Sound Financial Bancorp, Inc. 10-Q

Item 1. Financial Statements SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets (unaudited) (In thousands, except share and per share amounts) June 30, 2024 December 31, 2023 ASSETS Cash and cash equivalents $ 135,111 $ 49,690 Available-for-sale (“AFS”) securities, at fair value (amortized cost of $ 9,325 and $ 9,539 as of June 30, 2024 and December 31, 2023, respectively) 7,996 8,287 Held-to-maturity (“HTM”) securities, at amortized cost (fair value of $ 1,710 and $ 1,787 at June 30, 2024 and December 31, 2023, respectively) 2,147 2,166 Loans held-for-sale 257 603 Loans held-for-portfolio 889,274 894,478 Allowance for credit losses (“ACL”) on loans ( 8,493 ) ( 8,760 ) Total loans held-for-portfolio, net 880,781 885,718 Accrued interest receivable 3,413 3,452 Bank-owned life insurance (“BOLI”), net 22,172 21,860 Other real estate owned (“OREO”) and repossessed assets, net 115 575 Mortgage servicing rights (“MSRs”), at fair value 4,540 4,632 Federal Home Loan Bank ("FHLB") stock, at cost 2,406 2,396 Premises and equipment, net 4,906 5,240 Right of use assets 4,020 4,496 Other assets 6,995 6,106 Total assets $ 1,074,859 $ 995,221 LIABILITIES Deposits Interest-bearing $ 781,854 $ 699,813 Noninterest-bearing demand 124,915 126,726 Total deposits 906,769 826,539 Borrowings 40,000 40,000 Accrued interest payable 760 817 Lease liabilities 4,328 4,821 Other liabilities 9,105 9,563 Advance payments from borrowers for taxes and insurance 812 1,110 Subordinated notes, net 11,738 11,717 Total liabilities 973,512 894,567 COMMITMENTS AND CONTINGENCIES (NOTE 7) — — STOCKHOLDERS’ EQUITY Preferred stock, $ 0.01 par value, 10,000,000 shares authorized, none issued or outstanding — — Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,557,284 and 2,549,427 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively 25 25 Additional paid-in capital 28,198 27,990 Retained earnings 74,173 73,627 Accumulated other comprehensive loss, net of tax ( 1,049 ) ( 988 ) Total stockholders’ equity 101,347 100,654 Total liabilities and stockholders’ equity $ 1,074,859 $ 995,221 See Notes to Condensed Consolidated Financial Statements 3 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Income (unaudited) (In thousands, except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 INTEREST INCOME Loans, including fees $ 12,320 $ 11,551 $ 24,553 $ 22,932 Interest and dividends on investments, cash and cash equivalents 1,719 861 3,246 1,654 Total interest income 14,039 12,412 27,799 24,586 INTEREST EXPENSE Deposits 5,994 2,953 11,696 5,088 Borrowings 429 547 859 1,046 Subordinated notes 168 168 336 336 Total interest expense 6,591 3,668 12,891 6,470 Net interest income 7,448 8,744 14,908 18,116 RELEASE OF PROVISION FOR CREDIT LOSSES ( 109 ) ( 331 ) ( 142 ) ( 321 ) Net interest income after release of provision for credit losses 7,557 9,075 15,050 18,437 NONINTEREST INCOME Service charges and fee income 761 670 1,373 1,251 Earnings on BOLI 134 718 311 868 Mortgage servicing income 279 297 561 596 Fair value adjustment on MSRs ( 116 ) 96 ( 181 ) ( 44 ) Net gain on sale of loans 74 110 164 187 Other income 30 — 30 — Total noninterest income 1,162 1,891 2,258 2,858 NONINTEREST EXPENSE Salaries and benefits 4,658 4,700 9,201 9,185 Operations 1,569 1,491 3,026 2,933 Regulatory assessments 220 154 409 307 Occupancy 397 435 841 894 Data processing 910 788 1,928 1,780 Net (gain) loss on OREO and repossessed assets ( 17 ) ( 71 ) ( 11 ) 13 Total noninterest expense 7,737 7,497 15,394 15,112 Income before provision for income taxes 982 3,469 1,914 6,183 Provision for income taxes 187 577 350 1,124 Net income $ 795 $ 2,892 $ 1,564 $ 5,059 Earnings per common share: Basic $ 0.31 $ 1.12 $ 0.61 $ 1.95 Diluted $ 0.31 $ 1.11 $ 0.61 $ 1.94 Weighted-average number of common shares outstanding: Basic 2,540,538 2,574,677 2,539,872 2,576,545 Diluted 2,559,015 2,591,233 2,557,993 2,597,486 See Notes to Condensed Consolidated Financial Statements 4 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Comprehensive Income (unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net income $ 795 $ 2,892 $ 1,564 $ 5,059 Available for sale securities: Unrealized gains (losses) arising during the period 1 ( 76 ) ( 77 ) 29 Income tax benefit (expense) related to unrealized gains (losses) — 16 16 ( 6 ) Other comprehensive income (loss), net of tax 1 ( 60 ) ( 61 ) 23 Comprehensive income $ 796 $ 2,832 $ 1,503 $ 5,082 See Notes to Condensed Consolidated Financial Statements 5 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Stockholders’ Equity For the Three and Six Months Ended June 30, 2024 and 2023 (unaudited) (In thousands, except share and per share amounts) Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss), net of tax Total Stockholders’ Equity Balance, at March 31, 2024 2,558,546 $ 25 $ 28,110 $ 73,907 $ ( 1,050 ) $ 100,992 Net income — — — 795 — 795 Other comprehensive income, net of tax — — — — 1 1 Share-based compensation — — 97 — — 97 Cash dividends paid on common stock ($ 0.19 per share) — — — ( 486 ) — ( 486 ) Common stock repurchased ( 1,462 ) — ( 16 ) ( 43 ) — ( 59 ) Common stock options exercised 200 — 7 — — 7 Balance, at June 30, 2024 2,557,284 $ 25 $ 28,198 $ 74,173 $ ( 1,049 ) $ 101,347 Balance, at December 31, 2023 2,549,427 $ 25 $ 27,990 $ 73,627 $ ( 988 ) $ 100,654 Net income — — — 1,564 — 1,564 Other comprehensive loss, net of tax — — — — ( 61 ) ( 61 ) Share-based compensation — — 193 — — 193 Restricted stock awards issued 8,048 — — — — — Cash dividends paid on common stock ($ 0.38 per share) — — — ( 972 ) — ( 972 ) Common stock repurchased ( 1,626 ) — ( 18 ) ( 46 ) — ( 64 ) Common stock options exercised 1,435 — 33 — — 33 Balance, at June 30, 2024 2,557,284 $ 25 $ 28,198 $ 74,173 $ ( 1,049 ) $ 101,347 6 Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss), net of tax Total Stockholders’ Equity Balance, at March 31, 2023 2,601,443 $ 26 $ 28,251 $ 71,362 $ ( 1,034 ) $ 98,605 Net income — — — 2,892 — 2,892 Other comprehensive loss, net of tax — — — — ( 60 ) ( 60 ) Share-based compensation — — 87 — — 87 Cash dividends paid on common stock ($ 0.19 per share) — — — ( 494 ) — ( 494 ) Common stock repurchased ( 31,477 ) ( 1 ) ( 324 ) ( 837 ) — ( 1,162 ) Common stock options exercised 3,257 — 56 — — 56 Balance, at June 30, 2023 2,573,223 $ 25 $ 28,070 $ 72,923 $ ( 1,094 ) $ 99,924 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 — — — 5,059 — 5,059 Other comprehensive income, net of tax — — — — 23 23 Share-based compensation — — 279 — — 279 Restricted stock awards issued 8,850 — — — — — Cash dividends paid on common stock ($ 0.36 per share) — — — ( 936 ) — ( 936 ) Common stock repurchased ( 31,681 ) ( 1 ) ( 326 ) ( 843 ) — ( 1,170 ) Common stock surrendered ( 4,750 ) — ( 190 ) — — ( 190 ) Restricted stock forfeited ( 425 ) — — — — — Common stock options exercised 17,610 — 303 — — 303 Balance, at June 30, 2023 2,573,223 $ 25 $ 28,070 $ 72,923 $ ( 1,094 ) $ 99,924 See Notes to Condensed Consolidated Financial Statements 7 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (unaudited) (In thousands) Six Months Ended June 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,564 $ 5,059 Adjustments to reconcile net income to net cash from operating activities: Amortization of net discounts on investments 42 39 Release of provision for credit losses ( 142 ) ( 321 ) Depreciation and amortization 343 354 Share based compensation 193 279 Fair value adjustment on mortgage servicing rights 181 44 Right of use assets amortization 476 470 Change in lease liabilities ( 493 ) ( 476 ) Change in cash surrender value of BOLI ( 312 ) ( 301 ) Net gain on BOLI death benefit — ( 567 ) Net change in advances from borrowers for taxes and insurance ( 298 ) ( 314 ) Net gain on disposal of premises and equipment, net ( 30 ) — Net gain on sale of loans ( 164 ) ( 187 ) Proceeds from sale of loans held-for-sale 8,280 10,362 Originations of loans held-for-sale ( 8,718 ) ( 11,974 ) Net (gain) loss on OREO and repossessed assets ( 17 ) 13 Change in operating assets and liabilities: Accrued interest receivable 39 ( 17 ) Other assets ( 925 ) ( 2,811 ) Accrued interest payable ( 57 ) 224 Other liabilities ( 458 ) 1,925 Net cash provided by (used in) operating activities ( 496 ) 1,801 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from principal payments, maturities and sales of available-for-sale securities 193 1,820 Proceeds from principal payments of held-to-maturity securities 19 17 Net decrease in loans 5,875 10,408 Proceeds from death benefit on BOLI — 632 Purchases of premises and equipment, net ( 9 ) ( 162 ) Proceeds from disposal of premises and equipment, net 30 — Proceeds from sale of OREO and other repossessed assets 592 71 Net cash used in investing activities 6,700 12,786 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 80,230 13,490 Proceeds from borrowings — 40,000 Repayment of borrowings — ( 23,000 ) FHLB stock purchased ( 10 ) ( 751 ) Common stock repurchases ( 64 ) ( 1,170 ) Purchase of stock surrendered to pay tax liability — ( 190 ) Dividends paid on common stock ( 972 ) ( 936 ) Proceeds from common stock option exercises 33 303 Net cash provided by financing activities 79,217 27,746 Net change in cash and cash equivalents 85,421 42,333 Cash and cash equivalents, beginning of period 49,690 57,836 Cash and cash equivalents, end of period $ 135,111 $ 100,169 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes $ 237 $ 1,580 Interest paid on deposits and borrowings 12,948 6,246 Loans transferred from loans held-for-sale to loans held-for-portfolio 859 — Loans transferred from loans held-for-portfolio to OREO and repossessed assets 115 — ROU assets obtained in exchange for new operating lease liabilities — 334 Impact of adoption of ASU 2016-13 on retained earnings — ( 1,149 ) See Notes to Condensed Consolidated Financial Statements 8 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc. References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals adjustments) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 21, 2024 (“2023 Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full year or any other future period. 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 On March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, " Reference Rate Reform" ("Topic 848"). This ASU provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to modifications to eligible contracts (e.g., loans, debt securities, derivatives, borrowings) that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the related Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives. 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. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification. The amendments in this ASU have differing effective dates, beginning with interim periods including and subsequent to March 12, 2020 through December 31, 2022. 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 9 848. 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 not expect the adoption of ASU 2023-09 to have a material impact on the footnotes to our consolidated financial statements. Note 3 – Investments At June 30, 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): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2024 Municipal bonds $ 6,374 $ 11 $ ( 976 ) $ 5,409 Agency mortgage-backed securities 2,951 8 ( 372 ) 2,587 Total $ 9,325 $ 19 $ ( 1,348 ) $ 7,996 December 31, 2023 Municipal bonds $ 6,394 $ 12 $ ( 878 ) $ 5,528 Agency mortgage-backed securities 3,145 7 ( 393 ) 2,759 Total $ 9,539 $ 19 $ ( 1,271 ) $ 8,287 The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands): 10 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2024 Municipal bonds $ 704 $ — $ ( 191 ) $ 512 Agency mortgage-backed securities 1,443 — ( 245 ) 1,198 Total $ 2,147 $ — $ ( 436 ) $ 1,710 December 31, 2023 Municipal bonds $ 704 $ — $ ( 164 ) $ 540 Agency mortgage-backed securities 1,462 — ( 215 ) 1,247 Total $ 2,166 $ — $ ( 379 ) $ 1,787 The amortized cost and fair value of AFS and HTM securities at June 30, 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. June 30, 2024 Available-for-sale Held-to-maturity Amortized Cost Fair Value Amortized Cost Fair Value Due after one year through five years $ 455 $ 455 $ — $ — Due after five years through ten years 1,199 1,210 — — Due after ten years 4,720 3,744 704 512 Agency mortgage-backed securities 2,951 2,587 1,443 1,198 Total $ 9,325 $ 7,996 $ 2,147 $ 1,710 There were no pledged securities at June 30, 2024 or December 31, 2023. There were no sales of AFS or HTM securities during the three and six months ended June 30, 2024 and 2023. Accrued interest receivable on securities totaled $ 49 thousand at both June 30, 2024 and December 31, 2023, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the allowance for 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): June 30, 2024 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Available-for-sale securities Municipal bonds $ — $ — $ 3,744 $ ( 976 ) $ 3,744 $ ( 976 ) Agency mortgage-backed securities — — 2,202 ( 372 ) 2,202 ( 372 ) Total available-for-sale securities $ — $ — $ 5,946 $ ( 1,348 ) $ 5,946 $ ( 1,348 ) Held-to-maturity securities Municipal bonds $ — $ — $ 512 $ ( 191 ) $ 512 $ ( 191 ) Agency mortgage-backed securities — — 1,198 ( 245 ) 1,198 ( 245 ) Total held-to-maturity securities $ — $ — $ 1,710 $ ( 436 ) $ 1,710 $ ( 436 ) 11 December 31, 2023 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Available-for-sale securities Municipal bonds $ — $ — $ 3,862 $ ( 878 ) $ 3,862 $ ( 878 ) Agency mortgage-backed securities 48 ( 1 ) 2,290 ( 392 ) 2,338 ( 393 ) Total $ 48 $ ( 1 ) $ 6,152 $ ( 1,270 ) $ 6,200 $ ( 1,271 ) Held-to-maturity securities Municipal bonds $ — $ — $ 540 $ ( 164 ) $ 540 $ ( 164 ) Agency mortgage-backed securities — — 1,247 ( 215 ) 1,247 ( 215 ) Total held-to-maturity securities $ — $ — $ 1,787 $ ( 379 ) $ 1,787 $ ( 379 ) There was no allowance for credit losses on securities at June 30, 2024 or December 31, 2023. At both June 30, 2024 and December 31, 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 and $ 10.1 million, respectively. At June 30, 2024, there were no securities in an unrealized loss position for less than 12 months and 17 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 six months ended June 30, 2024 and 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. 12 Note 4 – Loans Loans-held-for portfolio (which excludes loans held-for-sale) at the dates indicated were as follows (in thousands): June 30, 2024 December 31, 2023 Real estate loans: One-to-four family $ 268,488 $ 279,448 Home equity 26,185 23,073 Commercial and multifamily 342,632 315,280 Construction and land 96,962 126,758 Total real estate loans 734,267 744,559 Consumer loans: Manufactured homes 38,953 36,193 Floating homes 81,622 75,108 Other consumer 18,422 19,612 Total consumer loans 138,997 130,913 Commercial business loans 17,860 20,688 Total loans held-for-portfolio 891,124 896,160 Premiums for purchased loans (1) 754 829 Deferred fees, net ( 2,604 ) ( 2,511 ) Total loans held-for-portfolio, gross 889,274 894,478 Allowance for credit losses — loans ( 8,493 ) ( 8,760 ) Total loans held-for-portfolio, net $ 880,781 $ 885,718 (1) Includes premiums resulting from purchased loans of $ 417 thousand related to one-to-four family loans, $ 261 thousand related to commercial and multifamily loans, and $ 76 thousand related to commercial business loans as of June 30, 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 June 30, 2024, there were three collateral dependent consumer mortgage 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): 13 Three Months Ended June 30, 2024 2023 ACL - Loans Reserve for Unfunded Loan Commitments ACL ACL - Loans Reserve for Unfunded Loan Commitments ACL Balance at beginning of period $ 8,598 $ 266 $ 8,864 $ 8,532 $ 795 $ 9,327 Release of credit losses during the period ( 88 ) ( 21 ) ( 109 ) ( 242 ) ( 89 ) ( 331 ) Net charge-offs during the period ( 17 ) — ( 17 ) ( 73 ) — ( 73 ) Balance at end of period $ 8,493 $ 245 $ 8,738 $ 8,217 $ 706 $ 8,923 Six months ended June 30, 2024 2024 2023 ACL - Loans Reserve for Unfunded Loan Commitments ACL ACL - Loans Reserve for Unfunded Loan Commitments ACL Balance at beginning of period $ 8,760 $ 193 $ 8,953 $ 7,599 $ 335 $ 7,934 Adoption of ASU 2016-13 (1) — — 760 695 1,455 (Release of) provision for credit losses during the period ( 194 ) 52 ( 142 ) 3 ( 324 ) ( 321 ) Net charge-offs during the period ( 73 ) — ( 73 ) ( 145 ) — ( 145 ) Balance at end of period $ 8,493 $ 245 $ 8,738 $ 8,217 $ 706 $ 8,923 (1) Represents the impact of adopting ASU 2016-13, Financial Instruments — Credit Losses on January 1, 2023. Since that date, as a result of adopting ASU 2016-13, our methodology to compute our 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 $ 3.3 million and $ 3.4 million at June 30, 2024 and December 31, 2023, respectively, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the allowance for credit losses. 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. 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 below. The ACL allowance is determined using quantitative and qualitative analysis. The quantitative analysis utilizes macroeconomic variables to establish a quantitative relationship between economic conditions and loan performance through an economic cycle. 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. We evaluate our ACL policy and judgments on an ongoing basis and update them as necessary based on changing conditions. During the six months ended June 30, 2024, we made qualitative adjustments for changes in concentration and market conditions. See “Note 1—Organization and Significant Accounting Policies” in the Company’s 2023 Form 10-K for further information on the Company’s accounting policy over the ACL. 14 The following tables summarize the activity in the ACL - loans for the periods indicated (in thousands): Three Months Ended June 30, 2024 Beginning Allowance Charge-offs Recoveries Provision (Release of) Ending Allowance One-to-four family $ 2,910 $ — $ — $ ( 112 ) $ 2,798 Home equity 179 — — 20 199 Commercial and multifamily 1,106 — — 24 1,130 Construction and land 1,329 — — ( 257 ) 1,072 Manufactured homes 833 — — 105 938 Floating homes 1,799 — — 111 1,910 Other consumer (1) 333 ( 21 ) 4 32 348 Commercial business 109 — — ( 11 ) 98 Total $ 8,598 $ ( 21 ) $ 4 $ ( 88 ) $ 8,493 (1) During the three months ended June 30, 2024, the gross charge-offs related entirely to deposit overdrafts that were charged off. Three Months Ended June 30, 2023 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 2,059 $ — $ — $ ( 62 ) $ 1,997 Home equity (1) 197 ( 25 ) — 22 194 Commercial and multifamily 2,225 — — 43 2,268 Construction and land 2,778 — — ( 280 ) 2,498 Manufactured homes 283 — — 26 309 Floating homes 611 — — ( 25 ) 586 Other consumer (2) 159 ( 53 ) 5 49 160 Commercial business 216 — — ( 11 ) 205 Unallocated 4 — — ( 4 ) — Total $ 8,532 $ ( 78 ) $ 5 $ ( 242 ) $ 8,217 (1) During the three months ended June 30, 2023, there was one home equity line of credit that was charged off. (2) During the three months ended June 30, 2023, the gross charge-offs related entirely to deposit overdrafts that were charged off. Six Months Ended June 30, 2024 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 2,630 $ — $ — $ 168 $ 2,798 Home equity 185 — — 14 199 Commercial and multifamily 1,070 — — 60 1,130 Construction and land 1,349 — — ( 277 ) 1,072 Manufactured homes (1) 971 ( 23 ) — ( 10 ) 938 Floating homes 2,022 — — ( 112 ) 1,910 Other consumer (2) 426 ( 60 ) 10 ( 28 ) 348 Commercial business 107 — — ( 9 ) 98 Total $ 8,760 $ ( 83 ) $ 10 $ ( 194 ) $ 8,493 15 (1) During the six months ended June 30, 2024, there was one manufactured home loan that was charged off and then subsequently foreclosed upon. (2) During the six months ended June 30, 2024, the gross charge-offs related entirely to deposit overdrafts that were charged off. Six Months Ended June 30, 2023 Beginning Allowance Impact of Adoption of ASU 2016-13 Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,771 $ 355 $ — $ — $ ( 129 ) $ 1,997 Home equity (1) 132 69 ( 25 ) — 18 194 Commercial and multifamily 2,501 ( 320 ) — — 87 2,268 Construction and land 1,209 1,359 — — ( 70 ) 2,498 Manufactured homes 462 ( 180 ) — — 27 309 Floating homes 456 166 — — ( 36 ) 586 Other consumer (2) 324 ( 163 ) ( 132 ) 12 119 160 Commercial business 256 ( 35 ) — — ( 16 ) 205 Unallocated 488 ( 491 ) — — 3 — Total $ 7,599 $ 760 $ ( 157 ) $ 12 $ 3 $ 8,217 (1) During the six months ended June 30, 2023, there was one home equity line of credit that was charged off. (2) During the six months ended June 30, 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. 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 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 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 June 30, 2024 and December 31, 2023. The following tables present the internally assigned grades as of June 30, 2024 and December 31, 2023, by type of loan and origination year (in thousands): 16 At June 30, 2024 Term Loans Amortized Cost Basis by Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Amortized Cost Basis Converted to Term 2024 2023 2022 2021 2020 Prior Total One-to-four family: Pass $ 13,925 $ 22,623 $ 82,186 $ 100,075 $ 15,902 $ 33,080 $ — $ — $ 267,791 Substandard — — 259 110 — 495 — — 864 Total one-to-four family $ 13,925 $ 22,623 $ 82,445 $ 100,185 $ 15,902 $ 33,575 $ — $ — $ 268,655 Home equity: Pass $ 2,373 $ 3,642 $ 2,489 $ 1,029 $ 295 $ 1,497 $ 13,923 $ 755 $ 26,003 Substandard — — — — — 60 277 68 405 Total home equity $ 2,373 $ 3,642 $ 2,489 $ 1,029 $ 295 $ 1,557 $ 14,200 $ 823 $ 26,408 Commercial and multifamily: Pass $ 15,552 $ 20,534 $ 97,837 $ 88,855 $ 22,013 $ 84,781 $ — $ — $ 329,572 Special mention — — — — 4,624 1,386 — — 6,010 Substandard — — 1,001 — — 4,841 — — 5,842 Total commercial and multifamily $ 15,552 $ 20,534 $ 98,838 $ 88,855 $ 26,637 $ 91,008 $ — $ — $ 341,424 Construction and land: Pass $ 8,784 $ 28,213 $ 20,199 $ 35,721 $ 700 $ 2,063 $ — $ — $ 95,680 Substandard — — — — — 709 — — 709 Total construction and land $ 8,784 $ 28,213 $ 20,199 $ 35,721 $ 700 $ 2,772 $ — $ — $ 96,389 Manufactured homes: Pass $ 4,878 $ 13,113 $ 7,332 $ 4,183 $ 2,009 $ 6,925 $ — $ — $ 38,440 Substandard — 115 90 — — 180 — — 385 Total manufactured homes $ 4,878 $ 13,228 $ 7,422 $ 4,183 $ 2,009 $ 7,105 $ — $ — $ 38,825 Floating homes: Pass $ 12,914 $ 8,372 $ 16,386 $ 24,277 $ 6,139 $ 10,721 $ — $ — $ 78,809 Substandard — — 2,403 — — — — — 2,403 Total floating homes $ 12,914 $ 8,372 $ 18,789 $ 24,277 $ 6,139 $ 10,721 $ — $ — $ 81,212 Other consumer: Pass $ 1,951 $ 3,843 $ 701 $ 3,710 $ 5,541 $ 2,165 $ 523 $ — $ 18,434 Substandard — — — 2 — — — — 2 Total other consumer $ 1,951 $ 3,843 $ 701 $ 3,712 $ 5,541 $ 2,165 $ 523 $ — $ 18,436 Commercial business: Pass $ 232 $ 801 $ 1,883 $ 3,323 $ 325 $ 4,419 $ 6,900 $ — $ 17,883 Substandard 42 — — — — — — — 42 Total commercial business $ 274 $ 801 $ 1,883 $ 3,323 $ 325 $ 4,419 $ 6,900 $ — $ 17,925 Total loans Pass $ 60,609 $ 101,141 $ 229,013 $ 261,173 $ 52,924 $ 145,651 $ 21,346 $ 755 $ 872,612 Special mention — — — — 4,624 1,386 — — 6,010 Substandard 42 115 3,753 112 — 6,285 277 68 10,652 Total loans $ 60,651 $ 101,256 $ 232,766 $ 261,285 $ 57,548 $ 153,322 $ 21,623 $ 823 $ 889,274 17 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 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 Home equity: 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: 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 18 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. The following table presents the amortized cost of nonaccrual loans as of the dates indicated, by type of loan (in thousands): June 30, 2024 December 31, 2023 Total Nonaccrual Loans Total Nonaccrual Loans with no ACL Total Nonaccrual Loans Total Nonaccrual Loans with no ACL One-to-four family $ 822 $ 822 $ 1,108 $ 848 Home equity 342 342 84 84 Commercial and multifamily 5,161 5,161 — — Construction and land 28 28 — — Manufactured homes 136 114 228 228 Floating homes 2,417 2,417 — — Other consumer 3 2 1 — Commercial business — — 2,135 2,135 Total $ 8,909 $ 8,886 $ 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): June 30, 2024 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due 90 Days and Greater Past Due and Accruing Total Past Due Current Total Loans One-to-four family $ — $ 110 $ 594 $ — $ 704 $ 267,951 $ 268,655 Home equity — 263 81 — 344 26,064 26,408 Commercial and multifamily 1,100 — 5,153 — 6,253 335,171 341,424 Construction and land — — 29 — 29 96,360 96,389 Manufactured homes — 120 98 — 218 38,607 38,825 Floating homes — — — — — 81,212 81,212 Other consumer 28 31 — — 59 18,378 18,437 Commercial business — 1,494 — — 1,494 16,430 17,924 Total $ 1,128 $ 2,018 $ 5,955 $ — $ 9,101 $ 880,173 $ 889,274 19 December 31, 2023 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due 90 Days and Greater Past Due and Accruing Total Past Due Current Total Loans One-to-four family $ 168 $ 870 $ 663 $ — $ 1,701 $ 278,011 $ 279,712 Home equity 345 — 84 — 429 22,893 23,322 Commercial and multifamily 4,116 1,036 — — 5,151 309,149 314,300 Construction and land — — — — — 125,940 125,940 Manufactured homes 295 49 189 — 533 35,552 36,085 Floating homes — 3,226 — — 3,226 71,507 74,733 Other consumer 34 31 — — 65 19,550 19,615 Commercial business 66 — 2,128 — 2,194 18,551 20,745 Total $ 5,024 $ 5,211 $ 3,064 $ — $ 13,299 $ 881,153 $ 894,452 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 June 30, 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 and six months ended June 30, 2024 and 2023. We have no modified loan receivables that have subsequently defaulted at June 30, 2024 and December 31, 2023. 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 legacy TDRs totaled $ 1.6 million and $ 1.7 million at June 30, 2024 and December 31, 2023, 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. 20 The following tables summarize collateral dependent loans by collateral type as of the dates indicated (in thousands): June 30, 2024 Commercial Real Estate Residential Real Estate Land Other Residential RVs/Automobiles Business Assets Total Real estate loans: One- to four- family $ — $ 485 $ — $ 536 $ — $ — $ 1,021 Home equity — 342 — — — — 342 Commercial and multifamily 5,161 — — — — — 5,161 Construction and land — — 28 — — — 28 Total real estate loans 5,161 827 28 536 — — 6,552 Consumer loans: Manufactured homes — — — 136 — — 136 Floating homes — — — 2,417 — — 2,417 Other consumer — — — — 2 — 2 Total consumer loans — — — 2,553 2 — 2,555 Total loans $ 5,161 $ 827 $ 28 $ 3,089 $ 2 $ — $ 9,107 December 31, 2023 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 Total real estate loans — 748 — 545 — — 1,293 Consumer loans: Manufactured homes — — — 228 — — 228 Total consumer loans — — — 228 — — 228 Commercial business loans — — — 2,135 — — 2,135 Total loans $ — $ 748 $ — $ 2,908 $ — $ — $ 3,656 Note 5 – Fair Value Measurements The Company determines the fair values of its financial instruments based on the requirements established in ASC 820 , Fair Value Measurements (“ASC 820”), which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The Company’s fair values for financial instruments at June 30, 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: Cash and cash equivalents - The estimated fair value is equal to the carrying amount. Available-for-sale securities – AFS securities are recorded at fair value based on quoted market prices, if available (Level 1). If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities. Held-to-maturity securities – The fair value is based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities. 21 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. Loans held-for-portfolio - The estimated fair value of loans held-for-portfolio consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment, to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and estimated current market rate yields on loans with similar characteristics. The estimated fair values of loans held-for-portfolio reflect exit price assumptions. The liquidity premiums/discounts are part of the valuation for exit pricing. Mortgage servicing rights –The fair value of 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 is 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 borrowing rates for similar long-term debt instruments with similar terms and remaining time to maturity. A description of the valuation methodologies used for collateral dependent loans and OREO is as follows: Collateral dependent loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell. 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 off-balance sheet loan commitments is estimated based on fees charged to others to enter into similar agreements, considering taking into account the remaining terms of the agreements and credit standing of the Company’s clients. The estimated fair value of these commitments is not significant. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. There were no transfers between levels during the three and six months ended June 30, 2024 and 2023. 22 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): June 30, 2024 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 135,111 $ 135,111 $ 135,111 $ — $ — Available-for-sale securities 7,996 7,996 — 7,996 — Held-to-maturity securities 2,147 1,710 — 1,710 — Loans held-for-sale 257 257 — 257 — Loans held-for-portfolio, net 880,781 838,052 — — 838,052 Mortgage servicing rights 4,540 4,540 — — 4,540 FINANCIAL LIABILITIES: Time deposits 311,784 312,169 — 312,169 — Borrowings 40,000 40,000 — 40,000 — Subordinated notes 11,738 11,708 — 11,708 — December 31, 2023 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 49,690 $ 49,690 $ 49,690 $ — $ — Available-for-sale securities 8,287 8,287 — 8,287 — 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 Mortgage servicing rights 4,632 4,632 — — 4,632 FINANCIAL LIABILITIES: Time deposits 307,962 308,604 — 308,604 — Borrowings 40,000 40,000 — 40,000 — Subordinated notes 11,717 9,996 — 9,996 — 23 The following tables present the balance of assets measured at fair value on a recurring basis as of the dates indicated (in thousands): Fair Value at June 30, 2024 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 5,409 $ — $ 5,409 $ — Agency mortgage-backed securities 2,587 — 2,587 — Mortgage servicing rights 4,540 — — 4,540 Fair Value at December 31, 2023 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 5,528 $ — $ 5,528 $ — Agency mortgage-backed securities 2,759 — 2,759 — Mortgage servicing rights 4,632 — — 4,632 The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis as of the dates indicated: June 30, 2024 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 92 %- 186 % ( 111 %) Discount rate 10.51 %- 14.51 % ( 12.51 %) December 31, 2023 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 109 %- 208 % ( 129 %) Discount rate 10.5 %- 14.5 % ( 12.5 %) Generally, any significant increases in the prepayment speed assumption 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 significant 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 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. 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 and six months ended June 30, 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. 24 The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands): Fair Value at June 30, 2024 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 115 $ — $ — $ 115 Collateral dependent loans 9,107 — — 9,107 Fair Value at December 31, 2023 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 575 $ — $ — $ 575 Collateral dependent loans 3,656 — — 3,656 There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at both June 30, 2024 and December 31, 2023. Note 6 – Mortgage Servicing Rights The unpaid principal balance of the Company’s mortgage servicing rights portfolio totaled $ 437.4 million at June 30, 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 June 30, 2024 and December 31, 2023 were $ 435.2 million and $ 446.8 million, respectively. The unpaid principal balance of loans serviced for other financial institutions totaled $ 2.1 million at June 30, 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Beginning balance, at fair value $ 4,612 $ 4,587 $ 4,632 $ 4,687 Servicing rights that result from transfers and sale of financial assets 44 43 89 83 Changes in fair value: Due to changes in model inputs or assumptions and other (1) ( 116 ) 96 ( 181 ) ( 44 ) Ending balance, at fair value $ 4,540 $ 4,726 $ 4,540 $ 4,726 (1) Represents changes due to collection/realization of expected cash flows and curtailments. The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows: June 30, 2024 December 31, 2023 Prepayment speed (Public Securities Association “PSA” model) 111 % 129 % Weighted-average life 8.0 years 7.7 years Weighted average discount rate 12.5 % 12.5 % The amount of contractually specified servicing, late and ancillary fees earned on mortgage servicing rights are included in mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 279 thousand and $ 561 thousand for the three and six months ended June 30, 2024, and $ 297 thousand and $ 596 thousand for the three and six months ended June 30, 2023, respectively. 25 Table of Contents Note 7 – Commitments and Contingencies In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments and lines of credit. Note 8 – Borrowings, FHLB Stock and Subordinated Notes FHLB Advances The following tables present advances from the FHLB as of the dates indicated (dollars in thousands): June 30, 2024 December 31, 2023 FHLB advances: Short-term advances $ 15,000 $ 15,000 Long-term advances $ 25,000 $ 25,000 Total $ 40,000 $ 40,000 June 30, 2024 December 31, 2023 Fixed Rate: Outstanding balance $ 40,000 $ 40,000 Interest rates ranging from 4.06 % 4.06 % Interest rates ranging to 4.35 % 4.35 % Weighted average interest rate 4.25 % 4.25 % Variable rate: Outstanding balance $ — $ — Weighted average interest rate — % — % The following table presents the maturity of our FHLB advances (dollars in thousands): June 30, 2024 Remainder of 2024 $ 15,000 2025 — 2026 15,000 2027 — 2028 10,000 Thereafter — $ 40,000 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 mortgage and commercial and multifamily loan portfolio based on the company’s outstanding borrowing balance. Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines to secure public deposits. The following table presents the borrowing capacity from the FHLB as of the dates indicated: 26 June 30, 2024 December 31, 2023 Amount available to borrow under credit facility (1) $ 489,094 $ 463,541 Advance equivalent of collateral: One-to-four family mortgage loans 191,259 196,547 Commercial and multifamily mortgage loans 32,480 34,464 Home equity loans 289 348 Notional amount of letters of credit outstanding 9,000 10,000 Remaining FHLB borrowing capacity (2) $ 175,028 $ 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 June 30, 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 The Company has a borrowing agreement with the FRB SF. The terms of the agreement call for a blanket pledge of a portion of the Company’s consumer and commercial business loans based on the company’s outstanding borrowing balance. At June 30, 2024 and December 31, 2023, the amount available to borrow under this credit facility was $ 22.5 million and $ 18.3 million, respectively, subject to eligible pledged collateral. The Company had no outstanding borrowings under this arrangement at June 30, 2024 and December 31, 2023. Other Borrowings The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank (“PCBB”). The line has a one year term maturing on June 30, 2025 and is renewable annually. As of June 30, 2024, the amount available under this line of credit was $ 20.0 million. There was no balance on this line of credit as of June 30, 2024 and December 31, 2023. Subordinated Debt In September 2020, the Company issued $ 12.0 million of fixed to floating rate subordinated notes that mature in 2030. The subordinated notes have an initial fixed interest rate of 5.25 % to, but excluding, October 1, 2025, payable semi-annually in arrears. From, and including, October 1, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030, and may be redeemed by the Company, in whole or in part, on October 1, 2025, or on any subsequent interest payment date. Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the terms of the subordinated notes. The balance of the subordinated notes was $ 11.7 million as of both June 30, 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): 27 Three Months Ended Six Months Ended 2024 2023 2024 2023 Net income $ 795 $ 2,892 $ 1,564 $ 5,059 LESS: Participating dividends - Unvested Restricted Stock Awards (“RSAs”) ( 3 ) ( 3 ) ( 7 ) ( 6 ) LESS: Income allocated to participating securities - Unvested RSAs ( 2 ) ( 15 ) ( 4 ) ( 26 ) Net income available to common stockholders - basic 790 2,874 1,554 5,027 ADD BACK: Income allocated to participating securities - Unvested RSAs 2 15 4 26 LESS: Income reallocated to participating securities - Unvested RSAs ( 2 ) ( 15 ) ( 4 ) ( 26 ) Net income available to common stockholders - diluted $ 790 $ 2,874 $ 1,554 $ 5,027 Weighted average number of shares outstanding, basic 2,540,538 2,574,677 2,539,872 2,576,545 Effect of potentially dilutive common shares 18,477 16,556 18,121 20,941 Weighted average number of shares outstanding, diluted 2,559,015 2,591,233 2,557,993 2,597,486 Earnings per share, basic $ 0.31 $ 1.12 $ 0.61 $ 1.95 Earnings per share, diluted $ 0.31 $ 1.11 $ 0.61 $ 1.94 There were no anti-dilutive securities at June 30, 2024 and 13,080 anti-dilutive securities at June 30, 2023. Note 10 – Stock-based Compensation Stock Options and Restricted Stock The Company currently has one active stockholder-approved stock-based compensation plan, the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan"). The 2013 Plan permits the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. The equity incentive plan approved by stockholders in 2008 (the"2008 Plan") expired in November 2018 and no further awards may be made under the 2008 Plan; provided, however, all awards outstanding under the 2008 Plan remain outstanding in accordance with their terms. Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units. As of June 30, 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 $ 97 thousand and $ 193 thousand for the three and six months ended June 30, 2024, and $ 87 thousand and $ 279 thousand for the three and six months ended June 30, 2023, respectively. Stock Option Awards All stock option awards granted under the 2008 Plan vested 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. 28 The following is a summary of the Company’s stock option award activity during the three months ended June 30, 2024 (dollars in thousands, except per share amounts): Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Outstanding at April 1, 2024 85,712 $ 33.00 5.36 $ 685 Granted — — Exercised ( 200 ) 33.50 Expired — — Outstanding at June 30, 2024 85,512 33.00 5.29 855 Exercisable 66,031 30.94 4.35 796 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 85,512 $ 33.00 5.29 $ 855 The following is a summary of the Company’s stock option award activity during the six months ended June 30, 2024 (dollars in thousands, except per share amounts): Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Outstanding at January 1, 2024 80,735 $ 32.28 5.36 $ 603 Granted 6,469 39.89 Exercised ( 1,435 ) 22.88 Expired ( 257 ) 36.57 Outstanding at June 30, 2024 85,512 33.00 5.29 855 Exercisable 66,031 30.94 4.35 796 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 85,512 $ 33.00 5.29 $ 855 As of June 30, 2024, there was $ 167 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 2.2 years. The total intrinsic value of the shares exercised during the three and six months ended June 30, 2024 was $ 1 thousand and $ 23 thousand, and for the three and six months ended June 30, 2023 was $ 61 thousand and $ 388 thousand, respectively. 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 six months ended June 30, 2024 and 2023 were determined using the following weighted-average assumptions as of the grant date. Six Months Ended June 30, 2024 2023 Annual dividend yield 1.69 % 1.69 % Expected volatility 28.15 % 28.15 % Risk-free interest rate 4.06 % 3.60 % Expected term 6.00 years 6.00 years Weighted-average grant date fair value per option granted $ 11.64 $ 11.33 There were no options granted during the three months ended June 30, 2024 and June 30, 2023, respectively . 29 Restricted Stock Awards The fair value of the restricted stock awards is equal to the fair value of the Company's common stock at the date of grant. Compensation expense is recognized over the vesting periods of the awards. The restricted stock awards granted under the 2008 Plan vested in 20 % annual increments commencing one year from the grant date. The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary dates of the grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company. The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended June 30, 2024: Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at April 1, 2024 17,143 $ 39.93 Granted — — Vested — — Forfeited — — Non-Vested at June 30, 2024 17,143 $ 39.93 $ 43.00 Expected to vest assuming a 0 % forfeiture rate over the vesting term 17,143 $ 39.93 $ 43.00 Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at January 1, 2024 15,967 $ 39.20 Granted 8,048 $ 39.89 Vested ( 6,872 ) $ 38.19 Forfeited — — Non-Vested at June 30, 2024 17,143 $ 39.93 $ 43.00 Expected to vest assuming a 0 % forfeiture rate over the vesting term 17,143 $ 39.93 $ 43.00 As of June 30, 2024, there was $ 557 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 2.2 years. The total fair value of shares vested for the six months ended June 30, 2024 and 2023 was $ 262 thousand and $ 370 thousand, respectively. The weighted average grant date fair value per share for restricted stock awards granted during the six months ended June 30, 2024 and 2023 was $ 39.89 and $ 40.13 , respectively. Employee Stock Ownership Plan The fair value of the 170,273 shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) trust was $ 7.3 million at June 30, 2024. ESOP compensation expense included in salaries and benefits was $ 189 thousand and $ 378 thousand for the three and six months ended June 30, 2024, and $ 204 thousand and $ 408 thousand for the three and six months ended June 30, 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 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. As of June 30, 2024, our leases had remaining lease terms ranging from three months to 5.0 years. The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties. 30 The following table presents the lease right-of-use assets and lease liabilities recorded on the Condensed Consolidated Balance Sheets at the dates indicated (in thousands): June 30, 2024 December 31, 2023 Operating lease right-of-use assets $ 4,020 $ 4,496 Operating lease liabilities $ 4,328 $ 4,821 The following table presents the components of lease expense for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Operating lease expense Office leases $ 270 $ 269 $ 540 $ 537 Sublease income ( 1 ) ( 3 ) ( 4 ) ( 6 ) Net lease expense $ 269 $ 266 $ 536 $ 531 The following table presents the schedule of lease liabilities at the date indicated (in thousands): June 30, 2024 Remainder of 2024 $ 1,040 2025 930 2026 948 2027 954 2028 750 Thereafter — Total lease payments 4,622 Less: Present value discount 294 Present value of lease liabilities $ 4,328 Lease term and discount rate by lease type consist of the following at the dates indicated: June 30, 2024 December 31, 2023 Weighted-average remaining lease term: Office leases 4.7 years 5.2 years Weighted-average discount rate (annualized): Office leases 2.78 % 2.77 % Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Cash paid for amounts included in the measurement of lease liabilities for operating leases: Operating cash flows Office leases $ 280 $ 266 $ 558 $ 537 31 Table of Contents Note 12 – Subsequent Events On July 29, 2024, the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.19 per common share, payable on August 23, 2024 to stockholders of record at the close of business on August 9, 2024. 32 Table of Contents