Sound Financial Bancorp, Inc. 10-Q

Item 1. Financial Statements SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets (unaudited) (In thousands, except share and per share amounts) September 30, 2024 December 31, 2023 ASSETS Cash and cash equivalents $ 148,930 $ 49,690 Available-for-sale (“AFS”) securities, at fair value (amortized cost of $ 9,200 and $ 9,539 as of September 30, 2024 and December 31, 2023, respectively) 8,032 8,287 Held-to-maturity (“HTM”) securities, at amortized cost (fair value of $ 1,779 and $ 1,787 at September 30, 2024 and December 31, 2023, respectively) 2,139 2,166 Loans held-for-sale 65 603 Loans held-for-portfolio 901,733 894,478 Allowance for credit losses (“ACL”) on loans ( 8,585 ) ( 8,760 ) Total loans held-for-portfolio, net 893,148 885,718 Accrued interest receivable 3,705 3,452 Bank-owned life insurance (“BOLI”), net 22,363 21,860 Other real estate owned (“OREO”) and repossessed assets, net 115 575 Mortgage servicing rights (“MSRs”), at fair value 4,665 4,632 Federal Home Loan Bank ("FHLB") stock, at cost 2,405 2,396 Premises and equipment, net 4,807 5,240 Right of use assets 3,779 4,496 Other assets 6,777 6,106 Total assets $ 1,100,930 $ 995,221 LIABILITIES Deposits Interest-bearing $ 800,480 $ 699,813 Noninterest-bearing demand 129,717 126,726 Total deposits 930,197 826,539 Borrowings 40,000 40,000 Accrued interest payable 908 817 Lease liabilities 4,079 4,821 Other liabilities 9,711 9,563 Advance payments from borrowers for taxes and insurance 2,047 1,110 Subordinated notes, net 11,749 11,717 Total liabilities 998,691 894,567 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, 2,564,095 and 2,549,427 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively 25 25 Additional paid-in capital 28,296 27,990 Retained earnings 74,840 73,627 Accumulated other comprehensive loss, net of tax ( 922 ) ( 988 ) Total stockholders’ equity 102,239 100,654 Total liabilities and stockholders’ equity $ 1,100,930 $ 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 INTEREST INCOME Loans, including fees $ 12,876 $ 11,505 $ 37,429 $ 34,437 Interest and dividends on investments, cash and cash equivalents 1,962 1,181 5,209 2,836 Total interest income 14,838 12,686 42,638 37,273 INTEREST EXPENSE Deposits 6,363 3,877 18,059 8,966 Borrowings 434 473 1,293 1,520 Subordinated notes 168 168 504 504 Total interest expense 6,965 4,518 19,856 10,990 Net interest income 7,873 8,168 22,782 26,283 PROVISION FOR (RELEASE OF) CREDIT LOSSES 8 75 ( 134 ) ( 246 ) Net interest income after provision for (release of) credit losses 7,865 8,093 22,916 26,529 NONINTEREST INCOME Service charges and fee income 628 700 2,001 1,951 Earnings on BOLI 186 88 498 957 Mortgage servicing income 280 295 841 891 Fair value adjustment on MSRs 101 ( 78 ) ( 81 ) ( 123 ) Net gain on sale of loans 40 76 205 264 Other income — — 30 — Total noninterest income 1,235 1,081 3,494 3,940 NONINTEREST EXPENSE Salaries and benefits 4,469 4,148 13,670 13,333 Operations 1,540 1,625 4,566 4,557 Regulatory assessments 189 183 598 490 Occupancy 414 458 1,255 1,352 Data processing 1,067 1,296 2,995 3,077 Net (gain) loss on OREO and repossessed assets — — ( 10 ) 13 Total noninterest expense 7,679 7,710 23,074 22,822 Income before provision for income taxes 1,421 1,464 3,336 7,647 Provision for income taxes 267 295 617 1,419 Net income $ 1,154 $ 1,169 $ 2,719 $ 6,228 Earnings per common share: Basic $ 0.45 $ 0.45 $ 1.06 $ 2.41 Diluted $ 0.45 $ 0.45 $ 1.05 $ 2.39 Weighted-average number of common shares outstanding: Basic 2,544,233 2,553,773 2,541,331 2,568,899 Diluted 2,569,368 2,571,808 2,561,942 2,588,788 See Notes to Condensed Consolidated Financial Statements 4 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Comprehensive Income (unaudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net income $ 1,154 $ 1,169 $ 2,719 $ 6,228 Available for sale securities: Unrealized gains (losses) arising during the period 161 ( 307 ) 84 ( 278 ) Income tax (expense) benefit related to unrealized gains (losses) ( 34 ) 64 ( 18 ) 58 Other comprehensive income (loss), net of tax 127 ( 243 ) 66 ( 220 ) Comprehensive income $ 1,281 $ 926 $ 2,785 $ 6,008 See Notes to Condensed Consolidated Financial Statements 5 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Stockholders’ Equity For the Three and Nine Months Ended September 30, 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 June 30, 2024 2,557,284 $ 25 $ 28,198 $ 74,173 $ ( 1,049 ) $ 101,347 Net income — — — 1,154 — 1,154 Other comprehensive income, net of tax — — — — 127 127 Share-based compensation — — 98 — — 98 Cash dividends paid on common stock ($ 0.19 per share) — — — ( 487 ) — ( 487 ) Common stock surrendered ( 5,053 ) — — — — — Common stock options exercised 11,864 — — — — — Balance, at September 30, 2024 2,564,095 $ 25 $ 28,296 $ 74,840 $ ( 922 ) $ 102,239 Balance, at December 31, 2023 2,549,427 $ 25 $ 27,990 $ 73,627 $ ( 988 ) $ 100,654 Net income — — — 2,719 — 2,719 Other comprehensive income, net of tax — — — — 66 66 Share-based compensation — — 291 — — 291 Restricted common stock awards issued 8,048 — — — — — Cash dividends paid on common stock ($ 0.57 per share) — — — ( 1,459 ) — ( 1,459 ) Common stock repurchased ( 1,626 ) — ( 18 ) ( 47 ) — ( 65 ) Common stock surrendered ( 5,053 ) — ( 218 ) — — ( 218 ) Common stock options exercised 13,299 — 251 — — 251 Balance, at September 30, 2024 2,564,095 $ 25 $ 28,296 $ 74,840 $ ( 922 ) $ 102,239 6 Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss), net of tax Total Stockholders’ Equity Balance, at June 30, 2023 2,573,223 $ 25 $ 28,070 $ 72,923 $ ( 1,094 ) $ 99,924 Net income — — — 1,169 — 1,169 Other comprehensive loss, net of tax — — — — ( 243 ) ( 243 ) Share-based compensation — — 88 — — 88 Cash dividends paid on common stock ($ 0.19 per share) — — — ( 489 ) — ( 489 ) Common stock repurchased ( 6,169 ) — ( 63 ) ( 165 ) — ( 228 ) Common stock options exercised 1,000 — 17 — — 17 Balance, at September 30, 2023 2,568,054 $ 25 $ 28,112 $ 73,438 $ ( 1,337 ) $ 100,238 Balance, at December 31, 2022 2,583,619 $ 26 $ 28,004 $ 70,792 $ ( 1,117 ) $ 97,705 Impact of adoption of Accounting Standards Update (“ASU”) 2016-13 — — — ( 1,149 ) — ( 1,149 ) Net income — — — 6,228 — 6,228 Other comprehensive loss, net of tax — — — — ( 220 ) ( 220 ) Share-based compensation — — 368 — — 368 Restricted common stock awards issued 8,850 — — — — — Cash dividends paid on common stock ($ 0.55 per share) — — — ( 1,425 ) — ( 1,425 ) Common stock repurchased ( 37,850 ) ( 1 ) ( 390 ) ( 1,008 ) — ( 1,399 ) Common stock surrendered ( 4,750 ) — ( 190 ) — — ( 190 ) Restricted common stock forfeited ( 425 ) — — — — — Common stock options exercised 18,610 — 320 — — 320 Balance, at September 30, 2023 2,568,054 $ 25 $ 28,112 $ 73,438 $ ( 1,337 ) $ 100,238 See Notes to Condensed Consolidated Financial Statements 7 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (unaudited) (In thousands) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,719 $ 6,228 Adjustments to reconcile net income to net cash from operating activities: Amortization of net discounts on investments 64 60 Release of provision for credit losses ( 134 ) ( 246 ) Depreciation and amortization 483 534 Share based compensation 291 368 Fair value adjustment on mortgage servicing rights 81 123 Right of use assets amortization 717 699 Change in lease liabilities ( 742 ) ( 712 ) Change in cash surrender value of BOLI ( 498 ) ( 390 ) Net gain on BOLI death benefit — ( 567 ) Net change in advances from borrowers for taxes and insurance 937 863 Net gain on disposal of premises and equipment, net ( 30 ) — Net gain on sale of loans ( 205 ) ( 264 ) Proceeds from sale of loans held-for-sale 10,722 14,822 Originations of loans held-for-sale ( 10,952 ) ( 15,828 ) Net (gain) loss on OREO and repossessed assets ( 17 ) 13 Change in operating assets and liabilities: Accrued interest receivable ( 253 ) ( 332 ) Other assets ( 643 ) ( 2,276 ) Accrued interest payable 91 193 Other liabilities 148 1,476 Net cash provided by operating activities 2,779 4,764 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from principal payments, maturities and sales of available-for-sale securities 307 1,920 Proceeds from principal payments of held-to-maturity securities 27 25 Net increase in loans ( 6,598 ) ( 9,601 ) (Purchase of) proceeds from BOLI ( 5 ) 633 Purchases of premises and equipment, net ( 50 ) ( 225 ) 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 ( 5,697 ) ( 7,177 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 103,658 52,112 Proceeds from borrowings — 40,000 Repayment of borrowings — ( 43,000 ) FHLB stock purchased ( 9 ) 49 Common stock repurchases ( 65 ) ( 1,399 ) Purchase of common stock surrendered to pay tax liability ( 218 ) ( 190 ) Dividends paid on common stock ( 1,459 ) ( 1,425 ) Proceeds from common stock option exercises 251 320 Net cash provided by financing activities 102,158 46,467 Net change in cash and cash equivalents 99,240 44,054 Cash and cash equivalents, beginning of period 49,690 57,836 Cash and cash equivalents, end of period $ 148,930 $ 101,890 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes $ 407 $ 2,100 Interest paid on deposits and borrowings 19,765 10,797 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 — 329 Impact of adoption of ASU 2016-13 on retained earnings — ( 1,149 ) See Notes to Condensed Consolidated Financial Statements 8 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc, and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc. References in this document to “Sound Financial Bancorp” refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refer to Sound Financial Bancorp, the Bank and Sound Community Insurance Agency, Inc., collectively, 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 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 Accounting Standard Update (“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 FASB issued 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 September 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 estimated fair value of our AFS securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2024 Municipal bonds $ 6,364 $ 11 $ ( 890 ) $ 5,485 Agency mortgage-backed securities 2,836 14 ( 303 ) 2,547 Total $ 9,200 $ 25 $ ( 1,193 ) $ 8,032 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 estimated 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 September 30, 2024 Municipal bonds $ 704 $ — $ ( 178 ) $ 526 Agency mortgage-backed securities 1,435 — ( 182 ) 1,253 Total $ 2,139 $ — $ ( 360 ) $ 1,779 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 estimated fair value of AFS and HTM securities at September 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. September 30, 2024 Available-for-sale Held-to-maturity Amortized Cost Estimated Fair Value Amortized Cost Estimated 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 4,710 3,820 704 526 Agency mortgage-backed securities 2,836 2,547 1,435 1,253 Total $ 9,200 $ 8,032 $ 2,139 $ 1,779 There were no pledged securities at September 30, 2024 or December 31, 2023. There were no sales of AFS or HTM securities during the three and nine months ended September 30, 2024 and 2023. Accrued interest receivable on securities totaled $ 77 thousand at September 30, 2024 and $ 49 thousand at 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): September 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 $ — $ — $ 3,820 $ ( 890 ) $ 3,820 $ ( 890 ) Agency mortgage-backed securities 46 — 2,128 ( 303 ) 2,174 ( 303 ) Total available-for-sale securities $ 46 $ — $ 5,948 $ ( 1,193 ) $ 5,994 $ ( 1,193 ) Held-to-maturity securities Municipal bonds $ — $ — $ 526 $ ( 178 ) $ 526 $ ( 178 ) Agency mortgage-backed securities — — 1,253 ( 182 ) 1,253 ( 182 ) Total held-to-maturity securities $ — $ — $ 1,779 $ ( 360 ) $ 1,779 $ ( 360 ) 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 September 30, 2024 or December 31, 2023. At both September 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 $ 9.8 million and $ 10.1 million, respectively. At both September 30, 2024 and 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 nine months ended September 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): September 30, 2024 December 31, 2023 Real estate loans: One-to-four family $ 271,702 $ 279,448 Home equity 25,199 23,073 Commercial and multifamily 358,587 315,280 Construction and land 85,724 126,758 Total real estate loans 741,212 744,559 Consumer loans: Manufactured homes 40,371 36,193 Floating homes 86,155 75,108 Other consumer 18,266 19,612 Total consumer loans 144,792 130,913 Commercial business loans 17,481 20,688 Total loans held-for-portfolio 903,485 896,160 Premiums for purchased loans (1) 736 829 Deferred fees, net ( 2,488 ) ( 2,511 ) Total loans held-for-portfolio, gross 901,733 894,478 Allowance for credit losses — loans ( 8,585 ) ( 8,760 ) Total loans held-for-portfolio, net $ 893,148 $ 885,718 (1) Includes premiums resulting from purchased loans of $ 410 thousand related to one-to-four family loans, $ 252 thousand related to commercial and multifamily loans, and $ 73 thousand related to commercial business loans as of September 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 September 30, 2024, there were three collateral dependent mortgage loans to consumers, totaling $ 355 thousand, that were in process of foreclosure. These loans in process of foreclosure all relate to judicial foreclosures for deceased borrowers. 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 September 30, 2024 2023 ACL - Loans Reserve for Unfunded Loan Commitments ACL ACL - Loans Reserve for Unfunded Loan Commitments ACL Balance at beginning of period $ 8,493 $ 245 $ 8,738 $ 8,217 $ 706 $ 8,923 Provision for (release of) credit losses during the period 106 ( 98 ) 8 224 ( 149 ) 75 Net charge-offs during the period ( 14 ) — ( 14 ) ( 3 ) — ( 3 ) Balance at end of period $ 8,585 $ 147 $ 8,732 $ 8,438 $ 557 $ 8,995 Nine months ended September 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 ( 88 ) ( 46 ) ( 134 ) 227 ( 473 ) ( 246 ) Net charge-offs during the period ( 87 ) — ( 87 ) ( 148 ) — ( 148 ) Balance at end of period $ 8,585 $ 147 $ 8,732 $ 8,438 $ 557 $ 8,995 (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 $ 3.4 million at both September 30, 2024 and December 31, 2023, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the ACL. The ACL is measured using the current expected credit losses (“CECL”) approach for financial instruments measured at amortized cost and for 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 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 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 loans; 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. See “Note 1—Organization and Significant Accounting Policies” in the Company’s 2023 Form 10-K for further information on the Company’s ACL accounting policy. 14 The following tables summarize the activity in the ACL - loans for the periods indicated (in thousands): Three Months Ended September 30, 2024 Beginning Allowance Charge-offs Recoveries Provision for (Release of) Credit Losses Ending Allowance One-to-four family $ 2,798 $ — $ — $ 14 $ 2,812 Home equity 199 — — 15 214 Commercial and multifamily 1,130 — — 155 1,285 Construction and land 1,072 — — ( 302 ) 770 Manufactured homes 938 — — 53 991 Floating homes 1,910 — — 150 2,060 Other consumer (1) 348 ( 20 ) 6 23 357 Commercial business 98 — — ( 2 ) 96 Total $ 8,493 $ ( 20 ) $ 6 $ 106 $ 8,585 (1) During the three months ended September 30, 2024, the gross charge-offs related entirely to deposit overdrafts that were charged off. Three Months Ended September 30, 2023 Beginning Allowance Charge-offs Recoveries Provision for (Release of) Credit Losses Ending Allowance One-to-four family $ 1,997 $ — $ — $ 8 $ 2,005 Home equity 194 — — 12 206 Commercial and multifamily 2,268 — — 77 2,345 Construction and land 2,498 — — 123 2,621 Manufactured homes 309 — — 21 330 Floating homes 586 — — 19 605 Other consumer (1) 160 ( 27 ) 24 ( 10 ) 147 Commercial business 205 — — ( 26 ) 179 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, 2024 Beginning Allowance Charge-offs Recoveries Provision for (Release of) Credit Losses Ending Allowance One-to-four family $ 2,630 $ — $ — $ 182 $ 2,812 Home equity 185 — — 29 214 Commercial and multifamily 1,070 — — 215 1,285 Construction and land 1,349 — — ( 579 ) 770 Manufactured homes (1) 971 ( 23 ) — 43 991 Floating homes 2,022 — — 38 2,060 Other consumer (2) 426 ( 80 ) 16 ( 5 ) 357 Commercial business 107 — — ( 11 ) 96 Total $ 8,760 $ ( 103 ) $ 16 $ ( 88 ) $ 8,585 (1) During the nine months ended September 30, 2024, there was one manufactured home loan that was charged off and then subsequently foreclosed upon. (2) During the nine months ended September 30, 2024, the gross charge-offs related entirely to deposit overdrafts that were charged off. 15 Nine Months Ended September 30, 2023 Beginning Allowance Impact of Adoption of ASU 2016-13 Charge-offs Recoveries Provision for (Release of) Credit Losses Ending Allowance One-to-four family $ 1,771 $ 355 $ — $ — $ ( 121 ) $ 2,005 Home equity (1) 132 69 ( 25 ) — 30 206 Commercial and multifamily 2,501 ( 320 ) — — 164 2,345 Construction and land 1,209 1,359 — — 53 2,621 Manufactured homes 462 ( 180 ) — — 48 330 Floating homes 456 166 — — ( 17 ) 605 Other consumer (2) 324 ( 163 ) ( 159 ) 36 109 147 Commercial business 256 ( 35 ) — — ( 42 ) 179 Unallocated 488 ( 491 ) — — 3 — Total $ 7,599 $ 760 $ ( 184 ) $ 36 $ 227 $ 8,438 (1) During the nine months ended September 30, 2023, there was one revolving home equity loan that was charged off. (2) During the nine months ended September 30, 2023, the gross charge-offs related 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), as well as 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 September 30, 2024 and December 31, 2023. The following tables present the internally assigned grades as of September 30, 2024 and December 31, 2023, by type of loan and origination year (in thousands): 16 At September 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 $ 23,702 $ 22,546 $ 78,999 $ 99,405 $ 14,208 $ 32,278 $ — $ — $ 271,138 Substandard — — 259 107 — 319 — — 685 Total one-to-four family $ 23,702 $ 22,546 $ 79,258 $ 99,512 $ 14,208 $ 32,597 $ — $ — $ 271,823 Home equity: Pass $ 2,455 $ 3,131 $ 2,467 $ 1,007 $ 213 $ 1,357 $ 13,478 $ 908 $ 25,016 Substandard — — — — — 58 274 67 399 Total home equity $ 2,455 $ 3,131 $ 2,467 $ 1,007 $ 213 $ 1,415 $ 13,752 $ 975 $ 25,415 Commercial and multifamily: Pass $ 20,001 $ 20,846 $ 94,546 $ 104,015 $ 21,826 $ 84,003 $ — $ — $ 345,237 Special mention — — — — 1,299 1,379 — — 2,678 Substandard — — 2,857 — 2,178 4,461 — — 9,496 Total commercial and multifamily $ 20,001 $ 20,846 $ 97,403 $ 104,015 $ 25,303 $ 89,843 $ — $ — $ 357,411 Construction and land: Pass $ 18,267 $ 23,946 $ 2,439 $ 20,814 $ 599 $ 1,912 $ — $ — $ 67,977 Special mention — — 16,554 — — — — — 16,554 Substandard — — 70 — — 701 — — 771 Total construction and land $ 18,267 $ 23,946 $ 19,063 $ 20,814 $ 599 $ 2,613 $ — $ — $ 85,302 Manufactured homes: Pass $ 7,706 $ 12,486 $ 7,108 $ 3,921 $ 1,957 $ 6,531 $ — $ — $ 39,709 Substandard — 310 62 — — 149 — — 521 Total manufactured homes $ 7,706 $ 12,796 $ 7,170 $ 3,921 $ 1,957 $ 6,680 $ — $ — $ 40,230 Floating homes: Pass $ 19,743 $ 6,568 $ 16,305 $ 24,064 $ 6,098 $ 10,594 $ — $ — $ 83,372 Substandard — — 2,363 — — — — — 2,363 Total floating homes $ 19,743 $ 6,568 $ 18,668 $ 24,064 $ 6,098 $ 10,594 $ — $ — $ 85,735 Other consumer: Pass $ 2,317 $ 3,543 $ 656 $ 3,661 $ 5,433 $ 2,114 $ 527 $ — $ 18,251 Substandard 5 — 23 1 — — — — 29 Total other consumer $ 2,322 $ 3,543 $ 679 $ 3,662 $ 5,433 $ 2,114 $ 527 $ — $ 18,280 Commercial business: Pass $ 224 $ 716 $ 1,847 $ 3,178 $ 291 $ 4,047 $ 7,171 $ — $ 17,474 Substandard 40 — — — — 23 — — 63 Total commercial business $ 264 $ 716 $ 1,847 $ 3,178 $ 291 $ 4,070 $ 7,171 $ — $ 17,537 Total loans Pass $ 94,415 $ 93,782 $ 204,367 $ 260,065 $ 50,625 $ 142,836 $ 21,176 $ 908 $ 868,174 Special mention — — 16,554 — 1,299 1,379 — — 19,232 Substandard 45 310 5,634 108 2,178 5,711 274 67 14,327 Total loans $ 94,460 $ 94,092 $ 226,555 $ 260,173 $ 54,102 $ 149,926 $ 21,450 $ 975 $ 901,733 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 Total loans 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 were not received as of the dates 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): September 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 $ 745 $ 745 $ 1,108 $ 848 Home equity 338 338 84 84 Commercial and multifamily 4,719 4,719 — — Construction and land 25 25 — — Manufactured homes 230 208 228 228 Floating homes 2,377 2,377 — — Other consumer 32 26 1 — Commercial business 23 23 2,135 2,135 Total $ 8,489 $ 8,461 $ 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, 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 $ — $ 168 $ 525 $ — $ 693 $ 271,130 $ 271,823 Home equity — — 341 — 341 25,074 25,415 Commercial and multifamily 151 — 4,713 — 4,864 352,547 357,411 Construction and land — — — — — 85,302 85,302 Manufactured homes — 445 86 — 531 39,699 40,230 Floating homes — — — — — 85,735 85,735 Other consumer 8 43 2 — 53 18,227 18,280 Commercial business — 23 — — 23 17,514 17,537 Total $ 159 $ 679 $ 5,667 $ — $ 6,504 $ 895,229 $ 901,733 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 September 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 nine months ended September 30, 2024 and 2023. We have no modified loan receivables that have subsequently defaulted at September 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 $ 1.5 million and $ 1.7 million at September 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 fair 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): September 30, 2024 Commercial Real Estate Residential Real Estate Land Other Residential RVs/Automobiles Business Assets Total Real estate loans: One- to four- family $ — $ 475 $ — $ 368 $ — $ — $ 843 Home equity — 338 — — — — 338 Commercial and multifamily 4,719 — — — — — 4,719 Construction and land — — 25 — — — 25 Total real estate loans 4,719 813 25 368 — — 5,925 Consumer loans: Manufactured homes — — — 230 — — 230 Floating homes — — — 2,377 — — 2,377 Other consumer — — — — 26 — 26 Total consumer loans — — — 2,607 26 — 2,633 Commercial business loans — — — — — 23 23 Total loans $ 4,719 $ 813 $ 25 $ 2,975 $ 26 $ 23 $ 8,581 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 September 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 the Company’s 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). Level 2 securities include those traded on an active exchange, as well as U.S. government securities. 21 Held-to-maturity securities – The fair value is based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities. Loans held-for-sale - The fair value of fixed-rate one-to-four family loans is based on whole loan forward prices obtained from government sponsored enterprises. 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 rates 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, OREO and repossessed assets and off-balance sheet loan commitments 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 of off-balance sheet financial instruments, which consisted entirely of loan commitments at September 30, 2024 and December 31, 2023, 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 was not significant at September 30, 2024 and December 31, 2023. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. There were no transfers between levels during the three and nine months ended September 30, 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): September 30, 2024 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 148,930 $ 148,930 $ 148,930 $ — $ — Available-for-sale securities 8,032 8,032 — 8,032 — Held-to-maturity securities 2,139 1,779 — 1,779 — Loans held-for-sale 65 65 — 65 — Loans held-for-portfolio, net 893,148 861,275 — — 861,275 Mortgage servicing rights 4,665 4,665 — — 4,665 FINANCIAL LIABILITIES: Time deposits 304,630 305,462 — 305,462 — Borrowings 40,000 40,000 — 40,000 — Subordinated notes 11,749 11,959 — 11,959 — 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 September 30, 2024 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 5,485 $ — $ 5,485 $ — Agency mortgage-backed securities 2,547 — 2,547 — Mortgage servicing rights 4,665 — — 4,665 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: September 30, 2024 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 110 %- 192 % ( 120 %) Discount rate 10.7 %- 14.8 % ( 12.7 %) 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 prepayment speed assumption 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 prepayment speed assumption and conversely, a decrease in the weighted average life assumptions will result in an increase in the prepayment speed assumption. 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 nine months ended September 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 September 30, 2024 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 115 $ — $ — $ 115 Collateral dependent loans 8,581 — — 8,581 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 September 30, 2024 and December 31, 2023. Note 6 – Mortgage Servicing Rights The unpaid principal balance of the Company’s mortgage servicing rights portfolio totaled $ 432.0 million at September 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 September 30, 2024 and December 31, 2023 were $ 429.9 million and $ 446.8 million, respectively. The unpaid principal balance of loans serviced for other financial institutions totaled $ 2.1 million at September 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Beginning balance, at fair value $ 4,540 $ 4,726 $ 4,632 $ 4,687 Servicing rights that result from transfers and sale of financial assets 24 33 114 117 Changes in fair value: Due to changes in model inputs or assumptions and other (1) 101 ( 78 ) ( 81 ) ( 123 ) Ending balance, at fair value $ 4,665 $ 4,681 $ 4,665 $ 4,681 (1) Represents changes due to collection/realization of expected cash flows and curtailments. The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows: September 30, 2024 December 31, 2023 Prepayment speed (Public Securities Association “PSA” model) 120 % 129 % Weighted-average life 7.6 years 7.7 years Weighted average discount rate 12.7 % 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 $ 280 thousand and $ 841 thousand for the three and nine months ended September 30, 2024, and $ 295 thousand and $ 891 thousand for the three and nine months ended September 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): September 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 September 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): September 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 Company’s borrowing capacity from the FHLB as of the dates indicated: 26 September 30, 2024 December 31, 2023 Amount available to borrow under credit facility (1) $ 483,759 $ 463,541 Advance equivalent of collateral: One-to-four family mortgage loans 184,256 196,547 Commercial and multifamily mortgage loans 31,565 34,464 Home equity loans 284 348 Notional amount of letters of credit outstanding 8,000 10,000 Remaining FHLB borrowing capacity (2) $ 168,105 $ 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, 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 September 30, 2024 and December 31, 2023, the amount available to borrow under this credit facility was $ 21.9 million and $ 18.3 million, respectively, subject to eligible pledged collateral. The Company had no outstanding borrowings under this arrangement at September 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 September 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 September 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 September 30, 2024 and December 31, 2023. 27 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 2024 2023 2024 2023 Net income $ 1,154 $ 1,169 $ 2,719 $ 6,228 LESS: Participating dividends - Unvested Restricted Stock Awards (“RSAs”) ( 3 ) ( 3 ) ( 10 ) ( 9 ) LESS: Income allocated to participating securities - Unvested RSAs ( 4 ) ( 4 ) ( 8 ) ( 31 ) Net income available to common stockholders - basic 1,146 1,162 2,701 6,188 ADD BACK: Income allocated to participating securities - Unvested RSAs 4 4 8 31 LESS: Income reallocated to participating securities - Unvested RSAs ( 4 ) ( 4 ) ( 8 ) ( 30 ) Net income available to common stockholders - diluted $ 1,146 $ 1,162 $ 2,701 $ 6,189 Weighted average number of shares outstanding, basic 2,544,233 2,553,773 2,541,331 2,568,899 Effect of potentially dilutive common shares 25,135 18,035 20,611 19,889 Weighted average number of shares outstanding, diluted 2,569,368 2,571,808 2,561,942 2,588,788 Earnings per share, basic $ 0.45 $ 0.45 $ 1.06 $ 2.41 Earnings per share, diluted $ 0.45 $ 0.45 $ 1.05 $ 2.39 There were no anti-dilutive securities at September 30, 2024 and 7,892 anti-dilutive securities at September 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" and together with the 2013 plan, the "Plans") expired in November 2018 and no further awards may be made under the 2008 Plan; provided, however, all awards outstanding under the 2008 Plan remain outstanding in accordance with their terms. Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units. As of September 30, 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 $ 98 thousand and $ 291 thousand for the three and nine months ended September 30, 2024, and $ 88 thousand and $ 368 thousand for the three and nine months ended September 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 dates of the grant date in equal annual installments over a period 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 generally 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 September 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 July 1, 2024 85,512 $ 33.00 5.29 $ 855 Granted — — Exercised ( 11,864 ) 18.36 Outstanding at September 30, 2024 73,648 35.36 5.80 1,336 Exercisable 54,167 33.70 4.92 1,073 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 73,648 $ 35.36 5.80 $ 1,336 The following is a summary of the Company’s stock option award activity during the nine months ended September 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 ( 13,299 ) 18.85 Expired ( 257 ) 36.57 Outstanding at September 30, 2024 73,648 35.36 5.80 1,336 Exercisable 54,167 33.70 4.92 1,073 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 73,648 $ 35.36 5.80 $ 1,336 As of September 30, 2024, there was $ 144 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans. This cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.0 years. The total intrinsic value of the shares exercised during the three and nine months ended September 30, 2024 was $ 294 thousand and $ 317 thousand, and for the three and nine months ended September 30, 2023 was $ 20 thousand and $ 408 thousand, respectively. The fair value of each option 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, 2024 and 2023 were determined using the following weighted-average assumptions as of the grant date. Nine Months Ended September 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 September 30, 2024 and September 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 a period 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, 2024: Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at July 1, 2024 17,143 $ 39.93 Granted — — Vested — — Forfeited — — Non-Vested at September 30, 2024 17,143 $ 39.93 $ 52.51 Expected to vest assuming a 0 % forfeiture rate over the vesting term 17,143 $ 39.93 $ 52.51 The following is a summary of the Company’s non-vested restricted stock award activity during the nine months ended September 30, 2024 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 Non-Vested at September 30, 2024 17,143 $ 39.93 $ 52.51 Expected to vest assuming a 0 % forfeiture rate over the vesting term 17,143 $ 39.93 $ 52.51 As of September 30, 2024, there was $ 482 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans. This cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.0 years. The total fair value of shares that vested during the nine months ended September 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 nine months ended September 30, 2024 and 2023 was $ 39.89 and $ 40.13 , respectively. Employee Stock Ownership Plan The fair value of the 169,778 shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) trust was $ 9.1 million at September 30, 2024. ESOP compensation expense included in salaries and benefits was $ 189 thousand and $ 567 thousand for the three and nine months ended September 30, 2024, and $ 204 thousand and $ 612 thousand for the three and nine months ended September 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 30 typically include one renewal option. As of September 30, 2024, our leases had remaining terms ranging from five months to 4.8 years. The operating leases 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, 2023 Operating lease right-of-use assets $ 3,779 $ 4,496 Operating lease liabilities $ 4,079 $ 4,821 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, 2024 2023 2024 2023 Operating lease expense Office leases $ 270 $ 270 $ 811 $ 808 Sublease income — ( 3 ) ( 4 ) ( 9 ) Net lease expense $ 270 $ 267 $ 807 $ 799 The following table presents the schedule of lease liabilities at the date indicated (in thousands): September 30, 2024 Remainder of 2024 $ 994 2025 934 2026 953 2027 917 2028 546 Thereafter — Total lease payments 4,344 Less: Present value discount 265 Present value of lease liabilities $ 4,079 Lease term and discount rate by lease type consisted of the following at the dates indicated: September 30, 2024 December 31, 2023 Weighted-average remaining lease term: Office leases 4.5 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Cash paid for amounts included in the measurement of lease liabilities for operating leases: Operating cash flows Office leases $ 278 $ 277 $ 836 $ 815 31 Table of Contents Note 12 – Subsequent Events On October 30, 2024, the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.19 per common share, payable on November 26, 2024 to stockholders of record at the close of business on November 12, 2024. 32 Table of Contents