Sound Financial Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a bank holding company operating primarily through Sound Community Bank, with lending, deposit-taking, mortgage origination and servicing, and insurance activities. Figures below are unaudited; dollar amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $7.35 | $6.90 | $13.89 | $13.62 |
| Noninterest income | $1.71 | $1.58 | $4.42 | $2.29 |
| Provision for loan losses | $0.25 | $0.40 | $0.25 | $0.65 |
| Net income | $2.25 | $2.13 | $4.70 | $3.11 |
| Diluted EPS | $0.85 | $0.82 | $1.78 | $1.20 |
| Net interest margin | 3.36% | 3.69% | 3.23% | 3.81% |
| Efficiency ratio | 66.07% | 63.79% | 66.38% | 71.34% |
- Balance sheet at June 30: Assets were $923.2, up 7.2% from year-end 2020; net portfolio loans were $633.5, deposits $804.7, and stockholders’ equity $89.5. Cash and equivalents were $236.8, versus $193.8 at year-end.
- Loans and credit: Portfolio loans grew 4.3% from year-end, with growth in one-to-four-family and construction/land loans partly offset by declines in commercial/multifamily and commercial business loans. The allowance was $6.16, or 0.96% of loans. Nonperforming loans were $1.49; nonperforming assets were $2.15, or 0.23% of assets.
- Funding, debt and capital: Deposits rose 7.6% from year-end. Noninterest-bearing deposits increased to $181.8, or 22.6% of deposits. The deposit cost was 0.56% for the first half. Subordinated notes totaled $11.6; there were no FHLB advances outstanding. Bank and company Community Bank Leverage Ratios were 10.28% and 9.57%, respectively.
- Cash flows, first half: Operating activities provided $14.3; investing activities used $27.0; financing activities provided $55.7. Cash and equivalents increased $43.0.
Material changes and management commentary
- Q2 net income rose 5.8%; first-half net income rose 51.3%. First-half noninterest income increased 93.1%, chiefly on gains from loan sales, which rose to $3.12 from $1.58. First-half loans sold totaled $108.0 versus $80.6.
- Interest expense fell as deposit pricing declined and noninterest-bearing deposits grew; this lifted net interest income. However, net interest margin narrowed as yields on interest-earning assets declined faster than funding costs. First-half average earning-asset yield was 3.81%, down from 4.85%.
- First-half noninterest expense rose 7.0%, mainly from higher salaries and benefits and data-processing costs. Management cited COVID-response and PPP-related bonuses, higher medical expenses, technology investment, and costs tied to increased loan originations.
- PPP participation generated substantial fee income: the bank had funded $119.2 in PPP loans, with $36.0 outstanding at June 30; these loans are SBA-guaranteed. PPP processing fees recognized in interest income were $1.5 for the first half, and $1.3 of deferred PPP fees remained to be accreted.
- COVID-related payment relief remained on 12 loans totaling $2.94 at quarter-end. Management said most prior borrowers had resumed payments and it continued monitoring affected credits. Three commercial loans totaling $1.67 and nine residential loans totaling $1.27 remained under relief. Two residential loans totaling $0.12 were in foreclosure proceedings.
- Liquidity included $244.3 in cash and available-for-sale securities, $131.9 of additional FHLB borrowing capacity against pledged collateral, $24.8 available through the Federal Reserve Discount Window, and a $20.0 unsecured credit line. Outstanding loan commitments totaled $85.7; certificates of deposit maturing within one year totaled $93.1.
- The board declared a $0.17-per-share quarterly dividend on July 28, payable August 24, 2021. A new share-repurchase authorization permits up to $2.0 of repurchases over six months, subject to conditions; no shares were reported purchased under that program during the quarter.
Outlook, risks and unusual items
The filing provides no specific earnings or financial guidance. Management highlighted continuing uncertainty from COVID-19, including the Delta variant, and risks to borrower credit quality if restrictions return. Other stated risks include interest-rate and market changes, loan demand and real-estate values, access to deposits and funding, loan-sale market conditions, regulatory review of reserves and capital, cybersecurity and third-party service providers, and the transition from LIBOR. Management reported no material change in previously disclosed risk factors or market risk and said disclosure controls were effective.
Notable items include the contribution of PPP fees to loan yields and interest income, fair-value sensitivity in mortgage servicing rights, and reliance on significant cash balances associated with deposits and PPP proceeds. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How quickly PPP balances and associated deferred fees run off, and whether deposit balances remain after PPP-related funds are used or withdrawn.
- Whether loan growth, particularly purchased and originated residential loans and construction/land credits, sustains returns without weakening credit quality; monitor delinquencies, nonperforming loans, charge-offs, and allowance adequacy.
- Whether reduced refinancing activity and changing prepayment assumptions affect loan-sale gains, mortgage servicing income, and the fair value of servicing rights.
- Whether deposit costs and asset yields stabilize or further compress net interest margin, and how subordinated-note costs compare with funding alternatives.
- Capacity to fund $85.7 of commitments and near-term certificate maturities while maintaining liquidity, regulatory capital, and dividend and repurchase plans.