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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission File Number: 001-35633
Sound Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland45-5188530
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2400 3rd Avenue, Suite 150, Seattle, Washington
98121
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code:   (206) 448-0884
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueSFBCThe NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒   No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒   No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☒Smaller reporting company☒
 Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
As of November 10, 2023, there were 2,568,707 shares of the registrant’s common stock outstanding. 

SOUND FINANCIAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
 Page Number
PART I    FINANCIAL INFORMATION 
 
 

2



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)
 September 30,
2023		December 31,
2022
ASSETS  
Cash and cash equivalents$101,890 $57,836 
Available-for-sale securities, at fair value (amortized cost of $9,673 and $11,621 as of September 30, 2023 and December 31, 2022, respectively)
7,980 10,207 
Held-to-maturity securities, at amortized cost2,174 2,199 
Loans held-for-sale1,153 — 
Loans held-for-portfolio875,434 865,981 
Allowance for credit losses on loans(8,438)(7,599)
Total loans held-for-portfolio, net866,996 858,382 
Accrued interest receivable3,415 3,083 
Bank-owned life insurance (“BOLI”), net21,638 21,314 
Other real estate owned (“OREO”) and repossessed assets, net575 659 
Mortgage servicing rights, at fair value4,681 4,687 
Federal Home Loan Bank (“FHLB”) stock, at cost2,783 2,832 
Premises and equipment, net5,204 5,513 
Right of use assets4,732 5,102 
Other assets6,955 4,537 
Total assets$1,030,176 $976,351 
LIABILITIES
Deposits
Interest-bearing$706,954 $635,567 
Noninterest-bearing demand153,921 173,196 
Total deposits860,875 808,763 
Borrowings40,000 43,000 
Accrued interest payable588 395 
Lease liabilities5,065 5,448 
Other liabilities9,794 8,318 
Advance payments from borrowers for taxes and insurance1,909 1,046 
Subordinated notes, net11,707 11,676 
Total liabilities929,938 878,646 
COMMITMENTS AND CONTINGENCIES (NOTE 7)— — 
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding
— — 
Common stock, $0.01 par value, 40,000,000 shares authorized, 2,568,054 and 2,583,619 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
25 26 
Additional paid-in capital28,112 28,004 
Retained earnings73,438 70,792 
Accumulated other comprehensive loss, net of tax(1,337)(1,117)
Total stockholders’ equity100,238 97,705 
Total liabilities and stockholders’ equity$1,030,176 $976,351 
See Notes to Condensed Consolidated Financial Statements
3


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except share and per share amounts)
 Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
INTEREST INCOME  
Loans, including fees$11,505 $10,327 $34,437 $27,099 
Interest and dividends on investments, cash and cash equivalents1,181 449 2,836 876 
Total interest income12,686 10,776 37,273 27,975 
INTEREST EXPENSE
Deposits3,877 730 8,966 1,571 
Borrowings473 281 1,520 293 
Subordinated notes168 168 504 504 
Total interest expense4,518 1,179 10,990 2,368 
Net interest income8,168 9,597 26,283 25,607 
PROVISION FOR (RELEASE OF) CREDIT LOSSES75 346 (246)1,079 
Net interest income after provision for (release of) credit losses8,093 9,251 26,529 24,528 
NONINTEREST INCOME
Service charges and fee income700 604 1,951 1,749 
Earnings on bank-owned life insurance88 59 957 45 
Mortgage servicing income295 306 891 939 
Fair value adjustment on mortgage servicing rights(78)9 (123)334 
Net gain on sale of loans76 48 264 497 
Total noninterest income1,081 1,026 3,940 3,564 
NONINTEREST EXPENSE
Salaries and benefits4,148 4,044 13,333 12,181 
Operations1,625 1,610 4,557 4,345 
Regulatory assessments183 116 490 316 
Occupancy458 447 1,352 1,318 
Data processing1,296 848 3,077 2,518 
Net loss on OREO and repossessed assets— — 13 — 
Total noninterest expense7,710 7,065 22,822 20,678 
Income before provision for income taxes1,464 3,212 7,647 7,414 
Provision for income taxes295 666 1,419 1,533 
Net income$1,169 $2,546 $6,228 $5,881 
Earnings per common share:
Basic$0.45 $0.99 $2.41 $2.26 
Diluted$0.45 $0.97 $2.39 $2.23 
Weighted-average number of common shares outstanding:
Basic2,553,773 2,562,551 2,568,899 2,582,891 
Diluted2,571,808 2,597,690 2,588,788 2,617,581 
See Notes to Condensed Consolidated Financial Statements
4


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net income$1,169 $2,546 $6,228 $5,881 
Available for sale securities:
Unrealized losses arising during the period(307)(400)(278)(1,777)
Income tax benefit related to unrealized losses64 84 58 373 
Other comprehensive loss, net of tax(243)(316)(220)(1,404)
Comprehensive income$926 $2,230 $6,008 $4,477 

See Notes to Condensed Consolidated Financial Statements
5


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
For the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)
(In thousands, except share and per share amounts)
 SharesCommon
Stock		Additional Paid-in CapitalRetained
Earnings		Accumulated Other
Comprehensive Income/(Loss), net of tax		Total
Stockholders’
Equity
Balance, at June 30, 2023
2,573,223 $25 $28,070 $72,923 $(1,094)$99,924 
Net income— — — 1,169 — 1,169 
Other comprehensive loss, net of tax— — — — (243)(243)
Share-based compensation— — 88 — — 88 
Cash dividends paid on common stock ($0.19 per share)
— — — (489)— (489)
Common stock repurchased(6,169)— (63)(165)— (228)
Common stock options exercised1,000 — 17 — — 17 
Balance, at September 30, 2023
2,568,054 $25 $28,112 $73,438 $(1,337)$100,238 
Balance, at December 31, 2022
2,583,619 $26 $28,004 $70,792 $(1,117)$97,705 
Impact of adoption of Accounting Standards Update (“ASU”) 2016-13— — — (1,149)— (1,149)
Net income— — — 6,228 — 6,228 
Other comprehensive loss, net of tax— — — — (220)(220)
Share-based compensation— — 368 — — 368 
Restricted stock awards issued8,850 — — — — — 
Cash dividends paid on common stock ($0.55 per share)
— — — (1,425)— (1,425)
Common stock repurchased(37,850)(1)(390)(1,008)— (1,399)
Common stock surrendered(4,750)— (190)— — (190)
Restricted shares forfeited(425)— — — — — 
Common stock options exercised18,610 — 320 — — 320 
Balance, at September 30, 2023
2,568,054 $25 $28,112 $73,438 $(1,337)$100,238 
6


 SharesCommon
Stock		Additional Paid-in CapitalRetained
Earnings		Accumulated Other Comprehensive
Income/(Loss), net of tax		Total
Stockholders’
Equity
Balance, at June 30, 2022
2,578,595 $26 $27,777 $66,203 $(949)$93,057 
Net income— — — 2,546 — 2,546 
Other comprehensive loss, net of tax— — — — (316)(316)
Share-based compensation— — 90 — — 90 
Common stock surrendered(2,431)— (91)— — (91)
Cash dividends paid on common stock ($0.17 per share)
— — — (440)— (440)
Restricted shares forfeited(95)— — — — — 
Common stock options exercised5,880 — 110 — — 110 
Balance, at September 30, 2022
2,581,949 $26 $27,886 $68,309 $(1,265)$94,956 
Balance, at December 31, 2021
2,613,768 $26 $27,956 $65,237 $139 $93,358 
Net income— — — 5,881 — 5,881 
Other comprehensive loss, net of tax— — — — (1,404)(1,404)
Share-based compensation— — 384 — — 384 
Restricted stock awards issued9,700 — — — — — 
Cash dividends paid on common stock ($0.61 per share)
— — — (1,591)— (1,591)
Common stock repurchased(46,799)(516)(1,218)(1,734)
Common stock surrendered(3,541)— (133)— — (133)
Restricted stock forfeited(930)— — — — — 
Common stock options exercised9,751 — 195 — — 195 
Balance, at September 30, 2022
2,581,949 $26 $27,886 $68,309 $(1,265)$94,956 
See Notes to Condensed Consolidated Financial Statements
7


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 Nine Months Ended September 30,
 20232022
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income$6,228 $5,881 
Adjustments to reconcile net income to net cash from operating activities:
Amortization of net discounts on investments60 61 
(Release of) provision for credit losses(246)1,079 
Depreciation and amortization534 539 
Share based compensation368 384 
Fair value adjustment on mortgage servicing rights123 (334)
Right of use assets amortization699 492 
Change in lease liabilities(712)(493)
Change in cash surrender value of BOLI(390)(45)
Net gain on BOLI death benefit(567)— 
Net change in advances from borrowers for taxes and insurance863 433 
Net gain on sale of loans(264)(497)
Proceeds from sale of loans held-for-sale14,822 17,750 
Originations of loans held-for-sale(15,828)(17,979)
Net loss on OREO and repossessed assets13 — 
Change in operating assets and liabilities:
Accrued interest receivable(332)(592)
Other assets(2,276)(626)
Accrued interest payable193 (91)
Other liabilities1,476 (500)
Net cash provided by operating activities4,764 5,462 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities— (4,380)
Proceeds from principal payments, maturities and sales of available-for-sale securities1,920 596 
Purchase of held-to-maturity securities— (2,226)
Proceeds from principal payments of held-to-maturity securities25 19 
Net decrease (increase) in loans(9,601)(163,235)
Proceeds from death benefit on BOLI633 — 
Purchases of premises and equipment, net(225)(225)
Proceeds from sale of OREO and other repossessed assets71 — 
Net cash used in investing activities(7,177)(169,451)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits52,112 17,077 
Proceeds from borrowings40,000 44,500 
Repayment of borrowings(43,000)— 
FHLB stock purchased49 (1,851)
Common stock repurchases(1,399)(1,734)
Purchase of stock surrendered to pay tax liability(190)(133)
Dividends paid on common stock(1,425)(1,591)
Proceeds from common stock option exercises320 195 
Net cash provided by financing activities46,467 56,463 
Net change in cash and cash equivalents44,054 (107,526)
Cash and cash equivalents, beginning of period57,836 183,590 
Cash and cash equivalents, end of period$101,890 $76,064 
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes$2,100 $1,410 
Interest paid on deposits and borrowings10,797 2,459 
ROU assets obtained in exchange for new operating lease liabilities329 — 
Impact of adoption of ASU 2016-13 on retained earnings(1,149)— 
See Notes to Condensed Consolidated Financial Statements
8


SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1 – Basis of Presentation
The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc.  References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires.
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 14, 2023 (“2022 Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full year or any other future period.
Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation. These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share.
We have not made any changes in our significant accounting policies from those disclosed in the 2022 Form 10-K, except for the accounting for debt securities, the allowance for credit losses (“ACL”) on loans and unfunded commitments, and loan modifications, as described below.
Allowance for Credit Losses on Investment Securities. The ACL on investment securities is determined for both the held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with Accounting Standards Codification (“ASC”) 326 - Financial Instruments - Credit Losses. For available-for-sale investment securities, we perform a quarterly qualitative evaluation for securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related. In determining whether a security’s decline in fair value is credit related, we consider a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments and (vi) general market conditions, which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that the unrealized loss can be attributed to credit loss, we record the amount of credit loss through a charge to provision for credit losses in current period earnings. However, the amount of credit loss recorded in current period earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost. If it is likely we will be required to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings. For unrealized losses deemed non-credit related, we record the loss, net of tax, through accumulated other comprehensive income.
We determine expected credit losses on available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities through a discounted cash flow approach, using the security’s effective interest rate. However, as previously mentioned, the measurement of credit losses on available-for-sale securities only occurs when, through our qualitative assessment, all or a portion of the unrealized loss is determined to be credit related. Our discounted cash flow approach incorporates assumptions about the collectability of future cash flows. The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows. Credit losses on available-for-sale securities are measured on an individual basis, while credit losses on held-to-maturity securities are measured on a collective basis according to shared risk characteristics. Credit losses on held-to-maturity securities are only recognized at the individual security level when we determine a security no longer possesses risk characteristics similar to others in the portfolio. We do not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable. Accrued interest receivable for investment securities is included in accrued interest receivable balances in the Condensed Consolidated Balance Sheets.
9

Allowance for Credit Losses on Loans and Unfunded Loan Commitments. We maintain an ACL on loans and unfunded loan commitments in accordance with ASC 326. ASC 326 requires us to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition. The recognition of credit losses at origination or acquisition represents our best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics. Determining the ACL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. We use a historical loss rate model when determining estimates for the ACL for our loan portfolio. We also utilize proxy loan data in our ACL model where our own historical data is not sufficiently available. We do not measure credit losses on a loan’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable. Accrued interest receivable for loans is included in accrued interest receivable balances in the Condensed Consolidated Balance Sheets.
Our ACL model forecasts primarily over a two-year time horizon, which we believe is a reasonable and supportable period. Beyond the two-year forecast time horizon, our ACL model reverts to historical long-term average loss rates. The duration of the forecast horizon, the period over which forecasts revert to long-term averages, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio.
We utilize a discounted cash flow ACL model for individually analyzed loans using internally derived estimates for prepayments in determining the amount and timing of future contractual cash flows we expect to collect, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell. The estimate of future cash flows also incorporates estimates for contractual amounts we believe may not be collected, which are based on assumptions for our estimated exposure at default. Our estimated exposure at default is determined by the contractual payment schedule and expected payment profile of the loan, incorporating estimates for expected prepayments and future draws on revolving credit facilities. Our ACL methodology for unfunded loan commitments also includes assumptions concerning the probability an unfunded commitment will be drawn upon by the borrower. These assumptions are based on the historical experience of banks in an independent third party database.
Expectations of future cash flows are discounted at the loan’s effective interest rate for individually analyzed loans. The effective interest rate represents the contractual rate on the loan, adjusted for any purchase premiums, or discounts, and deferred fees and costs associated with an originated loan. We have made an accounting policy election to adjust the effective interest rate to take into consideration the effects of estimated prepayments. The resulting ACL represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is our policy to charge-off loan balances at the time they are not expected to be collected.
The historical loss rate model is derived from our loan portfolio credit history, as well as the comparable credit history for peer banks in Washington state. Key loan level attributes and economic drivers in determining the loss rate for loans include unemployment rates, changes to interest rates, changes in credit quality, changes to the consumer price index, and changes in real estate prices.
In order to develop reasonable and supportable forecasts of future conditions, we estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligations to us and the ultimate collectability of future cash flows over the life of a loan. Management periodically evaluates appropriateness of economic scenarios and may decide that a particular economic scenario or a combination of probability-weighted economic scenarios should be used in our ACL model. Our ACL model at September 30, 2023 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, the potential impact of wars and other sources of geopolitical tension, general uncertainty concerning future economic conditions, and the potential for recessionary conditions.
It is important to note that our ACL model relies on multiple economic variables, which are used in several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, we have identified certain economic variables that have significant influence in our model for determining the ACL. These key economic variables include changes in the Washington state unemployment rate, residential real estate prices in the Seattle Metropolitan Statistical Area, and interest rates. Recognizing that forecasts of macroeconomic conditions are inherently uncertain, we believe that the process to consider the available information and associated risks and uncertainties is appropriately governed and that estimates of expected credit losses were reasonable and appropriate upon adoption and for the three and nine months ended September 30, 2023.
Our ACL model also includes adjustments for qualitative factors, where appropriate. We recognize that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. We therefore consider the need for qualitative adjustments to the ACL on a quarterly
10

basis. Qualitative adjustments may be related to and include, but are not limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios, and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.
Qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile or other factors where management believes the quantitative component of our ACL model may not be fully reflective of levels deemed adequate in the judgement of management. Certain qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.
Modified Loans to Borrowers Experiencing Financial Difficulty. We occasionally modify loans to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize our potential losses. We refer to these modifications as modified loans to troubled borrowers. Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and, in very limited cases, reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been past due for a period of 90 days or more. Such loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. We typically measure the ACL on modified loans to troubled borrowers on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach for loans measured individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated fair value of the underlying collateral, less estimated costs to sell. GAAP requires us to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. Refer to Note 4 – Loans for additional information concerning modified loans to troubled borrowers.

Note 2 – Accounting Pronouncements Recently Issued or Adopted
On March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, "Reference Rate Reform" ("Topic 848"). This ASU provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to modifications to eligible contracts (e.g., loans, debt securities, derivatives, borrowings) that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the related Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives.
In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification. The amendments in this ASU have differing effective dates, beginning with interim periods including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19,
11


April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02, and March 2020, ASU 2020-03, all of which clarify the codification and correct unintended application of the guidance. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period.
The Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach and recorded a net decrease of approximately $1.1 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the ACL of $1.5 million, net of related deferred tax assets arising from temporary differences of $305 thousand, commonly referred to as the “Day 1” adjustment. The Day 1 adjustment to the ACL is reflective of expected lifetime credit losses associated with the composition of financial assets within in the scope of ASC 326 as of January 1, 2023, which is comprised of loans held for investment and off-balance sheet credit exposures at January 1, 2023, as well as management’s current expectation of future economic conditions.
The following table presents the impact of adopting ASU 2016-13 on January 1, 2023:
(dollars in thousands)As Reported
Under
ASC 326		Prior to Adopting
ASC 326		Impact of ASC 326
Adoption
Allowance for credit losses - loans
Real estate loans:
One- to four- family$2,126 $1,771 $355 
Home equity201 132 69 
Commercial and multifamily2,181 2,501 (320)
Construction and land2,568 1,209 1,359 
Total real estate loans7,075 5,613 1,462 
Consumer loans:
Manufactured homes282 462 (180)
Floating homes622 456 166 
Other consumer161 324 (163)
Total consumer loans1,065 1,242 (177)
Commercial business loans221 256 (35)
Unallocated(3)488 (491)
Total loans8,359 7,599 760 
Allowance for credit losses - unfunded commitments
Reserve for unfunded commitments1,030 335 695 
Total$9,389 $7,934 $1,455 

In March 2022, the FASB issued ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, this ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology. The Company adopted ASU 2022-02 on January 1, 2023 using the prospective transition guidance which allows the entity to continue estimating expected credit losses in accordance with legacy U.S. GAAP for receivables modified in a TDR until the receivables are subsequently modified or settled. Once a legacy TDR is modified after adoption of ASU
12


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.

Note 3 – Investments
At September 30, 2023, the Company did not own any debt securities classified as trading or any equity investment securities.
The amortized cost and fair value of our AFS securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):
 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value
September 30, 2023    
Municipal bonds$6,404 $10 $(1,261)$5,153 
Agency mortgage-backed securities3,269 1 (443)2,827 
Total$9,673 $11 $(1,704)$7,980 
December 31, 2022
Treasury bills$1,596 $— $(2)$1,594 
Municipal bonds6,434 16 (1,029)5,421 
Agency mortgage-backed securities3,591 1 (400)3,192 
Total$11,621 $17 $(1,431)$10,207 
The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):
 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value
September 30, 2023
Municipal bonds$704 $— $(219)$485 
Agency mortgage-backed securities1,470 — (284)1,186 
Total$2,174 $— $(503)$1,671 
December 31, 2022
Municipal bonds$705 $— $(169)$536 
Agency mortgage-backed securities1,494 — (219)1,275 
Total$2,199 $— $(388)$1,811 
The amortized cost and fair value of AFS and HTM securities at September 30, 2023, by contractual maturity, are shown below (in thousands). Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, consisting of agency mortgage-backed securities, are shown separately.
13


September 30, 2023
Available-for-saleHeld-to-maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Due after one year through five years$150 $150 $— $— 
Due after five years through ten years1,227 1,233 — — 
Due after ten years5,027 3,770 704 486 
Agency mortgage-backed securities3,269 2,827 1,470 1,185 
Total$9,673 $7,980 $2,174 $1,671 
There were no pledged securities at September 30, 2023 or December 31, 2022.
There were no sales of AFS or HTM securities during the three and nine months ended September 30, 2023 and 2022.
Accrued interest receivable on securities totaled $78 thousand and $54 thousand at September 30, 2023 and December 31, 2022, respectively, in the accompanying Condensed Consolidated Balance Sheets. Accrued interest receivable is excluded from the estimate of expected credit losses.
The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments for which an allowance for credit losses has not been recorded that have been in a continuous unrealized loss position at the dates indicated (in thousands):
 September 30, 2023
 Less Than 12 Months12 Months or LongerTotal
 Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale securities
Municipal bonds$455 $— $3,490 $(1,261)$3,945 $(1,261)
Agency mortgage-backed securities47 (2)2,570 (441)2,617 (443)
Total available-for-sale securities$502 $(2)$6,060 $(1,702)$6,562 $(1,704)
Held-to-maturity securities
Municipal bonds$— $— $486 $(219)$486 $(219)
Agency mortgage-backed securities— — 1,185 (284)1,185 (284)
Total held-to-maturity securities$— $— $1,671 $(503)$1,671 $(503)
 December 31, 2022
 Less Than 12 Months12 Months or LongerTotal
 Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale securities
Treasury bills$1,594 $(2)$— $— $1,594 $(2)
Municipal bonds2,506 (641)1,246 (388)3,752 (1,029)
Agency mortgage-backed securities2,666 (314)292 (86)2,958 (400)
Total$6,766 $(957)$1,538 $(474)$8,304 $(1,431)
Held-to-maturity securities
Municipal bonds$536 $(169)$— $— $536 $(169)
Agency mortgage-backed securities1,274 (219)— — 1,274 (219)
Total held-to-maturity securities$1,810 $(388)$— $— $1,810 $(388)
There was no allowance for credit losses on securities at September 30, 2023 or December 31, 2022. At September 30, 2023, the total securities portfolio consisted of 12 agency mortgage-backed securities and 11 municipal bonds, with a total portfolio fair value of $9.7 million. At December 31, 2022, the total securities portfolio consisted of one treasury bill, 11 municipal
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bonds and 12 agency mortgage-backed securities, with a fair value of $12.0 million. At September 30, 2023, there were three securities in an unrealized loss position for less than 12 months, and 17 securities in an unrealized loss position for more than 12 months. All three securities in an unrealized loss position for less than 12 months were classified as AFS. At December 31, 2022, there were 16 securities in an unrealized loss position for less than 12 months, and three securities in an unrealized loss position for more than 12 months. The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. There was no provision for credit losses recognized for investment securities during the three or nine months ended September 30, 2023, because the declines in fair value were not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis. 

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Note 4 – Loans

Loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, were as follows (in thousands):
 September 30,
2023		December 31,
2022
Real estate loans:  
One-to-four family$280,556 $274,638 
Home equity21,313 19,548 
Commercial and multifamily304,252 313,358 
Construction and land118,619 116,878 
Total real estate loans724,740 724,422 
Consumer loans:
Manufactured homes34,652 26,953 
Floating homes73,716 74,443 
Other consumer18,710 17,923 
Total consumer loans127,078 119,319 
Commercial business loans25,033 23,815 
Total loans held-for-portfolio876,851 867,556 
Premiums for purchased loans(1)
850 973 
Deferred fees, net(2,267)(2,548)
Total loans held-for-portfolio, gross875,434 865,981 
Allowance for credit losses — loans(8,438)(7,599)
Total loans held-for-portfolio, net$866,996 $858,382 
(1)Includes premiums resulting from purchased loans of $472 thousand related to one-to-four family loans, $290 thousand related to commercial and multifamily loans, and $88 thousand related to commercial business loans as of September 30, 2023. Includes premiums resulting from purchased loans of $507 thousand related to one-to-four family loans, $320 thousand related to commercial and multifamily loans, and $146 thousand related to commercial business loans as of December 31, 2022.
As of September 30, 2023, there were two collateral dependent loans, totaling $99 thousand, that were in process of foreclosure.
The following table presents a summary of activity in the ACL on loans and unfunded commitments for the periods indicated (in thousands):
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Three Months Ended September 30,
20232022
Allowance for Credit Losses - LoansReserve for Unfunded Loan CommitmentsAllowance for Credit LossesAllowance for Credit Losses - LoansReserve for Unfunded Loan CommitmentsAllowance for Credit Losses
Balance at beginning of period$8,217 $706 $8,923 $7,117 $411 $7,528 
Provision for (release of) credit losses during the period224 (149)75 375 (29)346 
Net (charge-offs)/recoveries during the period(3)— (3)(3)— (3)
Balance at end of period$8,438 $557 $8,995 $7,489 $382 $7,871 
Nine months ended September 30, 2023
20232022
Allowance for Credit Losses - LoansReserve for Unfunded Loan CommitmentsAllowance for Credit LossesAllowance for Credit Losses - LoansReserve for Unfunded Loan CommitmentsAllowance for Credit Losses
Balance at beginning of period$7,599 $335 $7,934 $6,306 $404 $6,710 
Adoption of ASU 2016-13(1)
760 695 1,455 —