Sound Financial Bancorp, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain matters discussed in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 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. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: • adverse economic conditions in our market areas, and other markets where we have lending relationships; • effects of employment levels, persistent inflation, recessionary pressures, or slowing economic growth; • changes in interest rate levels and the duration of such changes, including actions by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), 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 monetary and fiscal policy responses thereto, and their impact on consumer behavior; • the effects of a federal government shutdown, debt ceiling standoff, or other fiscal policy uncertainties; • changes in consumer spending, borrowing and savings habits; • the risks of lending and investing activities, including delinquencies, write-offs and changes in our allowance for credit losses, and provision for credit losses; • monetary and fiscal policies of the Federal Reserve and the U.S. Government and other governmental initiatives affecting the financial services industry; • bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; • fluctuations in the demand for loans, unsold homes, land and other properties; • fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area; • our ability to access cost-effective funding, including maintaining the confidence of depositors; • the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to increase our allowance for credit losses, write-down asset values or increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits; • the inability of key third-party providers to perform their obligations to us; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate into our operations any assets, liabilities, clients, systems, and management personnel we may acquire and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • use of estimates in determining the fair values of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • our ability to keep pace with technological changes; • 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; • legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, 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; 29 • our ability to retain or attract key employees or members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to implement our business strategies, including expectations regarding key growth initiatives and strategic priorities; • environmental, social and governance goals; • staffing fluctuations in response to product demand or corporate implementation strategies; • our ability to pay dividends on and repurchase our common stock; • the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets; • vulnerabilities in information systems or third-party service providers, including disruptions, breaches, or attacks; • our ability to adapt to rapid technological changes, including advancements in artificial intelligence, digital banking, and cybersecurity; • geopolitical developments and international conflicts, including but not limited to tensions or instability in Eastern Europe, the Middle East, and Asia, or the imposition of new or increased tariffs and trade restrictions, which may disrupt financial markets, global supply chains, energy prices, or economic activity in 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; • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and • 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. 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. General Sound Financial Bancorp, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, Sound Community Bank. Substantially all of Sound Financial Bancorp’s business is conducted through Sound Community Bank, a Washington state-chartered commercial bank. As a Washington commercial bank that is not a member of the Federal Reserve System, the Bank’s regulators are the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”). As a bank holding company, Sound Financial Bancorp is regulated by the Federal Reserve. We also sell insurance products and services through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank. Sound Community Bank’s deposits are insured up to applicable limits by the FDIC. At September 30, 2025, Sound Financial Bancorp, on a consolidated basis, had total assets of $1.06 billion, net loans held-for-portfolio of $901.2 million, deposits of $898.9 million and stockholders’ equity of $107.5 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. 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 loans, construction and land loans, and consumer and commercial business loans. Our commercial business loans include unsecured lines of credit, 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”) and 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. 30 Critical Accounting Estimates Certain of our accounting policies require management to make difficult, complex or subjective judgments, which may relate to matters that are inherently uncertain. 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, 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, 2025 and December 31, 2024 General. Total assets increased $66.5 million, or 6.7%, to $1.06 billion at September 30, 2025 from $993.6 million at December 31, 2024. The increase primarily was a result of increases in cash and cash equivalents and loans held-for-portfolio. Cash and Cash Equivalents, and Investment Securities. Cash and cash equivalents increased $57.5 million, or 131.8%, to $101.2 million at September 30, 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 temporarily reduced our cash balances. 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. Investment securities decreased $384 thousand, or 3.9%, to $9.5 million at September 30, 2025, compared to $9.9 million at December 31, 2024. Held-to-maturity securities totaled $1.9 million and $2.1 million at September 30, 2025 and December 31, 2024, respectively. Available-for-sale securities totaled $7.6 million at September 30, 2025, compared to $7.8 million at December 31, 2024. The decrease in held-to-maturity securities was primarily due to principal paydowns. 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 the market value of our portfolio in 2025. Loans. Loans held-for-portfolio, net increased $9.5 million, or 1.1%, to $901.2 million at September 30, 2025, from $891.7 million at December 31, 2024. The following table reflects the changes in the mix of our loans held-for-portfolio at September 30, 2025, as compared to December 31, 2024 (dollars in thousands): September 30, 2025 December 31, 2024 Amount Change Percent Change One-to-four family $ 257,797 $ 269,684 $ (11,887) (4.4) % Home equity 29,903 26,686 3,217 12.1 Commercial and multifamily 408,802 371,516 37,286 10.0 Construction and land 52,797 73,077 (20,280) (27.8) Manufactured homes 42,735 41,128 1,607 3.9 Floating homes 88,674 86,411 2,263 2.6 Other consumer 17,031 17,720 (689) (3.9) Commercial business 14,214 15,605 (1,391) (8.9) Premiums for purchased loans 644 718 (74) (10.3) Deferred loan fees (2,882) (2,374) (508) 21.4 Total loans held-for-portfolio, gross 909,715 900,171 9,544 1.1 Allowance for credit losses — loans (8,564) (8,499) (65) 0.8 Total loans held-for-portfolio, net $ 901,151 $ 891,672 $ 9,479 1.1 % The increases in the loan held-for-portfolio were driven primarily by a $37.3 million, or 10.0%, increase in commercial and multifamily loans, driven by new originations and the conversion of construction projects to permanent financing, partially offset by pay-downs and normal payment amortization. Home equity loans increased by $3.2 million, or 12.1%, 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. Manufactured home loans and floating home loans increased by $1.6 million and $2.3 million, respectively, or 3.9% and 2.6%, primarily the result of seasonality as it relates to floating homes and affordability of manufactured homes in the current market as well as internal efficiencies in how we process these loans. The growth in these 31 portfolios were partially offset by a $20.3 million, or 27.8%, decline in construction and land loans largely due to project completions and a slowdown in new financing activities amid higher interest rates, as well as the payoff of a $17.0 million loan that had been risk rated as special mention. One-to-four-family loans and commercial business loans declined primarily due to loan repayments exceeding new originations. At September 30, 2025, our loan portfolio, net of deferred loan fees, remained well-diversified. At that date, commercial and multifamily real estate loans accounted for 44.8% of total loans, one-to-four family loans, including home equity loans, accounted for 31.5% of total loans, commercial business loans accounted for 1.6% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 16.3% of total loans. Construction and land loans accounted for 5.8% of total loans at September 30, 2025. Loans held-for-sale totaled $271 thousand at September 30, 2025, compared to $487 thousand at December 31, 2024. The decrease 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, 2025 2024 2025 2024 ACL — Loans: Balance at beginning of period $ 8,536 $ 8,493 $ 8,499 $ 8,760 Charge-offs (57) (20) (107) (103) Recoveries 20 6 28 16 Net charge-offs (37) (14) (79) (87) Provision for (release of) credit losses 65 106 144 (88) Balance at end of period $ 8,564 $ 8,585 $ 8,564 $ 8,585 Reserve for Unfunded Commitments: Balance at beginning of period 122 245 234 193 Provision for (release of) credit losses (10) (98) (122) (46) Balance at end of period 112 147 112 147 ACL $ 8,676 $ 8,732 $ 8,676 $ 8,732 Ratio of net charge-offs during the period to average loans outstanding during the period (0.02) % (0.01) % (0.01) % (0.01) % Our ACL — loans increased $65 thousand, or 0.8%, to $8.6 million at September 30, 2025, from $8.5 million at December 31, 2024. The increase in the ACL - loans was primarily a result of an increase in the balance of our loan portfolio, as well as higher reserves on our portfolio of other consumer loans and residential loans due to qualitative adjustments for uncertainty in market conditions and concentrations, partially offset by lower reserves due to qualitative adjustments for improved credit quality. See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2025 and 2024 — Provision for Credit Losses.” 32 The following tables show certain credit ratios at the dates and for the periods indicated and the components of each ratio's calculation (dollars in thousands). At September 30, 2025 At December 31, 2024 ACL - loans as a percentage of total loans outstanding 0.94 % 0.94 % ACL — loans $ 8,564 $ 8,499 Total loans outstanding $ 911,953 $ 901,827 Nonaccrual loans as a percentage of total loans outstanding 0.30 % 0.83 % Total nonaccrual loans $ 2,717 $ 7,491 Total loans outstanding $ 911,953 $ 901,827 ACL - loans as a percentage of nonaccrual loans 315.20 % 113.46 % ACL — loans $ 8,564 $ 8,499 Total nonaccrual loans $ 2,717 $ 7,491 ACL as a percentage of total loans outstanding 0.95 % 0.97 % ACL $ 8,676 $ 8,733 Total loans outstanding $ 911,953 $ 901,827 ACL as a percentage of nonaccrual loans 319.32 % 116.58 % ACL $ 8,676 $ 8,733 Total nonaccrual loans $ 2,717 $ 7,491 33 Three Months Ended September 30, Nine Months Ended September 30, 2025 2024 2025 2024 ($ in thousands) Net recoveries (charge-offs) during period to average loans outstanding: One-to-four family: — % — % — % — % Net (charge-offs)/recoveries $ — $ — $ — $ — Average loans outstanding $ 259,374 $ 273,113 $ 262,652 $ 275,054 Home equity: — % — % — % — % Net (charge-offs)/recoveries $ — $ — $ — $ — Average loans outstanding $ 29,166 $ 25,762 $ 28,420 $ 24,838 Commercial and multifamily real estate: — % — % — % — % Net (charge-offs)/recoveries $ — $ — $ — $ — Average loans outstanding $ 404,999 $ 343,282 $ 392,968 $ 328,361 Construction and land: — % — % — % — % Net (charge-offs)/recoveries $ — $ — — — Average loans outstanding $ 52,710 $ 97,296 $ 54,364 $ 109,884 Manufactured homes: (0.44) % — % (0.21) % (0.08) % Net (charge-offs)/recoveries $ (47) $ — $ (66) $ (23) Average loans outstanding $ 42,748 $ 39,582 $ 42,366 $ 38,277 Floating homes: — % — % — % — % Net (charge-offs)/recoveries $ — $ — $ — $ — Average loans outstanding $ 89,699 $ 84,766 $ 88,347 $ 82,177 Other consumer: 0.23 % (0.30) % (0.10) % (0.46) % Net (charge-offs) $ 10 $ (14) $ (13) $ (64) Average loans outstanding $ 17,075 $ 18,331 $ 17,407 $ 18,614 Commercial business: — % — % — % — % Net (charge-offs)/recoveries $ — $ — $ — $ — Average loans outstanding $ 15,406 $ 18,024 $ 15,041 $ 19,210 Total loans: (0.02) % (0.01) % (0.01) % (0.01) % Net (charge-offs) $ (37) $ (14) $ (79) $ (87) Average loans outstanding $ 911,177 $ 900,156 $ 901,565 $ 896,415 Nonperforming Assets. Nonperforming assets (“NPAs”), which were comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, decreased $4.4 million, or 59.1%, to $3.1 million, or 0.29% of total assets, at September 30, 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, 2024 Amount Change Percent Change Total nonperforming loans $ 2,717 $ 7,491 $ (4,774) (63.7) OREO and repossessed assets 344 — 344 — Total nonperforming assets $ 3,061 $ 7,491 $ (4,430) (59.1) % The decrease in NPAs from December 31, 2024 was primarily due to payoffs of nonaccrual loans totaling $7.7 million, including one commercial real estate loan, one floating home loan and one mortgage loan, the return of $334 thousand of loans 34 to accrual status, loan charge-offs of $261 thousand, and regular loan payments totaling $269 thousand. These decreases were partially offset by the addition of 15 loans totaling $3.8 million to nonaccrual status and $344 thousand of other real estate owned that was not included in nonperforming assets at December 31, 2024. The percentage of nonperforming loans to total loans was 0.30% at September 30, 2025, compared to 0.83% at December 31, 2024. Mortgage Servicing Rights. The fair value of mortgage servicing rights decreased $464 thousand, or 9.7%, to $4.3 million at September 30, 2025 from $4.8 million at December 31, 2024. The decrease was primarily related to a decline in the size of our mortgage servicing portfolio and an increase in the estimated cost of servicing. 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 increased $61.1 million, or 7.3%, to $898.9 million at September 30, 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 $1.1 million, or 0.9%, to $131.4 million at September 30, 2025, compared to $132.5 million at December 31, 2024. 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 14.6% of total deposits at September 30, 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, 2025 December 31, 2024 Amount Wtd. Avg. Rate Amount Wtd. Avg. Rate Noninterest-bearing demand $ 126,708 — % $ 130,095 — % Interest-bearing demand 129,570 0.28 142,126 0.34 Savings 60,106 0.10 61,252 0.10 Money market 286,827 3.18 206,067 3.60 Time deposits 291,052 3.95 295,822 4.57 Escrow (1) 4,680 — 2,437 — Total deposits $ 898,943 2.33 % $ 837,799 2.63 % (1) Escrow balances shown in noninterest-bearing deposits on the Condensed Consolidated Balance Sheets. Scheduled maturities of time deposits at September 30, 2025, are as follows (in thousands): Year Ending December 31, Amount 2025 $ 96,600 2026 168,410 2027 11,943 2028 11,895 2029 442 Thereafter 1,762 $ 291,052 Savings, demand, and money market accounts have no contractual maturity. 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, 2025 and December 31, 2024, totaled $103.9 million and $90.9 million, respectively. Deposit amounts in excess of $250,000 are not federally insured. As of September 30, 2025, uninsured deposits totaled $168.6 million, which represented 18.8% 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 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. 35 Borrowings, comprised of FHLB advances, were $25.0 million at both September 30, 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, 2025 had maturities ranging from early 2026 through early 2028. Subordinated notes, net totaled $11.8 million at both September 30, 2025 and December 31, 2024. Stockholders’ Equity. Total stockholders’ equity increased $3.8 million, or 3.7%, to $107.5 million at September 30, 2025, from $103.7 million at December 31, 2024. This increase primarily reflects $4.9 million of net income earned during the nine months ended September 30, 2025, $231 thousand of share-based compensation, an $80 thousand decrease in accumulated other comprehensive loss, net of tax, and $21 thousand related to the exercise of common stock options. These changes were partially offset by the payment of $1.5 million in cash dividends to stockholders. Average Balances, Net Interest Income, Yields Earned and Rates Paid 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. All average balances are daily average balances. 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, 2025 2024 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 910,330 $ 13,512 5.89 % $ 898,570 $ 12,876 5.70 % Investments 12,541 124 3.92 13,806 132 3.80 Cash and cash equivalents 95,422 1,016 4.22 138,240 1,830 5.27 Total interest-earning assets (1) 1,018,293 14,652 5.71 1,050,616 14,838 5.62 Interest-bearing liabilities: Savings and money market accounts 350,582 2,367 2.68 340,281 2,688 3.14 Demand and NOW accounts 132,309 103 0.31 148,252 151 0.41 Certificate accounts 291,139 2,805 3.82 303,632 3,524 4.62 Subordinated notes 11,787 168 5.65 11,745 168 5.69 Borrowings 25,000 269 4.27 40,000 434 4.32 Total interest-bearing liabilities 810,817 5,712 2.79 % 843,910 6,965 3.28 % Net interest income $ 8,940 $ 7,873 Net interest rate spread 2.91 % 2.34 % Net earning assets $ 207,476 $ 206,706 Net interest margin 3.48 % 2.98 % Average interest-earning assets to average interest-bearing liabilities 125.59 % 124.49 % Noninterest-bearing deposits $ 127,970 $ 132,762 Total deposits $ 902,000 $ 5,275 2.32 % $ 924,927 $ 6,363 2.74 % Total funding (2) $ 938,787 $ 5,712 2.41 % $ 976,672 $ 6,965 2.84 % (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 total funding. 36 Nine Months Ended September 30, 2025 2024 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 900,780 $ 39,795 5.91 % $ 895,300 $ 37,429 5.58 % Investments 11,431 355 4.15 12,607 377 3.99 Cash and cash equivalents 97,996 3,123 4.26 122,194 4,832 5.28 Total interest-earning assets (1) 1,010,207 43,273 5.73 1,030,101 42,638 5.53 Interest-bearing liabilities: Savings and money market accounts 344,274 6,684 2.60 308,845 6,669 2.88 Demand and NOW accounts 137,090 317 0.31 153,897 440 0.38 Certificate accounts 289,800 8,704 4.02 312,176 10,950 4.69 Subordinated notes 11,777 504 5.72 11,735 504 5.74 Borrowings 25,002 798 4.27 40,000 1,293 4.32 Total interest-bearing liabilities 807,943 17,007 2.81 % 826,653 19,856 3.21 % Net interest income $ 26,266 $ 22,782 Net interest rate spread 2.91 % 2.32 % Net earning assets $ 202,264 $ 203,448 Net interest margin 3.48 % 2.95 % Average interest-earning assets to average interest-bearing liabilities 125.03 % 124.61 % Noninterest-bearing deposits $ 125,370 $ 131,365 Total deposits $ 896,534 $ 15,705 2.34 % $ 906,283 $ 18,059 2.66 % Total funding (2) $ 933,313 $ 17,007 2.44 % $ 958,018 $ 19,856 2.77 % (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 total funding. Rate/Volume Analysis The following table presents, for the periods indicated, the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between changes related to outstanding balances and changes due to interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). 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). 37 Three Months Ended September 30, 2025 vs. 2024 Nine Months Ended September 30, 2025 vs. 2024 Increase (Decrease) due to Total Increase (Decrease) Increase (Decrease) due to Total Increase (Decrease) Volume Rate Volume Rate Interest-earning assets: Loans receivable $ 175 $ 461 $ 636 $ 242 $ 2,124 $ 2,366 Investments (13) 5 (8) (37) 15 (22) Cash and cash equivalents (456) (358) (814) (771) (938) (1,709) Total interest-earning assets (294) 108 (186) (566) 1,201 635 Interest-bearing liabilities: Savings and Money Market accounts 70 (391) (321) 688 (673) 15 Demand and NOW accounts (12) (36) (48) (39) (84) (123) Certificate accounts (120) (599) (719) (672) (1,574) (2,246) Subordinated notes 1 (1) — 2 (2) — Borrowings (161) (4) (165) (479) (16) (495) Total interest-bearing liabilities $ (222) $ (1,031) $ (1,253) $ (500) $ (2,349) $ (2,849) Change in net interest income $ 1,067 $ 3,484 Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2025 and 2024 General. Q3 2025 vs Q3 2024 . Net income increased $541 thousand, or 46.9%, to $1.7 million, or $0.66 per diluted common share, for the three months ended September 30, 2025, compared to $1.2 million, or $0.45 per diluted common share, for the three months ended September 30, 2024, reflecting strong growth in net interest income. The improvement was partially offset by higher provisions for credit losses, a modest decline in noninterest income, and slightly higher income taxes. Noninterest expenses remained relatively flat contributing positively to the overall increase in net income. YTD 2025 vs. YTD 2024 . Net income increased $2.2 million, or 80.7%, to $4.9 million, or $1.90 per diluted common share, for the nine months ended September 30, 2025, compared to $2.7 million, or $1.05 per diluted common share, for the nine months ended September 30, 2024, primarily driven by higher net interest income. This was partially offset by modest increases in provisions for credit losses, higher noninterest expenses, and an increase in income taxes, as well as a decrease in noninterest income. Overall, the Company’s strong interest income performance was the primarily factor behind the year-to-date improvement in profitability. Interest Income Three Months Ended September 30, Amount Change Percent Change 2025 2024 Loans, including fees $ 13,512 $ 12,876 $ 636 4.9 % Interest and dividends on investments 124 132 (8) (6.1) Cash and cash equivalents 1,016 1,830 (814) (44.5) Total interest income $ 14,652 $ 14,838 $ (186) (1.3) % Q3 2025 vs Q3 2024 . Total interest income decreased $186 thousand, or 1.3%, to $14.7 million for the three months ended September 30, 2025, from $14.8 million for the three months ended September 30, 2024, primarily due to a higher average balance of loans and a 19 basis point increase in the average yield on loans, partially offset by lower average balance of cash and cash equivalents and a 105 basis point decline in the average yield on cash and cash equivalents. 38 Interest income on loans increased $636 thousand, or 4.9%, to $13.5 million for the three months ended September 30, 2025, from $12.9 million for the three months ended September 30, 2024. The average yield on total loans rose to 5.89% for the three months ended September 30, 2025, from 5.70% for the three months ended September 30, 2024, primarily due to the origination of new loans at higher interest rates and upward repricing on variable-rate loans. The average balance of total loans was $910.3 million for the three months ended September 30, 2025, compared to $898.6 million for the three months ended September 30, 2024. Interest and dividends on investments decreased $8 thousand, or 6.1%, to $124 thousand for the three months ended September 30, 2025, compared to $132 thousand for the three months ended September 30, 2024. The decrease was due to a lower average balance, which totaled $12.5 million for the three months ended September 30, 2025, compared to $13.8 million for the three months ended September 30, 2024, resulting from regularly scheduled payments and maturities. Partially offsetting this decrease in balance, the average yield on investments increased to 3.92% for the three months ended September 30, 2025, from 3.80% for the same period in 2024, due to larger paydowns on lower yielding investments. Interest income on cash and cash equivalents decreased $814 thousand, or 44.5%, to $1.0 million for the three months ended September 30, 2025, compared to $1.8 million for the three months ended September 30, 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 4.22% for the three months ended September 30, 2025, compared to 5.27% for the three months ended September 30, 2024, as a result of lower market interest rates generally. (Refer to “ Net Interest Income ” below for additional detail regarding the interest rate environment.) The average balance of cash and cash equivalents was $95.4 million for the three months ended September 30, 2025, compared to $138.2 million for the three months ended September 30, 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, redeploying cash into higher yielding loans and a decrease in certificate accounts which contributed to the overall lower cash balance. Nine Months Ended September 30, Amount Change Percent Change 2025 2024 Loans, including fees $ 39,795 $ 37,429 $ 2,366 6.3 % Interest and dividends on investments 355 377 (22) (5.8) Cash and cash equivalents 3,123 4,832 (1,709) (35.4) Total interest income $ 43,273 $ 42,638 $ 635 1.5 % YTD 2025 vs. YTD 2024 . Total interest income increased $635 thousand, or 1.5%, to $43.3 million for the nine months ended September 30, 2025, from $42.6 million for the nine months ended September 30, 2024, due to a higher average loan balance and a 33 basis points increase in average yield on loans, as well as a 16 basis points increase in average yield on investments. These increases were partially offset by a lower average balance of cash and cash equivalents, and a 102 basis point decline in average yield on cash and cash equivalents, along with a lower average balance of investments. Interest income on loans increased $2.4 million, or 6.3%, to $39.8 million for the nine months ended September 30, 2025, compared to $37.4 million for the nine months ended September 30, 2024, primarily driven by a 33 basis point increase in the average yield on loans. The average yield on total loans was 5.91% for the nine months ended September 30, 2025, compared to 5.58% for the nine months ended September 30, 2024. The average yield on total loans increased primarily due to recognition of interest income from the payoff of loans previously on nonaccrual, variable rate loans adjusting to higher market interest rates, and new loan originations at higher interest rates. The average balance of total loans was $900.8 million for the nine months ended September 30, 2025, compared to $895.3 million for the nine months ended September 30, 2024. Interest income on cash and cash equivalents decreased $1.7 million, or 35.4% to $3.1 million for the nine months ended September 30, 2025, compared to $4.8 million for the nine months ended September 30, 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 declined to 4.26% for the nine months ended September 30, 2025, compared to 5.28% for the nine months ended September 30, 2024, as a result of lower market interest rates generally. (Refer to “ Net Interest Income ” below for additional detail regarding the interest rate environment.) The average balance of cash and cash equivalents was $98.0 million for the nine months ended September 30, 2025, compared to $122.2 million for the nine months ended September 30, 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, the redeployment of cash into higher yielding loans and a decrease in certificate accounts which contributed to the overall lower cash balance. 39 Interest Expense Three Months Ended September 30, Amount Change Percent Change 2025 2024 Deposits $ 5,275 $ 6,363 $ (1,088) (17.1) % Borrowings 269 434 (165) (38.0) Subordinated notes 168 168 — — Total interest expense $ 5,712 $ 6,965 $ (1,253) (18.0) % Q3 2025 vs Q3 2024 . Total interest expense decreased $1.3 million, or 18.0%, to $5.7 million for the three months ended September 30, 2025, from $7.0 million for the three months ended September 30, 2024. The decrease was primarily attributable to lower interest rates across most interest-bearing liabilities, resulting from lower market interest rates generally, as well as a $222 thousand decrease related to lower average liability balances, particularly in certificate accounts and borrowings. Interest expense on certificate accounts declined $719 thousand, driven by a $120 thousand volume-related decrease and a $599 thousand rate-related decrease. The average balance of certificate accounts declined to $291.1 million for the three months ended September 30, 2025, from $303.6 million during the same period in 2024, while the average rate paid decreased to 3.82% from 4.62%. These declines reflect the continued runoff and repricing of higher-rate time deposits originated in prior periods, and our strategy to focus on non-maturity interest-bearing deposits. In addition, interest expense on savings and money market accounts decreased $321 thousand, or 11.94%, to $2.4 million for the three months ended September 30, 2025, from $2.7 million for the same period in 2024. The decrease was driven entirely by lower average rate paid on these accounts, which declined 46 basis points to 2.68% from 3.14%. The rate decrease reflects repricing strategies implemented to manage overall funding costs in a stabilizing rate environment, partially offset by higher average balances, which increased to $350.6 million from $340.3 million, reflecting shifts in customer deposit preferences, as well as higher rates offered on some of these products as compared to new certificate accounts. The interest expense on demand and NOW accounts decreased $48 thousand, due to both lower average balances and slightly lower rates. Interest expense on borrowings, comprised solely of FHLB advances, decreased $165 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 September 30, 2025, compared to $40.0 million for the three months ended September 30, 2024. The average rate paid on borrowings decreased five basis points to 4.27% for the quarter ended September 30, 2025, compared to 4.32% for the same quarter in 2024. Interest expense on subordinated notes was $168 thousand for both the three months ended September 30, 2025 and the three months ended September 30, 2024, with no material changes in the average balance or rate paid. On October 1, 2025, we redeemed $4.0 million of the $12.0 million of our outstanding subordinated notes. Nine Months Ended September 30, Amount Change Percent Change 2025 2024 Deposits $ 15,705 $ 18,059 $ (2,354) (13.0) % Borrowings 798 1,293 (495) (38.3) Subordinated notes 504 504 — — Total interest expense $ 17,007 $ 19,856 $ (2,849) (14.3) % YTD 2025 vs. YTD 2024 . Total interest expense decreased $2.8 million, or 14.3%, to $17.0 million for the nine months ended September 30, 2025, from $19.9 million for the nine months ended September 30, 2024. Interest expense on deposits decreased $2.4 million, or 13.0%, to $15.7 million for the nine months ended September 30, 2025, compared to $18.1 million for the nine months ended September 30, 2024. The decrease was primarily the result of lower average rates paid on all categories of interest-bearing deposits, as well as a lower average balance of demand and NOW accounts, and certificate accounts, partially offset by an increase in the average balance of savings and money market accounts. The average cost of total deposits decreased 32 basis points to 2.34% for the nine months ended September 30, 2025, from 2.66% for the nine months ended September 30, 2024. Interest expense on borrowings, comprised solely of FHLB advances, was $798 thousand for the nine months ended September 30, 2025, compared to $1.3 million for the nine months ended September 30, 2024, reflecting the decreased use of FHLB advances to supplement our liquidity needs. The average cost of FHLB advances decreased five basis points to 4.27% for the nine months ended September 30, 2025, compared to 4.32% for the same period in 2024. The average cost of FHLB advances declined due to same reason noted above in the quarterly comparison. The average balance of FHLB advances was $25.0 million for the nine months ended September 30, 2025, compared to $40.0 million for the nine months ended 40 September 30, 2024, due to the payoff of an FHLB advance during the fourth quarter of 2024. Interest expense on subordinated notes was $504 thousand for both the nine months ended September 30, 2025 and nine months ended September 30, 2024. On October 1, 2025, we redeemed $4.0 million of the $12.0 million of our outstanding subordinated notes. Net Interest Income. Q3 2025 vs Q3 2024 . Net interest income increased $1.1 million, or 13.6%, to $8.9 million for the three months ended September 30, 2025, from $7.9 million for the three months ended September 30, 2024. The increase 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, as well as higher average yields on interest-earning assets due to the recognition of interest income from the payoff of loans previously on nonaccrual, variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates. These increases were partially offset by a decrease in the average balance of interest-earning assets. Overall, the decline in average funding costs and increase in average yield on loans primarily contributed to a 57 basis point improvement in the net interest rate spread and a 50 basis point increase in the annualized net interest margin, which rose to 3.48% for the three months ended September 30, 2025, compared to 2.98% for the same period in 2024. YTD 2025 vs. YTD 2024 . Net interest income increased $3.5 million, or 15.3%, to $26.3 million for the nine months ended September 30, 2025, from $22.8 million for the nine months ended September 30, 2024. Net interest margin (annualized) was 3.48% and 2.95% for the nine months ended September 30, 2025 and 2024, respectively. The increases in net interest income and net interest margin primarily were due to the lower average cost of funding and the increase in average loan yields, as described above in the quarterly comparison. 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 lowered the target range 100 basis points to 4.25% to 4.50% between September 2024 and December 2024. The target rate range remained at this level until September 2025, when the FOMC implemented an additional 25 basis point reduction, lowering the target range to 4.00% to 4.25%. 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. 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, 2025 2024 2025 2024 Provision for (release of) credit losses on loans $ 65 $ 106 $ 144 $ (88) Release of credit losses on unfunded loan commitments (10) (98) (122) (46) Provision for (release of) credit losses $ 55 $ 8 $ 22 $ (134) A provision for credit losses of $55 thousand was recorded for the quarter ended September 30, 2025, compared to a provision for credit losses of $8 thousand for the quarter ended September 30, 2024. The larger provision in the current quarter, primarily reflects the significant release of unfunded commitment reserves in the third quarter of 2024. That release was largely driven by both a reduction in unfunded balances as projects were completed and improvements in qualitative factors within the construction loan segment due to improved economic conditions. The provision for credit losses on loans in the current quarter was lower relative to the third quarter of 2024 due to lower loan portfolio growth during the current quarter as compared to the same quarter one year ago and a lower loss reserve rate, which was partially influenced by improving credit quality. Net charge-offs for the three months ended September 30, 2025 totaled $37 thousand, compared to $14 thousand for three months ended September 30, 2024. A provision for credit losses of $22 thousand was recorded for the nine months ended September 30, 2025, compared to a release of credit losses of $134 thousand for the nine months ended September 30, 2024. The provision for credit losses during the current year period was due primarily to a larger overall loan portfolio, largely contributing to the need for a provision in the current year period, as compared to a decline in loan growth in the prior year period. Qualitative adjustments remained largely consistent throughout 2025, with the exception of new adjustments for increased uncertainty about economic conditions and a decline in commercial real estate values. During the prior year period, 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, the weighted average life of the portfolio, and enhancements to the loss model, including an 41 additional qualitative adjustment related to loan review. Net charge-offs for the nine months ended September 30, 2025 totaled $79 thousand, compared to $87 thousand for nine months ended September 30, 2024. Expected credit loss estimates are based on a range of factors, including market conditions, borrower-specific information, projected delinquencies, and anticipated effects of economic trends on 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, 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 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 adjustment of reserves based upon their judgment of information available to them at the time of their examination. Noninterest Income. Total noninterest income decreased $354 thousand, or 28.7%, to $881 thousand for the three months ended September 30, 2025, as compared to $1.2 million for the three months ended September 30, 2024, as reflected below (dollars in thousands): Three Months Ended September 30, Amount Change Percent Change 2025 2024 Service charges and fee income $ 672 $ 628 $ 44 7.0 % Earnings on BOLI 225 186 39 21.0 Mortgage servicing income 262 280 (18) (6.4) Fair value adjustment on mortgage servicing rights (372) 101 (473) (468.3) Net gain on sale of loans 94 40 54 135.0 Total noninterest income $ 881 $ 1,235 $ (354) (28.7) % The decrease in noninterest income was primarily due to: • a $473 thousand decline in the fair value adjustment on mortgage servicing rights due to an overall smaller servicing portfolio, as well as a lower market valuation due to a change in one of our assumptions which assumed higher costs to service loans than previously estimated; and • an $18 thousand decrease in mortgage servicing income as a result of the portfolio paying down at a faster rate than originations replaced repayments; These decreases were partially offset by: • a $44 thousand increase in service charges and fee income, primarily due to higher interchange income in the current quarter; • a $39 thousand increase in earnings on BOLI, primarily due to the strategic surrender and exchange of existing policies into higher yielding policies in the first quarter of 2025, with the benefit of improved yields continuing to the third quarter. • a $54 thousand increase in net gain on sale of loans due to an increase in the volume of loans sold. 42 Total noninterest income decreased $396 thousand, or 11.3%, to $3.1 million for the nine months ended September 30, 2025, as compared to $3.5 million for the nine months ended September 30, 2024, as reflected below (dollars in thousands): Nine Months Ended September 30, Amount Change Percent Change 2025 2024 Service charges and fee income $ 2,020 $ 2,001 $ 19 0.9 % Earnings on BOLI 648 498 150 30.1 Mortgage servicing income 794 841 (47) (5.6) Fair value adjustment on mortgage servicing rights (551) (81) (470) 580.2 Net gain on sale of loans 187 205 (18) (8.8) Other income $ — $ 30 $ (30) (100.0) % Total noninterest income $ 3,098 $ 3,494 $ (396) (11.3) % The decrease in noninterest income was primarily due to: • a $470 thousand decrease in fair value adjustment on mortgage servicing rights, for the same reasons noted above in the quarterly comparison; • a $47 thousand decrease in mortgage servicing income as a result of the portfolio paying down at a faster rate than originations replaced repayments; • a $30 thousand decrease in other income due to a prior year gain on disposal of assets due to insurance claims on the loss of fully depreciated assets and no comparable gain in the current period; and • a $18 thousand decrease in net gain on sale of loans due to fewer loans sold. These decreases were partially offset by; • a $150 thousand increase in earnings on BOLI, primarily due to the strategic surrender and exchange of existing policies into higher-yielding policies in 2025, as well as changes due to market fluctuations; and • a $19 thousand increase in service charges and fee income, reflecting higher fees from new client acquisitions in specialty banking deposit accounts, increased interchange income, and a Mastercard volume incentive received in the first quarter of 202, partially offset by a second-quarter 2024 recovery of potential lost fee income related to a vendor error. Noninterest Expense. Total noninterest expense remained relatively unchanged during the three months ended September 30, 2025, compared the three months ended September 30, 2024, as reflected below (dollars in thousands): Three Months Ended September 30, Amount Change Percent Change 2025 2024 Salaries and benefits $ 4,259 $ 4,469 $ (210) (4.7) % Operations 1,483 1,540 (57) (3.7) % Regulatory assessments 221 189 32 16.9 % Occupancy 431 414 17 4.1 % Data processing 1,274 1,067 207 19.4 % Net loss (gain) on OREO and repossessed assets 8 — 8 — % Total noninterest expense $ 7,676 $ 7,679 $ (3) — % While overall noninterest expense remained flat, there were fluctuations within certain expense categories, as noted below: • a $210 thousand decrease in salaries and benefits related to higher deferred salaries resulting from higher loan originations in the current quarter than in the same quarter one year ago; and • a $57 thousand decrease in operations expense, primarily due to lower expenses across various accounts, resulting from ongoing cost-saving initiatives and process improvements, as well as the impact of timing of expenses, including marketing campaigns and charitable contributions. These decreases were partially offset by: 43 • a $207 thousand increase in data processing expenses, reflecting the amortization of projects implemented at the end of the third quarter of 2024, as well as the deployment of new software technology in 2025 that continues to streamline operations and processes; • a $32 thousand increase in regulatory assessments, due to higher accruals in the current year based on an increase in estimated exam costs; and • a $17 thousand increase in occupancy expense, due to higher building lease charges in 2025 resulting from lease renewals and maintenance charges. The efficiency ratio for the quarter ended September 30, 2025 was 78.16%, compared to 84.31% for the quarter ended September 30, 2024. The improvement in the efficiency ratio was primarily due to higher net interest income resulting from lower funding costs. Total noninterest expense increased $179 thousand, or 0.8%, to $23.3 million during the nine months ended September 30, 2025, compared to $23.1 million during the nine months ended September 30, 2024, as reflected below (dollars in thousands): Nine Months Ended September 30, Amount Change Percent Change 2025 2024 Salaries and benefits $ 13,175 $ 13,670 $ (495) (3.6) % Operations 4,291 4,566 (275) (6.0) Regulatory assessments 663 598 65 10.9 Occupancy 1,284 1,255 29 2.3 Data processing 3,821 2,995 826 27.6 Net loss (gain) on OREO and repossessed assets 19 (10) 29 (290.0) Total noninterest expense $ 23,253 $ 23,074 $ 179 0.8 % The increase in noninterest expense was primarily due to: • an $826 thousand increase in data processing expenses, due to the reasons stated above in the quarterly comparison, as well as new software technology being deployed in 2025 that continues to streamline our operations; • a $65 thousand increase in regulatory assessments, due to higher accruals in the current year based on an increase in estimated exam costs; • a $29 thousand increase in occupancy expense due to same reason noted above in the quarterly comparison; and • a $29 thousand increase in OREO and repossessed assets related-expense, due to the addition of new properties in 2025 and the absence of property sales in the current year. These increases were partially offset by: • a $495 thousand decrease in salaries and benefits related to lower incentive compensation expense as a result of changes to the calculation of incentive compensation; and • a $275 thousand decrease in operations expense, primarily due to lower expenses across various accounts resulting from ongoing cost saving initiatives and process improvements. Income Tax Expense . The provision for income taxes was $395 thousand and $1.2 million for the three and nine months ended September 30, 2025, compared to $267 thousand and $617 thousand for the three and nine months ended September 30, 2024, respectively. The effective tax rates for the three and nine months ended September 30, 2025 were 18.90% and 19.30%, compared to 18.79% and 18.50% for the same periods in 2024. The increase in the effective tax rate for the nine months ended September 30, 2025, compared to the nine months ended September 30, 2024, was primarily due to taxable earnings on BOLI in 2025, resulting from the surrender and exchange of existing BOLI policies in-to higher yielding policies. On July 4, 2025, the President of the United States signed into law the One Big Beautiful Bill Act (“OBBBA”). Except for certain provisions, the OBBBA is effective for tax years beginning on or after January 1, 2025 and permanently extends key business tax breaks originally enacted under the 2017 Tax Cuts and Jobs Act. The Company evaluated the potential impact of this legislation on its income tax provision and determined that the impact was not material to our consolidated financial statements. 44 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 2024 Form 10-K, this discussion updates that disclosure for the nine months ended September 30, 2025. Capital. Stockholders’ equity totaled $107.5 million at September 30, 2025 and $103.7 million at December 31, 2024. In addition to net income of $4.9 million, other sources of capital during the nine months ended September 30, 2025 primarily included $231 thousand related to stock-based compensation, $80 thousand of other comprehensive income, net of tax, primarily resulting from lower unrealized losses on available for sale securities, and $21 thousand in proceeds from stock option exercises. Uses of capital during the nine months ended September 30, 2025 primarily included $1.5 million of dividends paid on common stock. We paid cash dividends of $0.57 per common share during the nine months ended September 30, 2025 and September 30, 2024, which equates to a dividend payout ratio of 29.75% and 53.66%, 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 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 September 30, 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. Stock Repurchase Programs. From time to time, our Board of Directors has authorized stock repurchase programs. In general, stock repurchases allow us to proactively manage our capital position and return excess capital to stockholders. Stock repurchases may also offset the dilutive effects of stock compensation awards. 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. Liquidity measures the ability to meet current and future cash flow needs. The liquidity of a financial institution reflects its ability to meet loan requests, accommodate possible outflows in deposits and take advantage of potential opportunities presented by changes in market interest rates. 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 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. Asset liquidity is provided by assets that are readily marketable or pledgeable or that will mature in the near future. Liquid asset sources generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flows from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold. Liability liquidity generally is provided by access to funding sources, which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions. We continuously monitor our liquidity position and adjust the balance between sources and uses of funds as we deem appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model 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. 45 As of September 30, 2025, we had $108.8 million in cash and cash equivalents and available-for-sale investment securities, and $271 thousand in loans held-for-sale. At September 30, 2025, we had the ability to borrow $158.9 million in FHLB advances and access to additional borrowings of $19.5 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 September 30, 2025. We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding, at September 30, 2025. Subject to market conditions, we expect to utilize these borrowing facilities from time to time to fund loan originations and deposit withdrawals, to satisfy other financial commitments, to repay maturing debt and to take advantage of investment opportunities to the extent feasible. As of September 30, 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. For additional details, see “Note 8—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Condensed Consolidated Financial Statements contained in "Item 1. Financial Statements" of this Form 10-Q. 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, 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). See the discussion below for information regarding commitments to extend credit and standby letters of credit. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments generally represent commitments to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit- and interest-rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets. The Company's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established by the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the client. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments are not reflected in the condensed consolidated financial statements. The Company evaluates each client's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the client. At September 30, 2025 and December 31, 2024, financial instrument contractual amounts representing credit risk were as follows (in thousands): September 30, 2025 December 31, 2024 Residential mortgage commitments $ 4,372 $ 3,758 Unfunded construction commitments 19,640 25,810 Unused lines of credit 30,186 26,105 Irrevocable letters of credit 183 163 Total loan commitments $ 54,381 $ 55,836 Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on its outstanding debt, and other general corporate expenses. Sound Financial Bancorp is a holding company and does not conduct operations; its sources of liquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources. 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 2024 Form 10-K. At September 30, 2025, Sound Financial Bancorp, on an unconsolidated basis, had $6.3 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. Subsequent to September 30, 2025, the Company utilized $4.0 million to partially redeem its outstanding subordinated notes. See “Note 8 — Borrowings” for additional detail. See also the “Condensed Consolidated Statements of Cash Flows” included in “Item 1. Financial Statements and Supplementary Data” of this Form 10-Q, for further information. 46 Regulatory Capital Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action (“PCA”). 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, 2025, the Bank’s and the Company’s CBLRs were 10.71% and 10.14%, respectively, which exceeded the minimum requirement of 9%. In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. The capital relief is phased into regulatory capital at 25% per year over a three-year transition period. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023 and elected to phase in the full effect of CECL on regulatory capital over the three-year transition period. See "Part I, Item 1. Business – Regulation of Sound Community Bank – Capital Rules " in the Company's 2024 Form 10-K for additional information related to regulatory capital. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company provided information about market risk in Item 7A of its 2024 Form 10-K. There have been no material changes in our market risk since our 2024 Form 10-K.