $ 597

thousand, one commercial loan totaling $ 176 thousand, one consumer loan totaling $ 17 thousand, and one manufactured home loan totaling $ 15 thousand.

There were no TDRs for which there was a payment default within the first 12 months of modification during the year ended December 31, 2022 and 2021.

There were no TDRs that were charged off during the year ended December 31, 2022 and one commercial business TDR loan totaling $ 45 thousand that was charged off during the year ended December 31, 2021.

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified into TDRs.

Related Parties and Regulatory Matters.

In the ordinary course of business, the Company makes loans to its employees, officers and directors.

10 unchanged sentences

Note 6— Mortgage Servicing Rights

The Company’s MSR portfolio totaled $ 508.1 million at December 31, 2021, compared to $ 488.7 million at December 31, 2020.

The unpaid principal balances underlying the Company’s MSR portfolio totaled $ 472.5 million at December 31, 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 December 31, 2022 and 2021 was $ 470.3 million and $ 504.1 million, respectively.

6 unchanged sentences

Due to changes in model inputs or assumptions (1)

( 808 ) ( 1,857 )

Ending balance, at fair value $ 4,687 $ 4,273

(1) Includes 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:

The key economic assumptions used in determining the fair value of MSRs at December 31, 2022 and 2021 are as follows:

Prepayment speed (Public Securities Association "PSA" model) 132 % 205 %

1 unchanged sentence

Yield to maturity 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 Consolidated Statements of Income and totaled $ 1.3 million and $ 1.0 million for the years ended December 31, 2021 and 2020, respectively.

The amount of contractually specified servicing, late and ancillary fees earned on the MSRs are included in “Mortgage servicing income” on the Consolidated Statements of Income and totaled $ 1.2 million and $ 1.3 million for the years ended December 31, 2022 and 2021, respectively.

See "Note 1—Organization and Significant Accounting Policies" and "Note 11— Fair Measurements" for additional information on MSRs.

11 unchanged sentences

Note 8— Other Real Estate Owned and Repossessed Assets

The following table presents activity related to OREO and other repossessed assets for the periods shown (in thousands):

The following table presents activity related to OREO and other repossessed assets for the years ended December 31, 2022 and 2021 (in thousands).

Year Ended December 31,

2 unchanged sentences

Sales — ( 19 )

Write-downs/Losses — —

Ending balance, December 31 $ 659 $ 659

As of December 31, 2021, there was one one-to-four family loans totaling $ 39 thousand that was in process of foreclosure.

As of December 31, 2022, there were four one-to-four family loans totaling $ 1.6 million that were in process of foreclosure.

Note 9— Deposits

14 unchanged sentences

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

Certificates of deposit have maturities of five years or less.

Certificates of deposit have maturities of six years or less.

The aggregate amount of time deposits in denominations of more than $ 250 thousand at December 31, 2022 and 2021, totaled $ 56.1 million and $ 19.1 million, respectively.

Deposits in excess of $ 250 thousand are not federally insured.

There were no brokered deposits outstanding at December 31, 2021 and 2020, respectively.

There were no brokered deposits outstanding at December 31, 2022 and 2021.

Deposits from related parties held by the Company were $ 8.1 million and $ 4.9 million at December 31, 2022 and 2021, respectively.

5 unchanged sentences

At December 31, 2021, the credit facility was collateralized as follows:

one-to-four family mortgage loans with an advance equivalent of $ 103.6 million, commercial and multifamily mortgage loans with an advance equivalent of $ 128.9 million and home equity loans with an advance equivalent of $ 2.8 million.

The Company had no outstanding borrowings under this arrangement at December 31, 2021 and 2020.

The weighted-average interest rate of the Company's borrowings under this agreement was — % and 3.10 % for the years ended December 31, 2021 and 2020, respectively.

The maximum amount outstanding from FHLB advances during 2021 was $ — and during 2020 was $ 10.1 million.

The average balance outstanding was $ 0.0 million during 2021 and $ 7.1 million during 2020.

Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 11.5 million and $ 21.6 million at December 31, 2021 and 2020, respectively, to secure public deposits.

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 $ 43.0 million of outstanding overnight borrowings under this arrangement at December 31, 2022 and none at December 31, 2021.

The weighted-average interest rate of the Company's borrowings under this arrangement was 2.14 % and 0.00 % for the years ended December 31, 2022 and 2021, respectively.

The maximum amount outstanding from FHLB advances during 2022 was $ 114.0 million and during 2021 was zero .

The average balance outstanding was $ 27.3 million during 2022 and zero during 2021.

The Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 8.0 million and $ 11.5 million at December 31, 2022 and 2021, respectively, to secure public deposits.

At December 31, 2022 and 2021, the remaining amount available to borrow from the FHLB of Des Moines was $ 199.0 million and $ 101.5 million, respectively.

As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in the FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances.

At December 31, 2021 and 2020, the Company had an investment of $ 1.0 million and $ 877 thousand, respectively, in FHLB of Des Moines stock.

The Company participates in the Federal Reserve Bank Borrower-in-Custody program, which gives the Company access to the discount window and, beginning in 2020, the Paycheck Protection Program Liquidity Facility ("PPPLF").

Extensions of credit under the PPPLF concluded on July 30, 2021.

The terms of both programs call for a pledge of specific assets.

The Company pledges commercial and consumer loans as collateral for this borrower-in-custody line of credit and PPP loans for the PPPLF.

The Company had unused borrowing capacity of $ 22.4 million and $ 23.6 million under the borrower-in-custody program at December 31, 2021 and 2020 and $ — and $ 43.3 million under the PPPLF at December 31, 2021 and 2020.

The Company had no outstanding borrowings under either program at December 31, 2021 and 2020.

At December 31, 2022 and 2021, the Company had an investment of $ 2.8 million and $ 1.0 million, respectively, in FHLB of Des Moines stock.

The Company participates in the Federal Reserve Bank Borrower-in-Custody program, which gives the Company access to the discount window.

The terms of the program call for a pledge of specific assets.

The Company pledges commercial and consumer loans as collateral for this borrower-in-custody line of credit.

The Company had unused borrowing capacity of $ 20.8 million and $ 22.4 million under the borrower-in-custody program at December 31, 2022 and 2021, respectively.

The Company had no outstanding borrowings under the program at December 31, 2022 and 2021.

The Company has access to an unsecured Fed Funds line of credit from the Pacific Coast Banker's Bank.

1 unchanged sentence

At December 31, 2022, the amount available under this line of credit was $ 20.0 million.

There was no balance on this line of credit at December 31, 2021 and 2020, respectively.

Sound Financial Bancorp completed a private placement of $ 12.0 million in aggregate principal of 5.25 % Fixed-to-Floating Rate Subordinated Notes (the "subordinated notes") due 2030 resulting in net proceeds, after placement fees and offering expenses, of approximately $ 11.6 million during the quarter ended September 30, 2020.

There was no balance on this line of credit at December 31, 2022 or 2021.

The subordinated notes have a stated maturity of October 1, 2030 and bear interest at a fixed rate of 5.25 % per year until October 1, 2025.

4 unchanged sentences

Any redemption by Sound Financial Bancorp would be at a redemption price equal to 100 % of the principal amount of the subordinated notes being redeemed, together with any accrued and unpaid interest on the subordinated notes being redeemed to but excluding the date of redemption.

The Notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of Sound Financial Bancorp 's current and future subsidiaries, including the Bank’s deposits as well as Sound Financial Bancorp 's subsidiaries' liabilities to general creditors and liabilities arising during the ordinary course of business.

The Notes may be included in Tier 2 capital for Sound Financial Bancorp under current regulatory guidelines and interpretations.

The subordinated notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of Sound Financial Bancorp 's current and future subsidiaries, including the Bank’s deposits as well as Sound Financial Bancorp 's subsidiaries' liabilities to general creditors and liabilities arising during the ordinary course of business.

The subordinated notes may be included in Tier 2 capital for Sound Financial Bancorp under current regulatory guidelines and interpretations.

At December 31, 2022 and 2021, subordinated notes included $ 324 thousand and $ 366 thousand of unamortized debt issuance costs.

3 unchanged sentences

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 December 31, 2021 were determined based on these requirements.

The Company’s fair values for financial instruments at December 31, 2022 and 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.

Treasury Bills - The estimated fair value is equal to the carrying amount.

Available-for-Sale Securities - Available-for-sale securities are recorded at fair value based on quoted market prices, if available.

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.

1 unchanged sentence

government securities.

Loans Held-for-Sale - Residential mortgage loans held-for-sale are recorded at the lower of cost or fair value.

The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government-sponsored enterprises.

At December 31, 2021 and 2020, loans held-for-sale were carried at cost, as no impairment was required.

Held-to-maturity securities – 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 - The fair value of fixed-rate one-to-four family loans is based on whole loan forward prices obtained from government sponsored enterprises.

At December 31, 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 estimate fair value of loans-held-for-portfolio reflect exit price assumptions.

The liquidity premiums/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.

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 MSRs 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.

1 unchanged sentence

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 t 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.

Borrowings - The fair value of borrowings are estimated using the contractual cash flows of each debt instrument discounted 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:

3 unchanged sentences

The estimated fair value of these commitments is not significant.

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 December 31, 2021 and 2020 (in thousands):

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 years ended December 31, 2022 and 2021.

December 31, 2022 Fair Value Measurements Using:

4 unchanged sentences

Available for sale securities 10,207 10,207 — 10,207 —

Loans held-for-sale 3,094 3,094 — 3,094 —

Held-to-maturity securities 2,199 1,810 — 1,810 —

Loans held-for-portfolio, net 858,382 801,153 — — 801,153

Accrued interest receivable 2,217 2,217 2,217 — —

Mortgage servicing rights 4,687 4,687 — — 4,687

3 unchanged sentences

Time deposits 210,305 209,965 — 209,965 —

Borrowings 43,000 43,000 — 43,000 —

Subordinated notes 11,676 10,420 — 10,420 —

Accrued interest payable 200 200 200 — —

December 31, 2021 Fair Value Measurements Using:

6 unchanged sentences

Loans held-for-portfolio, net 680,092 675,154 — — 675,154

Accrued interest receivable 2,254 2,254 2,254 — —

Mortgage servicing rights 4,273 4,273 — — 4,273

3 unchanged sentences

Time deposits 105,722 106,834 — 106,834 —

Borrowings 11,592 11,592 — 11,592 —

Accrued interest payable 369 369 369 — —

Subordinated notes 11,634 11,634 — 11,634 —

The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2022 and 2021 (in thousands):

1 unchanged sentence

Description Total Level 1 Level 2 Level 3

Treasury bills $ 1,594 $ — $ 1,594 $ —

Municipal bonds 5,421 — 5,421 —

Agency mortgage-backed securities 3,192 — 3,192 —

Mortgage servicing rights 4,273 — — 4,273

MSRs 4,687 — — 4,687

Fair Value at December 31, 2021

2 unchanged sentences

Agency mortgage-backed securities 2,353 — 2,353 —

Mortgage servicing rights 3,780 — — 3,780

For the years ended December 31, 2021 and 2020, there were no transfers between Level 1 and Level 2 or between Level 2 and Level 3.

MSRs 4,273 — — 4,273

The following table provides 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 at December 31, 2022:

2 unchanged sentences

(Weighted Average)

Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 204 %- 344 % ( 205 %)

MSRs Discounted cash flow Prepayment speed assumption 119 %- 461 % ( 132 %)

Discount rate 10.5 %- 14.5 % ( 12.5 %)

3 unchanged sentences

(Weighted Average)

Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 178 %- 276 % ( 247 %)

MSRs 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).

Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the MSRs 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).

3 unchanged sentences

Such differences may result in significantly different fair value measurements.

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 years ended December 31, 2021 and 2020.

Mortgage servicing rights are measured at fair value using significant unobservable input (Level 3) on a recurring basis and a reconciliation of this asset can be found in "Note 6—Mortgage Servicing Rights."

The following table presents the balance of assets measured at fair value on a nonrecurring basis and the total losses resulting from these fair value adjustments (in thousands):

There were no assets or liabilities (excluding MSRs) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2022 and 2021.

MSRs are measured at fair value using significant unobservable input (Level 3) on a recurring basis and a reconciliation of this asset can be found in "Note 6—Mortgage Servicing Rights."

The following table presents the balance of assets measured at fair value on a nonrecurring basis (in thousands):

Fair Value at December 31, 2022

7 unchanged sentences

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2022 and 2021.

The following table provides 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 December 31, 2021:

The following table provides a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company's assets classified as Level 3 and measured at fair value on a nonrecurring basis at December 31, 2022:

December 31, 2022

5 unchanged sentences

Third Party Appraisals No discounts N/A

(1) Represents troubled debt restructurings included within impaired loans.

(2) Excludes troubled debt restructurings.

(1) Represents TDRs included within impaired loans.

(2) Excludes TDRs.

December 31, 2021

6 unchanged sentences

Third Party Appraisals No discounts N/A

(1) Represents troubled debt restructurings included within impaired loans.

(2) Excludes troubled debt restructurings.

(1) Represents TDRs included within impaired loans.

(2) Excludes TDRs.

Note 12— Leases

We have operating leases for branch locations, loan production offices, our corporate office and certain equipment.

We have operating leases for branch locations, loan production offices, and our corporate office.

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 10 years and typically include one renewal option.

Our leases have remaining lease terms of two months to 7.5 years.

Our leases have remaining terms of five months to 6.5 years.

The operating leases require us to pay property taxes and operating expenses for the properties.

The following table represents the Consolidated Balance Sheet classification of the Company’s right of use assets and lease liabilities (in thousands):

The following table represents the Consolidated Balance Sheet classification of the Company’s lease right of use assets and lease liabilities at December 31, 2022 and 2021 (in thousands):

Operating lease right of use assets $ 5,102 $ 5,811

Operating lease liabilities 5,448 6,242

The following table represents the components of lease expense (in thousands):

The following table represents the components of lease expense for the years ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31,

1 unchanged sentence

Office leases $ 1,119 $ 1,134

Equipment leases — 10

Sublease income ( 11 ) ( 11 )

Net lease expense $ 1,108 $ 1,123

The following table represents the maturity of lease liabilities:

The following table represents the maturity of lease liabilities at December 31, 2022 (in thousands):

December 31, 2022

Leases Equipment

Operating Lease Commitments

2022 $ 1,016 $ —

Thereafter 1,196

2 unchanged sentences

Present value of lease liabilities $ 5,448

Lease term and discount rate by lease type consist of the following:

Lease term and discount rate by lease type at December 31, 2022 and 2021 consist of the following:

Weighted-average remaining lease term:

Office leases 6.1 years 7.0 years

Equipment leases 0.0 years 1.4 years

Weighted-average discount rate (annualized):

Office leases 2.63 % 2.67 %

Equipment leases — % 1.62 %

Supplemental cash flow information related to leases was as follows (in thousands):

Supplemental cash flow information related to leases for the years ended December 31, 2022 and 2021 was as follows (in thousands):

Year Ended December 31,

2 unchanged sentences

Office leases $ 1,067 $ 1,042

Equipment leases — 20

Note 13— Earnings Per Share

Basic earnings per common share is computed by dividing net income 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 pursuant to the two-class method.

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.

Earnings per share are summarized for the periods presented in the following table (in thousands, except per share data):

Earnings per share are summarized for the years ended December 31, 2022 and 2021 as follows (in thousands, except per share data):

Year Ended December 31,

Net income $ 8,804 $ 9,156

Participating dividends - Unvested RSAs ( 14 ) ( 14 )

Income allocated to participating securities - Unvested RSAs ( 47 ) ( 49 )

Net income available to common stockholders - basic 8,743 9,093

Income allocated to participating securities - Unvested RSAs 47 49

Income reallocated to participating securities - Unvested RSAs ( 47 ) ( 48 )

Net income available to common stockholders - diluted $ 8,743 $ 9,094

Weighted average number of shares outstanding, basic 2,578,496 2,582,775

3 unchanged sentences

Earnings per share, diluted $ 3.35 $ 3.46

There were no anti-dilutive securities for the year ended December 31, 2021 or 2020.

There were 2,612 anti-dilutive securities for the year ended December 31, 2022.

There were no anti-dilutive securities for the year ended December 31, 2021.

Note 14— Employee Benefits

1 unchanged sentence

The Company matches a portion of employees' salary deferrals.

401(k) costs are accrued and funded on a current basis.

401(k) plan costs are accrued and funded on a current basis.

The Company contributed $ 259 thousand and $ 230 thousand to the plan for the years ended December 31, 2022 and 2021, respectively.

7 unchanged sentences

The assets in the deferred compensation account consist of cash, which is held in a certificate of deposit at the Bank and earns interest at market rates.

At December 31, 2021, the amounts held in the certificates of deposit at the Bank were $ 111 thousand, compared to $ 109 thousand at December 31, 2020.

The Bank maintains a nonqualified deferred compensation plan (the “NQDC Plan”), which was effective on January 1, 2017.

At both December 31, 2022 and 2021, the amount held in the certificates of deposit at the Bank was $ 111 thousand.

The Bank maintains a nonqualified deferred compensation plan (the “NQDC Plan”), which became effective on January 1, 2017.

The purpose of the NQDC Plan is to provide a select group of management or highly-compensated employees of the Bank with an opportunity to defer the receipt of up to eighty percent ( 80 %) of their annual base salary, bonus, performance-based compensation and any commission income and to assist the Company in attracting, retaining and motivating employees of high caliber and experience.

1 unchanged sentence

Discretionary contributions by the Bank become 100 % vested upon the completion of three years of service from a participant’s effective date of participation in the NQDC Plan (with accelerated vesting upon death, disability or a change in control), while other Bank contributions (including matching contributions) vest at the rate of 20 % per year, beginning with the participant’s two-year anniversary of his or her date of hire.

During the years ended December 31, 2021, and 2020, the Bank made discretionary contributions to the NQDC Plan in the amount of $ 93 thousand and $ 90 thousand, respectively.

During the years ended December 31, 2022, and 2021, the Bank made discretionary contributions to the NQDC Plan of $ 205 thousand and $ 93 thousand, respectively.

Each participant’s deferred compensation account is credited with an investment return determined as if the account was invested in one or more investment funds.

Each participant elects the investment funds in which his or her account shall be deemed to be invested.

Each participant elects the investment funds in which his or her account shall be

deemed to be invested.

Distributions of vested account balances are made upon death, disability, separation from service, or a specified in-service date unforeseeable emergency.

13 unchanged sentences

In the event Ms.

Stewart is involuntarily terminated in connection with a change in control (as defined in SERP 1), she will be entitled to receive the annual benefit described in the first sentence of this paragraph commencing upon such termination.

Under the terms of SERP 2, as amended, upon Ms.

Stewart's termination of employment with Sound Community Bank for any reason other than death, she will be entitled to receive additional retirement benefits of $ 96,390 per year for life commencing on the first day of the month following her separation from service (as defined in SERP 2) from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

Stewart's termination of employment with Sound Community Bank for any reason other than death, she will be entitled to receive additional retirement benefits each month for life commencing on the first day of the month following her separation from service (as defined in SERP 2) from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

The additional retirement benefits will equal the amount payable from the annuity underlying SERP 2, which benefits would equal $ 99,450 per year as of December 31, 2022.

In the event of Ms.

Stewart's death, her beneficiary will be entitled to a single lump sum payment within 90 days thereafter in an amount equal to the Bank's accrual for her retirement benefit under SERP 2 as of the date of death, or approximately $ 1.1 million at December 31, 2021.

Stewart's death prior to the commencement of the additional retirement benefits, her beneficiary will be entitled to a single lump sum payment within 90 days thereafter in an amount equal to the Bank's accrual for her retirement benefit under SERP 2 as of the date of death, or approximately $ 1.1 million at December 31, 2022.

If a change in control occurs (as defined in SERP 2), Ms.

Stewart will receive her full retirement benefit under SERP 2 commencing upon the first day of the month following her separation from service from Sound Community Bank.

Stewart will receive her full retirement benefit under SERP 2 commencing upon the first day of the month following her separation from service from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

Stock Options and Restricted Stock

4 unchanged sentences

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.

At December 31, 2021, on an adjusted basis, awards for stock options totaling 271,854 shares and awards for restricted stock totaling 142,201 shares of Company common stock have been granted in the aggregate, net of any forfeitures, under the 2008 Plan and 2013 Plan to participants.

At December 31, 2022, awards for stock options totaling 283,484 shares and awards for restricted stock totaling 150,971 shares of Company common stock have been granted in the aggregate, net of any forfeitures, under the 2008 Plan and 2013 Plan to participants.

During the years ended December 31, 2022 and 2021, share-based compensation expense totaled $ 475 thousand and $ 360 thousand, respectively.

1 unchanged sentence

All stock option awards granted under the 2008 Plan vest in 20 percent 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

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.

18 unchanged sentences

The cost is expected to be recognized over the remaining weighted-average vesting period of 2.5 years.

The total intrinsic value of the shares exercised during the years ended December 31, 2022 and 2021 was $ 207 thousand and $ 447 thousand, respectively.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model.

7 unchanged sentences

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.

The fair value of the restricted stock awards is equal to the fair value of the Company's common stock at the date of grant.

Compensation expense is recognized over the vesting period that the awards are based.

21 unchanged sentences

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 for $ 1.1 million is being repaid principally by the Bank through contributions to the ESOP over a period of 10 years.

The loan for $ 1.1 million was being repaid principally by the Bank through contributions to the ESOP over a period of 10 years.

The interest rate on the loan is fixed at 2.25 %, per annum.

1 unchanged sentence

Neither the loan balance nor the related interest expense is reflected on the consolidated financial statements.

For the years ended December 31, 2021 and 2020, the ESOP was committed to release 11,340 shares of the Company's common stock to participants.

There are no unallocated ESOP shares remaining to be released in 2022.

The funds to purchase shares in the ESOP come from contributions the Bank makes twice a year to the Plan.

For the year ended December 31, 2021, the ESOP was committed to release 11,340 shares of the Company's common stock to participants.

There were no unallocated ESOP shares remaining to be released subsequent to December 31, 2021.

The funds to purchase shares in the ESOP come from contributions the Bank makes up to twice a year to the Plan.

For the years ended December 31, 2022 and 2021, the ESOP trustee purchased 19,438 shares and 7,343 shares of the Company's common stock for inclusion in the Plan.

12 unchanged sentences

Tax-exempt income ( 169 ) ( 203 )

Other ( 41 ) 75

$ 2,072 $ 2,272

9 unchanged sentences

Lease liabilities 1,075 1,311

Other, net 71 29

Unrealized loss on securities 297 —

Allowance for loan losses 1,596 1,324

Other, net 109 71

Total deferred tax assets 3,675 3,253

18 unchanged sentences

Sound Financial Bancorp is a bank holding company under the supervision of the Federal Reserve.

Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3.0 billion is

generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations.The Bank is a state-chartered, federally insured institution and thereby is subject to the capital requirements established by the FDIC.

Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3.0 billion is generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations.The Bank is a state-chartered, federally insured institution and thereby is subject to the capital requirements established by the FDIC.

Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

4 unchanged sentences

There are no conditions or events since the notification that management believes have changed the Bank’s category.

Prior to January 1, 2020, Sound Community Bank followed the FDIC’s prompt corrective actions standards.

In order to be considered well-capitalized under the prompt corrective action standards, a bank must have a ratio of Common Equity Tier 1 ("CET1") capital to risk-weighted assets of at least 6.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 8%, a ratio of total capital to risk-weighted assets of at least 10%, and a leverage ratio of at least 5%, and the bank must not be subject to a regulatory capital requirement imposed on it as an individual bank.

In order to be considered adequately capitalized, a bank must have the minimum capital ratios described above.

Effective January 1, 2020, the Bank elected to use the Community Bank Leverage Ratio (“CBLR”) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act.

As of January 1, 2020, the Bank elected to use the Community Bank Leverage Ratio (“CBLR”) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act.

To be eligible to utilize the CBLR, the Bank must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter.

40 unchanged sentences

These amounts represent the unpaid principal balances of the Company's loans serviced for others' portfolios.

There was $ 284 thousand of loans repurchased during the year ended December 31, 2021 and no loans repurchased during the year ended 2020.

There were no loans repurchased during the year ended December 31, 2022 and $ 284 thousand of loans repurchased during the year ended 2021.

The Company pays certain medical, dental, prescription, and vision claims for its employees, on a self-insured basis.

The Company has purchased stop-loss insurance to cover claims that exceed stated limits and has recorded estimated reserves for the ultimate costs for both reported claims and claims incurred but not reported, which were not considered significant at December 31, 2022.

At December 31, 2021, the Company recorded no stop loss medical insurance claims exceeding stated coverage limits.

At December 31, 2022, the Company recorded $ 227 thousand of stop loss medical insurance claims exceeding stated coverage limits which offset our medical expense during the year ended December 31, 2022.

At various times, the Company may be the defendant in various legal proceedings arising in connection with its business.

It is the opinion of management that the financial position and the results of operations of the Company will not be materially adversely affected by the outcome of these legal proceedings and that adequate provision has been made in the accompanying consolidated balance sheets.

It is the opinion of management that the financial position and the results of operations of the Company will not be materially adversely affected by the outcome of any currently pending legal proceedings and that adequate provision has been made in the accompanying consolidated balance sheets.

Note 19— Parent Company Financial Information

12 unchanged sentences

Statements of Income Year Ended December 31,

Dividend from subsidiary $ 2,623 $ —

Interest expense on subordinated notes ( 672 ) ( 673 )

Other expenses ( 715 ) ( 550 )

Loss before income tax benefit and equity in undistributed net

income of subsidiary ( 1,223 ) ( 762 )

Income (loss) before income tax benefit and equity in undistributed net income of subsidiary 1,236 ( 1,223 )

Income tax benefit 306 257

13 unchanged sentences

Cash flows from financing activities:

Proceeds from issuance of subordinated notes, net — 11,582

Transfer of proceeds from issuance of debt to subsidiary — ( 5,500 )

Dividends paid ( 2,031 ) ( 2,039 )

1 unchanged sentence

Stock options exercised 223 182

Net cash (used in) provided by financing activities ( 2,009 ) 4,176

Net (decrease) increase in cash ( 2,622 ) 4,097

Net cash used in financing activities ( 3,542 ) ( 2,009 )

Net decrease in cash ( 2,063 ) ( 2,622 )

Cash and cash equivalents at beginning of year 4,215 6,837

41 unchanged sentences

In determining the gain or loss on sale, we adjust the transaction price and related gain or loss on sale if a significant financing component is present.

The Company generated income/incurred expenses, net of gain/losses on sale of OREO, on our OREO properties of $( 16 ) thousand and $ 5 thousand for the years ended December 31, 2021 and 2020, respectively, included in noninterest expense on the Consolidated Statements of Income.

The Company generated income/incurred expenses, net of gain/losses on sale of OREO, on our OREO properties of $ 0 and $( 16 ) thousand for the years ended December 31, 2022 and 2021, respectively, included under noninterest expense on the Consolidated Statements of Income.

Note 21— Subsequent Events

On January 28, 2022, the Company declared on Company common stock a quarterly cash dividend of $ 0.17 per common share and a special cash dividend of $ 0.10 per share, payable on February 24, 2022 to stockholders of record at the close of business February 10, 2022.

On January 27, 2023, the Company declared on Company common stock a quarterly cash dividend of $ 0.17 per common share, payable on February 23, 2023 to stockholders of record at the close of business February 9, 2023.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data