Sound Financial Bancorp, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The company is a bank holding company whose wholly owned subsidiary, Sound Community Bank, conducts substantially all operations. The unaudited quarter ended September 30, 2018; comparisons below are with Q3 2017 unless stated otherwise. Nine-month figures cover the period ended September 30.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $6.9 million | $6.2 million | $20.3 million | $17.7 million |
| Provision for loan losses | $250,000 | $250,000 | $500,000 | $250,000 |
| Noninterest income | $1.5 million | $826,000 | $3.7 million | $2.8 million |
| Noninterest expense | $5.9 million | $4.9 million | $16.7 million | $14.4 million |
| Net income | $1.8 million | $1.2 million | $5.4 million | $3.9 million |
| Diluted earnings per share | $0.71 | $0.48 | $2.10 | $1.54 |
- Q3 net income rose 49.8%; nine-month net income rose 37.0%. Q3 interest income increased 17.6% and nine-month interest income increased 18.8%, driven chiefly by loan growth and higher loan yields.
- Net interest margin was 4.24% in Q3 and 4.25% year to date, versus 4.35% and 4.28% in the comparable 2017 periods. The efficiency ratio improved to 69.9% for Q3 and 69.7% year to date, from 70.4% and 69.9%.
- Effective tax rates fell to 19.6% for Q3 and 20.4% year to date, from 33.1% and 33.7%, reflecting the Tax Act’s reduction in the federal corporate tax rate.
- For the first nine months, operating cash flow was $9.8 million, investing cash flow was negative $69.1 million (primarily loan growth), and financing cash flow was positive $61.0 million. Cash and cash equivalents ended at $62.3 million.
Financial position and material changes
- At September 30, 2018, total assets were $715.3 million, up 10.9% from year-end 2017. Net portfolio loans were $611.5 million, up 12.5%; commercial and multifamily loans rose 20.2%, and floating-home loans rose 42.1%.
- Deposits were $539.8 million, up 4.9% from year-end. Borrowings were $96.5 million, versus $59.0 million, with a reported weighted-average borrowing rate of 1.99% at quarter-end. The total deposit cost was 0.68%, compared with 0.61% at year-end.
- Stockholders’ equity was $70.1 million, up from $65.2 million. The bank reported capital ratios of 9.76% Tier 1 leverage, 11.82% CET1 and Tier 1 risk-based, and 12.86% total risk-based; management said the bank exceeded regulatory requirements and was well-capitalized.
- The allowance for loan losses was $5.7 million, or 0.93% of total loans and 228.8% of nonperforming loans. Nonperforming assets were $3.1 million, or 0.44% of assets; nonperforming loans rose 10.0% from year-end to $2.5 million, while their share of loans was 0.41%, compared with 0.42%.
- The company reported $99.2 million in loan commitments, including $51.0 million of undisbursed construction and land loans. Certificates of deposit totaling $111.1 million were scheduled to mature within one year. It reported $146.0 million of remaining FHLB borrowing availability and $59.1 million of Federal Reserve discount-window capacity.
Outlook, commentary, risks and unusual items
- Management attributed loan growth to positive economic conditions and credit demand, and said it continued to focus on low-cost deposits. The filing provides no specific earnings, growth, or margin guidance.
- Q3 and nine-month noninterest income included a one-time $490,000 gain on sale of Visa B Shares. This materially contributed to the increase in noninterest income.
- Higher salaries and benefits, operations, occupancy, and data-processing costs drove expense growth. Management cited staffing associated with a 2017 branch and loan-production-office addition, higher quarterly incentive payouts, professional and loan-related expenses, straight-line lease accounting, and transaction volume.
- Management identified risks including funding costs and deposit retention, interest-rate movements, credit quality and allowance estimates, real-estate markets, loan demand and secondary-market conditions, regulatory examinations, operating costs, cybersecurity and third-party providers. It cautioned that interim results are not necessarily indicative of full-year results.
- The company expects the forthcoming expected-credit-loss standard to cause earlier loss recognition and an increase in the allowance, but had not quantified the impact. It also expected the new lease standard to increase reported assets and liabilities; the amount was not yet determined.
- The board declared a quarterly dividend of $0.14 per share, payable November 21, 2018. Management said routine legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective, and no material change in internal control over financial reporting was reported.
Investor verification points
- Assess whether loan growth—especially commercial and multifamily and floating-home exposure—can be sustained without deterioration in credit quality or pressure on the allowance.
- Verify the sustainability of earnings growth excluding the one-time Visa B Share gain, alongside rising funding costs and noninterest expenses.
- Review the funding mix, borrowing reliance, deposit maturities, available borrowing capacity, and ability to meet loan commitments.
- Monitor nonperforming loans, troubled debt restructurings, construction and land exposures, and the effect of adopting the expected-credit-loss standard.
- Confirm future margin performance, lease-standard effects, and whether the declared dividend remains supported by bank capital and holding-company liquidity.