Sound Financial Bancorp, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Sound Financial Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Sound Financial Bancorp, Inc., and Subsidiary (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses on Loans As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses on loans balance was $8.5 million at December 31, 2024. The allowance for credit losses is maintained to provide for estimated losses expected to occur over the estimated remaining life of the asset. The Company uses relevant and reliable information from internal and external sources related to past events, current conditions, and a reasonable and supportable forecast. The quantitative component of the allowance is measured using a discounted cash flow model incorporating gross historical loss rates, adjusted for defaults, recoveries, expected prepayments, 66 Table of Contents and an economic forecast based on unemployment. Qualitative adjustments are used to estimate additional losses related to risks that are not captured in the quantitative analysis and are based on management’s evaluation of available internal and external data. We identified the auditing of the allowance for credit losses on loans, including management’s use of reasonable and supportable forecasts of future economic conditions in the discounted cash flow model, and the estimation of qualitative adjustments, both of which are used in the estimate, as a critical audit matter. Determination of the inputs used in the discounted cash flow model involve significant management judgment based on management’s consideration of the forecast of relevant economic conditions. Qualitative adjustments are based on management’s evaluation of available internal and external data and involves significant management judgment. Auditing management’s judgments relating to the determination of the inputs used in the discounted cash flow model and qualitative adjustments involved significant audit effort as well as especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures related to the critical audit matter included the following, among others: • Evaluating the appropriateness of the methodology, including the application of the forecasted economic conditions and qualitative adjustments determined by management and used in the calculation. • Testing the completeness and accuracy of the internal data and evaluating the relevance and reliability of the external data used in the calculation. • Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions assumption, and evaluating whether the significant assumptions used in the forecast is reasonable and supportable based on the analysis provided • Obtaining management’s analysis of internal and external qualitative adjustments and evaluating the reasonableness of the qualitative adjustments used in the calculation. /s/ Moss Adams LLP Everett, Washington March 18, 2025 We have served as the Company’s auditor since 2002. 67 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets (In thousands, except share and per share amounts) December 31, 2024 2023 ASSETS Cash and cash equivalents $ 43,641 $ 49,690 Available-for-sale (“AFS”) securities, at fair value (amortized cost of $ 9,112 and $ 9,539 at December 31, 2024 and 2023, respectively) 7,790 8,287 Held-to-maturity (“HTM”) securities, at amortized cost (fair value of $ 1,712 and $ 1,787 at December 31, 2024 and 2023, respectively) 2,130 2,166 Loans held-for-sale 487 603 Loans held-for-portfolio 900,171 894,478 Allowance for credit losses (“ACL”) on loans ( 8,499 ) ( 8,760 ) Total loans held-for-portfolio, net 891,672 885,718 Accrued interest receivable 3,471 3,452 Bank-owned life insurance (“BOLI”), net 22,490 21,860 Other real estate owned (“OREO”) and repossessed assets, net — 575 Mortgage servicing rights (“MSRs”), at fair value 4,769 4,632 Federal Home Loan Bank ("FHLB") stock, at cost 1,730 2,396 Premises and equipment, net 4,697 5,240 Operating lease right of use assets, net 3,725 4,496 Other assets 7,031 6,106 Total assets $ 993,633 $ 995,221 LIABILITIES Deposits Interest-bearing $ 705,267 $ 699,813 Noninterest-bearing demand 132,532 126,726 Total deposits 837,799 826,539 Borrowings 25,000 40,000 Accrued interest payable 765 817 Operating lease liabilities 4,013 4,821 Other liabilities 9,371 9,563 Advance payments from borrowers for taxes and insurance 1,260 1,110 Subordinated notes, net 11,759 11,717 Total liabilities 889,967 894,567 COMMITMENTS AND CONTINGENCIES (Notes 18) 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, 2,564,907 and 2,549,427 issued and outstanding at December 31, 2024 and 2023, respectively 25 25 Additional paid-in capital 28,413 27,990 Retained earnings 76,272 73,627 Accumulated other comprehensive loss, net of tax ( 1,044 ) ( 988 ) Total stockholders' equity 103,666 100,654 Total liabilities and stockholders' equity $ 993,633 $ 995,221 See notes to consolidated financial statements 68 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income (In thousands, except share and per share amounts) Year Ended December 31, 2024 2023 INTEREST INCOME Loans, including fees $ 50,499 $ 46,470 Interest and dividends on investments, cash and cash equivalents 6,875 4,139 Total interest income 57,374 50,609 INTEREST EXPENSE Deposits 24,076 14,136 Borrowings 1,624 1,951 Subordinated notes 672 672 Total interest expense 26,372 16,759 Net interest income 31,002 33,850 (RELEASE OF) PROVISION FOR CREDIT LOSSES ( 120 ) ( 273 ) Net interest income after (release of) provision for credit losses 31,122 34,123 NONINTEREST INCOME Service charges and fee income 2,620 2,527 Earnings on BOLI 625 1,179 Mortgage servicing income 1,118 1,179 Fair value adjustment on MSRs ( 4 ) ( 219 ) Net gain on sale of loans 258 340 Other income 38 — Total noninterest income 4,655 5,006 NONINTEREST EXPENSE Salaries and benefits 17,590 17,135 Operations 5,894 6,095 Regulatory assessments 787 688 Occupancy 1,665 1,810 Data processing 4,226 4,388 Net (gain) loss and expenses on OREO and repossessed assets ( 31 ) 13 Total noninterest expense 30,131 30,129 Income before provision for income taxes 5,646 9,000 Provision for income taxes 1,006 1,561 Net income $ 4,640 $ 7,439 Earnings per common share: Basic $ 1.81 $ 2.88 Diluted $ 1.80 $ 2.86 Weighted average number of common shares outstanding: Basic 2,542,805 2,562,182 Diluted 2,565,938 2,581,702 See notes to consolidated financial statements 69 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income (In thousands) Year Ended December 31, 2024 2023 Net income $ 4,640 $ 7,439 AFS securities: Unrealized (losses) gains arising during the year ( 71 ) 163 Income tax benefit (expense) related to unrealized (losses) gains 15 ( 34 ) Other comprehensive (loss) income, net of tax ( 56 ) 129 Comprehensive income $ 4,584 $ 7,568 See notes to consolidated financial statements 70 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (In thousands, except share and per share amounts) Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income, net of tax Total Stockholders' Equity Balance at December 31, 2023 2,549,427 $ 25 $ 27,990 $ 73,627 $ ( 988 ) $ 100,654 Net income 4,640 4,640 Other comprehensive loss, net of tax benefit ( 56 ) ( 56 ) Share-based compensation 390 390 Restricted stock awards issued 8,048 — Cash dividends on common stock ($ 0.76 per share) ( 1,948 ) ( 1,948 ) Common stock repurchased ( 1,626 ) ( 18 ) ( 47 ) ( 65 ) Common stock surrendered ( 5,053 ) ( 218 ) ( 218 ) Common stock options exercised 14,111 269 269 Balance at December 31, 2024 2,564,907 $ 25 $ 28,413 $ 76,272 $ ( 1,044 ) $ 103,666 Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss), net of tax Total Stockholders' Equity Balance at December 31, 2022 2,583,619 $ 26 $ 28,004 $ 70,792 $ ( 1,117 ) $ 97,705 Impact of adoption of ASU No. 2016-13 ( 1,149 ) ( 1,149 ) Net income 7,439 7,439 Other comprehensive income, net of tax 129 129 Share-based compensation 450 450 Restricted stock awards issued 8,850 Cash dividends on common stock ($ 0.74 per share) ( 1,913 ) ( 1,913 ) Common stock repurchased ( 58,035 ) ( 1 ) ( 594 ) ( 1,542 ) ( 2,137 ) Common stock surrendered ( 6,799 ) ( 265 ) ( 265 ) Restricted shares forfeited ( 755 ) Common stock options exercised 22,547 395 395 Balance at December 31, 2023 2,549,427 $ 25 $ 27,990 $ 73,627 $ ( 988 ) $ 100,654 See notes to consolidated financial statements 71 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,640 $ 7,439 Adjustments to reconcile net income to net cash from operating activities: Amortization of net discounts on investments 84 81 (Reversal of) provision for credit losses ( 120 ) ( 273 ) Depreciation and amortization 619 717 Compensation expense related to share based compensation 390 450 Fair value adjustment on MSRs 4 219 Right of use assets amortization 960 935 Increase in cash surrender value of BOLI ( 625 ) ( 612 ) Net gain on BOLI death benefit — ( 567 ) Deferred income tax ( 273 ) ( 467 ) Net gain on disposal of premises and equipment, net ( 38 ) — Net gain on sale of loans ( 258 ) ( 340 ) Proceeds from sale of loans held-for-sale 14,273 19,335 Originations of loans held-for-sale ( 14,899 ) ( 19,762 ) Net (gain) loss on sale of OREO and repossessed assets ( 37 ) 13 Change in operating assets and liabilities: Accrued interest receivable ( 19 ) ( 369 ) Other assets ( 637 ) ( 688 ) Lease liabilities ( 997 ) ( 956 ) Advances from borrowers for taxes and insurance 150 64 Accrued interest payable ( 52 ) 422 Other liabilities ( 233 ) 1,245 Net cash provided by operating activities 2,932 6,886 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from principal payments, maturities and sales of AFS securities 385 2,043 Proceeds from principal payments, maturities and sales of HTM securities 35 33 Net increase in loans ( 5,049 ) ( 28,660 ) (Purchases of BOLI) / Proceeds from death benefit of BOLI ( 5 ) 633 Purchases of premises and equipment, net ( 76 ) ( 444 ) Proceeds from disposal of premises and equipment, net 38 — Proceeds from sale of OREO and other repossessed assets 727 71 Net cash used in investing activities ( 3,945 ) ( 26,324 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 11,260 17,776 Proceeds from borrowings — 40,000 Repayment of borrowings ( 15,000 ) ( 43,000 ) FHLB stock redeemed 666 436 Common stock repurchases ( 65 ) ( 2,137 ) Dividends paid on common stock ( 1,948 ) ( 1,913 ) Surrender of stock to pay tax liability ( 218 ) ( 265 ) Proceeds from common stock option exercises 269 395 Net cash provided by financing activities ( 5,036 ) 11,292 Net change in cash and cash equivalents ( 6,049 ) ( 8,146 ) Cash and cash equivalents, beginning of period 49,690 57,836 Cash and cash equivalents, end of period $ 43,641 $ 49,690 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes $ 831 $ 2,400 Interest paid on deposits, borrowings and subordinated debt 26,424 16,337 Loans transferred from loans held-for-portfolio to OREO and repossessed assets 115 — ROU assets obtained in exchange for new operating lease liabilities 189 329 See notes to consolidated financial statements 72 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Note 1— Organization and Significant Accounting Policies Sound Financial Bancorp, a Maryland corporation (“Sound Financial Bancorp”), is the parent holding company for its wholly owned subsidiary, Sound Community Bank (the “Bank”) and the Bank's wholly- owned subsidiary, Sound Community Insurance Agency, Inc. Substantially all of Sound Financial Bancorp's business is conducted through the Bank, a Washington state-chartered commercial bank. As a Washington commercial bank that is not a member of the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Bank's regulators are the Washington State Department of Financial Institutions (“WDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). As a bank holding company, Sound Financial Bancorp is regulated by the Federal Reserve. Sound Financial Bancorp’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank. References to the “Company,” “we,” “us,” and “our” mean Sound Financial Bancorp and the Bank unless the context otherwise requires. Subsequent events – The Company has evaluated subsequent events for potential recognition and disclosure. See “Note 22—Subsequent Events” for further information. Basis of Presentation and Use of Estimates – The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses and the fair value of MSRs. The accompanying consolidated financial statements include the accounts of Sound Financial Bancorp and its wholly- owned subsidiaries, the Bank and Sound Community Insurance Agency, Inc. All significant intercompany balances and transactions between Sound Financial Bancorp and its subsidiaries have been eliminated in consolidation. Cash and cash equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash on hand and in banks and interest-bearing deposits. All have original maturities of three months or less and may exceed federally insured limits. Investment securities – Investment securities are classified as HTM securities or AFS securities. HTM securities are those securities that the Company has the positive intent and ability to hold until maturity. These securities are carried at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Securities not classified as HTM or trading are considered AFS securities. AFS securities may be sold to implement the Company's asset/liability management strategies and/or in response to changes in interest rates and similar factors. AFS securities are reported at fair value. Dividend and interest income on investment securities are recognized when earned. Unrealized gains and losses, net of the related deferred tax effect, are reported as a net amount in accumulated other comprehensive income (loss) on AFS securities in the Consolidated Balance Sheets. Realized gains and losses on AFS securities, determined using the specific identification method, are included in earnings. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the interest method over the period to the earlier of call date or maturity. Allowance for Credit Losses on Investment Securities – The ACL on investment securities is determined for both the HTM and AFS securities in accordance with Accounting Standards Codification (“ASC”) 326 - Financial Instruments - Credit Losses . For AFS securities, we perform a quarterly qualitative evaluation for securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related. In determining whether a security’s decline in fair value is credit related, we consider a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments; and (vi) general market conditions, which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that the unrealized loss can be attributed to credit loss, we record the amount of credit loss through a charge to provision for credit losses in current period earnings. However, the amount of credit loss recorded in current period earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost. 73 Table of Contents If we intend, or it is likely we will be required, to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings. For unrealized losses deemed non-credit related, we record the loss, net of tax, through accumulated other comprehensive income. For HTM securities, we evaluate at the end of each quarter whether any expected credit losses exist. We determine expected credit losses on AFS and HTM securities through a discounted cash flow approach, using the security’s effective interest rate. However, as previously mentioned, the measurement of credit losses on AFS securities only occurs when, through our qualitative assessment, all or a portion of the unrealized loss is determined to be credit related. Our discounted cash flow approach incorporates assumptions about the collectability of future cash flows. The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows. Credit losses on AFS securities are measured on an individual basis, while credit losses on HTM securities are measured on a collective basis according to shared risk characteristics. Credit losses on HTM securities are only recognized at the individual security level when we determine a security no longer possesses risk characteristics similar to other HTM securities in the portfolio. We do not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable. Accrued interest receivable for investment securities is included in accrued interest receivable balances in the Consolidated Balance Sheets. Loans held-for-sale – To mitigate interest-rate sensitivity, from time to time, certain fixed-rate mortgage loans are identified as held-for-sale in the secondary market. Accordingly, such loans are classified as held-for-sale in the Consolidated Balance Sheets and are carried at the lower of cost or estimated fair market value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Mortgage loans held-for-sale are generally sold with the mortgage servicing rights retained by the Company. Gains or losses on sales of loans are recognized based on the difference between the selling price and the carrying value of the related loans sold based on the specific identification method. Loans held-for-portfolio – The Company originates mortgage, commercial, and consumer loans to clients. A substantial portion of the loan portfolio is represented by loans secured by real estate located throughout the Puget Sound region, especially King, Snohomish and Pierce Counties, and in Clallam and Jefferson Counties of Washington State. The ability of the Company’s debtors to honor their contracts can be affected by employment, real estate and general economic conditions in these areas. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balance adjusted for any charge-offs, the ACL, and any premiums, discounts, deferred fees or costs on origination of loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the contractual life of the loan for term loans or the straight-line method for open-ended loans. The accrual of interest is discontinued at the time the loan is 90 days past due or if, in management's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions. Loans are typically charged off no later than 120 days past due, unless secured by collateral. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current, future payments are reasonably assured and payments have been received for six consecutive months. Allowance for Credit Losses on Loans – 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. The ACL consists of two elements: (1) identification of loans that do not share risk characteristics with collectively evaluated loan pools, which are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics. We maintain a loan review system that periodically assesses our loan portfolio and identifies individually analyzed loans. For loans that do not share risk characteristics with other loans, expected credit loss is measured as the difference between the discounted value of expected future cash flows (based on the original effective interest rate) and the loan’s amortized cost basis. The amortized cost basis is net of previous charge-offs and deferred loan fees and costs. If the net realizable value of the loan is less than its amortized cost basis, we recognize an expected credit loss for the difference. For collateral-dependent loans, where the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation 74 Table of Contents or sale of the collateral, we have elected the practical expedient under ASC 326. Under this approach, expected credit losses are measured based on the fair value of the collateral, considering estimated selling costs when a sale is expected. 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 in “Note 5— Loans.” The ACL is measured on a collective basis for pools of loans with similar risk characteristics. We have identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses: • Construction — While secured by real estate, construction loans carry greater risk than term real estate loans due to additional uncertainties, including the timely and cost-effective completion of construction, as well as the ability to sell the building or achieve stabilized occupancy sufficient to generate necessary cash flows for debt service and operating costs. Some loans are originated for borrowers who intend to occupy the property, creating a risk that they may be unable to secure permanent financing upon construction completion. To mitigate these risks, we require borrowers to adhere to lower loan-to-value ratios and additional covenants and demonstrate strong financial support from guarantors or borrowers. • One-to-four family residential closed end loans secured by first liens — The primary drivers of potential loss in our residential real estate portfolio included general, regional, or individual economic conditions that effect employment and borrowers’ cash flows. Risk in this portfolio is best measured through changes in borrower credit scores and loan-to-value ratios. Loss estimates are based on credit score trends, economic outlook, home values, and historical loss experience, adjusted for economic conditions and unemployment rates. • One-to-four family residential secured by junior liens — Similar to first-lien residential real estate loans, the performance of junior lien loans is primarily influenced by borrower cash flow and employment status. However, junior lien loans carry additional risk because they are typically secured by a deed of trust subordinate to the primary lien holder. For home equity lines of credit (“HELOCs”), there is an added risk that, as a borrower's financial condition deteriorates, the outstanding balance may increase since the Company can only cancel these credit lines under specific, limited conditions. In addition to the ACL maintained as a percentage of the outstanding loan balance, we maintain additional reserves for the unfunded portion of HELOCs. • Commercial and multifamily real estate — Non-owner-occupied commercial and multifamily properties typically consist of leased buildings, where rental income serves as the primary source of repayment. Owner-occupied commercial properties generally rely on the financial condition of the business operating within the property. The portfolio primarily includes loans secured by office, retail, light industrial, and multifamily properties, along with some special-use properties. The risk of loss is primarily driven by economic changes that affect tenants’ or business owners’ ability to pay rent. These properties require more intensive management due to potential tenant turnover, which can impact occupancy rates and rental income. Additional risks include oversupply from new construction, rising operating costs, and changes in interest rates. These loans typically have maturities of five to ten years at origination, with amortization periods ranging from 15 to 25 years. • Commercial and industrial — Repayment of these loans is primarily based on the borrower’s cash flow and secondarily on the underlying collateral. Borrower cash flows may be unpredictable, and collateral (often accounts receivable, inventory, or equipment) can fluctuate in value. Such collateral may depreciate, be difficult to appraise, or be illiquid. Losses in this portfolio tend to be closely correlated with actual and forecasted changes in gross domestic product. • Floating homes — The primary drivers of potential loss in our floating homes portfolio included general, regional, or individual economic conditions that effect employment and borrowers’ cash flows. Risk in this portfolio is best measured through changes in borrower credit scores and loan-to-value ratios. Loss estimates are based on credit score trends, economic outlook, floating home values, and historical loss experience, adjusted for economic conditions and unemployment rates. • Other consumer loans (excluding floating homes) — These loans are subject to three primary risks: non-payment due to income loss, over-extension of credit, and collateral shortfall in the event of default. Non-payment is typically driven by job loss and follows general economic trends, particularly increases in unemployment. Collateral values may decline due to market demand shifts, physical damage, or a combination of factors. Revolving lines of credit, which are unsecured, generally offer limited recovery opportunities in the event of default. The ACL quantitative allowance for each segment is measured using a discounted cash flow methodology incorporating a gross historical loss rate. Required cash flows over the contractual life of the loans are the basis for the cash flows utilized in the model, adjusted for defaults, recoveries, and expected prepayments. The contractual term excludes expected extensions, renewals, and modifications. 75 Table of Contents The quantitative analysis utilizes macroeconomic variables to establish a quantitative relationship between economic conditions and loan performance through an economic cycle. Using the historical relationship between economic conditions and loan performance, our expectation of future loan performance is incorporated using an economic forecast based upon unemployment. The forecast is applied over a period that we determined to be reasonable and supportable. Beyond the period over which we can develop or source a reasonable and supportable forecast, the model reverts to long-term average historical loss rates using a straight-line, time-based methodology over the next four quarters. Our current forecast period is four quarters, with a four-quarter reversion period to long-term average historical loss rates. After quantitative considerations, we apply additional qualitative adjustments that consider the expected impact of certain factors not fully captured in the quantitative reserve. The qualitative considerations are constructed within a framework that ranges from zero expected losses (minimum) to a maximum historical loss rate. The maximum historical loss rate is the highest two-year loss rate produced by the base historical loss rate model. Qualitative adjustments include but are not limited to changes in lending policies; changes in nature and volume of the portfolio; change in staff experience level; changes in the volume or trends of classified loans, delinquencies, and nonaccrual loans; concentration risk; value of underlying collateral; competitive, legal, and regulatory factors; changes in the loan review system; and economic conditions. Management has assigned weightings for each qualitative factor as to the relative importance of that factor to each segment. The qualitative factors are evaluated using a five-point scale ranging from improvement to major risk. Improvement represents an adjustment down to the minimum historical loss rate. Major risk represents an adjustment up to the maximum historical loss rate. The rating of the qualitative factor and the allocated weighting determines the adjustment to the historical loss rate. Management utilizes a scorecard approach in the determination of what level of the five-point scale to assign to each qualitative adjustment. This includes, but is not limited to, differences between local and national unemployment rates, quantitative changes in inflation, introduction of new product lines, level of past due loans, risk rating of certain loan portfolios, loan review downgrades or upgrades, and quantitative approaches to measuring the risk of underlying collateral. The ACL is established through the provision for credit losses that is reported in the Consolidated Statements of Income, which is based upon an evaluation of estimated losses in the current loan portfolio, including the evaluation of individually analyzed loans. Charge-offs against the ACL are taken on loans where we determine that the collection of loan principal and interest is unlikely. Recoveries made on loans that have been charged-off are credited to the ACL. Although we believe we have established and maintained the ACL on loans at appropriate levels, changes in reserves may be necessary if actual economic and other conditions differ substantially from the forecast used in estimating the ACL. We evaluate our ACL policy and judgments on an ongoing basis and update them as necessary based on changing conditions. As part of our continuous enhancement to the ACL methodology, during the year ended December 31, 2023, an assessment of the loss rates utilized for each segment was performed and updated to use peer loss rates. Additionally, we enhanced the inputs related to our reasonable and supportable forecast through the inclusion of a quantitative model as part of our forecast which replaced a previous qualitative method. This change in the ACL is considered a change in accounting estimate as per ASC 250-10, where adjustments should be made prospectively. Accrued interest receivable for loans is reported in accrued interest receivable balances in the Consolidated Balance Sheets. We elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if we believe the collection of interest is doubtful. We concluded that this policy results in the timely reversal of uncollectable interest. Allowance for Credit Losses on Unfunded Commitments – We are required to include unfunded commitments that are expected to be funded in the future within the ACL calculation, other than for those that are unconditionally cancellable. To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate. To determine the expected funding rate, we utilize a peer-based historical utilization rate for each segment. The ACL for off-balance-sheet exposures is reported in other liabilities on the Consolidated Balance Sheets. The liability represents an estimate of expected credit losses arising from off-balance-sheet exposures such as unfunded commitments. Modified Loans to Borrowers Experiencing Financial Difficulty – Modified loans are reviewed to determine if the modification was done for borrowers experiencing financial difficulty. Concessions may be granted in various forms, including a reduction in the stated interest rate, reduction in the loan balance or accrued interest, extension of the maturity date, or a combination of these. We refer to these loan modifications to borrowers experiencing financial difficulty as modified loans to troubled borrowers. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been past due for a period of 90 days or more. Such loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. 76 Table of Contents We typically measure the ACL on modified loans to troubled borrowers on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. Transfers of financial assets – Transfers of an entire financial asset, or a participating interest in an entire financial asset, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) a group of financial assets or a participating interest in an entire financial asset has been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Mortgage servicing rights – MSRs represent the value associated with servicing residential mortgage loans when the mortgage loans have been sold into the secondary market and the related servicing has been retained by the Company. The Company may also purchase MSRs. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. The Company measures its MSRs at fair value and reports changes in fair value through earnings under the caption fair value adjustment on MSRs in other income in the period in which the change occurs. Changes in the fair values of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Currently, we do not hedge the effects of changes in fair value of our MSRs. Premises and equipment – Premises, leasehold improvements and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 1 to 10 years. The cost of leasehold improvements is amortized using the straight-line method over the terms of the related leases. The cost of premises is amortized using the straight-line method over the estimated useful life of the building, up to 39 years. Management reviews premises, leasehold improvements and furniture and equipment for impairment when factors exist indicating potential impairment. Bank-owned life insurance, net – The carrying amount of BOLI approximates its fair value, and is estimated using the cash surrender value, net of any surrender charges. Federal Home Loan Bank stock – The Company is a member of the FHLB of Des Moines. FHLB stock represents the Company's investment in the FHLB and is carried at cost, which reasonably approximates its fair value. As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2024 and 2023, the Company's minimum required investment in FHLB stock was $ 1.7 million and $ 2.4 million, respectively. Typically, the Company may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB. Other real estate owned and repossessed assets – OREO and repossessed assets represent real estate and other assets which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, OREO and repossessed assets are recorded at fair value less estimated costs to sell, which becomes the new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for credit losses. After foreclosure, management periodically performs valuations such that the property is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in other noninterest expense in the Consolidated Statements of Income. In some instances, the Company may make loans to facilitate the sales of OREO. Management reviews all sales for which the Company is the lending institution. Any gains related to sales of other real estate owned may be deferred until the buyer has a sufficient investment in the property. Leases – We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease liabilities in the Consolidated Balance Sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease right-of-use asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Additionally, for equipment leases, we apply a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities. The Company has not entered into leases that meet the definition of a financing lease. Income Taxes – Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income 77 Table of Contents tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized. Segment reporting – The Company operates in one segment and makes management decisions based on consolidated results. The Company's operations are solely in the financial services industry and include providing to its clients traditional banking and other financial services. For additional information regarding our segments, see “Note 21 - Business Segments.” Off-balance-sheet credit-related financial instruments – 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 customers' requests for funding and take the form of loan commitments, letters of credit and lines of credit. Such financial instruments are recorded when they are funded. The Company also maintains a separate ACL for off-balance sheet credit commitments. Management estimates anticipated losses using expected loss factors consistent with those used for the ACL methodology for loans described above, and utilization assumptions based on historical experience. The ACL for off-balance sheet credit commitments totaled $ 234 thousand and $ 193 thousand at December 31, 2024 and 2023, respectively, and is included in other liabilities on the Consolidated Balance Sheets. Provision for credit losses for off-balance sheet credit commitments is included in provision for credit losses in the Consolidated Statements of Income. Advertising costs – The Company expenses advertising costs as they are incurred. Advertising costs, including other marketing expenses, were $ 361 thousand and $ 377 thousand for the years ended December 31, 2024 and 2023, respectively. Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on AFS securities, are reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets, net of tax. Such items, along with net income, are components of comprehensive income. Intangible assets –Identifiable intangible assets are included in other assets on the Consolidated Balance Sheets and include goodwill and intangibles related to the acquisition of core deposits from other financial institutions. Typically, these assets are amortized using the straight-line method over a period of eight to ten years ; however, goodwill is not amortized. Goodwill on the Company’s balance sheet is not material and resulted from the acquisition of branches in 2014 and 2017. The core deposit intangible was fully amortized as of December 31, 2024. Management reviews intangible assets for impairment on an annual basis or whenever events or circumstances indicate that the carrying amount of an intangible asset may not be recoverable. No impairment losses have been recognized in the periods presented. At both December 31, 2024, and 2023, the Company had $ 777 thousand of goodwill. Employee stock ownership plan (“ESOP”) – The Company sponsors an ESOP. As shares are committed to be released, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations. Cash dividends on allocated shares (those credited to ESOP participants' accounts) are recorded as a reduction of stockholders' equity and distributed directly to participants' accounts. Cash dividends on unallocated shares (those held by the ESOP not yet credited to participants' accounts) are used to pay administrative expenses and debt service requirements of the ESOP. See "Note 14—Employee Benefits" for further information. Earnings per common share – Earnings per share is computed using the two-class method. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, excluding any participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as the holders of the Company's common stock. Diluted earnings per share is computed by dividing net income available to common stockholders adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of common shares determined for the basic earnings per share plus the dilutive effect of common stock equivalents using the treasury stock method based on the average market price for the period. Anti-dilutive shares or stock options are excluded from the calculation of diluted earnings per share. Fair value – Fair value is the price that would be received when an asset is sold or a liability is transferred in an orderly transaction between market participants at the measurement date. Fair values of the Company's financial instruments are based on the fair value hierarchy which requires an entity to maximize the use of observable inputs, typically market data obtained from third parties, and minimize the use of unobservable inputs, which reflects its estimates for market assumptions, when measuring fair value. Three levels of valuation inputs are ranked in accordance with the prescribed fair value hierarchy as follows: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. 78 Table of Contents Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3: Assets or liabilities whose significant value drivers are unobservable. In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value measurements. In certain cases, the inputs used to measure the fair value of an asset or liability may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level unobservable input that is significant to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable. Share-Based Compensation – The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. These costs are recognized on a straight-line basis over the vesting period during which an employee is required to provide services in exchange for the award, also known as the requisite service period. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted. When determining the estimated fair value of stock options granted, the Company utilizes various assumptions regarding the expected volatility of the stock price, the risk-free interest rate for periods within the contractual life of the stock option, and the expected dividend yield that the Company expects over the expected life of the options granted. Reductions in compensation expense associated with forfeited options are expensed based on actual forfeiture experience. In the case of restricted stock grants, the Company measures the fair value of the restricted stock using the closing market price of the Company's common stock on the date of grant. The Company expenses the grant date fair value of the Company's stock options and restricted stock with a corresponding increase in equity. When shares are required to be issued under share-based awards, it is typically the Company’s policy to issue new shares of stock. Reclassifications – Certain amounts reported in prior years consolidated financial statements may be reclassified to conform to the current presentation. The results of the reclassifications are typically not considered material and have no effect on previously reported net income, earnings per share or stockholders' equity. There were no reclassifications to prior year amounts in the current year. Note 2— Accounting Pronouncements Recently Issued or Adopted In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02, and March 2020, ASU 2020-03, all of which clarify the codification and correct unintended application of the guidance. This ASU replaces the incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach and recorded a net decrease of approximately $ 1.1 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the ACL of $ 1.5 million, net of related deferred tax assets arising from temporary differences of $ 305 thousand, commonly referred to as the “Day 1” adjustment. The Day 1 adjustment to the ACL is reflective of expected lifetime credit losses associated with the composition of financial assets within the scope of ASC 326 as of January 1, 2023, which is comprised of loans held for investment and off-balance sheet credit exposures at January 1, 2023, as well as management’s expectation of future economic conditions. 79 Table of Contents The following table presents the impact of adopting ASU 2016-13 on January 1, 2023: (dollars in thousands) As Reported Under ASC 326 Prior to Adopting ASC 326 Impact of ASC 326 Adoption ACL - loans Real estate loans: One- to four- family $ 2,126 $ 1,771 $ 355 Home equity 201 132 69 Commercial and multifamily 2,181 2,501 ( 320 ) Construction and land 2,568 1,209 1,359 Total real estate loans 7,075 5,613 1,462 Consumer loans: Manufactured homes 282 462 ( 180 ) Floating homes 622 456 166 Other consumer 161 324 ( 163 ) Total consumer loans 1,065 1,242 ( 177 ) Commercial business loans 221 256 ( 35 ) Unallocated ( 3 ) 488 ( 491 ) Total loans 8,359 7,599 760 ACL - unfunded commitments Reserve for unfunded commitments 1,030 335 695 Total $ 9,389 $ 7,934 $ 1,455 In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, this ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology. The Company adopted ASU 2022-02 on January 1, 2023 using the prospective transition guidance which allows the entity to continue estimating expected credit losses in accordance with legacy GAAP for receivables modified in a TDR until the receivables are subsequently modified or settled. Once a legacy TDR is modified after adoption of ASU 2022-02, the prospective transition guidance no longer applies and the impact to the ACL is recognized in earnings in the period of modification. The adoption of this ASU did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows. As a result of the election to adopt this ASU on a prospective basis, the impact in future periods is not expected to be material. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which expands disclosures about a public entity’s reportable segments and requires more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. The Company adopted this ASU on January 1, 2024. ASU 2023-07 did not have an impact on the Company's financial position or results of operation as it impacts disclosures only. The adoption of this ASU did not have a material impact on the Company’s disclosures as the Company operates under one segment. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures . This ASU requires public business entities to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. This ASU was released in response to stakeholder feedback indicating that the existing income tax disclosures should be enhanced to provide information to better assess how an entity’s operations and 80 Table of Contents related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This ASU’s amendments are effective for public business entities for annual periods beginning after December 15, 2024, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) , which will change the disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses (for example, employee compensation, depreciation and amortization) in expense captions. This ASU’s amendments are effective for public business entities for annual reporting periods beginning after December 15, 2026, and for interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of this guidance. Note 3— Restricted Cash Federal Reserve regulations previously required that the Company maintain certain minimum reserve balances either as cash on hand or on deposit with the Federal Reserve Bank, based on a percentage of deposits. In March 2020, the Federal Reserve announced that it would be reducing the reserve requirement for all depository institutions to zero percent effective March 26, 2020; therefore, there was no reserve requirement at December 31, 2024 and 2023. Note 4— Investments At December 31, 2024, the Company did not own any debt securities classified as trading or any equity investment securities. The amortized cost and fair value of AFS securities and the corresponding amounts of gross unrealized gains and losses at December 31, 2024 and 2023 were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2024 Municipal bonds $ 6,354 $ 11 $ ( 991 ) $ 5,374 Agency mortgage-backed securities 2,758 7 ( 349 ) 2,416 Total AFS securities $ 9,112 $ 18 $ ( 1,340 ) $ 7,790 December 31, 2023 Municipal bonds $ 6,394 $ 12 $ ( 878 ) $ 5,528 Agency mortgage-backed securities 3,145 7 ( 393 ) 2,759 Total AFS securities $ 9,539 $ 19 $ ( 1,271 ) $ 8,287 The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at December 31, 2024 and 2023 are shown in the table below (in thousands): Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value December 31, 2024 Municipal bonds $ 704 $ — $ ( 163 ) $ 541 Agency mortgage-backed securities 1,426 — ( 255 ) 1,171 Total HTM securities $ 2,130 $ — $ ( 418 ) $ 1,712 December 31, 2023 Municipal bonds $ 704 $ — $ ( 164 ) $ 540 Agency mortgage-backed securities 1,462 — ( 215 ) 1,247 Total HTM securities $ 2,166 $ — $ ( 379 ) $ 1,787 81 Table of Contents The amortized cost and fair value of AFS and HTM securities at December 31, 2024, by contractual maturity, are shown below (in thousands). Expected maturities of AFS and HTM 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, primarily agency mortgage-backed securities, are shown separately. December 31, 2024 AFS HTM Amortized Cost Fair Value Weighted-Average Yield Amortized Cost Fair Value Weighted-Average Yield Due in one year or less $ — $ — — % $ — $ — — % Due after one to five years 455 455 5.06 — — — Due after five to ten years 1,200 1,210 5.43 — — — Due after ten years 4,699 3,708 2.60 704 540 3.04 Mortgage-backed securities 2,758 2,417 3.32 1,426 1,172 2.51 Total $ 9,112 $ 7,790 3.31 % $ 2,130 $ 1,712 2.69 % There were no pledged securities at December 31, 2024 and 2023. There were no sales of AFS or HTM securities during the years ended December 31, 2024 and 2023. Accrued interest receivable on securities totaled $ 48 thousand and $ 49 thousand at December 31, 2024 and 2023, respectively, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of expected credit losses. The following tables summarize the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at December 31, 2024 and 2023 (in thousands). December 31, 2024 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss AFS securities Municipal bonds $ — $ — $ 3,708 $ ( 991 ) $ 3,708 $ ( 991 ) Agency mortgage-backed securities 44 ( 2 ) 2,020 ( 347 ) 2,064 ( 349 ) Total AFS securities $ 44 $ ( 2 ) $ 5,728 $ ( 1,338 ) $ 5,772 $ ( 1,340 ) HTM securities Municipal bonds $ — $ — $ 540 $ ( 163 ) $ 540 $ ( 163 ) Agency mortgage-backed securities — — 1,172 ( 255 ) 1,172 ( 255 ) Total HTM securities $ — $ — $ 1,712 $ ( 418 ) $ 1,712 $ ( 418 ) 82 Table of Contents December 31, 2023 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss AFS securities Municipal bonds $ — $ — $ 3,862 $ ( 878 ) $ 3,862 $ ( 878 ) Agency mortgage-backed securities 48 ( 1 ) 2,290 ( 392 ) 2,338 ( 393 ) Total AFS securities $ 48 $ ( 1 ) $ 6,152 $ ( 1,270 ) $ 6,200 $ ( 1,271 ) HTM securities Municipal bonds $ — $ — $ 540 $ ( 164 ) $ 540 $ ( 164 ) Agency mortgage-backed securities — — 1,247 ( 215 ) 1,247 ( 215 ) Total HTM securities $ — $ — $ 1,787 $ ( 379 ) $ 1,787 $ ( 379 ) There were no credit losses recognized in earnings during the years ended December 31, 2024 and 2023 relating to the Company's securities. At December 31, 2024, the securities portfolio consisted of 11 municipal bonds and 11 agency mortgage-backed securities with a fair value of $ 9.5 million. At December 31, 2023, the securities portfolio consisted of 11 municipal bonds and 12 agency mortgage-backed securities with a fair value of $ 10.1 million. At December 31, 2024, there was one security in an unrealized loss position for less than 12 months and fifteen 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. For both 2024 and 2023, the unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and not related to the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. The unrealized losses on these investments are not considered credit losses during the years ended December 31, 2024 and 2023, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis . 83 Table of Contents Note 5— Loans The composition of the loan portfolio, excluding loans held-for-sale, at December 31, 2024 and 2023 is as follows (in thousands): December 31, 2024 2023 Real estate loans: One-to-four family $ 269,684 $ 279,448 Home equity 26,686 23,073 Commercial and multifamily 371,516 315,280 Construction and land 73,077 126,758 Total real estate loans 740,963 744,559 Consumer loans: Manufactured homes 41,128 36,193 Floating homes 86,411 75,108 Other consumer 17,720 19,612 Total consumer loans 145,259 130,913 Commercial business loans 15,605 20,688 Total loans 901,827 896,160 Premiums for purchased loans (1) 718 829 Deferred fees, net ( 2,374 ) ( 2,511 ) Total loans, gross 900,171 894,478 Allowance for credit losses - loans ( 8,499 ) ( 8,760 ) Total loans, net $ 891,672 $ 885,718 (1) Premiums resulting from purchased loans totaled $ 404 thousand on one-to-four family loans, $ 244 thousand on commercial and multifamily loans, and $ 70 thousand on commercial business loans as of December 31, 2024. Premiums resulting from purchased loans totaled $ 465 thousand on one-to-four family loans, $ 280 thousand on commercial and multifamily loans, and $ 84 thousand on commercial business loans as of December 31, 2023. The Company purchased $ 2.0 million of loans during the year ended December 31, 2024 and zero loans during the year ended December 31, 2023. The following table presents a summary of activity in the ACL on loans and unfunded commitments for the periods indicated (in thousands): Year Ended December 31, 2024 2023 ACL - Loans ACL - Unfunded Loan Commitments ACL Allowance for loan losses Reserve for Unfunded Loan Commitments Total Allowance for Loan Losses 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 ( 161 ) 41 ( 120 ) 564 ( 837 ) ( 273 ) Net charge-offs during the period ( 100 ) — ( 100 ) ( 163 ) — ( 163 ) Balance at end of period $ 8,499 $ 234 $ 8,733 $ 8,760 $ 193 $ 8,953 (1) Represents the impact of adopting ASU 2016-13, Financial Instruments — Credit Losses on January 1, 2023. 84 Table of Contents Accrued interest receivable on loans receivable totaled $ 3.4 million at both December 31, 2024 and December 31, 2023, in the accompanying Consolidated Balance Sheets . Accrued interest receivable is excluded from the estimate of expected credit losses. The following tables summarize the activity in the ACL for the years ended December 31, 2024 and 2023 (in thousands): Year ended December 31, 2024 Beginning Allowance Charge-offs Recoveries Provision (Release of) Ending Allowance One-to-four family $ 2,630 $ — $ — $ 395 $ 3,025 Home equity 185 — — 122 307 Commercial and multifamily 1,070 — — 148 1,218 Construction and land 1,349 — — ( 357 ) 992 Manufactured homes (1) 971 ( 23 ) — 224 1,172 Floating homes 2,022 — — ( 740 ) 1,282 Other consumer (2) 426 ( 99 ) 22 52 401 Commercial business 107 — — ( 5 ) 102 Unallocated — — — — — $ 8,760 $ ( 122 ) $ 22 $ ( 161 ) $ 8,499 (1) During the year ended December 31, 2024, there was one manufactured housing loan originated in 2020 that was charged off. (2) During the year ended December 31, 2024, gross charge-offs related primarily to deposit overdrafts that were charged off. Year ended December 31, 2023 Beginning Allowance Charge-offs Recoveries Provision (Release of) Ending Allowance One-to-four family $ 1,771 $ — $ — $ 504 $ 2,630 Home equity (1) 132 ( 25 ) — 9 185 Commercial and multifamily 2,501 — — ( 1,111 ) 1,070 Construction and land 1,209 — — ( 1,219 ) 1,349 Manufactured homes 462 — — 689 971 Floating homes 456 — — 1,400 2,022 Other consumer (2) 324 ( 179 ) 41 403 426 Commercial business 256 — — ( 114 ) 107 Unallocated 488 — — 3 — $ 7,599 $ ( 204 ) $ 41 $ 564 $ 8,760 (1) During the year ended December 31, 2023, there was one revolving home equity loan that was charged off. (2) During the year ended December 31, 2023, gross charge-offs related primarily to deposit overdrafts that were charged off. 85 Table of Contents Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading. The grades for watch and special mention loans are used by the Company to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful, or loss. These are loans which have been criticized and deserve management's close attention based upon known characteristics such as periodic payment delinquency, failure to comply with contractual terms of the loan, or collateral concerns. Loans identified as watch, special mention, substandard, doubtful, or loss are subject to additional problem loan reporting to management every three months. When we classify problem assets as either substandard or doubtful, we may determine that these assets should be individually analyzed if they no longer share common risk characteristics with the rest of the portfolio. When we classify problem assets as a loss, we are required to charge off those assets in the period in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC (the Bank’s federal regulator) and the WDFI (the Bank’s state banking regulator), which can order the establishment of additional credit loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess weaknesses are required to be designated as special mention. There were no loans classified as doubtful or loss as of December 31, 2024 and 2023. The following tables present the internally assigned grades as of December 31, 2024 and December 31, 2023, by type of loan and origination year (in thousands): 86 Table of Contents At December 31, 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 $ 26,327 $ 22,470 $ 78,427 $ 98,379 $ 14,095 $ 29,534 $ — $ — $ 269,232 Substandard — — 259 104 — 214 — — 577 Total one-to-four family $ 26,327 $ 22,470 $ 78,686 $ 98,483 $ 14,095 $ 29,748 $ — $ — $ 269,809 Home equity: Pass $ 3,084 $ 2,951 $ 2,420 $ 908 $ 210 $ 1,320 $ 14,578 $ 1,069 $ 26,540 Substandard — — — — — 56 234 66 356 Total home equity $ 3,084 $ 2,951 $ 2,420 $ 908 $ 210 $ 1,376 $ 14,812 $ 1,135 $ 26,896 Commercial and multifamily: Pass $ 34,844 $ 20,736 $ 90,067 $ 111,601 $ 21,240 $ 67,336 $ — $ — $ 345,824 Special mention — — — — — 1,375 — — 1,375 Substandard — — — 5,775 2,165 15,143 — — 23,083 Total commercial and multifamily $ 34,844 $ 20,736 $ 90,067 $ 117,376 $ 23,405 $ 83,854 $ — $ — $ 370,282 Construction and land: Pass $ 26,458 $ 22,846 $ 2,166 $ 968 $ 593 $ 2,338 $ — $ — $ 55,369 Special mention — — 17,349 — — — — — 17,349 Substandard — — 70 — — 24 — — 94 Total construction and land $ 26,458 $ 22,846 $ 19,585 $ 968 $ 593 $ 2,362 $ — $ — $ 72,812 Manufactured homes: Pass $ 9,396 $ 12,095 $ 7,039 $ 3,822 $ 1,816 $ 6,180 $ — $ — $ 40,348 Substandard — 427 — — — 205 — — 632 Total manufactured homes $ 9,396 $ 12,522 $ 7,039 $ 3,822 $ 1,816 $ 6,385 $ — $ — $ 40,980 Floating homes: Pass $ 20,587 $ 6,395 $ 16,225 $ 23,902 $ 6,059 $ 10,472 $ — $ — $ 83,640 Substandard — — 2,350 — — — — — 2,350 Total floating homes $ 20,587 $ 6,395 $ 18,575 $ 23,902 $ 6,059 $ 10,472 $ — $ — $ 85,990 Other consumer: Pass $ 2,273 $ 3,297 $ 622 $ 3,615 $ 5,387 $ 1,925 $ 618 $ — $ 17,737 Substandard — — — 1 — — — — 1 Total other consumer $ 2,273 $ 3,297 $ 622 $ 3,616 $ 5,387 $ 1,925 $ 618 $ — $ 17,738 Commercial business: Pass $ 314 $ 1,256 $ 1,811 $ 3,032 $ 257 $ 3,895 $ 4,862 $ — $ 15,427 Substandard 38 — — — — 11 188 — 237 Total commercial business $ 352 $ 1,256 $ 1,811 $ 3,032 $ 257 $ 3,906 $ 5,050 $ — $ 15,664 Total loans Pass $ 123,283 $ 92,046 $ 198,777 $ 246,227 $ 49,657 $ 123,000 $ 20,058 $ 1,069 $ 854,117 Special mention — — 17,349 — — 1,375 — — 18,724 Substandard 38 427 2,679 5,880 2,165 15,653 422 66 27,330 Total loans $ 123,321 $ 92,473 $ 218,805 $ 252,107 $ 51,822 $ 140,028 $ 20,480 $ 1,135 $ 900,171 87 Table of Contents 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 $ — $ 22,805 Substandard — — — — — 63 445 2 510 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 $ — $ 876,963 Special mention — — — 3,365 — 350 — — 3,715 Substandard 2,243 1,394 323 1,339 6,169 1,845 485 2 13,800 Total loans $ 113,770 $ 249,701 $ 280,109 $ 59,744 $ 54,481 $ 115,811 $ 20,860 $ 2 $ 894,478 88 Table of Contents 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 at December 31, 2024 and 2023, by type of loan (in thousands): December 31, 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 $ 537 $ 537 $ 1,108 $ 848 Home equity 298 298 84 84 Commercial and multifamily 3,734 3,734 — — Construction and land 24 24 — — Manufactured homes 521 521 228 228 Floating homes 2,363 2,363 — — Other consumer 3 1 1 — Commercial business 11 11 2,135 2,135 Total $ 7,491 $ 7,489 $ 3,556 $ 3,295 The following tables present the aging of past due loans, as of the dates indicated, by type of loan (in thousands): December 31, 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 $ 34 $ 339 $ 352 $ — $ 725 $ 269,084 $ 269,809 Home equity 249 — 66 — 315 26,581 26,896 Commercial and multifamily — — 3,733 — 3,731 366,551 370,282 Construction and land 24 — — — 24 72,788 72,812 Manufactured homes 402 287 394 — 1,083 39,897 40,980 Floating homes — — 2,350 — 2,350 83,640 85,990 Other consumer 6 12 — — 18 17,720 17,738 Commercial business — — — — — 15,664 15,664 Total $ 715 $ 638 $ 6,895 $ — $ 8,246 $ 891,925 $ 900,171 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 89 Table of Contents Loan Modifications to Borrowers Experiencing Financial Difficulty. The Company has granted modifications which can generally be described in the following categories: Principal Forgiveness : A modification in which the principal is reduced. Rate Modification : A modification in which the interest rate is changed. Term Modification : A modification in which the maturity date, timing of payments or frequency of payments is changed. Payment Modification : A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category. Combination Modification : Any other type of modification, including the use of multiple categories above. At December 31, 2024, the Company had no commitments to extend additional credit to borrowers owing loan receivables with modified terms. There were no loans modified during the year ended December 31, 2024. During the year ended December 31, 2023, there was one modified one-to-four family loan to a borrower experiencing financial difficulty. This loan received a term extension for 90 days, with an amortized cost basis of $ 90 thousand representing 0.03 % of the total class of loans. We have no modified loan receivables that have subsequently defaulted at December 31, 2024. Troubled debt restructurings. Prior to the adoption of ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , the Company had granted a variety of concessions to borrowers in the form of loan modifications that were considered TDRs. Loans classified as legacy TDRs totaled $ 1.3 million and $ 1.7 million at December 31, 2024 and 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. The following tables summarize collateral dependent loans by collateral type as of the dates indicated (in thousands): December 31, 2024 Commercial Real Estate Residential Real Estate Land Other Residential RVs/Automobiles Business Assets Total Real estate loans: One- to four- family $ — $ 311 $ — $ 364 $ — $ — $ 675 Home equity — 298 — — — — 298 Commercial and multifamily 3,734 — — — — — 3,734 Construction and land — — 24 — — — 24 Total real estate loans 3,734 609 24 364 — — 4,731 Consumer loans: Manufactured homes — — — 521 — — 521 Floating homes — — — 2,363 — — 2,363 Other consumer — — — — 1 — 1 Total consumer loans — — — 2,884 1 — 2,885 Commercial business loans — — — — — 11 11 Total loans $ 3,734 $ 609 $ 24 $ 3,248 $ 1 $ 11 $ 7,627 90 Table of Contents December 31, 2023 Commercial Real Estate Residential Real Estate Land Other Residential Total Real estate loans: One- to four- family $ — $ 664 $ — $ 545 $ 1,209 Home equity — 84 — — 84 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 Related Parties and Regulatory Matters. In the ordinary course of business, the Company makes loans to its employees, officers and directors. Certain loans to employees, officers and directors are offered at discounted rates as compared to other clients as permitted by federal regulations. Employees, officers, and directors are eligible for mortgage loans with an adjustable rate that resets annually to 1.0 % - 1.5 % over the Bank's rolling cost of funds. Employees, officers and directors are also eligible for consumer loans that are 1.00 % below the market loan rate at the time of origination. Director and officer loans are summarized as follows (in thousands): December 31, 2024 2023 Balance, beginning of period $ 5,906 $ 3,328 Advances — 60 New / (reclassified) loans, net 1,548 2,768 Repayments ( 772 ) ( 250 ) Balance, end of period $ 6,682 $ 5,906 Other. At December 31, 2024 and 2023, loans totaling $ 526 thousand and $ 9.4 million, respectively, represented real estate secured loans that had current loan-to-value ratios above supervisory guidelines. Note 6— Mortgage Servicing Rights The unpaid principal balances underlying the Company’s MSRs portfolio totaled $ 425.8 million and $ 448.9 million at December 31, 2024 and 2023, respectively. Of these total balances, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at December 31, 2024 and 2023 was $ 423.7 million and $ 446.8 million, respectively. The unpaid principal balances of loans serviced for other financial institutions at December 31, 2024 and 2023, totaled $ 2.1 million and $ 2.2 million, respectively. Loans serviced for Fannie Mae and others are not included in the Company’s financial statements as they are not assets of the Company. 91 Table of Contents A summary of the change in the balance of MSRs at December 31, 2024 and 2023 were as follows (in thousands): December 31, 2024 2023 Beginning balance, at fair value $ 4,632 $ 4,687 MSRs that result from transfers and sale of financial assets 141 164 Changes in fair value: Due to changes in model inputs or assumptions (1) ( 4 ) ( 219 ) Ending balance, at fair value $ 4,769 $ 4,632 (1) Includes changes due to collection/realization of expected cash flows and curtailments. The key economic assumptions used in determining the fair value of MSRs at December 31, 2024 and 2023 are as follows: December 31, 2024 2023 Prepayment speed (Public Securities Association "PSA" model) 125 % 129 % Weighted-average life 10.6 years 7.7 years Yield to maturity discount rate 10.0 % 12.5 % The amount of contractually specified servicing, late and ancillary fees earned on the MSRs are included in “Mortgage servicing income” on the Consolidated Statements of Income and totaled $ 1.1 million and $ 1.2 million for the years ended December 31, 2024 and 2023, respectively. See "Note 1—Organization and Significant Accounting Policies" and "Note 11— Fair Value Measurements" for additional information on MSRs. Note 7— Premises and Equipment Premises and equipment at December 31, 2024 and 2023 are summarized as follows (in thousands): December 31, 2024 2023 Land $ 920 $ 920 Buildings and improvements 7,351 7,315 Furniture and equipment 6,365 6,390 14,636 14,625 Less: Accumulated depreciation and amortization ( 9,939 ) ( 9,385 ) Premises and equipment, net $ 4,697 $ 5,240 Depreciation and amortization expense was $ 619 thousand and $ 717 thousand for the years ended December 31, 2024 and 2023, respectively. The Company leases office space in several buildings as well as certain equipment. See "Note 12—Leases" for additional information on our leased facilities and equipment. 92 Table of Contents Note 8— Other Real Estate Owned and Repossessed Assets The following table presents activity related to OREO and other repossessed assets for the years ended December 31, 2024 and 2023 (in thousands). Year Ended December 31, 2024 2023 Beginning balance, January 1 $ 575 $ 659 Additions to OREO and repossessed assets 115 — Sales ( 690 ) — Losses — ( 84 ) Ending balance, December 31 $ — $ 575 As of December 31, 2024, there was one one-to-four family loan totaling $ 260 thousand that was in process of foreclosure. Note 9— Deposits A summary of deposit accounts with the corresponding weighted-average cost of funds at December 31, 2024 and 2023, are presented below (dollars in thousands): December 31, 2024 December 31, 2023 Deposit Balance Wtd. Avg Rate Deposit Balance Wtd. Avg Rate Noninterest-bearing demand $ 130,095 — % $ 124,134 — % Interest-bearing demand 142,126 0.34 168,346 0.75 Savings 61,252 0.10 69,461 0.07 Money market 206,067 3.60 154,044 1.39 Certificates 295,822 4.57 307,962 3.45 Escrow (1) 2,437 — 2,592 — Total $ 837,799 2.63 % $ 826,539 1.64 % (1) Escrow balances shown in “Noninterest-bearing deposits” on the Consolidated Balance Sheets. Scheduled maturities of time deposits at December 31, 2024, are as follows (in thousands): Year Ending December 31, Amount 2025 $ 274,317 2026 18,496 2027 1,379 2028 1,109 2029 521 Thereafter — $ 295,822 Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of 5 years or less. The aggregate amount of time deposits in denominations of more than $250 thousand at December 31, 2024 and 2023, totaled $ 90.9 million and $ 88.3 million, respectively. Deposits in excess of $250 thousand are not federally insured. There were no money market brokered deposits outstanding at December 31, 2024 and $ 5.0 million at December 31, 2023. Deposits from related parties held by the Company were $ 9.8 million and $ 3.6 million at December 31, 2024 and 2023, respectively. 93 Table of Contents Note 10— Borrowings, FHLB Stock and Subordinated Notes FHLB Advances The following tables present advances from the FHLB as of the dates indicated (dollars in thousands): December 31, 2024 2023 FHLB advances: Short-term advances — 15,000 Long-term advances 25,000 25,000 Total $ 25,000 $ 40,000 December 31, 2024 December 31, 2023 Fixed Rate: Outstanding balance $ 25,000 $ 40,000 Interest rates ranging from 4.06 % 4.06 % Interest rates ranging to 4.27 % 4.35 % Weighted average interest rate 4.16 % 4.25 % The following table presents the maturity of our FHLB advances (dollars in thousands): December 31, 2024 2025 $ — 2026 15,000 2027 — 2028 10,000 $ 25,000 FHLB Des Moines Borrowing Capacity The Company has a loan agreement with the FHLB of Des Moines. The terms of the agreement call for a blanket pledge of a portion of the Company’s one-to-four family mortgage loan and commercial and multifamily loan portfolios based on the outstanding balance under the Company’s loan agreement with the FHLB of Des Moines. Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines to secure public deposits. The following table presents the borrowing capacity from the FHLB as of the dates indicated (dollars in thousands): December 31, 2024 December 31, 2023 Amount available to borrow under credit facility (1) $ 385,366 $ 463,541 Loans pledged as collateral for borrowings 333,613 344,572 Advance equivalent of collateral: One-to-four family mortgage loans 175,907 196,547 Commercial and multifamily mortgage loans 29,180 34,464 Home equity loans 241 348 Notional amount of letters of credit outstanding 8,000 10,000 Remaining FHLB borrowing capacity (2) $ 172,327 $ 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. 94 Table of Contents 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 December 31, 2024 and 2023, the Company had an investment of $ 1.7 million and $ 2.4 million, respectively, in FHLB of Des Moines stock. Federal Reserve Bank of San Francisco Borrowings The Company has a borrowing agreement with the Federal Reserve Bank of San Francisco. The terms of the agreement call for a blanket pledge of a portion of the Company’s consumer and commercial business loans based on the outstanding balance under the Company’s borrowing agreement with the Federal Reserve Bank of San Francisco. At December 31, 2024 and December 31, 2023, the amount available to borrow under this credit facility was $ 20.8 million and $ 18.3 million, respectively, subject to eligible pledged collateral. The Company had no outstanding borrowings under this arrangement at December 31, 2024 and 2023. Other Borrowings The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank. The line has a one year term maturing on June 30, 2025 and is renewable annually. As of December 31, 2024, the amount available under this line of credit was $ 20.0 million. There was no balance on this line of credit as of December 31, 2024 and 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 the then-current three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030, and may be redeemed by the Company, in whole or in part, on October 1, 2025, or on any subsequent interest payment date. Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the terms of the subordinated notes. The subordinated notes may be included in Tier 2 capital for Sound Financial Bancorp under current regulatory guidelines and interpretations. The balance of the subordinated notes, net of debt issuance costs, was $ 11.8 million at December 31, 2024 and $ 11.7 million at December 31, 2023. Note 11— Fair Value Measurements The Company determines the fair values of its financial instruments based on the requirements established in ASC 820 , Fair Value Measurements , which provides a framework for measuring fair value in accordance with 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 December 31, 2024 and 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). 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. Loans held-for-sale - The fair value of fixed-rate one-to-four family loans is based on whole loan forward prices obtained from government sponsored enterprises. At December 31, 2024 and 2023, loans held-for-sale were carried at cost, as no impairment was required. Loans held-for-portfolio - The estimated fair value of loans-held-for portfolio consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and 95 Table of Contents 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 premium/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 lending rates for similar long-term debt instruments with similar terms and remaining time to maturity. A description of the valuation methodologies used for impaired 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 of off-balance sheet financial instruments, which consisted entirely of loan commitments at December 31, 2024 and 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 December 31, 2024 and 2023. 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 years ended December 31, 2024 and 2023. 96 Table of Contents The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value, as of December 31, 2024 and 2023 (in thousands): December 31, 2024 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 43,641 $ 43,641 $ 43,641 $ — $ — AFS securities 7,790 7,790 — 7,790 — HTM securities 2,130 1,712 — 1,712 — Loans held-for-sale 487 487 — 487 — Loans held-for-portfolio, net 891,672 850,813 — — 850,813 MSRs 4,769 4,769 — — 4,769 FINANCIAL LIABILITIES: Time deposits 295,822 296,575 — 296,575 — Borrowings 25,000 25,000 — 25,000 — Subordinated notes 11,759 12,653 — 12,653 — 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 $ — $ — AFS securities 8,287 8,287 — 8,287 — HTM securities 2,166 1,787 — 1,787 — Loans held-for-sale 603 603 — 603 — Loans held-for-portfolio, net 885,718 837,579 — — 837,579 MSRs 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 — The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2024 and 2023 (in thousands): Fair Value at December 31, 2024 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 5,374 $ — $ 5,374 $ — Agency mortgage-backed securities 2,416 — 2,416 — MSRs 4,769 — — 4,769 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 — MSRs 4,632 — — 4,632 97 Table of Contents The following table provides 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 at December 31, 2024: Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted Average) MSRs Discounted cash flow Prepayment speed assumption 125 %- 556 % ( 125 %) Discount rate 10.0 % The following table provides 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 at December 31, 2023: Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted Average) MSRs Discounted cash flow Prepayment speed assumption 109 %- 208 % ( 129 %) Discount rate 10.5 %- 14.5 % ( 12.5 %) Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the MSRs will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted average life 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 years ended December 31, 2024 and 2023. MSRs are measured at fair value using significant unobservable input (Level 3) on a recurring basis and a reconciliation of this asset can be found in “Note 6—Mortgage Servicing Rights.” The following table presents the balance of assets measured at fair value on a nonrecurring basis (in thousands): Fair Value at December 31, 2024 Description Total Level 1 Level 2 Level 3 OREO and repossessed assets $ — $ — $ — $ — Collateral-dependent loans 7,627 — — 7,627 Fair Value at December 31, 2023 Description Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 575 $ — $ — $ 575 Impaired loans 3,656 — — 3,656 There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2024 and 2023. Note 12— Leases We have operating leases for branch locations, loan production offices, and our corporate office. 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 10 years and typically include one renewal option. Our leases have remaining terms of five months to 4.5 years. The operating leases require us to pay property taxes and operating expenses for the properties. 98 Table of Contents The following table represents the Consolidated Balance Sheet classification of the Company’s lease right of use assets and lease liabilities at December 31, 2024 and 2023 (in thousands): December 31, 2024 2023 Operating lease right of use assets $ 3,725 $ 4,496 Operating lease liabilities 4,013 4,821 The following table represents the components of lease expense for the years ended December 31, 2024 and 2023 (in thousands): Year Ended December 31, 2024 2023 Operating lease expense: Office leases $ 1,083 $ 1,078 Sublease income ( 4 ) ( 11 ) Net lease expense $ 1,079 $ 1,067 The following table represents the maturity of lease liabilities at December 31, 2024 (in thousands): December 31, 2024 Office Leases Operating Lease Commitments 2025 $ 1,024 2026 1,007 2027 1,009 2028 881 2029 341 Total lease payments 4,262 Less: Present value discount 249 Present value of lease liabilities $ 4,013 Lease term and discount rate by lease type at December 31, 2024 and 2023 consisted of the following: December 31, 2024 2023 Weighted-average remaining lease term: Office leases 4.3 years 5.2 years Weighted-average discount rate: Office leases 2.88 % 2.77 % 99 Table of Contents Supplemental cash flow information related to leases for the years ended December 31, 2024 and 2023 was as follows (in thousands): Year Ended December 31, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities for operating leases: Operating cash flows Office leases $ 1,120 $ 1,092 Note 13— Earnings Per Share Earnings per share are summarized for the years ended December 31, 2024 and 2023 as follows (in thousands, except per share data): Year Ended December 31, 2024 2023 Net income $ 4,640 $ 7,439 LESS: Participating dividends - Unvested RSAs ( 13 ) ( 12 ) LESS: Income allocated to participating securities - Unvested RSAs ( 18 ) ( 35 ) Net income available to common stockholders - basic 4,609 7,392 ADD BACK: Income allocated to participating securities - Unvested RSAs 18 35 LESS: Income reallocated to participating securities - Unvested RSAs ( 18 ) ( 35 ) Net income available to common stockholders - diluted $ 4,609 $ 7,392 Weighted average number of shares outstanding, basic 2,542,805 2,562,182 Effect of potentially dilutive common shares 23,133 19,520 Weighted average number of shares outstanding, diluted 2,565,938 2,581,702 Earnings per share, basic $ 1.81 $ 2.88 Earnings per share, diluted $ 1.80 $ 2.86 There were no anti-dilutive securities for the year ended December 31, 2024 and 7,892 anti-dilutive securities for the year ended December 31, 2023. Note 14— Employee Benefits The Company has a 401(k) retirement plan that allows employees to defer a portion of their salary into the 401(k) plan. The Company matches a portion of employees' salary deferrals. 401(k) plan costs are accrued and funded on a current basis. The Company contributed $ 279 thousand and $ 249 thousand to the plan for the years ended December 31, 2024 and 2023, respectively. The Bank maintains a deferred compensation account for the benefit of the Chief Executive Officer, established in 1994 in connection with an incentive plan which is no longer active. The Chief Executive Officer became fully vested in the benefits under this plan as of January 2005. Pursuant to the terms of the plan, payments in an amount equal to the fair market value of the assets in the deferred compensation account shall be made to the Chief Executive Officer (or to her designated beneficiary in the event of death) in 120 equal monthly installments commencing on the last day of the month following the month in which her employment with the Bank is terminated. In the event of the death of the Chief Executive Officer and her designated beneficiary prior to the account being fully paid, the remaining value of the account shall be paid in a lump sum to the beneficiary’s estate. The assets in the deferred compensation account consist of cash, which is held in a certificate of deposit at 100 Table of Contents the Bank and earns interest at market rates. At December 31, 2024 and 2023, the amount held in the certificate of deposit at the Bank was $ 117 thousand and $ 113 thousand, respectively. The Bank maintains a nonqualified deferred compensation plan (the “NQDC Plan”), which became effective on January 1, 2017. The purpose of the NQDC Plan is to provide a select group of management or highly-compensated employees of the Bank with an opportunity to defer the receipt of up to eighty percent ( 80 %) of their annual base salary, bonus, performance-based compensation and any commission income and to assist the Company in attracting, retaining and motivating employees of high caliber and experience. In addition to elective deferrals, the Bank may make discretionary and other contributions to be credited to the account of any or all participants, subject to the vesting requirements set forth in the NQDC Plan. Discretionary contributions by the Bank become 100 % vested upon the completion of three years of service from a participant’s effective date of participation in the NQDC Plan (with accelerated vesting upon death, disability or a change in control), while other Bank contributions (including matching contributions) vest at the rate of 20 % per year, beginning with the participant’s two-year anniversary of his or her date of hire. During the years ended December 31, 2024, and 2023, the Bank made discretionary contributions to the NQDC Plan of $ 253 thousand and $ 230 thousand, respectively. Each participant’s deferred compensation account is credited with an investment return determined as if the account was invested in one or more investment funds. Each participant elects the investment funds in which his or her account shall be deemed to be invested. Distributions of vested account balances are made upon death, disability, separation from service, or a specified in-service date unforeseeable emergency. Distributions shall be made in a single cash payment or, at the election of the participant, in annual installments for a period of up to ten ( 10 ) years in the case of a separation from service and in annual installments for a period of up to five ( 5 ) years in the case of an in-service distribution. The obligations of the Bank under the NQDC Plan are general unsecured obligations of the Bank to pay deferred compensation in the future to eligible participants in accordance with the terms of the NQDC Plan from the general assets of the Bank, although the Bank may establish a trust to hold amounts which the Bank may use to satisfy NQDC Plan distributions from time to time. Distributions from the NQDC Plan are governed by the Internal Revenue Code and the NQDC Plan. The Company may, at any time, in its sole discretion, terminate the NQDC Plan or amend or modify the NQDC Plan, in whole or in part, except that no such termination, amendment or modification shall have any retroactive effect to reduce any amounts deemed to be accrued and vested prior to such amendment. Supplemental Executive Retirement Plans. The Company maintains two supplemental executive retirement plans for the benefit of the Chief Executive Officer, which are intended to be unfunded, non-contributory defined benefit plans maintained primarily to provide her with supplemental retirement income. The first supplemental executive retirement plan ("SERP 1") became effective as of August 14, 2007. The second supplemental executive retirement plan ("SERP 2") became effective as of December 30, 2011, at which time the benefits under SERP 1 were frozen. Under the terms of SERP 1, as amended, the Chief Executive Officer is entitled to receive $ 53,320 per year for life commencing on the first day of the month following separation from service (as defined in SERP 1) for any reason from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code. No payments will be made under SERP 1 in the event of the Chief Executive Officer’s death and any payments that have commenced will cease upon death. In the event the Chief Executive Officer is involuntarily terminated in connection with a change in control (as defined in SERP 1), the Chief Executive Officer will be entitled to receive the annual benefit described in the first sentence of this paragraph commencing upon such termination, subject to a six-month delay if required by Section 409A of the Internal Revenue Code. Under the terms of SERP 2, as amended, upon the Chief Executive Officer’s termination of employment with Sound Community Bank for any reason other than death, the Chief Executive Officer will be entitled to receive additional retirement benefits each month for life commencing on the first day of the month following separation from service (as defined in SERP 2) from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code. The additional retirement benefits will equal the amount payable from the annuity underlying SERP 2, which benefits would equal $ 99,450 per year as of December 31, 2024. In the event of the Chief Executive Officer’s death prior to the commencement of the additional retirement benefits, the beneficiary will be entitled to a single lump sum payment within 90 days thereafter in an amount equal to the Bank's accrual for her retirement benefit under SERP 2 as of the date of death, or approximately $ 1.1 million at December 31, 2024. If a change in control occurs (as defined in SERP 2), the Chief Executive Officer will receive full retirement benefits under SERP 2 commencing upon the first day of the month following her separation from service from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code. 101 Table of Contents Stock Options and Restricted Stock The Company currently has one active stockholder approved equity incentive plan, the Amended and Restated 2013 Equity Incentive Plan (the “2013 Plan”), which shareholders originally approved in 2013 and, again in 2018, when amended. 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. At December 31, 2024, awards for stock options totaling 301,453 shares and awards for restricted stock totaling 167,114 shares of Company common stock have been granted in the aggregate, net of any forfeitures, under the 2008 Plan and 2013 Plan to participants. As of December 31, 2024, 257 awards for stock options and no awards for restricted stock remained available for issuance under the 2013 Plan. During the years ended December 31, 2024 and 2023, share-based compensation expense totaled $ 390 thousand and $ 450 thousand, respectively. Stock Option Awards All stock option awards granted under the 2008 Plan vest in 20 percent annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan. All outstanding stock option awards granted under the 2008 Plan were fully vested as of December 31, 2024. The stock option awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company. All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting. The following is a summary of the Company's stock option plan award activity during the year ended December 31, 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 ( 14,111 ) 19.09 Forfeited — — Expired ( 257 ) 36.57 Outstanding at December 31, 2024 72,836 35.50 5.59 1,249 Exercisable 53,355 33.86 4.72 1,003 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 72,836 $ 35.50 5.59 $ 1,249 At December 31, 2024, there was $ 121 thousand of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over the remaining weighted-average vesting period of 1.8 years. The total intrinsic value of the shares exercised during the years ended December 31, 2024 and 2023 was $ 341 thousand and $ 477 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 in 2024 and 2023 were determined using the following weighted-average assumptions as of the grant date. 102 Table of Contents Year Ended December 31, 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 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 period of the awards. The restricted stock awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date. 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 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 awards for the year ended December 31, 2024: Non-vested Shares 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 December 31, 2024 17,143 39.93 $ 52.65 Expected to vest assuming a 0 % forfeiture rate over the vesting term 17,143 $ 39.93 $ 52.65 At December 31, 2024, there was $ 406 thousand of unrecognized compensation cost related to non-vested restricted stock awards. The cost is expected to be recognized over the weighted-average vesting period of 1.9 years. The total fair value of shares vested for the years ended December 31, 2024 and 2023 was $ 262 thousand and $ 372 thousand, respectively. The weighted average grant date fair value per share for the years ended December 31, 2024 and 2023 was $ 39.89 and $ 40.13 , respectively. Employee Stock Ownership Plan The funds to purchase shares in the ESOP come from contributions the Bank makes to the plan. For the years ended December 31, 2024 and 2023, the ESOP trustee purchased 15,535 shares and 18,573 shares of the Company's common stock for inclusion in the ESOP. The number of allocated shares under the ESOP was 178,031 and 169,647 at December 31, 2024 and 2023, respectively. The fair value of the 178,031 shares held by the ESOP was $ 9.4 million at December 31, 2024. ESOP compensation expense included in salaries and benefits was $ 750 thousand and $ 691 thousand for the years ended December 31, 2024 and 2023, respectively. Note 15— Income Taxes The provision for income taxes at December 31, 2024 and 2023 was as follows (in thousands): December 31, 2024 2023 Current $ 1,279 $ 2,028 Deferred ( 273 ) ( 467 ) Total tax expense $ 1,006 $ 1,561 103 Table of Contents A reconciliation of the provision for income taxes for the years ended December 31, 2024 and 2023, with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes, is as follows (dollars in thousands): Year Ended December 31, 2024 2023 Provision at statutory rate $ 1,186 $ 1,894 Tax-exempt income ( 125 ) ( 126 ) BOLI ( 131 ) ( 248 ) Other 76 41 $ 1,006 $ 1,561 Federal Tax Rate 21.0 % 21.0 % Tax exempt rate ( 2.2 ) ( 1.4 ) BOLI ( 2.3 ) ( 2.7 ) Other 1.3 0.5 Effective tax rate 17.8 % 17.4 % The following table reflects the temporary differences that gave rise to the components of the Company's deferred tax assets at December 31, 2024 and 2023 (in thousands): December 31, 2024 2023 Deferred tax assets Deferred compensation and supplemental retirement $ 601 $ 499 Equity based compensation 90 165 Intangible assets 25 29 Depreciation 54 — Lease liabilities 843 1,012 Unrealized loss on securities 278 263 Allowance for loan losses 1,784 1,840 Other, net 101 47 Total deferred tax assets 3,776 3,855 Deferred tax liabilities Prepaid expenses ( 160 ) ( 171 ) FHLB stock dividends ( 40 ) ( 40 ) Depreciation — ( 39 ) Mortgage servicing rights ( 308 ) ( 405 ) Deferred loan costs ( 594 ) ( 652 ) Right of use assets ( 782 ) ( 944 ) Total deferred tax liabilities ( 1,884 ) ( 2,251 ) Net deferred tax asset $ 1,892 $ 1,604 At December 31, 2024 and 2023, the Company had no unrecognized tax benefits. During the years ended December 31, 2024 and 2023, the Company recognized no interest or penalties related to income taxes. The Company files an income tax return in the U.S. federal jurisdiction. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2021. 104 Table of Contents Note 16— Capital Sound Financial Bancorp is a bank holding company under the supervision of the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3.0 billion is generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations.The Bank is a state-chartered, federally insured institution and is subject to the capital requirements established by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. At December 31, 2024, according to the most recent notification from the FDIC, the Bank was categorized as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category. As of January 1, 2020, the Bank elected to use the Community Bank Leverage Ratio (“CBLR”) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act. To be eligible to utilize the CBLR, the Bank must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter. Under the CBLR framework, a bank will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a CBLR greater than 9.0%. A bank electing the framework that ceases to meet any qualifying criteria in a future period and that has a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or comply with the generally applicable capital requirements. A bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule. At December 31, 2024, the Bank’s Tier I capital was $ 115.4 million and the CBLR was 10.60 % and at December 31, 2023, the Bank’s Tier I capital was $ 113.7 million and the CBLR was 10.99 %. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank-only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations. If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2024, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2024 was 9.56 % On January 26, 2024, the Company announced that its Board of Directors approved an extension of the Company’s then-existing stock repurchase program, which was set to expire on January 31, 2024, until January 26, 2025. Under this stock repurchase program, the Company was authorized to repurchase up to $ 1.5 million of its outstanding shares of common stock from time to time in the open market, based on prevailing market prices, or in privately negotiated transactions. After this program expired on January 26, 2025, the Company’s Board of Directors did not extend the program or adopt a new program. During the years ended December 31, 2024 and 2023, the Company repurchased a total of 1,626 and 58,035 shares of Company common stock at an average price of $ 39.71 and $ 36.81 per share pursuant to the Company’s stock repurchase programs, leaving $ 1.4 million available for repurchases as of December 31, 2024. Note 17— Concentrations of Credit Risk Most of the Company's business activity is with clients located in the state of Washington. A substantial portion of the loan portfolio is represented by real estate loans throughout western Washington. The ability of the Company's debtors to honor their contracts may be affected by local real estate and general economic conditions. Loans to one borrower are generally limited by federal banking regulations to 15 % of the Company's unimpaired capital and surplus. Note 18— Commitments and Contingencies The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments generally represent a commitment to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit- and interest-rate risk in excess of the amount recognized in the Consolidated Balance Sheets. 105 Table of Contents The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments are not reflected in the consolidated financial statements. The Company evaluates each client's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the client. Financial instruments containing commitments representing credit risk were as follows at the dates indicated (in thousands): December 31, 2024 2023 Residential mortgage commitments $ 3,758 $ 10,465 Unfunded construction commitments 25,810 34,667 Unused lines of credit 26,105 27,245 Irrevocable letters of credit 163 277 Total loan commitments $ 55,836 $ 72,654 At December 31, 2024, fixed-rate loan commitments totaled $ 3.8 million and had a weighted-average interest rate of 8.26 %. At December 31, 2023, fixed-rate loan commitments totaled $ 10.5 million and had a weighted-average interest rate of 7.12 %. At December 31, 2024 and 2023, the Company had letters of credit issued by the FHLB with a notional amount of $ 8.0 million and $ 10.0 million, respectively, in order to secure Washington State Public Funds. In the ordinary course of business, the Company sells loans without recourse that may have to be subsequently repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payment defaults, and fraud. When a loan sold to an investor without recourse fails to perform, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Company has no obligation to repurchase the loan. At December 31, 2024 and 2023, the maximum amount of these guarantees totaled $ 425.8 million and $ 448.9 million, respectively. These amounts represent the unpaid principal balances of the Company's loans serviced for others' portfolios. There were no loans repurchased during the year ended December 31, 2024, and one loan for $ 448 thousand was repurchased during the year ended December 31, 2023. The Company pays certain medical, dental, prescription, and vision claims for its employees on a self-insured basis. To mitigate risk, the Company has purchased stop-loss insurance to cover claims that exceed stated limits and has recorded estimated reserves for the ultimate costs for both reported claims and claims incurred but not reported, which were not considered significant at December 31, 2024. The Company recorded $ 402 thousand in stop-loss medical insurance claims exceeding stated coverage limits during the year ended December 31, 2024, and $ 364 thousand for the year ended December 31, 2023. At various times, the Company may be the defendant in various legal proceedings arising in connection with its business. It is the opinion of management that the financial position and the results of operations of the Company will not be materially adversely affected by the outcome of any currently pending legal proceedings and that adequate provision has been made in the accompanying Consolidated Balance Sheets. 106 Table of Contents Note 19— Parent Company Financial Information The Balance Sheets, Statements of Income, and Statements of Cash Flows for Sound Financial Bancorp (Parent Only) are presented below (dollars in thousands): Balance sheets December 31, 2024 2023 Assets Cash and cash equivalents $ 1,310 $ 177 Investment in Sound Community Bank 114,534 112,668 Other assets 64 139 Total assets $ 115,908 $ 112,984 Liabilities and Stockholders' Equity Subordinated notes, net $ 11,759 $ 11,717 Other liabilities 483 613 Total liabilities 12,242 12,330 Stockholders' equity 103,666 100,654 Total liabilities and stockholders' equity $ 115,908 $ 112,984 Statements of Income Year Ended December 31, 2024 2023 Dividend from subsidiary $ 4,250 $ 2,771 Interest expense on subordinated notes ( 672 ) ( 672 ) Other expenses ( 776 ) ( 719 ) Income before income tax benefit and equity in undistributed net income of subsidiary 2,802 1,381 Income tax benefit 304 287 Equity in undistributed earnings of subsidiary 1,537 5,771 Net income $ 4,643 $ 7,439 Statements of Cash Flows Year Ended December 31, 2024 2023 Cash flows from operating activities: Net income $ 4,643 $ 7,439 Adjustments to reconcile net income to net cash provided by operating activities: Other, net ( 13 ) 277 Expense allocation to holding company ( 217 ) ( 265 ) Equity in undistributed earnings of subsidiary ( 1,537 ) ( 5,771 ) Net cash provided by operating activities 2,876 1,680 Cash flows from financing activities: Dividends paid ( 1,948 ) ( 1,913 ) Repurchase of stock ( 65 ) ( 2,137 ) Stock options exercised 269 395 Net cash used in financing activities ( 1,744 ) ( 3,655 ) Net increase (decrease) in cash 1,132 ( 1,975 ) Cash and cash equivalents at beginning of year 177 2,152 Cash and cash equivalents at end of year $ 1,309 $ 177 107 Table of Contents Note 20— Revenue from Contracts with Customers All of the Company's revenue from contracts with customers within the scope of ASC 606— Revenue from Contracts with Customers ("ASC 606") is recognized in noninterest income on the Consolidated Income Statements with the exception of the net loss on OREO and repossessed assets, which is included in noninterest expense on the Consolidated Income Statements. The following table presents the Company's sources of noninterest income for the year ended December 31, 2024 and 2023 (in thousands). Items outside of the scope of ASC 606 are noted as such. Year Ended December 31, 2024 2023 Noninterest income: Service charges and fee income Account maintenance fees $ 317 $ 280 Transaction-based and overdraft service charges 482 511 Debit/ATM interchange fees 1,380 1,388 Credit card interchange fees 83 111 Loan fees (a) 154 101 Other fees (a) 204 136 Total service charges and fee income 2,620 2,527 Earnings on cash surrender value of bank-owned life insurance (a) 625 1,179 Mortgage servicing income (a) 1,118 1,179 Fair value adjustment on MSRs (a) ( 4 ) ( 219 ) Net gain on sale of loans (a) 258 340 Other income (a) 38 — Total noninterest income $ 4,655 $ 5,006 (a) Not within scope of ASC 606 Account maintenance fees and transaction-based and overdraft service charges The Company earns fees from its customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts monthly.The performance obligation is satisfied and fees are recognized monthly as the service period is completed. Transaction-based fees and overdraft service fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds, overdraft, and wire services. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. Debit/ATM and credit card interchange income Debit/ATM interchange income represent fees earned when a debit card issued by the Bank is used for a transaction. The Bank earns interchange fees from debit cardholder transactions through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' account. Certain expenses directly associated with the debit card are recorded on a net basis with the interchange income. The Company utilizes a third-party agency relationship to brand credit cards with fees for originating new accounts paid by the issuing bank. Credit card interchange income represents fees earned when a credit card is issued by the third-party agent. Similar to debit card interchange fees, the Bank earns an interchange fee for each transaction made with Sound Community Bank's branded credit cards. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholder’s credit card. Certain expenses and rebates directly related to the credit card interchange contract are recorded net of the interchange income. Net loss on OREO and repossessed assets We record a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed of trust. When the Bank finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is 108 Table of Contents recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, we adjust the transaction price and related gain or loss on sale if a significant financing component is present. The Company generated income/incurred expenses on OREO properties, net of (gains)/losses on sale of OREO, of $( 31 ) thousand and $ 13 thousand for the years ended December 31, 2024 and 2023, respectively, included under noninterest expense on the Consolidated Statements of Income. Note 21— Business Segments The Company has evaluated its operations and identified that it has one reportable business segment: the Banking Segment. Loans and investments are the primary sources of revenues in the Banking Segment. Interest expense, provision for credit losses, and salaries and benefits are usually the most significant expenses in the Banking Segment. All operations are domestic. The accounting policies of the Banking Segment are the same as those described in the significant accounting policies. The segment was determined based upon how the Company’s Chief Operating Decision Maker (“CODM”) reviews the Company’s performance. The Company’s CODM is the CEO. As a part of the CODM review, pre-tax net income is utilized to allocate resources. Note 22— Subsequent Events On January 29, 2025, the Company’s Board of Directors declared on the Company’s common stock a quarterly cash dividend of $ 0.19 per share, payable on February 26, 2025 to stockholders of record at the close of business February 12, 2025. 109 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.