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 but 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 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, inflation, a recession, or slowed economic growth; • changes in interest rate levels and volatility, and the timing and pace 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 related monetary and fiscal policy responses thereto, including their effects on consumer and business behavior; • the effects of any federal government shutdown, debt ceiling standoff, or other fiscal 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 publicity about the banking industry 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 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, including the risk that changes to federal deposit insurance limits or coverage rules, or customer concerns regarding the safety of uninsured deposits, could adversely affect deposit stability; • 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 adapt to rapid technological changes, including advancements related to artificial intelligence (“AI”), the use of AI models in credit decisioning, customer service, and operations, including risks of model error, bias, regulatory scrutiny under fair lending laws, and third-party AI dependencies, digital banking platforms, and cybersecurity; 27 • risk associated with the evolving regulatory and market environment for digital assets and cryptocurrency, including potential impacts on customer behavior, deposit flows, and our ability to offer or support related products or services; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission (the “SEC”), or the Public Company Accounting Oversight Board (“PCAOB”); • legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax 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; • 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 matters; • 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; • geopolitical developments and international conflicts, or the imposition of new or increased tariffs and trade restrictions, any of which may disrupt financial markets, global supply chains, commodity 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, domestic 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 documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”), including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2025 (“2025 Form 10-K”). We caution readers not to place undue reliance on any forward-looking statements. The factors listed above could materially affect our financial performance and cause our actual results for future periods to differ materially from any forward-looking statements expressed or implied with respect to future periods and could 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 dates 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 March 31, 2026, Sound Financial Bancorp, on a consolidated basis, had total assets of $1.11 billion, net loans held-for-portfolio of $912.9 million, deposits of $968.5 million and stockholders’ equity of $110.4 million. The common stock of Sound Financial Bancorp is listed on the NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121. 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 28 loans which conform to the underwriting standards of Fannie Mae (“conforming”) and retain the servicing of such loans 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. 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 2025 Form 10-K. Comparison of Financial Condition at March 31, 2026 and December 31, 2025 General. Total assets increased $19.9 million, or 1.8%, to $1.11 billion at March 31, 2026 from $1.09 billion at December 31, 2025. The increase was primarily a result of higher balance of loans held-for-portfolio and a new equity investment in the first quarter of 2026. Cash and Cash Equivalents, and Investment Securities. Cash and cash equivalents decreased $469.0 thousand, or 0.3%, to $138.0 million at March 31, 2026 from $138.5 million at December 31, 2025. The decrease reflects cash deployed into higher-yielding assets, primarily loans held-for-portfolio and a new $5.0 million equity investment, partially offset by higher deposit balances. Investment securities decreased $190 thousand, or 2.0%, to $9.4 million at March 31, 2026, compared to $9.6 million at December 31, 2025. Held-to-maturity securities totaled $1.9 million at both March 31, 2026 and December 31, 2025. Available-for-sale securities totaled $7.5 million at March 31, 2026, compared to $7.7 million at December 31, 2025. The decrease in available-for-sale securities was related to principal paydowns or payoffs, as well as decreases in fair value. Equity securities totaled $5.0 million at March 31, 2026, compared to zero at both December 31, 2025 and March 31, 2025. The increase primarily related to the strategic decision to deploy some of our interest-earning cash into a higher yielding Community Reinvestment Act (“CRA”)-eligible workforce housing equity investment in the first quarter of 2026. While this investment carries more risk, the level of investment remains low compared to our total assets and partially replaces the runoff of our CRA-eligible available-for-sale debt securities over the past few years. Loans. Loans held-for-portfolio, net increased $16.0 million, or 1.8%, to $912.9 million at March 31, 2026, from $896.9 million at December 31, 2025. 29 The following table reflects the changes in the mix of our loans held-for-portfolio at March 31, 2026, as compared to December 31, 2025 (dollars in thousands): March 31, 2026 December 31, 2025 Amount Change Percent Change One-to-four family $ 251,146 $ 253,841 $ (2,695) (1.1) % Home equity 31,903 31,468 435 1.4 Commercial and multifamily 409,810 409,729 81 — Construction and land 71,878 50,261 21,617 43.0 Manufactured homes 42,968 43,080 (112) (0.3) Floating homes 84,927 87,315 (2,388) (2.7) Other consumer 15,978 16,571 (593) (3.6) Commercial business 15,164 15,378 (214) (1.4) Premiums for purchased loans 610 627 (17) (2.7) Deferred loan fees (2,866) (2,737) (129) 4.7 Total loans held-for-portfolio, gross 921,518 905,533 15,985 1.8 Allowance for credit losses — loans (8,635) (8,605) (30) 0.3 Total loans held-for-portfolio, net $ 912,883 $ 896,928 $ 15,955 1.8 % The increase in total loans held-for-portfolio was driven primarily by a $21.6 million, or 43.0%, increase in construction and land loans largely due to new project loan originations in the current quarter. Given the growth in this loan category and current macroeconomic uncertainty, we have applied qualitative adjustments to our ACL for construction and land loans, as discussed further in the “Allowance for Credit Losses” section below. Home equity loans increased by $435 thousand, or 1.4%, as demand for this product remains high with homeowners utilizing their home equity lines to access liquidity as opposed to paying off their lower rate mortgages. The growth in these segments of the portfolio was partially offset by decreases in one-to-four-family loans and floating home loans of $2.7 million and $2.4 million, respectively, or 1.1% and 2.7%, primarily due to loan repayments exceeding new originations. At March 31, 2026, our loan portfolio, net of deferred loan fees, remained well-diversified. At that date, commercial and multifamily real estate loans accounted for 44.4% of total loans, one-to-four family loans, including home equity loans, accounted for 30.6% 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 15.6% of total loans. Construction and land loans accounted for 7.8% of total loans at March 31, 2026. Loans held-for-sale totaled $281 thousand at March 31, 2026, compared to $542 thousand at December 31, 2025. 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): 30 Three Months Ended March 31, 2026 2025 ACL — Loans: Balance at beginning of period $ 8,605 $ 8,499 Charge-offs (26) (27) Recoveries 7 6 Net charge-offs (19) (21) Provision for (release of) credit losses 49 (85) Balance at end of period $ 8,635 $ 8,393 Reserve for Unfunded Commitments: Balance at beginning of period 148 234 Provision for (release of) credit losses 74 (118) Balance at end of period 222 116 ACL $ 8,857 $ 8,509 Ratio of net charge-offs during the period to average loans outstanding during the period (0.01) % (0.01) % Our ACL — loans increased $30 thousand, or 0.3%, to $8.6 million at March 31, 2026, from $8.6 million at December 31, 2025. 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 construction loan and land loans due to qualitative adjustments for uncertainty in market conditions and concentrations, partially offset by improvement in other consumer past due loans and commercial construction collateral values. See “Comparison of Results of Operations for the Three Months Ended March 31, 2026 and 2025 — Provision for Credit Losses.” 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 March 31, 2026 At December 31, 2025 ACL - loans as a percentage of total loans outstanding 0.93 % 0.95 % ACL — loans $ 8,635 $ 8,605 Total loans outstanding $ 923,774 $ 907,643 Nonaccrual loans as a percentage of total loans outstanding 0.80 % 0.64 % Total nonaccrual loans $ 7,379 $ 5,782 Total loans outstanding $ 923,774 $ 907,643 ACL - loans as a percentage of nonaccrual loans 117.02 % 148.82 % ACL — loans $ 8,635 $ 8,605 Total nonaccrual loans $ 7,379 $ 5,782 ACL as a percentage of total loans outstanding 0.96 % 0.96 % ACL $ 8,857 $ 8,753 Total loans outstanding $ 923,774 $ 907,643 ACL as a percentage of nonaccrual loans 120.03 % 151.38 % ACL $ 8,857 $ 8,753 Total nonaccrual loans $ 7,379 $ 5,782 31 Three Months Ended March 31, 2026 2025 ($ in thousands) Net recoveries (charge-offs) during period to average loans outstanding: One-to-four family: — % — % Net (charge-offs)/recoveries $ — $ — Average loans outstanding $ 251,815 $ 266,980 Home equity: — % — % Net (charge-offs)/recoveries $ — $ — Average loans outstanding $ 31,667 $ 27,562 Commercial and multifamily real estate: — % — % Net (charge-offs)/recoveries $ — $ — Average loans outstanding $ 408,333 $ 377,925 Construction and land: — % — % Net (charge-offs)/recoveries $ — $ — Average loans outstanding $ 64,339 $ 65,187 Manufactured homes: (0.19) % (0.19) % Net (charge-offs)/recoveries $ (20) $ (19) Average loans outstanding $ 42,770 $ 41,587 Floating homes: — % — % Net (charge-offs)/recoveries $ — $ — Average loans outstanding $ 85,708 $ 85,593 Other consumer: 0.03 % (0.05) % Net (charge-offs)/recoveries $ 1 $ (2) Average loans outstanding $ 16,049 $ 17,633 Commercial business: — % — % Net (charge-offs)/recoveries $ — $ — Average loans outstanding $ 14,799 $ 15,269 Total loans: (0.01) % (0.01) % Net (charge-offs) $ (19) $ (21) Average loans outstanding $ 915,480 $ 897,736 The ratio of ACL - loans to nonaccrual loans decreased to 117.0% at March 31, 2026, from 148.8% at December 31, 2025, reflecting the increase in nonaccrual loans during the quarter. Despite this decrease, we believe our allowance remains adequate given the collateralized nature of the nonaccrual loans and the overall performance of our loan portfolio. Nonperforming Assets. Nonperforming assets (“NPAs”), which were comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $1.4 million, or 22.1%, to $7.5 million, or 0.67% of total assets, at March 31, 2026 from $6.1 million, or 0.56% of total assets, at December 31, 2025. 32 The table below sets forth the amounts and categories of NPAs at the dates indicated (dollars in thousands): Nonperforming Assets March 31, 2026 December 31, 2025 Amount Change Percent Change Total nonperforming loans $ 7,379 $ 5,782 $ 1,597 27.6 OREO and repossessed assets 99 344 (245) (71.2) Total nonperforming assets $ 7,478 $ 6,126 $ 1,352 22.1 % The increase in NPAs from December 31, 2025 was primarily due to the placement of $1.8 million of loans on nonaccrual status during the quarter, including one multifamily real estate loan of $1.1 million. These additions were partially offset by loan repayments, the return of certain credits to accrual status, and the sale of OREO properties. The percentage of nonperforming loans to total loans was 0.80% at March 31, 2026, compared to 0.64% at December 31, 2025. We believe the collateral value of the multifamily real estate loan placed on nonaccrual status during the quarter is sufficient to minimize loss exposure. We continue to monitor this credit and other nonaccrual loans closely. While we believe the increase in nonperforming loans reflects isolated credit events rather than a systemic portfolio trend, we remain attentive to macroeconomic conditions that may affect borrower performance. Mortgage Servicing Rights. The fair value of mortgage servicing rights decreased $87 thousand, or 2.1%, to $4.1 million at March 31, 2026 from $4.2 million at December 31, 2025. The decrease was primarily related to a decline in the size of our mortgage servicing portfolio and modest changes in valuation assumptions, including prepayment speed assumptions reflecting current interest rate expectations. 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 $19.6 million, or 2.1%, to $968.5 million at March 31, 2026 from $948.9 million at December 31, 2025. This increase was primarily due to seasonal fluctuations in customer account balances, new client deposits, and higher balances from large depositors. Noninterest-bearing deposits decreased $1.5 million, or 1.1%, to $131.1 million at March 31, 2026, compared to $132.6 million at December 31, 2025. This decline was primarily the result of normal daily fluctuations in customer account balances, reflecting routine activity rather than significant changes in overall deposit levels. Noninterest-bearing deposits represented 13.5% of total deposits at March 31, 2026, compared to 14.0% at December 31, 2025. A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands): March 31, 2026 December 31, 2025 Amount Wtd. Avg. Rate Amount Wtd. Avg. Rate Noninterest-bearing demand $ 125,541 — % $ 129,828 — % Interest-bearing demand 130,642 0.23 125,634 0.27 Savings 58,881 0.10 59,478 0.10 Money market 345,913 2.82 331,604 3.13 Time deposits 301,973 3.63 299,593 3.89 Escrow (1) 5,551 — 2,738 — Total deposits $ 968,501 2.18 % $ 948,875 2.31 % (1) Escrow balances shown in noninterest-bearing deposits on the Condensed Consolidated Balance Sheets. 33 Scheduled maturities of time deposits at March 31, 2026, are as follows (in thousands): Year Ending December 31, Amount 2026 $ 259,929 2027 27,359 2028 12,375 2029 403 2030 1,828 Thereafter 79 $ 301,973 The aggregate amount of time deposits in denominations of more than $250,000 at March 31, 2026 and December 31, 2025, totaled $106.8 million and $112.4 million, respectively. Deposit amounts in excess of $250,000 are not federally insured. As of March 31, 2026, uninsured deposits totaled $197.9 million, which represented 20.4% of total deposits, as compared to uninsured deposits of $184.7 million, or 19.5% of total deposits as of December 31, 2025. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. The increase in the balance of uninsured deposits primarily related to jumbo tier pricing offered on some of our deposit products, as well as normal fluctuations within deposit accounts. We actively manage our uninsured deposit exposure through diversification of our deposit base, maintenance of robust liquidity resources, and ongoing monitoring of large depositor relationships. We believe our current liquidity position is sufficient to meet potential demands from uninsured depositors. Borrowings, comprised of FHLB advances, were $10.0 million at both March 31, 2026 and December 31, 2025. FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. A single FHLB advance outstanding at March 31, 2026 matures in early 2028. Subordinated notes, net totaled $7.8 million at both March 31, 2026 and December 31, 2025. Stockholders’ Equity. Total stockholders’ equity increased $1.0 million, or 0.9%, to $110.4 million at March 31, 2026, from $109.4 million at December 31, 2025. This increase primarily reflects $1.6 million of net income earned during the three months ended March 31, 2026, partially offset by the payment of $541 thousand in cash dividends to stockholders and an $80 thousand increase in accumulated other comprehensive loss, net of tax. Average Balances, Net Interest Income, Yields Earned and Rates Paid 34 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 March 31, 2026 2025 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 914,113 $ 13,307 5.90 % $ 896,822 $ 12,588 5.69 % Investments 11,701 97 3.36 12,924 108 3.39 Cash and cash equivalents 120,683 1,061 3.57 95,999 1,010 4.27 Total interest-earning assets (1) 1,046,497 14,465 5.61 1,005,745 13,706 5.53 Interest-bearing liabilities: Savings and money market accounts 388,633 2,306 2.41 332,406 2,058 2.51 Demand and NOW accounts 125,932 82 0.26 140,905 108 0.31 Certificate accounts 301,341 2,736 3.68 292,973 3,039 4.21 Subordinated notes 7,808 186 9.66 11,766 168 5.79 Borrowings 10,556 108 4.15 25,000 262 4.25 Total interest-bearing liabilities 834,270 5,418 2.63 % 803,050 5,635 2.85 % Net interest income $ 9,047 $ 8,071 Net interest rate spread 2.97 % 2.68 % Net earning assets $ 212,227 $ 202,695 Net interest margin 3.51 % 3.25 % Average interest-earning assets to average interest-bearing liabilities 125.44 % 125.24 % Noninterest-bearing deposits $ 133,691 $ 126,215 Total deposits $ 949,597 $ 5,124 2.19 % $ 892,499 $ 5,205 2.37 % Total funding (2) $ 967,961 $ 5,418 2.27 % $ 929,265 $ 5,635 2.46 % (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). 35 Three Months Ended March 31, 2026 vs. 2025 Increase (Decrease) due to Total Increase (Decrease) Volume Rate Interest-earning assets: Loans receivable $ 252 $ 467 $ 719 Investments (10) (1) (11) Cash and cash equivalents 217 (166) 51 Total interest-earning assets 459 300 759 Interest-bearing liabilities: Savings and Money Market accounts 334 (86) 248 Demand and NOW accounts (10) (16) (26) Certificate accounts 76 (379) (303) Subordinated notes (94) 112 18 Borrowings (148) (6) (154) Total interest-bearing liabilities $ 158 $ (375) $ (217) Change in net interest income $ 976 Comparison of Results of Operation for the Three Months Ended March 31, 2026 and 2025 General. Net income increased $409 thousand, or 35.0%, to $1.6 million, or $0.61 per diluted common share, for the three months ended March 31, 2026, compared to $1.2 million, or $0.45 per diluted common share, for the three months ended March 31, 2025, 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. Interest Income Three Months Ended March 31, Amount Change Percent Change 2026 2025 Loans, including fees $ 13,307 $ 12,588 $ 719 5.7 % Interest and dividends on investments 97 108 (11) (10.2) Cash and cash equivalents 1,061 1,010 51 5.0 Total interest income $ 14,465 $ 13,706 $ 759 5.5 % Total interest income increased $759 thousand, or 5.5%, to $14.5 million for the three months ended March 31, 2026, from $13.7 million for the three months ended March 31, 2025, primarily due to higher average balances of loans and interest earning cash, and a 21 basis point increase in the average yield on loans, partially offset by a 70 basis point decline in the average yield on cash and cash equivalents. Interest income on loans increased $719 thousand, or 5.7%, to $13.3 million for the three months ended March 31, 2026, from $12.6 million for the three months ended March 31, 2025. The average yield on total loans rose to 5.90% for the three months ended March 31, 2026, from 5.69% for the three months ended March 31, 2025, 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 $914.1 million for the three months ended March 31, 2026, compared to $896.8 million for the three months ended March 31, 2025. Interest and dividends on investments decreased $11 thousand, or 10.2%, to $97 thousand for the three months ended March 31, 2026, compared to $108 thousand for the three months ended March 31, 2025. The decrease was primarily due to a decline in the average balance of investments to $11.7 million from $12.9 million, reflecting continued paydown of the investment portfolio, with a modest further impact from a three basis point decline in average yield to 3.36% from 3.39%. 36 Interest income on cash and cash equivalents increased $51 thousand, or 5.0%, to $1.1 million for the three months ended March 31, 2026, compared to $1.0 million for the three months ended March 31, 2025. The increase was primarily due to a higher average balance of $120.7 million compared to $96.0 million for the same period in 2025, mainly attributable to higher deposit inflows and the repayment of borrowings and subordinated debt during the fourth quarter of 2025. The increase in average balance was partially offset by a 70 basis point decline in average yield to 3.57% from 4.27%, reflecting the lower market interest rate environment. (Refer to “ Net Interest Income ” below for additional detail regarding the interest rate environment.) Interest Expense Three Months Ended March 31, Amount Change Percent Change 2026 2025 Deposits $ 5,124 $ 5,205 $ (81) (1.6) % Borrowings 108 262 (154) (58.8) Subordinated notes 186 168 18 10.7 Total interest expense $ 5,418 $ 5,635 $ (217) (3.9) % Total interest expense decreased $217 thousand, or 3.9%, to $5.4 million for the three months ended March 31, 2026, from $5.6 million for the three months ended March 31, 2025. The decrease was primarily attributable to lower interest rates across most interest-bearing liabilities, resulting from lower market interest rates generally, partially offset by an increase in our average balance of interest-bearing liabilities. Interest expense on certificate accounts declined $303 thousand, driven by a $379 thousand rate-related decrease, partially offset by a $76 thousand volume-related increase. The average balance of certificate accounts rose to $301.3 million for the three months ended March 31, 2026, from $293.0 million during the same period in 2025, while the average rate paid fell to 3.68% from 4.21%. The decline in the average rate reflected lower market interest rates and the repricing of maturing certificates into the current rate environment. In addition, interest expense on demand and NOW accounts decreased $26 thousand, due to both lower average balances and slightly lower rates. Interest expense on savings and money market accounts increased $248 thousand, or 12.1%, to $2.3 million for the three months ended March 31, 2026, from $2.1 million for the same period in 2025, primarily due to an increase in average balances to $388.6 million from $332.4 million, reflecting shifts in customer deposit preferences from certificate accounts into more liquid deposit products. This increase was partially offset by a 10 basis point decline in the average rate paid to 2.41% from 2.51%, as we implemented repricing strategies to manage overall funding costs. Interest expense on borrowings, comprised solely of FHLB advances, decreased $154 thousand , primarily due to a $14.4 million decline in average borrowings following the payoff of an FHLB advance during the fourth quarter of 2025. The average balance of FHLB advances was $10.6 million for the three months ended March 31, 2026, compared to $25.0 million for the three months ended March 31, 2025. The average rate paid on borrowings decreased ten basis points to 4.15% for the quarter ended March 31, 2026, compared to 4.25% for the same quarter in 2025. Interest expense on subordinated notes was $186 thousand for the three months ended March 31, 2026, compared to $168 thousand for the three months ended March 31, 2025. The increase was due to the debt converting to a variable-rate instrument that reprices on a quarterly basis from the previous fixed-rate period, partially offset by a lower average balance as a result of the paydown of $4.0 million of our subordinated debt balance in the fourth quarter of 2025. Net Interest Income. Net interest income increased $976 thousand, or 12.1%, to $9.0 million for the three months ended March 31, 2026, from $8.1 million for the three months ended March 31, 2025, driven by both growth in interest-earning asset balances and improvement in the net interest rate spread, reflecting higher loan yields and lower funding costs across most categories of interest-bearing liabilities. These changes were partially offset by a decrease in the average yield on investments and interest-bearing cash. Overall, the decline in average funding costs and increase in average yield on loans resulted in a 29 basis point improvement in the net interest rate spread and a 26 basis point increase in the annualized net interest margin, which rose to 3.51% for the three months ended March 31, 2026, compared to 3.25% for the same period in 2025. Through most of 2025, the Federal Open Market Committee of the Federal Reserve (“FOMC”) maintained the target range for the federal funds rate at 4.25% to 4.50%, where it remained until September 2025. The FOMC subsequently lowered the target 37 range 75 basis points to 3.50% to 3.75% between September 2025 and December 2025. The FOMC maintained the target range for the federal funds rate through the first quarter of 2026. The lower interest rate environment has contributed to decreased funding costs, while loan yields have remained elevated due to repricing of variable-rate loans and higher rates on new loan originations. 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 March 31, 2026 2025 Provision for (release of) credit losses on loans $ 49 $ (85) Provision for (release of) credit losses on unfunded loan commitments 74 (118) Provision for (release of) credit losses $ 123 $ (203) A provision for credit losses of $123 thousand was recorded for the quarter ended March 31, 2026, compared to a release of provision for credit losses of $203 thousand for the quarter ended March 31, 2025. The swing to a provision in the current quarter resulted primarily from annual updates to model assumptions that increased estimated loss factors, growth in the loan portfolio, and additional qualitative adjustments applied to the commercial loan segment, reflecting uncertainty surrounding geopolitical conditions and the potential impact of tariffs on our borrowers. Expected credit loss estimates consider various factors, including market conditions, borrower-specific information, projected delinquencies, and anticipated effects of economic trends on borrowers' ability to repay. Net charge-offs for the three months ended March 31, 2026 totaled $19 thousand, compared to $21 thousand for the three months ended March 31, 2025. 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 $188 thousand, or 17.1%, to $910 thousand for the three months ended March 31, 2026, as compared to $1.1 million for the three months ended March 31, 2025, as reflected below (dollars in thousands): Three Months Ended March 31, Amount Change Percent Change 2026 2025 Service charges and fee income $ 624 $ 684 $ (60) (8.8) % Earnings on BOLI 130 195 (65) (33.3) Mortgage servicing income 248 269 (21) (7.8) Fair value adjustment on mortgage servicing rights (140) (99) (41) 41.4 Net gain on sale of loans 101 49 52 106.1 Other income (53) — (53) — Total noninterest income $ 910 $ 1,098 $ (188) (17.1) % The decrease in noninterest income was primarily due to: • a $60 thousand decrease in service charges and fee income, primarily due to differences in the volume incentive paid by Mastercard in 2025 and 2026; • a $65 thousand decrease in earnings from BOLI, primarily due to a one-time benefit recognized in the first quarter of 2025 in connection with the surrender and exchange of existing policies into higher-yielding policies, which did not recur in the current quarter, partially offset by improved yields on the new policies; • a $21 thousand decrease in mortgage servicing income as a result of a smaller servicing portfolio; 38 • a $41 thousand increase in the fair value adjustment loss on mortgage servicing rights, reflecting a smaller servicing portfolio and changes in valuation assumptions related to servicing costs and interest rate movements; and • a $53 thousand decrease in other income due to estimated costs related to the Tacoma branch closure announced in the January 2026 and which closed in April 2026. These decreases were partially offset by a $52 thousand increase in net gain on sale of loans due to an increase in the volume of loans sold. Noninterest Expense. Total noninterest expense remained relatively unchanged during the three months ended March 31, 2026, compared to the three months ended March 31, 2025, as reflected below (dollars in thousands): Three Months Ended March 31, Amount Change Percent Change 2026 2025 Salaries and benefits $ 4,458 $ 4,595 $ (137) (3.0) % Operations 1,501 1,365 136 10.0 % Regulatory assessments 198 221 (23) (10.4) % Occupancy 427 437 (10) (2.3) % Data processing 1,287 1,293 (6) (0.5) % Net loss on OREO and repossessed assets 3 3 — — % Total noninterest expense $ 7,874 $ 7,914 $ (40) (0.5) % While overall noninterest expense remained largely flat, there were fluctuations within certain expense categories, as noted below: • a $137 thousand decrease in salaries and benefits due to the impact of deferred compensation accruals for key executives and an increase in deferred salary costs associated with loan growth, partially offset by higher medical insurance premiums; • a $23 thousand decrease in regulatory assessments, primarily due to reduced quarterly assessments resulting from a lower rate applied to a lower average asset balance; and • a $10 thousand decrease in occupancy expense, due to higher building lease charges in the first quarter of 2025 resulting from lease renewals and maintenance charges. These decreases were partially offset by a $136 thousand increase in operations expense, primarily due to higher costs associated with our debit card processing. These costs reflect higher transaction volumes and vendor rate adjustments and are expected to continue at a similar level in future quarters. The efficiency ratio improved 723 basis points to 79.08% for the quarter ended March 31, 2026 from 86.31% for the same period in 2025, primarily reflecting significant growth in net interest income driven by lower funding costs and higher loan yields. Income Tax Expense . The provision for income taxes was $384 thousand for the three months ended March 31, 2026, compared to $291 thousand for the three months ended March 31, 2025. The effective tax rate decreased to 19.59% from 19.96% primarily because the first quarter of 2025 included a taxable gain recognized in connection with the surrender and exchange of BOLI policies, which elevated the prior year effective tax rate and did not recur in the current quarter. Capital and Liquidity The Management’s Discussion and Analysis in Item 7 of the Company’s 2025 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 December 31, 2025, this discussion updates that disclosure for the three months ended March 31, 2026. 39 Capital. Stockholders’ equity totaled $110.4 million at March 31, 2026 and $109.4 million at December 31, 2025. In addition to net income of $1.6 million, other sources of capital during the three months ended March 31, 2026 included $57 thousand related to stock-based compensation and $3 thousand in proceeds from stock option exercises. Uses of capital during the three months ended March 31, 2026 primarily included $541 thousand of dividends paid on common stock and an $80 thousand increase in accumulated other comprehensive loss, net of tax, primarily resulting from additional unrealized losses on available-for-sale securities. We paid cash dividends of $0.21 per common share during the three months ended March 31, 2026, compared to $0.19 per common share during the three months ended March 31, 2025, which equates to a dividend payout ratio of 34.33% and 41.73%, 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 2026 at the rate of $0.21 per share, our average total dividend paid each quarter would be approximately $539 thousand based on the number of outstanding shares as of March 31, 2026. 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 2025 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. The Company does not currently have a stock repurchase program in place. 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. As of March 31, 2026, we had $145.5 million in cash and cash equivalents and available-for-sale investment securities, and $281 thousand in loans held-for-sale. At March 31, 2026, we had the ability to borrow $182.6 million in FHLB advances and access to additional borrowings of $19.1 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements. We had $10.0 million in outstanding advances from the FHLB and none from the Federal Reserve at March 31, 2026. We also had a $20.0 million credit facility with Pacific Coast Bankers’ Bank available, with no balance outstanding, at March 31, 2026. 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 March 31, 2026, 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 March 31, 2026. These include payments related to (i) long-term borrowings (Note 8—Borrowings, FHLB 40 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 March 31, 2026 and December 31, 2025, financial instrument contractual amounts representing credit risk were as follows (in thousands): March 31, 2026 December 31, 2025 Residential mortgage commitments $ 6,769 $ 1,008 Unfunded construction commitments 32,990 23,718 Unused lines of credit 29,975 27,457 Irrevocable letters of credit 183 183 Total loan commitments $ 69,917 $ 52,366 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 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 2025 Form 10-K. At March 31, 2026, Sound Financial Bancorp, on an unconsolidated basis, had $2.2 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. See also the “Condensed Consolidated Statements of Cash Flows” included in “Item 1. Financial Statements and Supplementary Data” of this Form 10-Q, for further information. 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 (“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 41 under the agencies’ PCA framework. As of March 31, 2026, the Bank’s CBLR was 10.62%, which exceeded the minimum requirement of 9%. Subsequent to March 31, 2026, the federal banking agencies finalized a rule lowering the minimum CBLR requirement from 9% to 8%, effective July 1, 2026. The Bank’s CBLR of 10.62% at March 31, 2026 exceeds both the current and the forthcoming minimum requirements. See "Part I, Item 1. Business – Regulation of Sound Community Bank – Capital Rules " in the Company's 2025 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 2025 Form 10-K. There have been no material changes in our market risk since December 31, 2025.