What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-22 compared with 2023-03-14 · 561 added, 463 removed, 937 unchanged (52% of the section changed)

4 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet s of Sound Financial Bancorp, Inc.

and Subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of Sound Financial Bancorp, Inc., and Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses (Topic 326).

The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinion

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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan losses balance was $7.6 million at December 31, 2022.

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 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.

Determination of the assigned loan grades involves significant management judgement.

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 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, 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses on loans balance was $8.7 million at December 31, 2023.

The allowance for credit losses is maintained to provide

for estimated losses expected to occur over the estimated remaining life of the asset.

The Company incorporates relevant and reliable information from internal and external sources related to past events, current conditions, and a reasonable and supportable forecast.

The quantitative component of the reserve is calculated with a discounted cash flow model utilizing gross historical loss rates, adjusted for defaults, recoveries, expected prepayments, and an economic forecast based on unemployment.

Qualitative factors are used to estimate additional losses related to risks that are not captured in the quantitative reserve and are based on management’s evaluation of available internal and external data.

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

We identified the auditing of the allowance for credit losses on loans, including management’s use of reasonable and supportable forecasts of future economic conditions in the discounted cash flow model, and the estimation of qualitative factors, both of which are used in the estimate, as a critical audit matter.

Determination of the inputs into the discounted cash flow model involve significant management judgement based on selection of appropriate peer groups and management’s consideration of the forecast of relevant economic conditions.

The qualitative factors 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 loss rates 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.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address the critical audit matter included testing the Company’s process used by management to develop the estimate of the allowance for credit losses on loans by:

• Evaluating the appropriateness of the methodology used, including completeness and accuracy of the internal data and the relevance and reliability of the external data used in the calculation, application of the forecasted economic conditions, and qualitative factors determined by management and verifying calculations.

• Obtaining management’s analysis and supporting documentation related to the significant assumptions, including forecasted economic conditions, and evaluating whether the significant assumptions used in the forecasts are reasonable and supportable based on the analysis provided.

• Evaluating management’s analysis and supporting documentation related to the selection of the peer groups utilized in determining the quantitative component of the reserve are supported by the analysis provided by management.

• Obtaining management’s analysis of internal and external qualitative factors and evaluating the reasonableness of the qualitative factor adjustment used in the calculation.

/s/ Moss Adams LLP

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Cash and cash equivalents $ 49,690 $ 57,836

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)

Available-for-sale (“AFS”) securities, at fair value (amortized cost of $ 9,539 and $ 11,621 at December 31, 2023 and 2022, respectively)

Held-to-maturity (“HTM”) securities, at amortized cost (fair value of $ 1,787 and $ 1,810 at December 31, 2023 and 2022, respectively)

Loans held-for-sale 603 —

Loans held-for-portfolio 894,478 865,981

Allowance for loan losses ( 7,599 ) ( 6,306 )

Allowance for credit losses (“ACL”) on loans

( 8,760 ) ( 7,599 )

Total loans held-for-portfolio, net 885,718 858,382

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Bank-owned life insurance (“BOLI”), net

21,860 21,314

Other real estate owned (“OREO”) and repossessed assets, net

Mortgage servicing rights ("MSR"), at fair value 4,687 4,273

Mortgage servicing rights (“MSRs”), at fair value

Federal Home Loan Bank ("FHLB") stock, at cost 2,396 2,832

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Retained earnings 73,627 70,792

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

Accumulated other comprehensive loss, net of tax

( 988 ) ( 1,117 )

Total stockholders' equity 100,654 97,705

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Net interest income 33,850 35,295

PROVISION FOR LOAN LOSSES 1,225 425

Net interest income after provision for loan losses 34,070 29,495

(RELEASE OF) PROVISION FOR CREDIT LOSSES

( 273 ) 1,156

Net interest income after (release of) provision for credit losses

34,123 34,139

NONINTEREST INCOME

Service charges and fee income 2,527 2,368

Earnings on cash surrender value of BOLI 219 416

Earnings on BOLI

Mortgage servicing income 1,179 1,242

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Data processing 4,388 3,360

Net (gain)/loss and expenses on OREO and repossessed assets — ( 16 )

Net loss and expenses on OREO and repossessed assets

Total noninterest expense 30,129 27,845

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Net income $ 7,439 $ 8,804

Available for sale securities:

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 )

AFS securities:

Unrealized gains (losses) arising during the year

163 ( 1,590 )

Income tax (expense) benefit related to unrealized gains (losses)

Other comprehensive income (loss), net of tax

129 ( 1,256 )

Comprehensive income $ 7,568 $ 7,548

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Shares Common Stock Additional

Paid-in Capital Unearned

ESOP Shares Retained

Paid-in Capital Retained

Earnings Accumulated Other Comprehensive

Income (Loss), net of tax Total

(Loss) Income,

Stockholders' Equity

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2,583,619 $ 26 $ 28,004 $ 70,792 $ ( 1,117 ) $ 97,705

Impact of adoption of ASU No.

2016-13 ( 1,149 ) ( 1,149 )

Net income 7,439 7,439

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

Other comprehensive income, net of tax

Share-based compensation 450 450

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Shares Common Stock Additional

Paid-in Capital Unearned

ESOP Shares Retained

Paid-in Capital Retained

Earnings Accumulated Other Comprehensive

Income, net of tax Total

Income (Loss),

Stockholders' Equity

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Net income 8,804 8,804

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

Other comprehensive loss, net of tax benefit

( 1,256 ) ( 1,256 )

Share-based compensation 475 475

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( 2,031 ) ( 2,031 )

Common stock surrendered ( 4,091 ) —

Common stock repurchased ( 46,799 ) ( 516 ) ( 1,218 ) ( 1,734 )

Common stock surrendered ( 3,541 ) ( 134 ) ( 134 )

Restricted shares forfeited ( 930 ) —

Common stock options exercised 11,421 223 223

Allocation of ESOP shares 355 113 468

Balance at December 31, 2022

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Amortization of net discounts on investments 81 73

Provision for loan losses 1,225 425

(Reversal of) provision for credit losses

( 273 ) 1,156

Depreciation and amortization 717 704

Compensation expense related to stock options and restricted stock 475 360

Fair value adjustment on mortgage servicing rights ( 207 ) 808

Compensation expense related to share based compensation

Fair value adjustment on MSRs

Right of use assets amortization 935 895

Increase in cash surrender value of BOLI ( 612 ) ( 219 )

Net gain on BOLI death benefit ( 567 ) —

Deferred income tax ( 467 ) ( 149 )

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Originations of loans held-for-sale ( 19,762 ) ( 19,550 )

Net gain on OREO and repossessed assets — ( 16 )

Net loss on OREO and repossessed assets

Change in operating assets and liabilities:

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CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of available-for-sale securities ( 4,380 ) ( 1,950 )

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

Purchase of HTM investments ( 2,226 ) —

Purchase of AFS securities

Proceeds from principal payments, maturities and sales of AFS securities

Purchase of HTM securities

Proceeds from principal payments, maturities and sales of HTM securities 33 27

FHLB stock purchased ( 1,786 ) ( 169 )

Net increase in loans ( 28,660 ) ( 177,784 )

Purchase of BOLI — ( 6,091 )

Proceeds from death benefit of BOLI

Purchases of premises and equipment, net ( 444 ) ( 398 )

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Proceeds from borrowings 40,000 43,000

Repayment of borrowings ( 43,000 ) —

FHLB stock redeemed (purchased)

436 ( 1,786 )

Common stock repurchases ( 2,137 ) ( 1,734 )

Allocation of ESOP shares — 468

Dividends paid on common stock ( 1,913 ) ( 2,031 )

8 unchanged sentences

Interest paid on deposits, borrowings and subordinated debt 16,337 4,305

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

ROU assets obtained in exchange for new operating lease liabilities 329 186

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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 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").

As a Washington commercial bank that is not a member of the Board of Governors of the Federal Reserve System (“Federal Reserve”), 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 Federal Reserve.

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

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Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the fair value of MSRs, valuations of impaired loans and OREO, and the realization of deferred taxes.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses and the fair value of MSRs.

The accompanying consolidated financial statements include the accounts of Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc.

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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 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.

Investment securities – Investment securities are classified as HTM securities or AFS securities.

HTM securities are those securities 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.

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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.

The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relation to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether the Company intends to sell a security or if it is likely that the Company will be required to sell the security before recovery of its amortized cost basis of the investment, which may be maturity, and other factors.

For debt securities, if the Company intends to sell the security or it is likely that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI.

If the Company does not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings.

The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected.

Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI.

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 closely monitors its investment securities for changes in credit risk.

Allowance for Credit Losses on Investment Securities ( after adoption of ASC 326 ) – The ACL on investment securities is determined for both the HTM and AFS securities in accordance with Accounting Standards Codification (“ASC”) 326 - Financial Instruments - Credit Losses .

For AFS 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 we intend to sell, or 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.

For HTM securities, we evaluate at the end of each quarter whether any expected credit losses exist.

We determine expected credit losses on AFS and 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 AFS 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 AFS securities are measured on an individual basis, while credit losses on HTM securities are measured on a collective basis according to shared risk characteristics.

Credit losses on HTM securities are only recognized at the individual security level when we determine a security no longer possesses risk characteristics similar to other HTM securities 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 Consolidated Balance Sheets.

Loans held-for-sale – To mitigate interest-rate sensitivity, from time to time, certain fixed-rate mortgage loans are identified as held-for-sale in the secondary market.

Accordingly, such loans are classified as held-for-sale in the consolidated balance sheets and are carried at the lower of cost or estimated fair market value in the aggregate.

Accordingly, such loans are classified as held-for-sale in the Consolidated Balance Sheets and are carried at the lower of cost or estimated fair market value.

Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

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The ability of the Company’s debtors to honor their contracts is dependent upon employment, real estate and general economic conditions in these areas.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balance adjusted for any charge-offs, allowance for loan losses, and any deferred fees or costs on origination of loans.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balance adjusted for any charge-offs, the ACL, and any premiums, discounts, deferred fees or costs on origination of loans.

Interest income is accrued on the unpaid principal balance.

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Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current, future payments are reasonably assured and payments have been received for six consecutive months.

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) due according to the contractual terms of the original loan agreement.

When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as a practical expedient, the current fair value of the collateral, reduced by costs to sell, is used.

When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest), impairment is recognized by charging off the impaired portion or creating or adjusting a specific allocation of the allowance for loan losses.

The Company recognizes interest income on impaired loans, including cash receipts, based on its existing methods of recognizing interest income on nonaccrual loans.

A loan is classified as a troubled debt restructuring ("TDR") when certain concessions have been made to the contractual terms, such as reductions of interest rates or deferrals of interest or principal payments due to the borrower's deteriorated financial condition.

All TDRs are reported and accounted for as impaired loans.

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.

Portions of the allowance may be allocated for specific loans;

however, the allowance is available for any loan that is charged off.

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.

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.

The allowance for loan losses is maintained at a level sufficient to provide for probable credit losses based upon evaluating known and inherent risks in the loan portfolio.

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

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 allowance consists of specific, general and unallocated components.

The general component of the allowance for loan losses covers non-impaired loans and is determined using a formula-based approach.

The formula first incorporates either the historical loss rates of the Company or the historical loss rates of its peer group if minimal loss history exists.

This historical loss rate factor is then adjusted for qualitative factors.

Finally, the general component of the allowance for loan losses is adjusted for changes in the assigned grades of loans, which include the following:

pass, watch, special mention, substandard, doubtful, and loss.

As loans are downgraded from watch to the lower categories, they are assigned an additional factor to account for the increased credit risk.

Loan grades involve significant management judgment.

For such loans that are also classified as impaired, a specific component within the allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan.

An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The Company considers installment loans to be pools of smaller balance, homogenous loans that are collectively evaluated for impairment, unless such loans are subject to a TDR agreement.

The appropriateness of the allowance for loan losses is estimated based upon those factors and trends identified by management at the time consolidated financial statements are prepared.

When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses.

The existence of some or all of the following criteria will generally confirm that a loss has been incurred:

the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current;

the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt;

the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.

The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control.

These factors may result in losses or recoveries differing significantly from those provided in the consolidated financial statements.

Allowance for Credit Losses on Loans ( after adoption of ASC 326 ) – The ACL is measured using the current expected credit losses (“CECL”) approach for financial instruments measured at amortized cost and other commitments to extend credit.

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

The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.

The ACL consists of two elements:

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

We maintain a loan review system that provides a periodic review of the loan portfolio and the identification of individually analyzed loans.

For loans that do not share risk characteristics with other loans, expected credit loss is measured on net realizable value that is the difference between the discounted value of the expected future cash flows, based on the original effective interest rate and the amortized cost basis of the loan.

For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan fees and costs), except when the loan is collateral dependent, which is when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the

collateral (collateral dependent loans).

For collateral dependent loans we elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, which considers selling costs in the event sale of the collateral is expected.

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

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

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

Segments are based upon federal call report segmentation.

The reserve was applied on a loan-by-loan basis and condensed into the applicable segments reported in “Note 5— Loans.”

The ACL is measured on a collective basis for pools of loans with similar risk characteristics.

We have identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:

• Construction — While secured by real estate, construction loans represent a greater level of risk than term real estate loans due to the nature of the additional risks associated with not only the completion of construction within an estimated time period and budget, but also the need to sell the building or reach a level of stabilized occupancy sufficient to generate cash flows necessary to support debt service and operating costs.

Some loans are originated to a borrower who will occupy the property.

There is risk the borrower will not be able to obtain permanent financing upon the completion of construction.

We seek to mitigate the additional risks associated with construction lending by requiring borrowers to comply with lower loan-to-value ratios and additional covenants as well as strong financial support of guarantors or borrowers.

• One-to-four family residential closed end loans secured by first liens — The most significant drivers of potential loss within our residential real estate portfolio relate to general, regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow.

Risk in this portfolio is best measured by changes in borrower credit score and loan-to-value.

Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the value of homes and historical loss experience adjusted to reflect the economic outlook and the unemployment rate.

• One-to-four family residential secured by junior liens — Similar to residential real estate first lien loans, junior liens performance is also primarily driven by borrower cash flows based on employment status.

However, junior liens carry additional risks associated with the fact that most of these loans are secured by a deed of trust in a position that is junior to the primary lien holder.

Furthermore, for home equity lines of credit (“HELOCs”), there is risk that as the borrower's financial strength deteriorates, the outstanding balance on these credit lines may increase since they may only be canceled by the Company if certain limited criteria are met.

For HELOCs, in addition to the ACL maintained as a percent of the outstanding loan balance, we maintain additional reserves for the unfunded portion of the HELOC.

• Commercial and multifamily real estate — Non-owner occupied commercial and multifamily properties typically consist of buildings which are leased to others for their use and rely on rents as the primary source of repayment.

Owner occupied commercial generally rely on the financial condition of the business operated by the property owner.

Property types are predominantly office, retail, light industrial, or multifamily but the portfolio also has some special use properties.

As such, the risk of loss associated with these properties is primarily driven by general economic changes or changes in regional economies and the impact of such on a tenant’s or the operating business’ ability to pay.

Due to the nature of their use and the greater likelihood of tenant turnover, the management of these properties is more intensive and therefore is more critical to the preclusion of loss.

Ultimately this can affect occupancy, rental rates, or both.

Additional risk of loss can come from new construction resulting in oversupply, the costs to hold or operate the property, or changes in interest rates.

The terms on these loans at origination typically have maturities from five to 10 years with amortization periods from 15 to 25 years.

• Commercial and industrial — Repayment of these loans is primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the borrower.

A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.

Most often, collateral includes accounts receivable, inventory, or equipment.

Collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.

Actual and forecast changes in gross domestic product are believed to be corollary to losses associated with these loans.

• Other consumer loans — These loans are susceptible to three primary risks;

non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value, if any.

Typically, non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate.

Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of those factors.

Revolving lines of credit are unsecured and while collection efforts are pursued in the event of default, there is typically limited opportunity for recovery.

The ACL quantitative allowance for each segment is measured using a discounted cash flow methodology incorporating a gross historical loss rate.

Required cash flows over the contractual life of the loans are the basis for the cash flows utilized in the model, adjusted for defaults, recoveries, and expected prepayments.

The contractual term excludes expected extensions, renewals, and modifications.

The quantitative analysis utilizes macroeconomic variables to establish a quantitative relationship between economic conditions and loan performance through an economic cycle.

Using the historical relationship between economic conditions and loan performance, our expectation of future loan performance is incorporated using an economic forecast based upon unemployment.

The forecast is applied over a period that we determined to be reasonable and supportable.

Beyond the period over which we can develop or source a reasonable and supportable forecast, the model reverts to long-term average historical loss rates using a straight-line, time-based methodology over the next four quarters.

Our current forecast period is four quarters, with a four-quarter reversion period to long-term average historical loss rates.

After quantitative considerations, we apply additional qualitative adjustments that consider the expected impact of certain factors not fully captured in the quantitative reserve.

The qualitative considerations are constructed within a framework that ranges from zero expected losses (minimum) to a maximum historical loss rate.

The maximum historical loss rate is the highest two-year loss rate produced by the base historical loss rate model.

Qualitative adjustments include but are not limited to changes in lending policies;

changes in nature and volume of the portfolio;

change in staff experience level;

changes in the volume or trends of classified loans, delinquencies, and nonaccrual;

concentration risk;

value of underlying collateral;

competitive, legal, and regulatory factors;

changes in the loan review system;

and economic conditions.

Management has assigned weightings for each qualitative factor as to the relative importance of that factor to each segment.

The qualitative factors are evaluated using a five-point scale ranging from improvement to major risk.

Improvement represents an adjustment down to the minimum historical loss rate.

Major risk represents an adjustment up to the maximum historical loss rate.

The rating of the qualitative factor and the allocated weighting determines the adjustment to the historical loss rate.

The ACL is established through the provision for credit losses that is reported in the Consolidated Statements of Income, which is based upon an evaluation of estimated losses in the current loan portfolio, including the evaluation of individually analyzed loans.

Charge-offs against the ACL are taken on loans where we determine that the collection of loan principal and interest is unlikely.

Recoveries made on loans that have been charged-off are credited to the ACL.

Although we believe we have established and maintained the ACL on loans at appropriate levels, changes in reserves may be necessary if actual economic and other conditions differ substantially from the forecast used in estimating the ACL.

We evaluate our ACL policy and judgments on an ongoing basis and update them as necessary based on changing conditions.

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

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

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

Accrued interest receivable for loans is reported in accrued interest receivable balances in the Consolidated Balance Sheets.

We elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if we believe the collection of interest is doubtful.

We concluded that this policy results in the timely reversal of uncollectable interest.

Allowance for Credit Losses on Unfunded Commitments (after adoption of ASC 326) – We are required to include unfunded commitments that are expected to be funded in the future within the ACL calculation, other than for those that are unconditionally cancellable.

To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate.

To determine the expected funding rate, we utilize a peer-based historical utilization rate for each segment.

The ACL for off-balance-sheet exposures is reported in other liabilities in the Consolidated Balance Sheets.

The liability represents an estimate of expected credit losses arising from off-balance-sheet exposures such as unfunded commitments.

Modified Loans to Borrowers Experiencing Financial Difficulty – Modified loans are reviewed to determine if the modification was done for borrowers experiencing financial difficulty.

Concessions may be granted in various forms, including a reduction in the stated interest rate, reduction in the loan balance or accrued interest, extension of the maturity date, or a combination of these.

We refer to these loan modifications to borrowers experiencing financial difficulty as modified loans to troubled borrowers.

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.

Allowance for loan losses ( before adoption of ASC 326 ) – The allowance for loan losses was a reserve established through a provision for loan losses charged to expense and represented management's best estimate of probable incurred losses within the existing loan portfolio as of the balance sheet date.

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

Portions of the allowance were allocated for specific loans;

however, the allowance was available for any loan that was charged off.

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

Loan charge-offs were recognized when management believed the collectability of the principal balance outstanding was unlikely.

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

The allowance for loan losses was maintained at a level sufficient to provide for probable credit losses based upon evaluating known and inherent risks in the loan portfolio.

The allowance was provided based upon management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio.

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

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

The allowance consisted of specific, general and unallocated components.

Transfers of financial assets – Transfers of an entire financial asset, or a participating interest in an entire financial asset, are accounted for as sales when control over the assets has been surrendered.

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

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

The Company measures its mortgage servicing assets at fair value and reports changes in fair value through earnings under the caption fair value adjustment on MSRs in other income in the period in which the change occurs.

The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimates and actual prepayment speeds and default rates and losses.

Changes in the fair values of servicing rights occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions.

Currently, we do not hedge the effects of changes in fair value of our servicing assets.

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Federal Home Loan Bank stock – The Company is a member of the FHLB of Des Moines.

FHLB stock represents the Company's investment in the FHLB and is carried at par value, which reasonably approximates its fair value.

FHLB stock represents the Company's investment in the FHLB and is carried at cost, which reasonably approximates its fair value.

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.

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At the time of foreclosure, OREO and repossessed assets are recorded at fair value less estimated costs to sell, which becomes the new basis.

Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan and lease losses.

Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for credit losses.

After foreclosure, management periodically performs valuations such that the property is carried at the lower of its new cost basis or fair value, net of estimated costs to sell.

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Such financial instruments are recorded when they are funded.

The Company also maintains a separate allowance for off-balance sheet credit commitments.

Management estimates anticipated losses using historical data and utilization assumptions.

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.

The Company also maintains a separate allowance for credit losses for off-balance sheet credit commitments.

Management estimates anticipated losses using expected loss factors consistent with those used for the ACL methodology for loans described above, and utilization assumptions based on historical experience.

The allowance for credit losses for off-balance sheet credit commitments totaled $ 193 thousand and $ 335 thousand at December 31, 2023 and 2022, respectively, and is included in other liabilities on the Consolidated Balance Sheets.

Provision for credit losses for off-balance sheet credit commitments is included in provision for credit on the Consolidated Statements of Income.

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

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Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income.

Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component of the equity section of the consolidated balance sheets, net of tax.

Certain changes in assets and liabilities, such as unrealized gains and losses on AFS securities, are reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets, net of tax.

Such items, along with net income, are components of comprehensive income.

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No impairment losses have been recognized in the periods presented.

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

Employee stock ownership plan (“ESOP”) – The Company sponsors an 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.

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See "Note 14—Employee Benefits" for further information.

Unearned ESOP shares are shown as a reduction of stockholders' equity.

When the shares are released, unearned common shares held by the ESOP are reduced by the cost of the ESOP shares released and the differential between the fair value and the cost is charged to additional paid in capital.

The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability on the Company's consolidated statements of condition.

Earnings per common share – Earnings per share is computed using the two-class method.

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Diluted earnings per share is computed by dividing net income available to common stockholders adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of common shares determined for the basic earnings per share plus the dilutive effect of common stock equivalents using the treasury stock method based on the average market price for the period.

Some stock options are anti-dilutive and therefore are not included in the calculation of diluted earnings per share.

Anti-dilutive shares or stock options are excluded from the calculation of diluted earnings per share.

Fair value – Fair value is the price that would be received when an asset is sold or a liability is transferred in an orderly transaction between market participants at the measurement date.

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The results of the reclassifications are typically not considered material and have no effect on previously reported net income, earnings per share or stockholders' equity.

There were no reclassifications to prior year amounts in the current year.

Certain prior period amounts have been reclassified to conform to current period presentation, including reclassification of the provision for losses on unfunded loan commitments from being included in other noninterest expense to being included within provision for credit losses.

There were no other reclassifications to prior year amounts in the current year.

Note 2— Accounting Pronouncements Recently Issued or Adopted

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

This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

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 Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance:

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

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;

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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.

The amendments in this ASU had differing effective dates, beginning with interim period including and subsequent to March 12, 2020 through December 31, 2022.

The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No.

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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.

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 clarify the codification and correct unintended application of the guidance.

This ASU replaces the 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.

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.

2019-10, Financial Instruments - Credit Losses (Topic 326) , delaying implementation of ASU No.

2016-13 for SEC smaller reporting company filers until fiscal years beginning after December 15, 2022.

The 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.

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 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

ASC 326 Prior to Adopting

ASC 326 Impact of ASC 326

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

ACL - 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 .

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.

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 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.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures , which expands disclosures about a public entity’s reportable segments and requires more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources.

The update will be effective for annual periods beginning after December 15, 2023.

ASU 2023-07 will not have an impact on the Company's financial position or results of operation as it impacts disclosures only.

We are assessing the impact on our disclosures.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures .

This ASU requires public business entities to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold.

This ASU was released in response to stakeholder feedback indicating that

the existing income tax disclosures should be enhanced to provide information to better assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows.

This ASU’s amendments are effective for public business entities for annual periods beginning after December 15, 2024, with early adoption permitted.

The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

Note 3— Restricted Cash

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.

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;

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Note 4— Investments

The amortized cost and fair value of available-for-sale securities and the corresponding amounts of gross unrealized gains and losses at December 31, 2022 and 2021 were as follows (in thousands):

The amortized cost and fair value of AFS securities and the corresponding amounts of gross unrealized gains and losses at December 31, 2023 and 2022 were as follows (in thousands):

Unrealized Gains Gross

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December 31, 2023

Municipal bonds $ 6,394 $ 12 $ ( 878 ) $ 5,528

Agency mortgage-backed securities 3,145 7 ( 393 ) 2,759

Total AFS securities

$ 9,539 $ 19 $ ( 1,271 ) $ 8,287

December 31, 2022

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

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Agency mortgage-backed securities 3,591 1 ( 400 ) 3,192

Total available-for-sale securities $ 11,621 $ 17 $ ( 1,431 ) $ 10,207

Total AFS securities

$ 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 December 31, 2023 and 2022 are shown in the table below (in thousands):

December 31, 2023

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Agency mortgage-backed securities 1,462 — ( 215 ) 1,247

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

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

There were no HTM securities at December 31, 2021.

Losses Estimated

Total HTM securities

$ 2,166 $ — $ ( 379 ) $ 1,787

December 31, 2022

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

Total $ 2,199 $ — $ ( 388 ) $ 1,810

Total HTM securities

$ 2,199 $ — $ ( 388 ) $ 1,810

The amortized cost and fair value of AFS and HTM securities at December 31, 2023, by contractual maturity, are shown below (in thousands).

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December 31, 2023

Available-for-sale Held-to-maturity

Value Weighted-Average Yield Amortized

Value Weighted-Average Yield

Due within one year $ 1,596 $ 1,594 2.86 % $ — $ — — %

Due in one to five years 151 151 3.57 — — —

Due in one year or less

$ — $ — — % $ — $ — — %

Due after one to five years

455 455 5.06 — — —

Due after five to ten years 1,198 1,210 5.43 — — —

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There were no pledged securities at December 31, 2023 and 2022.

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.

There were no sales of AFS or HTM securities during the years ended December 31, 2023 and 2022.

Accrued interest receivable on securities totaled $ 49 thousand and $ 54 thousand at December 31, 2023 and 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 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, 2023 and 2022 (in thousands).

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Value Unrealized

Available-for-sale securities

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

AFS securities

Municipal bonds $ — $ — $ 3,862 $ ( 878 ) $ 3,862 $ ( 878 )

Agency mortgage-backed securities 48 ( 1 ) 2,290 ( 392 ) 2,338 ( 393 )

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

Held-to-maturity securities

Total AFS securities

$ 48 $ ( 1 ) $ 6,152 $ ( 1,270 ) $ 6,200 $ ( 1,271 )

HTM securities

Municipal bonds $ — $ — $ 540 $ ( 164 ) $ 540 $ ( 164 )

Agency mortgage-backed securities — — 1,247 ( 215 ) 1,247 ( 215 )

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

Total HTM securities

$ — $ — $ 1,787 $ ( 379 ) $ 1,787 $ ( 379 )

December 31, 2022

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Value Unrealized

AFS 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 AFS securities

$ 6,766 $ ( 957 ) $ 1,538 $ ( 474 ) $ 8,304 $ ( 1,431 )

HTM securities

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

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

Total HTM securities

$ 1,810 $ ( 388 ) $ — $ — $ 1,810 $ ( 388 )

There were no credit losses recognized in earnings during the years ended December 31, 2023 and 2022 relating to the Company's securities.

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, 2023, the securities portfolio consisted of 11 municipal bonds and 12 agency mortgage-backed securities with a total portfolio fair value of $ 10.1 million.

At December 31, 2022, the securities portfolio consisted of one treasury bill security, 11 municipal bonds and 12 agency mortgage-backed securities with a fair value of $ 12.0 million.

At December 31, 2023, there was one security in an unrealized loss position for less than 12 months, and sixteen securities in an unrealized loss position for more than 12 months.

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.

For both 2023 and 2022, the unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral.

It is expected that these securities will not be settled at a price less than the amortized cost of each investment.

The unrealized losses on these investments are not considered OTTI losses during the years ended December 31, 2022 and 2021, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

The unrealized losses on these investments are not considered credit losses during the years ended December 31, 2023 and 2022, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

Note 5— Loans

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Premiums for purchased loans (1)

Deferred fees ( 2,548 ) ( 2,367 )

Deferred fees, net

( 2,511 ) ( 2,548 )

Total loans, gross 894,478 865,981

Allowance for loan losses ( 7,599 ) ( 6,306 )

Allowance for credit losses - loans

( 8,760 ) ( 7,599 )

Total loans, net $ 885,718 $ 858,382

(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.

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.

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, 2022 and 2021 (in thousands):

December 31, 2022

Individually Evaluated for Impairment Allowance:

Collectively Evaluated for Impairment Ending Balance Loans Held for Investment:

Individually Evaluated for Impairment Loans Held for Investment:

Collectively Evaluated for Impairment Ending Balance

One-to-four family $ 102 $ 1,669 $ 1,771 $ 3,746 $ 270,892 $ 274,638

Home equity 5 127 132 210 19,338 19,548

Commercial and multifamily — 2,501 2,501 — 313,358 313,358

Construction and land 3 1,206 1,209 358 116,520 116,878

Manufactured homes 52 410 462 187 26,766 26,953

Floating homes — 456 456 — 74,443 74,443

Other consumer 22 302 324 343 17,580 17,923

Commercial business — 256 256 — 23,815 23,815

Unallocated — 488 488 — — —

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

December 31, 2021

Individually Evaluated for Impairment Allowance:

Collectively Evaluated for Impairment Ending Balance Loans Held for Investment:

Individually Evaluated for Impairment Loans Held for Investment:

Collectively Evaluated for Impairment Ending Balance

(1) Premiums resulting from purchased loans totaled $ 465 thousand on one-to-four family loans, $ 280 thousand on commercial and multifamily loans, and $ 84 thousand on commercial business loans as of December 31, 2023.

Premiums resulting from purchased loans totaled $ 507 thousand on one-to-four family loans, $ 320 thousand on commercial and multifamily loans, and $ 146 thousand on commercial business loans as of December 31, 2022.

The Company purchased no loans during the year ended December 31, 2023.

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

The following table presents a summary of activity in the ACL on loans and unfunded commitments for the periods indicated (in thousands):

Year ended December 31, 2023

ACL - Unfunded Loan Commitments

Allowance for loan losses

Reserve for Unfunded Loan Commitments

Total Allowance for Loan 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 564 ( 837 ) ( 273 ) 1,225 ( 69 ) 1,156

Net (charge-offs)/recoveries during the period ( 163 ) — ( 163 ) 68 — 68

Balance at end of period $ 8,760 $ 193 $ 8,953 $ 7,599 $ 335 $ 7,934

(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 estimate our ACL 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 $ 3.4 million and $ 3.0 million at December 31, 2023 and December 31, 2022, respectively, in the accompanying Consolidated Balance Sheets .

Accrued interest receivable is excluded from the estimate of expected credit losses.

The following tables summarize the activity in the ACL for the year ended December 31, 2023 and the allowance for loan losses for the year ended December 31, 2022 (in thousands):

Year ended December 31, 2023

Allowance Impact of Adoption of ASU 2016-13

Charge-offs Recoveries Provision (Release of)

One-to-four family $ 1,771 $ 355 $ — $ — $ 504 $ 2,630

Home equity (1)

132 69 ( 25 ) — 9 185

Commercial and multifamily 2,501 ( 320 ) — — ( 1,111 ) 1,070

3 unchanged sentences

Other consumer (2)

324 ( 163 ) ( 179 ) 41 403 426

Commercial business 256 ( 35 ) — — ( 114 ) 107

Unallocated 488 ( 491 ) — — 3 —

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

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

$ 7,599 $ 760 $ ( 204 ) $ 41 $ 564 $ 8,760

(1) During the year ended December 31, 2023, there was one revolving home equity loan that was charged off.

(2) During the year ended December 31, 2023, gross charge-offs related primarily to deposit overdrafts that were charged off.

Year ended December 31, 2022

Allowance Charge-offs Recoveries Provision/(Recapture) Ending

Allowance Charge-offs Recoveries Provision (Release of)

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

8 unchanged sentences

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

Year ended December 31, 2021

Allowance Charge-offs Recoveries Provision/(Recapture) Ending

Credit Quality Indicators.

Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

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

Assets classified as "doubtful" have all of the weaknesses in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

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.

When we classify problem assets as a loss, we are 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 FDIC (the Bank’s federal regulator) and the WDFI (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 as substandard or doubtful but possess weaknesses are required to be designated as special mention.

There were no loans classified as doubtful or loss as of December 31, 2023 and 2022.

The following table presents the internally assigned grades as of December 31, 2023, by type of loan and origination year (in thousands):

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:

Home equity 147 ( 8 ) 6 ( 52 ) 93

Pass $ 26,272 $ 84,467 $ 110,488 $ 16,126 $ 13,029 $ 28,139 $ — $ — $ 278,521

Substandard — 259 119 — 260 553 — — 1,191

Total one-to-four family $ 26,272 $ 84,726 $ 110,607 $ 16,126 $ 13,289 $ 28,692 $ — $ — $ 279,712

Pass $ 3,963 $ 2,783 $ 1,072 $ 302 $ 95 $ 1,608 $ 12,982 $ 2 $ 22,807

Substandard — — — — — 63 445 — 508

Total home equity $ 3,963 $ 2,783 $ 1,072 $ 302 $ 95 $ 1,671 $ 13,427 $ 2 $ 23,315

Commercial and multifamily:

Pass $ 21,144 $ 75,960 $ 93,932 $ 22,731 $ 29,822 $ 58,388 $ — $ — $ 301,977

Special mention — — — 3,365 — 350 — — 3,715

Substandard — 1,036 — 1,317 5,134 1,121 — — 8,608

Total commercial and multifamily $ 21,144 $ 76,996 $ 93,932 $ 27,413 $ 34,956 $ 59,859 $ — $ — $ 314,300

Construction and land:

Pass $ 32,057 $ 53,302 $ 36,285 $ 967 $ 601 $ 2,031 $ — $ — $ 125,243

Substandard — — — — 689 44 — — 733

Total construction and land $ 32,057 $ 53,302 $ 36,285 $ 967 $ 1,290 $ 2,075 $ — $ — $ 125,976

Manufactured homes:

Pass $ 13,696 $ 7,958 $ 4,365 $ 2,160 $ 2,075 $ 5,498 $ — $ — $ 35,752

Substandard 115 46 — 22 86 64 — — 333

Total manufactured homes $ 13,811 $ 8,004 $ 4,365 $ 2,182 $ 2,161 $ 5,562 $ — $ — $ 36,085

Floating homes:

Pass $ 8,779 $ 21,555 $ 26,196 $ 6,471 $ 1,865 $ 9,867 $ — $ — $ 74,733

Total floating homes $ 8,779 $ 21,555 $ 26,196 $ 6,471 $ 1,865 $ 9,867 $ — $ — $ 74,733

Other consumer:

Pass $ 4,629 $ 1,845 $ 3,884 $ 5,883 $ 598 $ 2,237 $ 539 $ — $ 19,615

Total other consumer $ 4,629 $ 1,845 $ 3,884 $ 5,883 $ 598 $ 2,237 $ 539 $ — $ 19,615

Commercial business:

Unallocated 406 — — ( 11 ) 395

$ 6,000 $ ( 136 ) $ 17 $ 425 $ 6,306

Credit Quality Indicators.

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

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).

General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets.

When the Company classifies problem loans as a loss, it charges-off such loans in the period in which they are deemed uncollectible.

Assets that do not currently expose the Company to sufficient risk to warrant classification as substandard or doubtful, but possess identified weaknesses are classified as either watch or special mention loans.

Determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC, the Bank's federal regulator, and the WDFI, the Bank's state banking regulator, both of whom can order the establishment of additional loss allowances.

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

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

and Multifamily Construction

and Land Manufactured

Homes Floating

Consumer Commercial

Business Total

Pass $ 987 $ 437 $ 3,564 $ 400 $ 227 $ 5,848 $ 6,854 $ — $ 18,317

Watch 279 2 7,538 4,037 134 — — 161 12,151

Substandard 2,128 53 204 — — — 40 — 2,425

Total commercial business $ 3,115 $ 490 $ 3,768 $ 400 $ 227 $ 5,848 $ 6,894 $ — $ 20,742

Pass $ 111,527 $ 248,307 $ 279,786 $ 55,040 $ 48,312 $ 113,616 $ 20,375 $ 2 $ 876,965

Special mention — — — 3,365 — 350 — — 3,715

Substandard 2,243 1,394 323 1,339 6,169 1,845 485 — 13,798

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

Total loans $ 113,770 $ 249,701 $ 280,109 $ 59,744 $ 54,481 $ 115,811 $ 20,860 $ 2 $ 894,478

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

December 31, 2022

12 unchanged sentences

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

Loans are placed on nonaccrual once the loan is 90 days past due or sooner if, in management's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.

The following table presents the recorded investment in nonaccrual loans at December 31, 2022 and 2021, by type of loan (in thousands):

The following table presents the amortized cost of nonaccrual loans at December 31, 2023 and 2022, by type of loan (in thousands):

December 31, 2023 December 31, 2022

with no ACL Total

One-to-four family $ 1,108 $ 848 $ 2,135 $ 2,135

Home equity 84 84 142 142

Commercial and multifamily — 2,380

Construction and land — — 324 324

Manufactured homes 228 228 96 52

Floating homes — 493

Other consumer 1 — 262 262

1 unchanged sentence

Total $ 3,556 $ 3,295 $ 2,959 $ 2,915

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

The following tables present the aging of past due loans, as of the dates indicated, by type of loan (in thousands):

December 31, 2023

Past Due 60-89 Days

Past Due Greater than 90

Days Past Due Recorded Investment

> 90 Days and Accruing Total

Past Due 90 Days

and Greater Past Due and

Past Due Current Total

8 unchanged sentences

Total $ 5,024 $ 5,211 $ 3,064 $ — $ 13,299 $ 881,153 $ 894,452

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

December 31, 2022

Past Due 60-89 Days

Past Due Greater Than 90

Days Past Due Recorded Investment

> 90 Days and Accruing Total

Past Due 90 Days

and Greater Past Due and

Past Due Current Total

8 unchanged sentences

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

Nonperforming Loans.

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

and Multifamily Construction

and Land Manufactured

Homes Floating

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

December 31, 2021

Equity Commercial

and Multifamily Construction

and Land Manufactured

Homes Floating

Consumer Commercial

Business Total

Performing $ 205,453 $ 13,110 $ 275,795 $ 63,072 $ 21,514 $ 58,775 $ 16,748 $ 27,850 $ 682,316

Nonperforming 2,207 140 2,380 33 122 493 — 176 5,552

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

Impaired Loans .

A loan is considered impaired when it is determined that the Company may not be able to collect payments of principal or interest when due under the terms of the loan.

In the process of identifying loans as impaired, the Company takes into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future.

Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired.

The significance of payment delays and shortfalls is considered on a case-by-case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, including payment history.

Impairment is measured on a loan-by-loan basis for all loans in the portfolio.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.

Impaired loans at December 31, 2022 and 2021, by type of loan were as follows (in thousands):

Loan Modifications to Borrowers Experiencing Financial Difficulty.

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 December 31, 2023, the Company had no commitments to extend additional credit to borrowers owing loan receivables with modified terms.

During the year ended December 31, 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.

We have no modified loans to troubled borrowers that have subsequently defaulted at December 31, 2023.

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 legacy TDRs totaled $ 1.7 million and $ 2.0 million at December 31, 2023 and 2022, respectively.

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):

December 31, 2023

Recorded Investment

Unpaid Principal

Balance Without

Allowance With

Allowance Total

Investment Related

Commercial Real Estate Residential Real Estate Land Other Residential Total

Real estate loans:

One- to four- family $ — $ 664 $ — $ 545 $ 1,209

Home equity — 84 — — 84

Construction and land 358 324 34 358 3

Total real estate loans — 748 — 545 1,293

Consumer loans:

Manufactured homes — — — 228 228

Other consumer 343 261 82 343 22

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

Total consumer loans — — — 228 228

Commercial business loans — — — 2,135 2,135

Total loans $ — $ 748 $ — $ 2,908 $ 3,656

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 include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future.

Minor payment delays and insignificant payment shortfalls typically 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 December 31, 2022, by type of loan were as follows (in thousands):

December 31, 2022

7 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

The following table provides the average recorded investment and interest income on impaired loans for the year ended December 31, 2022 and 2021, by type of loan (in thousands):

December 31, 2022

The following table provides the average recorded investment and interest income on impaired loans for the year ended December 31, 2022, by type of loan (in thousands):

December 31, 2022

Investment Interest Income

Recognized Average

Investment Interest Income

One-to-four family $ 3,628 $ 106

7 unchanged sentences

Total $ 6,041 $ 174

Forgone interest on nonaccrual loans was $ 174 thousand and $ 138 thousand for the year ended December 31, 2022 and 2021, respectively.

Troubled debt restructurings.

TDRs, accounted for under ASC 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.

Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity.

Once a TDR has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, we remove the TDR from nonperforming status.

Loans classified as TDRs totaled $ 2.0 million and $ 2.6 million at December 31, 2022 and 2021, respectively, and are included in impaired loans.

The Company has granted, in its TDRs, a variety of concessions to borrowers in the form of loan modifications.

The modifications granted can generally be described in the following categories:

Rate Modification :

A modification in which the interest rate is changed.

Term Modification :

A modification in which the maturity date, timing of payments or frequency of payments is changed.

Payment Modifications:

A modification in which the dollar amount of the payment is changed.

Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category.

Combination Modification :

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

There were 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:

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.

11 unchanged sentences

Note 6— Mortgage Servicing Rights

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.

The unpaid principal balances underlying the Company’s MSRs portfolio totaled $ 448.9 million at December 31, 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 December 31, 2023 and 2022 was $ 446.8 million and $ 470.3 million, respectively.

1 unchanged sentence

Loans serviced for Fannie Mae and 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 at December 31, 2022 and 2021 were as follows (in thousands):

A summary of the change in the balance of MSRs at December 31, 2023 and 2022 were as follows (in thousands):

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

Servicing rights that result from transfers and sale of financial assets 207 1,301

MSRs that result from transfers and sale of financial assets

Changes in fair value:

6 unchanged sentences

Yield to maturity discount rate 12.5 % 12.5 %

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.

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 for both the years ended December 31, 2023 and 2022.

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

14 unchanged sentences

Beginning balance, January 1 $ 659 $ 659

Additions to OREO and repossessed assets — 84

Sales — ( 19 )

Ending balance, December 31 $ 575 $ 659

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

As of December 31, 2023, there were three one-to-four family loans totaling $ 457 thousand that were in process of foreclosure.

Note 9— Deposits

12 unchanged sentences

2024 $ 249,457

Thereafter 12

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

Certificates of deposit have maturities of six years or less.

Certificates of deposit have maturities of 5 years or less.

The aggregate amount of time deposits in denominations of more than $ 250 thousand at December 31, 2023 and 2022, totaled $ 88.3 million and $ 56.1 million, respectively.

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

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

There was $ 5.0 million in money market brokered deposits outstanding at December 31, 2023 and none at December 31, 2022.

Deposits from related parties held by the Company were $ 3.6 million and $ 8.1 million at December 31, 2023 and 2022, respectively.

Note 10— Borrowings, FHLB Stock and Subordinated Notes

The Company utilizes a loan agreement with the FHLB of Des Moines, the terms of which call for a blanket pledge of a portion of the Company's mortgage and commercial and multifamily portfolios based on the outstanding balance.

At December 31, 2022 and 2021, the maximum amount available to borrow under this credit facility was $ 442.1 million and $ 417.7 million, respectively, subject to eligible pledged collateral.

At December 31, 2022, the credit facility was collateralized as follows:

one-to-four family mortgage loans with an advance equivalent of $ 204.1 million, commercial and multifamily mortgage loans with an advance equivalent of $ 45.4 million and home equity loans with an advance equivalent of $ 505 thousand.

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

one-to-four family mortgage loans with an advance equivalent of $ 59.7 million, commercial and multifamily mortgage loans with an advance equivalent of $ 52.9 million and home equity loans with an advance equivalent of $ 482 thousand.

The Company had $ 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, 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.

FHLB Advances

The following tables present advances from the FHLB as of the dates indicated (dollars in thousands):

FHLB advances:

Overnight advances

Short-term advances

Long-term advances

$ 40,000 $ 43,000

December 31, 2023 December 31, 2022

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 %

The following table presents the maturity of our FHLB advances (dollars in thousands):

2024 $ 15,000

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 one-to-four family mortgage loan and commercial and multifamily loan portfolios based on the outstanding balance under the Company’s loan agreement with the FHLB of Des Moines.

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 (dollars in thousands):

December 31, 2023 December 31, 2022

Amount available to borrow under credit facility (1)

$ 463,541 $ 442,078

Loans pledged as collateral for borrowings

344,572 350,362

Advance equivalent of collateral:

One-to-four family mortgage loans 196,547 204,097

Commercial and multifamily mortgage loans 34,464 45,437

Home equity loans 348 505

Notional amount of letters of credit outstanding 10,000 8,000

Remaining FHLB borrowing capacity (2)

$ 181,360 $ 199,039

(1) Subject to eligible pledged collateral.

(2) Amount remaining from the advance equivalent of collateral less letters of credit outstanding and FHLB advances.

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 December 31, 2023 and 2022, the Company had an investment of $ 2.4 million and $ 2.8 million, respectively, in FHLB of Des Moines stock.

Federal Reserve Bank of San Francisco Borrowings

The Company has a borrowing agreement with the Federal Reserve Bank of San Francisco.

The terms of the agreement call for a blanket pledge of a portion of the Company’s consumer and commercial business loans based on the outstanding balance under the Company’s borrowing agreement with the Federal Reserve Bank of San Francisco.

At December 31, 2023 and December 31, 2022, the amount available to borrow under this credit facility was $ 18.3 million and $ 20.8 million, respectively, subject to eligible pledged collateral.

The Company had no outstanding borrowings under this arrangement at December 31, 2023 and December 31, 2022.

Other Borrowings

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

The line has a one year term maturing on June 30, 2024 and is renewable annually.

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, 2022 or 2021.

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 year ended December 31, 2020.

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.

From October 1, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 513 basis points.

As provided in the subordinated notes, the interest rate on the subordinated notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR.

Prior to October 1, 2025, Sound Financial Bancorp may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes.

On or after October 1, 2025, Sound Financial Bancorp may redeem the subordinated notes, in whole or in part, at its option, on any interest payment date.

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 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.

As of December 31, 2023, the amount available under this line of credit was $ 20.0 million.

There was no balance on this line of credit as of December 31, 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 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 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.

The balance of the subordinated notes, net of debt issuance costs, was $ 11.7 million as of both December 31, 2023 and December 31, 2022.

Note 11— Fair Value Measurements

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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.

At December 31, 2023 and 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.

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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.

Non-maturity deposits - The estimated fair value is equal to the carrying amount.

Time deposits - The estimated fair value of time deposits is based on the difference between interest costs paid on the Company’s time deposits and current market rates for time deposits with comparable characteristics.

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A description of the valuation methodologies used for impaired loans and OREO is as follows:

Impaired loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell, or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions.

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.

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.

Off-balance sheet financial instruments - The fair value for the 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.

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Cash and cash equivalents $ 49,690 $ 49,690 $ 49,690 $ — $ —

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

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

AFS securities

8,287 8,287 — 8,287 —

HTM securities

2,166 1,787 — 1,787 —

Loans held-for-sale 603 603 — 603 —

Loans held-for-portfolio, net 885,718 837,579 — — 837,579

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

FHLB Stock 2,832 2,832 — 2,832 —

4,632 4,632 — — 4,632

FINANCIAL LIABILITIES:

Non-maturity deposits 598,458 598,458 — 598,458 —

Time deposits 307,962 308,604 — 308,604 —

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Cash and cash equivalents $ 57,836 $ 57,836 $ 57,836 $ — $ —

Available for sale securities 8,419 8,419 — 8,419 —

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

AFS securities

10,207 10,207 — 10,207 —

HTM securities

2,199 1,810 — 1,810 —

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

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

FHLB Stock 1,046 1,046 — 1,046 —

4,687 4,687 — — 4,687

FINANCIAL LIABILITIES:

Non-maturity deposits 692,598 692,598 — 692,598 —

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

Borrowings 43,000 43,000 — 43,000 —

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

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Description Total Level 1 Level 2 Level 3

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

Municipal bonds $ 5,528 $ — $ 5,528 $ —

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Description Total Level 1 Level 2 Level 3

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

Municipal bonds $ 5,421 $ — $ 5,421 $ —

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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 MSRs) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2023 and 2022.

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OREO and repossessed assets $ 575 $ — $ — $ 575

Impaired loans 4,844 — — 4,844

Collateral-dependent loans

3,656 — — 3,656

Fair Value at December 31, 2022

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There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2023 and 2022.

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

Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average)

OREO Third Party Appraisals No discounts N/A

Impaired loans (1)

Discounted Cash Flow Discount Rate 0 - 12.75 % ( 5 %)

Impaired loans (2)

Third Party Appraisals No discounts N/A

(1) Represents TDRs included within impaired loans.

(2) Excludes TDRs.

December 31, 2021

Instrument Valuation Technique(s) Unobservable Input(s) Range

(Weighted Average)

OREO Third Party Appraisals No discounts N/A

Impaired loans (1)

Discounted Cash Flow Discount Rate 0 - 10 % ( 4 %)

Impaired loans (2)

Third Party Appraisals No discounts N/A

(1) Represents TDRs included within impaired loans.

(2) Excludes TDRs.

Note 12— Leases

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.

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 premises, 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 terms of five months to 6.5 years.

Our leases have remaining terms of nine months to 5.5 years.

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

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Earnings per share, diluted $ 2.86 $ 3.35

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.

There were 7,892 anti-dilutive securities for the year ended December 31, 2023 and 2,612 anti-dilutive securities for the year ended December 31, 2022.

Note 14— Employee Benefits

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The Company contributed $ 249 thousand and $ 259 thousand to the plan for the years ended December 31, 2023 and 2022, respectively.

The Bank maintains a deferred compensation account for the benefit of Ms.

Stewart, established in 1994 in connection with an incentive plan which is no longer active.

Stewart was fully vested in her benefits under this plan as of January 2005.

Pursuant to the terms of the plan, payments in an amount equal to the fair market value of the assets in the deferred compensation account shall be made to Ms.

Stewart (or to her designated beneficiary in the event of her death) in 120 equal monthly installments commencing on the last day of the month following the month in which her employment with the Bank is terminated.

In the event of the death of Ms.

Stewart and her designated beneficiary prior to the account being fully paid, the remaining value of the account shall be paid in a lump sum to the beneficiary’s estate.

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

The Bank maintains a deferred compensation account for the benefit of the chief executive officer, established in 1994 in connection with an incentive plan which is no longer active.

The chief executive officer is fully vested in the benefits under this plan as of January 2005.

Pursuant to the terms of the plan, payments in an amount equal to the fair market value of the assets in the deferred compensation account shall be made to the chief executive officer (or to the designated beneficiary in the event of death) in 120 equal monthly installments commencing on the last day of the month following the month in which her employment with the Bank is terminated.

In the event of the death of the chief executive officer and the designated beneficiary prior to the account being fully paid, the remaining value of the account shall be paid in a lump sum to the beneficiary’s estate.

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 both December 31, 2023 and 2022, the amount held in the certificate of deposit at the Bank was $ 113 thousand and $ 111 thousand, respectively.

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

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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.

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Supplemental Executive Retirement Plans.

The Company maintains two supplemental executive retirement plans for the benefit of Ms.

Stewart, which are intended to be unfunded, non-contributory defined benefit plans maintained primarily to provide her with supplemental retirement income.

The Company maintains two supplemental executive retirement plans for the benefit of the chief executive officer, which are intended to be unfunded, non-contributory defined benefit plans maintained primarily to provide her with supplemental retirement income.

The first supplemental executive retirement plan ("SERP 1") was effective as of August 14, 2007.

The second supplemental executive retirement plan ("SERP 2") was effective as of December 30, 2011, at which time the benefits under SERP 1 were frozen.

Under the terms of SERP 1, as amended, Ms.

Stewart is entitled to receive $ 53,320 per year for life commencing on the first day of the month following her separation from service (as defined in SERP 1) for any reason from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

No payments will be made under SERP 1 in the event of Ms.

Stewart's death and any payments that have commenced will cease upon death.

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, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

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 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.

Under the terms of SERP 1, as amended, the chief executive officer is entitled to receive $ 53,320 per year for life commencing on the first day of the month following separation from service (as defined in SERP 1) for any reason from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

No payments will be made under SERP 1 in the event of the chief executive officer’s death and any payments that have commenced will cease upon death.

In the event the chief executive officer is involuntarily terminated in connection with a change in control (as defined in SERP 1), the chief executive officer will be entitled to receive the annual benefit described in the first sentence of this paragraph commencing upon such termination, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

Under the terms of SERP 2, as amended, upon the chief executive officer’s termination of employment with Sound Community Bank for any reason other than death, the chief executive officer will be entitled to receive additional retirement benefits each month for life commencing on the first day of the month following 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, 2023.

In the event of Ms.

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, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

In the event of the chief executive officer’s death prior to the commencement of the additional retirement benefits, the 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, 2023.

If a change in control occurs (as defined in SERP 2), the chief executive officer will receive 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

The Company currently has one active stockholder approved equity incentive 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 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;

2 unchanged sentences

At December 31, 2023, awards for stock options totaling 295,241 shares and awards for restricted stock totaling 159,066 shares of Company common stock have been granted in the aggregate, net of any forfeitures, under the 2008 Plan and 2013 Plan to participants.

As of December 31, 2023, 6,469 awards for stock options and 8,048 awards for restricted stock remained available for issuance.

During the years ended December 31, 2023 and 2022, share-based compensation expense totaled $ 450 thousand and $ 475 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 Company.

All remaining stock option awards granted under the 2008 Plan are fully vested as of December 31, 2023.

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 plan award activity during the period ended December 31, 2022:

The following is a summary of the Company's stock option plan award activity during the period ended December 31, 2023 (dollars in thousands, except per share amounts):

Shares Weighted-Average

14 unchanged sentences

80,735 $ 32.28 5.36 $ 603

At December 31, 2022, there was $ 112 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plan.

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

At December 31, 2023, there was $ 137 thousand of total unrecognized compensation cost related to non-vested stock options.

This cost is expected to be recognized over the remaining weighted-average vesting period of 2.3 years.

The total intrinsic value of the shares exercised during the years ended December 31, 2023 and 2022 was $ 477 thousand and $ 207 thousand, respectively.

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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.

Compensation expense is recognized over the vesting period of the awards.

The restricted stock awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date.

14 unchanged sentences

15,967 $ 39.20 $ 39.00

At December 31, 2022, there was $ 403 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plan.

At December 31, 2023, there was $ 384 thousand of unrecognized compensation cost related to non-vested restricted stock awards.

The cost is expected to be recognized over the weighted-average vesting period of 2.2 years.

The total fair value of shares vested for the years ended December 31, 2023 and 2022 was $ 372 thousand and $ 308 thousand, respectively.

The weighted average grant date fair value per share for the years ended December 31, 2023 and 2022 was $ 40.13 and $ 42.85 , respectively.

Employee Stock Ownership Plan

In January 2008, the ESOP borrowed $ 1.2 million from the Company to purchase common stock of the Company, which was paid in full in 2017.

In August 2012, in conjunction with the Company's conversion to a full stock company from the mutual holding company structure, the ESOP borrowed an additional $ 1.1 million from the Company to purchase common stock of the Company.

The loan 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.

At December 31, 2022, the remaining balance of the ESOP loan was zero .

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

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, 2023 and 2022, the ESOP trustee purchased 18,573 shares and 19,438 shares of the Company's common stock for inclusion in the Plan.

The number of allocated shares was 155,135 and 131,805 at December 31, 2022 and 2021, respectively.

The fair value of the 155,135 restricted shares held by the ESOP trust was $ 6.4 million at December 31, 2022.

The number of allocated shares under the ESOP was 169,647 and 155,135 at December 31, 2023 and 2022, respectively.

The fair value of the 169,647 shares held by the ESOP trust was $ 6.6 million at December 31, 2023.

ESOP compensation expense included in salaries and benefits was $ 691 thousand and $ 820 thousand for the years ended December 31, 2023 and 2022, respectively.

28 unchanged sentences

FHLB stock dividends ( 40 ) ( 40 )

Unrealized gain on securities — ( 37 )

Depreciation ( 39 ) ( 108 )

5 unchanged sentences

At December 31, 2023 and 2022, the Company had no unrecognized tax benefits.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in "Provision for income taxes" in the Consolidated Statements of Income.

During the years ended December 31, 2023 and 2022, the Company recognized no interest and penalties related to income taxes.

The Company or its subsidiary files an income tax return in the U.S.

The Company files an income tax return in the U.S.

federal jurisdiction.

3 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.

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.

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.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

7 unchanged sentences

A bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule.

At December 31, 2022, the Bank’s CBLR was 10.83 %.

At December 31, 2023, the Bank’s Tier I capital was $ 113.7 million and the CBLR was 10.99 % and at December 31, 2022, the Bank’s Tier I capital was $ 107.7 million and the CBLR was 10.83 %.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank-only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations.

If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2022, Sound Financial Bancorp would have exceeded all regulatory capital requirements.

If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2023, Sound Financial Bancorp would have exceeded all regulatory capital requirements.

The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2023 was 9.78 %

During the years ended December 31, 2022 and 2021, the Company repurchased a total of 46,799 and 3,657 shares of Company common stock at an average price of $ 37.05 and $ 41.68 per share pursuant to the Company’s stock repurchase program, leaving $ 2.1 million available for future repurchase under the existing program.

On July 25, 2023, the Company announced that its Board of Directors approved an extension of the Company’s existing stock repurchase program, which was set to expire on July 31, 2023, until January 31, 2024.

Under this stock repurchase program, the Company is authorized to repurchase up to $ 4.0 million of its outstanding shares of common stock from time to time in the open market, based on prevailing market prices, or in privately negotiated transactions.

During the years ended December 31, 2023 and 2022, the Company repurchased a total of 58,035 and 46,799 shares of Company common stock at an average price of $ 36.81 and $ 37.05 per share pursuant to the Company’s stock repurchase programs, leaving $ 1 thousand available for future repurchases under the existing program as of December 31, 2023.

Note 17— Concentrations of Credit Risk

1 unchanged sentence

A substantial portion of the loan portfolio is represented by real estate loans throughout western Washington.

The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in the area.

The ability of the Company's debtors to honor their contracts may be affected by local real estate and general economic conditions.

Loans to one borrower are generally limited by federal banking regulations to 15 % of the Company's unimpaired capital and surplus.

11 unchanged sentences

The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the client.

Financial instruments whose contract amount represents credit risk were as follow (in thousands):

Financial instruments containing commitments representing credit risk were as follows at the dates indicated (in thousands):

Residential mortgage commitments $ 10,465 $ 3,184

13 unchanged sentences

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

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

There was one loan for $ 448 thousand repurchased during the year ended December 31, 2023, and no loans were repurchased during the year ended December 31, 2022.

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, 2023.

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.

During the year-ended December 31, 2023, the Company recorded no stop loss medical insurance claims exceeding stated coverage limits and recorded $ 227 thousand 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.

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Other expenses ( 719 ) ( 715 )

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

Income before income tax benefit and equity in undistributed net income of subsidiary

Income tax benefit 287 306

9 unchanged sentences

Net cash used in operating activities 1,680 1,479

Cash flows from investing activities:

ESOP shares released — 431

Net cash provided by investing activities — 431

Cash flows from financing activities:

7 unchanged sentences

Note 20— Revenue from Contracts with Customers

All of the Company's revenue from contracts with customers in the scope of ASC 606— Revenue from Contracts with Customers ("ASC 606") is recognized in Noninterest Income with the exception of the net loss on OREO and repossessed assets, which is included in Noninterest Expense.

All of the Company's revenue from contracts with customers within the scope of ASC 606— Revenue from Contracts with Customers ("ASC 606") is recognized in noninterest income on the Consolidated Income Statements with the exception of the net loss on OREO and repossessed assets, which is included in noninterest expense on the Consolidated Income Statements.

The following table presents the Company's sources of noninterest income for the year ended December 31, 2023 and 2022 (in thousands).

18 unchanged sentences

The Company earns fees from its customers for account maintenance, transaction-based and overdraft services.

Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis.The performance obligation is satisfied and fees are recognized on a monthly basis as the service period is completed.

Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts monthly.The performance obligation is satisfied and fees are recognized monthly as the service period is completed.

Transaction-based fees and overdraft service fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds, overdraft, and wire services.

15 unchanged sentences

Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

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 $ 0 and $( 16 ) thousand for the years ended December 31, 2022 and 2021, respectively, included under noninterest expense on the Consolidated Statements of Income.

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 on OREO properties, net of gain/losses on sale of OREO, of $ 13 thousand and $ 0 for the years ended December 31, 2023 and 2022, respectively, included under noninterest expense on the Consolidated Statements of Income.

Note 21— Subsequent Events

On January 26, 2024, the Company declared on Company common stock a quarterly cash dividend of $ 0.19 per common share, payable on February 21, 2024 to stockholders of record at the close of business February 7, 2024.

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

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