What changed in this filing

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Item 1. Financial Statements

2024-05-14 compared with 2023-11-14 · 206 added, 409 removed, 653 unchanged (49% of the section changed)

4 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

2024 December 31,

Cash and cash equivalents $ 137,977 $ 49,690

Available-for-sale securities, at fair value (amortized cost of $ 9,673 and $ 11,621 as of September 30, 2023 and December 31, 2022, respectively)

Held-to-maturity securities, at amortized cost 2,174 2,199

Available-for-sale (“AFS”) securities, at fair value (amortized cost of $ 9,445 and $ 9,539 as of March 31, 2024 and December 31, 2023, respectively)

Held-to-maturity (“HTM”) securities, at amortized cost (fair value of $ 1,730 and $ 1,787 at March 31, 2024 and December 31, 2023, respectively)

Loans held-for-sale 351 603

Loans held-for-portfolio 897,877 894,478

Allowance for credit losses on loans ( 8,438 ) ( 7,599 )

Allowance for credit losses (“ACL”) on loans

( 8,598 ) ( 8,760 )

Total loans held-for-portfolio, net 889,279 885,718

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

22,037 21,860

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

Mortgage servicing rights, at fair value 4,681 4,687

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

Federal Home Loan Bank ("FHLB") stock, at cost 2,406 2,396

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Preferred stock, $ 0.01 par value, 10,000,000 shares authorized, none issued or outstanding

Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,568,054 and 2,583,619 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively

Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,558,546 and 2,549,427 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital 28,110 27,990

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(In thousands, except share and per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

INTEREST INCOME

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PROVISION FOR (RELEASE OF) CREDIT LOSSES ( 33 ) 10

Net interest income after provision for (release of) credit losses 8,093 9,251 26,529 24,528

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

NONINTEREST INCOME

Service charges and fee income 612 581

Earnings on bank-owned life insurance 88 59 957 45

Earnings on BOLI 177 151

Mortgage servicing income 282 299

Fair value adjustment on mortgage servicing rights ( 78 ) 9 ( 123 ) 334

Fair value adjustment on MSRs ( 65 ) ( 140 )

Net gain on sale of loans 90 78

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(In thousands)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Net income $ 770 $ 2,168

Available for sale securities:

Unrealized losses arising during the period ( 307 ) ( 400 ) ( 278 ) ( 1,777 )

Income tax benefit related to unrealized losses 64 84 58 373

Other comprehensive loss, net of tax ( 243 ) ( 316 ) ( 220 ) ( 1,404 )

Unrealized (losses) gains arising during the period ( 78 ) 105

Income tax benefit (expense) related to unrealized (losses) gains 16 ( 22 )

Other comprehensive (loss) income, net of tax ( 62 ) 83

Comprehensive income $ 708 $ 2,251

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Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

For the Three Months Ended March 31, 2024 and 2023 (unaudited)

(In thousands, except share and per share amounts)

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Stockholders’

Balance, at June 30, 2023

2,573,223 $ 25 $ 28,070 $ 72,923 $ ( 1,094 ) $ 99,924

Net income — — — 1,169 — 1,169

Other comprehensive loss, net of tax — — — — ( 243 ) ( 243 )

Share-based compensation — — 88 — — 88

Cash dividends paid on common stock ($ 0.19 per share)

— — — ( 489 ) — ( 489 )

Common stock repurchased ( 6,169 ) — ( 63 ) ( 165 ) — ( 228 )

Common stock options exercised 1,000 — 17 — — 17

Balance, at September 30, 2023

2,568,054 $ 25 $ 28,112 $ 73,438 $ ( 1,337 ) $ 100,238

Balance, at December 31, 2023

2,549,427 $ 25 $ 27,990 $ 73,627 $ ( 988 ) $ 100,654

Impact of adoption of Accounting Standards Update (“ASU”) 2016-13 — — — ( 1,149 ) — ( 1,149 )

Net income — — — 770 — 770

5 unchanged sentences

Common stock repurchased ( 164 ) ( 1 ) ( 4 ) — ( 5 )

Common stock surrendered ( 4,750 ) — ( 190 ) — — ( 190 )

Restricted shares forfeited ( 425 ) — — — — —

Common stock options exercised 1,235 — 26 — — 26

Balance, at September 30, 2023

Balance, at March 31, 2024

2,558,546 $ 25 $ 28,110 $ 73,907 $ ( 1,050 ) $ 100,992

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Stockholders’

Balance, at June 30, 2022

2,578,595 $ 26 $ 27,777 $ 66,203 $ ( 949 ) $ 93,057

Net income — — — 2,546 — 2,546

Other comprehensive loss, net of tax — — — — ( 316 ) ( 316 )

Share-based compensation — — 90 — — 90

Common stock surrendered ( 2,431 ) — ( 91 ) — — ( 91 )

Cash dividends paid on common stock ($ 0.17 per share)

— — — ( 440 ) — ( 440 )

Restricted shares forfeited ( 95 ) — — — — —

Common stock options exercised 5,880 — 110 — — 110

Balance, at September 30, 2022

2,581,949 $ 26 $ 27,886 $ 68,309 $ ( 1,265 ) $ 94,956

Balance, at December 31, 2022

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

Impact of adoption of Accounting Standards Update (“ASU”) 2016-13 — — — ( 1,149 ) — ( 1,149 )

Net income — — — 2,168 — 2,168

Other comprehensive loss, net of tax — — — — ( 1,404 ) ( 1,404 )

Other comprehensive income, net of tax — — — — 83 83

Share-based compensation — — 192 — — 192

6 unchanged sentences

Common stock options exercised 14,353 — 247 — — 247

Balance, at September 30, 2022

Balance, at March 31, 2023

2,601,443 $ 26 $ 28,251 $ 71,362 $ ( 1,034 ) $ 98,605

4 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

9 unchanged sentences

Change in cash surrender value of BOLI ( 177 ) ( 151 )

Net gain on BOLI death benefit ( 567 ) —

Net change in advances from borrowers for taxes and insurance 1,099 1,053

10 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES:

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

Proceeds from principal payments, maturities and sales of available-for-sale securities 83 1,704

Purchase of held-to-maturity securities — ( 2,226 )

Proceeds from principal payments of held-to-maturity securities 9 9

Net decrease (increase) in loans ( 3,570 ) ( 4,636 )

Proceeds from death benefit on BOLI 633 —

Purchases of premises and equipment, net ( 1,623 ) ( 35 )

Proceeds from sale of OREO and other repossessed assets 71 —

Net cash used in investing activities ( 5,101 ) ( 2,958 )

1 unchanged sentence

Net increase in deposits 90,344 32,884

Proceeds from borrowings 40,000 44,500

Repayment of borrowings — ( 8,000 )

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These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share.

We have not made any changes in our significant accounting policies from those disclosed in the 2022 Form 10-K, except for the accounting for debt securities, the allowance for credit losses (“ACL”) on loans and unfunded commitments, and loan modifications, as described below.

Allowance for Credit Losses on Investment Securities .

The ACL on investment securities is determined for both the held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with Accounting Standards Codification (“ASC”) 326 - Financial Instruments - Credit Losses .

For available-for-sale investment securities, we perform a quarterly qualitative evaluation for securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related.

In determining whether a security’s decline in fair value is credit related, we consider a number of factors including, but not limited to:

(i) the extent to which the fair value of the investment is less than its amortized cost;

(ii) the financial condition and near-term prospects of the issuer;

(iii) downgrades in credit ratings;

(iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments and (vi) general market conditions, which reflect prospects for the economy as a whole, including interest rates and sector credit spreads.

If it is determined that the unrealized loss can be attributed to credit loss, we record the amount of credit loss through a charge to provision for credit losses in current period earnings.

However, the amount of credit loss recorded in current period earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost.

If it is likely we will be required to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings.

For unrealized losses deemed non-credit related, we record the loss, net of tax, through accumulated other comprehensive income.

We determine expected credit losses on available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities through a discounted cash flow approach, using the security’s effective interest rate.

However, as previously mentioned, the measurement of credit losses on available-for-sale securities only occurs when, through our qualitative assessment, all or a portion of the unrealized loss is determined to be credit related.

Our discounted cash flow approach incorporates assumptions about the collectability of future cash flows.

The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows.

Credit losses on available-for-sale securities are measured on an individual basis, while credit losses on held-to-maturity securities are measured on a collective basis according to shared risk characteristics.

Credit losses on held-to-maturity securities are only recognized at the individual security level when we determine a security no longer possesses risk characteristics similar to others in the portfolio.

We do not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable.

Accrued interest receivable for investment securities is included in accrued interest receivable balances in the Condensed Consolidated Balance Sheets.

Allowance for Credit Losses on Loans and Unfunded Loan Commitments.

We maintain an ACL on loans and unfunded loan commitments in accordance with ASC 326.

ASC 326 requires us to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition.

The recognition of credit losses at origination or acquisition represents our best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics.

Determining the ACL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model.

We use a historical loss rate model when determining estimates for the ACL for our loan portfolio.

We also utilize proxy loan data in our ACL model where our own historical data is not sufficiently available.

We do not measure credit losses on a loan’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable.

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

Our ACL model forecasts primarily over a two-year time horizon, which we believe is a reasonable and supportable period.

Beyond the two-year forecast time horizon, our ACL model reverts to historical long-term average loss rates.

The duration of the forecast horizon, the period over which forecasts revert to long-term averages, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio.

We utilize a discounted cash flow ACL model for individually analyzed loans using internally derived estimates for prepayments in determining the amount and timing of future contractual cash flows we expect to collect, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell.

The estimate of future cash flows also incorporates estimates for contractual amounts we believe may not be collected, which are based on assumptions for our estimated exposure at default.

Our estimated exposure at default is determined by the contractual payment schedule and expected payment profile of the loan, incorporating estimates for expected prepayments and future draws on revolving credit facilities.

Our ACL methodology for unfunded loan commitments also includes assumptions concerning the probability an unfunded commitment will be drawn upon by the borrower.

These assumptions are based on the historical experience of banks in an independent third party database.

Expectations of future cash flows are discounted at the loan’s effective interest rate for individually analyzed loans.

The effective interest rate represents the contractual rate on the loan, adjusted for any purchase premiums, or discounts, and deferred fees and costs associated with an originated loan.

We have made an accounting policy election to adjust the effective interest rate to take into consideration the effects of estimated prepayments.

The resulting ACL represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows.

The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off.

It is our policy to charge-off loan balances at the time they are not expected to be collected.

The historical loss rate model is derived from our loan portfolio credit history, as well as the comparable credit history for peer banks in Washington state.

Key loan level attributes and economic drivers in determining the loss rate for loans include unemployment rates, changes to interest rates, changes in credit quality, changes to the consumer price index, and changes in real estate prices.

In order to develop reasonable and supportable forecasts of future conditions, we estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligations to us and the ultimate collectability of future cash flows over the life of a loan.

Management periodically evaluates appropriateness of economic scenarios and may decide that a particular economic scenario or a combination of probability-weighted economic scenarios should be used in our ACL model.

Our ACL model at September 30, 2023 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S.

economy, higher energy prices, the potential impact of wars and other sources of geopolitical tension, general uncertainty concerning future economic conditions, and the potential for recessionary conditions.

It is important to note that our ACL model relies on multiple economic variables, which are used in several economic scenarios.

Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, we have identified certain economic variables that have significant influence in our model for determining the ACL.

These key economic variables include changes in the Washington state unemployment rate, residential real estate prices in the Seattle Metropolitan Statistical Area, and interest rates.

Recognizing that forecasts of macroeconomic conditions are inherently uncertain, we believe that the process to consider the available information and associated risks and uncertainties is appropriately governed and that estimates of expected credit losses were reasonable and appropriate upon adoption and for the three and nine months ended September 30, 2023.

Our ACL model also includes adjustments for qualitative factors, where appropriate.

We recognize that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses.

We therefore consider the need for qualitative adjustments to the ACL on a quarterly

Qualitative adjustments may be related to and include, but are not limited to, factors such as:

(i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios, and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.

Qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile or other factors where management believes the quantitative component of our ACL model may not be fully reflective of levels deemed adequate in the judgement of management.

Certain qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments.

Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.

Modified Loans to Borrowers Experiencing Financial Difficulty .

We occasionally modify loans to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize our potential losses.

We refer to these modifications as modified loans to troubled borrowers.

Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and, in very limited cases, reductions to the outstanding loan balance.

Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been past due for a period of 90 days or more.

Such loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt.

We typically measure the ACL on modified loans to troubled borrowers on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio.

The determination of the ACL for these loans is based on a discounted cash flow approach for loans measured individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated fair value of the underlying collateral, less estimated costs to sell.

GAAP requires us to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications.

Refer to Note 4 – Loans for additional information concerning modified loans to troubled borrowers.

We have not made any changes in our significant accounting policies from those disclosed in the 2023 Form 10-K.

Note 2 – Accounting Pronouncements Recently Issued or Adopted

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and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives.

ASU 2020-04 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.

In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

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

The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments — Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU No.

April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02, and March 2020, ASU 2020-03, all of which clarify the codification and correct unintended application of the guidance.

This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses.

The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected.

The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period.

The Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach and recorded a net decrease of approximately $ 1.1 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the ACL of $ 1.5 million, net of related deferred tax assets arising from temporary differences of $ 305 thousand, commonly referred to as the “Day 1” adjustment.

The Day 1 adjustment to the ACL is reflective of expected lifetime credit losses associated with the composition of financial assets within in the scope of ASC 326 as of January 1, 2023, which is comprised of loans held for investment and off-balance sheet credit exposures at January 1, 2023, as well as management’s current expectation of future economic conditions.

The following table presents the impact of adopting ASU 2016-13 on January 1, 2023:

(dollars in thousands) As Reported

ASC 326 Prior to Adopting

ASC 326 Impact of ASC 326

Allowance for credit losses - loans

Real estate loans:

One- to four- family $ 2,126 $ 1,771 $ 355

Home equity 201 132 69

Commercial and multifamily 2,181 2,501 ( 320 )

Construction and land 2,568 1,209 1,359

Total real estate loans 7,075 5,613 1,462

Consumer loans:

Manufactured homes 282 462 ( 180 )

Floating homes 622 456 166

Other consumer 161 324 ( 163 )

Total consumer loans 1,065 1,242 ( 177 )

Commercial business loans 221 256 ( 35 )

Unallocated ( 3 ) 488 ( 491 )

Total loans 8,359 7,599 760

Allowance for credit losses - unfunded commitments

Reserve for unfunded commitments 1,030 335 695

Total $ 9,389 $ 7,934 $ 1,455

In March 2022, the FASB issued ASU 2022-02, Financial Instruments — Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures .

This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Additionally, this ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases.

This ASU was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology.

The Company adopted ASU 2022-02 on January 1, 2023 using the prospective transition guidance which allows the entity to continue estimating expected credit losses in accordance with legacy U.S.

GAAP for receivables modified in a TDR until the receivables are subsequently modified or settled.

Once a legacy TDR is modified after adoption of ASU

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.

Based upon amendments provided in ASU 2022-06 discussed below, provisions of ASU 2021-01 can now generally be applied through December 31, 2024.

ASU 2021-01 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.

In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.

ASU 2022-06 extends the period of time entities can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01, which are discussed above.

ASU 2022-06 was effective upon issuance and defers the sunset date of this prior guidance to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848.

ASU 2022-06 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures .” The amended guidance requires incremental reportable segment disclosures, primarily about significant segment expenses.

The amendments also require entities with a single reportable segment to provide all disclosures required by these amendments, and all existing segment disclosures.

The amendments will be applied retrospectively to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is evaluating the impact of the adoption of ASU 2023-07 on the footnotes to our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, “ Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” The amended guidance enhances income tax disclosures primarily related to the effective tax rate reconciliation and income taxes paid information.

This guidance requires disclosure of specific categories in the effective tax rate reconciliation and further information on reconciling items meeting a quantitative threshold.

In addition, the amended guidance requires disaggregating income taxes paid (net of refunds received) by federal, state, and foreign taxes.

It also requires disaggregating individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received).

The amended guidance is effective for fiscal years beginning after December 15, 2024.

The guidance can be applied either prospectively or retrospectively.

We do expect the adoption of ASU 2023-09 to have a material impact on the footnotes to our consolidated financial statements.

Note 3 – Investments

At September 30, 2023, the Company did not own any debt securities classified as trading or any equity investment securities.

At March 31, 2024, the Company did not own any debt securities classified as trading or any equity investment securities, except for the FHLB securities described in “Note 8 — Borrowings, FHLB Stock and Subordinated Notes.”

The amortized cost and fair value of our AFS securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):

Losses Estimated

September 30, 2023

March 31, 2024

Municipal bonds $ 6,384 $ 11 $ ( 953 ) $ 5,442

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December 31, 2023

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

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

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Losses Estimated

September 30, 2023

March 31, 2024

Municipal bonds $ 704 $ — $ ( 182 ) $ 522

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Total $ 2,166 $ — $ ( 379 ) $ 1,787

The amortized cost and fair value of AFS and HTM securities at September 30, 2023, by contractual maturity, are shown below (in thousands).

The amortized cost and fair value of AFS and HTM securities at March 31, 2024, by contractual maturity, are shown below (in thousands).

Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investments not due at a single maturity date, consisting of agency mortgage-backed securities, are shown separately.

September 30, 2023

Investments not due at a single maturity date, primarily agency mortgage-backed securities, are shown separately.

March 31, 2024

Available-for-sale Held-to-maturity

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Total $ 9,445 $ 8,115 $ 2,157 $ 1,730

There were no pledged securities at September 30, 2023 or December 31, 2022.

There were no sales of AFS or HTM securities during the three and nine months ended September 30, 2023 and 2022.

Accrued interest receivable on securities totaled $ 78 thousand and $ 54 thousand at September 30, 2023 and December 31, 2022, respectively, in the accompanying Condensed Consolidated Balance Sheets.

There were no pledged securities at March 31, 2024 or December 31, 2023.

There were no sales of AFS or HTM securities during the three months ended March 31, 2024 and 2023.

Accrued interest receivable on securities totaled $ 77 thousand and $ 49 thousand at March 31, 2024 and December 31, 2023, respectively, in the accompanying Condensed Consolidated Balance Sheets.

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

The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments for which an allowance for credit losses has not been recorded that have been in a continuous unrealized loss position at the dates indicated (in thousands):

September 30, 2023

March 31, 2024

Less Than 12 Months 12 Months or Longer Total

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Available-for-sale securities

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

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

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Total held-to-maturity securities $ — $ — $ 1,787 $ ( 379 ) $ 1,787 $ ( 379 )

There was no allowance for credit losses on securities at September 30, 2023 or December 31, 2022.

At September 30, 2023, the total securities portfolio consisted of 12 agency mortgage-backed securities and 11 municipal bonds, with a total portfolio fair value of $ 9.7 million.

At December 31, 2022, the total securities portfolio consisted of one treasury bill, 11 municipal

bonds and 12 agency mortgage-backed securities, with a fair value of $ 12.0 million.

At September 30, 2023, there were three securities in an unrealized loss position for less than 12 months, and 17 securities in an unrealized loss position for more than 12 months.

There was no allowance for credit losses on securities at March 31, 2024 or December 31, 2023.

At March 31, 2024, the total securities portfolio consisted of 12 agency mortgage-backed securities and 11 municipal bonds, with a total portfolio fair value of $ 9.8 million.

At December 31, 2023, the total securities portfolio consisted of 11 municipal bonds and 12 agency mortgage-backed securities, with a total portfolio fair value of $ 10.1 million.

At March 31, 2024, there were three securities in an unrealized loss position for less than 12 months, and 16 securities in an unrealized loss position for more than 12 months.

All three securities in an unrealized loss position for less than 12 months were classified as AFS.

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

At December 31, 2023, there was one security in an unrealized loss position for less than 12 months, and 16 securities in an unrealized loss position for more than 12 months.

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

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

There was no provision for credit losses recognized for investment securities during the three or nine months ended September 30, 2023, because the declines in fair value were not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

There was no provision for credit losses recognized for investment securities during the three months ended March 31, 2024, because the declines in fair value were not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

Note 4 – Loans

Loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, were as follows (in thousands):

September 30,

2024 December 31,

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Total loans held-for-portfolio, net $ 889,279 $ 885,718

(1) Includes premiums resulting from purchased loans of $ 472 thousand related to one-to-four family loans, $ 290 thousand related to commercial and multifamily loans, and $ 88 thousand related to commercial business loans as of September 30, 2023.

(1) Includes premiums resulting from purchased loans of $ 458 thousand related to one-to-four family loans, $ 270 thousand related to commercial and multifamily loans, and $ 80 thousand related to commercial business loans as of March 31, 2024.

Includes premiums resulting from purchased loans of $ 465 thousand related to one-to-four family loans, $ 280 thousand related to commercial and multifamily loans, and $ 84 thousand related to commercial business loans as of December 31, 2023.

As of September 30, 2023, there were two collateral dependent loans, totaling $ 99 thousand, that were in process of foreclosure.

As of March 31, 2024, there were three collateral dependent loans, totaling $ 457 thousand, that were in process of foreclosure.

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

Three Months Ended September 30,

Allowance for Credit Losses - Loans Reserve for Unfunded Loan Commitments Allowance for Credit Losses Allowance for Credit Losses - Loans Reserve for Unfunded Loan Commitments Allowance for Credit Losses

Balance at beginning of period $ 8,217 $ 706 $ 8,923 $ 7,117 $ 411 $ 7,528

Provision for (release of) credit losses during the period 224 ( 149 ) 75 375 ( 29 ) 346

Net (charge-offs)/recoveries during the period ( 3 ) — ( 3 ) ( 3 ) — ( 3 )

Balance at end of period $ 8,438 $ 557 $ 8,995 $ 7,489 $ 382 $ 7,871

Nine months ended September 30, 2023

Three Months Ended March 31,

2 unchanged sentences

— — — 760 695 1,455

Provision for (release of) credit losses during the period 227 ( 473 ) ( 246 ) 1,101 ( 22 ) 1,079

(Release of) provision for credit losses during the period ( 106 ) 73 ( 33 ) 245 ( 235 ) 10

Net (charge-offs)/recoveries during the period ( 56 ) — ( 56 ) ( 72 ) — ( 72 )

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Since that date, as a result of adopting ASU 2016-13, our methodology to compute our allowance for credit losses has been based on a current expected credit loss methodology, rather than the previously applied incurred loss methodology.

Accrued interest receivable on loans receivable totaled $ 3.2 million and $ 3.0 million at September 30, 2023 and December 31, 2022, respectively, in the accompanying Condensed Consolidated Balance Sheets.

Accrued interest receivable on loans receivable totaled $ 3.4 million at both March 31, 2024 and December 31, 2023 in the accompanying Condensed Consolidated Balance Sheets.

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

The following tables summarize the activity in the allowance for credit losses - loans, excluding accrued interest, for the periods indicated (in thousands):

Three Months Ended September 30, 2023

Allowance Charge-offs Recoveries Provision (Recapture) Ending

Three Months Ended March 31, 2024

Allowance Charge-offs Recoveries Provision (Release of) Ending

One-to-four family $ 2,630 $ — $ — $ 280 $ 2,910

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Manufactured homes (1)

Floating homes 586 — — 19 605

Other consumer (1)

971 ( 23 ) — ( 115 ) 833

Commercial business 205 — — ( 26 ) 179

Unallocated — — — — —

Total $ 8,217 $ ( 27 ) $ 24 $ 224 $ 8,438

(1) During the three months ended September 30, 2023, the gross charge-offs related entirely to deposit overdrafts that were charged off.

Nine Months Ended September 30, 2023

Allowance Impact of Adoption of ASU 2016-16 Charge-offs Recoveries Provision (Recapture) Ending

One-to-four family $ 1,771 $ 355 $ — $ — $ ( 121 ) $ 2,005

Home equity (1)

132 69 ( 25 ) — 30 206

Commercial and multifamily 2,501 ( 320 ) — — 164 2,345

Construction and land 1,209 1,359 — — 53 2,621

Manufactured homes 462 ( 180 ) — — 48 330

Floating homes 2,022 — — ( 223 ) 1,799

2 unchanged sentences

Commercial business 107 — — 2 109

Unallocated 488 ( 491 ) — — 3 —

Total $ 8,760 $ ( 62 ) $ 6 $ ( 106 ) $ 8,598

(1) During the nine months ended September 30, 2023, there was one revolving home equity loan that was charged off.

(2) During the nine months ended September 30, 2023, the gross charge-offs related primarily to deposit overdrafts that were charged off.

Three Months Ended September 30, 2022

Allowance Charge-offs Recoveries Provision

(Recapture) Ending

One-to-four family $ 1,638 $ — $ — $ 121 $ 1,759

Home equity 113 — — 8 121

Commercial and multifamily 2,312 — — 37 2,349

Construction and land 1,024 — — 106 1,130

Manufactured homes 444 — — 45 489

Floating homes 410 — — 20 430

Other consumer 331 ( 6 ) 3 ( 3 ) 325

Commercial business 240 — — ( 7 ) 233

Unallocated 605 — — 48 653

Total $ 7,117 $ ( 6 ) $ 3 $ 375 $ 7,489

Nine Months Ended September 30, 2022

(1) During the three months ended March 31, 2024, there was one manufactured home loan that was charged off and then subsequently foreclosed upon.

(2) During the three months ended March 31, 2024, the gross charge-offs related entirely to deposit overdrafts that were charged off.

Three Months Ended March 31, 2023

Allowance Charge-offs Recoveries Provision

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Other consumer (1)

324 ( 79 ) 7 70 159

Commercial business 256 — — ( 5 ) 216

1 unchanged sentence

Total $ 7,599 $ ( 79 ) $ 7 $ 245 $ 8,532

(1) During the three months ended March 31, 2023, the gross charge-offs related entirely to deposit overdrafts that were charged off.

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.

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When we classify problem assets as either substandard or doubtful, we may determine that these assets should be individually analyzed if they no longer share common risk characteristics with the rest of the portfolio.

Therefore we may establish a specific allowance in an amount we deem prudent to address those risks.

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

When an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are deemed uncollectible.

Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank's federal regulator, and the Washington Department of Financial Institutions, the Bank's state banking regulator, which can order the establishment of additional credit loss allowances.

Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention.

The following table presents the internally assigned grades as of September 30, 2023, by type of loan and origination year (in thousands):

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 March 31, 2024 and December 31, 2023.

The following tables present the internally assigned grades as of March 31, 2024 and December 31, 2023, by type of loan and origination year (in thousands):

At March 31, 2024

Term Loans Amortized Cost Basis by Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Amortized Cost Basis Converted to Term

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Total loans $ 28,911 $ 108,146 $ 240,257 $ 280,769 $ 59,155 $ 158,844 $ 20,915 $ 880 $ 897,877

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

December 31, 2022

four family Home

equity Commercial

and multifamily Construction

and land Manufactured

homes Floating

consumer Commercial

business Total

At December 31, 2023

Term Loans Amortized Cost Basis by Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Amortized Cost Basis

Converted to Term

2023 2022 2021 2020 2019 Prior Total

One-to-four family:

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

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

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

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:

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

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

Nonaccrual and Past Due Loans .

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

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

The following table presents the amortized cost of nonaccrual loans as of the dates indicated, by type of loan (in thousands):

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

with no ACL Total

4 unchanged sentences

Manufactured homes 166 166 228 228

Floating homes 3,192 3,192 — —

Other consumer 1 — 1 —

Commercial business — — 2,135 2,135

Total $ 9,053 $ 8,792 $ 3,556 $ 3,295

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

September 30, 2023

March 31, 2024

Past Due 60-89 Days

23 unchanged sentences

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

Nonperforming Loans.

Loans are considered nonperforming when they are placed on nonaccrual.

The following table presents the credit risk profile of our loan portfolio based on payment activity as of the date indicated, by type of loan (in thousands):

December 31, 2022

equity Commercial

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

Loan Modifications to Borrowers Experiencing Financial Difficulty.

Loans modified to borrowers experiencing financial difficulty totaled $ 2.0 million at September 30, 2023.

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

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

At September 30, 2023, the Company had no commitments to extend additional credit to borrowers owing loan receivables with modified terms.

During the nine months ended September 30, 2023, there was one modified one-to-four family loan to a borrower experiencing financial difficulty.

This loan received a term extension for 90 days, with an amortized cost basis of $ 90 thousand representing 0.03 % of the total class of loans.

There were no loans modified within the three months ended September 30, 2023.

We have no modified loan receivables that have subsequently defaulted at September 30, 2023.

Troubled debt restructurings.

At March 31, 2024, the Company had no commitments to extend additional credit to borrowers owing loan receivables with modified terms.

There were no loans modified within the three months ended March 31, 2024.

We have no modified loan receivables that have subsequently defaulted at March 31, 2024.

Troubled debt restructurings (“TDRs”).

Prior to the adoption of ASU 2022-02, Financial Instruments—Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , the Company had granted a variety of concessions to borrowers in the form of loan modifications that were considered TDRs.

Loans classified as TDRs totaled $ 2.0 million at December 31, 2022, and were previously included in impaired loans.

Loans classified as legacy TDRs totaled $ 1.7 million at both March 31, 2024 and December 31, 2023.

Collateral Dependent Loans .

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The following tables summarize collateral dependent loans by collateral type as of the dates indicated (in thousands):

September 30, 2023

Commercial Real Estate Residential Real Estate Land Other Residential Total

March 31, 2024

Commercial Real Estate Residential Real Estate Land Other Residential RVs/Automobiles Business Assets Total

Real estate loans:

6 unchanged sentences

Manufactured homes — — — 166 — — 166

Floating homes — — — 3,192 — — 3,192

Total consumer loans — — — 3,358 — — 3,358

Total loans $ 4,747 $ 477 $ 29 $ 3,899 $ — $ — $ 9,152

Impaired Loans.

Prior to the adoption of ASC 326 on January 1, 2023, we classified loans as impaired when we determined that we might be unable to collect payments of principal or interest when due under the terms of the loan.

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

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

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

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

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

Impaired loans at the dates indicated, by type of loan were as follows (in thousands):

December 31, 2023

Recorded Investment

Unpaid Principal

Balance Without

Allowance With

Allowance Total

Investment Related

One-to-four family $ 3,758 $ 3,038 $ 708 $ 3,746 $ 102

Home equity 210 142 68 210 5

Construction and land 358 324 34 358 3

Manufactured homes 187 93 94 187 52

Other consumer 343 261 82 343 22

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

The following tables present the average recorded investment and interest income recognized on impaired loans for the periods indicated, by loan types (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

Investment Interest Income

Recognized Average

Investment Interest Income

Commercial Real Estate Residential Real Estate Land Other Residential RVs/Automobiles Business Assets Total

Real estate loans:

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

Home equity — 84 — — — — 84

Commercial and multifamily 1,154 135 1,756 186

Construction and land 64 1 66 3

Total real estate loans — 748 — 545 — — 1,293

Consumer loans:

Manufactured homes — — — 228 — — 228

Floating homes — — 123 —

Other consumer 349 4 288 13

Commercial business — — 86 —

Total $ 5,409 $ 176 $ 6,341 $ 298

Total consumer loans — — — 228 — — 228

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

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

Note 5 – Fair Value Measurements

2 unchanged sentences

ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

The Company’s fair values for financial instruments at September 30, 2023 and December 31, 2022 were determined based on these requirements.

The Company’s fair values for financial instruments at March 31, 2024 and December 31, 2023 were determined based on these requirements.

The following methods and assumptions were used to estimate the fair value of other financial instruments:

2 unchanged sentences

If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments.

Level 2 securities include those traded on an active exchange without readily available market prices, as well as U.S.

Level 2 securities include those traded on an active exchange, as well as U.S.

government securities.

Held-to-maturity securities – HTM securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.

The fair value is based on quoted market prices, if available (Level 1).

Held-to-maturity securities – The fair value is based on quoted market prices, if available.

If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments.

Level 2 securities include those traded on an active exchange without readily available market prices, as well as U.S.

Level 2 securities include those traded on an active exchange, as well as U.S.

government securities.

Loans held-for-sale - One-to-four family mortgage loans held-for-sale are recorded at the lower of cost or fair value.

The fair value of fixed-rate one-to-four family loans held-for-sale is based on whole loan forward prices obtained from government sponsored enterprises.

At September 30, 2023 and December 31, 2022, loans held-for-sale were carried at cost, as no impairment was required.

Loans held-for-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 March 31, 2024 and 2023, 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.

1 unchanged sentence

The liquidity premiums/discounts are part of the valuation for exit pricing.

Mortgage servicing rights –The fair value of mortgage servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.

FHLB stock - The estimated fair value is equal to the par value of the stock.

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

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.

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

Borrowings - The fair value of borrowings are estimated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Borrowings - The fair value of borrowings are estimated using the contractual cash flows of each debt instrument discounted using the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Subordinated notes - The fair value of subordinated notes is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.

1 unchanged sentence

Collateral dependent loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell.

Troubled debt restructurings (prior to adoption of ASU 2022-02) - The fair value of loan modifications that were considered TDRs prior to the adoption of ASU 2022-02 is based on the current appraised value of the collateral less estimated costs to sell, or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions.

OREO and repossessed assets – The fair value of OREO and repossessed assets is based on the current appraised value of the collateral less estimated costs to sell.

Off-balance sheet financial instruments - The fair value for the Company’s off-balance sheet loan commitments is estimated based on fees charged to others to enter into similar agreements, taking into account the remaining terms of the agreements and credit standing of the Company’s clients.

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.

2 unchanged sentences

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process.

There were no transfers between levels during the three and nine months ended September 30, 2023 and 2022.

There were no transfers between levels during the three months ended March 31, 2024 and 2023.

The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether recognized or recorded at fair value or not as of the dates indicated (in thousands):

September 30, 2023 Fair Value Measurements Using:

March 31, 2024 Fair Value Measurements Using:

Value Estimated

18 unchanged sentences

Held-to-maturity 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

5 unchanged sentences

The following tables present the balance of assets measured at fair value on a recurring basis as of the dates indicated (in thousands):

Fair Value at September 30, 2023

Fair Value at March 31, 2024

Description Total Level 1 Level 2 Level 3

4 unchanged sentences

Description Total Level 1 Level 2 Level 3

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

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

2 unchanged sentences

The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis as of the dates indicated:

September 30, 2023

March 31, 2024

Financial Instrument Valuation Technique Unobservable Input(s) Range

7 unchanged sentences

Discount rate 10.5 %- 14.5 % ( 12.5 %)

Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement).

Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the MSRs will result in a negative fair value adjustment (and decrease in the fair value measurement).

Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement).

An increase in the weighted-average life will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate.

An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted average life will result in an increase of the constant prepayment rate.

As a result of the difficulty in observing certain significant valuation inputs affecting our “Level 3” fair value assets, we are required to make judgments regarding these items’ fair values.

Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and their fair values.

Such differences may result in significantly different fair value measurements.

There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2023 and 2022.

Mortgage servicing rights are measured at fair value using a significant unobservable input (Level 3) on a recurring basis.

Additional information is included in “Note 6—Mortgage Servicing Rights.”

The fair value of individually evaluated loans with specific allocations of the ACL based on collateral values and OREO is generally based on recent real estate appraisals and automated valuation models (“AVMs”).

These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach.

Adjustments are routinely made in the appraisal process by the appraisers for differences between the comparable sales and income data available.

Such adjustments are typically deemed significant unobservable inputs used for determining fair value and result in a Level 3 classification.

There were no assets or liabilities (excluding MSRs) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months ended March 31, 2024 and 2023.

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

The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands):

Fair Value at September 30, 2023

Fair Value at March 31, 2024

Total Level 1 Level 2 Level 3

4 unchanged sentences

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

Impaired loans 4,844 — — 4,844

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at both September 30, 2023 and December 31, 2022.

Collateral dependent loans 3,656 — — 3,656

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at both March 31, 2024 and December 31, 2023.

Note 6 – Mortgage Servicing Rights

The unpaid principal balance of the Company’s mortgage servicing rights portfolio totaled $ 456.1 million at September 30, 2023 compared to $ 472.5 million at December 31, 2022.

Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at September 30, 2023 and December 31, 2022 were $ 453.9 million and $ 470.3 million, respectively.

The unpaid principal balance of loans serviced for other financial institutions totaled $ 2.2 million at both September 30, 2023 and December 31, 2022.

Loans serviced for others are not included in the Company’s financial statements as they are not assets of the Company.

The unpaid principal balance of the Company’s mortgage servicing rights portfolio totaled $ 443.6 million at March 31, 2024 compared to $ 448.9 million at December 31, 2023.

Of these total balances, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at March 31, 2024 and December 31, 2023 were $ 441.5 million and $ 446.8 million, respectively.

The unpaid principal balance of loans serviced for other financial institutions totaled $ 2.1 million at March 31, 2024 and $ 2.2 million at December 31, 2023.

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 during the periods indicated were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Beginning balance, at fair value $ 4,632 $ 4,687

6 unchanged sentences

The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Prepayment speed (Public Securities Association “PSA” model) 110 % 129 %

2 unchanged sentences

The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in

mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 295 thousand and $ 891 thousand for the three and nine months ended September 30, 2023, and $ 306 thousand and $ 939 thousand for the three and nine months ended September 30, 2022, respectively.

mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 282 thousand and $ 299 thousand for the three months ended March 31, 2024 and March 31, 2023, respectively.

Note 7 – Commitments and Contingencies

4 unchanged sentences

FHLB Advances

The following table presents advances from the FHLB as of the dates indicated:

September 30, 2023 December 31, 2022

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

March 31, 2024 December 31, 2023

FHLB advances:

Overnight advances

Short-term advances

15,000 15,000

Long-term advances

25,000 25,000

$ 40,000 $ 40,000

March 31, 2024 December 31, 2023

Outstanding balance $ 40,000 $ 40,000

5 unchanged sentences

Weighted average interest rate — % — %

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

Remainder of 2024 $ 15,000

FHLB Des Moines Borrowing Capacity

3 unchanged sentences

The following table presents the borrowing capacity from the FHLB as of the dates indicated:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Amount available to borrow under credit facility (1)

6 unchanged sentences

Remaining FHLB borrowing capacity (2)

$ 180,925 $ 181,360

(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 September 30, 2023 and December 31, 2022, the Company had an investment of $ 2.8 million in FHLB of Des Moines stock.

At both March 31, 2024 and December 31, 2023, the Company had an investment of $ 2.4 million in FHLB of Des Moines stock.

Federal Reserve Bank of San Francisco (“FRB SF”) Borrowings

1 unchanged sentence

The terms of the agreement call for a blanket pledge of a portion of the Company’s consumer and commercial business loans based on the outstanding balance.

At September 30, 2023 and December 31, 2022, the amount available to borrow under this credit facility was $ 17.5 million and $ 20.8 million, respectively, subject to eligible pledged collateral.

The Company had no outstanding borrowings under this arrangement at September 30, 2023 and December 31, 2022.

At March 31, 2024 and December 31, 2023, the amount available to borrow under this credit facility was $ 19.5 million and $ 18.3 million, respectively, subject to eligible pledged collateral.

The Company had no outstanding borrowings under this arrangement at March 31, 2024 and December 31, 2023.

Other Borrowings

1 unchanged sentence

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

As of September 30, 2023, the amount available under this line of credit was $ 20.0 million.

There was no balance on this line of credit as of September 30, 2023 and December 31, 2022.

As of March 31, 2024, the amount available under this line of credit was $ 20.0 million.

There was no balance on this line of credit as of March 31, 2024 and December 31, 2023.

Subordinated Debt

4 unchanged sentences

Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the terms of the subordinated notes.

The balance of the subordinated notes was $ 11.7 million as of both September 30, 2023 and December 31, 2022.

The balance of the subordinated notes was $ 11.7 million as of both March 31, 2024 and December 31, 2023.

Note 9 – Earnings Per Common Share

The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data):

Three Months Ended Nine Months Ended

2023 2022 2023 2022

Three Months Ended

Net income $ 770 $ 2,168

10 unchanged sentences

Earnings per share, diluted $ 0.30 $ 0.83

There were 7,892 anti-dilutive securities at September 30, 2023 and 2,612 anti-dilutive securities at September 30, 2022.

There were 7,596 anti-dilutive securities at March 31, 2024 and 8,009 anti-dilutive securities at March 31, 2023.

Note 10 – Stock-based Compensation

5 unchanged sentences

Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units.

As of September 30, 2023, on an adjusted basis, awards for stock options totaling 295,464 shares and awards for restricted stock totaling 159,396 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan.

Share-based compensation expense was $ 88 thousand and $ 368 thousand for the three and nine months

ended September 30, 2023, and $ 90 thousand and $ 384 thousand for the three and nine months ended September 30, 2022, respectively.

As of March 31, 2024, on an adjusted basis, awards for stock options totaling 301,453 shares and awards for restricted stock totaling 167,114 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan.

Share-based compensation expense was $ 95 thousand and $ 192 thousand for the three months ended March 31, 2024 and March 31, 2023, respectively.

Stock Option Awards

All stock option awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan.

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 of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting.

The following is a summary of the Company’s stock option award activity during the three months ended September 30, 2023 (dollars in thousands, except per share amounts):

Shares Weighted-

Exercise Price Weighted-Average

Remaining Contractual

Term in Years Aggregate

Outstanding at July 1, 2023 85,895 $ 31.51 5.68 $ 647

Exercised ( 1,000 ) 16.80

Outstanding at September 30, 2023 84,895 31.68 5.42 560

Exercisable 62,550 28.96 4.36 540

Expected to vest, assuming a 0 % forfeiture rate over the vesting term

84,895 $ 31.68 5.42 $ 560

The following is a summary of the Company’s stock option award activity during the nine months ended September 30, 2023 (dollars in thousands, except per share amounts):

The following is a summary of the Company’s stock option award activity during the three months ended March 31, 2024 (dollars in thousands, except per share amounts):

Shares Weighted-

5 unchanged sentences

Exercised ( 1,235 ) 21.16

Forfeited ( 328 ) 42.02

Expired ( 257 ) 36.57

Outstanding at September 30, 2023 84,895 31.68 5.42 560

Outstanding at March 31, 2024 85,712 33.00 5.53 685

Exercisable 66,231 30.95 4.58 661

1 unchanged sentence

85,712 $ 33.00 5.53 $ 685

As of September 30, 2023, there was $ 158 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans.

As of March 31, 2024, there was $ 190 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans.

The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.4 years.

The total intrinsic value of the shares exercised during the three and nine months ended September 30, 2023 was $ 20 thousand and $ 408 thousand, and for the three and nine months ended 2022 was $ 113 and $ 168 thousand, respectively.

The total intrinsic value of the shares exercised during the three months ended March 31, 2024 was $ 22 thousand and for the three months ended March 31, 2023 was $ 327 thousand.

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

The fair values of options granted during the nine months ended September 30, 2023 and 2022 were determined using the following weighted-average assumptions as of the grant date.

Nine Months Ended September 30,

The fair values of options granted during the three months ended March 31, 2024 and 2023 were determined using the following weighted-average assumptions as of the grant date.

Three Months Ended March 31,

Annual dividend yield 1.69 % 1.69 %

3 unchanged sentences

Weighted-average grant date fair value per option granted $ 11.64 $ 11.33

There were no options granted during the three months ended September 30, 2023 or 2022.

There were 6,469 and 12,425 options granted during the three months ended March 31, 2024 and March 31, 2023, respectively .

Restricted Stock Awards

3 unchanged sentences

The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary dates of the grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company.

The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended September 30, 2023:

Shares Weighted-Average

Grant-Date Fair

Value Per Share Aggregate Intrinsic Value Per Share

Non-Vested at July 1, 2023 16,342 $ 39.17

Forfeited — —

Non-Vested at September 30, 2023 16,342 42.45 36.97

Expected to vest assuming a 0 % forfeiture rate over the vesting term

16,342 $ 42.45 $ 36.97

The following is a summary of the Company’s non-vested restricted stock award activity during the nine months ended September 30, 2023:

The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended March 31, 2024:

Shares Weighted-Average

5 unchanged sentences

Forfeited — —

Non-Vested at September 30, 2023 16,342 $ 42.45 $ 36.97

Non-Vested at March 31, 2024 17,143 39.93 40.17

Expected to vest assuming a 0 % forfeiture rate over the vesting term

17,143 $ 39.93 $ 40.17

As of September 30, 2023, there was $ 459 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans.

As of March 31, 2024, there was $ 632 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans.

The cost is expected to be recognized over the weighted-average vesting period of 2.4 years.

The total fair value of shares vested for the nine months ended September 30, 2023 and 2022 was $ 370 thousand and $ 306 thousand, respectively.

The total fair value of shares vested for the three months ended March 31, 2024 and 2023 was $ 262 thousand and $ 370 thousand, respectively.

The weighted average grant date fair value per share for the three months ended March 31, 2024 and 2023 was $ 39.89 and $ 40.13 , respectively.

Employee Stock Ownership Plan

The fair value of the 162,523 shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) trust was $ 6.0 million at September 30, 2023.

ESOP compensation expense included in salaries and benefits was $ 204 thousand and $ 612 thousand for the three and nine months ended September 30, 2023, and $ 205 thousand and $ 580 thousand for the three and nine months ended September 30, 2022, respectively.

The fair value of the 169,647 shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) trust was $ 6.8 million at March 31, 2024.

ESOP compensation expense included in salaries and benefits was $ 189 thousand for the three months ended March 31, 2024, and $ 204 thousand for the three months ended March 31, 2023.

Note 11 – Leases

We have operating leases for branch locations, a loan production office, our corporate office and in the past, for certain equipment.

The term for our real estate leases begins on the date we become legally obligated for the rent payments or take possession of the building, whichever is earlier.

The 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 ten years and typically include one renewal option.

Our leases have remaining lease terms of one to six years .

Our leases have remaining lease terms of five months to 5.3 years.

The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties.

The following table presents the lease right-of-use assets and lease liabilities recorded on the Condensed Consolidated Balance Sheets at the dates indicated (in thousands):

September 30,

2024 December 31,

2 unchanged sentences

The following table presents the components of lease expense for the periods indicated (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Operating lease expense

3 unchanged sentences

The following table presents the schedule of lease liabilities at the date indicated (in thousands):

September 30, 2023

March 31, 2024

Remainder of 2024

4 unchanged sentences

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

September 30,

2024 December 31,

4 unchanged sentences

Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Cash paid for amounts included in the measurement of lease liabilities for operating leases:

2 unchanged sentences

Note 12 – Subsequent Events

On October 24, 2023, the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.19 per common share, payable on November 22, 2023 to stockholders of record at the close of business on November 8, 2023.

On April 29, 2024, the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.19 per common share, payable on May 22, 2024 to stockholders of record at the close of business on May 8, 2024.

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-Q

Item 1. Financial Statements