Sound Financial Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. The company is a bank holding company whose principal business is conducted through Sound Community Bank, serving Washington markets through lending, deposit-taking, and related financial services.
Key financial results
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $8.8 million | $7.5 million in Q1 2018 |
| Net interest income | $7.0 million | $6.4 million in Q1 2018 |
| Net interest margin | 4.13% | 4.29% in Q1 2018 |
| Net income | $1.44 million; diluted EPS $0.56 | $1.60 million; diluted EPS $0.63 in Q1 2018 |
| Net cash from operating activities | $2.8 million | $4.4 million in Q1 2018 |
| Total assets | $697.6 million | $716.7 million at December 31, 2018 |
| Net portfolio loans | $578.9 million | $613.8 million at December 31, 2018 |
| Deposits | $583.7 million | $553.6 million at December 31, 2018 |
| Borrowings | $25.0 million | $84.0 million at December 31, 2018 |
| Stockholders’ equity | $72.9 million | $71.6 million at December 31, 2018 |
Amounts are in U.S. dollars. The filing reports noninterest income of $1.0 million and noninterest expense of $6.4 million for Q1 2019. The efficiency ratio was 79.97%, compared with 71.89% in Q1 2018. The effective tax rate was 19.87%.
Material changes and management commentary
- Net income fell 9.9% year over year. Higher interest income and a $200,000 loan-loss allowance recapture were offset by increased funding costs and operating expenses.
- Interest income rose 17.8%, attributed to higher average loan balances and yields. Interest expense increased 74.4%; the average deposit rate increased to 1.02% from 0.63% a year earlier. Management said funding costs rose faster than asset yields, compressing net interest margin.
- Noninterest expense increased 17.7%, including higher salary and benefits and operations costs. Operations expense included a $100,000 impairment loss related to wire fraud, as well as higher legal, professional, and loan-related expenses.
- Noninterest income decreased 11.0%, chiefly because mortgage servicing income shifted from $220,000 of income in Q1 2018 to an $82,000 loss in Q1 2019, reflecting a decline in mortgage servicing rights fair value.
- Assets declined 2.7%, primarily due to lower portfolio loans, including a $16.2 million sale of one-to-four-family loans, and reduced FHLB stock. Deposits rose 5.4%, while borrowings declined by $59.0 million as deposit growth and lower loans reduced borrowing needs.
- Cash and cash equivalents increased to $72.5 million. Investing activities provided $34.8 million, mainly from a decline in loans; financing activities used $26.9 million, principally reflecting net repayment of borrowings. Total loan commitments, including unused lines and letters of credit, were $115.7 million.
Credit, liquidity, capital, and other matters
- The allowance for loan losses was $5.6 million, or 0.95% of total loans, versus 0.93% at year-end. The quarter included a $200,000 recapture, which management attributed mainly to the loan sale and continued strong credit quality. Net recoveries were $3,000.
- Nonperforming assets rose to $3.7 million, or 0.52% of assets, from $3.2 million, or 0.45%, at year-end. Nonperforming loans were $2.6 million; OREO and repossessed assets increased to $1.1 million. Three TDR loans totaling $416,000 defaulted within 12 months of modification during the quarter.
- Management reported $77.5 million of cash and available-for-sale securities, $216.4 million of additional FHLB borrowing capacity, $40.3 million of Federal Reserve discount-window capacity, and $21.0 million of other credit facilities available. Certificates of deposit maturing within one year totaled $100.6 million.
- Sound Community Bank exceeded regulatory capital requirements and was considered well-capitalized. Its March 31, 2019 total risk-based capital ratio was 12.71%; CET1 was 11.68%.
- The company adopted lease accounting guidance on January 1, 2019, recording $8.1 million of operating lease right-of-use assets and $8.4 million of lease liabilities. It expects adoption of the new expected-credit-loss standard (CECL) to increase the allowance and recognize losses earlier, but had not quantified the impact.
- The board declared a $0.14-per-share quarterly dividend on April 26, payable May 23, 2019. The filing reports a stock repurchase authorization, but describes its limit inconsistently—as up to 1,750,000 shares in one section and $1,750,000 in another. The company reported no purchases under the program through March 31.
- No formal earnings guidance is provided. The filing identifies risks including interest-rate changes, credit quality and real-estate conditions, deposit retention and funding costs, loan-sale market conditions, expense control, regulatory actions, cybersecurity, and third-party provider performance.
Most important facts for investors to verify
- Clarify the repurchase program’s authorized limit: shares or dollar amount; confirm subsequent activity and remaining authorization.
- Track whether deposit-cost increases continue to outpace loan and asset yields, and the resulting effect on net interest margin and profitability.
- Review the composition and trend of nonperforming assets, TDR defaults, OREO, and specific loan-loss reserves.
- Assess the ultimate CECL adoption impact; management had not yet quantified the expected allowance increase.
- Monitor the $100,000 wire-fraud-related impairment and related operational, legal, or control consequences.