Sound Financial Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. Sound Financial Bancorp is a bank holding company whose principal business is conducted through Sound Community Bank, serving Washington markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $12.17 million | $8.21 million in Q1 2022 |
| Net interest income | $9.37 million | $7.62 million in Q1 2022 |
| Provision for credit losses | $10,000 | $140,000 in Q1 2022 |
| Net income | $2.17 million; diluted EPS $0.83 | $1.72 million; diluted EPS $0.65 in Q1 2022 |
| Net interest margin | 4.01% | 3.49% in Q1 2022 |
| Efficiency ratio | 73.65% | 74.61% in Q1 2022 |
| Total assets | $1.004 billion | $976.4 million at December 31, 2022 |
| Loans held-for-portfolio, net | $862.0 million | $858.4 million at December 31, 2022 |
| Total deposits | $841.6 million | $808.8 million at December 31, 2022 |
| Borrowings | $35.0 million | $43.0 million at December 31, 2022 |
| Stockholders’ equity | $98.6 million | $97.7 million at December 31, 2022 |
| Operating cash flow | $2.0 million provided | $2.9 million provided in Q1 2022 |
Cash and cash equivalents were $81.6 million at quarter-end. The company reported $92.4 million in cash and available-for-sale securities, plus $1.4 million in loans held-for-sale. Available borrowing capacity included $197.0 million through the FHLB, subject to collateral requirements; $22.0 million through the Federal Reserve, subject to collateral; and a $20.0 million unsecured line with no balance outstanding. The Bank’s Community Bank Leverage Ratio was 10.94%, and the Company’s was 9.93%, above the stated 9% minimum.
Changes versus the prior comparable period
- Net income rose 25.8% year over year, while net interest income increased 23.0%. Higher loan balances and yields, alongside higher yields on cash and investments, drove interest income growth.
- Interest expense increased to $2.80 million from $595,000, reflecting deposit repricing, increased certificate balances, and FHLB borrowing. Average cost of total deposits rose to 1.05% from 0.21%.
- Noninterest income fell 36.4% to $969,000, mainly because gains on loan sales and mortgage-servicing-rights fair-value adjustments declined. Loans sold were $3.9 million versus $12.2 million in Q1 2022.
- Noninterest expense increased 11.7% to $7.62 million, including higher salaries and benefits and data-processing costs.
- Deposits grew 4.1% from year-end, primarily in certificates and money-market accounts. Noninterest-bearing deposits were 20.6% of deposits, down from 21.4%.
- Construction and land loans increased $9.1 million, while commercial and multifamily loans declined $5.8 million. Net portfolio loans rose 0.4% from year-end.
- Nonperforming assets declined to $1.87 million, or 0.19% of assets, from $3.62 million, or 0.37%, at year-end. Management attributed the decrease mainly to a $1.5 million payoff of nonperforming residential loans related to one borrower.
Outlook, risks, and unusual items
- The filing provides no specific earnings or balance-sheet guidance. Management said it expected to use borrowing facilities as needed for loan originations, deposit withdrawals, other commitments, debt repayment, and investment opportunities, subject to market conditions. Management reported no known event reasonably likely to materially adversely affect liquidity, capital resources, or operations as of March 31.
- The company adopted CECL on January 1, 2023. The adoption increased the loan allowance by $760,000 and the reserve for unfunded commitments by $695,000, with an after-tax $1.1 million reduction to opening retained earnings. The methodology change limits direct comparison of credit-loss measures with prior periods.
- At March 31, the loan allowance was $8.53 million; the reserve for unfunded commitments was $795,000. Net charge-offs were $72,000. Management’s loss estimates incorporate assumptions about higher rates, inflation, economic uncertainty, and possible recession; actual losses or regulatory assessments could differ.
- Uninsured deposits were estimated at $174.1 million, or 20.7% of deposits, compared with $161.9 million, or 20.0%, at year-end. Management identified unexpected uninsured-deposit outflows and possible forced securities sales at a loss among key risks.
- Available-for-sale and held-to-maturity securities had gross unrealized losses of $1.33 million and $371,000, respectively. The company reported no securities credit-loss allowance and attributed the unrealized losses to market rates or spreads, not issuer or collateral credit quality; it said it did not intend, and was not likely to be required, to sell before recovery.
- Other risks highlighted include local and broader economic weakness, real-estate values, loan demand and credit quality, interest-rate changes, funding costs, competition, cybersecurity and third-party providers, and regulatory actions. The company reported no material change to previously disclosed risk factors, no material litigation expected to adversely affect it, and effective disclosure controls.
- The board declared a quarterly dividend of $0.19 per share in April 2023, payable May 24 to shareholders of record May 10. Q1 dividends paid were $0.17 per share.
Important facts for investors to verify
- Whether deposit growth and liquidity remain durable, particularly given the $174.1 million estimated uninsured-deposit balance and repricing pressure on deposits.
- How loan credit quality, delinquencies, nonaccruals, and the CECL allowance evolve; the filing describes significant forecast and qualitative judgments.
- Whether net interest margin can be sustained as deposit costs and borrowing costs adjust to interest rates.
- Future construction and commercial-real-estate exposure, including the effect of economic conditions on collateral values and borrower repayment.
- Changes in securities unrealized losses and whether liquidity needs could require sales before amortized cost is recovered.
- The effect of lower mortgage-sale activity and mortgage-servicing-rights valuation changes on noninterest income.
- Regulatory capital and dividend capacity, including the effect of the CECL transition and any restrictions on bank-to-holding-company distributions.