Sound Financial Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company is a bank holding company whose business is primarily conducted through Sound Community Bank, serving Washington markets. Financial statements are unaudited.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $9.6 million | $8.3 million | $25.6 million | $22.2 million |
| Net interest margin | 4.13% | 3.74% | 3.83% | 3.40% |
| Net income | $2.55 million | $2.59 million | $5.88 million | $7.29 million |
| Diluted EPS | $0.97 | $0.98 | $2.23 | $2.76 |
| Provision for loan losses | $375,000 | $175,000 | $1.10 million | $425,000 |
- Balance sheet at September 30: Total assets were $982.2 million, up 6.8% from year-end 2021. Net portfolio loans were $844.0 million, up 24.1%; deposits were $815.4 million, up 2.1%; and stockholders’ equity was $95.0 million, up 1.7%.
- Cash and securities: Cash and cash equivalents were $76.1 million, down from $183.6 million at December 31, 2021, as funds were deployed into loans and securities. Available-for-sale and held-to-maturity securities totaled $12.6 million.
- Cash flows, nine months: Operating activities provided $5.5 million; investing activities used $169.5 million, principally reflecting $163.2 million of net loan growth; financing activities provided $56.5 million. Cash declined by $107.5 million to $76.1 million.
- Debt and liquidity: The company had $44.5 million in FHLB borrowings, versus none at year-end 2021, and $11.7 million in subordinated notes. Management reported $86.5 million in cash and available-for-sale securities, $180.9 million of remaining FHLB borrowing availability, $21.2 million available through the Federal Reserve facility, and a $20.0 million unused unsecured line. Availability is subject to collateral and other conditions.
- Capital: The Bank’s Community Bank Leverage Ratio was 10.79% and the Company’s was 9.87%, above the 9% minimum cited in the filing.
Material changes versus comparable periods
- Q3 net income fell 1.8% year over year; nine-month net income fell 19.4%. Higher net interest income was outweighed by lower noninterest income, increased expenses, and higher loan-loss provision.
- Net interest income rose 15.4% in Q3 and 15.3% year to date, reflecting loan growth and higher investment and cash yields. Average loan yields declined, while Q3 funding costs increased as deposit rates and borrowings rose.
- Noninterest income declined 28.3% in Q3 and 39.0% year to date. Net gains on loan sales fell to $48,000 for Q3 and $497,000 year to date, compared with $568,000 and $3.68 million, respectively, in 2021, amid lower mortgage originations and sales.
- Noninterest expense increased 11.4% in Q3 and 11.8% year to date, mainly due to salaries and benefits. The efficiency ratio worsened to 66.23% for Q3 from 64.81%, and to 70.81% year to date from 65.83%.
- Loan growth was broad, especially in construction and land (up 79.0% from year-end), one-to-four-family (up 30.0%), and commercial and multifamily (up 13.5%). Commercial business loans declined 14.4%, primarily due to PPP loan forgiveness.
- Nonperforming assets fell to $3.15 million, or 0.32% of assets, from $6.21 million, or 0.68%, at year-end. The decrease largely reflected payoff of a $2.3 million nonperforming multifamily loan. Nonaccrual loans were $2.49 million; the allowance was $7.49 million, or 0.88% of loans.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management said it expects to continue regular quarterly dividends of $0.17 per share, subject to Board discretion and regulatory limits. A $0.17 dividend was declared after quarter-end, payable November 23, 2022.
- The Board expanded the stock repurchase authorization to $4.0 million and extended it through January 31, 2023. Approximately $2.1 million remained available as of November 9, 2022.
- Management cited inflation, a potential recession or slower growth, interest-rate changes, real estate values, loan demand and credit performance, funding access and costs, competition, regulation, cybersecurity and third-party providers as risks. It cautioned that loan-loss estimates could prove insufficient and regulators may require additional reserves.
- Market-rate increases drove unrealized securities losses: accumulated other comprehensive loss was $1.27 million at quarter-end, versus income of $139,000 at year-end 2021. Management attributed the losses to rates and market spreads, not credit quality, and said it did not intend or expect to be required to sell the securities before recovery.
- CECL adoption was deferred until fiscal years beginning after December 15, 2022; the company was still assessing the impact. Management reported effective disclosure controls and no material change in internal control over financial reporting. It said pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth can be sustained without deterioration in credit quality, particularly in construction, commercial real estate, and other growing portfolios.
- How rising rates affect deposit costs, borrowing needs, net interest margin, liquidity, and the market value of securities.
- Whether lower mortgage originations and loan-sale gains continue to weigh on noninterest income, and whether expense growth moderates.
- The adequacy of the loan-loss allowance and the expected effect of CECL adoption.
- Actual use of remaining repurchase authorization and the company’s ability to maintain dividends within regulatory and holding-company liquidity constraints.