What changed in this filing

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Item 1A. Risk Factors

2026-03-18 compared with 2025-03-18 · 84 added, 62 removed, 277 unchanged (35% of the section changed)

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Accordingly, local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans.

Further, as a result of a high concentration of our customer base in the Puget Sound area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses with a large employee base in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Broader economic factors such as inflation, unemployment and money supply fluctuations also may adversely affect our profitability.

Further, as a result of a high concentration of our customer base in the Puget Sound and eastern Washington state regions, a deterioration in the business environment in these areas, or the financial challenges of one or more large employers in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Broad economic factors such as inflation, unemployment and money supply fluctuations, changes in monetary policy expectations, and volatility in interest rate markets also may adversely affect our profitability.

Uncertainty regarding the timing and magnitude of potential interest rate reductions by the Federal Reserve, following a prolonged period of elevated interest rates, may negatively affect borrowing demand, asset yields, deposit pricing, and overall economic activity in our market areas.

Furthermore, trade disputes,

trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers.

These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.

These developments may, in turn, negatively impact our clients’ operations and, consequently, our financial performance.

A deterioration in economic conditions in the markets we serve, in particular the Puget Sound area and western region of Washington State, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

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• Reduction in our low-cost or noninterest-bearing deposits.

Moreover, a significant decline in local, regional or national economic conditions caused by inflation, recession, severe weather, natural disasters, widespread disease or pandemics, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, trade-related pressures that may affect construction costs or materials availability, unemployment or other factors beyond our control could negatively affect the financial results of our banking operations.

Moreover, a significant decline in local, regional or national economic conditions caused by inflation, recession, economic slowdown, severe weather, natural disasters, widespread disease or pandemics, sustained higher interest rates, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, trade-related pressures that may affect construction costs or materials availability, unemployment or other factors beyond our control could negatively affect the financial results of our banking operations.

Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses.

Monetary policy, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve.

Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance.

tariffs on imported goods could exacerbate inflationary pressures by increasing the cost of goods and materials for businesses and consumers.

This may particularly affect small to medium-sized businesses, as they are less able to leverage economies of scale to mitigate cost pressures compared to larger businesses.

Consequently, our business clients may experience increased financial strain, reducing their ability to repay loans and adversely impacting our results of operations and financial condition.

Furthermore, a prolonged period of inflation could cause wages and other costs to us to increase, which could adversely affect our results of operations and financial condition.

Virtually all of our assets and liabilities are monetary in nature and, as a result, market interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation.

However, interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services, creating additional uncertainty in the economic environment.

Our financial condition and results of operations are influenced by monetary, fiscal, and trade policies, including those of the Federal Reserve, the U.S.

Treasury, and other governmental authorities.

Actions by these authorities may lead to inflation, deflation, changes in interest rates, or other economic conditions that could materially adversely affect our results of operations.

Tariffs, supply-chain disruptions, or rising costs could reduce the ability of our clients, particularly small- and medium-sized businesses, to repay loans, negatively affecting credit quality and financial performance.

Prolonged inflation may increase operational costs, including wages and benefits, while fluctuations in interest rates and the yield curve can significantly impact our net interest income.

Interest rates may not move in alignment with inflation or deflation, adding uncertainty to the economic environment.

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Risks Related to Our Lending

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Moreover, a substantial portion of our commercial and multifamily real estate loans do not fully amortize and include substantial balloon payments upon maturity.

These balloon payments may require the borrower to either sell or refinance the property, potentially heightening the risk of default or non-payment.

In the event of a foreclosure on a commercial or multifamily real estate loan, our holding period for the collateral tends to be more extended compared to one-to-four family residential loans.

This elongated holding period results from a limited pool of potential purchasers for the collateral.

These balloon payments may require the borrower to either sell or refinance the property, and refinancing may be difficult or unavailable due to elevated interest rates, tighter underwriting standards, declining property values, or reduced lender appetite, heightening the risk of default or non-payment.

In the event of a foreclosure on a commercial or multifamily real estate loan, our holding period for the collateral tends to be longer compared to one-to-four family residential loans.

This extended holding period results from a limited pool of potential purchasers for the collateral.

In recent years, the commercial real estate market has experienced substantial growth, with increased competition contributing to historically low capitalization rates and rising property values.

However, the economic disruption caused by the COVID-19 pandemic significantly impacted this market.

The pandemic also accelerated the adoption of remote work, which has led many companies to re-evaluate their long-term real estate needs.

While some businesses are returning to traditional office environments, others are downsizing or shifting to hybrid models, creating uncertainty in demand for office space and other commercial properties.

This trend could result in prolonged vacancies, declining rental income, and reduced property values, adversely affecting the performance of our commercial real estate loan portfolio.

Federal banking regulators also have raised concerns about weaknesses in the commercial real estate market.

More recently, the commercial real estate market has been affected by higher interest rates, tighter credit conditions, and changing economic and workplace dynamics.

The adoption of remote and hybrid work models has led many companies to re-evaluate their long-term real estate needs.

Although certain employers have increased in-office requirements, others are downsizing or shifting to hybrid models, and demand for office space in certain markets has remained structurally lower than pre-pandemic levels, creating uncertainty in demand for office space and other commercial properties.

This trend could result in prolonged vacancies, declining rental income, refinancing challenges, and reduced property values, particularly for

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certain property types or markets, adversely affecting the performance of our commercial real estate loan portfolio.

Federal banking regulators have increased supervisory focus on commercial real estate exposures, particularly with respect to refinancing risk, collateral valuation, and borrower equity levels, which may subject us to heightened examination scrutiny, additional risk management expectations, or more conservative supervisory expectations.

Failures in our risk management policies and controls could lead to higher delinquencies and losses, adversely affecting our business, financial condition, and results of operations.

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Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.

A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value.

A borrower’s cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.

Most often, this collateral includes accounts receivable, inventory, equipment or real estate.

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Future additions to our allowance for credit losses on loans, as well as charge-offs in excess of reserves, will reduce our earnings.

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Our business relies significantly on the creditworthiness of our customers.

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• our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics and the present value of the expected future cash flows or the fair value of the underlying collateral.

The determination of the appropriate allowance for credit losses involves a significant degree of subjectivity, relying on substantial estimates of both current credit risks and future trends, all of which are subject to potential material changes.

Inaccuracies in our estimations could lead to an insufficient allowance for credit losses, necessitating increases through provisions for credit losses, adversely impacting our net income.

Additionally, as we acknowledge the potential impact of significant portfolio growth, new loan products, and refinancing activities, these actions may result in portfolios consisting of unseasoned loans that may not perform as anticipated, elevating the risk of an inadequate allowance to absorb losses without additional provisions.

Bank regulatory agencies also periodically review our allowance for credit losses on loans.

Based on their assessment, they may require increased provisions or loan charge-offs.A material decrease in the credit quality of our loan portfolio, significant changes in the risk profile of markets, industries, or customer groups, or inadequacy in the allowance for credit losses could have a materially adverse impact on our business, financial condition, liquidity, capital, and results of operations.

The determination of the appropriate allowance for credit losses involves a significant degree of subjectivity and judgment, relying on substantial estimates of both current credit risks and future economic and portfolio trends, all of which are subject to change.

Inaccuracies in our estimates could result in an allowance for credit losses that is insufficient to absorb actual losses, and changes in economic forecasts, borrower performance, or asset-class conditions may result in period-to-period volatility in our provision for credit losses, which could adversely impact our net income.

Additionally, significant portfolio growth, the introduction of new loan products, or increased refinancing activity may result in portfolios consisting of unseasoned loans that may not perform as anticipated, increasing the risk that our allowance for credit losses may prove inadequate without additional provisions.

Environmental and climate-related events, including wildfires, flooding, mudslides, hurricanes, or other natural disasters, including recent events in our market regions, may adversely affect borrowers’ ability to repay loans, reduce the value of collateral, and increase uncertainty in estimating credit losses.

These factors may require increases to our allowance for credit losses to account for elevated credit risks.

Bank regulatory agencies periodically review our allowance for credit losses and related methodologies and, based on their assessments, may require increased provisions or loan charge-offs.

A material deterioration in the credit quality of our loan portfolio, significant changes in the risk profile of markets, industries, or customer groups, or an inadequately maintained allowance for credit losses could have a material adverse effect on our business, financial condition, liquidity, capital, and results of operations.

Risks Related to Market and Interest Rate Changes

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Shifts in interest rates can also impact the average lifespan of loans and mortgage-backed securities.

In periods of rising interest rates, the growth rate of interest income from our interest-earning assets might lag behind the accelerating interest expenses on our interest-bearing liabilities.

Conversely, declining interest rates can trigger increased loan prepayments and mortgage-backed security redemptions as borrowers seek lower borrowing costs through refinancing.

In periods of interest rate volatility, prolonged elevated rates, or an uncertain rate-cutting environment, the growth rate of interest income from our interest-earning assets might lag behind the accelerating interest expenses on our interest-bearing liabilities or decline more rapidly than anticipated as assets reprice.

In addition, periods of declining or volatile interest rates, or changes in borrower refinancing behavior, may trigger increased loan prepayments and mortgage-backed security redemptions.

This introduces reinvestment risk, where the challenge lies in reinvesting prepayments at rates comparable to those initially earned on the prepaid loans or securities.

Moreover, an inverted interest rate yield curve, wherein short-term interest rates (which are usually the rates at which financial institutions borrow funds) surpass long-term rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans), can compress a financial institution's net interest margin.

This occurrence poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans.

Moreover, changes in the shape of the interest rate yield curve, including an inverted or rapidly flattening yield curve, can compress a financial institution’s net interest margin.

This poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans.

As of December 31, 2025 , approximately 50.1% of our loan portfolio consisted of fixed-rate loans, potentially exposing us to these risks.

As of December 31, 2024 , our deposit composition included $274.3 million in certificates of deposit maturing within one year and $542.0 million in noninterest-bearing, NOW checking, savings, and money market accounts.

In a rising rate environment, retaining deposits can become costlier.

Rising rates can also increase the cost of deposits and other funding sources.

If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline.

Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment.

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A sustained and substantial change in market interest rates could significantly impact our financial condition, liquidity, and operational results.

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In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts’ reports.

Changes in interest rates can also have an adverse effect on our financial condition, as our AFS securities are reported at their estimated fair value and therefore are impacted by fluctuations in interest rates.

Changes in interest rates can also adversely affect our financial condition, as our AFS securities are reported at their estimated fair values and therefore are impacted by fluctuations in interest rates.

We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the AFS securities, net of taxes.

Declines in market value could result in credit losses on these assets, which would lead to accounting charges that could

have a material adverse effect on our net income and capital levels.

Declines in market value could result in credit losses on these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

At December 31, 2025, we had no allowance for credit losses on securities.

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These parties may attempt to deceive employees, customers, or system users to extract confidential information, thereby gaining access to our data or that of our customers.

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Our operations heavily rely on the secure processing, transmission, and storage of confidential information within our computer systems and networks, managed directly by us or through third-party data processing vendors.

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As a result, continuously developing and enhancing our information security controls, processes, and practices to safeguard customer information, systems, computers, software, data, and networks remains a management priority.

With the evolving nature of cyber threats, we may need to allocate significant additional resources to bolster our protective measures or investigate and

address crucial information security vulnerabilities or exposures.

With the evolving nature of cyber threats, we may need to allocate significant additional resources to bolster our protective measures or investigate and address crucial information security vulnerabilities or exposures.

Despite our efforts, they might not prevent all physical and electronic intrusions, denial of service, cyber-attacks, or security breaches.

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Operational risks also arise from potential system failures, over-reliance on AI, and integration challenges with existing infrastructure.

Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and customer support.

Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and

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customer support.

Ethical and reputational risks, including unintended consequences or perceived unfairness in AI-driven decisions, may erode customer trust and expose us to regulatory scrutiny.

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Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations.

Many national vendors provide turn-key services to community banks, such as internet

banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements.

Many national vendors provide turn-key services to community banks, such as internet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements.

We may not be able, however, to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

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Any adverse change in the FinCEN guidance noted above, any new regulations or legislation, any change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a negative impact on our non-interest income, as well as the cost of our operations, increasing our cost of regulatory compliance and of doing business and/or otherwise affect us, which may materially affect our profitability.

Moreover, our failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations.

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and results of operations.

See “Part I, Item 1.

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Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending, should perform a risk assessment to identify concentrations.

A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital (or in the case of a bank, such as the Bank, that has elected to follow the CBLR framework, CBLR Capital (Tier 1 capital plus the entire allowance for loan and lease losses), or (ii) total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital or CBLR Capital, as appropriate, and the outstanding

balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.

The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).

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In addition, at December 31, 2025, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 355.2% of CBLR Capital.

While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

Although our total commercial real estate loans exceeded 300% of CBLR Capital at December 31, 2025, the outstanding balance of our commercial real estate loan portfolio has not increased by 50% or more during the preceding 36 months.

Our banking regulators may nevertheless determine that the level of our commercial real estate lending warrants enhanced risk management practices.

Regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

Our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and we use estimates in determining the fair value of certain of our assets, which estimates may prove to be imprecise and result in significant changes in valuation.

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An additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on the effective interest method, and credit losses, recognized upfront at origination.

This asymmetry might create the perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses.

This asymmetry might create the

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perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses.

Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized.

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

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social, and governance (“ESG”) practices and disclosure.

Investor advocacy groups, investment funds, and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, and human rights.

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

In recent years, companies have faced scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social, and governance (“ESG”) practices and disclosure.

Investor advocacy groups, investment funds, and influential investors are also focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, and human rights.

Increased ESG-related compliance costs could result in increases to our overall operational costs.

Failure to adapt to or comply with regulatory requirements, or investor or stakeholder expectations and standards, could negatively impact our reputation, ability to do business with certain partners, and our stock price.

Recent changes in the regulatory landscape under the new Trump administration have moved toward a reduction in emphasis on certain ESG priorities, particularly around climate change and diversity, equity, and inclusion (“DEI”).

Recent changes in the regulatory landscape and shifting federal priorities have moved toward a reduction in emphasis on certain ESG priorities, particularly around climate change and diversity, equity, and inclusion (“DEI”).

This shift is leading to the rollback of regulations that mandate specific disclosures and operational practices in these areas.

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Several factors influence our liquidity, including (i) interest rate trends and competition affecting deposit flows and loan prepayments and (ii) potential limitations arising from changes in FHLB of Des Moines’ underwriting guidelines, which could restrict our borrowing capacity.

While historically we have successfully replaced maturing deposits and borrowings, future replacements may be challenged by shifts in our financial condition, FHLB of Des Moines’ status, or market conditions.

While in prior periods we have successfully replaced maturing deposits and borrowings, deposit balances across the banking industry have become more rate-sensitive and responsive to market perceptions, and future replacements may be challenged by shifts in our financial condition, FHLB of Des Moines’ status, or market conditions.

Our access to adequate funding, vital for our activities, could be hindered by specific issues impacting us or broader industry and economic concerns.

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The effects of climate change continue to raise significant concerns about the state of the environment.

However, under the new Trump administration, federal policy may shift to reduce the emphasis on climate change initiatives and environmental regulations.

This could include scaling back federal participation in international agreements, such as the Paris Agreement, and reducing regulatory pressures on businesses, including banks, to address climate-related risks.

Legislative and regulatory proposals aimed at combating climate change may face greater scrutiny or diminished priority.

Federal and state policy approaches to climate change continue to evolve, and changes in legislative or regulatory priorities could alter the requirements and expectations placed on businesses, including banks, to address climate-related risks.

The lack of empirical data regarding the financial and credit risks posed by climate change makes it difficult to predict its specific impact on our financial condition and results of operations.

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Moreover, climate change may adversely affect regional and local economic activity, harming our customers and the communities in which we operate.

Regardless of changes in federal policy, the effects of climate change and their unknown long-term impacts could still have a material adverse effect on our financial condition and results of operations.

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

Regardless of changes in federal policy,

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the effects of climate change and their unknown long-term impacts could still have a material adverse effect on our financial condition and results of operations.

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

We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face.

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As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified.

If our risk management

framework proves ineffective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially adversely affected.

If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially adversely affected.

We are subject to certain risks in connection with our data management or aggregation.

We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management.

Our ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed.

While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure.

Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.

We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and decision-making.

Deficiencies in how data is acquired, validated, stored, protected, or processed, as well as the manual nature of many of our data management and aggregation processes, could lead to human error or system failures.

Inaccurate, incomplete, or delayed data could limit our ability to identify, measure, and manage current and emerging risks, impair management decision-making, and hinder our ability to respond to changing business conditions.

These shortcomings could also adversely affect our financial reporting, regulatory compliance, operational efficiency, and strategic initiatives.

Any of these outcomes could materially and adversely affect our business, financial condition, results of operations, and growth prospects.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed, or the cost of that capital may be exceedingly high.

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The Company's ability to pay dividends, repurchase stock and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company.

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The Company is a separate legal entity from its subsidiary bank and does not have significant operations of its own.

The long-term ability of the Company to pay dividends to its stockholders, repurchase its stock and make debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level.

The long-term ability of the Company to pay dividends to its stockholders, repurchase its stock and make debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and on the availability of cash at the holding company level.

The availability of dividends from the Bank is limited by the Bank's earnings and capital, as well as various statutes and regulations.

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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-K

Item 1A. Risk Factors