The decrease in interest income from the prior quarter was primarily due to a lower average balance of loans, investments and interest-earning cash, an eight basis point decline in the average yield on loans, a 41 basis point decline in the average yield on interest-bearing cash, and a 57 basis point decline in the average yield on investments.

Interest income on loans decreased $482 thousand, or 3.7%, to $12.6 million for the quarter ended March 31, 2025, compared to $13.1 million for the quarter ended December 31, 2024. The average balance of total loans was $896.8 million for the quarter ended March 31, 2025, down from $900.8 million for the quarter ended December 31, 2024. The decrease in the average balance of total loans was primarily due to declines in construction and land loans and one-to-four family loans, offset by growth in commercial and multifamily loans and home equity loans. The average balances for manufactured home loans, floating home loans, commercial business loans, and other consumer loans remained relatively flat from the fourth quarter of 2024. The average yield on total loans was 5.69% for the quarter ended March 31, 2025, down from 5.77% for the quarter ended December 31, 2024. The decline was primarily due to interest that was reversed on nonaccrual loans during the first quarter, as well as interest that had been recognized on those loans in the fourth quarter. This was partly offset by new loans being made at higher interest rates and some variable-rate loans adjusting upward. Interest income on investments was $108 thousand for the quarter ended March 31, 2025, compared to $132 thousand for the quarter ended December 31, 2024. Interest income on interest-bearing cash decreased $524 thousand to $1.0 million for the quarter ended March 31, 2025, compared to $1.5 million for the quarter ended December 31, 2024. This decrease was a result of both lower average yields and average balances during the quarter.

The decrease in interest expense during the current quarter from the prior quarter was primarily the result of lower average balances and rates paid on all categories of interest-bearing deposits. The average cost of deposits was 2.37% for the quarter ended March 31, 2025, down from 2.58% for the quarter ended December 31, 2024 as higher costing deposits repriced lower due to market interest rate cuts beginning in September 2024. The average cost of FHLB advances was 4.25% for the quarter ended March 31, 2025, down from 4.31% for the quarter ended December 31, 2024.

A release of provision for credit losses of $203 thousand was recorded for the quarter ended March 31, 2025, consisting of a release of provision for credit losses on loans of $85 thousand and a release of provision for credit losses on unfunded loan commitments of $118 thousand. This compared to a provision for credit losses of $14 thousand for the quarter ended December 31, 2024, consisting of a release of provision for credit losses on loans of $73 thousand and a provision for credit losses on unfunded loan commitments of $87 thousand. The decrease in the provision for credit losses for the quarter ended March 31, 2025 compared to the quarter ended December 31, 2024 resulted primarily from a smaller loan portfolio and a reduced balance of unfunded commitments, partially offset by an additional qualitative adjustment applied to certain loan segments, specifically consumer and construction loans, reflecting increased uncertainty in market conditions tied to the impact of tariffs and other external factors affecting our clients. 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.

Interest income on loans increased $355 thousand, or 2.9%, to $12.6 million for the quarter ended March 31, 2025, compared to $12.2 million for the quarter ended March 31, 2024. The average balance of total loans was $896.8 million for the quarter ended March 31, 2025, up from $895.4 million for the quarter ended March 31, 2024. The average yield on total loans was 5.69% for the quarter ended March 31, 2025, up from 5.49% for the quarter ended March 31, 2024. The increase in the average loan yield during the current quarter, compared to the same quarter in 2024, was primarily due to the origination of new loans at higher interest rates. Additionally, variable-rate loans resetting to higher rates contributed to the increase in average yield compared to the first quarter of 2024. Interest income on investments was $108 thousand for the quarter ended March 31, 2025, compared to $111 thousand for the quarter ended March 31, 2024. Interest income on interest-bearing cash decreased $406 thousand to $1.0 million for the quarter ended March 31, 2025, compared to $1.4 million for the quarter ended March 31, 2024. The decrease was a result of both a lower average yield and average balance.

The decrease in interest expense during the current quarter from the same quarter a year ago was primarily the result of a $18.9 million decrease in the average balance of interest-bearing demand and NOW accounts, a $25.5 million decrease in the average balance of certificate accounts, and a $15.0 million decrease in the average balance of FHLB advances, as well as lower average rates paid on all categories of interest-bearing deposits; resulting from lower market interest rates generally. These average-balance decreases were partially offset by a $51.0 million increase in the average balance of savings and money market accounts. The average cost of deposits was 2.37% for the quarter ended March 31, 2025, down from 2.57% for the quarter ended March 31, 2024. The average cost of FHLB advances was 4.25% for the quarter ended March 31, 2025, down from 4.31% for the quarter ended March 31, 2024.

A release of provision for credit losses of $203 thousand was recorded for the quarter ended March 31, 2025, consisting of a release of provision for credit losses on loans of $85 thousand and a release of provision for credit losses on unfunded loan commitments of $118 thousand. This compared to a release of provision for credit losses of $33 thousand for the quarter ended March 31, 2024, consisting of a release of provision for credit losses on loans of $106 thousand and a provision for credit losses on unfunded loan commitments of $73 thousand. The larger release recorded in the current quarter primarily reflected the factors discussed above.

The decrease in noninterest income during the current quarter compared to the quarter ended December 31, 2024 was primarily related to

•a $176 thousand downward adjustment in fair value of mortgage servicing rights due to a smaller servicing portfolio, partially offset by :

•an increase of $68 thousand in earnings from BOLI primarily due to the strategic decision to surrender and exchange existing policies into higher yielding policies in the first quarter, offset by fluctuations in financial markets which decreased the values of policies; and

•a $65 thousand increase in service charges and fee income due to a volume incentive paid by Mastercard in the first quarter of 2025 and higher interchange income.

Loans sold during the quarter ended March 31, 2025, totaled $2.0 million, compared to $3.5 million and $4.2 million of loans sold during the quarters ended December 31, 2024 and March 31, 2024, respectively.

The increase in noninterest income during the current quarter compared to the quarter ended March 31, 2024 was primarily due to

•a $72 thousand increase in service charges and fee income primarily due to the reasons noted above, and

•an $18 thousand increase in earnings from BOLI primarily due to the strategic decision to surrender and exchange existing policies into higher yielding policies in the first quarter, offset by fluctuations in financial markets, which reduced the values of policies. The increases in service charges and fee income and in earnings from BOLI were partially offset by

•a $13 thousand decrease in mortgage servicing income as a result of the portfolio paying down at a faster rate than originations replace repayments;

•a $34 thousand decrease in the fair value adjustment on mortgage servicing rights due to a smaller servicing portfolio; and

•a $41 thousand decrease in net gain on sale of loans due to fewer loans sold.

The increase in noninterest expense during the current quarter from the quarter ended December 31, 2024 was primarily a result of:

•a $675 thousand increase in salaries and benefits related to higher salaries expense, partially due to accrual reversals in the fourth quarter 2024, along with an annual deferred compensation contribution for key executives made in the first quarter of each year, higher 401(k) contributions, and higher payroll taxes related to annual bonus payments;

•a $32 thousand increase in regulatory assessments due to a higher estimated accrual for exam costs;

•a $28 thousand increase in occupancy due to higher annual property charges and maintenance fees recognized in the first quarter;

•a $61 thousand increase in data processing due to higher vendor fees associated with annual subscription renewals; and

•a $24 thousand increase in OREO and repossessed assets due to the addition of a new property in the first quarter of 2025 and the absence of property sales in the prior quarter.

The increase in noninterest expense during the current quarter from the quarter ended March 31, 2024 was primarily a result of:

•a $276 thousand increase in data processing expenses due to various project implementations that began amortizing in the third quarter of 2024 and the reimbursement of expenses by a software vendor in the first quarter of 2024;

•a $32 thousand increase in regulatory assessment expenses due to a higher estimated accrual for exam costs.

These increases were partially offset by a $92 thousand decrease in operations expense, primarily due to the recognition of annual fee reimbursements from Mastercard beginning in the first quarter of 2025 and lower expenses across various accounts resulting from ongoing cost saving initiatives and process improvements.

Assets at March 31, 2025 totaled $1.07 billion, up from $993.6 million at December 31, 2024 and down from $1.09 billion at March 31, 2024. The increase in total assets from December 31, 2024 was primarily due to an increase in cash and cash equivalents, partially offset by a lower balance of loans held-for-portfolio. The decrease from one year ago was primarily a result of lower balances of cash and cash equivalents and loans held-for-portfolio.

Cash and cash equivalents increased $87.9 million, or 201.3%, to $131.5 million at March 31, 2025, compared to $43.6 million at December 31, 2024, and decreased $6.5 million, or 4.7%, from $138.0 million at March 31, 2024. The increased cash and cash equivalents from the prior quarter-end was primarily due to the strategic decision to sell reciprocal deposits at the end of 2024, which reduced our cash balances. These reciprocal deposits returned to our balance sheet in the first quarter of 2025.

Investment securities decreased $110 thousand, or 1.1%, to $9.8 million at March 31, 2025, compared to $9.9 million at December 31, 2024, and decreased $462 thousand, or 4.5%, from $10.3 million at March 31, 2024, as pay-offs and paydowns of investments exceeded new purchases. Held-to-maturity securities totaled $2.1 million at both March 31, 2025 and December 31, 2024, and totaled $2.2 million at March 31, 2024. Available-for-sale securities totaled $7.7 million at March 31, 2025, compared to $7.8 million at December 31, 2024 and $8.1 million at March 31, 2024.

Loans held-for-portfolio were $886.2 million at March 31, 2025, compared to $900.2 million at December 31, 2024 and $897.9 million at March 31, 2024. The decrease from both prior dates was primarily due to the payoff during the first quarter of 2025 of one $17.0 million loan that was risk rated special mention.

Nonperforming assets (“NPAs”), which are comprised of nonaccrual loans (including nonperforming modified loans), other real estate owned (“OREO”) and other repossessed assets, increased $2.2 million, or 29.4%, to $9.7 million at March 31, 2025, from $7.5 million at December 31, 2024 and decreased $49 thousand, or 0.5%, from $9.7 million at March 31, 2024. The increase in NPAs from December 31, 2024 was primarily due to the addition of six loans totaling $2.4 million to nonaccrual status, including two commercial real estate loans of $1.1 million and $988 thousand. The increase also included $41 thousand of other real estate owned properties. These additions were partially offset by $207 thousand in regular loan payments. Subsequent to quarter-end, the $988 thousand commercial real estate loan added during the quarter was paid-off. The decrease in NPAs from one year ago was primarily due to payoffs totaling $2.1 million, the return of $522 thousand of loans to accrual status, the sale of two other real estate owned properties for $690 thousand, and regular loan payments. These decreases were partially offset by the placement of an additional $3.6 million of loans on nonaccrual status, which included the two commercial real estate loans noted above.

NPAs to total assets were 0.91%, 0.75% and 0.90% at March 31, 2025, December 31, 2024 and March 31, 2024, respectively. The allowance for credit losses on loans to total loans outstanding was 0.95% at March 31, 2025, compared to 0.94% at December 31, 2024 and 0.96% at March 31, 2024. Net loan charge-offs for the first quarter of 2025 totaled $21 thousand, compared to $13 thousand for the fourth quarter of 2024, and $56 thousand for the first quarter of 2024.

The following table summarizes our NPAs at the dates indicated (dollars in thousands):

The following table summarizes the allowance for credit losses at the dates and for the periods indicated (dollars in thousands, unaudited):

Total deposits increased $72.5 million, or 8.7%, to $910.3 million at March 31, 2025, from $837.8 million at December 31, 2024 and decreased $6.5 million, or 0.7%, from $916.9 million at March 31, 2024. The increase in total deposits compared to the prior quarter-end was primarily a result of the movement of reciprocal deposits off balance sheet for strategic objectives at year-end, followed by the return of those deposits to our balance sheet in the first quarter of 2025, and a decrease in one high cost money market deposit relationship as part of our strategic decision to decrease our overall cost of funds. Noninterest-bearing deposits decreased $5.8 million, or 4.4%, to $126.7 million at March 31, 2025, compared to $132.5 million at December 31, 2024 and decreased $2.0 million, or 1.5%, from $128.7 million at March 31, 2024. Noninterest-bearing deposits represented 13.9%, 15.8% and 14.0% of total deposits at March 31, 2025, December 31, 2024 and March 31, 2024, respectively.

FHLB advances totaled $25.0 million at March 31, 2025, compared to $25.0 million at both December 31, 2024, and March 31, 2024. FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. FHLB advances outstanding at March 31, 2025 had maturities ranging from early 2026 through early 2028. Subordinated notes, net totaled $11.8 million at both March 31, 2025 and December 31, 2024, and $11.7 million at March 31, 2024.

Stockholders’ equity totaled $104.4 million at March 31, 2025, an increase of $765 thousand, or 0.7%, from $103.7 million at December 31, 2024, and an increase of $3.4 million, or 3.4%, from $101.0 million at March 31, 2024. The increase in stockholders’ equity from December 31, 2024 was primarily the result of $1.2 million of net income earned during the current quarter, $81 thousand in share-based compensation, and $21 thousand in common stock options exercised, partially offset by a $17 thousand increase in accumulated other comprehensive loss, net of tax and the payment of $487 thousand in cash dividends to the Company's stockholders.

Sound Financial Bancorp, Inc., a bank holding company, is the parent company of Sound Community Bank, which is headquartered in Seattle, Washington and has full-service branches in Seattle, Tacoma, Mountlake Terrace, Sequim, Port Angeles, Port Ludlow and University Place. Sound Community Bank is a Fannie Mae Approved Lender and Seller/Servicer with one loan production office located in the Madison Park neighborhood of Seattle. For more information, please visit www.soundcb.com.

Factors which could cause actual results to differ materially, include, but are not limited to: adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation or deflation, a recession or slowed economic growth, as well as supply chain disruptions; 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 at which such interest rate levels are maintained, 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 current and future monetary policies of the Federal Reserve in response thereto; the effects of any federal government shutdown; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; changes in consumer spending, borrowing and savings habits; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; secondary market conditions for loans;expectations regarding key growth initiatives and strategic priorities; environmental, social and governance goals and targets; results of examinations of the Company or the Bank by their regulators; increased competition; changes in management's business strategies; legislative changes; changes in the regulatory and tax environments in which the Company operates; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on our third-party vendors; the potential for new or increased tariffs, trade restrictions, or geopolitical tensions that could affect economic activity or specific industry sectors; the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest and other external events on our business; and other factors described in the Company's latest Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q and other documents filed with or furnished to the SEC, which are available at www.soundcb.com and on the SEC's website at www.sec.gov. The risks inherent in these factors could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company and could negatively affect the Company's operating and stock performance.

(1)Net interest income divided by average interest earning assets.

(2)Noninterest expense divided by total revenue (net interest income and noninterest income).

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).

(1)Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.

 

						At or For the Quarter Ended
						March 31, 2025						December 31, 2024						September 30, 2024						June 30, 2024						March 31, 2024
Total nonperforming loans						$	9,653					$	7,491					$	8,489					$	8,909					$	9,053
OREO and other repossessed assets						41						—						115						115						690
Total nonperforming assets						$	9,694					$	7,491					$	8,604					$	9,024					$	9,743
Net charge-offs during the quarter						$	(21)					$	(13)					$	(14)					$	(17)					$	(56)
Provision for (release of) credit losses during the quarter						(203)						14						8						(109)						(33)
Allowance for credit losses - loans						8,393						8,499						8,585						8,493						8,598
Allowance for credit losses - loans to total loans						0.95		%				0.94		%				0.95		%				0.96		%				0.96		%
Allowance for credit losses - loans to total nonperforming loans						86.95		%				113.46		%				101.13		%				95.33		%				94.97		%
Nonperforming loans to total loans						1.09		%				0.83		%				0.94		%				1.00		%				1.01		%
Nonperforming assets to total assets						0.91		%				0.75		%				0.78		%				0.84		%				0.90		%