What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-13 compared with 2024-11-13 · 164 added, 263 removed, 322 unchanged (57% of the section changed)

5 unchanged sentences

These statements relate to our financial condition, results of operations, plans, objectives, future performance or business.

Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit loss experience, and statements regarding our mission and vision.

Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision.

These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties.

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• adverse economic conditions in our market areas, and other markets where we have lending relationships;

• effects of employment levels, labor shortages, inflation, a recession, or slowed economic growth;

• changes in the interest rate environment, including increases and decreases in the Board of Governors of the Federal Reserve System (the “Federal Reserve”) benchmark rate and duration of such rates, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;

• effects of employment levels, inflation, a recession, or slowed economic growth;

• changes in the interest rate environment, including increases and decreases in the Board of Governors of the Federal Reserve System (the “Federal Reserve”) benchmark rate and the duration of such rates, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;

• the impact of inflation and the Federal Reserve’s monetary policy decisions;

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• changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Financial Accounting Standards Board, the U.S.

Securities and Exchange Commission (the “SEC”), or the Public Company Accounting Oversight Board (“PCAOB”);

• legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry and the availability of resources to address such changes;

Securities and Exchange Commission (the “SEC”), or the Public Company Accounting Oversight Board;

governmental initiatives affecting the financial services industry and the availability of resources to address such changes;

• our ability to retain or attract key employees or members of our senior management team;

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• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on those of our third-party vendors;

• the potential for new or increased tariffs, trade restrictions, or geopolitical tensions that could affect economic activity or specific industry sectors;

• the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest and other external events;

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• the other risks described from time to time in our reports filed with or furnished to the SEC, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2024 (“2024 Form 10-K”).

We caution readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance.

We caution readers not to place undue reliance on any forward-looking statements.

The factors described above could materially affect our financial performance, cause our actual results for future periods to differ materially from those expressed in forward-looking statements, and negatively affect our stock price performance.

We do not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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Sound Community Bank’s deposits are insured up to applicable limits by the FDIC.

At September 30, 2024, Sound Financial Bancorp, on a consolidated basis, had assets of $1.10 billion, net loans held-for-portfolio of $893.1 million, deposits of $930.2 million and stockholders’ equity of $102.2 million.

At March 31, 2025, Sound Financial Bancorp, on a consolidated basis, had assets of $1.07 billion, net loans held-for-portfolio of $877.8 million, deposits of $910.3 million and stockholders’ equity of $104.4 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.

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Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances.

Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of

Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, other changes in economic conditions and changes in the financial condition and performance of borrowers.

Management believes that its critical accounting estimates include determining the allowance for credit losses and accounting for mortgage servicing rights.

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2024 Form 10-K.

Comparison of Financial Condition at September 30, 2024 and December 31, 2023

Total assets increased $105.7 million, or 10.6%, to $1.10 billion at September 30, 2024 from $995.2 million at December 31, 2023.

The increase primarily was a result of an increase in cash and cash equivalents and loans held-for-portfolio.

Cash and Securities, and Investment Securities.

Cash and cash equivalents increased $99.2 million, or 199.7%, to $148.9 million at September 30, 2024 from $49.7 million at December 31, 2023.

Comparison of Financial Condition at March 31, 2025 and December 31, 2024

Total assets increased $75.6 million, or 7.6%, to $1.07 billion at March 31, 2025 from $993.6 million at December 31, 2024.

The increase primarily was a result of an increase in cash and cash equivalents, partially offset by a lower balance of loans held-for-portfolio.

Cash and Cash Equivalents, and Investment Securities.

Cash and cash equivalents increased $87.9 million, or 201.3%, to $131.5 million at March 31, 2025 from $43.6 million at December 31, 2024.

The increase was primarily due to the strategic decision to sell reciprocal deposits at the end of 2024, which reduced our cash balances.

These reciprocal deposits returned to our balance sheet in the first quarter of 2024, which included deposits that had been generated during the fourth quarter of 2023 and subsequently sold.

In addition, balances of cash and cash equivalents increased as a result of higher overall deposit balances.

Investment securities decreased $282 thousand, or 2.7%, to $10.2 million at September 30, 2024, compared to $10.5 million at December 31, 2023.

Held-to-maturity securities totaled $2.1 million at September 30, 2024, compared to $2.2 million at December 31, 2023.

Available-for-sale securities totaled $8.0 million at September 30, 2024, compared to $8.3 million at December 31, 2023.

The decrease in available-for-sale securities was primarily due to regularly scheduled payments, partially offset by lower net unrealized losses resulting from an increase in yields on our agency mortgage backed securities during 2024.

Loans held-for-portfolio, net, increased $7.4 million, or 0.8%, to $893.1 million at September 30, 2024 from $885.7 million at December 31, 2023.

The following table reflects the changes in the mix of our loan portfolio at September 30, 2024, as compared to December 31, 2023 (dollars in thousands):

September 30,

These reciprocal deposits returned to our balance sheet in the first quarter of 2025.

In addition, balances of cash and cash equivalents increased as a result of higher overall deposit balances, except for time deposits.

Investment securities decreased $110 thousand, or 1.1%, to $9.8 million at March 31, 2025, compared to $9.9 million at December 31, 2024.

Held-to-maturity securities totaled $2.1 million at both March 31, 2025 and December 31, 2024.

Available-for-sale securities totaled $7.7 million at March 31, 2025, compared to $7.8 million at December 31, 2024.

The decrease in available-for-sale securities was primarily due to regularly scheduled payments, as well as lower net unrealized losses resulting from an increase in yields on our agency mortgage-backed securities during the first quarter of 2025.

Loans held-for-portfolio, net, decreased $13.8 million, or 1.6%, to $877.8 million at March 31, 2025 from $891.7 million at December 31, 2024.

The following table reflects the changes in the mix of our loan portfolio at March 31, 2025, as compared to December 31, 2024 (dollars in thousands):

2025 December 31,

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Total loans held-for-portfolio, net $ 877,833 $ 891,672 $ (13,839) (1.6) %

As noted in the table above, increases in the loan portfolio were driven primarily by increases in commercial and multifamily loans, floating home loans, home equity loans, and manufactured home loans.

The increase in commercial and multifamily loans was primarily due to the conversion of construction projects to permanent financing, while the increase in floating home loans was due to the funding of a large portfolio of individual loans that had been delayed in our pipeline.

The increase in home equity loans was primarily driven by homeowners utilizing the equity in their homes.

The increase in manufactured home loans was primarily the result of affordability of these homes in the current market and internal efficiencies in how we process these loans.

These increases were partially offset by decreases in construction and land loans, which were primarily due to project completions and reduced demand caused by higher interest rates, which limited new financing opportunities, and decreases in one-to-four-family loans, which was primarily due to one low yielding jumbo mortgage loan that the borrower paid off early and normal loan payments exceeding loan originations.

In addition, other consumer and commercial business loans decreased because of payoffs and paydowns, including the payoff of a $2.1 million commercial business loan that was previously on nonaccrual.

At September 30, 2024, our loan portfolio, net of deferred loan fees, remained well-diversified.

The decreases in the loan portfolio were driven primarily by decreases in construction and land loans and, to a lesser extent, one-to-four family and commercial business loans.

The $30.6 million, or 41.9%, decline in construction and land loans was the primarily driver of the overall decrease in the loan portfolio as of March 31, 2025, compared to December 31, 2024.

This decline was largely due to project completions, a slowdown in new financing activities amid higher interest rates, and the payoff of a $17.0 million loan that had been risk rated as special mention.

In addition, one-to-four-family loans and commercial business loans declined by $7.2 million, or 2.7%, and $915 thousand, or 5.9%, respectively, primarily due to loan repayments exceeding new originations.

These reductions were partially offset by a $21.3 million, or 5.7%, increase in commercial and multifamily loans, driven by the conversion of construction projects to permanent financing.

Home equity loans also rose by $1.4 million, or 5.3%, as homeowners likely utilized their home equity lines to access liquidity, particularly in response to

elevated living costs and inflationary pressures.

At March 31, 2025, our loan portfolio, net of deferred loan fees, remained well-diversified.

At that date, commercial and multifamily real estate loans accounted for 44.2% of total loans, one-to-four family loans, including home equity loans, accounted for 32.6% of total loans, commercial business loans accounted for 1.7% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 16.7% of total loans.

Construction and land loans accounted for 9.5% of total loans at September 30, 2024.

Loans held-for-sale totaled $65 thousand at September 30, 2024, compared to $603 thousand at December 31, 2023.

The decrease was primarily due to timing of mortgage originations and sales.

Construction and land loans accounted for 4.8% of total loans at March 31, 2025.

Loans held-for-sale totaled $2.27 million at March 31, 2025, compared to $487 thousand at December 31, 2024.

The increase was primarily due to timing of mortgage originations and sales.

Allowance for Credit Losses.

The following table reflects the activity in our allowance for credit losses (“ACL”) during the periods indicated (dollars in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Three Months Ended March 31,

Balance at beginning of period $ 8,499 $ 8,760

Impact of Adoption of ASU 2016-13 — — — 760

Charge-offs (27) (62)

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Balance at beginning of period 234 193

Impact of Adoption of ASU 2016-13 — — — 695

(Release of) provision for credit losses (118) 73

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Ratio of net charge-offs during the period to average loans outstanding during the period (0.01) % (0.03) %

Our ACL — loans decreased $175 thousand, or 2.0%, to $8.6 million at September 30, 2024, from $8.8 million at December 31, 2023.

The decrease in the ACL - loans from December 31, 2023 to September 30, 2024 was primarily a result of lower reserves on our other consumer loan portfolio and residential loan portfolios due to qualitative adjustments for changes in concentration and market conditions, partially offset by an increase in the ACL- loans due to portfolio growth, an increase in nonaccrual loans and an increase in the weighted average life of the portfolio.

See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 — Provision for Credit Losses.”

Our ACL — loans decreased $106 thousand, or 1.2%, to $8.4 million at March 31, 2025, from $8.5 million at December 31, 2024.

The decrease in the ACL - loans was primarily a result of a decrease in the balance of our loan portfolio, partially offset by higher reserves on our portfolio of other consumer loans and residential loans due to qualitative adjustments for uncertainty in market conditions.

See “Comparison of Results of Operations for the Three Months Ended March 31, 2025 and 2024 — Provision for Credit Losses.”

The following tables show certain credit ratios at and for the dates and periods indicated and the components of each ratio's calculation (dollars in thousands).

At September 30, 2024 At December 31, 2023

At March 31, 2025 At December 31, 2024

ACL - loans as a percentage of total loans outstanding 0.95 % 0.94 %

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Total nonaccrual loans $ 9,653 $ 7,491

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Three Months Ended March 31,

($ in thousands)

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One-to-four family:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

$ 266,980 $ 278,472

— % — % — % (0.17) %

Net (charge-offs)/recoveries

$ — $ — $ — $ (25)

Average loans outstanding

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Commercial and multifamily real estate:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

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Construction and land:

— % — % — % — %

Net (charge-offs)/recoveries

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Floating homes:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

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Net (charge-offs)

$ (14) $ (3) $ (64) $ (123)

Average loans outstanding

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Commercial business:

— % — % — % — %

Net (charge-offs)/recoveries

$ — $ — $ — $ —

Average loans outstanding

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Nonperforming Assets.

Nonperforming assets (“NPAs”), which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $4.5 million, or 108.3%, to $8.6 million, or 0.78% of total assets, at September 30, 2024 from $4.1 million, or 0.42% of total assets, at December 31, 2023.

Nonperforming assets (“NPAs”), which were comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $2.2 million, or 29.4%, to $9.7 million, or 0.91% of total assets, at March 31, 2025 from $7.5 million, or 0.75% of total assets, at December 31, 2024.

The table below sets forth the amounts and categories of NPAs at the dates indicated (dollars in thousands):

Nonperforming Assets

September 30,

2025 December 31,

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Total nonperforming assets $ 9,694 $ 7,491 $ 2,203 29.4 %

The increase in NPAs primarily was due to the addition of $9.0 million of loans to nonaccrual status, which included a $3.7 million matured commercial real estate loan in process of securing financing from another lender, $3.2 million for two floating homes loans to a single borrower, and a $1.0 million commercial real estate loan, all of which are well secured, and one

manufactured home loan of $115 thousand that was repossessed in the first quarter of 2024.

These increases in NPAs were partially offset by the payoff of a $2.1 million commercial business loan, the payoff of one floating home loan of $722 thousand that was new in the first quarter of 2024 (included above in additions), the return of five loans to accrual status, and normal payment amortization.

Subsequent to September 30, 2024, the repossessed manufactured home noted above was sold for a small gain on sale.

The percentage of nonperforming loans to total loans was 0.94% at September 30, 2024, compared to 0.40% at December 31, 2023.

The increase in NPAs primarily was due to the addition of six loans totaling $2.4 million to nonaccrual status, including two commercial real estate loans of $1.1 million and $988 thousand.

The increase also included $41 thousand of other real estate owned properties.

These additions were partially offset by $207 thousand in regular loan payments.

Subsequent to quarter-end,

the $988 thousand commercial real estate loan added to NPAs during the quarter was paid-off.

The percentage of nonperforming loans to total loans was 1.09% at March 31, 2025, compared to 0.83% at December 31, 2024.

Mortgage Servicing Rights.

The fair value of mortgage servicing rights increased $33 thousand or 0.7%, to $4.7 million at September 30, 2024 from $4.6 million at December 31, 2023.

The fair value of mortgage servicing rights decreased $81 thousand or 1.7%, to $4.7 million at March 31, 2025 from $4.8 million at December 31, 2024.

We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio.

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Deposits and Borrowings.

Total deposits increased $103.7 million, or 12.5%, to $930.2 million at September 30, 2024 from $826.5 million at December 31, 2023.

The increase was largely a result of the strategic movement of reciprocal deposits off balance sheet at year-end, which then returned in the first quarter of 2024.

Additionally, there was an increase in money market accounts, which was partially offset by decreases in public funds accounts, interest-bearing demand accounts, and savings accounts.

The shift occurred as interest rate sensitive clients moved a portion of their non-operating deposit balances from lower costing deposits, including noninterest-bearing deposits, into higher costing money market accounts.

Noninterest-bearing deposits increased $3.0 million, or 2.4%, to $129.7 million at September 30, 2024, compared to $126.7 million at December 31, 2023.

Noninterest-bearing deposits represented 13.9% of total deposits at September 30, 2024, compared to 15.3% at December 31, 2023.

Total deposits increased $72.5 million, or 8.7%, to $910.3 million at March 31, 2025 from $837.8 million at December 31, 2024.

This increase was primarily due to the return of reciprocal deposits that were temporarily moved off balance sheet at year-end for liquidity and balance sheet management purposes.

The reintroduction of these deposits in the first quarter of 2025 contributed significantly to the overall growth.

In contrast, noninterest-bearing deposits decreased $5.8 million, or 4.4%, to $126.7 million at March 31, 2025, compared to $132.5 million at December 31, 2024.

This decline may reflect continued migration into higher-yielding interest-bearing products as customers seek better returns in a competitive rate environment.

Noninterest-bearing deposits represented 13.9% of total deposits at March 31, 2025, compared to 15.8% at December 31, 2024.

A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands):

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

Rate Amount Wtd.

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(1) Escrow balances shown in noninterest-bearing deposits on the Condensed Consolidated Balance Sheets.

Scheduled maturities of time deposits at September 30, 2024, are as follows (in thousands):

Scheduled maturities of time deposits at March 31, 2025, are as follows (in thousands):

Year Ending December 31, Amount

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Certificates of deposit have maturities of five years or less.

The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2024 and December 31, 2023, totaled $88.1 million and $88.3 million, respectively.

The aggregate amount of time deposits in denominations of more than $250,000 at March 31, 2025 and December 31, 2024, totaled $96.4 million and $90.9 million, respectively.

Deposit amounts in excess of $250,000 are not federally insured.

As of September 30, 2024, uninsured deposits totaled $148.1 million, which represented 15.9% of total deposits, as compared to uninsured deposits of $140.1 million, or 17.0% of total deposits as of December 31, 2023.

As of March 31, 2025, uninsured deposits totaled $182.9 million, which represented 20.1% of total deposits, as compared to uninsured deposits of $167.3 million, or 20.0% of total deposits as of December 31, 2024.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

The increase in

uninsured deposits primarily related to jumbo tier pricing offered on some of our deposit products, as well as normal fluctuation within deposit accounts.

Borrowings, comprised of FHLB advances, were $40.0 million at both September 30, 2024 and December 31, 2023.

The increase in 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 $25.0 million at both March 31, 2025 and December 31, 2024.

FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives.

FHLB advances outstanding at September 30, 2024 had maturities ranging from late 2024 through early 2028.

Subordinated notes, net totaled $11.7 million at both September 30, 2024 and December 31, 2023.

FHLB advances outstanding at March 31, 2025 had maturities ranging from early 2026 through early 2028.

Subordinated notes, net totaled $11.8 million at both March 31, 2025 and December 31, 2024.

Stockholders’ Equity.

Total stockholders’ equity increased $1.6 million, or 1.6%, to $102.2 million at September 30, 2024, from $100.7 million at December 31, 2023.

This increase primarily reflects $2.7 million of net income earned during the nine months ended September 30, 2024 and $251 thousand in proceeds from exercises of stock options, partially offset by the cash payment of $1.5 million in dividends to the Company’s stockholders.

Total stockholders’ equity increased $765 thousand, or 0.7%, to $104.4 million at March 31, 2025, from $103.7 million at December 31, 2024.

This increase primarily reflects $1.2 million of net income earned during the current quarter, $81 thousand in share-based compensation, and $21 thousand in common stock options exercised, partially offset by a $17 thousand increase in accumulated other comprehensive loss, net of tax and the payment of $487 thousand in cash dividends to the Company's stockholders.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.

Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis.

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Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).

Three Months Ended September 30,

Balance Interest

Rate Annualized Average

Balance Interest

Rate Annualized

Interest-earning assets:

Loans receivable $ 898,570 $ 12,876 5.70 % $ 862,397 $ 11,505 5.29 %

Investments 13,806 132 3.80 14,793 139 3.73

Cash and cash equivalents 138,240 1,830 5.27 81,616 1,042 5.07

Total interest-earning assets (1)

1,050,616 14,838 5.62 958,806 12,686 5.25

Interest-bearing liabilities:

Savings and money market accounts 340,281 2,688 3.14 192,214 720 1.49

Demand and NOW accounts 148,252 151 0.41 194,561 173 0.35

Certificate accounts 303,632 3,524 4.62 293,820 2,984 4.03

Subordinated notes 11,745 168 5.69 11,703 168 5.70

Borrowings 40,000 434 4.32 42,815 473 4.38

Total interest-bearing liabilities 843,910 6,965 3.28 % 735,113 4,518 2.44 %

Net interest income $ 7,873 $ 8,168

Net interest rate spread 2.34 % 2.81 %

Net earning assets $ 206,706 $ 223,693

Net interest margin 2.98 % 3.38 %

Average interest-earning assets to average interest-bearing liabilities 124.49 % 130.43 %

Noninterest-bearing deposits $ 132,762 $ 151,298

Total deposits $ 924,927 $ 6,363 2.74 % $ 831,893 $ 3,877 1.85 %

Total funding (2)

$ 976,672 $ 6,965 2.84 % $ 886,411 $ 4,518 2.02 %

(1) Calculated net of deferred loan fees, loan discounts and loans in process.

(2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits.

The cost of total funding is calculated as annualized total interest expense divided by average total funding.

Nine Months Ended September 30,

Three Months Ended March 31,

Balance Interest

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(2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits.

The cost of total funding is calculated as annualized total interest expense divided by average total funding.

The cost of total funding is calculated as annualized total interest expense divided by total funding.

Rate/Volume Analysis

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For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands).

Three Months Ended September 30, 2024 vs.

Nine Months Ended September 30, 2024 vs.

Three Months Ended March 31, 2025 vs.

Increase (Decrease) due to Total

Increase (Decrease) Increase (Decrease) due to Total

Increase (Decrease)

Volume Rate Volume Rate

Interest-earning assets:

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Change in net interest income $ 611

Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2024 and 2023

Q3 2024 vs Q3 2023 .

Net income decreased $15 thousand, or 1.3%, to $1.2 million, or $0.45 per diluted common share, for the three months ended September 30, 2024, from the three months ended September 30, 2023.

The decrease was the result of a $295 thousand decrease in net interest income, offset by a $154 thousand increase in noninterest income, a $31 thousand decrease in noninterest expense, a $67 thousand decrease in the release of credit losses, and a $28 thousand decrease in the provision for income taxes.

Net income decreased $3.5 million, or 56.3%, to $2.7 million, or $1.05 per diluted common share, for the nine months ended September 30, 2024, compared to $6.2 million, or $2.39 per diluted common share, for the nine months ended September 30, 2023.

The decrease was primarily a result of a $3.5 million decrease in net interest income, a $112 thousand decrease in the release of credit losses, a $446 thousand decrease in noninterest income and a $252 thousand increase in noninterest expense, partially offset by a $802 thousand decrease in the provision for income taxes.

Comparison of Results of Operation for the Three Months Ended March 31, 2025 and 2024

Net income increased $397 thousand, or 51.6%, to $1.2 million, or $0.45 per diluted common share, for the three months ended March 31, 2025, from $770 thousand for the three months ended March 31, 2024.

The increase was primarily the result of a $611 thousand increase in net interest income and a $170 thousand increase in the release of provision for credit losses, partially offset by a $258 thousand increase in noninterest expense and a $128 thousand increase in the provision for income taxes.

Noninterest income remained relatively unchanged between periods.

Interest Income

Q3 2024 vs Q3 2023 .

Interest income increased $2.2 million, or 17.0%, to $14.8 million for the three months ended September 30, 2024, from $12.7 million for the three months ended September 30, 2023, primarily due to higher average balances of loans and interest-bearing cash, a 41 basis point increase in the average yield on loans, a 20 basis point increase in the average yield on interest-bearing cash, and an eight basis point increase in the average yield on investments, partially offset by a decline in the average balance of investments.

Interest income on loans increased $1.4 million, or 11.9%, to $12.9 million for the three months ended September 30, 2024, from $11.5 million for the three months ended September 30, 2023.

The average balance of total loans was $898.6 million for the three months ended September 30, 2024, compared to $862.4 million for the three months ended September 30, 2023.

The average yield on total loans was 5.70% for the three months ended September 30, 2024, compared to 5.29% for the three months ended September 30, 2023.

The increase in the average balance resulted primarily from growth in commercial and multifamily loans and floating home loans.

The average yield on total loans increased primarily due to variable rate loans resetting to higher market interest rates and new loan originations at higher interest rates.

Interest income on the investment portfolio decreased $7 thousand, or 5.0%, to $132 thousand for the three months ended September 30, 2024, compared to $139 thousand for the three months ended September 30, 2023.

Three Months Ended March 31,

Change Percent Change

Loans, including fees $ 12,588 $ 12,233 $ 355 2.9 %

Interest and dividends on investments, cash and cash equivalents 1,118 1,527 (409) (26.8)

Total interest Income $ 13,706 $ 13,760 $ (54) (0.4) %

Interest income decreased $54 thousand, or 0.4%, to $13.7 million for the three months ended March 31, 2025, from $13.8 million for the three months ended March 31, 2024, primarily due to lower average balances of interest-bearing cash and investments and a 103 basis point decline in the average yield on interest-bearing cash, partially offset by a 20 basis point increase in the average yield on loans.

Interest income on loans increased $355 thousand, or 2.9%, to $12.6 million for the three months ended March 31, 2025, from $12.2 million for the three months ended March 31, 2024.

The average yield on total loans rose to 5.69% for the three months ended March 31, 2025, from 5.49% for the three months ended March 31, 2024, primarily due to variable rate loans resetting to higher market interest rates and new loan originations at higher interest rates.

The average balance of total loans was $896.8 million for the three months ended March 31, 2025, compared to $895.4 million for the three months ended March 31, 2024.

Interest income on the investment portfolio decreased $3 thousand, or 2.7%, to $108 thousand for the three months ended March 31, 2025, compared to $111 thousand for the three months ended March 31, 2024.

The decrease was due to a decrease in the average balance, partially offset by a higher average yield.

The average balance of investments was $13.8 million for the three months ended September 30, 2024, compared to $14.8 million for the three months ended September 30, 2023, while the average yield on investments increased seven basis points to 3.80% for the three months ended September 30, 2024, compared to 3.73% for the three months ended September 30, 2023.

Interest income on cash and cash equivalents increased $788 thousand, or 75.6% to $1.8 million for the three months ended September 30, 2024, compared to $1.0 million for the three months ended September 30, 2023.

The increase was due to a higher average balance of and yield on cash and cash equivalents.

The average yield on cash and cash equivalents increased to 5.27% for the three months ended September 30, 2024, compared to 5.07% for the three months ended September 30, 2023, as a result of the higher interest rate environment.

The average balance of cash and cash equivalents was $138.2 million for the three months ended September 30, 2024, compared to $81.6 million for the three months ended September 30, 2023.

The increase in the average balance was due to higher average cash balances, as deposits increased during the period at a faster pace than we were able to increase loans.

Interest income increased $5.4 million, or 14.4%, to $42.6 million for the nine months ended September 30, 2024, from $37.3 million for the nine months ended September 30, 2023, primarily due to a higher average balances of loans and interest-bearing cash, and increases in average yields on loans, investments and cash and cash equivalents of 26 basis points, 26 basis points, and 61 basis points, respectively, partially offset by a lower average balance of investments.

Interest income on loans increased $3.0 million, or 8.7%, to $37.4 million for the nine months ended September 30, 2024, compared to $34.4 million for the nine months ended September 30, 2023, driven by a higher average balance of total loans and a 26 basis point increase in the average yield on loans.

The average balance of total loans was $895.3 million for the nine months ended September 30, 2024, compared to $865.4 million for the nine months ended September 30, 2023.

The average yield on total loans was 5.58% for the nine months ended September 30, 2024, compared to 5.32% for the nine months ended September 30, 2023.

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 cash and cash equivalents increased $2.4 million, or 130.19% to $4.8 million for the nine months ended September 30, 2024, compared to $2.4 million for the nine months ended September 30, 2023.

The increase was due to a higher average balance of and yield on cash and cash equivalents.

The average yield on cash and cash equivalents increased to 5.28% for the nine months ended September 30, 2024, compared to 4.67% for the nine months ended September 30, 2023, as a result of the higher interest rate environment.

During September 2024 and November 2024, the Federal Reserve lowered the federal funds rate by 50 basis points and 25 basis points, respectively, which is expected to decrease the average yield on cash and cash equivalents in future periods.

The average balance of cash and cash equivalents was $122.2 million for the nine months ended September 30, 2024, compared to $70.1 million for the nine months ended September 30, 2023.

The increase in the average balance was due to higher average cash balances, as deposits increased during the period at a faster pace than we were able to increase loans.

The average balance of investments was $12.9 million for the three months ended March 31, 2025, compared to $14.0 million for the three months ended March 31, 2024, while the average yield on investments increased 21 basis points to 3.39% for the three months ended March 31, 2025, compared to 3.18% for the three months ended March 31, 2024.

The decrease in the average balance was due to regularly scheduled payments and maturities, while the increase in the average yield was due to higher market interest rates.

Interest income on cash and cash equivalents decreased $406 thousand, or 28.7%, to $1.0 million for the three months ended March 31, 2025, compared to $1.4 million for the three months ended March 31, 2024.

The decrease was due to a lower average balance of and yield on cash and cash equivalents.

The average yield on cash and cash equivalents decreased to 4.27% for the three months ended March 31, 2025, compared to 5.30% for the three months ended March 31, 2024, as a result of the lower market interest rates generally.

The average balance of cash and cash equivalents was $96.0 million for the three months ended March 31, 2025, compared to $107.4 million for the three months ended March 31, 2024, primarily due to a lower average cash balance following the payoff of $15.0 million of FHLB advances during the fourth quarter of 2024.

Interest Expense

Q3 2024 vs Q3 2023 .

Interest expense increased $2.4 million, or 54.2%, to $7.0 million for the three months ended September 30, 2024, from $4.5 million for the three months ended September 30, 2023.

The increase was primarily the result of a $9.8 million increase in the average balance of certificate accounts and a $148.1 million increase in the average balance of savings and money market accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $46.3 million decrease in the average balance of demand and NOW accounts and a $2.8 million decrease in the average balance of FHLB advances.

The 59 basis point increase in the rate paid on certificate accounts and the 165 basis point increase in the rate paid on savings and money market accounts contributed to an overall 89 basis point increase in the average cost of total deposits to 2.74% for the quarter ended September 30, 2024, from 1.85% for the quarter ended September 30, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $434 thousand for the three months ended September 30, 2024, compared to $473 thousand for the three months ended September 30, 2023, primarily due to a six basis point decline in the average cost of FHLB advances to 4.32% for the quarter ended September 30, 2024, compared to 4.38% for the same quarter in 2023.

The average cost of FHLB advances declined due to no overnight borrowings being utilized in the current quarter as compared to utilization of overnight borrowings in the same quarter of 2023.

The average balance of FHLB advances was $40.0 million for the three months ended September 30, 2024, compared to $42.8 million for the three months ended September 30, 2023.

Interest expense on subordinated notes was $168 thousand for both the three months ended September 30, 2024 and the three months ended September 30, 2023.

Interest expense increased $8.9 million, or 80.7%, to $19.9 million for the nine months ended September 30, 2024, from $11.0 million for the nine months ended September 30, 2023.

Interest expense on deposits increased $9.1 million, or 101.4%, to $18.1 million for the nine months ended September 30, 2024, compared to $9.0 million for the nine months ended September 30, 2023.

The increase was primarily the result of an increase in the average balance of savings and money market accounts and certificate accounts, as well as higher average rates paid on these accounts, partially offset by a decrease in the average balance of demand and NOW accounts.

The average cost of total deposits increased 121 basis points to 2.66% for the nine months ended September 30, 2024, from 1.45% for the nine months ended September 30, 2023.

Interest expense on borrowings, comprised solely of FHLB advances, was $1.3 million for the nine months ended September 30, 2024, compared to $1.5 million for the nine months ended September 30, 2023, reflecting the decreased use of

FHLB advances to supplement our liquidity needs.

The average cost of FHLB advances decreased 17 basis points to 4.32% for the nine months ended September 30, 2024, compared to 4.49% for the same period in 2023.

The average cost of FHLB advances declined due to no overnight borrowings being utilized in the 2024 nine-month period as compared to utilization of overnight borrowings in the 2023 nine-month period.

The average balance of FHLB advances was $40.0 million for the nine months ended September 30, 2024, compared to $45.3 million for the nine months ended September 30, 2023.

Interest expense on subordinated notes was $504 thousand for both the nine months ended September 30, 2024 and 2023.

Three Months Ended March 31,

Change Percent Change

Deposit $ 5,205 $ 5,703 $ (498) (8.7) %

Borrowings 262 429 (167) (38.9)

Subordinated notes 168 168 — —

Total interest expense $ 5,635 $ 6,300 $ (665) (10.6)

The decrease in total interest expense was primarily attributable to lower interest rates across most interest-bearing liabilities, resulting from lower market interest rates generally, as well as a $125 thousand decrease related to lower average balances, particularly in certificate accounts.

Interest expense on certificate accounts declined $657 thousand, driven by a $268 thousand volume-related decrease and a $389 thousand rate-relate decrease.

The average balance of certificate accounts declined to $290.0 million for the three months ended March 31, 2025, from $315.5 million a year earlier, while the average rate paid decreased to 4.25% from 4.71%.

These declines reflect the continued runoff and repricing of higher-rate time deposits originated in prior periods.

In addition, interest expense on demand and Now accounts decreased $33 thousand, due to both lower average balances and slightly lower rates.

Partially offsetting these decreases was an increase in interest expense on savings and money market accounts, which increased $192 thousand, or 10.29%, to $2.1 million for the three months ended March 31, 2025, from $1.9 million for the same period in 2024.

This increase was driven entirely by higher average balances, which increased to $335.4 million from $284.5 million, reflecting shifts in customer deposit preferences, partially offset by a lower average rate paid on these accounts, which declined 15 basis points to 2.49% from 2.64%.

The rate decrease reflects competitive repricing strategies implemented to manage overall funding costs in a stabilizing rate environment.

Interest expense on borrowings, comprised solely of FHLB advances, decreased $167 thousand , primarily due to a $15.0 million decline in average borrowings following the payoff of an FHLB advance during the fourth quarter of 2024.

The average balance of FHLB advances was $25.0 million for the three months ended March 31, 2025, compared to $40.0 million for the three months ended March 31, 2024.

The average rate paid on borrowings decreased six basis points to 4.25% for the quarter ended March 31, 2025, compared to 4.31% for the same quarter in 2024.

Interest expense on subordinated notes was $168 thousand for both the three months ended March 31, 2025 and March 31, 2024, with no material changes in the average balance or rate paid.

Net Interest Income.

Q3 2024 vs Q3 2023 .

Net interest income decreased $295 thousand, or 3.6%, to $7.9 million for the three months ended September 30, 2024, from $8.2 million for the three months ended September 30, 2023.

The decrease in net interest income was primarily the result of increased funding costs, primarily the rates paid on and balances of money market and certificate accounts, partially offset by an increase in the average balance of and yield earned on interest-earning assets.

Net interest margin (annualized) was 2.98% and 3.38% for the three months ended September 30, 2024 and 2023, respectively.

The decrease in net interest margin primarily was due to the cost of funding increasing at a faster pace than the yield earning on interest-earning assets, driven by the higher average balance of higher costing money market and certificate accounts.

Net interest income decreased $3.5 million, or 13.3%, to $22.8 million for the nine months ended September 30, 2024, from $26.3 million for the nine months ended September 30, 2023.

Net interest margin (annualized) was 2.95% and 3.70% for the nine months ended September 30, 2024 and 2023, respectively.

The decrease in net interest income primarily resulted from an increase in the average balances of and rate paid on deposits, partially offset by higher average balances and yield earned on interest-earning assets and lower average balances and rate paid on borrowings.

The decrease in net interest margin primarily was due to average interest rates paid on interest-bearing liabilities increasing at a faster pace than the average yields earned on interest-earning assets.

During 2023, in response to inflation, the Federal Open Market Committee of the Federal Reserve (“FOMC”) increased the target range for the federal funds rate by 100 basis points to a range of 5.25% to 5.50%, where it remained until September 18, 2024.

In light of the progress on reducing inflation and after considering the balance of risks, the FOMC decided to lower the target range 50 basis points to 4.75% to 5.00%.

Net interest income increased $611 thousand, or 8.2%, to $8.1 million for the three months ended March 31, 2025, from $7.5 million for the three months ended March 31, 2024.

The increase in net interest income was mainly the result of decreased funding costs, primarily from lower average rates paid on all categories of interest-bearing deposits and a lower average balance of borrowings, partially offset by a decrease in the average balance of interest-earning assets.

Overall, the decline in funding costs contributed to a 36 basis point improvement in the net interest rate spread and a 30 basis point increase in the net interest margin, which rose to 3.25% for the three months ended March 31, 2025, compared to 2.95% for the same period in 2024.

Through most of 2024, the Federal Open Market Committee of the Federal Reserve (“FOMC”) maintained the target range for the federal funds rate at 5.25% to 5.50%, where it remained until September 18, 2024.

In light of continued progress on reducing inflation and after considering the balance of risks to the economy, the FOMC has since lowered the target range 100 basis points to 4.25% to 4.50% as March 31, 2025 .

Provision for Credit Losse s.

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Provision for (release of) credit losses on loans $ 106 $ 224 $ (88) $ 227

(Release of) provision for credit losses on unfunded loan commitments (98) (149) (46) (473)

Provision for (release of) credit losses $ 8 $ 75 $ (134) $ (246)

During the three months ended September 30, 2024, the provision for credit losses on loans was primarily due to growth in the loan portfolio and higher quantitative loss rates, which were influenced by a forecast of higher unemployment in the current quarter.

The current quarter also included enhancements to the loss model, including an additional qualitative adjustment related to loan review.

The release of credit losses on unfunded loan commitments related to overall fewer loan commitments.

During the nine months ended September 30, 2024, the release of credit losses on loans primarily related to lower reserves on our other consumer loan portfolio and residential loan portfolios due to qualitative adjustments for changes in concentration, the value of underlying collateral, and market conditions, partially offset by growth in the loan portfolio, an increase in nonaccrual loans and the weighted average life of the portfolio, and enhancements to the loss model as noted above.

The release of provision for credit losses on unfunded loan commitments during the current nine-month period related to overall fewer loan commitments.

Net charge-offs for the three months ended September 30, 2024 totaled $14 thousand, compared to $3 thousand for three months ended September 30, 2023.

Net charge-offs for the nine months ended September 30, 2024 totaled $87 thousand, compared to net charge-offs of $148 thousand for the nine months ended September 30, 2023.

Three Months Ended March 31,

Release of credit losses on loans $ (85) $ (106)

Release of credit losses on unfunded loan commitments (118) 73

(Release of) provision for credit losses $ (203) $ (33)

A release of credit losses of $203 thousand was recorded for the quarter ended March 31, 2025, compared to a release of credit losses of $33 thousand for the quarter ended March 31, 2024.

The release of credit losses on loans during the current quarter was primarily due to a decline in the balance of the loan portfolio, partially offset by higher qualitative factors which were influenced by uncertainty in the market.

The release of credit losses on unfunded loan commitments during the current quarter related to overall fewer loan commitments.

Net charge-offs for the three months ended March 31, 2025 totaled $21 thousand, compared to $56 thousand for three months ended March 31, 2024.

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, 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 further decline in national and local economic conditions, as a result of the effects of inflation, and a potential recession or slowed economic growth, among other factors, could result in a material increase in the ACL and have a material adverse impact on our financial condition and results of

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 adjustment of reserves based upon their judgment of information available to them at the time of their examination.

Noninterest Income.

Noninterest income increased $154 thousand, or 14.2%, to $1.2 million for the three months ended September 30, 2024, as compared to $1.1 million for the three months ended September 30, 2023, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

Service charges and fee income $ 628 $ 700 $ (72) (10.3) %

Earnings on BOLI 186 88 98 111.4

Mortgage servicing income 280 295 (15) (5.1)

Fair value adjustment on mortgage servicing rights 101 (78) 179 (229.5)

Net gain on sale of loans 40 76 (36) (47.4)

Total noninterest income $ 1,235 $ 1,081 $ 154 14.2 %

The increase in noninterest income was due to a $98 thousand increase in earnings on BOLI due to market rate fluctuations, and an $179 thousand increase in the fair value adjustment on mortgage servicing rights due to changes in prepayment speeds, servicing costs, and discount rate.

These increases were partially offset by a $72 thousand decrease in service charges and fee income, primarily due to a volume incentive paid by Mastercard in the quarter ended September 30, 2023, a $36 thousand decrease in net gain on sale of loans resulting from lower mortgage activity, and a decrease in mortgage servicing income as a result of the portfolio paying down at a faster rate than we are replacing the loans.

Additionally, mortgage servicing income decreased by $15 thousand compared to the third quarter of 2023.

Loans sold during the quarter ended September 30, 2024, totaled $2.4 million, compared to $4.4 million during the quarter ended September 30, 2023.

Noninterest income decreased $446 thousand, or 11.3%, to $3.5 million for the nine months ended September 30, 2024, as compared to $3.9 million for the nine months ended September 30, 2023, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Noninterest income remained relatively unchanged at $1.1 million for both the three months ended March 31, 2025 and March 31, 2024, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Change Percent

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Net gain on sale of loans 49 90 (41) (45.6)

Other income 30 — 30 100.0

Total noninterest income $ 1,098 $ 1,096 $ 2 0.2 %

The decrease in noninterest income during the nine months ended September 30, 2024, compared to the same period in 2023 primarily resulted from a $459 thousand decrease in earnings on BOLI due to a death benefit received in the second quarter of 2023, a $59 thousand decrease in net gain on sale of loans resulting from lower mortgage activity and a $50 thousand decline in mortgage servicing income for the same reasons discussed above for the three months ended September 30, 2024.

These decreases were partially offset by a $50 thousand increase in service charges and fee income due to the recovery of potential future lost fee income due to vendor error, a $42 thousand upward adjustment in the fair value of mortgage servicing rights due to changes in prepayment speeds, servicing costs, and discount rate, and a $30 thousand gain on disposal of assets due to insurance claims on loss of fully depreciated assets.

Loans sold during the nine months ended September 30, 2024, totaled $10.6 million, compared to $14.7 million during the nine months ended September 30, 2023.

The changes in noninterest income for the three months ended March 31, 2025, compared to the same period in 2024 were primarily due to:

• a $72 thousand increase in service charges and fee income, primarily due to a volume incentive paid by Mastercard in the first quarter of 2025 and higher debit card interchange income;

• an $18 thousand increase in earnings from BOLI, primarily due to the strategic decision to surrender and exchange existing policies for higher yielding policies, partially offset by market fluctuations that reduced the value of the policies;

• a $13 thousand decrease in mortgage servicing income, resulting from portfolio paydowns occurring at a faster pace than new originations;

• a $34 thousand decrease in the fair value adjustment on mortgage servicing rights, due to a smaller servicing portfolio;

• a $41 thousand decrease in net gain on sale of loans, due to a lower volume of loans sold during the first quarter of 2025.

Noninterest Expense.

Noninterest expense decreased $31 thousand, or 0.4%, to $7.7 million during the three months ended September 30, 2024, compared to $7.7 million during the three months ended September 30, 2023, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Noninterest expense increased $258 thousand, or 3.4%, to $7.9 million during the three months ended March 31, 2025, compared to $7.7 million during the three months ended March 31, 2024, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Change Percent

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Total noninterest expense $ 7,914 $ 7,656 $ 258 3.4 %

The decrease in noninterest expense was primarily due to a decrease in data processing expenses of $229 thousand, due to one-time costs related to new technology implemented in 2023.

Operations expense decreased $85 thousand due to reductions in loan origination costs, office expenses, marketing costs, legal fees, and charitable contributions, partially offset by an operational loss from a fraudulently obtained loan charged off in the third quarter of 2024.

Occupancy expenses decreased $44 thousand, primarily due to fully amortized leasehold improvements.

Salaries and benefits increased $321 thousand, reflecting higher incentive compensation, medical expenses, retirement plan costs, and directors' fees (due to the addition of a new director), partially offset by lower salaries from a restructuring of positions at the end of 2023.

The efficiency ratio for the quarter ended September 30, 2024 was 84.31%, compared to 83.36% for the quarter ended September 30, 2023.

The deterioration in the efficiency ratio was primarily due to lower net interest income resulting from a faster increase in interest expense compared to interest income.

Noninterest expense increased $252 thousand, or 1.1%, to $23.1 million during the nine months ended September 30, 2024, compared to $22.8 million during the nine months ended September 30, 2023, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

Salaries and benefits $ 13,670 $ 13,333 $ 337 2.5 %

Operations 4,566 4,557 9 0.2

Regulatory assessments 598 490 108 22.0

Occupancy 1,255 1,352 (97) (7.2)

Data processing 2,995 3,077 (82) (2.7)

Net (gain) loss on OREO and repossessed assets (10) 13 (23) (176.9)

Total noninterest expense $ 23,074 $ 22,822 $ 252 1.1 %

Salaries and benefits increased for the reasons noted above.

Regulatory assessments increased primarily due to higher regulatory exam costs paid in the 2024 nine-month period and an increase in regulatory assessments due to the change in the assessment rate in the prior year not being adjusted for until later in 2023.

These increases were partially offset by decreases in occupancy expense, data processing expense, and net (gain) loss on OREO and repossessed assets.

Occupancy expenses decreased from the prior year nine-month period as a result of the release of an accrual for property taxes due to lower than expected payments and fully amortized leasehold improvements in the 2024 nine-month period.

Data processing expense decreased due to costs related to new technology implemented in 2023, partially offset by a higher volume of transaction activity in the 2024 nine-month period.

The net gain on OREO and repossessed assets in the current year nine-month period relates to the sale of a longtime OREO property at a gain, partially offset by expenses related to the foreclosure of one manufactured home loan in the first quarter of 2024.

The net loss on OREO and repossessed assets in the prior year nine-month period relates to the expenses associated with, and the charge-off of, a former OREO property during the first quarter of 2023, which was partially offset by the sale of that property at a gain in the second quarter of 2023.

The change in noninterest expense for the three months ended March 31, 2025, compared to the same period in 2024, were primarily due to:

• a $276 thousand increase in data processing expenses, due to the amortization of costs associated with various project implementations that began in the third quarter of 2024, as well as the absence of a one-time vendor reimbursement received in the first quarter of 2024;

• a $52 thousand increase in salaries and benefits, primarily due to higher salaries expense as a result of annual pay increases in the first quarter and lower deferred compensation, partially offset by lower retirement plan expense and lower commission expense.

• a $32 thousand increase in regulatory assessments, due to a higher estimated accrual for regulatory exam costs;

• a $92 thousand decrease in operations expense, primarily due to the recognition of annual fee reimbursements from Mastercard beginning in the first quarter of 2025 and lower expenses across various accounts resulting from ongoing cost saving initiatives and process improvements.

The efficiency ratio for the quarter ended March 31, 2025 was 86.31%, compared to 89.48% for the quarter ended March 31, 2024.

The improvement in the efficiency ratio was primarily due to higher net interest income resulting from lower funding costs.

Income Tax Expense .

The provision for income taxes was $267 thousand and $617 thousand for the three and nine months ended September 30, 2024, compared to $295 thousand and $1.4 million for the three and nine months ended September 30, 2023, respectively.

The effective tax rates for the three and nine months ended September 30, 2024 were 18.79% and 18.50%, respectively.

The effective tax rates for the three and nine months ended September 30, 2023 were 20.15% and 18.56%, respectively.

The effective tax rate for the three months ended September 30, 2024 was lower than the same period in the prior year as a result of higher earnings on our BOLI in the current quarter, which was nontaxable income.

The provision for income taxes was $291 thousand and $163 thousand for the three months ended March 31, 2025 and March 31, 2024, respectively.

The effective tax rates for the three months ended March 31, 2025 and March 31, 2024 were 19.96% and 17.47%, respectively.

The increase in the effective tax rate was due to taxable earnings on BOLI in the current quarter, resulting from the surrender and exchange of existing BOLI policies in to higher yielding policies.

Capital and Liquidity

The Management’s Discussion and Analysis in Item 7 of the Company’s 2024 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows.

Although there have been no material changes in our liquidity management, sources of liquidity and cash flows since our 2023 Form 10-K, this discussion updates that disclosure for the nine months ended September 30, 2024.

Stockholders’ equity totaled $102.2 million at September 30, 2024 and $100.7 million at December 31, 2023.

In addition to net income of $2.7 million, other sources of capital during the nine months ended September 30, 2024 primarily included $251 thousand in proceeds from stock option exercises, and $291 thousand related to stock-based compensation, and $66 thousand of other comprehensive income, net of tax, primarily resulting from unrealized gains on available for sale securities.

Uses of capital during the nine months ended September 30, 2024 primarily included $1.5 million of dividends paid on common stock, $65 thousand in common stock repurchases and $218 thousand in common stock surrendered to pay the exercise price of stock option exercises.

We paid cash dividends of $0.57 per common share during the nine months ended September 30, 2024 and $0.55 per common share during the nine months ended September 30, 2023, which equates to a dividend payout ratio of 53.66% and 22.88%, respectively.

Although there have been no material changes in our liquidity management, sources of liquidity and cash flows since our 2024 Form 10-K, this discussion updates that disclosure for the three months ended March 31, 2025.

Stockholders’ equity totaled $104.4 million at March 31, 2025 and $103.7 million at December 31, 2024.

In addition to net income of $1.2 million, other sources of capital during the three months ended March 31, 2025 primarily included $81 thousand related to stock-based compensation and $21 thousand in proceeds from stock option exercises.

Uses of capital during the three months ended March 31, 2025 primarily included $487 thousand of dividends paid on common stock and $17 thousand of other comprehensive income, net of tax, primarily resulting from unrealized losses on available for sale securities.

We paid cash dividends of $0.19 per common share during the three months ended March 31, 2025 and March 31, 2024, which equates to a dividend payout ratio of 41.73% and 63.12%, respectively.

The Company expects to continue paying quarterly cash dividends on its common stock, subject to the Board of Directors' discretion to change this practice at any time and for any reason, without prior notice.

Assuming continued payment of the regular quarterly cash dividend during the remainder of 2024 at the rate of $0.19 per share, our average total dividend paid each quarter would be approximately $487 thousand based on the number of outstanding shares as of September 30, 2024.

Assuming continued payment of the regular quarterly cash dividend during the remainder of 2025 at the rate of $0.19 per share, our average total dividend paid each quarter would be approximately $488 thousand based on the number of outstanding shares as of March 31, 2025.

The dividends, if any, we pay may be limited as more fully discussed under “Business—How We Are Regulated—Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2024 Form 10-K.

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Stock repurchases may also offset the dilutive effects of stock compensation awards.

As of September 30, 2024, approximately $1.4 million of our common stock remained available for repurchase under our existing stock repurchase program.

Purchases under the Company’s existing stock repurchase program may be made through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as well as any constraints specified in any trading plan that may be adopted in accordance with SEC Rule 10b5-1.

The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

The Company’s stock repurchase program does not obligate the Company to purchase any particular number of shares.

For additional details on our stock repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II, Item 2 of this Form 10-Q.

In January 2024, the Board of Directors approved a new stock repurchase program authorizing the Company to purchase up to $1.5 million of the Company’s issued and outstanding common stock over a period of 12 months which expired on January 26, 2025 and was not renewed.

For additional details on our stock repurchase activity, see “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II, Item 2 of this Form 10-Q.

Liquidity measures the ability to meet current and future cash flow needs.

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The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.

The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost.

We seek to achieve this objective and ensure our that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.

The objective of our liquidity management is to manage cash flows and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost.

We seek to achieve this objective and ensure that our funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.

Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.

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Liquidity risk management is an important element in our asset/liability management process.

We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding challenges resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

We regularly model

liquidity stress scenarios to assess potential liquidity outflows or funding challenges resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.

As of September 30, 2024, we had $157.0 million in cash and cash equivalents and available-for-sale investment securities, and $65 thousand in loans held-for-sale.

At September 30, 2024, we had the ability to borrow $168.1 million in FHLB advances and access to additional borrowings of $21.9 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $40.0 million in outstanding advances from the FHLB and none from the Federal Reserve at September 30, 2024.

We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding, at September 30, 2024.

As of March 31, 2025, we had $139.2 million in cash and cash equivalents and available-for-sale investment securities, and $2.3 million in loans held-for-sale.

At March 31, 2025, we had the ability to borrow $167.5 million in FHLB advances and access to additional borrowings of $20.3 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $25.0 million in outstanding advances from the FHLB and none from the Federal Reserve at March 31, 2025.

We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding, at March 31, 2025.

Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

As of September 30, 2024, management was not aware of any events reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

As of March 31, 2025, management was not aware of any events reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

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In the ordinary course of business, we enter into contractual obligations and other commitments to make future payments.

Refer to the accompanying Notes to Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of September 30, 2024.

Refer to the accompanying Notes to Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of March 31, 2025.

These include payments related to (i) long-term borrowings (Note 8—Borrowings, FHLB Stock and Subordinated Notes) and (ii) operating leases (Note 10—Leases).

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The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the client.

At September 30, 2024 and December 31, 2023, financial instrument contractual amounts representing credit risk were as follows (in thousands):

September 30, 2024 December 31, 2023

At March 31, 2025 and December 31, 2024, financial instrument contractual amounts representing credit risk were as follows (in thousands):

March 31, 2025 December 31, 2024

Residential mortgage commitments $ 10,143 $ 3,758

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Banking regulations may limit the dividends that may be paid to Sound Financial Bancorp by Sound Community Bank.

See “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the

Company’s 2023 Form 10-K.

At September 30, 2024 Sound Financial Bancorp, on an unconsolidated basis, had $1.3 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

See “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2024 Form 10-K.

At March 31, 2025 Sound Financial Bancorp, on an unconsolidated basis, had $3.9 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

See also the “Condensed Consolidated Statements of Cash Flows” included in “Item 1.

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Qualifying institutions that elect to use the Community Bank Leverage Ratio, or CBLR, framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework.

As of September 30, 2024, the Bank’s and the Company’s CBLRs were 10.40% and 9.36%, respectively, which exceeded the minimum requirement of 9%.

As of March 31, 2025, the Bank’s and the Company’s CBLRs were 10.76% and 9.98%, respectively, which exceeded the minimum requirement of 9%.

In February 2019, the U.S.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis