Item 2. Management’s Discussion and Analysis
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;
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• 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 June 30, 2026, Sound Financial Bancorp, on a consolidated basis, had total assets of $1.07 billion, net loans held-for-portfolio of $883.5 million, deposits of $930.9 million and stockholders’ equity of $112.6 million. The common stock of Sound Financial Bancorp is listed on the NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121.
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
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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 June 30, 2026 and December 31, 2025
General. Total assets decreased $26.4 million, or 2.4%, to $1.07 billion at June 30, 2026 from $1.09 billion at December 31, 2025. The decrease was primarily the result of an $18.4 million decrease in cash and cash equivalents and a $13.4 million decrease in loans held-for-portfolio, net, partially offset by a $5.0 million increase in equity securities.
Cash and Cash Equivalents, and Investment Securities. Cash and cash equivalents decreased $18.4 million, or 13.3%, to $120.1 million at June 30, 2026 from $138.5 million at December 31, 2025. The decrease reflects lower deposits, repayment of FHLB borrowings, and a new $5.0 million equity investment, partially offset by cash flows from lower loan balances resulting from loan repayments exceeding new originations.
Investment securities decreased $140 thousand, or 1.5%, to $9.5 million at June 30, 2026, compared to $9.6 million at December 31, 2025. Held-to-maturity securities totaled $1.9 million at both June 30, 2026 and December 31, 2025. Available-for-sale securities totaled $7.6 million at June 30, 2026, compared to $7.7 million at December 31, 2025. The decrease in available-for-sale securities was related to principal paydowns or payoffs, partially offset by changes in fair value.
Equity securities totaled $5.0 million at both June 30, 2026 and March 31, 2026, compared to zero at June 30, 2025. The increase primarily related to the 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 half of 2026. While this investment has different risk characteristics than our prior CRA-eligible available-for-sale debt securities, the level of investment remains low compared to our total assets and partially replaces the runoff of those securities over the past few years.
Loans. Loans held-for-portfolio, net decreased $13.4 million, or 1.5%, to $883.5 million at June 30, 2026, from $896.9 million at December 31, 2025.
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The following table reflects the changes in the mix of our loans held-for-portfolio at June 30, 2026, as compared to December 31, 2025 (dollars in thousands):
June 30,
2026 December 31,
2025 Amount
Change Percent
Change
One-to-four family $ 244,168 $ 253,841 $ (9,673) (3.8) %
Home equity 32,107 31,468 639 2.0
Commercial and multifamily 381,809 409,729 (27,920) (6.8)
Construction and land 76,158 50,261 25,897 51.5
Manufactured homes 42,668 43,080 (412) (1.0)
Floating homes 87,566 87,315 251 0.3
Other consumer 13,832 16,571 (2,739) (16.5)
Commercial business 15,748 15,378 370 2.4
Premiums for purchased loans 583 627 (44) (7.0)
Deferred loan fees (2,670) (2,737) 67 (2.4)
Total loans held-for-portfolio, gross 891,969 905,533 (13,564) (1.5)
Allowance for credit losses — loans (8,420) (8,605) 185 (2.1)
Total loans held-for-portfolio, net $ 883,549 $ 896,928 $ (13,379) (1.5) %
The decrease in total loans held-for-portfolio was driven primarily by a decrease of $27.9 million, or 6.8%, in commercial and multifamily loans as a result of two large loans paying off early which had lower yields than our FRB cash balances and which resulted in prepayment penalties. Additional decreases in one-to-four-family loans and other consumer loans of $9.7 million and $2.7 million, respectively, or 3.8% and 16.5%, occurred primarily due to loan repayments exceeding new originations. The declines in these segments of the portfolio were partially offset by a $25.9 million, or 51.5%, increase in construction and land loans largely due to new project loan originations in the current period. Constructions and land loans generally involve greater credit risk than completed commercial real estate loans due to increased exposure to construction execution, market demand, and project completion risks. Given the growth in this loan category and current macroeconomic uncertainty, we applied qualitative adjustments to our ACL for construction and land loans beginning in the first quarter of 2026, as discussed further in the “Allowance for Credit Losses” section below. Home equity loans increased by $639 thousand, or 2.0%, as demand for this product remains high with homeowners utilizing their home equity lines to access liquidity as opposed to paying off their lower rate mortgages.
At June 30, 2026, our loan portfolio, net of deferred loan fees, remained diversified across multiple loan categories. At that date, commercial and multifamily real estate loans accounted for 42.7% of total loans, one-to-four family loans, including home equity loans, accounted for 30.9% of total loans, commercial business loans accounted for 1.8% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 16.1% of total loans. Construction and land loans accounted for 8.5% of total loans at June 30, 2026.
Loans held-for-sale totaled $1.6 million at June 30, 2026, compared to $542 thousand at December 31, 2025. The increase was primarily due to timing of mortgage originations and sales, as well as increased volume of saleable loans throughout the first half of 2026.
Allowance for Credit Losses.
The following table reflects the activity in our allowance for credit losses (“ACL”) during the periods indicated (dollars in thousands):
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Three Months Ended June 30, Six Months Ended June 30,
2026 2025 2026 2025
ACL — Loans:
Balance at beginning of period $ 8,635 $ 8,393 $ 8,605 $ 8,499
Charge-offs (33) (23) (59) (50)
Recoveries 3 2 10 8
Net charge-offs (30) (21) (49) (42)
(Release of) provision for credit losses (185) 164 (136) 79
Balance at end of period $ 8,420 $ 8,536 $ 8,420 $ 8,536
Reserve for Unfunded Commitments:
Balance at beginning of period 222 116 148 234
(Release of) provision for credit losses (38) 6 36 (112)
Balance at end of period 184 122 184 122
ACL $ 8,604 $ 8,658 $ 8,604 $ 8,658
Ratio of net charge-offs during the period to average loans outstanding during the period (0.01) % (0.01) % (0.01) % (0.01) %
Our ACL - loans decreased $185 thousand, or 2.1%, to $8.4 million at June 30, 2026, from $8.6 million at December 31, 2025. The decrease in the ACL - loans was primarily a result of a decrease in the balance of our loan portfolio, as well as changes in the composition of our loan portfolio, including changes in the relative mix of construction and land loans and other loan categories with differing loss rates, partially offset by higher reserves on our portfolio of construction loan and land loans due to qualitative adjustments for uncertainty in market conditions and concentrations added in the first quarter of 2026. See “Comparison of Results of Operations for the Three and Six Months Ended June 30, 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 June 30, 2026 At December 31, 2025
ACL - loans as a percentage of total loans outstanding 0.94 % 0.95 %
ACL — loans $ 8,420 $ 8,605
Total loans outstanding $ 894,056 $ 907,643
Nonaccrual loans as a percentage of total loans outstanding
0.90 % 0.64 %
Total nonaccrual loans $ 8,055 $ 5,782
Total loans outstanding $ 894,056 $ 907,643
ACL - loans as a percentage of nonaccrual loans
104.53 % 148.82 %
ACL — loans $ 8,420 $ 8,605
Total nonaccrual loans $ 8,055 $ 5,782
ACL as a percentage of total loans outstanding 0.96 % 0.96 %
ACL $ 8,604 $ 8,753
Total loans outstanding $ 894,056 $ 907,643
ACL as a percentage of nonaccrual loans 106.82 % 151.38 %
ACL $ 8,604 $ 8,753
Total nonaccrual loans $ 8,055 $ 5,782
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Three Months Ended June 30, Six Months Ended June 30,
2026 2025 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
$ 248,056 $ 261,685 $ 249,925 $ 264,318
Home equity:
— % — % — % — %
Net (charge-offs)/recoveries
$ — $ — $ — $ —
Average loans outstanding
$ 32,116 $ 28,514 $ 31,893 $ 28,041
Commercial and multifamily real estate:
— % — % — % — %
Net (charge-offs)/recoveries
$ — $ — $ — $ —
Average loans outstanding
$ 399,407 $ 395,683 $ 403,845 $ 386,853
Construction and land:
— % — % — % — %
Net (charge-offs)/recoveries
$ — $ — — —
Average loans outstanding
$ 74,268 $ 45,332 $ 69,331 $ 55,205
Manufactured homes:
— % — % (0.09) % (0.09) %
Net (charge-offs)/recoveries
$ — $ — $ (20) $ (19)
Average loans outstanding
$ 42,816 $ 42,751 $ 42,794 $ 42,172
Floating homes:
— % — % — % — %
Net (charge-offs)/recoveries
$ — $ — $ — $ —
Average loans outstanding
$ 86,236 $ 89,704 $ 85,973 $ 87,660
Other consumer:
— % (0.48) % 0.01 % (0.26) %
Net (charge-offs)/recoveries $ — $ (21) $ 1 $ (23)
Average loans outstanding
$ 14,407 $ 17,519 $ 15,223 $ 17,576
Commercial business:
(0.78) % — % (0.40) % — %
Net (charge-offs)/recoveries
$ (30) $ — $ (30) $ —
Average loans outstanding
$ 15,389 $ 14,446 $ 15,096 $ 14,855
Total loans: (0.01) % (0.01) % (0.01) % (0.01) %
Net (charge-offs)
$ (30) $ (21) $ (49) $ (42)
Average loans outstanding
$ 912,695 $ 895,634 $ 914,080 $ 896,680
The ratio of ACL - loans to nonaccrual loans decreased to 104.53% at June 30, 2026, from 148.82% at December 31, 2025, reflecting the increase in nonaccrual loans during the period. Despite this decrease, we believe our allowance remains adequate given the collateralized nature of the nonaccrual loans and the overall performance of our loan portfolio.
Nonperforming Assets.
Nonperforming assets (“NPAs”), which were comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans), other real estate owned (“OREO”) and repossessed assets, increased $2.0 million, or 32.3%, to $8.1 million, or 0.76% of total assets, at June 30, 2026 from $6.1 million, or 0.56% of total assets, at December 31, 2025.
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The table below sets forth the amounts and categories of NPAs at the dates indicated (dollars in thousands):
Nonperforming Assets
June 30,
2026 December 31,
2025 Amount
Change Percent
Change
Total nonperforming loans $ 8,055 $ 5,782 $ 2,273 39.3
OREO and repossessed assets 47 344 (297) (86.3)
Total nonperforming assets $ 8,102 $ 6,126 $ 1,976 32.3 %
The increase in NPAs from December 31, 2025 was primarily due to the placement of $2.7 million of loans on nonaccrual status during the period, including one multifamily real estate loan of $1.1 million, three one-to-four family home loans totaling $976 thousand, and one home equity loan totaling $251 thousand, with the remaining additions comprised of manufactured housing, land and other consumer loans. These additions were partially offset by loan repayments, the return of certain credits to accrual status, and the sale of OREO properties. The percentage of nonperforming loans to total loans was 0.90% at June 30, 2026, compared to 0.64% at December 31, 2025.
We believe the collateral value of the multifamily real estate loan and three one-to-four family loans placed on nonaccrual status during the period is sufficient to minimize loss exposure. We continue to monitor these credits and other nonaccrual loans closely. While we believe the increase in nonperforming loans primarily reflects specific borrower circumstances rather than broader deterioration in portfolio credit quality, we remain attentive to macroeconomic conditions that may affect borrower performance.
Mortgage Servicing Rights. The fair value of mortgage servicing rights increased $94 thousand, or 2.2%, to $4.3 million at June 30, 2026 from $4.2 million at December 31, 2025. The increase was primarily related to changes in valuation assumptions, including prepayment speed assumptions reflecting current interest rate expectations, partially offset by a decline in the size of our mortgage servicing portfolio. We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio. Mortgage servicing rights are carried at fair value. If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted.
Deposits and Borrowings. Total deposits decreased $18.0 million, or 1.9%, to $930.9 million at June 30, 2026 from $948.9 million at December 31, 2025. This decrease was primarily due to seasonal fluctuations in customer account balances and the managed reduction of certain higher-cost deposits, including reciprocal deposits. Noninterest-bearing deposits decreased $3.2 million, or 2.4%, to $129.3 million at June 30, 2026, compared to $132.6 million at December 31, 2025. This decline was primarily the result of normal daily fluctuations in customer account balances, reflecting routine activity rather than significant changes in overall deposit levels. Noninterest-bearing deposits represented 13.9% of total deposits at June 30, 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):
June 30, 2026 December 31, 2025
Amount Wtd. Avg. Rate Amount Wtd. Avg. Rate
Noninterest-bearing demand $ 126,145 — % $ 129,828 — %
Interest-bearing demand 130,210 0.25 125,634 0.27
Savings 59,081 0.10 59,478 0.10
Money market 314,205 2.81 331,604 3.13
Time deposits 298,045 3.61 299,593 3.89
Escrow (1)
3,195 — 2,738 —
Total deposits $ 930,881 2.17 % $ 948,875 2.31 %
(1) Escrow balances shown in noninterest-bearing deposits on the Condensed Consolidated Balance Sheets.
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Scheduled maturities of time deposits at June 30, 2026, are as follows (in thousands):
Year Ending December 31, Amount
2026 $ 213,305
2027 69,138
2028 12,887
2029 522
2030 1,867
Thereafter 326
$ 298,045
The aggregate amount of time deposits in denominations of more than $250,000 at June 30, 2026 and December 31, 2025, totaled $104.8 million and $112.4 million, respectively. Deposit amounts in excess of $250,000 are not federally insured. As of June 30, 2026, uninsured deposits totaled $188.9 million, which represented 20.3% of total deposits, as compared to uninsured deposits of $184.7 million, or 19.5% of total deposits as of December 31, 2025. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. The increase in the balance of uninsured deposits primarily related to jumbo tier pricing offered on some of our deposit products, as well as normal fluctuations within deposit accounts.
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 zero at June 30, 2026 and $10.0 million at 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. The single remaining FHLB advance at December 31, 2025 was scheduled to mature in early 2028, which the Company repaid during the three months ended June 30, 2026. Subordinated notes, net totaled $7.8 million at both June 30, 2026 and December 31, 2025.
Stockholders’ Equity. Total stockholders’ equity increased $3.2 million, or 2.9%, to $112.6 million at June 30, 2026, from $109.4 million at December 31, 2025. This increase primarily reflects $4.1 million of net income earned during the six months ended June 30, 2026, partially offset by the payment of $1.1 million in cash dividends to stockholders and a $47 thousand decrease in accumulated other comprehensive loss, net of tax.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
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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 June 30,
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 $ 911,869 $ 13,777 6.06 % $ 895,039 $ 13,695 6.14 %
Investments 16,566 187 4.53 12,842 123 3.84
Cash and cash equivalents 98,902 882 3.58 102,572 1,097 4.29
Total interest-earning assets (1)
1,027,337 14,846 5.80 1,010,453 14,915 5.92
Interest-bearing liabilities:
Savings and money market accounts 370,406 2,177 2.36 344,553 2,258 2.63
Demand and NOW accounts 130,208 95 0.29 138,150 107 0.31
Certificate accounts 299,654 2,704 3.62 290,388 2,860 3.95
Subordinated notes 7,819 189 9.70 11,777 168 5.72
Borrowings 8,571 90 4.21 25,007 267 4.28
Total interest-bearing liabilities 816,658 5,255 2.58 % 809,875 5,660 2.80 %
Net interest income $ 9,591 $ 9,255
Net interest rate spread 3.22 % 3.12 %
Net earning assets $ 210,679 $ 200,578
Net interest margin 3.74 % 3.67 %
Average interest-earning assets to average interest-bearing liabilities 125.80 % 124.77 %
Noninterest-bearing deposits $ 128,204 $ 121,906
Total deposits $ 928,472 $ 4,976 2.15 % $ 894,997 $ 5,225 2.34 %
Total funding (2)
$ 944,862 $ 5,255 2.23 % $ 931,781 $ 5,660 2.44 %
(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.
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Six Months Ended June 30,
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 $ 912,985 $ 27,083 5.98 % $ 895,926 $ 26,283 5.92 %
Investments 16,109 284 3.56 12,883 232 3.63
Cash and cash equivalents 109,732 1,943 3.57 99,304 2,107 4.28
Total interest-earning assets (1)
1,038,826 29,310 5.69 1,008,113 28,622 5.73
Interest-bearing liabilities:
Savings and money market accounts 379,469 4,484 2.38 338,514 4,317 2.57
Demand and NOW accounts 128,082 176 0.28 139,520 214 0.31
Certificate accounts 300,493 5,440 3.65 291,673 5,899 4.08
Subordinated notes 7,813 375 9.68 11,772 336 5.76
Borrowings 9,558 198 4.18 25,003 529 4.27
Total interest-bearing liabilities 825,415 10,673 2.61 % 806,482 11,295 2.82 %
Net interest income $ 18,637 $ 17,327
Net interest rate spread 3.08 % 2.90 %
Net earning assets $ 213,411 $ 201,631
Net interest margin 3.62 % 3.47 %
Average interest-earning assets to average interest-bearing liabilities 125.85 % 125.00 %
Noninterest-bearing deposits $ 130,933 $ 124,048
Total deposits $ 938,977 $ 10,100 2.17 % $ 893,755 $ 10,430 2.35 %
Total funding (2)
$ 956,348 $ 10,673 2.25 % $ 930,530 $ 11,295 2.45 %
(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).
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Three Months Ended June 30, 2026 vs. 2025
Six Months Ended June 30, 2026 vs. 2025
Increase (Decrease) due to Total
Increase (Decrease) Increase (Decrease) due to Total
Increase (Decrease)
Volume Rate Volume Rate
Interest-earning assets:
Loans receivable $ 254 $ (172) $ 82 $ 506 $ 294 $ 800
Investments 42 22 64 57 (5) 52
Cash and cash equivalents (33) (182) (215) 185 (349) (164)
Total interest-earning assets 263 (332) (69) 748 (60) 688
Interest-bearing liabilities:
Savings and Money Market accounts 152 (233) (81) 484 (317) 167
Demand and NOW accounts (6) (6) (12) (16) (22) (38)
Certificate accounts 84 (240) (156) 160 (619) (459)
Subordinated notes (96) 117 21 (190) 229 39
Borrowings (173) (4) (177) (320) (11) (331)
Total interest-bearing liabilities $ (39) $ (366) $ (405) $ 118 $ (740) $ (622)
Change in net interest income $ 336 $ 1,310
Comparison of Results of Operation for the Three and Six Months Ended June 30, 2026 and 2025
General.
Q2 2026 vs Q2 2025 . Net income increased $466 thousand, or 22.7%, to $2.5 million, or $0.98 per diluted common share, for the three months ended June 30, 2026, compared to $2.1 million, or $0.79 per diluted common share, for the three months ended June 30, 2025, reflecting a favorable change in the provision for credit losses, as the Company recorded a release of provision for credit losses in the current quarter compared to a provision for credit losses in the prior-year quarter, growth in net interest income, and an increase in noninterest income. These improvements were partially offset by higher noninterest expenses and an increase in income taxes.
YTD 2026 vs. YTD 2025 . Net income increased $872 thousand, or 27.1%, to $4.1 million, or $1.59 per diluted common share, for the six months ended June 30, 2026, compared to $3.2 million, or $1.24 per diluted common share, for the six months ended June 30, 2025, a favorable change in the provision for credit losses, as the Company recorded a release of provision for credit losses during the current-year period compared to a provision for credit losses in the prior-year period, higher net interest income, and an increase in noninterest income. This was partially offset by higher noninterest expenses and an increase in income taxes. Overall, the improvement in net interest income, primarily resulting from lower funding costs, growth in average loan balances, and an improved net interest margin, was the primary factor behind the year-to-date improvement in profitability.
Interest Income
Three Months Ended June 30, Amount
Change Percent Change
2026 2025
Loans, including fees $ 13,777 $ 13,695 $ 82 0.6 %
Interest and dividends on investments 187 123 64 52.0
Cash and cash equivalents 882 1,097 (215) (19.6)
Total interest income $ 14,846 $ 14,915 $ (69) (0.5) %
Q2 2026 vs Q2 2025 . Total interest income decreased $69 thousand, or 0.5%, to $14.8 million for the three months ended June 30, 2026 from $14.9 million for the three months ended June 30, 2025, primarily due to lower yield on interest earning assets, including a 71 basis point decline in the average yield on cash and cash equivalents and an eight basis point decline in the average yield on loans. These decreases were partially offset by growth in average loan balances and investments, which increased the volume of interest-earning assets. The benefit from higher average loan balances and investments was more than offset by lower average balances of cash and cash equivalents.
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Interest income on loans increased $82 thousand, or 0.6%, to $13.8 million for the three months ended June 30, 2026, from $13.7 million for the three months ended June 30, 2025. The increase was primarily due to a higher average balance of loans, partially offset by a decline in the average yield on loans to 6.06% from 6.14%. The decrease in average loan yield primarily reflected interest income recognized during the second quarter of 2025 upon the payoff of loans that had previously been classified as nonaccrual, which increased the prior-year period average yield, as well as lower yields on certain variable-rate loans following reductions in market interest rates. These decreases were partially offset by new loan originations at higher interest rates and upward repricing of certain on variable-rate loans.
Interest and dividends on investments increased $64 thousand, or 52.0%, to $187 thousand for the three months ended June 30, 2026, compared to $123 thousand for the three months ended June 30, 2025. The increase was due to a 69 basis point increase in average yield to 4.53% from 3.84% resulting from the receipt of a dividend paid from our equity investment in the second quarter of 2026, as well as an increase in the average balance of investments to $16.6 million from $12.8 million, reflecting the new $5.0 million equity investment partially offset by the continued paydown of the AFS and HTM investment portfolio.
Interest income on cash and cash equivalents decreased $215 thousand, or 19.6%, to $882 thousand for the three months ended June 30, 2026, compared to $1.1 million for the three months ended June 30, 2025. The decrease was primarily due to a 71 basis point decline in the average yield on cash and cash equivalents to 3.58% from 4.29%, reflecting the lower market interest rate environment. The decrease was also impacted by a lower average balance of $98.9 million compared to $102.6 million for the same period in 2025, reflecting the managed reduction of higher-cost reciprocal deposits and lower liquidity needs following the repayment of borrowings and subordinated debt. (Refer to “ Net Interest Income ” below for additional detail regarding the interest rate environment.)
Six Months Ended June 30, Amount
Change Percent Change
2026 2025
Loans, including fees $ 27,083 $ 26,283 $ 800 3.0 %
Interest and dividends on investments 284 232 52 22.4
Cash and cash equivalents 1,943 2,107 (164) (7.8)
Total interest income $ 29,310 $ 28,622 $ 688 2.4 %
YTD 2026 vs. YTD 2025 . Total interest income increased $688 thousand, or 2.4%, to $29.3 million for the six months ended June 30, 2026, from $28.6 million for the six months ended June 30, 2025, due to higher average balances on our loans and cash and cash equivalents, a six basis points increase in average yield on loans and a higher average balance of investments. These increases were partially offset by a seven basis point decline in average yield on investments and a 71 basis point decline in average yield on cash and cash equivalents.
Interest income on loans increased $800 thousand, or 3.0%, to $27.1 million for the six months ended June 30, 2026, compared to $26.3 million for the six months ended June 30, 2025, primarily driven by a six basis point increase in the average yield on loans and a higher average balance. The average yield on total loans was 5.98% for the six months ended June 30, 2026, compared to 5.92% for the six months ended June 30, 2025. The average yield on total loans increased primarily due to variable-rate loans that repriced earlier in the year at higher market interest rates and new loan originations at higher interest rates, partially offset by the recognition of interest income from the payoff of loans previously on nonaccrual during the prior year and subsequent reductions in rates for loans with indexes tied to the Prime rate. The average balance of total loans was $913.0 million for the six months ended June 30, 2026, compared to $895.9 million for the six months ended June 30, 2025.
Interest and dividends on investments increased $52 thousand, or 22.4%, to $284 thousand for the six months ended June 30, 2026, compared to $232 thousand for the six months ended June 30, 2025. The increase was due to an increase in the average balance of investments to $16.1 million from $12.9 million, reflecting the new $5.0 million equity investment partially offset by the continued paydown of the AFS and HTM investment portfolio. This increase was partially offset by a seven basis point decline in average yield to 3.56% from 3.63% due to larger paydowns on higher yielding investments offset by the receipt of a dividend paid from our equity investment in the second quarter of 2026.
Interest income on cash and cash equivalents decreased $164 thousand, or 7.8%, to $1.9 million for the six months ended June 30, 2026, compared to $2.1 million for the six months ended June 30, 2025. The decrease was due to a 71 basis point decline in the average yield on cash and cash equivalents to 3.57% from 4.28%, which more than offset the benefit from a higher average balance of cash and cash equivalents. The decline in average yield was primarily attributable to lower market interest rates generally. The average balance of cash and cash equivalents increased to $109.7 million for the six months ended June 30, 2026, compared to $99.3 million for the same period in 2025, partially offset by the repayment of FHLB advances and the redemption of $4.0 million of subordinated debt during the fourth quarter of 2025. (Refer to “ Net Interest Income ” below for additional detail regarding the interest rate environment.)
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Interest Expense
Three Months Ended June 30,
Amount
Change Percent Change
2026 2025
Deposits $ 4,976 $ 5,225 $ (249) (4.8) %
Borrowings 90 267 (177) (66.3)
Subordinated notes 189 168 21 12.5
Total interest expense $ 5,255 $ 5,660 $ (405) (7.2) %
Q2 2026 vs Q2 2025 . Total interest expense decreased $405 thousand, or 7.2%, to $5.3 million for the three months ended June 30, 2026, from $5.7 million for the three months ended June 30, 2025. The decrease was primarily attributable to lower interest rates across all interest-bearing liabilities excluding subordinated debt, resulting from lower market interest rates generally, partially offset by an increase in our average balance of interest-bearing liabilities and an increase in the rate paid on our subordinated debt.
Interest expense on certificate accounts declined $156 thousand, driven by a $240 thousand rate-related decrease, partially offset by an $84 thousand volume-related increase. The average balance of certificate accounts rose to $299.7 million for the three months ended June 30, 2026, from $290.4 million during the same period in 2025, while the average rate paid fell to 3.62% from 3.95%. The decline in the average rate reflected lower market interest rates and the repricing of maturing certificates into the current rate environment. In addition, interest expense on demand and NOW accounts decreased $12 thousand, due to both lower average balances and slightly lower rates. Interest expense on savings and money market accounts decreased $81 thousand, or 3.6%, to $2.2 million for the three months ended June 30, 2026, from $2.3 million for the same period in 2025, primarily due to a 27 basis point decline in the average rate paid to 2.36% from 2.63%, as we implemented repricing strategies to manage overall funding costs. This decrease was partially offset by an increase in average balances to $370.4 million from $344.6 million, reflecting shifts in customer deposit preferences from certificate accounts into more liquid deposit products.
Interest expense on borrowings, comprised solely of FHLB advances, decreased $177 thousand, primarily due to a $16.4 million decline in average borrowings following the payoff of an FHLB advance during the fourth quarter of 2025. The average balance of FHLB advances was $9.6 million for the three months ended June 30, 2026, compared to $25.0 million for the three months ended June 30, 2025. The average rate paid on borrowings decreased 7 basis points to 4.21% for the quarter ended June 30, 2026, compared to 4.28% for the same quarter in 2025. Interest expense on subordinated notes was $189 thousand for the three months ended June 30, 2026, compared to $168 thousand for the three months ended June 30, 2025. The increase was due to the debt converting to a variable-rate instrument that reprices on a quarterly basis from the previous fixed-rate period, partially offset by a lower average balance as a result of the paydown of $4.0 million of our subordinated debt balance in the fourth quarter of 2025.
Six Months Ended June 30, Amount
Change Percent Change
2026 2025
Deposits $ 10,100 $ 10,430 $ (330) (3.2) %
Borrowings 198 529 (331) (62.6)
Subordinated notes 375 336 39 11.6
Total interest expense $ 10,673 $ 11,295 $ (622) (5.5) %
YTD 2026 vs. YTD 2025 . Total interest expense decreased $622 thousand, or 5.5%, to $10.7 million for the six months ended June 30, 2026, from $11.3 million for the six months ended June 30, 2025. Interest expense on deposits decreased $330 thousand, or 3.2%, to $10.1 million for the six months ended June 30, 2026, compared to $10.4 million for the six months ended June 30, 2025. 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, partially offset by an increase in the average balance of savings and money market accounts and certificate accounts. The average cost of total deposits decreased 18 basis points to 2.17% for the six months ended June 30, 2026, from 2.35% for the six months ended June 30, 2025.
Interest expense on borrowings, comprised solely of FHLB advances, was $198 thousand for the six months ended June 30, 2026, compared to $529 thousand for the six months ended June 30, 2025, reflecting the decreased use of FHLB advances to supplement our liquidity needs. The average cost of FHLB advances decreased nine basis points to 4.18% for the six months ended June 30, 2026, compared to 4.27% for the same period in 2025. The average cost of FHLB advances declined due to
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same reason noted above in the quarterly comparison. The average balance of FHLB advances was $9.6 million for the six months ended June 30, 2026, compared to $25.0 million for the six months ended June 30, 2025, due to the payoff of an FHLB advance during the fourth quarter of 2025. Interest expense on subordinated notes was $375 thousand for the six months ended June 30, 2026 and $336 thousand for the six months ended June 30, 2025. The increase was due to the same reasons noted above in the quarterly comparison.
Net Interest Income.
Q2 2026 vs Q2 2025 . Net interest income increased $336 thousand, or 3.6%, to $9.6 million for the three months ended June 30, 2026, from $9.3 million for the three months ended June 30, 2025, driven by both growth in interest-earning asset balances and improvement in the net interest rate spread, reflecting the impact of higher average loan balances and the improvement in loan yields excluding the impact of prior-year nonaccrual loan activity, and lower funding costs across most categories of interest-bearing liabilities excluding subordinated debt. These changes were partially offset by a decrease in the average yield on investments and interest-bearing cash and an increase in the rate paid on our subordinated debt for the reasons noted above in “Interest Expense.” Overall, these changes resulted in a 10 basis point improvement in the net interest rate spread and a 7 basis point increase in the annualized net interest margin, which rose to 3.74% for the three months ended June 30, 2026, compared to 3.67% for the same period in 2025.
YTD 2026 vs. YTD 2025 . Net interest income increased $1.3 million, or 7.6%, to $18.6 million for the six months ended June 30, 2026, from $17.3 million for the six months ended June 30, 2025. Net interest margin (annualized) was 3.62% and 3.47% for the six months ended June 30, 2026 and 2025, respectively. The increases in net interest income and net interest margin primarily were due to lower average funding costs, higher average loan balances, and improved loan yields during the current six-month period, primarily reflecting repricing of variable-rate loans and new loan originations at higher rates, partially offset by the decline in loan yields during the second quarter of 2026 as described above.
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 balances and yields, as described above in the quarterly comparison.
Through most of 2025, the Federal Open Market Committee of the Federal Reserve (“FOMC”) maintained the target range for the federal funds rate at 4.25% to 4.50%, where it remained until September 2025. The FOMC subsequently lowered the target range 75 basis points to 3.50% to 3.75% between September 2025 and December 2025. The FOMC maintained the target range for the federal funds rate through the first half 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 (release of) provision for credit losses during the periods indicated (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2026 2025 2026 2025
(Release of) provision for credit losses on loans $ (185) $ 164 $ (136) $ 79
(Release of) provision for credit losses on unfunded loan commitments (38) 6 36 (112)
(Release of) provision for credit losses $ (223) $ 170 $ (100) $ (33)
A release of provision for credit losses of $223 thousand was recorded for the quarter ended June 30, 2026, compared to a provision for credit losses of $170 thousand for the quarter ended June 30, 2025. The release in the current quarter resulted primarily from a decrease in loan balances and annual updates to the model assumptions, including changes in certain economic assumptions, partially offset by additional qualitative adjustments applied to the commercial loan segments, reflecting increased uncertainty in market conditions surrounding geopolitical events, in addition to the uncertainty adjustment tied to the impact of tariffs and other external factors affecting our clients already applied to our consumer portfolio. Expected credit loss estimates consider various factors, including market conditions, borrower-specific information, projected delinquencies, and anticipated effects of economic trends on borrowers' ability to repay. Net charge-offs for the three months ended June 30, 2026 totaled $30 thousand, compared to $21 thousand for the three months ended June 30, 2025.
A release of provision for credit losses of $100 thousand was recorded for the six months ended June 30, 2026, compared to a release of the provision for credit losses of $33 thousand for the six months ended June 30, 2025. The release of provision for credit losses during the current year period was due primarily to the same reasons noted above in the quarterly comparison. During the prior year period, the release of the provision for credit losses on loans primarily related to a reduction in qualitative
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adjustments reflecting improved credit quality and a decrease in unfunded loan commitments, partially offset by growth in the balance of the loan portfolio and a qualitative adjustment applied to certain loan segments related to uncertainty in the market and concentrations. Net charge-offs for the six months ended June 30, 2026 totaled $49 thousand, compared to $42 thousand for the six months ended June 30, 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 increased $309 thousand, or 27.6%, to $1.4 million for the three months ended June 30, 2026, as compared to $1.1 million for the three months ended June 30, 2025, as reflected below (dollars in thousands):
Three Months Ended June 30, Amount
Change Percent
Change
2026 2025
Service charges and fee income $ 684 $ 664 $ 20 3.0 %
Earnings on BOLI 277 229 48 21.0
Mortgage servicing income 245 263 (18) (6.8)
Fair value adjustment on mortgage servicing rights 119 (80) 199 (248.8)
Net gain on sale of loans 112 44 68 154.5
Other income (loss) (8) — (8) —
Total noninterest income $ 1,429 $ 1,120 $ 309 27.6 %
The increase in noninterest income during the current quarter compared to the quarter ended June 30, 2025, was primarily as a result of:
• a $199 thousand improvement in the fair value adjustment on mortgage servicing rights, primarily due to changes in valuation assumptions, including the increase in the cost of servicing assumption recorded in the prior year quarter that did not recur in the current quarter and slower estimated prepayment speeds resulting from higher market interest rates during the current quarter, partially offset by the impact of a smaller servicing portfolio;
• a $8 thousand increase in other income due to costs associated with closing our Tacoma branch in the second quarter of 2026; and
• a $68 thousand increase in net gain on sale of loans due to an increase in the volume of loans sold.
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Total noninterest income increased $121 thousand, or 5.5%, to $2.3 million for the six months ended June 30, 2026, as compared to $2.2 million for the six months ended June 30, 2025, as reflected below (dollars in thousands):
Six Months Ended June 30, Amount
Change Percent
Change
2026 2025
Service charges and fee income $ 1,307 $ 1,348 $ (41) (3.0) %
Earnings on BOLI 407 423 (16) (3.8)
Mortgage servicing income 493 531 (38) (7.2)
Fair value adjustment on mortgage servicing rights (21) (179) 158 (88.3)
Net gain on sale of loans 212 93 119 128.0
Other income (loss) (61) — $ (61) 100.0 %
Total noninterest income $ 2,337 $ 2,216 $ 121 5.5 %
The increase in noninterest income during the current six-month period compared to the six months ended June 30, 2025, was primarily due to:
• a $158 thousand improvement in the fair value adjustment on mortgage servicing rights, for the same reasons noted above in the quarterly comparison; and
• a $119 thousand increase in net gain on sale of loans due to an increase in the volume of loans sold.
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These increases were partially offset by:
• a $38 thousand decrease in mortgage servicing income as a result of the portfolio paying down at a faster rate than originations replaced repayments;
• a $16 thousand decrease in earnings on BOLI, primarily due to the strategic surrender and exchange of existing policies into higher-yielding policies in 2025, partially offset by changes due to market fluctuations;
• a $41 thousand decrease in service charges and fee income, reflecting lower fees related to past due loans and loan payoff activity and a Mastercard volume incentive received in the first quarter of 2025, partially offset by increased interchange income; and
• a $61 thousand decrease in other income due to costs associated with closing our Tacoma branch in 2026.
Noninterest Expense. Total noninterest expense increased $463 thousand, or 6.0%, to $8.1 million during the three months ended June 30, 2026, compared to $7.7 million for the three months ended June 30, 2025, as reflected below (dollars in thousands):
Three Months Ended June 30, Amount
Change Percent
Change
2026 2025
Salaries and benefits $ 4,645 $ 4,321 $ 324 7.5 %
Operations 1,617 1,443 174 12.1 %
Regulatory assessments 129 222 (93) (41.9) %
Occupancy 388 416 (28) (6.7) %
Data processing 1,332 1,254 78 6.2 %
Net loss and expenses on OREO and repossessed assets 17 9 8 88.9 %
Total noninterest expense $ 8,128 $ 7,665 $ 463 6.0 %
The increase in noninterest expense during the current quarter compared to the quarter ended June 30, 2025 was primarily related to:
• a $324 thousand increase in salaries and benefits due to annual wage increases, lower deferred loan origination costs due to reduced loan growth, higher market valuations on our deferred compensation for key executives (partially offset by higher BOLI income recorded in noninterest income), and higher medical expense due to higher insurance premiums paid by the Company, partially offset by lower stock compensation expense and lower incentive compensation expense;
• a $174 thousand increase in operations expense, primarily due to higher costs associated with our debit card processing; and
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• a $78 thousand increase in data processing expense, primarily due to higher processing costs related to annual increases in software vendor contracts, increased application programming interface (“API”) and usage charges, and the addition of new features, such as fraud detection software, intended to lower operational losses.
These increases were partially offset by:
• a $93 thousand decrease in regulatory assessments, primarily due to reduced quarterly assessments resulting from a lower rate applied to a lower average asset balance and the release of an accrual related to exam costs as actual costs incurred were lower than previously estimated; and
• a $28 thousand decrease in occupancy expense, primarily due to lower building lease charges following the closure of our Tacoma branch during the second quarter of 2026.
The efficiency ratio improved 12 basis points to 73.76% for the quarter ended June 30, 2026 from 73.88% for the same period in 2025, primarily reflecting modest growth in net interest income driven by lower funding costs and growth in average loan balances, partially offset by lower yields on interest-earning assets.
Total noninterest expense increased $424 thousand, or 2.7%, to $16.0 million during the six months ended June 30, 2026, compared to $15.6 million during the six months ended June 30, 2025, as reflected below (dollars in thousands):
Six Months Ended June 30, Amount
Change Percent
Change
2026 2025
Salaries and benefits $ 9,103 $ 8,916 $ 187 2.1 %
Operations 3,118 2,808 310 11.0
Regulatory assessments 327 442 (115) (26.0)
Occupancy 815 853 (38) (4.5)
Data processing 2,619 2,547 72 2.8
Net loss and expenses on OREO and repossessed assets 20 12 8 66.7
Total noninterest expense $ 16,002 $ 15,578 $ 424 2.7 %
The increase in noninterest expense was primarily due to:
• a $187 thousand increase in salaries and benefits related to the same reasons noted above in the quarterly comparison;
• a $310 thousand increase in operations expense, primarily due to higher costs associated with our debit card processing; and
• a $72 thousand increase in data processing expense, due to the reasons stated above in the quarterly comparison.
These increases were partially offset by:
• a $115 thousand decrease in regulatory assessments, due to reduced quarterly assessments resulting from a lower rate applied to a lower average asset balance and the release of an accrual related to exam costs as actual costs incurred were lower than previously estimated; and
• a $38 thousand decrease in occupancy expense due to same reason noted above in the quarterly comparison.
Income Tax Expense . The provision for income taxes was $597 thousand and $1.0 million for the three and six months ended June 30, 2026, compared to $488 thousand and $779 thousand for the three and six months ended June 30, 2025, respectively. The effective tax rates for the three and six months ended June 30, 2026 were 19.17% and 19.34%, compared to 19.21% and 19.48% for the same periods in 2025.
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 six months ended June 30, 2026.
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Capital. Stockholders’ equity totaled $112.6 million at June 30, 2026 and $109.4 million at December 31, 2025. The increase primarily reflected net income of $4.1 million, $106 thousand of related to stock-based compensation, and a $47 thousand decrease in accumulated other comprehensive loss, net of tax, primarily resulting from lower unrealized losses on available-for-sale securities, partially offset by $1.1 million of dividends paid on common stock.
We paid cash dividends of $0.42 per common share during the six months ended June 30, 2026, compared to $0.38 per common share during the six months ended June 30, 2025, which equates to a dividend payout ratio of 26.35% and 30.26%, 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 the Board’s 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 June 30, 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 our ability to meet current and future cash flow needs. The liquidity of a financial institution reflects its ability to meet loan demand, accommodate deposit withdrawals and take advantage of opportunities presented by changes in market interest rates. Our ability to meet financial obligations depends on the composition of our balance sheet, the liquidity of our assets and access to alternative funding sources. 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, pledgeable or expected to mature in the near term. Liquid asset sources generally include cash, interest-bearing deposits in banks, available-for-sale securities, principal and interest payments from securities, sales of fixed-rate residential mortgage loans in the secondary market and federal funds sold. Liability liquidity generally is provided by core deposits, advances from the FHLB and other borrowing arrangements 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 June 30, 2026, we had $127.6 million of cash and cash equivalents and available-for-sale investment securities, as well as $1.6 million in loans held-for-sale. At June 30, 2026, we had the ability to borrow up to $201.7 million in FHLB advances and access to additional borrowings of $21.1 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements. We had no outstanding advances from either the FHLB or the Federal Reserve at June 30, 2026. We also maintained a $20.0 million credit facility with Pacific Coast Bankers’ Bank available, with no balance outstanding, at June 30, 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 obligations and to take advantage of investment opportunities to the extent feasible. As of June 30, 2026, management was not aware of any events or regulatory recommendations reasonably likely to have a material adverse effect on our liquidity, capital resources or result of operations. 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 June 30, 2026. 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.
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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 June 30, 2026 and December 31, 2025, financial instrument contractual amounts representing credit risk were as follows (in thousands):
June 30, 2026 December 31, 2025
Residential mortgage commitments $ 4,535 $ 1,008
Unfunded construction commitments 28,068 23,718
Unused lines of credit 29,694 27,457
Irrevocable letters of credit 183 183
Total loan commitments $ 62,480 $ 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 funding 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 received 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 June 30, 2026, Sound Financial Bancorp, on an unconsolidated basis, had $3.7 million in cash, noninterest-bearing deposits and liquid investments available for its liquidity needs and other corporate obligations.
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 under the agencies’ PCA framework. As of June 30, 2026, the Bank’s CBLR was 10.93%, which exceeded the then-minimum requirement of 9%.
During the second quarter of 2026, the federal banking agencies finalized a rule lowering the minimum CBLR requirement from 9% to 8%, effective July 1, 2026.
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.
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