SFBC 10-K & 10-Q changes, risk factors and insider trading

Substantially all our loans are to businesses and individuals in the state of Washington. Accordingly, local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. Further, as a result of a high concentration of our customer base in the Puget Sound area and eastern Washington state regions, thea deterioration ofin businessesthe business environment in these areas, or the financial challenges of one or more businesses with a large employee baseemployers in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. BroaderBroad economic factors such as inflation, unemployment and money supply fluctuationsfluctuations, changes in monetary policy expectations, and volatility in interest rate markets also may adversely affect our profitability. TradeUncertainty regarding the timing and magnitude of potential interest rate reductions by the Federal Reserve, following a prolonged period of elevated interest rates, may negatively affect borrowing demand, asset yields, deposit pricing, and overall economic activity in our market areas. Furthermore, trade disputes, trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers. These developments may, in turn, negatively impact theseour businessesclients’ operations and, by extension,consequently, our operations and financial performance.

Moreover, a significant decline in local, regional or national economic conditions caused by inflation, recession, economic slowdown, severe weather, natural disasters, widespread disease or pandemics, sustained higher interest rates, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, trade-related pressures that may affect construction costs or materials availability, unemployment or other factors beyond our control could negatively affect the financial results of our banking operations. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses.

•Commercial and Multifamily Real Estate Loans. Our commercial and multifamily real estate loans generally involve higher principal amounts compared to other loan types, and some commercial borrowers maintain multiple loans with us. Consequently, an adverse development in any single loan or credit relationship can significantly heighten our exposure to potential losses, far more than the impact of a similar development in a one-to-four family residential mortgage loan. The repayment of these loans relies on income generated from the property securing the loan. This income must sufficiently cover operational expenses and debt service. Economic fluctuations or shifts in local market conditions may adversely affect the property's income, posing potential repayment challenges. Moreover, a substantial portion of our commercial and multifamily real estate loans do not fully amortize and include substantial balloon payments upon maturity. These balloon payments may require the borrower to either sell or refinance the property, potentiallyand refinancing may be difficult or unavailable due to elevated interest rates, tighter underwriting standards, declining property values, or reduced lender appetite, heightening the risk of default or non-payment. In the event of a foreclosure on a commercial or multifamily real estate loan, our holding period for the collateral tends to be more extendedlonger compared to one-to-four family residential loans. This elongatedextended holding period results from a limited pool of potential purchasers for the collateral.

In recent years, the commercial real estate market has experienced substantial growth, with increased competition contributing to historically low capitalization rates and rising property values. However,More recently, the economiccommercial disruptionreal causedestate market has been affected by thehigher COVID-19interest pandemicrates, significantlytighter impactedcredit thisconditions, market.and changing economic and workplace dynamics. The pandemic also accelerated the adoption of remote work,and whichhybrid work models has led many companies to re-evaluate their long-term real estate needs. WhileAlthough somecertain businessesemployers arehave returningincreased toin-office traditional office environments,requirements, others are downsizing or shifting to hybrid models, and demand for office space in certain markets has remained structurally lower than pre-pandemic levels, creating uncertainty in demand for office space and other commercial properties. This trend could result in prolonged vacancies, declining rental income, refinancing challenges, and reduced property values, particularly for certain property types or markets, adversely affecting the performance of our commercial real estate loan portfolio. Federal banking regulators also have raisedincreased concernssupervisory aboutfocus weaknesses in theon commercial real estate market.exposures, particularly with respect to refinancing risk, collateral valuation, and borrower equity levels, which may subject us to heightened examination scrutiny, additional risk management expectations, or more conservative supervisory expectations. Failures in our risk management policies and controls could lead to higher delinquencies and losses, adversely affecting our business, financial condition, and results of operations.

•Commercial Business Loans. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral includes accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing commercial business loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.

The determination of the appropriate allowance for credit losses involves a significant degree of subjectivity,subjectivity and judgment, relying on substantial estimates of both current credit risks and future economic and portfolio trends, all of which are subject to potential material changes.change. Inaccuracies in our estimationsestimates could leadresult toin an insufficient allowance for credit losses that is insufficient to absorb actual losses, necessitatingand increaseschanges throughin provisionseconomic forecasts, borrower performance, or asset-class conditions may result in period-to-period volatility in our provision for credit losses, which could adversely impactingimpact our net income. Additionally, as we acknowledge the potential impact of significant portfolio growth, the introduction of new loan products, andor increased refinancing activities, these actionsactivity may result in portfolios consisting of unseasoned loans that may not perform as anticipated, elevatingincreasing the risk of an inadequate allowance to absorb losses without additional provisions. Bank regulatory agencies also periodically reviewthat our allowance for credit losses on loans. Based on their assessment, they may requireprove increasedinadequate provisionswithout oradditional loan charge-offs.A material decrease in the credit quality of our loan portfolio, significant changes in the risk profile of markets, industries, or customer groups, or inadequacy in the allowance for credit losses could have a materially adverse impact on our business, financial condition, liquidity, capital, and results of operations.provisions.

The yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities are generally fixed for a contractual period of time. Like many financial institutions, our liabilities generally have shorter contractual maturities than our assets. This mismatch exposes us to significant earnings volatility as market interest rates fluctuate. Shifts in interest rates can also impact the average lifespan of loans and mortgage-backed securities. In periods of rising interest rate volatility, prolonged elevated rates, or an uncertain rate-cutting environment, the growth rate of interest income from our interest-earning assets might lag behind the accelerating interest expenses on our interest-bearing liabilities.liabilities Conversely,or decline more rapidly than anticipated as assets reprice. In addition, periods of declining or volatile interest ratesrates, canor changes in borrower refinancing behavior, may trigger increased loan prepayments and mortgage-backed security redemptions as borrowers seek lower borrowing costs through refinancing.redemptions. This introduces reinvestment risk, where the challenge lies in reinvesting prepayments at rates comparable to those initially earned on the prepaid loans or securities. Moreover, anchanges invertedin the shape of the interest rate yield curve, whereinincluding short-terman interestinverted ratesor (whichrapidly areflattening usuallyyield the rates at which financial institutions borrow funds) surpass long-term rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans),curve, can compress a financial institution'sinstitution’s net interest margin. This occurrence poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans. As of December 31, 2024,2025, approximately 52.4%50.1% of our loan portfolio consisted of fixed-rate loans, potentially exposing us to these risks.

AsRising rates can also increase the cost of December 31, 2024, our deposit composition included $274.3 million in certificates of deposit maturing within one yeardeposits and $542.0other millionfunding in noninterest-bearing, NOW checking, savings, and money market accounts. In a rising rate environment, retaining deposits can become costlier.sources. If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline. Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for credit losses on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts’ reports. Changes in interest rates can also haveadversely an adverse effect onaffect our financial condition, as our AFS securities are reported at their estimated fair valuevalues and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the AFS securities, net of taxes. Declines in market value could result in credit losses on these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. At December 31, 2024,2025, we had no allowance for credit losses on securities.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending, should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital (or in the case of a bank, such as the Bank, that has elected to follow the CBLR framework, CBLR Capital (Tier 1 capital plus the entire allowance for loan and lease losses), or (ii) total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital or CBLR Capital, as appropriate, and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of their real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. At December 31, 2024,2025, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 63.9%42.4% of CBLR Capital. In addition, at December 31, 2024,2025, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 348.5%355.2% of CBLR Capital. WhileAlthough weour believetotal wecommercial havereal implementedestate policiesloans andexceeded procedures300% withof respectCBLR toCapital at December 31, 2025, the outstanding balance of our commercial real estate loan portfolio consistenthas withnot thisincreased guidance,by bank50% or more during the preceding 36 months. Our banking regulators may nevertheless determine that the level of our commercial real estate lending warrants enhanced risk management practices. Regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

Increasing scrutinyScrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

CompaniesIn arerecent facingyears, increasingcompanies have faced scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social, and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds, and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, and human rights. Increased ESG-related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements, or investor or stakeholder expectations and standards, could negatively impact our reputation, ability to do business with certain partners, and our stock price.

Recent changes in the regulatory landscape underand theshifting newfederal Trump administrationpriorities have moved toward a reduction in emphasis on certain ESG priorities, particularly around climate change and diversity, equity, and inclusion (“DEI”). This shift is leading to the rollback of regulations that mandate specific disclosures and operational practices in these areas. However, some stakeholder groups continue to demand greater transparency and action, resulting in a complex and potentially conflicting environment for companies. If regulatory enforcement of ESG-related policies becomes less stringent, companies may face reputational risks if their practices are seen as insufficient or inconsistent with broader societal expectations, especially related to DEI and environmental stewardship. As a result, navigating this evolving regulatory and public opinion landscape may require us to balance compliance with regulatory requirements against maintaining investor, customer, and stakeholder trust.

Raising funds through deposits, borrowings, loan sales, or sales of investment securities is essential for our liquidity. We primarily rely on customer deposits and occasionally borrow from entities like the FHLB of Des Moines, the Federal Reserve, and other wholesale funding sources. Several factors influence our liquidity, including (i) interest rate trends and competition affecting deposit flows and loan prepayments and (ii) potential limitations arising from changes in FHLB of Des Moines’ underwriting guidelines, which could restrict our borrowing capacity. While historicallyin prior periods we have successfully replaced maturing deposits and borrowings, deposit balances across the banking industry have become more rate-sensitive and responsive to market perceptions, and future replacements may be challenged by shifts in our financial condition, FHLB of Des Moines’ status, or market conditions.

The effects of climate change continue to raise significant concerns about the state of the environment. However,Federal underand the new Trump administration, federalstate policy may shiftapproaches to reduce the emphasis on climate change initiativescontinue to evolve, and environmentalchanges regulations.in Thislegislative or regulatory priorities could include scaling back federal participation in international agreements, such asalter the Paris Agreement,requirements and reducingexpectations regulatory pressuresplaced on businesses, including banks, to address climate-related risks. Legislative and regulatory proposals aimed at combating climate change may face greater scrutiny or diminished priority.

If our enterprise risk management framework is not effective at mitigating riskrisks andwe loss to us,face, we could suffer unexpected losses and our results of operations could be materially adversely affected.

We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management.decision-making. OurDeficiencies ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that governin how data is acquired, validated, stored, protectedprotected, andor processed.processed, Whileas wewell continuouslyas updatethe ourmanual policies,nature programs, processes and practices,of many of our data management and aggregation processesprocesses, arecould manual and subjectlead to human error or system failure.failures. FailureInaccurate, toincomplete, manageor delayed data effectively and to aggregate data in an accurate and timely manner maycould limit our ability to identify, measure, and manage current and emerging risks, asimpair wellmanagement asdecision-making, and hinder our ability to managerespond to changing business needs.conditions. These shortcomings could also adversely affect our financial reporting, regulatory compliance, operational efficiency, and strategic initiatives. Any of these outcomes could materially and adversely affect our business, financial condition, results of operations, and growth prospects.

The Company is a separate legal entity from its subsidiary bank and does not have significant operations of its own. The long-term ability of the Company to pay dividends to its stockholders, repurchase its stock and make debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level. The availability of dividends from the Bank is limited by the Bank's earnings and capital, as well as various statutes and regulations. Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals. If the Bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock, repurchase its common stock or make payments on its outstanding debt. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects and the value of the Company's common stock. At December 31, 2024,2025, Sound Financial Bancorp had $1.3$1.4 million in unrestricted cash to support dividend and debt payments. See "Part I. Item 1. Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules” and “—Regulation of Sound Financial Bancorp—Limitations on Dividends and Stock Repurchases" for additional information.

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statementsdiscussion and notes thereto that appear in "Part II. Item 8. Financial Statements and Supplementary Data" of this Form 10-K. The information contained in this sectionanalysis should be read in conjunction with theseour Consolidated Financial Statements and related notes and the business and financial information providedincluded in Part II, Item 8 of this Form 10-K.

Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds, along with borrowed funds, in loans secured by first and second mortgages on one-to-four family residences (including home equity loans and lines of credit), commercial and multifamily real estate, construction and land, and consumer and commercial business loans. Our commercial business loans include unsecured lines of credit and secured term loans and lines of credit secured by inventory, equipment and accounts receivable. We also offer a variety of secured and unsecured consumer loan products, including manufactured home loans, floating home loans, automobile loans, boat loans and recreational vehicle loans. As part of our business, we focus on residential mortgage loan originations, a portion of which we sell to Fannie Mae and other investors and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives. We sell loans which conform to the underwriting standards of Fannie Mae (“conforming”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income. Residential loans which do not conform to the underwriting standards of Fannie Mae (“non-conforming”), are either held in our loan portfolio or sold with servicing released. We originate and retain a significant amount of commercial real estate loans, including those secured by owner-occupied and nonowner-occupied commercial real estate, multifamily properties and mobile home parks, and construction and land development loans.

In 2022 and continuing into 2023, due to a generally illiquid jumbo loan market for residential mortgage loans, we retained a higher proportion of these jumbo loans than historically, resulting in commercial business and commercial and multifamily real estate loans making up a lower percentage of our overall portfolio. Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) totaled $425.1 million or 46.8% of our loan portfolio at December 31, 2025, up from $387.1 million or 42.9% of our loan portfolio at December 31, 2024, up slightly from $336.0 million or 37.5% of our loan portfolio at December 31, 2023.2024. Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, increasedwas $147.0 million or 16.1% of our loan portfolio at December 31, 2025, compared to $145.3 million or 16.2% of our loan portfolio at December 31, 2024, from $130.9 million or 14.6% of our loan portfolio at December 31, 2023.2024.

Our operating revenues are derived principally from earnings on interest-earning assets, service charges and fees, and gains on the sale of loans. TheDuring ongoing2025, highthe elevated interest rate environment is expectedcontinued to continue exertingexert downward pressure on our net gain on sale of loans,loans and keepingcontributed to higher borrowing costscosts, elevated.which Thismodestly may adversely affectaffected our net interest income and net interest margin in 2025.margin. While the high interest rate environment also impacts the interest expense paid on ourdeposits deposits,also potentially reducing net interest margin as deposit rates rise, we expectincreased, the rates earned on our loan portfolio continued to continue repricingreprice at higher yields.yields, Topartially meetoffsetting ourthese fundingpressures. requirements,Deposit wecosts relybegan ontrending variousdownward sources,during includingthe depositslatter (bothpart retailof and2025 brokered),following FHLBrate advances,reductions borrowings throughby the Federal Reserve,Reserve and payments received on loans and securities. We offer a diverse range of deposit accounts to our customers, including savings, money market, NOW (negotiable order of withdrawal), interest-bearing and noninterest-bearing demand accounts, as well as certificates of deposit. This variety of deposit accounts provides customers with flexibility in terms of interest rates and terms to suit their financial preferences.Board.

The provision for credit losses, or the release of such provision, is essential for maintaining the ACL at a level sufficient to cover estimated lifetime credit losses in our loan portfolio, including unfunded loan commitments. An increase in our loan portfolio or a rise in estimated lifetime credit losses may result in additional provisions for credit losses, thereby decreasing net income. However, improvements in loan risk ratings, increased property values, or recoveries of previously charged-off amounts may partially or fully offset the required increase in the ACL due to factors such as loan growth or an increase in estimated lifetime losses on loans and unfunded loan commitments. We recorded a provision for credit losses of $127 thousand for the year ended December 31, 2025, consisting of a provision for credit losses on loans of $212 thousand and a release of provision for credit losses on unfunded commitments of $86 thousand, compared to a release of provision for credit losses of $120 thousand for the year ended December 31, 2024, consisting of a release of provision for credit losses on loans of $161 thousand and a provision for credit losses on unfunded commitments of $41 thousand,thousand. compared to a release ofThe provision forrecorded in 2025 primarily reflected loan growth and changes in portfolio composition, partially offset by stable credit lossesquality of $273 thousand for the year ended December 31, 2023, consisting of a provision for credit losses on loans of $564 thousand and a release of the provision for credit losses on unfunded commitments of $837 thousand.trends.

We continuously evaluate and update our critical accounting estimates and judgments based on changing conditions. As part of our ongoing enhancement of the ACL methodology, during the year ended December 31, 2024,2025, we made additional improvementschanges to benchmark ratios and the annual loss model. This included a qualitative adjustment related to our loan review process and how we adjust for the qualitative component using a scorecard to guide management’sdriver analysis. This change in the ACL is not considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively.provisions.

Mortgage Servicing Rights. We record MSRs on loans sold to Fannie Mae with servicing retainedretained, as well as foron acquired servicing rights. We stratify our capitalized MSRs based on the type, term and interest rates of the underlying loans. MSRs are carried at fair value. The fair value is determined throughusing a discounted cash flow analysis,analysis whichthat usesincorporates assumptions for interest rates, prepayment speeds, weighted average lifelife, and delinquency rate assumptions as inputs.rates. All of these assumptions require a significant degree of management judgment. IfChanges ourin these assumptions provecould tomaterially be incorrect,affect the fair value of our MSRs could be negatively impacted.MSRs. We use a third party to assist us in the preparation of the analysis of the market value each quarter.

FocusingMaintaining onStrong Asset Quality. We believe that strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans, resolving nonperforming assets and selling foreclosed assets. Nonperforming assets were $6.1 million, or 0.56% of total assets, at December 31, 2025 compared to $7.5 million, or 0.75% of total assets, at December 31, 2024 compared to $4.1 million or 0.42% of total assets, at December 31, 2023.2024. We continually seek to reduce the level of nonperforming assets through collections, modifications and sales of OREO. We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions on delinquent loans when such actions have been deemed appropriate. Our goal is to maintain or improve upon our level of nonperforming assets by managing all segments of our loan portfolio in order to proactively identify and mitigate risk.

Improving Earnings by Expanding Product Offerings. We intend to prudently maintain the percentage of our assets consisting of higher-yielding commercial and multifamily real estate and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest-rate fluctuations than one-to-four family mortgage loans, while maintainingremaining our focusfocused on residential lending. In addition, we continue to focus on consumer loan products, such as floating and manufactured home loans. With our long experience and expertise in residential lendinglending, we believe we can be effective in capturingcapture mortgage banking opportunities and grow consumer deposits. We continue to develop correspondent relationships to sell nonconforming mortgage loans servicing released. We also intend to selectively add products to further diversify revenue sources and to capture more of each client's banking relationship by offering additional services. We continue to refine our products and services for additional business and to automate services, such as automating consumer loan originations this past year,processes in an effort to improve customer service. We intend to further build relationships with medium and small businesses through new and improving existing service offerings, including remote deposit.

Emphasizing Lower Cost Core Deposits to Manage the Funding Costs of Our Loan Growth. Our strategic focus is to emphasize total relationship banking with our clients to internally fund our loan growth. We also emphasizeseek reducingto reduce our need for wholesale funding sources, including FHLB advances, through the continued growth of core deposits. We believe that a continued focus on client relationships will help increase the level of core deposits and retail certificates of deposit from consumers and businesses in our market area. We intend to increase demand deposits by growing retail and business banking relationships. New technology and services are generally reviewed for business development and cost saving opportunities. We continue to experience growth in client use of our online and mobile banking services, which allow clients to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying, while providing ourthem clientswith greater flexibility and convenience in conducting their banking. In addition to our retail branches, we believe we maintain state of the art technology-based products, such as business cash management, business remote deposit products, business and consumer mobile banking applications and consumer remote deposit products. Total deposits increased to $948.9 million at December 31, 2025, from $837.8 million at December 31, 2024, from $826.5 million at December 31, 2023, with core deposits, which we define as our non-time deposit accounts and time deposit accounts of less than $250 thousand, increasing $15.3$78.5 million to $809.5 million at December 31, 2025, from $731.0 million at December 31, 2024, from $715.7 million at December 31, 2023.2024.

Maintaining Our Client Service Focus. Exceptional service, local involvement (including volunteering and contributing to the communities where we do business) and timely decision-making are integral parts of our business strategy. Our employees understand the importance of delivering exemplary customer service and seeking opportunities to build relationships with our clients to enhance our market position and add profitable growth opportunities. We compete with other financial service providers by relying on the strength of our customer service and relationship banking approach.approach, including developing an enhanced online banking user experience, significantly increasing usage and client satisfaction as identified by app scores, as well as implementing remote notary services for mortgage loan originations. We believe that one of our strengths is that our employees are also significant stockholders through our ESOP and 401(k) plans. We also offer incentives that are designed to reward employees for achieving high-quality client relationship growth.

General. Total assets decreasedincreased by $1.6$98.5 million, or 0.2%,9.9%, to $1.1 billion at December 31, 2025, from $993.6 million at December 31, 2024, from $995.2 million at December 31, 2023.2024. This decreaseincrease was primarily a result of lowerhigher balances of cash and cash equivalents and investment securities, offset by an increase in loans held-for-portfolio.

Cash and Securities. Cash, cash equivalents, AFS securities and HTM securities decreasedincreased by $6.6$94.5 million, or 10.9%,176.4%, to $53.6$148.0 million at December 31, 20242025 compared to the prior year-end. Cash and cash equivalents decreasedincreased $6.0$94.8 million, or 12.2%,217.3%, to $43.6$138.5 million at December 31, 20242025 compared to the prior year-end due to higher deposit balances, including the effects of a strategic decision to utilize cash balances to sell reciprocal deposits at the end of 2024 and bring them back onto the balance sheet in early 2025, partially offset by an increase in loans held-for-portfolio and the payoffpartial repayment of FHLBborrowings advances,and partiallypartial offsetredemption byof ansubordinated increasenotes induring deposits.the fourth quarter of 2025. AFS securities decreased $497$91 thousand, or 6.0%,1.2%, to $7.8$7.7 million at December 31, 20242025 fromand HTM securities decreased $238 thousand, or 11.2%, to $1.9 million at December 31, 2025, compared to the 20232024 year end, primarily due to regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months. HTM securities totaled $2.1 million at December 31, 2024 and 2023, and consisted of municipal bonds and agency mortgage-backed securities.

Loans. LoansGross loans held-for-portfolio increased $5.7$5.8 million, or 0.6%, to $907.6 million at December 31, 2025 from $901.8 million at December 31, 20242024. fromLoans $896.2held-for-sale millionincreased to $542 thousand at December 31, 2023.2025 Loans held-for-sale decreased tofrom $487 thousand at December 31, 2024 from $603 thousand at December 31, 20232024, primarily due to timing of originations.

The following table reflects the changes in the loan mix, excluding premiums and deferred fees, of our loan portfolio at December 31, 2024,2025, as compared to December 31, 20232024 (dollars in thousands):

Commercial and multifamily loans saw the largest increase, rising by $56.2$38.2 million, or 17.8%,10.3%, primarilydriven dueby tonew originations and the conversion of completed construction loansprojects to permanent financing.financing, Floatingpartially home loans increasedoffset by $11.3pay-downs million,and ornormal 15.0%,payment whileamortization. homeHome equity loans grew by $3.6$4.8 million, or 15.7%,17.9%, as demand for this product remains high with homeowners utilizedutilizing thetheir home equity inlines to access liquidity as opposed to paying off their homes.lower rate mortgages. Manufactured home loans rose by $4.9$2.0 million, or 13.6%,4.7%, reflecting affordability of these homes in the current market,market as well as internal efficiencies in loanhow processing,we andprocess successfulthese marketing efforts.loans. These increases were partially offset by declines in other loan categories. Construction and land loans experienced the largest decrease, declining by $53.7$22.8 million, or 42.3%,31.2%, as completed construction loans paid off or converted to permanent financing, while new construction loans have not yet fully advanced. Commercial business loans decreased by $5.1 million, or 24.6%,largely due to lowerproject outstandingcompletions balancesand ona linesslowdown in new financing activities amid continuing elevated interest rates, as well as the payoff of credita and$17.0 paydownsmillion exceedingloan newthat originations.had been risk rated as special mention. One-to-four family loans declined by $9.8$15.8 million, or 3.5%,5.9%, asdue ato resultloan ofrepayments elevatedexceeding mortgagenew interest rates and a lower supply of housing.originations. Additionally, other consumer loans decreased by $1.9$1.1 million, or 9.6%.6.5%.

The loan portfolio remainsremained well-diversified at December 31, 2025, with commercial and multifamily real estate loans accounting for 41.2%45.1% of the total loan portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 32.9%31.4% of the total loan portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 16.2%16.1% of the total loan portfolio at December 31, 2024.portfolio. Construction and land loans accounted for 8.1%5.5% of the total loan portfolio and commercial business loans accounted for the remaining 1.7% of the total loan portfolio at December 31, 2024.2025.

Nonperforming Assets. Nonperforming assets, comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans to troubled borrowers) and OREO and repossessed assets, increaseddecreased $3.4$1.4 million, or 81.3%,18.2%, to $6.1 million, or 0.56% of total assets, at December 31, 2025 from $7.5 million, or 0.75% of total assets, at December 31, 2024 from $4.1 million, or 0.42% of total assets, at December 31, 2023.2024.

The ACL for loans decreasedincreased $261$106 thousand, or 3.0%,1.2%, to $8.6 million at December 31, 2025, from $8.5 million at December 31, 2024, from $8.8 million at December 31, 2023, while the ACL for unfunded loan commitments increaseddecreased $41$86 thousand, or 21.2%36.8% to $148 thousand at December 31, 2025, from $234 thousand at December 31, 2024, from $193 thousand at December 31, 2023.2024. The changes in the balances were primarily due to changesupdates to assumptions in the mix of the loan portfolio, enhancements to the loss model related to howour weannual adjustreview forcompleted during 2025, which included changes to benchmark ratios and the qualitativeannual component,loss including the utilization of a scorecard to drive managementsdriver analysis, and growtha larger loan portfolio. Additionally, qualitative adjustments applied to certain loan segments, specifically consumer and construction loans, reflecting increased uncertainty in ourmarket unfundedconditions constructiontied loanto portfolio,the whichimpact hasof atariffs higherand lossother rateexternal thanfactors affecting our otherclients, loancontributed portfolios.to the change in balances. Expected credit loss estimates consider various factors, such asincluding market conditions, borrower-specific information, projected delinquencies, and theanticipated impacteffects of economic conditionstrends on borrowers' ability to repay. See “Comparison of Results of Operations for the Years Ended December 31, 20242025 and 20232024 — Provision for Credit Losses.”

Deposits.TotalDeposits. Total deposits increased $11.3$111.1 million to $837.8$948.9 million at December 31, 2024,2025, compared to the prior year-end. The increase in total deposits primarily was the result of a $52.0$125.5 million, or 33.8%,60.9%, increase in money market accounts. Management attributes this increase primarily to the strategic decision to sell reciprocal money market deposits at the end of 2024 and bring them back onto the balance sheet in early 2025, as well as interest rate sensitive clients moving a portion of their non-operating deposit balances from lower interest-bearing demand and savings accounts into higher interest-bearing money market accounts. Certificate accounts increased $3.8 million, or 1.3%, to $299.6 million at December 31, 2025, compared to the 2024 year-end. Interest-bearing demand and saving accounts decreased $26.2$16.5 million, or 15.6%,11.6%, and $8.2$1.8 million, or 11.8%,2.9%, respectively, from December 31, 20232024 to December 31, 2024. Certificate accounts decreased $12.1 million, or 3.9%, to $295.8 million at December 31, 2024, compared to the 2023 year-end, primarily due to a strategic decision to pay higher rates on money market accounts as opposed to certificate accounts.2025. Noninterest-bearing demand accounts (excluding escrow accounts) increaseddecreased $6.0$267.5 million,thousand, or 4.8%,0.2%, in 2024,2025, compared to 2023.2024.

Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less.

Borrowings. FHLB advances totaled $10.0 million at December 31, 2025, down from $25.0 million at December 31, 2024, compared to $40.0 million at December 31, 2023. The decrease was due to the early repayment of a $15.0 million FHLB advance thatduring maturedthe infourth Novemberquarter 2024.of 2025. FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. Outstanding FHLB advances outstanding at December 31, 20242025 hadmature maturities ranging from early 2026 throughin early 2028. Subordinated notes, netnet, totaleddecreased to $7.8 million at December 31, 2025 from $11.8 million at December 31, 20242024, reflecting a $4.0 million partial redemption on the first scheduled repricing date of October 1, 2025, as part of a strategic decision to reduce higher cost debt and 2023.repurpose cash. For additional information regarding our borrowings, see “Note 10—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.

Stockholders' Equity. Total stockholders’ equity increased $3.0$5.7 million, or 3.0%,5.5%, to $109.4 million at December 31, 2025, from $103.7 million at December 31, 2024, from $100.7 million at December 31, 2023.2024. This increase primarily reflects $4.6$7.2 million in net income for the year ended December 31, 2024,2025, $390$303 thousand in share-based compensation, $198 thousand in unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, and $269$151 thousand in common stock options exercised, partially offset by the payment of cash dividends of $1.9 million to common stockholders, as well as unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, of $56 thousand, the repurchase of $65 thousand of common stock,stockholders and stock surrendered of $218$130 thousand to satisfy tax withholding obligations upon the vesting of restricted stock during the year ended December 31, 2024.2025.

General. Net income decreasedincreased $2.8$2.5 million, or 37.6%,54.3%, to $7.2 million, or $2.77 per diluted common share, for the year ended December 31, 2025, compared to $4.6 million, or $1.80 per diluted common share, for the year ended December 31, 2024, compared to $7.4 million, or $2.86 per diluted common share, for the year ended December 31, 2023.2024. The decreaseincrease was primarily a result of a $2.8$3.9 million decreaseincrease in net interest income, partially offset by a $351$247 thousand increase in the provision for credit losses, a $691 thousand decrease in noninterest income and a $153$508 thousand decrease in the release of credit losses, partially offset by a $555 thousand decreaseincrease in provision for income taxes.

Interest Income. Interest income increased $6.8$183 million,thousand, or 13.4%,0.3%, to $57.6 million for the year ended December 31, 2025, from $57.4 million for the year ended December 31, 2024, from $50.6 million for the year ended December 31, 2023, due to an increase in both the average balance of and yield earned on interest earning assets, offset by a lower average balance of interest earning assets.

Interest income on loans increased $4.0$2.5 million, or 8.7%,4.9%, to $53.0 million for the year ended December 31, 2025, compared to $50.5 million for the year ended December 31, 2024, compared to $46.5 million for the year ended December 31, 2023, driven by a higher average balance of total loans and a 2924 basis points increase in the average yield on loans. The average balance of total loans was $902.0 million for the year ended December 31, 2025, compared to $896.7 million for the year ended December 31, 2024, compared to $870.2 million for the year ended December 31, 2023, resulting primarily from increased average balances in commercial and multifamily, home equity, floating homes and consumermanufactured home loans. The average yield on total loans was 5.87% for the year ended December 31, 2025, compared to 5.63% for the year ended December 31, 2024, compared to 5.34% for the year ended December 31, 2023.2024. The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.

Interest income on the investment portfolio decreased $10$31 thousand, or 1.93%,6.10%, to $477 thousand for the year ended December 31, 2025, compared to $508 thousand for the year ended December 31, 2024, compared to $518 thousand for the year ended December 31, 2023.2024. The decrease was due to lower average balances, partially offset by higher average yields. The average yield on investments was 4.20% for the year ended December 31, 2025, compared to 4.07% for the year ended December 31, 2024, compared to 3.79% for the year ended December 31, 2023, primarily due to the impact of risinga rates.partial paydown on a lower - yielding investment during the year.

Interest income on cash and cash equivalents increaseddecreased $2.7$2.2 million, or 75.8%,35.1%, to $4.1 million for the year ended December 31, 2025, compared to $6.4 million for the year ended December 31, 2024, compared to $3.6 million for the year ended December 31, 2023.2024. The increasedecrease was due to higherlower average yields and higherlower average balances. The average yield on cash and cash equivalents was 4.15% for the year ended December 31, 2025, compared to 5.12% for the year ended December 31, 2024, compared to 4.85% for the year ended December 31, 2023, primarily due to the impact of higherlower market interest rates during the year. The average balance of cash and cash equivalents was $99.5 million for the year ended December 31, 2025, compared to $124.3 million for the year ended December 31, 2024,2024. comparedThe todecrease $74.7 million forin the yearaverage endedbalance December 31, 2023. The increase inof cash and cash equivalents was primarily due to the partial repayment of borrowings and partial redemption of subordinated notes during 2025, as well as an increase in deposits,loans held-for-portfolio, partially offset by an increase in loans held-for-portfolio and the payoff of one FHLB borrowing.deposits.

Interest Expense. Interest expense increaseddecreased $9.6$3.7 million, or 57.4%,14.2%, to $22.6 million for the year ended December 31, 2025, from $26.4 million for the year ended December 31, 2024, from $16.8 million for the year ended December 31, 2023,primarily as a result of ana increasedecrease in the overall average balances and costs of deposits and borrowings.

Interest expense on deposits increaseddecreased $9.9$3.2 million, or 70.3%,13.2%, to $20.9 million for the year ended December 31, 2025, compared to $24.1 million for the year ended December 31, 2024, compared to $14.1 million for the year ended December 31, 2023.2024. The increasedecrease was the result of ana decrease in the average balance of certificate accounts and demand and NOW accounts, as well as lower average rates paid on all categories of interest-bearing deposits, reflecting lower market interest rates, offset slightly by a $31.4 million increase in the average balance of and rates paid on certificate accounts and savings and money market accounts, offset slightly by a $53.4 million decrease in the average balance of demand and NOW accounts. The average cost of total deposits, including noninterest bearing deposits, increaseddecreased 9532 basis points to 2.32% for the year ended December 31, 2025, from 2.64% for the year ended December 31, 2024, from 1.69% for the year ended December 31, 2023.2024.

Interest expense on borrowings, comprised solely of FHLB advances, was $1.0 million for the year ended December 31, 2025, compared to $1.6 million for the year ended December 31, 2024, compared to $2.0 million for the year ended December 31, 2023, reflecting the decreased use of FHLB advances to supplement our liquidity needs. The cost of FHLB advances decreased 12two basis points to 4.30% for the year ended December 31, 2025, compared to 4.32% for the year ended December 31, 2024, compared to 4.44% for the year ended December 31, 2023.2024. The average balance of FHLB advances was $23.8 million for the year ended December 31, 2025, compared to $37.6 million for the year ended December 31, 2024,2024. comparedInterest toexpense $44.0on millionsubordinated notes was $701 thousand for the year ended December 31, 2023.2025, Interestcompared expense on subordinated notes wasto $672 thousand for both the year ended December 31, 20242024. andInterest expense on our subordinated notes increased despite a lower average balance, due to the yearnotes endedconverting Decemberto 31,variable-rate 2023.debt that reprices on a quarterly basis from the previous fixed-rate period.

Net Interest Income. Net interest income decreasedincreased $2.8$3.9 million, or 8.4%,12.7%, to $34.9 million for the year ended December 31, 2025, from $31.0 million for the year ended December 31, 2024,2024. fromNet $33.9interest millionmargin was 3.45% and 3.00% for the year ended December 31, 2023. Net interest margin was 3.00%2025 and 3.53% for the year ended December 31, 2024 and 2023,2024, respectively. The decreaseincrease in net interest income primarily resulted from an increase in the average balances of and rates paid on deposits and borrowings, partially offset by higher average balances and yields earned on interest-earning assets.assets and lower average rates paid on all categories of interest-bearing deposits, partially offset by lower average balances of interest-earning assets and all categories of interest-bearing deposits. The decreaseincrease in net interest margin primarily was due to a decline in funding costs increasingdue atto adeclines fasterin pacemarket thaninterest rates, as well as an increase in the average yields earned on interest-earningloans assetsas andour anportfolio increasecontinued into thereprice averageat balancehigher of interest earning assets.rates.

Under CECL, the provision for credit losses for the year ended December 31, 20242025 reflects assumptions related to our forecast concerningabout the economic environment asat a result ofthe local, nationalnational, and global events.levels, In addition,with expected loss estimates consider variousconsidering factors, includingsuch as customer-specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers'borrowers’ ability to repay.

While we believe the estimates and assumptions used in our determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not have a material adverse impact on our financial condition and results of operations. A deterioration in national and local economic conditions due to such factors as inflation, a recession or slowed economic growth, among others, may lead to a material increase in the provision for credit losses, which could have a material adverse impact on our financial condition and results of operations. In addition, the determination of the amount of our ACL is subject to review by bank regulators as part of the routine examination process, which may result in the adjustmentadjustments to the ACL based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income decreased $351$691 thousand, or 7.0%,14.8%, to $4.0 million for the year ended December 31, 2025, compared to $4.7 million for the year ended December 31, 2024, compared to $5.0 million for the year ended December 31, 2023,primarily as reflecteda belowresult (dollars in thousands)of:

Noninterest Expense. Noninterest expense was $30.1 million during the years ended December 31, 20242025 and 2023,2024. While overall noninterest expense remained flat, there were fluctuations within certain expense categories, as reflectednoted below (dollars in thousands):

Sound Community Bank’s deposits are insured up to applicable limits by the FDIC. At MarchJune 31,30, 2026, Sound Financial Bancorp, on a consolidated basis, had total assets of $1.11$1.07 billion, net loans held-for-portfolio of $912.9$883.5 million, deposits of $968.5$930.9 million and stockholders’ equity of $110.4$112.6 million. The common stock of Sound Financial Bancorp is listed on the NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121.

Comparison of Financial Condition at MarchJune 31,30, 2026 and December 31, 2025

General. Total assets increaseddecreased $19.9$26.4 million, or 1.8%,2.4%, to $1.11$1.07 billion at MarchJune 31,30, 2026 from $1.09 billion at December 31, 2025. The increasedecrease was primarily athe result of higheran balance$18.4 ofmillion loansdecrease held-for-portfolioin cash and cash equivalents and a new$13.4 million decrease in loans held-for-portfolio, net, partially offset by a $5.0 million increase in equity investment in the first quarter of 2026.securities.

Cash and Cash Equivalents, and Investment Securities. Cash and cash equivalents decreased $469.0$18.4 thousand,million, or 0.3%,13.3%, to $138.0$120.1 million at MarchJune 31,30, 2026 from $138.5 million at December 31, 2025. The decrease reflects cashlower deployeddeposits, intorepayment higher-yieldingof assets,FHLB primarily loans held-for-portfolioborrowings, and a new $5.0 million equity investment, partially offset by highercash depositflows balances.from lower loan balances resulting from loan repayments exceeding new originations.

Investment securities decreased $190$140 thousand, or 2.0%,1.5%, to $9.4$9.5 million at MarchJune 31,30, 2026, compared to $9.6 million at December 31, 2025. Held-to-maturity securities totaled $1.9 million at both MarchJune 31,30, 2026 and December 31, 2025. Available-for-sale securities totaled $7.5$7.6 million at MarchJune 31,30, 2026, compared to $7.7 million at December 31, 2025. The decrease in available-for-sale securities was related to principal paydowns or payoffs, aspartially welloffset asby decreaseschanges in fair value.

Equity securities totaled $5.0 million at both June 30, 2026 and March 31, 2026, compared to zero at bothJune December 31, 2025 and March 31,30, 2025. The increase primarily related to the strategic decision to deploy some of our interest-earning cash into a higher yielding Community Reinvestment Act (“CRA”)-eligible workforce housing equity investment in the first quarterhalf of 2026. While this investment carrieshas moredifferent risk,risk characteristics than our prior CRA-eligible available-for-sale debt securities, the level of investment remains low compared to our total assets and partially replaces the runoff of our CRA-eligible available-for-sale debtthose securities over the past few years.

Loans. Loans held-for-portfolio, net increaseddecreased $16.0$13.4 million, or 1.8%,1.5%, to $912.9$883.5 million at MarchJune 31,30, 2026, from $896.9 million at December 31, 2025.

The following table reflects the changes in the mix of our loans held-for-portfolio at MarchJune 31,30, 2026, as compared to December 31, 2025 (dollars in thousands):

The increasedecrease in total loans held-for-portfolio was driven primarily by a $21.6decrease of $27.9 million, or 43.0%,6.8%, in commercial and multifamily loans as a result of two large loans paying off early which had lower yields than our FRB cash balances and which resulted in prepayment penalties. Additional decreases in one-to-four-family loans and other consumer loans of $9.7 million and $2.7 million, respectively, or 3.8% and 16.5%, occurred primarily due to loan repayments exceeding new originations. The declines in these segments of the portfolio were partially offset by a $25.9 million, or 51.5%, increase in construction and land loans largely due to new project loan originations in the current quarter.period. Constructions and land loans generally involve greater credit risk than completed commercial real estate loans due to increased exposure to construction execution, market demand, and project completion risks. Given the growth in this loan category and current macroeconomic uncertainty, we have applied qualitative adjustments to our ACL for construction and land loans,loans beginning in the first quarter of 2026, as discussed further in the “Allowance for Credit Losses” section below. Home equity loans increased by $435$639 thousand, or 1.4%,2.0%, as demand for this product remains high with homeowners utilizing their home equity lines to access liquidity as opposed to paying off their lower rate mortgages. The growth in these segments of the portfolio was partially offset by decreases in one-to-four-family loans and floating home loans of $2.7 million and $2.4 million, respectively, or 1.1% and 2.7%, primarily due to loan repayments exceeding new originations.

At MarchJune 31,30, 2026, our loan portfolio, net of deferred loan fees, remained well-diversified.diversified across multiple loan categories. At that date, commercial and multifamily real estate loans accounted for 44.4%42.7% of total loans, one-to-four family loans, including home equity loans, accounted for 30.6%30.9% of total loans, commercial business loans accounted for 1.6%1.8% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 15.6%16.1% of total loans. Construction and land loans accounted for 7.8%8.5% of total loans at MarchJune 31,30, 2026.

Loans held-for-sale totaled $281$1.6 thousandmillion at MarchJune 31,30, 2026, compared to $542 thousand at December 31, 2025. The decreaseincrease was primarily due to timing of mortgage originations and sales.sales, as well as increased volume of saleable loans throughout the first half of 2026.

Our ACL —- loans increaseddecreased $30$185 thousand, or 0.3%,2.1%, to $8.6$8.4 million at MarchJune 31,30, 2026, from $8.6 million at December 31, 2025. The increasedecrease in the ACL - loans was primarily a result of ana increasedecrease in the balance of our loan portfolio, as well as changes in the composition of our loan portfolio, including changes in the relative mix of construction and land loans and other loan categories with differing loss rates, partially offset by higher reserves on our portfolio of construction loan and land loans due to qualitative adjustments for uncertainty in market conditions and concentrations,concentrations partially offset by improvementadded in otherthe consumerfirst pastquarter dueof loans and commercial construction collateral values.2026. See “Comparison of Results of Operations for the Three and Six Months Ended MarchJune 31,30, 2026 and 2025 — Provision for Credit Losses.”

The ratio of ACL - loans to nonaccrual loans decreased to 117.0%104.53% at MarchJune 31,30, 2026, from 148.8%148.82% at December 31, 2025, reflecting the increase in nonaccrual loans during the quarter.period. Despite this decrease, we believe our allowance remains adequate given the collateralized nature of the nonaccrual loans and the overall performance of our loan portfolio.

Nonperforming assets (“NPAs”), which were comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $1.4$2.0 million, or 22.1%,32.3%, to $7.5$8.1 million, or 0.67%0.76% of total assets, at MarchJune 31,30, 2026 from $6.1 million, or 0.56% of total assets, at December 31, 2025.

The increase in NPAs from December 31, 2025 was primarily due to the placement of $1.8$2.7 million of loans on nonaccrual status during the quarter,period, including one multifamily real estate loan of $1.1 million.million, three one-to-four family home loans totaling $976 thousand, and one home equity loan totaling $251 thousand, with the remaining additions comprised of manufactured housing, land and other consumer loans. These additions were partially offset by loan repayments, the return of certain credits to accrual status, and the sale of OREO properties. The percentage of nonperforming loans to total loans was 0.80%0.90% at MarchJune 31,30, 2026, compared to 0.64% at December 31, 2025.

We believe the collateral value of the multifamily real estate loan and three one-to-four family loans placed on nonaccrual status during the quarterperiod is sufficient to minimize loss exposure. We continue to monitor thisthese creditcredits and other nonaccrual loans closely. While we believe the increase in nonperforming loans primarily reflects isolatedspecific creditborrower eventscircumstances rather than abroader systemicdeterioration in portfolio trend,credit quality, we remain attentive to macroeconomic conditions that may affect borrower performance.

Mortgage Servicing Rights. The fair value of mortgage servicing rights decreasedincreased $87$94 thousand, or 2.1%,2.2%, to $4.1$4.3 million at MarchJune 31,30, 2026 from $4.2 million at December 31, 2025. The decreaseincrease was primarily related to a decline in the size of our mortgage servicing portfolio and modest changes in valuation assumptions, including prepayment speed assumptions reflecting current interest rate expectations.expectations, partially offset by a decline in the size of our mortgage servicing portfolio. We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio. Mortgage servicing rights are carried at fair value. If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted.

Deposits and Borrowings. Total deposits increaseddecreased $19.6$18.0 million, or 2.1%,1.9%, to $968.5$930.9 million at MarchJune 31,30, 2026 from $948.9 million at December 31, 2025. This increasedecrease was primarily due to seasonal fluctuations in customer account balances,balances newand clientthe managed reduction of certain higher-cost deposits, andincluding higherreciprocal balances from large depositors.deposits. Noninterest-bearing deposits decreased $1.5$3.2 million, or 1.1%,2.4%, to $131.1$129.3 million at MarchJune 31,30, 2026, compared to $132.6 million at December 31, 2025. This decline was primarily the result of normal daily fluctuations in customer account balances, reflecting routine activity rather than significant changes in overall deposit levels. Noninterest-bearing deposits represented 13.5%13.9% of total deposits at MarchJune 31,30, 2026, compared to 14.0% at December 31, 2025.

Scheduled maturities of time deposits at MarchJune 31,30, 2026, are as follows (in thousands):

The aggregate amount of time deposits in denominations of more than $250,000 at MarchJune 31,30, 2026 and December 31, 2025, totaled $106.8$104.8 million and $112.4 million, respectively. Deposit amounts in excess of $250,000 are not federally insured. As of MarchJune 31,30, 2026, uninsured deposits totaled $197.9$188.9 million, which represented 20.4%20.3% of total deposits, as compared to uninsured deposits of $184.7 million, or 19.5% of total deposits as of December 31, 2025. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. The increase in the balance of uninsured deposits primarily related to jumbo tier pricing offered on some of our deposit products, as well as normal fluctuations within deposit accounts.

Borrowings, comprised of FHLB advances, were zero at June 30, 2026 and $10.0 million at both March 31, 2026 and December 31, 2025. FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. AThe single remaining FHLB advance outstanding at MarchDecember 31, 20262025 matureswas scheduled to mature in early 2028.2028, which the Company repaid during the three months ended June 30, 2026. Subordinated notes, net totaled $7.8 million at both MarchJune 31,30, 2026 and December 31, 2025.

Stockholders’ Equity. Total stockholders’ equity increased $1.0$3.2 million, or 0.9%,2.9%, to $110.4$112.6 million at MarchJune 31,30, 2026, from $109.4 million at December 31, 2025. This increase primarily reflects $1.6$4.1 million of net income earned during the threesix months ended MarchJune 31,30, 2026, partially offset by the payment of $541$1.1 thousandmillion in cash dividends to stockholders and ana $80$47 thousand increasedecrease in accumulated other comprehensive loss, net of tax.

Comparison of Results of Operation for the Three and Six Months Ended MarchJune 31,30, 2026 and 2025

Q2 2026 vs Q2 2025. Net income increased $409$466 thousand, or 35.0%,22.7%, to $1.6$2.5 million, or $0.61$0.98 per diluted common share, for the three months ended MarchJune 31,30, 2026, compared to $1.2$2.1 million, or $0.45$0.79 per diluted common share, for the three months ended MarchJune 31,30, 2025, reflecting stronga favorable change in the provision for credit losses, as the Company recorded a release of provision for credit losses in the current quarter compared to a provision for credit losses in the prior-year quarter, growth in net interest income, and an increase in noninterest income. TheThese improvementimprovements waswere partially offset by higher provisions for credit losses, a modest decline in noninterest income,expenses and slightlyan higherincrease in income taxes. Noninterest expenses remained relatively flat.

Q2 2026 vs Q2 2025. Total interest income increaseddecreased $759$69 thousand, or 5.5%,0.5%, to $14.5$14.8 million for the three months ended MarchJune 31,30, 2026,2026 from $13.7$14.9 million for the three months ended MarchJune 31,30, 2025, primarily due to higherlower averageyield balances of loans andon interest earning cash,assets, andincluding a 21 basis point increase in the average yield on loans, partially offset by a 7071 basis point decline in the average yield on cash and cash equivalents and an eight basis point decline in the average yield on loans. These decreases were partially offset by growth in average loan balances and investments, which increased the volume of interest-earning assets. The benefit from higher average loan balances and investments was more than offset by lower average balances of cash and cash equivalents.

Interest and dividends on investments decreasedincreased $11$64 thousand, or 10.2%,52.0%, to $97$187 thousand for the three months ended MarchJune 31,30, 2026, compared to $108$123 thousand for the three months ended MarchJune 31,30, 2025. The decreaseincrease was primarily due to a decline69 basis point increase in average yield to 4.53% from 3.84% resulting from the receipt of a dividend paid from our equity investment in the second quarter of 2026, as well as an increase in the average balance of investments to $11.7$16.6 million from $12.9$12.8 million, reflecting the new $5.0 million equity investment partially offset by the continued paydown of the AFS and HTM investment portfolio, with a modest further impact from a three basis point decline in average yield to 3.36% from 3.39%.portfolio.

Interest incomeand dividends on cash and cash equivalentsinvestments increased $51$52 thousand, or 5.0%,22.4%, to $1.1$284 millionthousand for the threesix months ended MarchJune 31,30, 2026, compared to $1.0$232 millionthousand for the threesix months ended MarchJune 31,30, 2025. The increase was primarily due to aan higherincrease in the average balance of $120.7investments to $16.1 million comparedfrom to$12.9 $96.0million, reflecting the new $5.0 million forequity investment partially offset by the samecontinued periodpaydown inof 2025,the mainly attributable to higher deposit inflowsAFS and theHTM repaymentinvestment ofportfolio. borrowings and subordinated debt during the fourth quarter of 2025. TheThis increase in average balance was partially offset by a 70seven basis point decline in average yield to 3.57%3.56% from 4.27%,3.63% reflectingdue to larger paydowns on higher yielding investments offset by the lowerreceipt marketof interesta ratedividend environment.paid (Referfrom toour “Netequity Interestinvestment Income” below for additional detail regardingin the interestsecond ratequarter environment.)of 2026.

Q2 2026 vs Q2 2025. Total interest expense decreased $217$405 thousand, or 3.9%,7.2%, to $5.4$5.3 million for the three months ended MarchJune 31,30, 2026, from $5.6$5.7 million for the three months ended MarchJune 31,30, 2025. The decrease was primarily attributable to lower interest rates across mostall interest-bearing liabilities,liabilities excluding subordinated debt, resulting from lower market interest rates generally, partially offset by an increase in our average balance of interest-bearing liabilities.liabilities and an increase in the rate paid on our subordinated debt.

Interest expense on certificate accounts declined $303$156 thousand, driven by a $379$240 thousand rate-related decrease, partially offset by aan $76$84 thousand volume-related increase. The average balance of certificate accounts rose to $301.3$299.7 million for the three months ended MarchJune 31,30, 2026, from $293.0$290.4 million during the same period in 2025, while the average rate paid fell to 3.68%3.62% from 4.21%.3.95%. The decline in the average rate reflected lower market interest rates and the repricing of maturing certificates into the current rate environment. In addition, interest expense on demand and NOW accounts decreased $26$12 thousand, due to both lower average balances and slightly lower rates. Interest expense on savings and money market accounts increaseddecreased $248$81 thousand, or 12.1%,3.6%, to $2.3$2.2 million for the three months ended MarchJune 31,30, 2026, from $2.1$2.3 million for the same period in 2025, primarily due to a 27 basis point decline in the average rate paid to 2.36% from 2.63%, as we implemented repricing strategies to manage overall funding costs. This decrease was partially offset by an increase in average balances to $388.6$370.4 million from $332.4$344.6 million, reflecting shifts in customer deposit preferences from certificate accounts into more liquid deposit products. This increase was partially offset by a 10 basis point decline in the average rate paid to 2.41% from 2.51%, as we implemented repricing strategies to manage overall funding costs.

Interest expense on borrowings, comprised solely of FHLB advances, decreased $154$177 thousand ,thousand, primarily due to a $14.4$16.4 million decline in average borrowings following the payoff of an FHLB advance during the fourth quarter of 2025. The average balance of FHLB advances was $10.6$9.6 million for the three months ended MarchJune 31,30, 2026, compared to $25.0 million for the three months ended MarchJune 31,30, 2025. The average rate paid on borrowings decreased ten7 basis points to 4.15%4.21% for the quarter ended MarchJune 31,30, 2026, compared to 4.25%4.28% for the same quarter in 2025. Interest expense on subordinated notes was $186$189 thousand for the three months ended MarchJune 31,30, 2026, compared to $168 thousand for the three months ended MarchJune 31,30, 2025. The increase was due to the debt converting to a variable-rate instrument that reprices on a quarterly basis from the previous fixed-rate period, partially offset by a lower average balance as a result of the paydown of $4.0 million of our subordinated debt balance in the fourth quarter of 2025.

Q2 2026 vs Q2 2025. Net interest income increased $976$336 thousand, or 12.1%,3.6%, to $9.0$9.6 million for the three months ended MarchJune 31,30, 2026, from $8.1$9.3 million for the three months ended MarchJune 31,30, 2025, driven by both growth in interest-earning asset balances and improvement in the net interest rate spread, reflecting the impact of higher average loan balances and the improvement in loan yields excluding the impact of prior-year nonaccrual loan activity, and lower funding costs across most categories of interest-bearing liabilities.liabilities excluding subordinated debt. These changes were partially offset by a decrease in the average yield on investments and interest-bearing cash. Overall, the decline in average funding costscash and an increase in averagethe yieldrate paid on loansour subordinated debt for the reasons noted above in “Interest Expense.” Overall, these changes resulted in a 2910 basis point improvement in the net interest rate spread and a 267 basis point increase in the annualized net interest margin, which rose to 3.51%3.74% for the three months ended MarchJune 31,30, 2026, compared to 3.25%3.67% for the same period in 2025.

Through most of 2025, the Federal Open Market Committee of the Federal Reserve (“FOMC”) maintained the target range for the federal funds rate at 4.25% to 4.50%, where it remained until September 2025. The FOMC subsequently lowered the target range 75 basis points to 3.50% to 3.75% between September 2025 and December 2025. The FOMC maintained the target range for the federal funds rate through the first quarterhalf of 2026. The lower interest rate environment has contributed to decreased funding costs, while loan yields have remained elevated due to repricing of variable-rate loans and higher rates on new loan originations.

The following table reflects the components of the provision for (release of) provision for credit losses during the periods indicated (dollars in thousands):

A release of provision for credit losses of $123$223 thousand was recorded for the quarter ended MarchJune 31,30, 2026, compared to a release of provision for credit losses of $203$170 thousand for the quarter ended MarchJune 31,30, 2025. The swing to a provisionrelease in the current quarter resulted primarily from a decrease in loan balances and annual updates to the model assumptionsassumptions, thatincluding increased estimated loss factors, growthchanges in thecertain loaneconomic portfolio,assumptions, andpartially offset by additional qualitative adjustments applied to the commercial loan segment,segments, reflecting increased uncertainty in market conditions surrounding geopolitical conditionsevents, andin addition to the potentialuncertainty adjustment tied to the impact of tariffs onand other external factors affecting our borrowers.clients already applied to our consumer portfolio. Expected credit loss estimates consider various factors, including market conditions, borrower-specific information, projected delinquencies, and anticipated effects of economic trends on borrowers' ability to repay. Net charge-offs for the three months ended MarchJune 31,30, 2026 totaled $19$30 thousand, compared to $21 thousand for the three months ended MarchJune 31,30, 2025.

Noninterest Income. Total noninterest income decreasedincreased $188$309 thousand, or 17.1%,27.6%, to $910$1.4 thousandmillion for the three months ended MarchJune 31,30, 2026, as compared to $1.1 million for the three months ended MarchJune 31,30, 2025, as reflected below (dollars in thousands):

The decreaseincrease in noninterest income during the current quarter compared to the quarter ended June 30, 2025, was primarily dueas toa result of:

•a $53$8 thousand decreaseincrease in other income due to estimated costs relatedassociated towith theclosing our Tacoma branch closure announced in the Januarysecond quarter of 2026; and which closed in April 2026.

These decreases were partially offset by •a $52$68 thousand increase in net gain on sale of loans due to an increase in the volume of loans sold.

Noninterest Expense. Total noninterest expenseincome remainedincreased relatively$121 unchangedthousand, duringor 5.5%, to $2.3 million for the threesix months ended MarchJune 31,30, 2026, as compared to $2.2 million for the threesix months ended MarchJune 31,30, 2025, as reflected below (dollars in thousands):