Sound Financial Bancorp, Inc. 10-Q

Item 1. Financial Statements SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets (unaudited) (In thousands, except share and per share amounts) September 30, 2023 December 31, 2022 ASSETS Cash and cash equivalents $ 101,890 $ 57,836 Available-for-sale securities, at fair value (amortized cost of $ 9,673 and $ 11,621 as of September 30, 2023 and December 31, 2022, respectively) 7,980 10,207 Held-to-maturity securities, at amortized cost 2,174 2,199 Loans held-for-sale 1,153 — Loans held-for-portfolio 875,434 865,981 Allowance for credit losses on loans ( 8,438 ) ( 7,599 ) Total loans held-for-portfolio, net 866,996 858,382 Accrued interest receivable 3,415 3,083 Bank-owned life insurance (“BOLI”), net 21,638 21,314 Other real estate owned (“OREO”) and repossessed assets, net 575 659 Mortgage servicing rights, at fair value 4,681 4,687 Federal Home Loan Bank (“FHLB”) stock, at cost 2,783 2,832 Premises and equipment, net 5,204 5,513 Right of use assets 4,732 5,102 Other assets 6,955 4,537 Total assets $ 1,030,176 $ 976,351 LIABILITIES Deposits Interest-bearing $ 706,954 $ 635,567 Noninterest-bearing demand 153,921 173,196 Total deposits 860,875 808,763 Borrowings 40,000 43,000 Accrued interest payable 588 395 Lease liabilities 5,065 5,448 Other liabilities 9,794 8,318 Advance payments from borrowers for taxes and insurance 1,909 1,046 Subordinated notes, net 11,707 11,676 Total liabilities 929,938 878,646 COMMITMENTS AND CONTINGENCIES (NOTE 7) — — STOCKHOLDERS’ EQUITY Preferred stock, $ 0.01 par value, 10,000,000 shares authorized, none issued or outstanding — — Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,568,054 and 2,583,619 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively 25 26 Additional paid-in capital 28,112 28,004 Retained earnings 73,438 70,792 Accumulated other comprehensive loss, net of tax ( 1,337 ) ( 1,117 ) Total stockholders’ equity 100,238 97,705 Total liabilities and stockholders’ equity $ 1,030,176 $ 976,351 See Notes to Condensed Consolidated Financial Statements 3 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Income (unaudited) (In thousands, except share and per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 INTEREST INCOME Loans, including fees $ 11,505 $ 10,327 $ 34,437 $ 27,099 Interest and dividends on investments, cash and cash equivalents 1,181 449 2,836 876 Total interest income 12,686 10,776 37,273 27,975 INTEREST EXPENSE Deposits 3,877 730 8,966 1,571 Borrowings 473 281 1,520 293 Subordinated notes 168 168 504 504 Total interest expense 4,518 1,179 10,990 2,368 Net interest income 8,168 9,597 26,283 25,607 PROVISION FOR (RELEASE OF) CREDIT LOSSES 75 346 ( 246 ) 1,079 Net interest income after provision for (release of) credit losses 8,093 9,251 26,529 24,528 NONINTEREST INCOME Service charges and fee income 700 604 1,951 1,749 Earnings on bank-owned life insurance 88 59 957 45 Mortgage servicing income 295 306 891 939 Fair value adjustment on mortgage servicing rights ( 78 ) 9 ( 123 ) 334 Net gain on sale of loans 76 48 264 497 Total noninterest income 1,081 1,026 3,940 3,564 NONINTEREST EXPENSE Salaries and benefits 4,148 4,044 13,333 12,181 Operations 1,625 1,610 4,557 4,345 Regulatory assessments 183 116 490 316 Occupancy 458 447 1,352 1,318 Data processing 1,296 848 3,077 2,518 Net loss on OREO and repossessed assets — — 13 — Total noninterest expense 7,710 7,065 22,822 20,678 Income before provision for income taxes 1,464 3,212 7,647 7,414 Provision for income taxes 295 666 1,419 1,533 Net income $ 1,169 $ 2,546 $ 6,228 $ 5,881 Earnings per common share: Basic $ 0.45 $ 0.99 $ 2.41 $ 2.26 Diluted $ 0.45 $ 0.97 $ 2.39 $ 2.23 Weighted-average number of common shares outstanding: Basic 2,553,773 2,562,551 2,568,899 2,582,891 Diluted 2,571,808 2,597,690 2,588,788 2,617,581 See Notes to Condensed Consolidated Financial Statements 4 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Comprehensive Income (unaudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income $ 1,169 $ 2,546 $ 6,228 $ 5,881 Available for sale securities: Unrealized losses arising during the period ( 307 ) ( 400 ) ( 278 ) ( 1,777 ) Income tax benefit related to unrealized losses 64 84 58 373 Other comprehensive loss, net of tax ( 243 ) ( 316 ) ( 220 ) ( 1,404 ) Comprehensive income $ 926 $ 2,230 $ 6,008 $ 4,477 See Notes to Condensed Consolidated Financial Statements 5 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Stockholders’ Equity For the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited) (In thousands, except share and per share amounts) Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss), net of tax Total Stockholders’ Equity Balance, at June 30, 2023 2,573,223 $ 25 $ 28,070 $ 72,923 $ ( 1,094 ) $ 99,924 Net income — — — 1,169 — 1,169 Other comprehensive loss, net of tax — — — — ( 243 ) ( 243 ) Share-based compensation — — 88 — — 88 Cash dividends paid on common stock ($ 0.19 per share) — — — ( 489 ) — ( 489 ) Common stock repurchased ( 6,169 ) — ( 63 ) ( 165 ) — ( 228 ) Common stock options exercised 1,000 — 17 — — 17 Balance, at September 30, 2023 2,568,054 $ 25 $ 28,112 $ 73,438 $ ( 1,337 ) $ 100,238 Balance, at December 31, 2022 2,583,619 $ 26 $ 28,004 $ 70,792 $ ( 1,117 ) $ 97,705 Impact of adoption of Accounting Standards Update (“ASU”) 2016-13 — — — ( 1,149 ) — ( 1,149 ) Net income — — — 6,228 — 6,228 Other comprehensive loss, net of tax — — — — ( 220 ) ( 220 ) Share-based compensation — — 368 — — 368 Restricted stock awards issued 8,850 — — — — — Cash dividends paid on common stock ($ 0.55 per share) — — — ( 1,425 ) — ( 1,425 ) Common stock repurchased ( 37,850 ) ( 1 ) ( 390 ) ( 1,008 ) — ( 1,399 ) Common stock surrendered ( 4,750 ) — ( 190 ) — — ( 190 ) Restricted shares forfeited ( 425 ) — — — — — Common stock options exercised 18,610 — 320 — — 320 Balance, at September 30, 2023 2,568,054 $ 25 $ 28,112 $ 73,438 $ ( 1,337 ) $ 100,238 6 Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss), net of tax Total Stockholders’ Equity Balance, at June 30, 2022 2,578,595 $ 26 $ 27,777 $ 66,203 $ ( 949 ) $ 93,057 Net income — — — 2,546 — 2,546 Other comprehensive loss, net of tax — — — — ( 316 ) ( 316 ) Share-based compensation — — 90 — — 90 Common stock surrendered ( 2,431 ) — ( 91 ) — — ( 91 ) Cash dividends paid on common stock ($ 0.17 per share) — — — ( 440 ) — ( 440 ) Restricted shares forfeited ( 95 ) — — — — — Common stock options exercised 5,880 — 110 — — 110 Balance, at September 30, 2022 2,581,949 $ 26 $ 27,886 $ 68,309 $ ( 1,265 ) $ 94,956 Balance, at December 31, 2021 2,613,768 $ 26 $ 27,956 $ 65,237 $ 139 $ 93,358 Net income — — — 5,881 — 5,881 Other comprehensive loss, net of tax — — — — ( 1,404 ) ( 1,404 ) Share-based compensation — — 384 — — 384 Restricted stock awards issued 9,700 — — — — — Cash dividends paid on common stock ($ 0.61 per share) — — — ( 1,591 ) — ( 1,591 ) Common stock repurchased ( 46,799 ) ( 516 ) ( 1,218 ) ( 1,734 ) Common stock surrendered ( 3,541 ) — ( 133 ) — — ( 133 ) Restricted stock forfeited ( 930 ) — — — — — Common stock options exercised 9,751 — 195 — — 195 Balance, at September 30, 2022 2,581,949 $ 26 $ 27,886 $ 68,309 $ ( 1,265 ) $ 94,956 See Notes to Condensed Consolidated Financial Statements 7 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (unaudited) (In thousands) Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,228 $ 5,881 Adjustments to reconcile net income to net cash from operating activities: Amortization of net discounts on investments 60 61 (Release of) provision for credit losses ( 246 ) 1,079 Depreciation and amortization 534 539 Share based compensation 368 384 Fair value adjustment on mortgage servicing rights 123 ( 334 ) Right of use assets amortization 699 492 Change in lease liabilities ( 712 ) ( 493 ) Change in cash surrender value of BOLI ( 390 ) ( 45 ) Net gain on BOLI death benefit ( 567 ) — Net change in advances from borrowers for taxes and insurance 863 433 Net gain on sale of loans ( 264 ) ( 497 ) Proceeds from sale of loans held-for-sale 14,822 17,750 Originations of loans held-for-sale ( 15,828 ) ( 17,979 ) Net loss on OREO and repossessed assets 13 — Change in operating assets and liabilities: Accrued interest receivable ( 332 ) ( 592 ) Other assets ( 2,276 ) ( 626 ) Accrued interest payable 193 ( 91 ) Other liabilities 1,476 ( 500 ) Net cash provided by operating activities 4,764 5,462 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities — ( 4,380 ) Proceeds from principal payments, maturities and sales of available-for-sale securities 1,920 596 Purchase of held-to-maturity securities — ( 2,226 ) Proceeds from principal payments of held-to-maturity securities 25 19 Net decrease (increase) in loans ( 9,601 ) ( 163,235 ) Proceeds from death benefit on BOLI 633 — Purchases of premises and equipment, net ( 225 ) ( 225 ) Proceeds from sale of OREO and other repossessed assets 71 — Net cash used in investing activities ( 7,177 ) ( 169,451 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 52,112 17,077 Proceeds from borrowings 40,000 44,500 Repayment of borrowings ( 43,000 ) — FHLB stock purchased 49 ( 1,851 ) Common stock repurchases ( 1,399 ) ( 1,734 ) Purchase of stock surrendered to pay tax liability ( 190 ) ( 133 ) Dividends paid on common stock ( 1,425 ) ( 1,591 ) Proceeds from common stock option exercises 320 195 Net cash provided by financing activities 46,467 56,463 Net change in cash and cash equivalents 44,054 ( 107,526 ) Cash and cash equivalents, beginning of period 57,836 183,590 Cash and cash equivalents, end of period $ 101,890 $ 76,064 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes $ 2,100 $ 1,410 Interest paid on deposits and borrowings 10,797 2,459 ROU assets obtained in exchange for new operating lease liabilities 329 — Impact of adoption of ASU 2016-13 on retained earnings ( 1,149 ) — See Notes to Condensed Consolidated Financial Statements 8 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc. References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 14, 2023 (“2022 Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full year or any other future period. Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation. These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share. We have not made any changes in our significant accounting policies from those disclosed in the 2022 Form 10-K, except for the accounting for debt securities, the allowance for credit losses (“ACL”) on loans and unfunded commitments, and loan modifications, as described below. Allowance for Credit Losses on Investment Securities . The ACL on investment securities is determined for both the held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with Accounting Standards Codification (“ASC”) 326 - Financial Instruments - Credit Losses . For available-for-sale investment securities, we perform a quarterly qualitative evaluation for securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related. In determining whether a security’s decline in fair value is credit related, we consider a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments and (vi) general market conditions, which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that the unrealized loss can be attributed to credit loss, we record the amount of credit loss through a charge to provision for credit losses in current period earnings. However, the amount of credit loss recorded in current period earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost. If it is likely we will be required to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings. For unrealized losses deemed non-credit related, we record the loss, net of tax, through accumulated other comprehensive income. We determine expected credit losses on available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities through a discounted cash flow approach, using the security’s effective interest rate. However, as previously mentioned, the measurement of credit losses on available-for-sale securities only occurs when, through our qualitative assessment, all or a portion of the unrealized loss is determined to be credit related. Our discounted cash flow approach incorporates assumptions about the collectability of future cash flows. The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows. Credit losses on available-for-sale securities are measured on an individual basis, while credit losses on held-to-maturity securities are measured on a collective basis according to shared risk characteristics. Credit losses on held-to-maturity securities are only recognized at the individual security level when we determine a security no longer possesses risk characteristics similar to others in the portfolio. We do not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable. Accrued interest receivable for investment securities is included in accrued interest receivable balances in the Condensed Consolidated Balance Sheets. 9 Table of Contents Allowance for Credit Losses on Loans and Unfunded Loan Commitments. We maintain an ACL on loans and unfunded loan commitments in accordance with ASC 326. ASC 326 requires us to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition. The recognition of credit losses at origination or acquisition represents our best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics. Determining the ACL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. We use a historical loss rate model when determining estimates for the ACL for our loan portfolio. We also utilize proxy loan data in our ACL model where our own historical data is not sufficiently available. We do not measure credit losses on a loan’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable. Accrued interest receivable for loans is included in accrued interest receivable balances in the Condensed Consolidated Balance Sheets. Our ACL model forecasts primarily over a two-year time horizon, which we believe is a reasonable and supportable period. Beyond the two-year forecast time horizon, our ACL model reverts to historical long-term average loss rates. The duration of the forecast horizon, the period over which forecasts revert to long-term averages, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio. We utilize a discounted cash flow ACL model for individually analyzed loans using internally derived estimates for prepayments in determining the amount and timing of future contractual cash flows we expect to collect, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell. The estimate of future cash flows also incorporates estimates for contractual amounts we believe may not be collected, which are based on assumptions for our estimated exposure at default. Our estimated exposure at default is determined by the contractual payment schedule and expected payment profile of the loan, incorporating estimates for expected prepayments and future draws on revolving credit facilities. Our ACL methodology for unfunded loan commitments also includes assumptions concerning the probability an unfunded commitment will be drawn upon by the borrower. These assumptions are based on the historical experience of banks in an independent third party database. Expectations of future cash flows are discounted at the loan’s effective interest rate for individually analyzed loans. The effective interest rate represents the contractual rate on the loan, adjusted for any purchase premiums, or discounts, and deferred fees and costs associated with an originated loan. We have made an accounting policy election to adjust the effective interest rate to take into consideration the effects of estimated prepayments. The resulting ACL represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is our policy to charge-off loan balances at the time they are not expected to be collected. The historical loss rate model is derived from our loan portfolio credit history, as well as the comparable credit history for peer banks in Washington state. Key loan level attributes and economic drivers in determining the loss rate for loans include unemployment rates, changes to interest rates, changes in credit quality, changes to the consumer price index, and changes in real estate prices. In order to develop reasonable and supportable forecasts of future conditions, we estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligations to us and the ultimate collectability of future cash flows over the life of a loan. Management periodically evaluates appropriateness of economic scenarios and may decide that a particular economic scenario or a combination of probability-weighted economic scenarios should be used in our ACL model. Our ACL model at September 30, 2023 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, the potential impact of wars and other sources of geopolitical tension, general uncertainty concerning future economic conditions, and the potential for recessionary conditions. It is important to note that our ACL model relies on multiple economic variables, which are used in several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, we have identified certain economic variables that have significant influence in our model for determining the ACL. These key economic variables include changes in the Washington state unemployment rate, residential real estate prices in the Seattle Metropolitan Statistical Area, and interest rates. Recognizing that forecasts of macroeconomic conditions are inherently uncertain, we believe that the process to consider the available information and associated risks and uncertainties is appropriately governed and that estimates of expected credit losses were reasonable and appropriate upon adoption and for the three and nine months ended September 30, 2023. Our ACL model also includes adjustments for qualitative factors, where appropriate. We recognize that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. We therefore consider the need for qualitative adjustments to the ACL on a quarterly 10 Table of Contents basis. Qualitative adjustments may be related to and include, but are not limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios, and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL. Qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile or other factors where management believes the quantitative component of our ACL model may not be fully reflective of levels deemed adequate in the judgement of management. Certain qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods. Modified Loans to Borrowers Experiencing Financial Difficulty . We occasionally modify loans to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize our potential losses. We refer to these modifications as modified loans to troubled borrowers. Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and, in very limited cases, reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been past due for a period of 90 days or more. Such loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. We typically measure the ACL on modified loans to troubled borrowers on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach for loans measured individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated fair value of the underlying collateral, less estimated costs to sell. GAAP requires us to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. Refer to Note 4 – Loans for additional information concerning modified loans to troubled borrowers. Note 2 – Accounting Pronouncements Recently Issued or Adopted On March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, " Reference Rate Reform" ("Topic 848"). This ASU provides optional guidance for a limited 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 related 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 periods including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, 11 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 clarify the codification and correct unintended application of the guidance. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The 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 Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach and recorded a net decrease of approximately $ 1.1 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the ACL of $ 1.5 million, net of related deferred tax assets arising from temporary differences of $ 305 thousand, commonly referred to as the “Day 1” adjustment. The Day 1 adjustment to the ACL is reflective of expected lifetime credit losses associated with the composition of financial assets within in the scope of ASC 326 as of January 1, 2023, which is comprised of loans held for investment and off-balance sheet credit exposures at January 1, 2023, as well as management’s current expectation of future economic conditions. The following table presents the impact of adopting ASU 2016-13 on January 1, 2023: (dollars in thousands) As Reported Under ASC 326 Prior to Adopting ASC 326 Impact of ASC 326 Adoption Allowance for credit losses - loans Real estate loans: One- to four- family $ 2,126 $ 1,771 $ 355 Home equity 201 132 69 Commercial and multifamily 2,181 2,501 ( 320 ) Construction and land 2,568 1,209 1,359 Total real estate loans 7,075 5,613 1,462 Consumer loans: Manufactured homes 282 462 ( 180 ) Floating homes 622 456 166 Other consumer 161 324 ( 163 ) Total consumer loans 1,065 1,242 ( 177 ) Commercial business loans 221 256 ( 35 ) Unallocated ( 3 ) 488 ( 491 ) Total loans 8,359 7,599 760 Allowance for credit losses - unfunded commitments Reserve for unfunded commitments 1,030 335 695 Total $ 9,389 $ 7,934 $ 1,455 In March 2022, the FASB issued ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . This 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, this 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 was 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 ASU 2022-02 on January 1, 2023 using the prospective transition guidance which allows the entity to continue estimating expected credit losses in accordance with legacy U.S. GAAP for receivables modified in a TDR until the receivables are subsequently modified or settled. Once a legacy TDR is modified after adoption of ASU 12 2022-02, the prospective transition guidance no longer applies and the impact to the ACL is recognized in earnings in the period of modification. The adoption of this ASU did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows. As a result of the election to adopt this ASU on a prospective basis, the impact in future periods is not expected to be material. Note 3 – Investments At September 30, 2023, the Company did not own any debt securities classified as trading or any equity investment securities. The amortized cost and fair value of our AFS securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2023 Municipal bonds $ 6,404 $ 10 $ ( 1,261 ) $ 5,153 Agency mortgage-backed securities 3,269 1 ( 443 ) 2,827 Total $ 9,673 $ 11 $ ( 1,704 ) $ 7,980 December 31, 2022 Treasury bills $ 1,596 $ — $ ( 2 ) $ 1,594 Municipal bonds 6,434 16 ( 1,029 ) 5,421 Agency mortgage-backed securities 3,591 1 ( 400 ) 3,192 Total $ 11,621 $ 17 $ ( 1,431 ) $ 10,207 The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2023 Municipal bonds $ 704 $ — $ ( 219 ) $ 485 Agency mortgage-backed securities 1,470 — ( 284 ) 1,186 Total $ 2,174 $ — $ ( 503 ) $ 1,671 December 31, 2022 Municipal bonds $ 705 $ — $ ( 169 ) $ 536 Agency mortgage-backed securities 1,494 — ( 219 ) 1,275 Total $ 2,199 $ — $ ( 388 ) $ 1,811 The amortized cost and fair value of AFS and HTM securities at September 30, 2023, 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, consisting of agency mortgage-backed securities, are shown separately. 13 September 30, 2023 Available-for-sale Held-to-maturity Amortized Cost Fair Value Amortized Cost Fair Value Due after one year through five years $ 150 $ 150 $ — $ — Due after five years through ten years 1,227 1,233 — — Due after ten years 5,027 3,770 704 486 Agency mortgage-backed securities 3,269 2,827 1,470 1,185 Total $ 9,673 $ 7,980 $ 2,174 $ 1,671 There were no pledged securities at September 30, 2023 or December 31, 2022. There were no sales of AFS or HTM securities during the three and nine months ended September 30, 2023 and 2022. Accrued interest receivable on securities totaled $ 78 thousand and $ 54 thousand at September 30, 2023 and December 31, 2022, respectively, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of expected credit losses. The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments for which an allowance for credit losses has not been recorded that have been in a continuous unrealized loss position at the dates indicated (in thousands): September 30, 2023 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Available-for-sale securities Municipal bonds $ 455 $ — $ 3,490 $ ( 1,261 ) $ 3,945 $ ( 1,261 ) Agency mortgage-backed securities 47 ( 2 ) 2,570 ( 441 ) 2,617 ( 443 ) Total available-for-sale securities $ 502 $ ( 2 ) $ 6,060 $ ( 1,702 ) $ 6,562 $ ( 1,704 ) Held-to-maturity securities Municipal bonds $ — $ — $ 486 $ ( 219 ) $ 486 $ ( 219 ) Agency mortgage-backed securities — — 1,185 ( 284 ) 1,185 ( 284 ) Total held-to-maturity securities $ — $ — $ 1,671 $ ( 503 ) $ 1,671 $ ( 503 ) December 31, 2022 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Available-for-sale securities 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 $ 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 ) There was no allowance for credit losses on securities at September 30, 2023 or December 31, 2022. At September 30, 2023, the total securities portfolio consisted of 12 agency mortgage-backed securities and 11 municipal bonds, with a total portfolio fair value of $ 9.7 million. At December 31, 2022, the total securities portfolio consisted of one treasury bill, 11 municipal 14 bonds and 12 agency mortgage-backed securities, with a fair value of $ 12.0 million. At September 30, 2023, there were three securities in an unrealized loss position for less than 12 months, and 17 securities in an unrealized loss position for more than 12 months. All three securities in an unrealized loss position for less than 12 months were classified as AFS. 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. 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. There was no provision for credit losses recognized for investment securities during the three or nine months ended September 30, 2023, because the declines in fair value were not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis . 15 Note 4 – Loans Loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, were as follows (in thousands): September 30, 2023 December 31, 2022 Real estate loans: One-to-four family $ 280,556 $ 274,638 Home equity 21,313 19,548 Commercial and multifamily 304,252 313,358 Construction and land 118,619 116,878 Total real estate loans 724,740 724,422 Consumer loans: Manufactured homes 34,652 26,953 Floating homes 73,716 74,443 Other consumer 18,710 17,923 Total consumer loans 127,078 119,319 Commercial business loans 25,033 23,815 Total loans held-for-portfolio 876,851 867,556 Premiums for purchased loans (1) 850 973 Deferred fees, net ( 2,267 ) ( 2,548 ) Total loans held-for-portfolio, gross 875,434 865,981 Allowance for credit losses — loans ( 8,438 ) ( 7,599 ) Total loans held-for-portfolio, net $ 866,996 $ 858,382 (1) Includes premiums resulting from purchased loans of $ 472 thousand related to one-to-four family loans, $ 290 thousand related to commercial and multifamily loans, and $ 88 thousand related to commercial business loans as of September 30, 2023. 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. As of September 30, 2023, there were two collateral dependent loans, totaling $ 99 thousand, that were in process of foreclosure. The following table presents a summary of activity in the ACL on loans and unfunded commitments for the periods indicated (in thousands): 16 Three Months Ended September 30, 2023 2022 Allowance for Credit Losses - Loans Reserve for Unfunded Loan Commitments Allowance for Credit Losses Allowance for Credit Losses - Loans Reserve for Unfunded Loan Commitments Allowance for Credit Losses Balance at beginning of period $ 8,217 $ 706 $ 8,923 $ 7,117 $ 411 $ 7,528 Provision for (release of) credit losses during the period 224 ( 149 ) 75 375 ( 29 ) 346 Net (charge-offs)/recoveries during the period ( 3 ) — ( 3 ) ( 3 ) — ( 3 ) Balance at end of period $ 8,438 $ 557 $ 8,995 $ 7,489 $ 382 $ 7,871 Nine months ended September 30, 2023 2023 2022 Allowance for Credit Losses - Loans Reserve for Unfunded Loan Commitments Allowance for Credit Losses Allowance for Credit Losses - Loans Reserve for Unfunded Loan Commitments Allowance for Credit Losses Balance at beginning of period $ 7,599 $ 335 $ 7,934 $ 6,306 $ 404 $ 6,710 Adoption of ASU 2016-13 (1) 760 695 1,455 — — — Provision for (release of) credit losses during the period 227 ( 473 ) ( 246 ) 1,101 ( 22 ) 1,079 Net (charge-offs)/recoveries during the period ( 148 ) — ( 148 ) 82 — 82 Balance at end of period $ 8,438 $ 557 $ 8,995 $ 7,489 $ 382 $ 7,871 (1) Represents the impact of adopting ASU 2016-13, Financial Instruments — Credit Losses on January 1, 2023. Since that date, as a result of adopting ASU 2016-13, our methodology to compute our allowance for credit losses has been based on a current expected credit loss methodology, rather than the previously applied incurred loss methodology. Accrued interest receivable on loans receivable totaled $ 3.2 million and $ 3.0 million at September 30, 2023 and December 31, 2022, respectively, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of expected credit losses. The following tables summarize the activity in the allowance for credit losses - loans, excluding accrued interest, for the periods indicated (in thousands): Three Months Ended September 30, 2023 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,997 $ — $ — $ 8 $ 2,005 Home equity 194 — — 12 206 Commercial and multifamily 2,268 — — 77 2,345 Construction and land 2,498 — — 123 2,621 Manufactured homes 309 — — 21 330 Floating homes 586 — — 19 605 Other consumer (1) 160 ( 27 ) 24 ( 10 ) 147 Commercial business 205 — — ( 26 ) 179 Unallocated — — — — — Total $ 8,217 $ ( 27 ) $ 24 $ 224 $ 8,438 (1) During the three months ended September 30, 2023, the gross charge-offs related entirely to deposit overdrafts that were charged off. 17 Nine Months Ended September 30, 2023 Beginning Allowance Impact of Adoption of ASU 2016-16 Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,771 $ 355 $ — $ — $ ( 121 ) $ 2,005 Home equity (1) 132 69 ( 25 ) — 30 206 Commercial and multifamily 2,501 ( 320 ) — — 164 2,345 Construction and land 1,209 1,359 — — 53 2,621 Manufactured homes 462 ( 180 ) — — 48 330 Floating homes 456 166 — — ( 17 ) 605 Other consumer (2) 324 ( 163 ) ( 159 ) 36 109 147 Commercial business 256 ( 35 ) — — ( 42 ) 179 Unallocated 488 ( 491 ) — — 3 — Total $ 7,599 $ 760 $ ( 184 ) $ 36 $ 227 $ 8,438 (1) During the nine months ended September 30, 2023, there was one revolving home equity loan that was charged off. (2) During the nine months ended September 30, 2023, the gross charge-offs related primarily to deposit overdrafts that were charged off. Three Months Ended September 30, 2022 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,638 $ — $ — $ 121 $ 1,759 Home equity 113 — — 8 121 Commercial and multifamily 2,312 — — 37 2,349 Construction and land 1,024 — — 106 1,130 Manufactured homes 444 — — 45 489 Floating homes 410 — — 20 430 Other consumer 331 ( 6 ) 3 ( 3 ) 325 Commercial business 240 — — ( 7 ) 233 Unallocated 605 — — 48 653 Total $ 7,117 $ ( 6 ) $ 3 $ 375 $ 7,489 Nine Months Ended September 30, 2022 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,402 $ — $ 45 $ 312 $ 1,759 Home equity 93 — 58 ( 30 ) 121 Commercial and multifamily 2,340 — — 9 2,349 Construction and land 650 — — 480 1,130 Manufactured homes 475 — 12 2 489 Floating homes 372 — — 58 430 Other consumer 310 ( 42 ) 9 48 325 Commercial business 269 ( 6 ) 6 ( 36 ) 233 Unallocated 395 — — 258 653 Total $ 6,306 $ ( 48 ) $ 130 $ 1,101 $ 7,489 Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the 18 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. Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading. The grades for watch and special mention loans are used by the Company to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful, or loss. These are loans which have been criticized and deserve management's close attention based upon known characteristics such as periodic payment delinquency, failure to comply with contractual terms of the loan, or collateral concerns. Loans identified as watch, special mention, substandard, doubtful, or loss are subject to additional problem loan reporting to management every three months. When we classify problem assets as either substandard or doubtful, we may determine that these assets should be individually analyzed if they no longer share common risk characteristics with the rest of the portfolio. Therefore we may establish a specific allowance in an amount we deem prudent to address those risks. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities for pooled loans with common risk characteristics, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank's federal regulator, and the Washington Department of Financial Institutions, the Bank's state banking regulator, which can order the establishment of additional credit loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. The following table presents the internally assigned grades as of September 30, 2023, by type of loan and origination year (in thousands): 19 Term Loans Amortized Cost Basis by Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Amortized Cost Basis Converted to Term 2023 2022 2021 2020 2019 Prior Total One-to-four family: Pass $ 21,831 $ 86,993 $ 111,616 $ 16,269 $ 13,125 $ 29,766 $ — $ — $ 279,600 Substandard — 259 121 — 264 581 — — 1,225 Total one-to-four family $ 21,831 $ 87,252 $ 111,737 $ 16,269 $ 13,389 $ 30,347 $ — $ — $ 280,825 Home equity: Pass $ 3,064 $ 2,874 $ 1,089 $ 305 $ 98 $ 1,739 $ 10,804 $ 1,348 $ 21,321 Substandard — — — — — 64 — 179 243 Total home equity $ 3,064 $ 2,874 $ 1,089 $ 305 $ 98 $ 1,803 $ 10,804 $ 1,527 $ 21,564 Commercial and multifamily: Pass $ 13,820 $ 80,182 $ 85,099 $ 22,910 $ 30,336 $ 59,329 $ — $ — $ 291,676 Special mention — — — 3,388 — 353 — — 3,741 Substandard — — — 1,323 5,136 1,433 — — 7,892 Total commercial and multifamily $ 13,820 $ 80,182 $ 85,099 $ 27,621 $ 35,472 $ 61,115 $ — $ — $ 303,309 Construction and land: Pass $ 11,272 $ 60,325 $ 41,860 $ 978 $ 608 $ 2,223 $ — $ — $ 117,266 Substandard — — — — 693 70 — — 763 Total construction and land $ 11,272 $ 60,325 $ 41,860 $ 978 $ 1,301 $ 2,293 $ — $ — $ 118,029 Manufactured homes: Pass $ 11,011 $ 8,388 $ 4,624 $ 2,184 $ 2,226 $ 5,924 $ — $ — $ 34,357 Substandard — 28 — 22 41 103 — — 194 Total manufactured homes $ 11,011 $ 8,416 $ 4,624 $ 2,206 $ 2,267 $ 6,027 $ — $ — $ 34,551 Floating homes: Pass $ 5,722 $ 21,644 $ 27,146 $ 6,514 $ 1,892 $ 10,418 $ — $ — $ 73,336 Total floating homes $ 5,722 $ 21,644 $ 27,146 $ 6,514 $ 1,892 $ 10,418 $ — $ — $ 73,336 Other consumer: Pass $ 3,469 $ 1,977 $ 3,936 $ 5,938 $ 622 $ 2,269 $ 499 $ — $ 18,710 Total other consumer $ 3,469 $ 1,977 $ 3,936 $ 5,938 $ 622 $ 2,269 $ 499 $ — $ 18,710 Commercial business: Pass $ 6,329 $ 457 $ 3,689 $ 439 $ 290 $ 5,531 $ 8,020 $ — $ 24,755 Substandard — 61 294 — — — — — 355 Total commercial business $ 6,329 $ 518 $ 3,983 $ 439 $ 290 $ 5,531 $ 8,020 $ — $ 25,110 Total loans Pass $ 76,518 $ 262,840 $ 279,059 $ 55,537 $ 49,197 $ 117,199 $ 19,323 $ 1,348 $ 861,021 Special mention — — — 3,388 — 353 — — 3,741 Substandard — 348 415 1,345 6,134 2,251 — 179 10,672 Total loans $ 76,518 $ 263,188 $ 279,474 $ 60,270 $ 55,331 $ 119,803 $ 19,323 $ 1,527 $ 875,434 20 The following tables present the internally assigned grades as of December 31, 2022, by type of loan (in thousands): December 31, 2022 One-to- four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Grade: Pass $ 271,295 $ 19,230 $ 291,677 $ 109,484 $ 26,583 $ 74,443 $ 17,661 $ 22,853 $ 833,226 Watch 279 2 7,538 4,037 134 — — 161 12,151 Special Mention — — 4,096 — — — — — 4,096 Substandard 3,064 316 10,047 3,357 236 — 262 801 18,083 Total $ 274,638 $ 19,548 $ 313,358 $ 116,878 $ 26,953 $ 74,443 $ 17,923 $ 23,815 $ 867,556 Nonaccrual and Past Due Loans . Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual once the loan is 90 days past due or sooner if, in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions. The following table presents the amortized cost of nonaccrual loans as of the dates indicated, by type of loan (in thousands): September 30, 2023 December 31, 2022 Total Nonaccrual Loans Total Nonaccrual Loans with no ACL Total Nonaccrual Loans Total Nonaccrual Loans with no ACL One-to-four family $ 1,137 $ 1,137 $ 2,135 $ 2,135 Home equity 86 86 142 142 Commercial and multifamily 306 306 — — Construction and land 78 78 324 324 Manufactured homes 151 111 96 52 Other consumer 4 — 262 262 Total $ 1,762 $ 1,718 $ 2,959 $ 2,915 The following tables present the aging of past due loans, based on amortized cost, as of the dates indicated, by type of loan (in thousands): September 30, 2023 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due 90 Days and Greater Past Due and Accruing Total Past Due Current Total Loans One-to-four family $ — $ 828 $ 737 $ — $ 1,565 $ 279,260 $ 280,825 Home equity 302 — 86 — 388 21,176 21,564 Commercial and multifamily — 1,040 — — 1,040 302,269 303,309 Construction and land 7,446 — 54 — 7,500 110,529 118,029 Manufactured homes — 134 76 — 210 34,341 34,551 Floating homes — — — — — 73,336 73,336 Other consumer 7 5 — — 12 18,698 18,710 Commercial business 729 2,128 — — 2,857 22,253 25,110 Total $ 8,484 $ 4,135 $ 953 $ — $ 13,572 $ 861,862 $ 875,434 21 December 31, 2022 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due 90 Days and Greater Past Due and Accruing Total Past Due Current Total Loans One-to-four family $ 393 $ 289 $ 1,934 $ — $ 2,616 $ 272,022 $ 274,638 Home equity 115 — 116 — 231 19,317 19,548 Commercial and multifamily 7,198 — — — 7,198 306,160 313,358 Construction and land 1,210 — 296 — 1,506 115,372 116,878 Manufactured homes 261 155 52 — 468 26,485 26,953 Floating homes — — — — — 74,443 74,443 Other consumer 360 5 — — 365 17,558 17,923 Commercial business 4 — — — 4 23,811 23,815 Total $ 9,542 $ 449 $ 2,398 $ — $ 12,389 $ 855,167 $ 867,556 Nonperforming Loans. Loans are considered nonperforming when they are placed on nonaccrual. The following table presents the credit risk profile of our loan portfolio based on payment activity as of the date indicated, by type of loan (in thousands): December 31, 2022 One-to-four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Performing $ 272,503 $ 19,406 $ 313,358 $ 116,554 $ 26,857 $ 74,443 $ 17,661 $ 23,815 $ 864,597 Nonperforming 2,135 142 — 324 96 — 262 — 2,959 Total $ 274,638 $ 19,548 $ 313,358 $ 116,878 $ 26,953 $ 74,443 $ 17,923 $ 23,815 $ 867,556 Loan Modifications to Borrowers Experiencing Financial Difficulty. Loans modified to borrowers experiencing financial difficulty totaled $ 2.0 million at September 30, 2023. The Company has granted modifications which can generally be described in the following categories: Principal Forgiveness : A modification in which the principal is reduced. Rate Modification : A modification in which the interest rate is changed. Term Modification : A modification in which the maturity date, timing of payments or frequency of payments is changed. Payment Modification : A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category. Combination Modification : Any other type of modification, including the use of multiple categories above. At September 30, 2023, the Company had no commitments to extend additional credit to borrowers owing loan receivables with modified terms. During the nine months ended September 30, 2023, there was one modified one-to-four family loan to a borrower experiencing financial difficulty. This loan received a term extension for 90 days, with an amortized cost basis of $ 90 thousand representing 0.03 % of the total class of loans. There were no loans modified within the three months ended September 30, 2023. We have no modified loan receivables that have subsequently defaulted at September 30, 2023. 22 Troubled debt restructurings. Prior to the adoption of ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , the Company had granted a variety of concessions to borrowers in the form of loan modifications that were considered TDRs. Loans classified as TDRs totaled $ 2.0 million at December 31, 2022, and were previously included in impaired loans. Collateral Dependent Loans . Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded. The following tables summarize collateral dependent loans by collateral type as of the dates indicated (in thousands): September 30, 2023 Commercial Real Estate Residential Real Estate Land Other Residential Total Real estate loans: One- to four- family $ — $ 691 $ — $ 547 $ 1,238 Home equity — 86 — — 86 Commercial and multifamily 306 — — — 306 Construction and land — — 78 — 78 Total real estate loans 306 777 78 547 1,708 Consumer loans: Manufactured homes — — — 151 151 Total consumer loans — — — 151 151 Total loans $ 306 $ 777 $ 78 $ 698 $ 1,859 Impaired Loans. Prior to the adoption of ASC 326 on January 1, 2023, we classified loans as impaired when we determined that we might be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, we took into consideration factors which included payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically did not result in a loan being classified as impaired. The significance of payment delays and shortfalls was considered on a case-by-case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, including payment history. Impairment was measured on a loan-by-loan basis for all loans in the portfolio. All TDRs were also classified as impaired loans and were included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses. Impaired loans at the dates indicated, by type of loan were as follows (in thousands): December 31, 2022 Recorded Investment Unpaid Principal Balance Without Allowance With Allowance Total Recorded Investment Related Allowance One-to-four family $ 3,758 $ 3,038 $ 708 $ 3,746 $ 102 Home equity 210 142 68 210 5 Construction and land 358 324 34 358 3 Manufactured homes 187 93 94 187 52 Other consumer 343 261 82 343 22 Total $ 4,856 $ 3,858 $ 986 $ 4,844 $ 184 23 The following tables present the average recorded investment and interest income recognized on impaired loans for the periods indicated, by loan types (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2022 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized One-to-four family $ 3,436 $ 32 $ 3,599 $ 76 Home equity 213 1 217 8 Commercial and multifamily 1,154 135 1,756 186 Construction and land 64 1 66 3 Manufactured homes 193 3 206 12 Floating homes — — 123 — Other consumer 349 4 288 13 Commercial business — — 86 — Total $ 5,409 $ 176 $ 6,341 $ 298 Note 5 – Fair Value Measurements The Company determines the fair values of its financial instruments based on the requirements established in ASC 820 , Fair Value Measurements (“ASC 820”), which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The Company’s fair values for financial instruments at September 30, 2023 and December 31, 2022 were determined based on these requirements. The following methods and assumptions were used to estimate the fair value of other financial instruments: Cash and cash equivalents - The estimated fair value is equal to the carrying amount. Available-for-sale securities – AFS securities are recorded at fair value based on quoted market prices, if available (Level 1). 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 without readily available market prices, as well as U.S. government securities. Held-to-maturity securities – HTM securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. The fair value is based on quoted market prices, if available (Level 1). 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 without readily available market prices, as well as U.S. government securities. Loans held-for-sale - One-to-four family mortgage loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate one-to-four family loans held-for-sale is based on whole loan forward prices obtained from government sponsored enterprises. At September 30, 2023 and December 31, 2022, loans held-for-sale were carried at cost, as no impairment was required. Loans held-for-portfolio - The estimated fair value of loans held-for-portfolio consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment, to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and estimated current market rate yields on loans with similar characteristics. The estimated fair values of loans held-for-portfolio reflect exit price assumptions. The liquidity 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. FHLB stock - The estimated fair value is equal to the par value of the stock. Non-maturity deposits - The estimated fair value is equal to the carrying amount. 24 Time deposits - The estimated fair value of time deposits is based on the difference between interest costs paid on the Company’s time deposits and current market rates for time deposits with comparable characteristics. Borrowings - The fair value of borrowings are estimated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Subordinated notes - The fair value of subordinated notes is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity. A description of the valuation methodologies used for collateral dependent loans and OREO is as follows: Collateral dependent loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell. Troubled debt restructurings (prior to adoption of ASU 2022-02) - The fair value of loan modifications that were considered TDRs prior to the adoption of ASU 2022-02 is based on the current appraised value of the collateral less estimated costs to sell, or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions. OREO and repossessed assets – The fair value of OREO and repossessed assets is based on the current appraised value of the collateral less estimated costs to sell. Off-balance sheet financial instruments - The fair value for the Company’s off-balance sheet loan commitments is estimated based on fees charged to others to enter into similar agreements, taking into account the remaining terms of the agreements and credit standing of the Company’s clients. The estimated fair value of these commitments is not significant. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. There were no transfers between levels during the three and nine months ended September 30, 2023 and 2022. 25 The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether recognized or recorded at fair value or not as of the dates indicated (in thousands): September 30, 2023 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 101,890 $ 101,890 $ 101,890 $ — $ — Available-for-sale securities 7,980 7,980 — 7,980 — Held-to-maturity securities 2,174 1,671 — 1,671 — Loans held-for-sale 1,153 1,153 — 1,153 — Loans held-for-portfolio, net 866,996 811,384 — — 811,384 Mortgage servicing rights 4,681 4,681 — — 4,681 FINANCIAL LIABILITIES: Time deposits 301,226 302,574 — 302,574 — Borrowings 40,000 40,000 — 40,000 — Subordinated notes 11,707 9,938 — 9,938 — December 31, 2022 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 57,836 $ 57,836 $ 57,836 $ — $ — Available-for-sale securities 10,207 10,207 — 10,207 — Held-to-maturity securities 2,199 1,811 — 1,811 — Loans held-for-portfolio, net 858,382 801,153 — — 801,153 Mortgage servicing rights 4,687 4,687 — — 4,687 FINANCIAL LIABILITIES: Time deposits 210,305 209,965 — 209,965 — Borrowings 43,000 43,000 — 43,000 — Subordinated notes 11,676 10,420 — 10,420 — 26 The following tables present the balance of assets measured at fair value on a recurring basis as of the dates indicated (in thousands): Fair Value at September 30, 2023 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 5,153 $ — $ 5,153 $ — Agency mortgage-backed securities 2,827 — 2,827 — Mortgage servicing rights 4,681 — — 4,681 Fair Value at December 31, 2022 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 4,687 — — 4,687 The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis as of the dates indicated: September 30, 2023 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 101 %- 595 % ( 122 %) Discount rate 10.5 %- 14.5 % ( 12.5 %) December 31, 2022 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 119 %- 461 % ( 132 %) Discount rate 10.5 %- 14.5 % ( 12.5 %) Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted-average life will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate. As a result of the difficulty in observing certain significant valuation inputs affecting our “Level 3” fair value assets, we are required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and their fair values. 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 three and nine months ended September 30, 2023 and 2022. Mortgage servicing rights are measured at fair value using a significant unobservable input (Level 3) on a recurring basis. Additional information is included in “Note 6—Mortgage Servicing Rights.” 27 The fair value of individually evaluated loans with specific allocations of the ACL based on collateral values and OREO is generally based on recent real estate appraisals and automated valuation models (“AVMs”). These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers for differences between the comparable sales and income data available. Such adjustments are typically deemed significant unobservable inputs used for determining fair value and result in a Level 3 classification. The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands): Fair Value at September 30, 2023 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 575 $ — $ — $ 575 Collateral dependent loans 1,859 — — 1,859 Fair Value at December 31, 2022 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 659 $ — $ — $ 659 Impaired loans 4,844 — — 4,844 There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at both September 30, 2023 and December 31, 2022. Note 6 – Mortgage Servicing Rights The unpaid principal balance of the Company’s mortgage servicing rights portfolio totaled $ 456.1 million at September 30, 2023 compared to $ 472.5 million at December 31, 2022. Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at September 30, 2023 and December 31, 2022 were $ 453.9 million and $ 470.3 million, respectively. The unpaid principal balance of loans serviced for other financial institutions totaled $ 2.2 million at both September 30, 2023 and December 31, 2022. Loans serviced for others are not included in the Company’s financial statements as they are not assets of the Company. A summary of the change in the balance of mortgage servicing assets during the periods indicated were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Beginning balance, at fair value $ 4,726 $ 4,754 $ 4,687 $ 4,273 Servicing rights that result from transfers and sale of financial assets 33 24 117 180 Changes in fair value: Due to changes in model inputs or assumptions and other (1) ( 78 ) 9 ( 123 ) 334 Ending balance, at fair value $ 4,681 $ 4,787 $ 4,681 $ 4,787 (1) Represents changes due to collection/realization of expected cash flows and curtailments. The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows: September 30, 2023 December 31, 2022 Prepayment speed (Public Securities Association “PSA” model) 122 % 132 % Weighted-average life 7.9 years 7.5 years Weighted average 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 28 mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 295 thousand and $ 891 thousand for the three and nine months ended September 30, 2023, and $ 306 thousand and $ 939 thousand for the three and nine months ended September 30, 2022, respectively. Note 7 – Commitments and Contingencies In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments and lines of credit. Note 8 – Borrowings, FHLB Stock and Subordinated Notes FHLB Advances The following table presents advances from the FHLB as of the dates indicated: September 30, 2023 December 31, 2022 Fixed Rate: Outstanding balance $ 40,000 $ — Interest rates ranging from 4.06 % — % Interest rates ranging to 4.35 % — % Weighted average interest rate 4.25 % — % Variable rate: Outstanding balance $ — $ 43,000 Weighted average interest rate — % 2.14 % FHLB Des Moines Borrowing Capacity The Company has a loan agreement with the FHLB of Des Moines. The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance. Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines to secure public deposits. The following table presents the borrowing capacity from the FHLB as of the dates indicated: September 30, 2023 December 31, 2022 Amount available to borrow under credit facility (1) $ 454,907 $ 442,078 Advance equivalent of collateral: One-to-four family mortgage loans 193,734 204,097 Commercial and multifamily mortgage loans 35,359 45,437 Home equity loans 382 505 Notional amount of letters of credit outstanding 11,000 8,000 Remaining FHLB borrowing capacity $ 178,475 $ 199,039 (1) Subject to eligible pledged collateral. As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances. At both September 30, 2023 and December 31, 2022, the Company had an investment of $ 2.8 million in FHLB of Des Moines stock. Federal Reserve Bank of San Francisco (“FRB SF”) Borrowings The Company has a borrowing agreement with the FRB SF. The terms of the agreement call for a blanket pledge of a portion of the Company’s consumer and commercial business loans based on the outstanding balance. At September 30, 2023 and December 31, 2022, the amount available to borrow under this credit facility was $ 17.5 million and $ 20.8 million, respectively, subject to eligible pledged collateral. The Company had no outstanding borrowings under this arrangement at September 30, 2023 and December 31, 2022. 29 Other Borrowings The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank (“PCBB”). The line has a one year term maturing on June 30, 2024 and is renewable annually. As of September 30, 2023, the amount available under this line of credit was $ 20.0 million. There was no balance on this line of credit as of September 30, 2023 and December 31, 2022. Subordinated Debt In September 2020, the Company issued $ 12.0 million of fixed to floating rate subordinated notes that mature in 2030. The subordinated notes have an initial fixed interest rate of 5.25 % to, but excluding, October 1, 2025, payable semi-annually in arrears. From, and including, October 1, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030, and may be redeemed by the Company, in whole or in part, on October 1, 2025, or on any subsequent interest payment date. Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the terms of the subordinated notes. The balance of the subordinated notes was $ 11.7 million as of both September 30, 2023 and December 31, 2022. Note 9 – Earnings Per Common Share The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data): Three Months Ended Nine Months Ended 2023 2022 2023 2022 Net income $ 1,169 $ 2,546 $ 6,228 $ 5,881 LESS: Participating dividends - Unvested Restricted Stock Awards (“RSAs”) ( 3 ) ( 3 ) ( 9 ) ( 11 ) LESS: Income allocated to participating securities - Unvested RSAs ( 4 ) ( 15 ) ( 31 ) ( 30 ) Net income available to common stockholders - basic 1,162 2,528 6,188 5,840 ADD BACK: Income allocated to participating securities - Unvested RSAs 4 15 31 30 LESS: Income reallocated to participating securities - Unvested RSAs ( 4 ) ( 15 ) ( 30 ) ( 30 ) Net income available to common stockholders - diluted $ 1,162 $ 2,528 $ 6,189 $ 5,840 Weighted average number of shares outstanding, basic 2,553,773 2,562,551 2,568,899 2,582,891 Effect of potentially dilutive common shares 18,035 35,139 19,889 34,690 Weighted average number of shares outstanding, diluted 2,571,808 2,597,690 2,588,788 2,617,581 Earnings per share, basic $ 0.45 $ 0.99 $ 2.41 $ 2.26 Earnings per share, diluted $ 0.45 $ 0.97 $ 2.39 $ 2.23 There were 7,892 anti-dilutive securities at September 30, 2023 and 2,612 anti-dilutive securities at September 30, 2022. Note 10 – Stock-based Compensation Stock Options and Restricted Stock The Company currently has one active stockholder-approved stock-based compensation plan, the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan"). The 2013 Plan permits the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. The equity incentive plan approved by stockholders in 2008 (the"2008 Plan") expired in November 2018 and no further awards may be made under the 2008 Plan; provided, however, all awards outstanding under the 2008 Plan remain outstanding in accordance with their terms. Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units. As of September 30, 2023, on an adjusted basis, awards for stock options totaling 295,464 shares and awards for restricted stock totaling 159,396 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan. Share-based compensation expense was $ 88 thousand and $ 368 thousand for the three and nine months 30 ended September 30, 2023, and $ 90 thousand and $ 384 thousand for the three and nine months ended September 30, 2022, respectively. Stock Option Awards All stock option awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan. The stock option awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company. All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting. The following is a summary of the Company’s stock option award activity during the three months ended September 30, 2023 (dollars in thousands, except per share amounts): Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Outstanding at July 1, 2023 85,895 $ 31.51 5.68 $ 647 Granted — — Exercised ( 1,000 ) 16.80 Expired — — Outstanding at September 30, 2023 84,895 31.68 5.42 560 Exercisable 62,550 28.96 4.36 540 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 84,895 $ 31.68 5.42 $ 560 The following is a summary of the Company’s stock option award activity during the nine months ended September 30, 2023 (dollars in thousands, except per share amounts): Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Outstanding at January 1, 2023 91,525 $ 27.64 4.65 $ 1,109 Granted 12,425 40.13 Exercised ( 18,610 ) 17.20 Forfeited ( 328 ) 42.02 Expired ( 117 ) 42.27 Outstanding at September 30, 2023 84,895 31.68 5.42 560 Exercisable 62,550 28.96 4.36 540 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 84,895 $ 31.68 5.42 $ 560 As of September 30, 2023, there was $ 158 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.5 years. The total intrinsic value of the shares exercised during the three and nine months ended September 30, 2023 was $ 20 thousand and $ 408 thousand, and for the three and nine months ended 2022 was $ 113 and $ 168 thousand, respectively. 31 The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The fair values of options granted during the nine months ended September 30, 2023 and 2022 were determined using the following weighted-average assumptions as of the grant date. Nine Months Ended September 30, 2023 2022 Annual dividend yield 1.69 % 1.59 % Expected volatility 28.15 % 26.48 % Risk-free interest rate 3.60 % 1.64 % Expected term 6.00 years 6.00 years Weighted-average grant date fair value per option granted $ 11.33 $ 9.95 There were no options granted during the three months ended September 30, 2023 or 2022. Restricted Stock Awards 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 periods of the awards. The restricted stock awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date. The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary dates of the grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company. The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended September 30, 2023: Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at July 1, 2023 16,342 $ 39.17 Granted — — Vested — — Forfeited — — Non-Vested at September 30, 2023 16,342 42.45 36.97 Expected to vest assuming a 0 % forfeiture rate over the vesting term 16,342 $ 42.45 $ 36.97 The following is a summary of the Company’s non-vested restricted stock award activity during the nine months ended September 30, 2023: Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at January 1, 2023 17,879 $ 37.63 Granted 8,850 40.13 Vested ( 9,962 ) 37.14 Forfeited ( 425 ) 41.95 Non-Vested at September 30, 2023 16,342 $ 42.45 $ 36.97 Expected to vest assuming a 0 % forfeiture rate over the vesting term 16,342 $ 42.45 $ 36.97 32 As of September 30, 2023, there was $ 459 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans. The cost is expected to be recognized over the weighted-average vesting period of 2.4 years. The total fair value of shares vested for the nine months ended September 30, 2023 and 2022 was $ 370 thousand and $ 306 thousand, respectively. Employee Stock Ownership Plan The fair value of the 162,523 shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) trust was $ 6.0 million at September 30, 2023. ESOP compensation expense included in salaries and benefits was $ 204 thousand and $ 612 thousand for the three and nine months ended September 30, 2023, and $ 205 thousand and $ 580 thousand for the three and nine months ended September 30, 2022, respectively. Note 11 – Leases We have operating leases for branch locations, a loan production office, our corporate office and in the past, for certain equipment. The term for our real estate leases begins on the date we become legally obligated for the rent payments or take possession of the building, whichever is earlier. Generally, our real estate leases have initial terms of three to ten years and typically include one renewal option. Our leases have remaining lease terms of one to six years . The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties. The following table presents the lease right-of-use assets and lease liabilities recorded on the Condensed Consolidated Balance Sheets at the dates indicated (in thousands): September 30, 2023 December 31, 2022 Operating lease right-of-use assets $ 4,732 $ 5,102 Operating lease liabilities $ 5,065 $ 5,448 The following table presents the components of lease expense for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Operating lease expense Office leases $ 270 $ 285 $ 808 $ 847 Sublease income ( 3 ) ( 3 ) ( 9 ) ( 9 ) Net lease expense $ 267 $ 282 $ 799 $ 838 The following table presents the schedule of lease liabilities at the date indicated (in thousands): September 30, 2023 Remainder of 2023 $ 278 2024 1,104 2025 958 2026 939 2027 957 Thereafter 1,222 Total lease payments 5,458 Less: Present value discount 393 Present value of lease liabilities $ 5,065 33 Lease term and discount rate by lease type consist of the following at the dates indicated: September 30, 2023 December 31, 2022 Weighted-average remaining lease term: Office leases 5.4 years 6.1 years Weighted-average discount rate (annualized): Office leases 2.77 % 2.63 % Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cash paid for amounts included in the measurement of lease liabilities for operating leases: Operating cash flows Office leases $ 277 $ 270 $ 815 $ 800 Note 12 – Subsequent Events On October 24, 2023, the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.19 per common share, payable on November 22, 2023 to stockholders of record at the close of business on November 8, 2023. 34 Table of Contents