Sound Financial Bancorp(SFBC) - 2025 Q2 - Quarterly Report

Filing Information This section provides general information about the Form 10-Q filing, including the registrant's name, the quarterly period covered, and the number of common shares outstanding as of the latest practicable date - Registrant: Sound Financial Bancorp, Inc.[2] - Quarterly period ended: June 30, 2025[2] Common Stock Outstanding | As of Date | Shares Outstanding | | :--- | :--- | | August 8, 2025 | 2,566,069 | PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the Company's unaudited condensed consolidated financial statements, including the balance sheets, income statements, comprehensive income statements, stockholders' equity statements, and cash flow statements for the periods ended June 30, 2025, and December 31, 2024, or for the three and six months ended June 30, 2025 and 2024 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | ASSETS | | | | Cash and cash equivalents | $102,542 | $43,641 | | Available-for-sale securities | $7,521 | $7,790 | | Held-to-maturity securities | $2,113 | $2,130 | | Loans held-for-portfolio, net | $895,750 | $891,672 | | Total assets | $1,058,242 | $993,633 | | LIABILITIES | | | | Total deposits | $899,459 | $837,799 | | Borrowings | $25,000 | $25,000 | | Total liabilities | $952,238 | $889,967 | | STOCKHOLDERS' EQUITY | | | | Total stockholders' equity | $106,004 | $103,666 | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income (in thousands, except per share) | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Total interest income | $14,915 | $14,039 | $28,622 | $27,799 | | Total interest expense | $5,660 | $6,591 | $11,295 | $12,891 | | Net interest income | $9,255 | $7,448 | $17,327 | $14,908 | | Provision for (release of) credit losses | $170 | $(109) | $(33) | $(142) | | Total noninterest income | $1,120 | $1,162 | $2,216 | $2,258 | | Total noninterest expense | $7,665 | $7,737 | $15,578 | $15,394 | | Net income | $2,052 | $795 | $3,219 | $1,564 | | Basic EPS | $0.80 | $0.31 | $1.25 | $0.61 | | Diluted EPS | $0.79 | $0.31 | $1.24 | $0.61 | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in thousands) | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net income | $2,052 | $795 | $3,219 | $1,564 | | Other comprehensive (loss) gain, net of tax | $(67) | $1 | $(84) | $(61) | | Comprehensive income | $1,985 | $796 | $3,135 | $1,503 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity Changes (in thousands) | Item | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | | Balance, at December 31, prior year | $103,666 | $100,654 | | Net income | $3,219 | $1,564 | | Other comprehensive loss, net of tax | $(84) | $(61) | | Share-based compensation | $156 | $193 | | Cash dividends paid on common stock | $(974) | $(972) | | Common stock options exercised | $21 | $33 | | Common stock repurchased | $0 | $(64) | | Balance, at June 30, current year | $106,004 | $101,347 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,358 | $(496) | | Net cash (used in) provided by investing activities | $(3,160) | $6,700 | | Net cash provided by financing activities | $60,703 | $79,217 | | Net change in cash and cash equivalents | $58,901 | $85,421 | | Cash and cash equivalents, end of period | $102,542 | $135,111 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures and explanations for the condensed consolidated financial statements, covering accounting policies, recent pronouncements, investments, loans, fair value measurements, mortgage servicing rights, commitments, borrowings, earnings per share, leases, and subsequent events Note 1 – Basis of Presentation - Financial statements are unaudited and prepared in accordance with U.S. GAAP for interim information and SEC regulations[23] - No changes in significant accounting policies from the 2024 Form 10-K[24] Note 2 – Accounting Pronouncements Recently Issued or Adopted - Adopted ASU 2023-09 (Improvements to Income Tax Disclosures) on January 1, 2025, with no material impact expected[25] - ASU 2024-03 (Expense Disaggregation Disclosures) effective for annual periods beginning after December 15, 2026[26] Note 3 – Investments Investment Securities (in thousands) | Security Type | June 30, 2025 Fair Value | December 31, 2024 Fair Value | | :--- | :--- | :--- | | Available-for-sale securities | $7,521 | $7,790 | | Held-to-maturity securities | $1,687 | $1,712 | Unrealized Losses on Investment Securities (in thousands) | Security Type | June 30, 2025 Gross Unrealized Losses | December 31, 2024 Gross Unrealized Losses | | :--- | :--- | :--- | | Available-for-sale securities | $(1,449) | $(1,340) | | Held-to-maturity securities | $(426) | $(418) | - Unrealized losses are due to changes in market interest rates, not credit quality; no allowance for credit losses on securities[32] Note 4 – Loans Loans Held-for-Portfolio (in thousands) | Loan Type | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | One-to-four family | $262,672 | $269,684 | | Commercial and multifamily | $398,429 | $371,516 | | Construction and land | $49,926 | $73,077 | | Total loans held-for-portfolio, gross | $904,286 | $900,171 | | Allowance for credit losses — loans | $(8,536) | $(8,499) | | Total loans held-for-portfolio, net | $895,750 | $891,672 | Allowance for Credit Losses (ACL) Activity (in thousands) | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | ACL - Loans, beginning balance | $8,393 | $8,598 | $8,499 | $8,760 | | Provision for (release of) credit losses | $164 | $(88) | $79 | $(194) | | Net charge-offs | $(21) | $(17) | $(42) | $(73) | | ACL - Loans, ending balance | $8,536 | $8,493 | $8,536 | $8,493 | Nonaccrual Loans (in thousands) | Loan Type | June 30, 2025 Total Nonaccrual Loans | December 31, 2024 Total Nonaccrual Loans | | :--- | :--- | :--- | | One-to-four family | $1,423 | $537 | | Commercial and multifamily | $1,065 | $3,734 | | Floating homes | $0 | $2,363 | | Total nonaccrual loans | $3,366 | $7,491 | Note 5 – Fair Value Measurements - Fair value measurements are based on ASC 820, maximizing observable inputs (Level 1, 2) and minimizing unobservable inputs (Level 3)[59] Financial Assets Measured at Fair Value (in thousands) | Asset Type | June 30, 2025 Fair Value | December 31, 2024 Fair Value | | :--- | :--- | :--- | | Available-for-sale securities | $7,521 | $7,790 | | Loans held-for-sale | $2,025 | $487 | | Mortgage servicing rights | $4,638 | $4,769 | | OREO and repossessed assets (nonrecurring) | $300 | $0 | | Collateral dependent loans (nonrecurring) | $3,501 | $7,627 | - Mortgage Servicing Rights (MSRs) are classified as Level 3, using unobservable inputs like prepayment speed (125%-438%) and discount rate (9.0%-13.5%)[70] Note 6 – Mortgage Servicing Rights Mortgage Servicing Rights (MSRs) Activity (in thousands) | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Beginning balance, at fair value | $4,688 | $4,612 | $4,769 | $4,632 | | Changes in fair value | $(80) | $(116) | $(179) | $(181) | | Ending balance, at fair value | $4,638 | $4,540 | $4,638 | $4,540 | Key MSR Economic Assumptions | Assumption | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Prepayment speed (PSA model) | 125% | 125% | | Weighted-average life | 10.4 years | 10.6 years | | Weighted average discount rate | 10.0% | 10.0% | Note 7 – Commitments and Contingencies - Company engages in off-balance sheet financial transactions, primarily loan commitments and lines of credit, involving credit and interest rate risks[76][167] - Total loan commitments were $52.5 million at June 30, 2025, down from $55.8 million at December 31, 2024[170] Note 8 – Borrowings, FHLB Stock and Subordinated Notes FHLB Advances (in thousands) | Type | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Short-term advances | $15,000 | $0 | | Long-term advances | $10,000 | $25,000 | | Total FHLB advances | $25,000 | $25,000 | FHLB Borrowing Capacity (in thousands) | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Amount available to borrow | $374,270 | $385,366 | | Remaining FHLB borrowing capacity | $161,155 | $172,327 | - Subordinated notes totaled $11.8 million at June 30, 2025, with a fixed interest rate of 5.25% until October 1, 2025, then resetting to SOFR plus 513 basis points[82] Note 9 – Earnings Per Common Share Earnings Per Common Share | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net income available to common stockholders - basic | $2,044 | $790 | $3,206 | $1,554 | | Basic EPS | $0.80 | $0.31 | $1.25 | $0.61 | | Diluted EPS | $0.79 | $0.31 | $1.24 | $0.61 | | Weighted average shares outstanding, basic | 2,556,562 | 2,540,538 | 2,555,413 | 2,539,872 | | Weighted average shares outstanding, diluted | 2,577,990 | 2,559,015 | 2,578,287 | 2,557,993 | Note 10 – Leases Lease Right-of-Use Assets and Liabilities (in thousands) | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Operating lease right-of-use assets | $3,816 | $3,725 | | Finance lease right-of-use assets | $117 | $0 | | Operating lease liabilities | $4,095 | $4,013 | | Finance lease liabilities | $118 | $0 | Net Lease Expense (in thousands) | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net lease expense | $291 | $269 | $564 | $536 | Weighted-Average Lease Terms and Discount Rates | Lease Type | June 30, 2025 Term | June 30, 2025 Discount Rate | | :--- | :--- | :--- | | Operating leases | 3.9 years | 3.09% | | Finance leases | 4.5 years | 4.41% | Note 11 – Subsequent Events - On July 29, 2025, the Board of Directors declared a quarterly cash dividend of $0.19 per common share, payable on August 25, 2025[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including forward-looking statements, critical accounting estimates, and detailed comparisons of financial performance and key metrics for the periods presented Special Note Regarding Forward-Looking Statements - Forward-looking statements involve risks and uncertainties, including adverse economic conditions, changes in interest rates, inflation, and regulatory policies[89] - Company does not undertake to publicly release revisions to forward-looking statements[91] General Business Overview - Sound Financial Bancorp is a bank holding company for Sound Community Bank, a Washington state-chartered commercial bank[92] - Primary business: attracting retail/commercial deposits and investing in various loan types (residential, commercial, construction, consumer, business)[94] Consolidated Financial Position (in millions) | Item | June 30, 2025 | | :--- | :--- | | Total assets | $1,060 | | Net loans held-for-portfolio | $895.8 | | Deposits | $899.5 | | Stockholders' equity | $106.0 | Critical Accounting Estimates - Critical accounting estimates include the allowance for credit losses (ACL) and accounting for mortgage servicing rights (MSRs)[97] - Estimates are susceptible to material changes due to interest rates, economic conditions, and borrower performance[97] Financial Condition Analysis Total Assets - Total assets increased by $64.6 million, or 6.5%, to $1.06 billion at June 30, 2025, from $993.6 million at December 31, 2024[98] Cash and Cash Equivalents, and Investment Securities - Cash and cash equivalents increased $58.9 million (135.0%) to $102.5 million, primarily due to the return of reciprocal deposits[99] - Investment securities decreased $286 thousand (2.9%) to $9.6 million, mainly due to scheduled payments and higher net unrealized losses on AFS securities[100] Loans - Loans held-for-portfolio, net, increased $4.1 million (0.5%) to $895.8 million[101] Changes in Loans Held-for-Portfolio (in thousands) | Loan Type | Amount Change | Percent Change | | :--- | :--- | :--- | | Commercial and multifamily | $26,913 | 7.2% | | Home equity | $1,896 | 7.1% | | Construction and land | $(23,151) | (31.7)% | | One-to-four family | $(7,012) | (2.6)% | - Loans held-for-sale increased to $2.03 million at June 30, 2025, from $487 thousand at December 31, 2024, due to timing of mortgage originations and sales[103] Allowance for Credit Losses (ACL) - ACL on loans increased $37 thousand (0.4%) to $8.5 million, driven by loan portfolio growth and qualitative adjustments for market uncertainty[104] Credit Ratios | Ratio | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | ACL - loans as % of total loans outstanding | 0.94% | 0.94% | | Nonaccrual loans as % of total loans outstanding | 0.37% | 0.83% | | ACL - loans as % of nonaccrual loans | 253.59% | 113.46% | Nonperforming Assets (NPAs) - NPAs decreased $3.8 million (51.1%) to $3.7 million, or 0.35% of total assets, at June 30, 2025[108] - Decrease primarily due to $6.9 million in payoffs of nonaccrual loans, including commercial real estate and floating home loans[109] - Percentage of nonperforming loans to total loans decreased to 0.37% from 0.83%[110] Mortgage Servicing Rights (MSRs) - Fair value of MSRs decreased $131 thousand (2.7%) to $4.6 million[110] - Fluctuations in MSR fair value can materially impact financial results[110] Deposits and Borrowings - Total deposits increased $61.7 million (7.4%) to $899.5 million, mainly due to the return of reciprocal deposits[111] - Noninterest-bearing deposits decreased $8.3 million (6.3%) to $124.2 million, representing 13.8% of total deposits[111] Deposit Balances and Weighted-Average Rates (in thousands) | Deposit Type | June 30, 2025 Amount | June 30, 2025 Wtd. Avg. Rate | December 31, 2024 Amount | December 31, 2024 Wtd. Avg. Rate | | :--- | :--- | :--- | :--- | :--- | | Noninterest-bearing demand | $120,979 | —% | $130,095 | —% | | Money market | $282,346 | 3.14% | $206,067 | 3.60% | | Time deposits | $293,881 | 4.05% | $295,822 | 4.57% | | Total deposits | $899,459 | 2.34% | $837,799 | 2.63% | - Uninsured deposits totaled $171.2 million (19.0% of total deposits) at June 30, 2025, up from $167.3 million (20.0%) at December 31, 2024[113] Stockholders' Equity - Total stockholders' equity increased $2.3 million (2.3%) to $106.0 million[116] - Increase reflects $3.2 million net income, $156 thousand share-based compensation, and $21 thousand from stock options, partially offset by $974 thousand in cash dividends and $84 thousand other comprehensive loss[116] Net Interest Income and Yield Analysis Average Balances, Net Interest Income, Yields Earned and Rates Paid Key Interest Rate Metrics (Annualized) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Average loan yield | 6.14% | 5.56% | 5.92% | 5.53% | | Average cost of total interest-bearing liabilities | 2.80% | 3.22% | 2.82% | 3.17% | | Net interest rate spread | 3.12% | 2.28% | 2.91% | 2.31% | | Net interest margin | 3.67% | 2.92% | 3.47% | 2.94% | Rate/Volume Analysis Change in Net Interest Income (in thousands) | Item | 3 Months Ended June 30, 2025 vs. 2024 | 6 Months Ended June 30, 2025 vs. 2024 | | :--- | :--- | :--- | | Total Increase (Decrease) in Net Interest Income | $1,807 | $2,419 | - For the three months, interest income increased by $876 thousand (rate-driven), and interest expense decreased by $931 thousand (rate-driven)[122] - For the six months, interest income increased by $823 thousand (rate-driven), and interest expense decreased by $1,596 thousand (rate-driven)[122] Results of Operations Analysis General Results - Q2 2025 net income increased $1.3 million (158.1%) to $2.1 million, or $0.79 diluted EPS, driven by higher net interest income[123] - YTD 2025 net income increased $1.7 million (105.8%) to $3.2 million, or $1.24 diluted EPS, also primarily due to increased net interest income[124] Interest Income - Q2 2025 total interest income increased $876 thousand (6.2%) to $14.9 million, mainly from a 58 basis point increase in average loan yield[125] - YTD 2025 total interest income increased $823 thousand (3.0%) to $28.6 million, driven by a 39 basis point increase in average loan yield[130][131] - Interest income on cash and cash equivalents decreased by $489 thousand (30.8%) in Q2 and $895 thousand (29.8%) YTD due to lower average balances and yields[129][131] Interest Expense - Q2 2025 total interest expense decreased $931 thousand (14.1%) to $5.7 million, primarily due to lower interest rates across most interest-bearing liabilities[133] - YTD 2025 total interest expense decreased $1.6 million (12.4%) to $11.3 million, mainly from lower average rates paid on deposits and borrowings[136] - Interest expense on certificate accounts declined $871 thousand in Q2, with average rate decreasing to 3.98% from 4.73%[134] Net Interest Income - Q2 2025 net interest income increased $1.8 million (24.3%) to $9.3 million, with net interest margin rising to 3.67% from 2.92%[138][139] - YTD 2025 net interest income increased $2.4 million (16.2%) to $17.3 million, with net interest margin rising to 3.47% from 2.94%[140] - FOMC lowered federal funds rate target range by 100 basis points to 4.25%-4.50% by June 30, 2025, with all cuts in H2 2024[141] Provision for Credit Losses - Q2 2025 provision for credit losses was $170 thousand, compared to a $109 thousand release in Q2 2024, due to loan growth and market uncertainty[142] - YTD 2025 saw a $33 thousand release of credit losses, compared to a $142 thousand release in YTD 2024, due to improved credit quality and lower unfunded commitments[143] - Net charge-offs were $21 thousand for Q2 2025 and $42 thousand for YTD 2025[142][143] Noninterest Income - Q2 2025 noninterest income decreased $42 thousand (3.6%) to $1.1 million, primarily due to lower service charges and net gain on loan sales[145][147] - YTD 2025 noninterest income decreased $42 thousand (1.9%) to $2.2 million, also due to lower service charges and net gain on loan sales[146][150] - Earnings on BOLI increased by $95 thousand in Q2 and $112 thousand YTD due to strategic policy exchanges into higher yielding policies[147][148] Noninterest Expense - Q2 2025 noninterest expense decreased $72 thousand (0.9%) to $7.7 million, driven by lower salaries and benefits ($337 thousand decrease) and operations expense ($126 thousand decrease)[149][151] - YTD 2025 noninterest expense increased $184 thousand (1.2%) to $15.6 million, primarily due to a $619 thousand increase in data processing expenses[153][156] - Efficiency ratio improved to 73.88% for Q2 2025 from 89.86% in Q2 2024[152] Income Tax Expense - Q2 2025 income tax expense was $488 thousand (19.21% effective rate), up from $187 thousand (19.04%) in Q2 2024[153] - YTD 2025 income tax expense was $779 thousand (19.48% effective rate), up from $350 thousand (18.29%) in YTD 2024[153] - Increase in effective tax rate due to taxable earnings on BOLI from policy exchanges[153] Capital and Liquidity Management Capital - Stockholders' equity increased $2.3 million to $106.0 million at June 30, 2025[157] - Dividend payout ratio was 30.26% for the six months ended June 30, 2025, compared to 62.15% for the same period in 2024[158] Stock Repurchase Programs - A $1.5 million stock repurchase program authorized in January 2024 expired on January 26, 2025, and was not renewed[160] - No shares were repurchased during the three months ended June 30, 2025[183] Liquidity - As of June 30, 2025, liquid assets included $110.1 million in cash and cash equivalents and available-for-sale investment securities, and $2.0 million in loans held-for-sale[164] - Available borrowing capacity: $161.2 million from FHLB and $19.4 million from Federal Reserve's discount window[164] - Sound Financial Bancorp (unconsolidated) had $6.8 million in cash, noninterest-bearing deposits, and liquid investments[171] Regulatory Capital Community Bank Leverage Ratios (CBLR) | Entity | June 30, 2025 CBLR | | :--- | :--- | | Bank | 10.60% | | Company | 10.09% | | Minimum Requirement | 9% | - Company elected to phase in the full effect of CECL on regulatory capital over a three-year transition period, commencing January 1, 2023[174] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the Company's market risk profile since the filing of its 2024 Form 10-K - No material changes in market risk since the 2024 Form 10-K[176] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Disclosure controls and procedures were effective as of June 30, 2025, as concluded by principal executive and financial officers[177] - Acknowledges inherent limitations in control procedures, meaning they can provide only reasonable, not absolute, assurance[179] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting during the three months ended June 30, 2025[180] PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in various legal proceedings in the normal course of business, but no currently pending proceedings are expected to have a material adverse effect on its financial condition - Any liability from currently pending legal proceedings is not expected to have a material adverse effect on the Company's business or financial condition[181] Item 1A. Risk Factors This section confirms that there have been no material changes to the risk factors previously disclosed in the Company's 2024 Form 10-K - No material changes in the Risk Factors previously disclosed in Item 1A of the 2024 Form 10-K[182] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the Company's equity security sales and use of proceeds, specifically noting no common share repurchases during the three months ended June 30, 2025 - No common shares were repurchased during the three months ended June 30, 2025[183] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - None[184] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company's operations - Not applicable[185] Item 5. Other Information This section provides other information, including details on trading plans by directors and officers - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during the three months ended June 30, 2025[186] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, employment agreements, equity incentive plans, and certifications - Includes Articles of Incorporation, Bylaws, Employment Agreements, Equity Incentive Plans, and Certifications[191] SIGNATURES This section contains the official signatures of the Company's principal executive officer and principal financial officer, certifying the report - Report signed by Laura Lee Stewart (President/CEO) and Wes Ochs (EVP/CSO/CFO) on August 11, 2025[196]