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What changed in Sound Financial Bancorp, Inc.'s 10-K — 2024 vs 2025

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Paragraph-level year-over-year comparison of Sound Financial Bancorp, Inc.'s 2024 and 2025 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2025 report.

+477 added−466 removedSource: 10-K (2026-03-18) vs 10-K (2025-03-18)

Top changes in Sound Financial Bancorp, Inc.'s 2025 10-K

477 paragraphs added · 466 removed · 392 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

194 edited+30 added−20 removed212 unchanged
Biggest changeBased on information from the MLS, the average home sales price in Jefferson County in December 2024 was $640 thousand, a 2% increase from December 2023's median home sales price of $625 thousand. 6 Table of Contents Lending Activities The following table presents information concerning the composition of our loan portfolio, excluding loans held-for-sale, by the type of loan as of the dates indicated (dollars in thousands): December 31, 2024 2023 Amount Percent Amount Percent Real estate loans: One-to-four family $ 269,684 29.8 % $ 279,448 31.2 % Home equity 26,686 3.0 23,073 2.6 Commercial and multifamily 371,516 41.2 315,280 35.2 Construction and land 73,077 8.1 126,758 14.1 Total real estate loans 740,963 82.1 744,559 83.1 Consumer loans: Manufactured homes 41,128 4.6 36,193 4.0 Floating homes 86,411 9.6 75,108 8.4 Other consumer 17,720 2.0 19,612 2.2 Total consumer loans 145,259 16.2 130,913 14.6 Commercial business loans 15,605 1.7 20,688 2.3 Total loans 901,827 100.0 % 896,160 100.0 % Less: Premiums 718 829 Deferred fees and discounts (2,374) (2,511) Allowance for credit losses on loans (8,499) (8,760) Total loans, net $ 891,672 $ 885,718 7 Table of Contents The following table shows the composition of our loan portfolio in dollar amounts and in percentages by fixed and adjustable-rate loans as of the dates indicated (dollars in thousands): December 31, 2024 2023 Amount Percent Amount Percent Fixed-rate loans: Real estate loans: One-to-four family $ 170,268 18.9 % $ 176,291 19.7 % Home equity 11,040 1.2 9,941 1.1 Commercial and multifamily 125,081 13.9 98,827 11.0 Construction and land 42,158 4.7 55,976 6.2 Total real estate loans 348,547 38.6 341,035 38.1 Consumer loans: Manufactured homes 41,128 4.6 36,193 4.0 Floating homes 58,991 6.5 60,906 6.8 Other consumer 17,258 1.9 19,283 2.2 Total consumer loans 117,377 13.0 116,382 13.0 Commercial business loans 6,432 0.7 10,253 1.1 Total fixed-rate loans 472,356 52.4 467,670 52.2 Adjustable-rate loans: Real estate loans: One-to-four family 99,416 11.0 103,157 11.5 Home equity 15,646 1.7 13,132 1.5 Commercial and multifamily 246,435 27.3 216,453 24.2 Construction and land 30,919 3.4 70,782 7.9 Total real estate loans 392,416 43.5 403,524 45.0 Consumer loans: Floating homes 27,419 3.0 14,202 1.6 Other consumer 462 0.1 329 — Total consumer loans 27,881 3.1 14,531 1.6 Commercial business loans 9,174 1.0 10,435 1.2 Total adjustable-rate loans 429,471 47.6 428,490 47.8 Total loans 901,827 100.0 % 896,160 100.0 % Less: Premiums 718 829 Deferred fees and discounts (2,374) (2,511) Allowance for credit losses on loans (8,499) (8,760) Total loans, net $ 891,672 $ 885,718 At December 31, 2024 and 2023, we had floating or variable rate loans totaling $429.5 million and $428.5 million, respectively.
Biggest changeAND SUBSIDIARY The following table shows the composition of our loan portfolio in dollar amounts and in percentages by fixed and adjustable-rate loans as of the dates indicated (dollars in thousands): December 31, 2025 2024 Amount Percent Amount Percent Fixed-rate loans: Real estate loans: One-to-four family $ 158,874 17.5 % $ 170,268 18.9 % Home equity 9,869 1.1 11,040 1.2 Commercial and multifamily 147,083 16.2 125,081 13.9 Construction and land 21,331 2.4 42,158 4.7 Total real estate loans 337,157 37.1 348,547 38.6 Consumer loans: Manufactured homes 43,080 4.7 41,128 4.6 Floating homes 51,673 5.7 58,991 6.5 Other consumer 16,037 1.8 17,258 1.9 Total consumer loans 110,790 12.2 117,377 13.0 Commercial business loans 6,898 0.8 6,432 0.7 Total fixed-rate loans 454,845 50.1 472,356 52.4 Adjustable-rate loans: Real estate loans: One-to-four family 94,967 10.5 99,416 11.0 Home equity 21,599 2.4 15,646 1.7 Commercial and multifamily 262,646 28.9 246,435 27.3 Construction and land 28,930 3.2 30,919 3.4 Total real estate loans 408,142 45.0 392,416 43.5 Consumer loans: Floating homes 35,642 3.9 27,419 3.0 Other consumer 534 0.1 462 0.1 Total consumer loans 36,176 4.0 27,881 3.1 Commercial business loans 8,480 0.9 9,174 1.0 Total adjustable-rate loans 452,798 49.9 429,471 47.6 Total loans 907,643 100.0 % 901,827 100.0 % Less: Premiums 627 718 Deferred fees and discounts (2,737) (2,374) Allowance for credit losses on loans (8,605) (8,499) Total loans, net $ 896,928 $ 891,672 At December 31, 2025 and 2024, we had floating or variable rate loans totaling $452.8 million and $429.5 million, respectively.
Loans that are sold into the secondary market to Fannie Mae are generally sold with the servicing retained to maintain the client relationship and to generate noninterest income. We also originate a small portion of government guaranteed and jumbo loans for sale servicing released to certain correspondent purchasers.
Loans that are sold into the secondary market to Fannie Mae are generally sold with the servicing retained to maintain the client relationship and generate noninterest income. We also originate a small portion of government guaranteed and jumbo loans for sale, servicing released, to certain correspondent purchasers.
We offer a variety of commercial and multifamily real estate loans. Most of these loans are secured by owner-occupied and nonowner-occupied commercial income producing properties, apartment buildings, warehouses, office buildings, gas station/convenience stores and mobile home parks located in our market area.
We offer a variety of commercial and multifamily real estate loans. Most of these loans are secured by owner-occupied and nonowner-occupied commercial income producing properties, multifamily apartment buildings, warehouses, office buildings, gas station/convenience stores and mobile home parks located in our market area.
This approach has yielded loyalty and commitment in our employee base which in turn grows our business, our products, and our customers, while adding new employees and external ideas supports a continuous improvement mindset. We believe that our average tenure of over six years reflects the engagement of our employees in this talent management philosophy.
This approach has yielded loyalty and commitment in our employee base which in turn grows our business, our products, and our customers, while adding new employees and external ideas supports a continuous improvement mindset. We believe that our average employee tenure of over six years reflects the engagement of our employees in this talent management philosophy.
Home equity lines of credit generally have a three-, five-, ten- or 12-year draw period, during which time the funds may be paid down and redrawn up to the committed amount. Once the draw period has lapsed, the payment is amortized over either a 12-, 15-, 19- or 21-year period based on the loan balance at that time.
AND SUBSIDIARY Home equity lines of credit generally have a three-, five-, ten- or 12-year draw period, during which time the funds may be paid down and redrawn up to the committed amount. Once the draw period has lapsed, the payment is amortized over either a 12-, 15-, 19- or 21-year period based on the loan balance at that time.
Construction loans necessitate active monitoring of the building process, including cost comparisons and on-site inspections, making them more challenging and costly to oversee. Increases in market interest rates can disproportionately impact construction loans by rapidly escalating end purchasers’ borrowing costs, potentially reducing overall project demand.
AND SUBSIDIARY Construction loans necessitate active monitoring of the building process, including cost comparisons and on-site inspections, making them more challenging and costly to oversee. Increases in market interest rates can disproportionately impact construction loans by rapidly escalating end purchasers’ borrowing costs, potentially reducing overall project demand.
Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans.
Such borrowers may have higher debt-to-income ratios, or the loans may be secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans.
As provided in the subordinated notes, the interest rate on the subordinated notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. Prior to October 1, 2025, the Company may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes.
As provided in the subordinated notes, the interest rate on the subordinated notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. Prior to October 1, 2025, the Company could redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes.
No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Total base assessment rates currently range from 5 to 32 basis points subject to certain adjustments. The FDIC has authority to increase insurance assessments.
No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Total base assessment rates currently range from 2.5 to 32 basis points subject to certain adjustments. The FDIC has authority to increase insurance assessments.
As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to the Federal National Mortgage Association ("Fannie Mae") and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives.
AND SUBSIDIARY As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to the Federal National Mortgage Association ("Fannie Mae") and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives.
We are required to own stock in the FHLB of Des Moines, the amount of which varies based on the amount of our advance activity. From time to time, we also may borrow from the Federal Reserve Bank of San Francisco's "discount window" for overnight liquidity needs.
We are required to own stock in the FHLB of Des Moines, the amount of which varies based on the level of our advance activity. From time to time, we also may borrow from the Federal Reserve Bank of San Francisco's "discount window" for overnight liquidity needs.
Payments on loans secured by rental properties may depend primarily on the tenants’ continuing ability to pay rent to the property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream.
Payments on loans secured by rental properties may depend primarily on the tenants’ continuing ability to pay rent to the property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of rental income.
State Taxation We are subject to a business and occupation tax imposed under Washington state law at the rate of 1.5% of gross receipts, as well as personal property and sales tax.
AND SUBSIDIARY State Taxation We are subject to a business and occupation tax imposed under Washington state law at the rate of 1.5% of gross receipts, as well as personal property and sales tax.
Consumer loans generally entail greater risk than do one-to-four family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as manufactured homes, automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance.
Consumer loans generally entail greater risk than those of one-to-four family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as manufactured homes, automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance.
Among other things, these laws: • require lenders to disclose credit terms in meaningful and consistent ways; 29 Table of Contents • prohibit discrimination against an applicant in a credit transaction; • prohibit discrimination in housing-related lending activities; • require certain lenders to collect and report applicant and borrower data regarding home loans; • require lenders to provide borrowers with information regarding the nature and cost of real estate settlements; • prohibit certain lending practices and limit escrow account amounts with respect to real estate loan transactions; • require financial institutions to implement identity theft prevention programs and measures to protect the confidentiality of consumer financial information; and • prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
Among other things, these laws: • require lenders to disclose credit terms in meaningful and consistent ways; • prohibit discrimination against an applicant in a credit transaction; • prohibit discrimination in housing-related lending activities; • require certain lenders to collect and report applicant and borrower data regarding home loans; • require lenders to provide borrowers with information regarding the nature and cost of real estate settlements; • prohibit certain lending practices and limit escrow account amounts with respect to real estate loan transactions; • require financial institutions to implement identity theft prevention programs and measures to protect the confidentiality of consumer financial information; and • prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
The term “subprime” refers to the credit characteristics of individual borrowers which may include payment delinquencies, judgements, foreclosures, bankruptcies, low credit scores and/or high debt-to-income ratios. In exchange for the additional risk we take with such borrowers, we may require them to pay higher interest rates, require a lower debt-to-income ratio or require other enhancements to manage the additional risk.
The term “subprime” refers to the credit characteristics of individual borrowers which may include payment delinquencies, judgments, foreclosures, bankruptcies, low credit scores and/or high debt-to-income ratios. In exchange for the additional risk we take with such borrowers, we may require them to pay higher interest rates, require a lower debt-to-income ratio or require other enhancements to manage the additional risk.
The table below sets forth the amounts and categories of nonperforming assets in our loan portfolio (in thousands). Loans are placed on nonaccrual status when the collection of principal and/or interest become doubtful or when the loan is 90 days or more past due. Other real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.
The table below sets forth the amounts and categories of nonperforming assets in our loan portfolio (in thousands). Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or when the loan is 90 days or more past due. Other real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.
The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit. At December 31, 2024, the Bank had no outstanding borrowings from the discount window.
The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit. At December 31, 2025, the Bank had no outstanding borrowings from the discount window.
Our fixed-rate home equity loans generally have terms of up to 20 years and are fully amortizing. At December 31, 2024, fixed-rate home equity loans totaled $11.0 million, or 1.2% of our gross loan portfolio, compared to $9.9 million, or 1.1% of our total loan portfolio at December 31, 2023. Commercial and Multifamily Real Estate Lending.
Our fixed-rate home equity loans generally have terms of up to 20 years and are fully amortizing. At December 31, 2025, fixed-rate home equity loans totaled $9.9 million, or 1.1% of our gross loan portfolio, compared to $11.0 million, or 1.2% of our total loan portfolio at December 31, 2024. Commercial and Multifamily Real Estate Lending.
The following table sets forth certain information at December 31, 2024, regarding the amount of loans in our portfolio based on their contractual terms to maturity (in thousands). The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
The following table sets forth certain information at December 31, 2025, regarding the amount of loans in our portfolio based on their contractual terms to maturity (in thousands). The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
We had $2.0 million in purchases of commercial business loan participations from other financial institutions in 2024 and no such purchases in 2023. We originate loans that may meet one or more of the credit characteristics commonly associated with subprime lending.
We had no purchases of commercial business loan participations from other financial institutions in 2025 and $2.0 million of such purchases in 2024. We originate loans that may meet one or more of the credit characteristics commonly associated with subprime lending.
Based on the most recent data provided by the FDIC, there are approximately 46 other commercial banks operating in the Seattle MSA, which includes King, Snohomish and Pierce Counties. Based on the most recent branch deposit data provided by the FDIC, our share of deposits in the Seattle MSA is approximately 0.28%.
Based on the most recent data provided by the FDIC, there are approximately 45 other commercial banks operating in the Seattle MSA, which includes King, Snohomish and Pierce Counties. Based on the most recent branch deposit data provided by the FDIC, our share of deposits in the Seattle MSA is approximately 0.28%.
We also, from time to time, purchase loans from or participate with other financial institutions on loans they originate. We underwrite loan purchases and participations to the same standards as internally originated loans. We did not sell any commercial loan participations in 2024 or 2023.
We also, from time to time, purchase loans from or participate with other financial institutions on loans they originate. We underwrite loan purchases and participations to the same standards as internally originated loans. We did not sell any commercial loan participations in 2025 or 2024.
Accounting principles generally accepted in the United States (“GAAP”) requires us to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. Modified loans to borrowers experiencing financial difficulty totaled $1.3 million and $1.7 million at December 31, 2024 and 2023, respectively . OREO and Repossessed Assets.
Accounting principles generally accepted in the United States (“GAAP”) requires us to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. Modified loans to borrowers experiencing financial difficulty totaled $1.1 million and $1.3 million at December 31, 2025 and 2024, respectively . OREO and Repossessed Assets.
We have entered into a loan agreement with the FHLB of Des Moines pursuant to which the Bank may borrow up to approximately 45% of total assets, secured by a blanket pledge on a portion of our residential mortgage loan portfolio, including one-to-four family loans, commercial and multifamily real estate 25 Table of Contents loans and home equity loans.
We have entered into a loan agreement with the FHLB of Des Moines pursuant to which the Bank may borrow up to approximately 45% of total assets, secured by a blanket pledge on a portion of our residential mortgage loan portfolio, including one-to-four family loans, commercial and multifamily real estate loans and home equity loans.
Sound Community Bank is required to maintain minimum levels of regulatory capital and is subject to certain limitations on the payment of dividends to Sound Financial Bancorp. See “—Capital Rules” and “—Limitations on Dividends and Stock Repurchase.” Regulation by the WDFI and the FDIC .
Sound Community Bank is required to maintain minimum levels of regulatory capital and is subject to certain limitations on the payment of dividends to Sound Financial Bancorp. See “—Capital Rules” and “—Limitations on Dividends and Stock Repurchases.” Regulation by the WDFI and the FDIC .
Loans secured by commercial and multifamily real estate are generally originated with a variable interest rate, fixed for an initial three- to ten-year term and have a 20- to 25-year amortization period.
Loans secured by commercial and multifamily real estate are generally originated with a variable interest rate, fixed for an initial three- to ten-year term, and have a 20- to 30-year amortization period.
One-to-Four Family Real Estate Lending . One of our primary lending activities is the origination of loans secured by first mortgages on one-to-four family residences, substantially all of which are secured by properties located in our geographic lending area.
One of our primary lending activities is the origination of loans secured by first mortgages on one-to-four family residences, substantially all of which are secured by properties located in our geographic lending area.
First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources. As a result, these loans may have a higher probability of default and higher delinquency rates than single- 15 Table of Contents family residential loans and other types of consumer loans.
First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources. As a result, these loans may have a higher probability of default and higher delinquency rates than single-family residential loans and other types of consumer loans.
Additionally, we had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $8.0 million at December 31, 2024, which was used to secure public fund deposits. We rely in part on FHLB advances to fund asset and loan growth. We also use short-term FHLB advances to meet short term liquidity needs.
Additionally, we had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $14.0 million at December 31, 2025, which was used to secure public fund deposits. We rely in part on FHLB advances to fund asset and loan growth. We also use short-term FHLB advances to meet short-term liquidity needs.
At December 31, 2024, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $526 thousand and were within the aggregate limits set forth in the preceding paragraph. The FDIC and the WDFI must approve any merger transaction involving Sound Community Bank as the acquirer, including an assumption of deposits from another depository institution.
At December 31, 2025, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $509 thousand and were within the aggregate limits set forth in the preceding paragraph. The FDIC and the WDFI must approve any merger transaction involving Sound Community Bank as the acquirer, including an assumption of deposits from another depository institution.
The Company participates in the Federal Reserve's Borrower-in-Custody program, which gives the Company access to the discount window. The Company pledges commercial and consumer loans as collateral for its Borrower-in-Custody line of credit. At December 31, 2024 and 2023, the Company had no outstanding borrowings and unused borrowing capacity of $20.8 million and $18.3 million, respectively, under the Borrower-in-Custody program.
The Company participates in the Federal Reserve's Borrower-in-Custody program, which gives the Company access to the discount window. The Company pledges commercial and consumer loans as collateral for its Borrower-in-Custody line of credit. At December 31, 2025 and 2024, the Company had no outstanding borrowings and unused borrowing capacity of $18.5 million and $20.8 million, respectively, under the Borrower-in-Custody program.
At the end of the initial term, the balance is due in full or the loan re-prices based on an independent index plus a margin over the applicable index of 1% to 4% for another five years.
At the end of the initial term, the balance is due in full, or the loan re-prices based on an independent index plus a margin over the applicable index of 1% to 4% for another three- to five-year term.
Information pertaining to us, including SEC filings, can be found by clicking the link on our site called "Investor Relations." For more information regarding access to these filings on our website, please contact our Corporate Secretary, Sound Financial Bancorp, Inc., 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121 or by calling (206) 448-0884. 34 Table of Contents
Information pertaining to us, including SEC filings, can be found by clicking the link on our site called “Investor Relations.” For more information regarding access to these filings on our website, please contact our Corporate Secretary, Sound Financial Bancorp, Inc., 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121 or by calling (206) 448-0884. 35 Table of Contents SOUND FINANCIAL BANCORP, INC.
Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Fannie Mae credit requirements because of personal and financial reasons (i.e., bankruptcy, length of time employed, etc.), and other aspects, which do not conform to Fannie Mae’s guidelines.
Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Fannie Mae credit requirements because of personal and financial reasons (e.g., bankruptcy, length of time employed, etc.), and other aspects that do not conform to Fannie Mae’s guidelines.
Home equity lines of credit are typically originated for up to $250,000 with 11 Table of Contents an adjustable rate of interest, based on the one-year Treasury Bill rate or the Wall Street Journal Prime rate, plus a margin .
Home equity lines of credit are typically originated for up to $250,000 with an adjustable rate of interest, based on the one-year Treasury Bill rate or the Wall Street Journal Prime rate, plus a margin . 11 Table of Contents SOUND FINANCIAL BANCORP, INC.
Sound Community Bank is obligated to monitor conditions in its real estate markets to ensure that its standards remain appropriate for current market conditions. Sound Community Bank’s Board of 27 Table of Contents Directors is required to review and approve Sound Community Bank’s standards at least annually.
Sound Community Bank is obligated to monitor conditions in its real estate markets to ensure that its standards remain appropriate for current market conditions. Sound Community Bank’s Board of 27 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Directors is required to review and approve Sound Community Bank’s standards at least annually.
A bank holding company subject to the Small Bank 32 Table of Contents Holding Company Policy Statement, such as Sound Financial Bancorp, is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1 and it meets certain additional criteria.
A bank holding company subject to the Small Bank Holding Company Policy Statement, such as Sound Financial Bancorp, is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1 and it meets certain additional criteria.
The subordinated notes have a stated maturity of October 1, 2030 and bear interest at a fixed rate of 5.25% per year until October 1, 2025. From October 1, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR, plus 513 basis points.
The subordinated notes have a stated maturity of October 1, 2030 and bore interest at a fixed rate of 5.25% per year until October 1, 2025. From October 1, 2025 to the maturity date or early redemption date, the interest rate resets quarterly at a variable rate equal to the then current three-month term SOFR, plus 513 basis points.
The yields on these loans are higher than on our other residential lending products, and the portfolio has performed reasonably well with an acceptable level of risk and loss in exchange for the higher yield. Our weighted-average yield on manufactured home loans at December 31, 2024 was 8.61%, compared to 4.55% for one-to-four family mortgages, excluding loans held-for-sale.
The yields on these loans are higher than on our other residential lending products, and the portfolio has performed reasonably well with an acceptable level of risk and loss in exchange for the higher yield. Our weighted-average yield on manufactured home loans at December 31, 2025 was 8.72%, compared to 4.79% for one-to-four family mortgages, excluding loans held-for-sale.
Approximately $5.9 million of our home equity line of credit products at December 31, 2024, allow an amount up to the credit limit to be converted to up to three installment loans at a fixed rate prior to the lapse of the draw period.
Approximately $9.2 million of our home equity line of credit products at December 31, 2025, allow an amount up to the credit limit to be converted to up to three installment loans at a fixed rate prior to the lapse of the draw period.
At December 31, 2024, our ACL for loans was $8.5 million, or 0.94% of our total loan portfolio, compared to $8.8 million, or 0.98% of our total loan portfolio, at December 31, 2023. See “Note 1—Organization and Significant Accounting Policies” and “Note 5—Loans” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8.
At December 31, 2025, our ACL for loans was $8.6 million, or 0.95% of our total loan portfolio, compared to $8.5 million, or 0.94% of our total loan portfolio, at December 31, 2024. See “Note 1—Organization and Significant Accounting Policies” and “Note 5—Loans” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8.
Financial Statements and Supplementary Data” of this report on Form 10-K. 20 Table of Contents The following table shows certain credit ratios at and for the periods indicated and each component of the ratio's calculations (dollars in thousands).
Financial Statements and Supplementary Data” of this report on Form 10-K. 20 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY The following table shows certain credit ratios at and for the periods indicated and each component of the ratio's calculations (dollars in thousands).
During the year ended December 31, 2024, we did not recognize any credit losses on investment securities.
During the year ended December 31, 2025, we did not recognize any credit losses on investment securities.
Substantially all of the one-to-four family residential mortgage loans we retain in our portfolio consist of loans that do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Fannie Mae or private investors.
A significant portion of the one-to-four family residential mortgage loans we retain in our portfolio consist of loans that do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Fannie Mae or private investors.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. At December 31, 2024, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 63.9% of CBLR Capital.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. At December 31, 2025, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 42.4% of CBLR Capital.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2024 Compared to December 31, 2023—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets. 18 Table of Contents Modified Loans to Borrowers Experiencing Financial Difficulty.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2025 Compared to December 31, 2024—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets. Modified Loans to Borrowers Experiencing Financial Difficulty.
At December 31, 2024, approximately 62% of our workforce was female and approximately 38% was male, and women held 69% of the Bank's management roles. The average employee tenure was 6.14 years. As part of our compensation philosophy, we offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent.
At December 31, 2025, approximately 61% of our workforce was female and approximately 39% was male, and women held 69% of the Bank's management roles. The average employee tenure was 6.38 years. As part of our compensation philosophy, we offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent.
Selling 14 Table of Contents properties under construction can be challenging, requiring completion for successful sales, complicating the resolution of problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. In the case of speculative construction loans, identifying an end purchaser for the finished project is an added risk.
Selling properties under construction can be challenging, requiring completion for successful sales, complicating the resolution of problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. In the case of speculative construction loans, having to identify an end purchaser for the finished project is an added risk.
As a result, these loans may have higher collateral recovery costs than one-to-four family mortgage loans and other types of consumer loans. We consider these additional risks as a component of our ACL. At December 31, 2024, floating home loans totaled $86.4 million, or 59.5% of our consumer loan portfolio and 9.6% of our total loan portfolio.
As a result, these loans may have higher collateral recovery costs than one-to-four family mortgage loans and other types of consumer loans. We consider these additional risks as a component of our ACL. At December 31, 2025, floating home loans totaled $87.3 million, or 59.4% of our consumer loan portfolio and 9.6% of our total loan portfolio.
The Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $8.0 million and $10.0 million at December 31, 2024 and 2023, respectively, to secure public fund deposits.
The Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $14.0 million and $8.0 million at December 31, 2025 and 2024, respectively, to secure public fund deposits.
In 2016, we introduced a loan program aimed at assisting individuals in acquiring a new residence before selling their existing one. This program enables borrowers to leverage the equity in their current residence for the purchase of a new one.
We also have a loan program aimed at assisting individuals in acquiring a new residence before selling their existing one. This program enables borrowers to leverage the equity in their current residence for the purchase of a new one.
We consider this additional risk as a component of our ACL. We attempt to work out delinquent loans with the borrower and, if that is not successful, any past due manufactured homes are repossessed and sold. At December 31, 2024, we had ten nonperforming manufactured home loans, totaling $521 thousand.
We consider this additional risk as a component of our ACL. We attempt to work out delinquent loans with the borrower and, if that is not successful, any past due manufactured homes are repossessed and sold. At December 31, 2025, we had twelve nonperforming manufactured home loans, totaling $461 thousand.
However, the Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies, such as Sound Financial Bancorp, with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve. Federal Securities Law.
However, the Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies, such as Sound Financial Bancorp, with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve. 32 Table of Contents SOUND FINANCIAL BANCORP, INC.
We manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe 23 Table of Contents that our deposits are relatively stable sources of funds.
We manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe 23 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY that our deposits are relatively stable sources of funds.
Sound Financial Bancorp’s ability to declare and pay dividends is subject to the Federal Reserve’s limits and Maryland law and may depend on its ability to receive dividends from Sound Community Bank.
Limitations on Dividends and Stock Repurchases Sound Financial Bancorp. Sound Financial Bancorp’s ability to declare and pay dividends is subject to the Federal Reserve’s limits and Maryland law and may depend on its ability to receive dividends from Sound Community Bank.
The notice of default begins the foreclosure process. If foreclosure is completed, typically we take title to the property and sell it directly through a real estate broker. Delinquent consumer loans are handled in a manner similar to one-to-four family loans.
If foreclosure is completed, typically we take title to the property and sell it directly through a real estate broker. Delinquent consumer loans are handled in a manner similar to one-to-four family loans.
Consequently, the success of these loans relies heavily on the project’s ultimate outcome and the borrower’s ability to sell or lease the property or secure permanent take-out financing. If our appraisal of the completed project’s value proves overstated, we may lack sufficient security for the loan’s repayment, leading to potential losses.
Consequently, the success of these loans relies heavily on the project’s ultimate outcome and the borrower’s ability to sell or lease the property or secure permanent take-out financing. If our appraisal of the completed project’s value proves overstated, we may lack sufficient security for the loan’s repayment, leading to potential losses. 14 Table of Contents SOUND FINANCIAL BANCORP, INC.
We earned mortgage servicing income of $1.1 million and $1.2 million for the years ended December 31, 2024 and 2023, respectively. See “Note 6 — Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.
We earned mortgage servicing income of $1.0 million and $1.1 million for the years ended December 31, 2025 and 2024, respectively. See “Note 6 — Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K. We repurchased no loans in 2025 and 2024.
Sound Community Bank is an affiliate of Sound Financial Bancorp and any non-bank subsidiary of the latter. Federal laws restrict the ability of banks to engage in certain transactions with their affiliates.
Sound Financial Bancorp and Sound Community Bank are separate and distinct legal entities. Sound Community Bank is an affiliate of Sound Financial Bancorp and any non-bank subsidiary of the latter. Federal laws restrict the ability of banks to engage in certain transactions with their affiliates.
At December 31, 2024, land acquisition and development and lot loans totaled $15.5 million, or 21.3% of our construction and land portfolio. We also offer commercial and multifamily construction loans. These loans are underwritten as interest only with financing typically up to 24 months under terms similar to our residential construction loans.
At December 31, 2025, land acquisition and development and lot loans totaled $15.2 million, or 30.2% of our construction and land portfolio. We also offer commercial and multifamily construction loans. These loans are underwritten as interest only with financing typically up to 24 months under terms similar to our residential construction loans.
At December 31, 2024, manufactured home loans totaled $41.1 million, or 28.3% of our consumer loans and 4.6% of our total loan portfolio. For both new and used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years.
At December 31, 2025, manufactured home loans totaled $43.1 million, or 29.3% of our consumer loans and 4.7% of our total loan portfolio. For both new and used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years.
We recorded a release of provision for credit losses on loans of $161 thousand for the year ended December 31, 2024, compared to a provision for credit losses on loans of $564 thousand for the year ended December 31, 2023.
We recorded a release of provision for credit losses on loans of $212 thousand for the year ended December 31, 2025, compared to a provision for credit losses on loans of $161 thousand for the year ended December 31, 2024.
Our CEO and Chief Financial Officer (“CFO”) have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors. These officers consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment.
Our CEO and President/CFO have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors. These officers consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment.
At December 31, 2024, there was one security in an unrealized loss position for less than 12 months, and 15 securities in an unrealized loss position for more than 12 months, although management determined the decline in value was not related to specific credit deterioration.
At December 31, 2025, there were no securities in an unrealized loss position for less than 12 months, and 15 securities in an unrealized loss position for more than 12 months, although management determined the decline in value was not related to specific credit deterioration.
Our Senior Vice President and Chief Credit Officer (“CCO”) may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $3.7 million at December 31, 2024.
Our Senior Vice President and Chief Credit Officer (“CCO”) may approve unsecured loans up to $400,000 and all type of secured loans up to 15% of our legal lending limit, or approximately $3.8 million at December 31, 2025.
Commercial Business Lending. At December 31, 2024, commercial business loans totaled $15.6 million, or 1.7% of our total loan portfolio, compared to $20.7 million, or 2.3% of our total loan portfolio at December 31, 2023. Substantially all our commercial business loans have been to borrowers in our market area.
Commercial Business Lending. At December 31, 2025, commercial business loans totaled $15.4 million, or 1.7% of our total loan portfolio, compared to $15.6 million, or 1.7% of our total loan portfolio at December 31, 2024. Substantially all our commercial business loans have been to borrowers in our market area.
Government and other governmental initiatives affecting the financial services industry; • bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; • fluctuations in the demand for loans, unsold homes, land and other properties; • fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area; • our ability to access cost-effective funding, including maintaining the confidence of depositors; • the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to increase our allowance for credit losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits; • the inability of key third-party providers to perform their obligations; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate into our operations any assets, liabilities, clients, systems, and management personnel we may acquire and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • use of estimates in determining the fair values of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • our ability to keep pace with technological changes; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Financial Accounting Standards Board, the U.S.
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 uninsured deposits may require us to sell investment securities at a loss; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to increase our allowance for credit losses, write-down asset values or increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits; • the inability of key third-party providers to perform their obligations to us; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate into our operations any assets, liabilities, clients, systems, and management personnel we may acquire and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • use of estimates in determining the fair values of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • our ability to adapt to rapid technological changes, including advancements related to artificial intelligence, digital banking platforms, and cybersecurity; 4 Table of Contents SOUND FINANCIAL BANCORP, INC.
Sound Financial Bancorp has elected to file a consolidated return with Sound Community Bank. Therefore, any dividends Sound Financial Bancorp receives from Sound Community Bank will not be included as income to Sound Financial Bancorp.
Sound Financial Bancorp has elected to file a consolidated return with Sound Community Bank. Therefore, any dividends Sound Financial Bancorp receives from Sound Community Bank will not be included as income to Sound Financial Bancorp. 33 Table of Contents SOUND FINANCIAL BANCORP, INC.
At December 31, 2024, $29.4 million, or 10.9% of our one-to-four family residential portfolio consisted of nonowner-occupied loans, compared to $28.8 million, or 10.3% of our one-to-four family residential portfolio at December 31, 2023. At December 31, 2024, our average nonowner-occupied residential loan had a balance of $127 thousand. Loans secured by rental properties represent potentially higher risk.
At December 31, 2025, $25.8 million, or 10.2% of our one-to-four family residential portfolio consisted of nonowner-occupied loans, compared to $29.4 million, or 10.9% of our one-to-four family residential portfolio at December 31, 2024. At December 31, 2025, our average nonowner-occupied residential loan had a balance of $117 thousand. Loans secured by rental properties represent potentially higher risk.
Our commercial business loans include unsecured lines of credit and 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.
Our commercial business loans include unsecured lines of credit and 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. 5 Table of Contents SOUND FINANCIAL BANCORP, INC.
We generally require personal guarantees on both our secured and unsecured commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage and commercial real estate loans. At December 31, 2024, approximately $1.5 million of our commercial business loans were unsecured.
We generally require personal guarantees on both our secured and unsecured commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage and commercial real estate loans. At December 31, 2025, approximately $589 thousand of our commercial business loans were unsecured.
At December 31, 2024, core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250 thousand (excluding brokered deposits and public funds), represented approximately 87.3% of total deposits, compared to 86.6% at December 31, 2023.
At December 31, 2025, core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250 thousand (excluding brokered deposits and public funds), represented approximately 85.3% of total deposits, compared to 87.3% at December 31, 2024. We had no brokered deposits at December 31, 2025 and December 31, 2024.
Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: • adverse economic conditions in our market areas, and other markets where we have lending relationships; • effects of employment levels, inflation, a recession, or slowed economic growth; • changes in the interest rate environment, including increases and decreases in the Board of Governors of the Federal Reserve System (the “Federal Reserve”) benchmark rate and the duration of such rates, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity; • the impact of inflation and the Federal Reserve’s monetary policy decisions; • the effects of any federal government shutdown; • 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.
Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: • adverse economic conditions in our market areas, and other markets where we have lending relationships; • effects of employment levels, 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.
The common stock of Sound Financial Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended. Sound Financial Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”). Limitations on Dividends and Stock Repurchases Sound Financial Bancorp.
AND SUBSIDIARY Federal Securities Law. The common stock of Sound Financial Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended. Sound Financial Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”).
Our President and Chief Executive Officer (“CEO”) may approve unsecured loans up to $1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $7.4 million at December 31, 2024.
Our Chief Executive Officer (“CEO”) and our President/Chief Financial Officer (“CFO”) may both approve unsecured loans up to $1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $7.5 million at December 31, 2025.
Adjustable-rate home equity lines of credit at December 31, 2024 totaled $15.6 million, or 1.7% of our total loan portfolio, compared to $13.1 million, or 1.5% of our total loan portfolio at December 31, 2023. At December 31, 2024, unfunded commitments on home equity lines of credit totaled $19.4 million.
Adjustable-rate home equity lines of credit at December 31, 2025 totaled $21.6 million, or 2.4% of our total loan portfolio, compared to $15.6 million, or 1.7% of our total loan portfolio at December 31, 2024. At December 31, 2025, unfunded commitments on home equity lines of credit totaled $19.9 million.
While no single credit characteristic defines a subprime loan, one commonly used indicator is a loan originated to a borrower with a credit score of 660 or lower. Of the $39.9 million in one-to-four-family loans originated in 2024, $407 thousand or 1.0% were to borrowers with a credit score under 660.
While no single credit characteristic defines a subprime loan, one commonly used indicator is a loan originated to a borrower with a credit score of 660 or lower. Of the $32.0 million in one-to-four-family loans originated in 2025, no loans were to borrowers with a credit score under 660.
We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans. We also retain jumbo loans, which exceed the conforming loan limits and are therefore, not eligible to be purchased by Fannie Mae.
We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we generally continue to originate these types of loans. We also retain jumbo loans, which exceed the conforming loan limits and are therefore ineligible for purchase by Fannie Mae.
At December 31, 2024, our consumer loans totaled $145.3 million, or 16.2% of our total loan portfolio, compared to $130.9 million, or 14.6% of our total loan portfolio at December 31, 2023. We typically originate new and used manufactured home loans to borrowers who intend to use the home as a primary residence.
At December 31, 2025, our consumer loans totaled $147.0 million, or 16.1% of our total loan portfolio, compared to $145.3 million, or 16.2% of our total loan portfolio at December 31, 2024. We typically originate new and used manufactured home loans to borrowers who intend to use the home as a primary residence.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeFailure to adapt to or comply with regulatory requirements, or investor or stakeholder expectations and standards, could negatively impact our reputation, ability to do business with certain partners, and our stock price. 42 Table of Contents Recent changes in the regulatory landscape under the new Trump administration have moved toward a reduction in emphasis on certain ESG priorities, particularly around climate change and diversity, equity, and inclusion (“DEI”).
Biggest changeIncreased ESG-related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements, or investor or stakeholder expectations and standards, could negatively impact our reputation, ability to do business with certain partners, and our stock price.
Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized. Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized. Scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
The long-term ability of the Company to pay dividends to its stockholders, repurchase its stock and make debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level.
The long-term ability of the Company to pay dividends to its stockholders, repurchase its stock and make debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and on the availability of cash at the holding company level.
The amount of this allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to: 37 Table of Contents • our collective loss reserve, for loans evaluated on a pool basis with similar risk characteristics based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events and certain qualitative factors; and • our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics and the present value of the expected future cash flows or the fair value of the underlying collateral.
The amount of this allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to: • our collective loss reserve, for loans evaluated on a pool basis with similar risk characteristics based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events and certain qualitative factors; and • our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics and the present value of the expected future cash flows or the fair value of the underlying collateral.
A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital (or in the case of a bank, such as the Bank, that has elected to follow the CBLR framework, CBLR Capital (Tier 1 capital plus the entire allowance for loan and lease losses), or (ii) total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital or CBLR Capital, as appropriate, and the outstanding 41 Table of Contents balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital (or in the case of a bank, such as the Bank, that has elected to follow the CBLR framework, CBLR Capital (Tier 1 capital plus the entire allowance for loan and lease losses), or (ii) total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital or CBLR Capital, as appropriate, and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
With the evolving nature of cyber threats, we may need to allocate significant additional resources to bolster our protective measures or investigate and 39 Table of Contents address crucial information security vulnerabilities or exposures. Despite our efforts, they might not prevent all physical and electronic intrusions, denial of service, cyber-attacks, or security breaches.
With the evolving nature of cyber threats, we may need to allocate significant additional resources to bolster our protective measures or investigate and address crucial information security vulnerabilities or exposures. Despite our efforts, they might not prevent all physical and electronic intrusions, denial of service, cyber-attacks, or security breaches.
A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral includes accounts receivable, inventory, equipment or real estate.
A borrower’s cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral includes accounts receivable, inventory, equipment or real estate.
Failures in our risk management policies and controls could lead to higher delinquencies and losses, adversely affecting our business, financial condition, and results of operations. 36 Table of Contents • Commercial Business Loans . Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.
Failures in our risk management policies and controls could lead to higher delinquencies and losses, adversely affecting our business, financial condition, and results of operations. • Commercial Business Loans . Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.
Moreover, a significant decline in local, regional or national economic conditions caused by inflation, recession, severe weather, natural disasters, widespread disease or pandemics, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, trade-related pressures that may affect construction costs or materials availability, unemployment or other factors beyond our control could negatively affect the financial results of our banking operations.
Moreover, a significant decline in local, regional or national economic conditions caused by inflation, recession, economic slowdown, severe weather, natural disasters, widespread disease or pandemics, sustained higher interest rates, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, trade-related pressures that may affect construction costs or materials availability, unemployment or other factors beyond our control could negatively affect the financial results of our banking operations.
Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects and the value of the Company's common stock. At December 31, 2024 , Sound Financial Bancorp had $1.3 million in unrestricted cash to support dividend and debt payments. See "Part I. Item 1.
Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects and the value of the Company's common stock. At December 31, 2025 , Sound Financial Bancorp had $1.4 million in unrestricted cash to support dividend and debt payments. See "Part I. Item 1.
Many national vendors provide turn-key services to community banks, such as internet 40 Table of Contents banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements.
Many national vendors provide turn-key services to community banks, such as internet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements.
Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules” and “—Regulation of Sound Financial Bancorp—Limitations on Dividends and Stock Repurchases" for additional information. 44 Table of Contents
Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules” and “—Regulation of Sound Financial Bancorp—Limitations on Dividends and Stock Repurchases" for additional information.
Legislation has previously been introduced in Congress that would allow banks and financial institutions to serve cannabis businesses in states where it is legal without any risk of federal prosecution but has yet to be enacted. At December 31, 2024, approximately 5.1% of our total deposits and a portion of our service charges from deposits are from legal cannabis-related businesses.
Legislation has previously been introduced in Congress that would allow banks and financial institutions to serve cannabis businesses in states where it is legal without any risk of federal prosecution but has yet to be enacted. At December 31, 2025, approximately 3.6% of our total deposits and a portion of our service charges from deposits are from legal cannabis-related businesses.
The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. At December 31, 2024, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 63.9% of CBLR Capital.
The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. At December 31, 2025, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 42.4% of CBLR Capital.
Declines in market value could result in credit losses on these assets, which would lead to accounting charges that could 38 Table of Contents have a material adverse effect on our net income and capital levels. At December 31, 2024, we had no allowance for credit losses on securities.
Declines in market value could result in credit losses on these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. At December 31, 2025, we had no allowance for credit losses on securities.
Moreover, our failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. See “Part I, Item 1.
Moreover, our failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputational damage, which could have a material adverse effect on our business, financial condition 42 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY and results of operations. See “Part I, Item 1.
Further, as a result of a high concentration of our customer base in the Puget Sound area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses with a large employee base in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
Further, as a result of a high concentration of our customer base in the Puget Sound and eastern Washington state regions, a deterioration in the business environment in these areas, or the financial challenges of one or more large employers in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
In addition, at December 31, 2024, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 348.5% of CBLR Capital.
In addition, at December 31, 2025, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 355.2% of CBLR Capital.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social, and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds, and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, and human rights.
In recent years, companies have faced scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social, and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds, and influential investors are also focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, and human rights.
An additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on the effective interest method, and credit losses, recognized upfront at origination. This asymmetry might create the perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses.
An additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on the effective interest method, and credit losses, recognized upfront at origination. This asymmetry might create the 43 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses.
The Company's ability to pay dividends, repurchase stock and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company. The Company is a separate legal entity from its subsidiary bank and does not have significant operations of its own.
The Company's ability to pay dividends, repurchase stock and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company. 45 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY The Company is a separate legal entity from its subsidiary bank and does not have significant operations of its own.
Changes in interest rates can also have an adverse effect on our financial condition, as our AFS securities are reported at their estimated fair value and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the AFS securities, net of taxes.
Changes in interest rates can also adversely affect our financial condition, as our AFS securities are reported at their estimated fair values and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the AFS securities, net of taxes.
The determination of the appropriate allowance for credit losses involves a significant degree of subjectivity, relying on substantial estimates of both current credit risks and future trends, all of which are subject to potential material changes.
The determination of the appropriate allowance for credit losses involves a significant degree of subjectivity and judgment, relying on substantial estimates of both current credit risks and future economic and portfolio trends, all of which are subject to change.
This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.
As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.
Our origination of commercial and multifamily real estate, construction and land, consumer and commercial business loans, typically present different risks to us than our one-to-four family residential loans for a number of reasons, including as follows: • Construction and Land Loans .
AND SUBSIDIARY Risks Related to Our Lending Our loan portfolio includes loans with a higher risk of loss. Our origination of commercial and multifamily real estate, construction and land, consumer and commercial business loans, typically present different risks to us than our one-to-four family residential loans for a number of reasons, including as follows: • Construction and Land Loans .
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for credit losses on a quarterly basis, with more frequent evaluation for selected issues.
Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for credit losses on a quarterly basis, with more frequent evaluation for selected issues.
These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation risks. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation risks. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures.
A key aspect of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation.
We are a community bank, and our reputation is one of the most valuable components of our business. A key aspect of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas.
Additionally, our customers use personal computers, smartphones, tablets, and other mobile devices to access our services, which are beyond our direct control. While we have robust information security procedures and controls in place, our reliance on third-party vendors, technologies, systems, networks, and customers’ devices makes them susceptible to cyber-attacks, viruses, unauthorized access, hackers, or security breaches.
While we have robust information security procedures and controls in place, our reliance on third-party vendors, technologies, systems, networks, and customers’ devices makes them susceptible to cyber-attacks, viruses, unauthorized access, hackers, or security breaches.
Monetary policy, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations. Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve.
Monetary policy, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations. Our financial condition and results of operations are influenced by monetary, fiscal, and trade policies, including those of the Federal Reserve, the U.S. Treasury, and other governmental authorities.
Shifts in interest rates can also impact the average lifespan of loans and mortgage-backed securities. In periods of rising interest rates, the growth rate of interest income from our interest-earning assets might lag behind the accelerating interest expenses on our interest-bearing liabilities.
Shifts in interest rates can also impact the average lifespan of loans and mortgage-backed securities. In periods of interest rate volatility, prolonged elevated rates, or an uncertain rate-cutting environment, the growth rate of interest income from our interest-earning assets might lag behind the accelerating interest expenses on our interest-bearing liabilities or decline more rapidly than anticipated as assets reprice.
Conversely, declining interest rates can trigger increased loan prepayments and mortgage-backed security redemptions as borrowers seek lower borrowing costs through refinancing. This introduces reinvestment risk, where the challenge lies in reinvesting prepayments at rates comparable to those initially earned on the prepaid loans or securities.
In addition, periods of declining or volatile interest rates, or changes in borrower refinancing behavior, may trigger increased loan prepayments and mortgage-backed security redemptions. This introduces reinvestment risk, where the challenge lies in reinvesting prepayments at rates comparable to those initially earned on the prepaid loans or securities.
If regulatory enforcement of ESG-related policies becomes less stringent, companies may face reputational risks if their practices are seen as insufficient or inconsistent with broader societal expectations, especially related to DEI and environmental stewardship.
However, some stakeholder groups continue to demand greater transparency and action, resulting in a complex and potentially conflicting environment for companies. If regulatory enforcement of ESG-related policies becomes less stringent, companies may face reputational risks if their practices are seen as insufficient or inconsistent with broader societal expectations, especially related to DEI and environmental stewardship.
Based on their assessment, they may require increased provisions or loan charge-offs.A material decrease in the credit quality of our loan portfolio, significant changes in the risk profile of markets, industries, or customer groups, or inadequacy in the allowance for credit losses could have a materially adverse impact on our business, financial condition, liquidity, capital, and results of operations.
A material deterioration in the credit quality of our loan portfolio, significant changes in the risk profile of markets, industries, or customer groups, or an inadequately maintained allowance for credit losses could have a material adverse effect on our business, financial condition, liquidity, capital, and results of operations.
The pandemic also accelerated the adoption of remote work, which has led many companies to re-evaluate their long-term real estate needs. While some businesses are returning to traditional office environments, others are downsizing or shifting to hybrid models, creating uncertainty in demand for office space and other commercial properties.
The adoption of remote and hybrid work models has led many companies to re-evaluate their long-term real estate needs. Although certain employers have increased in-office requirements, others are downsizing or shifting to hybrid models, and demand for office space in certain markets has remained structurally lower than pre-pandemic levels, creating uncertainty in demand for office space and other commercial properties.
Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and customer support. Ethical and reputational risks, including unintended consequences or perceived unfairness in AI-driven decisions, may erode customer trust and expose us to regulatory scrutiny. Mitigating these risks requires a robust governance framework, regularly testing and auditing of AI models, and strong human oversight.
Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and 41 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY customer support. Ethical and reputational risks, including unintended consequences or perceived unfairness in AI-driven decisions, may erode customer trust and expose us to regulatory scrutiny.
While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.
Regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.
As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified.
As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially adversely affected.
At some point, we may need to raise additional capital to support our growth or replenish future losses. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all.
As a community bank, maintaining our reputation in our market area is critical to the success of our business, and the failure to do so may materially adversely affect our performance. We are a community bank, and our reputation is one of the most valuable components of our business.
Further, if we are unable to raise additional capital when required by our banking regulators, we may be subject to adverse regulatory action. As a community bank, maintaining our reputation in our market area is critical to the success of our business, and the failure to do so may materially adversely affect our performance.
The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.
Additionally, as we acknowledge the potential impact of significant portfolio growth, new loan products, and refinancing activities, these actions may result in portfolios consisting of unseasoned loans that may not perform as anticipated, elevating the risk of an inadequate allowance to absorb losses without additional provisions. Bank regulatory agencies also periodically review our allowance for credit losses on loans.
Additionally, significant portfolio growth, the introduction of new loan products, or increased refinancing activity may result in portfolios consisting of unseasoned loans that may not perform as anticipated, increasing the risk that our allowance for credit losses may prove inadequate without additional provisions.
If our borrower’s insurance is insufficient to cover these losses or if insurance becomes unavailable, the value of collateral securing our loans could be negatively affected, potentially impacting our financial condition and results of operations. Moreover, climate change may adversely affect regional and local economic activity, harming our customers and the communities in which we operate.
For instance, such events may damage real property securing loans in our portfolio or reduce the value of that collateral. If our borrower’s insurance is insufficient to cover these losses or if insurance becomes unavailable, the value of collateral securing our loans could be negatively affected, potentially impacting our financial condition and results of operations.
Future additions to our allowance for credit losses on loans, as well as charge-offs in excess of reserves, will reduce our earnings. Our business relies significantly on the creditworthiness of our customers. To account for potential defaults and nonperformance in our loan portfolio, we maintain an allowance for credit losses on loans using the Current Expected Credit Loss (“CECL”) methodology.
To account for potential defaults and nonperformance in our loan portfolio, we maintain an allowance for credit losses on loans using the Current Expected Credit Loss (“CECL”) methodology. This allowance represents management’s best estimate of the lifetime expected credit losses in our loan portfolio.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed, or the cost of that capital may be exceedingly high. We are required by regulatory authorities to maintain adequate levels of capital to support our operations.
Any of these outcomes could materially and adversely affect our business, financial condition, results of operations, and growth prospects. Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed, or the cost of that capital may be exceedingly high.
A sustained and substantial change in market interest rates could significantly impact our financial condition, liquidity, and operational results. Furthermore, f luctuations in interest rates could adversely affect the valuation of our assets and liabilities, ultimately affecting our earnings. Changes in the valuation of our securities portfolio could hurt our profits and reduce our capital levels.
Furthermore, f luctuations in interest rates could adversely affect the valuation of our assets and liabilities, ultimately affecting our earnings. Changes in the valuation of our securities portfolio could hurt our profits and reduce our capital levels. Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings.
Broader economic factors such as inflation, unemployment and money supply fluctuations also may adversely affect our profitability. Trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers.
Furthermore, trade disputes, trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers. These developments may, in turn, negatively impact our clients’ operations and, consequently, our financial performance.
These balloon payments may require the borrower to either sell or refinance the property, potentially heightening the risk of default or non-payment. In the event of a foreclosure on a commercial or multifamily real estate loan, our holding period for the collateral tends to be more extended compared to one-to-four family residential loans.
In the event of a foreclosure on a commercial or multifamily real estate loan, our holding period for the collateral tends to be longer compared to one-to-four family residential loans. This extended holding period results from a limited pool of potential purchasers for the collateral.
These parties may attempt to deceive employees, customers, or system users to extract confidential information, thereby gaining access to our data or that of our customers. Our operations heavily rely on the secure processing, transmission, and storage of confidential information within our computer systems and networks, managed directly by us or through third-party data processing vendors.
AND SUBSIDIARY Our operations heavily rely on the secure processing, transmission, and storage of confidential information within our computer systems and networks, managed directly by us or through third-party data processing vendors. Additionally, our customers use personal computers, smartphones, tablets, and other mobile devices to access our services, which are beyond our direct control.
Investments in cybersecurity, data privacy protections, and employee training are critical to managing these risks. We continually encounter technological change, and we may have fewer resources than many of our competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.
Mitigating these risks requires a robust governance framework, regularly testing and auditing of AI models, and strong human oversight. Investments in cybersecurity, data privacy protections, and employee training are critical to managing these risks. We continually encounter technological change, and we may have fewer resources than many of our competitors to invest in technological improvements.
While historically we have successfully replaced maturing deposits and borrowings, future replacements may be challenged by shifts in our financial condition, FHLB of Des Moines’ status, or market conditions. Our access to adequate funding, vital for our activities, could be hindered by specific issues impacting us or broader industry and economic concerns.
While in prior periods we have successfully replaced maturing deposits and borrowings, deposit balances across the banking industry have become more rate-sensitive and responsive to market perceptions, and future replacements may be challenged by shifts in our financial condition, FHLB of Des Moines’ status, or market conditions.
Legislative and regulatory proposals aimed at combating climate change may face greater scrutiny or diminished priority. The lack of empirical data regarding the financial and credit risks posed by climate change makes it difficult to predict its specific impact on our financial condition and results of operations.
The lack of empirical data regarding the financial and credit risks posed by climate change makes it difficult to predict its specific impact on our financial condition and results of operations. However, the physical effects of climate change, such as more frequent and severe weather disasters, could directly affect us.
This trend could result in prolonged vacancies, declining rental income, and reduced property values, adversely affecting the performance of our commercial real estate loan portfolio. Federal banking regulators also have raised concerns about weaknesses in the commercial real estate market.
This trend could result in prolonged vacancies, declining rental income, refinancing challenges, and reduced property values, particularly for 37 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY certain property types or markets, adversely affecting the performance of our commercial real estate loan portfolio.
In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our banking regulators, we may be subject to adverse regulatory action.
If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock.
Regardless of changes in federal policy, the effects of climate change and their unknown long-term impacts could still have a material adverse effect on our financial condition and results of operations.
AND SUBSIDIARY the effects of climate change and their unknown long-term impacts could still have a material adverse effect on our financial condition and results of operations. If our enterprise risk management framework is not effective at mitigating risks we face, we could suffer unexpected losses and our results of operations could be materially adversely affected.
Consequently, this could significantly affect our business, financial condition, and results of operations. Climate change and related legislative and regulatory initiatives may materially affect the Company's business and results of operations. The effects of climate change continue to raise significant concerns about the state of the environment.
Any decline in available funding sufficient to sustain our operations could severely impact our ability to lend, invest, meet expenses, repay borrowings, or manage deposit withdrawal demands. Consequently, this could significantly affect our business, financial condition, and results of operations. Climate change and related legislative and regulatory initiatives may materially affect the Company's business and results of operations.
This elongated holding period results from a limited pool of potential purchasers for the collateral. In recent years, the commercial real estate market has experienced substantial growth, with increased competition contributing to historically low capitalization rates and rising property values. However, the economic disruption caused by the COVID-19 pandemic significantly impacted this market.
In recent years, the commercial real estate market has experienced substantial growth, with increased competition contributing to historically low capitalization rates and rising property values. More recently, the commercial real estate market has been affected by higher interest rates, tighter credit conditions, and changing economic and workplace dynamics.
If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline. Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment.
Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment. 39 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY A sustained and substantial change in market interest rates could significantly impact our financial condition, liquidity, and operational results.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed.
We are subject to certain risks in connection with our data management or aggregation. We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and decision-making.
Moreover, an inverted interest rate yield curve, wherein short-term interest rates (which are usually the rates at which financial institutions borrow funds) surpass long-term rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans), can compress a financial institution's net interest margin.
Moreover, changes in the shape of the interest rate yield curve, including an inverted or rapidly flattening yield curve, can compress a financial institution’s net interest margin. This poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans.
Such limitations could arise due to financial market disruptions, negative industry outlooks, credit market deterioration, reduced market activity, poor financial performance, or adverse regulatory actions. Any decline in available funding sufficient to sustain our operations could severely impact our ability to lend, invest, meet expenses, repay borrowings, or manage deposit withdrawal demands.
Our access to adequate funding, vital for our activities, could be hindered by specific issues impacting us or broader industry and economic concerns. Such limitations could arise due to financial market disruptions, negative industry outlooks, credit market deterioration, reduced market activity, poor financial performance, or adverse regulatory actions.
While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure.
Deficiencies in how data is acquired, validated, stored, protected, or processed, as well as the manual nature of many of our data management and aggregation processes, could lead to human error or system failures.
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These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.
Added
Broad economic factors such as inflation, unemployment and money supply fluctuations, changes in monetary policy expectations, and volatility in interest rate markets also may adversely affect our profitability.
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Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Higher U.S. tariffs on imported goods could exacerbate inflationary pressures by increasing the cost of goods and materials for businesses and consumers.
Added
Uncertainty regarding the timing and magnitude of potential interest rate reductions by the Federal Reserve, following a prolonged period of elevated interest rates, may negatively affect borrowing demand, asset yields, deposit pricing, and overall economic activity in our market areas.
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This may particularly affect small to medium-sized businesses, as they are less able to leverage economies of scale to mitigate cost pressures compared to larger businesses. Consequently, our business clients may experience increased financial strain, reducing their ability to repay loans and adversely impacting our results of operations and financial condition.
Added
Actions by these authorities may lead to inflation, deflation, changes in interest rates, or other economic conditions that could materially adversely affect our results of operations. Tariffs, supply-chain disruptions, or rising costs could reduce the ability of our clients, particularly small- and medium-sized businesses, to repay loans, negatively affecting credit quality and financial performance.
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Furthermore, a prolonged period of inflation could cause wages and other costs to us to increase, which could adversely affect our results of operations and financial condition.
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Prolonged inflation may increase operational costs, including wages and benefits, while fluctuations in interest rates and the yield curve can significantly impact our net interest income. Interest rates may not move in alignment with inflation or deflation, adding uncertainty to the economic environment. 36 Table of Contents SOUND FINANCIAL BANCORP, INC.
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Virtually all of our assets and liabilities are monetary in nature and, as a result, market interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation.
Added
These balloon payments may require the borrower to either sell or refinance the property, and refinancing may be difficult or unavailable due to elevated interest rates, tighter underwriting standards, declining property values, or reduced lender appetite, heightening the risk of default or non-payment.
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However, interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services, creating additional uncertainty in the economic environment. Risks Related to Our Lending 35 Table of Contents Our loan portfolio includes loans with a higher risk of loss.
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Federal banking regulators have increased supervisory focus on commercial real estate exposures, particularly with respect to refinancing risk, collateral valuation, and borrower equity levels, which may subject us to heightened examination scrutiny, additional risk management expectations, or more conservative supervisory expectations.
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This allowance represents management’s best estimate of the lifetime expected credit losses in our loan portfolio.
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Future additions to our allowance for credit losses on loans, as well as charge-offs in excess of reserves, will reduce our earnings. 38 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Our business relies significantly on the creditworthiness of our customers.
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Inaccuracies in our estimations could lead to an insufficient allowance for credit losses, necessitating increases through provisions for credit losses, adversely impacting our net income.
Added
Inaccuracies in our estimates could result in an allowance for credit losses that is insufficient to absorb actual losses, and changes in economic forecasts, borrower performance, or asset-class conditions may result in period-to-period volatility in our provision for credit losses, which could adversely impact our net income.
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This occurrence poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans. As of December 31, 2024 , approximately 52.4% of our loan portfolio consisted of fixed-rate loans, potentially exposing us to these risks.
Added
Environmental and climate-related events, including wildfires, flooding, mudslides, hurricanes, or other natural disasters, including recent events in our market regions, may adversely affect borrowers’ ability to repay loans, reduce the value of collateral, and increase uncertainty in estimating credit losses. These factors may require increases to our allowance for credit losses to account for elevated credit risks.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeOur cybersecurity risk management program contains eleven key elements: Information Security Policies, Strategic Planning, Risk Assessment, Audit and Examination, Business Continuity Planning, Incident Response Planning, Third-Party Due Diligence, Cyber Insurance Coverage, Employee Training and Testing, Patch and Vulnerability Management, and the Federal Financial Institutions Examination Council (“FFIEC”) Cyber Assessment Tool (“CAT”).
Biggest changeOur cybersecurity risk management program contains eleven key elements: Information Security Policies, Strategic Planning, Risk Assessment, Audit and Examination, Business Continuity Planning, Incident Response Planning, Third-Party Due Diligence, Cyber Insurance Coverage, Employee Training and Testing, Patch and Vulnerability Management, and the National Institute of Standards and Technology (“NIST”) framework.
Further, to enhance cybersecurity awareness, reduce vulnerability, and foster consideration of cybersecurity threats, our employees and the Board of Directors attend annual trainings. Specific role-based trainings are mandatory for certain employees, tailored to their duties. In the ordinary course of business, we rely heavily on electronic communications and information systems to conduct our operations and to store sensitive data.
Further, to enhance cybersecurity awareness, reduce vulnerability, and foster consideration of cybersecurity threats, our employees and the Board of Directors attend annual trainings. Specific role-based training is mandatory for certain employees, tailored to their duties. In the ordinary course of business, we rely heavily on electronic communications and information systems to conduct our operations and to store sensitive data.
Attackers adapt quickly to changes in defense measures. While we have not 46 Table of Contents identified significant compromises, substantial data losses, or major financial setbacks from cybersecurity attacks so far, our systems, along with those of our clients and service providers, face constant threats.
Attackers adapt quickly to changes in defense measures. While we have not 47 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY identified significant compromises, substantial data losses, or major financial setbacks from cybersecurity attacks so far, our systems, along with those of our clients and service providers, face constant threats.
This process is activated whenever the FFIEC CAT or the ISSC identifies changes in inherent risks. In response, the Company proactively updates its cybersecurity objectives, policies, and tactical goals. This ensures that the Company’s cybersecurity strategy remains responsive, continuously adapting to emerging threats and evolving industry standards.
This process is activated whenever the NIST CSF 2.0 or the ISSC identifies changes in inherent risks. In response, the Company proactively updates its cybersecurity objectives, policies, and tactical goals. This ensures that the Company’s cybersecurity strategy remains responsive, continuously adapting to emerging threats and evolving industry standards.
The Company’s approach to managing cybersecurity risks is shaped by insights from the FFIEC CAT, a tool designed for assessing and improving cybersecurity practices. This tool undergoes a thorough examination by an independent third-party on an annual basis to ensure an unbiased and comprehensive evaluation.
The Company’s approach to managing cybersecurity risks is shaped by insights from the NIST Cyber Security Framework (“CSF”) 2.0, a tool designed for assessing and improving cybersecurity practices. This tool undergoes a thorough examination by an independent third-party on an annual basis to ensure an unbiased and comprehensive evaluation.
In its most recent assessment in 2023, the FFIEC CAT identified that the Company is operating at an acceptable level of cyber maturity.
In its most recent assessment in 2025, the NIST CSF 2.0 identified that the Company is operating at an acceptable level of cyber maturity.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeAny such decisions would be made based on ongoing strategic evaluations and the evolving needs of the business. We maintain depositor and borrower client data on in-house servers, in the cloud and within a service bureau environment, utilizing a telecommunications network, portions of which are leased.
Biggest changeWe maintain depositor and borrower client data on in-house servers, in the cloud and within a service bureau environment, utilizing a telecommunications network, portions of which are leased. Management has a disaster recovery plan in place that encompasses both the data processing system and the broader operations of our organization.
In the opinion of management, our existing facilities are adequate and suitable for our current needs. We may consider opening additional banking offices in subsequent years to enhance service to existing clients and attract new ones; however, we have no current plans to open any new branches.
Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K. In the opinion of management, our existing facilities are adequate and suitable for our current needs. We may consider opening additional banking offices in subsequent years to enhance service to existing clients and attract new ones; however, we have no current plans to open any new branches.
The aggregate net book value of our land, buildings, leasehold improvements, furniture and equipment was $4.7 million at December 31, 2024. See also "Note 7—Premises and Equipment" in the Notes to Consolidated Financial Statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K.
Our total rental expense was $1.1 million for both the year ended December 31, 2025 and the year ended December 31, 2024. The aggregate net book value of our land, buildings, leasehold improvements, furniture and equipment was $4.2 million at December 31, 2025. See also "Note 7—Premises and Equipment" in the Notes to Consolidated Financial Statements contained in "Part II.
Management has a disaster recovery plan in place that encompasses both the data processing system and the broader operations of our organization. This plan is designed to ensure the resilience and continuity of our data management and operational capabilities in the event of unforeseen disruptions or emergencies. 47 Table of Contents
This plan is designed to ensure the resilience and continuity of our data management and operational capabilities in the event of unforeseen disruptions or emergencies. 48 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
We serve these markets through our headquarters in Seattle and eight branch offices, four located in the Seattle MSA, three in Clallam County and one in Jefferson County. We also have a loan production office in the Madison Park neighborhood of Seattle.
We serve these markets through our headquarters in Seattle and eight branch offices, four located in the Seattle MSA, three in Clallam County and one in Jefferson County. We have provided notice that the Tacoma branch, located in the Seattle MSA (Pierce County), will close in April 2026 as part of ongoing strategic consolidation efforts.
Six of our nine offices, including our headquarters, are leased, and each of the leases include renewal options, with the obligation to cover property taxes and operating expenses. Our total rental expense was $1.1 million for both the year ended December 31, 2024 and the year ended December 31, 2023.
We also have a loan production office in the Madison Park neighborhood of Seattle. Six of our nine offices, including our headquarters, are leased, and each of the leases include renewal options, with the obligation to cover property taxes and operating expenses.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings We are involved as plaintiff or defendant, from time to time, in various legal actions arising in the normal course of business. We do not anticipate incurring any material legal fees or other material liability as a result of any currently pending litigation. Item 4. Mine Safety Disclosures Not applicable. PART II
Biggest changeItem 3. Legal Proceedings We are involved as plaintiff or defendant, from time to time, in various legal actions arising in the normal course of business. We do not anticipate incurring any material legal fees or other material liability as a result of any currently pending litigation.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIssuer Purchases of Equity Securities The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended December 31, 2024 : Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) October 1, 2024 - October 31, 2024 — $ — — $ 1,435,350 November 1, 2024 - November 30, 2024 — — — 1,435,350 December 1, 2024 - December 31, 2024 — — — 1,435,350 Total — — $ 1,435,350 (1) On January 26, 2024, the Company announced that its Board of Directors approved an extension of the Company’s then-existing stock repurchase program, which was set to expire on January 31, 2024, until January 26, 2025.
Biggest changeIssuer Purchases of Equity Securities The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended December 31, 2025 : Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs October 1, 2025 - October 31, 2025 — $ — — $ — November 1, 2025 - November 30, 2025 2,329 44.81 — — December 1, 2025 - December 31, 2025 577 44.23 — — Total 2,906 $ 44.69 — $ — (1) Includes the surrender of shares of Company common stock that the participants already own as payment of the exercise price for stock options.
No assurances, however, can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of dividends may depend, in part, upon receipt of dividends from Sound Community Bank, which are restricted by federal regulations.
No assurances, however, can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of dividends may depend, in part, upon receipt of dividends from Sound Community Bank, which are restricted by federal and state regulations.
Sound Financial Bancorp has historically paid cash dividends to its common stockholders. In 2024, the Company paid quarterly cash dividends totaling $0.76 per share for the year, and currently pays a quarterly cash dividend of $0.19 per share. Our cash dividend policy is reviewed regularly by management and the Board of Directors.
Sound Financial Bancorp has historically paid cash dividends to its common stockholders. In 2025, the Company paid quarterly cash dividends totaling $0.76 per share for the year, and currently pays a quarterly cash dividend of $0.21 per share. Our cash dividend policy is reviewed regularly by management and the Board of Directors.
Equity Compensation Plan Information The equity compensation plan information presented in "Part III. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" of this Form 10-K is incorporated herein by reference.
Equity Compensation Plan Information The equity compensation plan information presented in “Part III. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K is incorporated herein by reference.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The common stock of Sound Financial Bancorp is listed on The NASDAQ Capital Market under the symbol "SFBC." There were approximately 243 holders of record of our common stock at March 13, 2025.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The common stock of Sound Financial Bancorp is listed on The NASDAQ Capital Market under the symbol “SFBC.” There were approximately 243 holders of record of our common stock at March 3, 2026.
Removed
Under this stock repurchase program, the Company was authorized to repurchase up to $1.5 million of its outstanding shares of common stock from time to time in the open market, based on prevailing market prices, or in privately negotiated transactions.
Added
Shares surrendered by participants in the equity incentive plans are repurchased pursuant to the terms of the plan and applicable award agreement and not pursuant to publicly announced share repurchase programs.
Removed
The Company’s Board of Directors did not extend this repurchase program or adopt a new repurchase program after this program expired on January 26, 2025.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeNoninterest income decreased $351 thousand, or 7.0%, to $4.7 million for the year ended December 31, 2024, compared to $5.0 million for the year ended December 31, 2023, as reflected below (dollars in thousands): Year Ended December 31, Amount Change Percent Change 2024 2023 Service charges and fee income $ 2,620 $ 2,527 $ 93 3.7 % Earnings on cash surrender value of BOLI 625 1,179 (554) (47.0) Mortgage servicing income 1,118 1,179 (61) (5.2) Fair value adjustment on MSRs (4) (219) 215 (98.2) Net gain on sale of loans 258 340 (82) (24.1) Other income $ 38 $ — $ 38 100.0 % Total noninterest income $ 4,655 $ 5,006 $ (351) (7.0) % The decrease in noninterest income during the year ended December 31, 2024, compared to 2023 primarily was due to a $554 thousand decrease in earnings on BOLI, reflecting death benefits paid under our BOLI policies in the prior year.
Biggest changeYear Ended December 31, Amount Change Percent Change 2025 2024 Service charges and fee income $ 2,669 $ 2,620 $ 49 1.9 % Earnings on cash surrender value of BOLI 837 625 212 33.9 Mortgage servicing income 1,046 1,118 (72) (6.4) Fair value adjustment on MSRs (711) (4) (707) 17,675.0 Net gain on sale of loans 260 258 2 0.8 Other income $ (137) $ 38 $ (175) (460.5) % Total noninterest income $ 3,964 $ 4,655 $ (691) (14.8) % Noninterest income decreased $691 thousand, or 14.8%, to $4.0 million for the year ended December 31, 2025, compared to $4.7 million for the year ended December 31, 2024, primarily as a result of: • a $707 thousand decrease in fair value adjustment on mortgage servicing rights due to changes in valuation assumptions associated with interest rate movements compared to the prior year and an overall smaller servicing portfolio; • a $175 thousand decrease in other income due to losses recognized on the disposal of ITMs decommissioned or replaced during 2025 compared to a gain on disposal of assets in 2024 due to insurance claims on the loss of fully depreciated assets; and • a $72 thousand decline in mortgage servicing income as a result of a smaller servicing portfolio.
We intend to further build relationships with medium and small businesses through new and improving existing service offerings, including remote deposit. Emphasizing Lower Cost Core Deposits to Manage the Funding Costs of Our Loan Growth. Our strategic focus is to emphasize total relationship banking with our clients to internally fund our loan growth.
We intend to further build relationships with medium and small businesses through new and improving existing service offerings, including remote deposit. Emphasizing Lower Cost Core Deposits to Manage the Funding Costs of Our Loan Growth. Our strategic focus is to emphasize total relationship banking with our clients to internally fund loan growth.
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, or 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.
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.
We record MSRs on loans sold to Fannie Mae with servicing retained as well as for acquired servicing rights. We stratify our capitalized MSRs based on the type, term and interest rates of the underlying loans. MSRs are carried at fair value.
We record MSRs on loans sold to Fannie Mae with servicing retained, as well as on acquired servicing rights. We stratify our capitalized MSRs based on the type, term and interest rates of the underlying loans. MSRs are carried at fair value.
Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year ending December 31, 2024 that would materially impact liquidity. Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity.
Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year ending December 31, 2026 that would materially impact liquidity. Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity.
We continue to experience growth in client use of our online and mobile banking services, which allow clients to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying, while providing our clients greater flexibility and convenience in conducting their banking.
We continue to experience growth in client use of our online and mobile banking services, which allow clients to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying, while providing them with greater flexibility and convenience in conducting their banking.
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 to the ACL based upon their judgment of information available to them at the time of their examination. Noninterest Income.
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 adjustments to the ACL based upon their judgment of information available to them at the time of their examination. Noninterest Income.
As of December 31, 2024, management is not aware of any events that are 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.
As of December 31, 2025, management is not aware of any events that are 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.
Capital adequacy requirements are quantitative measures established by regulation that require Sound Community Bank to maintain minimum amounts and ratios of capital. Based on its capital levels at December 31, 2024, Sound Community Bank exceeded these requirements at that date.
Capital adequacy requirements are quantitative measures established by regulation that require Sound Community Bank to maintain minimum amounts and ratios of capital. Based on its capital levels at December 31, 2025, Sound Community Bank exceeded these requirements at that date.
See also the “Consolidated Statements of Cash Flows” included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, for additional information regarding our sources and use of funds. 63 Table of Contents Regulatory Capital. Sound Community Bank is subject to minimum capital requirements imposed by regulations of the FDIC.
See also the “Consolidated Statements of Cash Flows” included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, for additional information regarding our sources and use of funds. Regulatory Capital. Sound Community Bank is subject to minimum capital requirements imposed by regulations of the FDIC.
Financial Statements and Supplementary Data" of this report on Form 10-K. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions.
Financial Statements and Supplementary Data” of this report on Form 10-K. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions.
However, improvements in loan risk ratings, increased property values, or recoveries of previously charged-off amounts may partially or fully offset the required increase in the ACL due to factors such as loan growth or an increase in 49 Table of Contents estimated lifetime losses on loans and unfunded loan commitments.
However, improvements in loan risk ratings, increased property values, or recoveries of previously charged-off amounts may partially or fully offset the required increase in the ACL due to factors such as loan growth or an increase in estimated lifetime losses on loans and unfunded loan commitments.
At December 31, 2024, the Bank’s CBLR was 10.60%, which exceeded the minimum requirements. For additional details, see “Note 16—Capital” in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" and "Item 1. Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules" of this Form 10-K.
At December 31, 2025, the Bank’s CBLR was 10.91%, which exceeded the minimum requirements. For additional details, see “Note 16—Capital” in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" and "Item 1. Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules" of this Form 10-K.
Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flows 62 Table of Contents from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold.
Liquid assets 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.
Interest expense on borrowings, comprised solely of FHLB advances, was $1.6 million for the year ended December 31, 2024, compared to $2.0 million for the year ended December 31, 2023, reflecting the decreased use of FHLB advances to supplement our liquidity needs.
Interest expense on borrowings, comprised solely of FHLB advances, was $1.0 million for the year ended December 31, 2025, compared to $1.6 million for the year ended December 31, 2024, reflecting the decreased use of FHLB advances to supplement our liquidity needs.
The average yield on total loans was 5.63% for the year ended December 31, 2024, compared to 5.34% for the year ended December 31, 2023. The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.
The average yield on total loans was 5.87% for the year ended December 31, 2025, compared to 5.63% for the year ended December 31, 2024. The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.
Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and the cost of utilities. Recent Accounting Standards For a discussion of recent accounting standards, see "Note 2—Accounting Pronouncements Recently Issued or Adopted" in the Notes to Consolidated Financial Statements contained in "Part II. Item 8.
Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and the cost of utilities. Recent Accounting Standards For a discussion of recent accounting standards, see “Note 2—Accounting Pronouncements Recently Issued or Adopted” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8.
In addition, we continue to focus on consumer products, such as floating and manufactured home loans. With our long experience and expertise in residential lending we believe we can be effective in capturing mortgage banking opportunities and grow consumer deposits. We continue to develop correspondent relationships to sell nonconforming mortgage loans servicing released.
In addition, we continue to focus on consumer loan products, such as floating and manufactured home loans. With our long experience and expertise in residential lending, we believe we can capture mortgage banking opportunities and grow consumer deposits. We continue to develop correspondent relationships to sell nonconforming mortgage loans servicing released.
We had $25.0 million in outstanding advances with the FHLB at December 31, 2024 and no outstanding borrowings with the Federal Reserve at December 31, 2024. We also had available $20.0 million of credit facilities with other financial institutions, with no balance outstanding at December 31, 2024.
We had $10.0 million in outstanding advances with the FHLB at December 31, 2025 and no outstanding borrowings with the Federal Reserve at December 31, 2025. We also had available $20.0 million of credit facilities with other financial institutions, with no balance outstanding at December 31, 2025.
In evaluating the results of the sensitivity analysis, the qualitative factor adjustment provided the largest change in the ACL. If all qualitative factors were adjusted from the base model to the High Watermark, the estimated ACL on loans would increase to $25.2 million (2.82%).
In evaluating the results of the sensitivity analysis, the qualitative factor adjustment provided the largest change in the ACL. If all qualitative factors were adjusted from the base model to the High Watermark, the estimated ACL on loans would increase to $26.6 million (2.96%).
The aggregate amount of time deposits in denominations of more than $250,000 at December 31, 2024 and December 31, 2023, totaled $90.9 million and $88.3 million, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. Borrowings .
The aggregate amount of time deposits in denominations of more than $250,000 at December 31, 2025 and December 31, 2024, totaled $112.4 million and $90.9 million, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. Borrowings .
If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2024, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2024 was 9.56%.
If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2025, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2025 was 10.28%.
Assuming continued payment of cash dividends during 2025 at the current quarterly dividend rate of $0.19 per share, our total dividend paid each quarter would be approximately $488 thousand based on the number of our outstanding shares at December 31, 2024.
Assuming continued payment of cash dividends during 2026 at the current quarterly dividend rate of $0.21 per share, our total dividend paid each quarter would be approximately $539 thousand based on the number of our outstanding shares at December 31, 2025.
A bank that elects to use the CBLR framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act will generally be considered "well-capitalized" and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%.
A bank that elects to use the CBLR framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act will generally be considered "well-capitalized" and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio 65 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY greater than 9.0%.
However, considering all relevant information, management estimated pooled loan losses to range between the base model of $6.1 million (0.69%) and, with all qualitative factors assigned a minor risk level, $12.5 million (1.40%). This evaluation included an assessment of changes to business risks and alignment with the Company’s overall strategy and objectives.
However, considering all relevant information, management estimated pooled loan losses to range between the base model of $6.6 million (0.73%) and, with all qualitative factors assigned a minor risk level, $13.3 million (1.47%). This evaluation included an assessment of changes to business risks and alignment with the Company’s overall strategy and objectives.
The High Watermark is established by utilizing the same historical loss rate model used to establish modified loss rates, assuming a worse-case economic scenario. Risk levels are categorized as minor, moderate, major, no change, and improvement, segmenting the gap between the Low Watermark and High Watermark.
The High Watermark is established by utilizing the same historical loss rate model used to establish 52 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY modified loss rates, assuming a worse-case economic scenario. Risk levels are categorized as minor, moderate, major, no change, and improvement, segmenting the gap between the Low Watermark and High Watermark.
Expected loss estimates consider various factors, such as market conditions, borrower-specific information, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay. See “Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023 — Provision for Credit Losses.” Mortgage Servicing Rights.
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. See “Comparison of Results of Operations for the Years Ended December 31, 2025 and 2024 — Provision for Credit Losses.” Mortgage Servicing Rights.
Interest income on the investment portfolio decreased $10 thousand, or 1.93%, to $508 thousand for the year ended December 31, 2024, compared to $518 thousand for the year ended December 31, 2023. The decrease was due to lower average balances, partially offset by higher average yields.
Interest income on the investment portfolio decreased $31 thousand, or 6.10%, to $477 thousand for the year ended December 31, 2025, compared to $508 thousand for the year ended December 31, 2024. The decrease was due to lower average balances, partially offset by higher average yields.
We paid quarterly dividends aggregating $0.76 per common share during the year ended December 31, 2024 and quarterly dividends aggregating $0.74 per common share during the year ended December 31, 2023. This equates to a dividend payout ratio of 42.0% in 2024 and 25.7% in 2023.
We paid quarterly dividends aggregating $0.76 per common share during the year ended December 31, 2025 and quarterly dividends aggregating $0.76 per common share during the year ended December 31, 2024. This equates to a dividend payout ratio of 27.2% in 2025 and 42.0% in 2024.
We also intend to selectively add products to further diversify revenue sources and to capture more of each client's banking relationship by offering additional services. We continue to refine our products and services for additional business and to automate services, such as automating consumer loan originations this past year, in an effort to improve customer service.
We also intend to selectively add products to further diversify revenue sources and to capture more of each client's banking relationship by offering additional services. We continue to refine our products and services for additional business and to automate processes in an effort to improve customer service.
Interest income on loans increased $4.0 million, or 8.7%, to $50.5 million for the year ended December 31, 2024, compared to $46.5 million for the year ended December 31, 2023, driven by a higher average balance of total loans and a 29 basis points increase in the average yield on loans.
Interest income on loans increased $2.5 million, or 4.9%, to $53.0 million for the year ended December 31, 2025, compared to $50.5 million for the year ended December 31, 2024, driven by a higher average balance of total loans and a 24 basis points increase in the average yield on loans.
Total deposits increased to $837.8 million at December 31, 2024, from $826.5 million at December 31, 2023, with core deposits, which we define as our non-time deposit accounts and time deposit accounts of less than $250 thousand, increasing $15.3 million to $731.0 million at December 31, 2024, from $715.7 million at December 31, 2023. Maintaining Our Client Service Focus.
Total deposits increased to $948.9 million at December 31, 2025, from $837.8 million at December 31, 2024, with core deposits, which we define as non-time deposit accounts and time deposit accounts of less than $250 thousand, increasing $78.5 million to $809.5 million at December 31, 2025, from $731.0 million at December 31, 2024. Maintaining Our Client Service Focus.
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 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).
Deposit amounts in excess of $250,000 are not federally insured. As of December 31, 2024, uninsured deposits totaled $167.3 million, which represented 20.0% of total deposits, as compared to uninsured deposits of $140.1 million, or 17.0% of total deposits as of December 31, 2023.
Deposit amounts in excess of $250,000 are not federally insured. As of December 31, 2025, uninsured deposits totaled $184.7 million, which represented 19.5% of total deposits, as compared to uninsured deposits of $167.3 million, or 20.0% of total deposits as of December 31, 2024.
We also emphasize reducing wholesale funding sources, including FHLB advances, through the continued growth of core deposits. We believe that a continued focus on client relationships will help increase the level of core deposits and retail certificates of deposit from consumers and businesses in our market area. We intend to increase demand deposits by growing retail and business banking relationships.
We also seek to reduce our need for wholesale funding sources, including FHLB advances, through the continued growth of core deposits. We believe that a continued focus on client relationships will help increase the level of core deposits and retail certificates of deposit from consumers and businesses in our market area.
Improving Earnings by Expanding Product Offerings. We intend to prudently maintain the percentage of our assets consisting of higher-yielding commercial and multifamily real estate and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest-rate fluctuations than one-to-four family mortgage loans, while 51 Table of Contents maintaining our focus on residential lending.
We intend to prudently maintain the percentage of our assets consisting of higher-yielding commercial and multifamily real estate and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest-rate fluctuations than one-to-four family mortgage loans, while remaining focused on residential lending.
The loan portfolio remains well-diversified with commercial and multifamily real estate loans accounting for 41.2% of the portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 32.9% of the portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 16.2% of the total loan portfolio at December 31, 2024.
The loan portfolio remained well-diversified at December 31, 2025, with commercial and multifamily real estate loans accounting for 45.1% of the total loan portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 31.4% of the total loan portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 16.1% of the total loan portfolio.
The average yield on cash and cash equivalents was 5.12% for the year ended December 31, 2024, compared to 4.85% for the year ended December 31, 2023, primarily due to the impact of higher market interest rates during 59 Table of Contents the year.
The average yield on cash and cash equivalents was 4.15% for the year ended December 31, 2025, compared to 5.12% for the year ended December 31, 2024, primarily due to the impact of lower market interest rates during the year.
At December 31, 2024, we had the ability to borrow up to $172.3 million in FHLB advances (in addition to FHLB advances outstanding at that date) and up to $20.8 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.
At December 31, 2025, we had the ability to borrow up to $187.7 million in FHLB advances (in addition to FHLB advances outstanding at that date) and up to $18.5 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.
The average balance of total loans was $896.7 million for the year ended December 31, 2024, compared to $870.2 million for the year ended December 31, 2023, resulting primarily from increased average balances in commercial and multifamily, home equity, and consumer loans.
The average balance of total loans was $902.0 million for the year ended December 31, 2025, compared to $896.7 million for the year ended December 31, 2024, resulting primarily from increased average balances in commercial and multifamily, home equity, floating homes and manufactured home loans.
While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported on the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise.
This change in the ACL is not considered a change in accounting estimate as per ASC 250-10 provisions. While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported on the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise.
We continuously evaluate and update our critical accounting estimates and judgments based on changing conditions. As part of our ongoing enhancement of the ACL methodology, during the year ended December 31, 2024, we made additional improvements to the loss model.
We continuously evaluate and update our critical accounting estimates and judgments based on changing conditions. As part of our ongoing enhancement of the ACL methodology, during the year ended December 31, 2025, we made changes to benchmark ratios and the annual loss driver analysis.
To meet our funding requirements, we rely on various sources, including deposits (both retail and brokered), FHLB advances, borrowings through the Federal Reserve, and payments received on loans and securities.
To meet our funding requirements, we rely on a variety of sources, including retail and brokered deposits, FHLB advances, borrowings through the Federal Reserve, and cash received from loan and securities payments.
The cost of FHLB advances decreased 12 basis points to 4.32% for the year ended December 31, 2024, compared to 4.44% for the year ended December 31, 2023. The average balance of FHLB advances was $37.6 million for the year ended December 31, 2024, compared to $44.0 million for the year ended December 31, 2023.
The cost of FHLB advances decreased two basis points to 4.30% for the year ended December 31, 2025, compared to 4.32% for the year ended December 31, 2024. The average balance of FHLB advances was $23.8 million for the year ended December 31, 2025, compared to $37.6 million for the year ended December 31, 2024.
The average cost of total deposits, including noninterest bearing deposits, increased 95 basis points to 2.64% for the year ended December 31, 2024, from 1.69% for the year ended December 31, 2023.
The average cost of total deposits, including noninterest bearing deposits, decreased 32 basis points to 2.32% for the year ended December 31, 2025, from 2.64% for the year ended December 31, 2024.
AFS securities decreased $497 thousand, or 6.0%, to $7.8 million at December 31, 2024 from the 2023 year end, primarily due to regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months.
AFS securities decreased $91 thousand, or 1.2%, to $7.7 million at December 31, 2025 and HTM securities decreased $238 thousand, or 11.2%, to $1.9 million at December 31, 2025, compared to the 2024 year end, primarily due to regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months.
Stockholders’ equity totaled $103.7 million at December 31, 2024 and $100.7 million at December 31, 2023. In addition to net income of $4.6 million, other sources of capital during 2024 included $390 thousand related to stock-based compensation and $269 thousand in proceeds from stock option exercises.
Stockholders’ equity totaled $109.4 million at December 31, 2025 and $103.7 million at December 31, 2024. In addition to net income of $7.2 million, other sources of capital during 2025 included $303 thousand related to stock-based compensation, $198 thousand of other comprehensive income, net of tax, and $151 thousand in proceeds from stock option exercises.
Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) totaled $387.1 million or 42.9% of our loan portfolio at December 31, 2024, up slightly from $336.0 million or 37.5% of our loan portfolio at December 31, 2023.
Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) totaled $425.1 million or 46.8% of our loan portfolio at December 31, 2025, up from $387.1 million or 42.9% of our loan portfolio at December 31, 2024.
Uses of capital during 2024 included $56 thousand of other comprehensive income, net of tax, $1.9 million of dividends paid on common stock, $65 thousand of stock repurchases and $218 thousand of stock surrendered to satisfy tax withholding obligations upon the vesting of restricted stock awards.
Uses of capital during 2025 included $1.9 million of dividends paid on common stock and $130 thousand of stock surrendered to satisfy tax withholding obligations upon the vesting of restricted stock awards.
A significant portion of our commercial business and commercial and multifamily real estate loans have adjustable rates, higher yields and shorter terms, and higher credit risk than traditional residential fixed-rate mortgage loans.
In managing the size and concentrations of our loan portfolio, we focus on including a significant amount of commercial business and commercial and multifamily real estate loans. A significant portion of our commercial business and commercial and multifamily real estate loans have adjustable rates, higher yields and shorter terms, and higher credit risk than traditional residential fixed-rate mortgage loans.
We compete with other financial service providers by relying on the strength of our customer service and relationship banking approach. We believe that one of our strengths is that our employees are also significant stockholders through our ESOP and 401(k) plans. We also offer incentives that are designed to reward employees for achieving high-quality client relationship growth.
We believe that one of our strengths is that our employees are also significant stockholders through our ESOP and 401(k) plans. We also offer incentives that are designed to reward employees for achieving high-quality client relationship growth.
The increase was the result of an increase in the average balance of and rates paid on certificate accounts and savings and money market accounts, offset slightly by a $53.4 million decrease in the average balance of demand and NOW accounts.
The decrease was the result of a decrease in the average balance of certificate accounts and demand and NOW accounts, as well as lower average rates paid on all categories of interest-bearing deposits, reflecting lower market interest rates, offset slightly by a $31.4 million increase in the average balance of savings and money market accounts.
We offer a diverse range of deposit accounts to our customers, including savings, money market, NOW (negotiable order of withdrawal), interest-bearing and noninterest-bearing demand accounts, as well as certificates of deposit. This variety of deposit accounts provides customers with flexibility in terms of interest rates and terms to suit their financial preferences.
We offer a broad range of deposit accounts, including savings, money market, NOW (negotiable order of withdrawal), interest-bearing and noninterest-bearing demand accounts, and certificates of deposit, providing customers with flexibility in interest rates and account terms to meet their financial needs.
These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of December 31, 2024, we had $51.4 million in cash, cash equivalents and AFS securities, and $487 thousand in loans held-for-sale.
These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. 64 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY As of December 31, 2025, we had $146.2 million in cash, cash equivalents and AFS securities, and $542 thousand in loans held-for-sale.
Interest expense on deposits increased $9.9 million, or 70.3%, to $24.1 million for the year ended December 31, 2024, compared to $14.1 million for the year ended December 31, 2023.
Interest expense on deposits decreased $3.2 million, or 13.2%, to $20.9 million for the year ended December 31, 2025, compared to $24.1 million for the year ended December 31, 2024.
Net income decreased $2.8 million, or 37.6%, to $4.6 million, or $1.80 per diluted common share, for the year ended December 31, 2024, compared to $7.4 million, or $2.86 per diluted common share, for the year ended December 31, 2023.
Net income increased $2.5 million, or 54.3%, to $7.2 million, or $2.77 per diluted common share, for the year ended December 31, 2025, compared to $4.6 million, or $1.80 per diluted common share, for the year ended December 31, 2024.
FHLB advances totaled $25.0 million at December 31, 2024, compared to $40.0 million at December 31, 2023. The decrease was due to the repayment of a $15.0 million FHLB advance that matured in November 2024. FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives.
FHLB advances totaled $10.0 million at December 31, 2025, down from $25.0 million at December 31, 2024, due to the early repayment of a $15.0 million FHLB advance during the fourth quarter of 2025. FHLB advances are primarily used to support organic loan growth and maintain liquidity in line with our asset/liability objectives.
The following table reflects the adjustments in our ACL during the periods indicated (dollars in thousands): Year Ended December 31, 2024 2023 ACL — Loans: Balance at beginning of period $ 8,760 $ 7,599 Impact of adoption of ASU 2016-13 — 760 Charge-offs (122) (204) Recoveries 22 41 Net charge-offs (100) (163) (Release of) provision for credit losses (161) 564 Balance at end of period $ 8,499 $ 8,760 ACL - Unfunded Loan Commitments: Balance at beginning of period 193 335 Impact of adoption of ASU 2016-13 — 695 Provision for (release of) credit losses 41 (837) Balance at end of period 234 193 ACL $ 8,733 $ 8,953 Ratio of net charge-offs during the period to average loans outstanding during the period (0.01) % (0.02) % The ACL for loans decreased $261 thousand, or 3.0%, to $8.5 million at December 31, 2024, from $8.8 million at December 31, 2023, while the ACL for unfunded loan commitments increased $41 thousand, or 21.2% to $234 thousand at December 31, 2024, from $193 thousand at December 31, 2023.
The following table reflects the adjustments in our ACL during the periods indicated (dollars in thousands): Year Ended December 31, 2025 2024 ACL — Loans: Balance at beginning of period $ 8,499 $ 8,760 Charge-offs (135) (122) Recoveries 29 22 Net charge-offs (106) (100) Provision for (release of) credit losses 212 (161) Balance at end of period $ 8,605 $ 8,499 ACL - Unfunded Loan Commitments: Balance at beginning of period 234 193 (Release of) provision for credit losses (86) 41 Balance at end of period 148 234 ACL $ 8,753 $ 8,733 Ratio of net charge-offs during the period to average loans outstanding during the period (0.01) % (0.01) % The ACL for loans increased $106 thousand, or 1.2%, to $8.6 million at December 31, 2025, from $8.5 million at December 31, 2024, while the ACL for unfunded loan commitments decreased $86 thousand, or 36.8% to $148 thousand at December 31, 2025, from $234 thousand at December 31, 2024.
Total assets decreased by $1.6 million, or 0.2%, to $993.6 million at December 31, 2024, from $995.2 million at December 31, 2023. This decrease was primarily a result of lower balances of cash and cash equivalents and investment securities, offset by an increase in loans held-for-portfolio. Cash and Securities.
Total assets increased by $98.5 million, or 9.9%, to $1.1 billion at December 31, 2025, from $993.6 million at December 31, 2024. This increase was primarily a result of higher balances of cash and cash equivalents and an increase in loans held-for-portfolio. Cash and Securities.
The fair value of MSRs was $4.8 million at December 31, 2024, compared to $4.6 million at December 31, 2023. We record MSRs on loans sold with servicing retained and upon acquisition of a servicing portfolio. MSRs are carried at fair value. If the fair value of our MSRs fluctuates significantly, our financial results could be materially impacted. Deposits.
The fair value of MSRs was $4.2 million at December 31, 2025, compared to $4.8 million at December 31, 2024. We record MSRs on loans sold with servicing retained and upon acquisition of a servicing portfolio. MSRs are carried at fair value.
Interest income increased $6.8 million, or 13.4%, to $57.4 million for the year ended December 31, 2024, from $50.6 million for the year ended December 31, 2023, due to an increase in both the average balance of and yield earned on interest earning assets.
Interest income increased $183 thousand, or 0.3%, to $57.6 million for the year ended December 31, 2025, from $57.4 million for the year ended December 31, 2024, due to an increase in the yield earned on interest earning assets, offset by a lower average balance of interest earning assets.
The decrease was primarily a result of a $2.8 million decrease in net interest income, a $351 thousand decrease in noninterest income and a $153 thousand decrease in the release of credit losses, partially offset by a $555 thousand decrease in provision for income taxes. Interest Income.
The increase was primarily a result of a $3.9 million increase in net interest income, partially offset by a $247 thousand increase in the provision for credit losses, a $691 thousand decrease in noninterest income and a $508 thousand increase in provision for income taxes. Interest Income.
Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, increased to $145.3 million or 16.2% of our loan portfolio at December 31, 2024, from $130.9 million or 14.6% of our loan portfolio at December 31, 2023.
Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, was $147.0 million or 16.1% of our loan portfolio at December 31, 2025, compared to $145.3 million or 16.2% of our loan portfolio at December 31, 2024.
Scheduled maturities of time deposits at December 31, 2024, are as follows (in thousands): Year Ending December 31, Amount 2025 $ 274,317 2026 18,496 2027 1,379 2028 1,109 2029 521 Thereafter — $ 295,822 Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five or less.
Scheduled maturities of time deposits at December 31, 2025, are as follows (in thousands): Year Ending December 31, Amount 2026 $ 270,638 2027 14,587 2028 12,130 2029 403 2030 1,835 Thereafter — $ 299,593 Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less.
Our operating revenues are derived principally from earnings on interest-earning assets, service charges and fees, and gains on the sale of loans. The ongoing high interest rate environment is expected to continue exerting downward pressure on our net gain on sale of loans, and keeping borrowing costs elevated.
Our operating revenues are derived principally from earnings on interest-earning assets, service charges and fees, and gains on the sale of loans. During 2025, the elevated interest rate environment continued to exert downward pressure on our net gain on sale of loans and contributed to higher borrowing costs, which modestly affected our net interest income and net interest margin.
Interest income on cash and cash equivalents increased $2.7 million, or 75.8%, to $6.4 million for the year ended December 31, 2024, compared to $3.6 million for the year ended December 31, 2023. The increase was due to higher average yields and higher average balances.
AND SUBSIDIARY Interest income on cash and cash equivalents decreased $2.2 million, or 35.1%, to $4.1 million for the year ended December 31, 2025, compared to $6.4 million for the year ended December 31, 2024. The decrease was due to lower average yields and lower average balances.
Interest Expense. Interest expense increased $9.6 million, or 57.4%, to $26.4 million for the year ended December 31, 2024, from $16.8 million for the year ended December 31, 2023, as a result of an increase in the overall average balances and costs of deposits and borrowings.
Interest expense decreased $3.7 million, or 14.2%, to $22.6 million for the year ended December 31, 2025, from $26.4 million for the year ended December 31, 2024, primarily as a result of a decrease in the overall average balances and costs of deposits and borrowings.
We recorded a release of provision for credit losses of $120 thousand for the year ended December 31, 2024, consisting of a release of provision for credit losses on loans of $161 thousand and a provision for credit losses on unfunded commitments of $41 thousand, compared to a release of provision for credit losses of $273 thousand for the year ended December 31, 2023, consisting of a provision for credit losses on loans of $564 thousand and a release of the provision for credit losses on unfunded commitments of $837 thousand.
We recorded a provision for credit losses of $127 thousand for the year ended December 31, 2025, consisting of a provision for credit losses on loans of $212 thousand and a release of provision for credit losses on unfunded commitments of $86 thousand, compared to a release of provision for credit losses of $120 thousand for the year ended December 31, 2024, consisting of a release of provision for credit losses on loans of $161 51 Table of Contents SOUND FINANCIAL BANCORP, INC.
Nonperforming assets, comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans to troubled borrowers) and OREO and repossessed assets, increased $3.4 million, or 81.3%, to $7.5 million, or 0.75% of total assets, at December 31, 2024 from $4.1 million, or 0.42% of total assets, at December 31, 2023.
Nonperforming assets, comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans to troubled borrowers) and OREO and repossessed assets, decreased $1.4 million, or 18.2%, to $6.1 million, or 0.56% of total assets, at December 31, 2025 from $7.5 million, or 0.75% of total assets, at December 31, 2024. 55 Table of Contents SOUND FINANCIAL BANCORP, INC.
Noninterest-bearing demand accounts (excluding escrow accounts) increased $6.0 million, or 4.8%, in 2024, compared to 2023. 55 Table of Contents A summary of deposit accounts with the corresponding weighted-average cost at December 31, 2024 and 2023 is presented below (dollars in thousands): December 31, 2024 December 31, 2023 Amount Wtd. Avg. Rate Amount Wtd. Avg.
A summary of deposit accounts with the corresponding weighted-average cost at December 31, 2025 and 2024 is presented below (dollars in thousands): December 31, 2025 December 31, 2024 Amount Wtd. Avg. Rate Amount Wtd. Avg.
The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, weighted average life and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our MSRs could be negatively impacted.
The fair value is determined using a discounted cash flow analysis that incorporates assumptions for interest rates, prepayment speeds, weighted average life, and delinquency rates. All of these assumptions require a significant degree of management judgment. Changes in these assumptions could materially affect the fair value of our MSRs.
No historical or recent experience has indicated notable deviations from management’s assessments. Business and Operating Strategies and Goals Our goal is to deliver returns to stockholders by increasing higher-yielding assets (including consumer, commercial and multifamily real estate and commercial business loans), increasing lower-cost core deposit balances, managing expenses, managing problem assets and exploring expansion opportunities.
Business and Operating Strategies and Goals Our goal is to deliver returns to stockholders by increasing higher-yielding assets (including consumer, commercial and multifamily real estate and commercial business loans), increasing lower-cost core deposit balances, managing expenses, managing problem assets and exploring expansion opportunities. We seek to achieve these results by focusing on the following objectives: Maintaining Strong Asset Quality.
We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions on delinquent loans when such actions have been deemed appropriate. Our goal is to maintain or improve upon our level of nonperforming assets by managing all segments of our loan portfolio in order to proactively identify and mitigate risk.
We continually seek to reduce the level of nonperforming assets through collections, modifications and sales of OREO. We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions on delinquent loans when such actions have been deemed appropriate.
Cash, cash equivalents, AFS securities and HTM securities decreased by $6.6 million, or 10.9%, to $53.6 million at December 31, 2024 compared to the prior year-end.
Cash, cash equivalents, AFS securities and HTM securities increased by $94.5 million, or 176.4%, to $148.0 million at December 31, 2025 compared to the prior year-end.
Rate Noninterest-bearing demand $ 130,095 — % $ 124,134 — % Interest-bearing demand 142,126 0.34 168,346 0.75 Savings 61,252 0.10 69,461 0.07 Money market 206,067 3.60 154,044 1.39 Certificates of deposit 295,822 4.57 307,962 3.45 Escrow (1) 2,437 — 2,592 — Total $ 837,799 2.63 % $ 826,539 1.64 % (1) Escrow balances shown in noninterest-bearing deposits on the Consolidated Balance Sheets.
Rate Noninterest-bearing demand $ 129,828 — % $ 130,095 — % Interest-bearing demand 125,634 0.27 142,126 0.34 Savings 59,478 0.10 61,252 0.10 Money market 331,604 3.13 206,067 3.60 Certificates of deposit 299,593 3.89 295,822 4.57 Escrow (1) 2,738 — 2,437 — Total $ 948,875 2.31 % $ 837,799 2.63 % (1) Escrow balances shown in noninterest-bearing deposits on the Consolidated Balance Sheets.
Net interest margin was 3.00% and 3.53% for the year ended December 31, 2024 and 2023, respectively. The decrease in net interest income primarily resulted from an increase in the average balances of and rates paid on deposits and borrowings, partially offset by higher average balances and yields earned on interest-earning assets.
The increase in net interest income primarily resulted from higher yields earned on interest-earning assets and lower average rates paid on all categories of interest-bearing deposits, partially offset by lower average balances of interest-earning assets and all categories of interest-bearing deposits.
In addition, by delivering high-quality, client-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation.
In addition, by delivering high-quality, client-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation. We continue to be disciplined as it pertains to future expansion, acquisitions and de novo branching focusing on the markets in Western Washington, which we know and understand.
This increase primarily reflects $4.6 million in net income for the year ended December 31, 2024, $390 thousand in share-based compensation, and $269 thousand in common stock options exercised, partially offset by the payment of cash dividends of $1.9 million to common stockholders, as well as unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, of $56 thousand, the repurchase of $65 thousand of common stock, and stock surrendered of $218 thousand to satisfy tax withholding obligations upon the vesting of restricted stock during the year ended December 31, 2024. 56 Table of Contents Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.
This increase primarily reflects $7.2 million in net income for the year ended December 31, 2025, $303 thousand in share-based compensation, $198 thousand in unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, and $151 thousand in common stock options exercised, partially offset by the payment of cash dividends of $1.9 million to common stockholders and stock surrendered of $130 thousand to satisfy tax withholding obligations upon the vesting of restricted stock during the year ended December 31, 2025.
The following table reflects the components of the provision for (release of) credit losses during the periods indicated (dollars in thousands): Year Ended December 31, 2024 2023 (Release of) provision for credit losses on loans $ (161) $ 564 Provision for (release of) credit losses on unfunded loan commitments 41 (837) Release of provision for credit losses $ (120) $ (273) The change in the (release of) provision for credit losses for 2024 from 2023 resulted primarily from changes in methodology used to reserve for credit losses.
The following table reflects the components of the provision for (release of) credit losses during the periods indicated (dollars in thousands): Year Ended December 31, 2025 2024 Provision for (release of) credit losses on loans $ 212 $ (161) (Release of) provision for credit losses on unfunded loan commitments (86) 41 Provision for (release of) credit losses $ 126 $ (120) The change in the provision for (release of) credit losses for 2025 from 2024 primarily reflects updates to assumptions in the model related to our annual review completed during 2025, which included changes to benchmark ratios and the annual loss driver analysis, and a larger loan portfolio.
The following table reflects the changes in the loan mix, excluding premiums and deferred fees, of our portfolio at December 31, 2024, as compared to December 31, 2023 (dollars in thousands): December 31, Amount Percent 2024 2023 Change Change One-to-four family $ 269,684 $ 279,448 $ (9,764) (3.5) % Home equity 26,686 23,073 3,613 15.7 Commercial and multifamily 371,516 315,280 56,236 17.8 Construction and land 73,077 126,758 (53,681) (42.3) Manufactured homes 41,128 36,193 4,935 13.6 Floating homes 86,411 75,108 11,303 15.0 Other consumer 17,720 19,612 (1,892) (9.6) Commercial business 15,605 20,688 (5,083) (24.6) Total loans $ 901,827 $ 896,160 $ 5,667 0.6 Commercial and multifamily loans saw the largest increase, rising by $56.2 million, or 17.8%, primarily due to the conversion of completed construction loans to permanent financing.
The following table reflects the changes in the loan mix, excluding premiums and deferred fees, of our loan portfolio at December 31, 2025, as compared to December 31, 2024 (dollars in thousands): December 31, Amount Percent 2025 2024 Change Change One-to-four family $ 253,841 $ 269,684 $ (15,843) (5.9) % Home equity 31,468 26,686 4,782 17.9 Commercial and multifamily 409,729 371,516 38,213 10.3 Construction and land 50,261 73,077 (22,816) (31.2) Manufactured homes 43,080 41,128 1,952 4.7 Floating homes 87,315 86,411 904 1.0 Other consumer 16,571 17,720 (1,149) (6.5) Commercial business 15,378 15,605 (227) (1.5) Total loans $ 907,643 $ 901,827 $ 5,816 0.6 Commercial and multifamily loans saw the largest increase, rising by $38.2 million, or 10.3%, driven by new originations and the conversion of construction projects to permanent financing, partially offset by pay-downs and normal payment amortization.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

8 edited+0 added−1 removed17 unchanged
Biggest changeThe model contains several assumptions that are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest-rate scenarios.
Biggest changeAs part of our efforts to monitor and manage interest-rate risk, we maintain an interest-rate risk model and utilize software and resources provided by a third party. The model contains several assumptions that are based upon a combination of proprietary and market data that reflect historical results and current market conditions.
For interest rate increases and decreases of 100, 200, 300 and 400 basis points, our internal policy states that our EVE percentage change should not decrease greater than 10%, 20%, 25% and 30%. As indicated in the following table (dollars in thousands), our EVE shows a liability sensitive position at December 31, 2024.
For interest rate increases and decreases of 100, 200, 300 and 400 basis points, our internal policy states that our EVE percentage change should not decrease greater than 10%, 20%, 25% and 30%. As indicated in the following table (dollars in thousands), our EVE shows a liability sensitive position at December 31, 2025.
EVE values only the current position of the balance sheet at December 31, 2024, and therefore does not incorporate any new business assumptions that might be inherent in a simulation of net interest income.
EVE values only the current position of the balance sheet at December 31, 2025, and therefore does not incorporate any new business assumptions that might be inherent in a simulation of net interest income.
Our projections generally assume instantaneous parallel shifts upward and downward of the yield curve of 100, 200, 300 and 400 basis points (assuming the downward shift does not result in negative interest rates) occurring immediately.
Our projections generally assume instantaneous parallel shifts upward and downward of the yield curve of 100, 200, 300 and 400 basis points (assuming the downward shift 66 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY does not result in negative interest rates) occurring immediately.
Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk. 65 Table of Contents
Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk. 67 Table of Contents SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
The model's capital at risk measure, also known as the Economic Value of Equity ("EVE"), evaluates the change in the projected EVE over a two-year period given an immediate increase or decrease in interest rates.
These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest-rate scenarios. The model's capital at risk measure, also known as the Economic Value of Equity ("EVE"), evaluates the change in the projected EVE over a two-year period given an immediate increase or decrease in interest rates.
A key element of our asset/liability management plan is to protect net earnings by managing the maturity or re-pricing mismatch between our interest-earning assets and our rate-sensitive liabilities.
A key element of our asset/liability management plan is to protect net earnings by managing the maturity or re-pricing mismatch between our interest-earning assets and our rate-sensitive liabilities. We seek to reduce exposure to earnings by extending funding maturities using FHLB advances, adjustable-rate loans and the sale of certain fixed-rate loans in the secondary market.
December 31, 2024 Change in Interest Rates in Basis Points (bps) Economic Value of Equity EVE Ratio % $ Amount $ Change % Change +400 $ 145,607 $ (21,243) (12.73) % 17.1 % +300 152,505 (14,345) (8.60) 17.4 +200 157,656 (9,194) (5.51) 17.6 +100 161,851 (4,999) (3.00) 17.6 0 166,850 — — 17.7 -100 165,624 (1,226) (0.73) 17.2 -200 158,786 (8,064) (4.83) 16.1 -300 146,417 (20,433) (12.25) 14.5 -400 $ 130,031 (36,819) (22.07) 12.6 % In addition to monitoring selected measures of EVE, management also monitors effects on net interest income resulting from increases or decrease in rates.
December 31, 2025 Change in Interest Rates in Basis Points (bps) Economic Value of Equity EVE Ratio % $ Amount $ Change % Change +400 $ 151,128 $ (31,999) (17.5) % 15.7 % +300 160,513 (22,614) (12.3) 16.3 +200 168,918 (14,209) (7.8) 16.7 +100 175,880 (7,247) (4.0) 16.9 0 183,127 — — 17.2 -100 185,418 2,291 1.3 17.0 -200 183,460 333 0.2 16.4 -300 181,076 (2,051) (1.1) 15.8 -400 $ 175,327 (7,800) (4.3) 14.9 % In addition to monitoring selected measures of EVE, management also monitors effects on net interest income resulting from increases or decrease in rates.
Removed
We seek to reduce exposure to earnings by extending funding maturities using FHLB advances, adjustable-rate loans and the sale of certain fixed-rate loans in the secondary market. 64 Table of Contents As part of our efforts to monitor and manage interest-rate risk, we maintain an interest-rate risk model and utilize software and resources provided by a third party.

Other SFBC 10-K year-over-year comparisons