Sound Financial Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance sheet compared with December 31, 2022. The company is a bank holding company operating primarily through Sound Community Bank in Washington. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $12.4 | $9.0 | $24.6 | $17.2 |
| Net interest income | $8.7 | $8.4 | $18.1 | $16.0 |
| Net income | $2.9 | $1.6 | $5.1 | $3.3 |
| Diluted EPS | $1.11 | $0.61 | $1.94 | $1.26 |
| Net interest margin | 3.71% | 3.82% | 3.86% | 3.67% |
| Noninterest expense | $7.5 | $6.8 | $15.1 | $13.6 |
- Q2 net income increased 79.2%; first-half net income increased 51.6%. Q2 results benefited from higher net interest income, a credit-loss release, and higher noninterest income. First-half results reflected similar drivers.
- Q2 provision for credit losses was a $331,000 release, versus $592,000 of provision in Q2 2022. For the first half, the release was $321,000, versus $732,000 of provision in 2022. The periods are not directly comparable because the company adopted CECL in 2023.
- Q2 noninterest income was $1.9 million, including $718,000 of bank-owned life insurance earnings. Management attributed $567,000 to BOLI death benefits. First-half noninterest income was $2.9 million; mortgage-loan sale gains and mortgage servicing income were lower year over year.
- Q2 noninterest expense rose 10.4%, chiefly due to salaries and benefits. The quarterly efficiency ratio was 70.49%, compared with 72.20% a year earlier.
Balance sheet, funding, cash flow, and capital
- Total assets were $1.011 billion, up 3.5% from year-end 2022. Cash and cash equivalents rose to $100.2 million from $57.8 million; management said it increased liquidity in response to banking-sector volatility.
- Net loans held for portfolio were $847.2 million, down 1.3%. Commercial and multifamily loans fell $11.5 million, while manufactured-home loans rose $4.7 million. Deposits increased 1.7% to $822.3 million; noninterest-bearing deposits declined to $158.5 million from $173.2 million.
- Deposit costs increased: average total deposit cost was 1.45% in Q2 versus 0.21% a year earlier, and 1.25% for the first half versus 0.21%. Time deposits totaled $288.5 million, with a weighted-average rate of 2.91% at June 30.
- Borrowings were $60.0 million, all FHLB advances, compared with $43.0 million at year-end. The company reported $169.3 million of remaining FHLB borrowing capacity, subject to collateral, plus $18.4 million of Federal Reserve borrowing availability and a $20.0 million unsecured line with no balance outstanding. Subordinated notes, net, were $11.7 million.
- For the first half, operating cash flow was $1.8 million and investing cash flow was positive $12.8 million, principally reflecting a $10.4 million net decrease in loans. Financing cash flow was positive $27.7 million. Cash increased $42.3 million to $100.2 million.
- Stockholders’ equity was $99.9 million. The Bank’s and company’s Community Bank Leverage Ratios were 11.31% and 10.11%, respectively, above the stated 9% minimum.
Credit, risks, and unusual items
- Nonperforming assets declined to $2.1 million, or 0.21% of assets, from $3.6 million, or 0.37%, at year-end. Nonaccrual loans were $1.5 million, or 0.18% of loans. The allowance for credit losses on loans was $8.2 million; the allowance including unfunded commitments was $8.9 million.
- Uninsured deposits were estimated at $140.0 million, or 17.0% of deposits, compared with $161.9 million, or 20.0%, at year-end. Management attributed the reduction mainly to greater customer use of deposit-insurance sweep products.
- CECL adoption on January 1, 2023 increased the loan and unfunded-commitment allowances by a combined $1.455 million and reduced opening retained earnings by $1.149 million after tax. Management’s expected-loss estimates incorporate economic uncertainty, inflation, interest rates, potential recession, and local real-estate conditions.
- Available-for-sale securities had $1.403 million of gross unrealized losses at June 30; held-to-maturity securities had $385,000. The company reported no securities credit-loss allowance and said losses reflected market rates and spreads, not issuer credit quality; it did not expect or intend to sell before recovery.
- Key stated risks include deposit outflows and funding costs, interest-rate changes, local residential and commercial real-estate conditions, recession and inflation, credit-loss estimation, and the possibility that regulators may require reserve or asset adjustments. The filing reports no material change in previously disclosed risk factors, no material adverse effect expected from pending legal proceedings, and effective disclosure controls.
- No specific earnings or financial guidance was provided. Management said it expected to use borrowing facilities as needed, subject to market conditions, and was not aware of events likely to materially harm liquidity, capital resources, or operations.
- After quarter-end, the board declared a $0.19-per-share dividend and extended the $4.0 million repurchase program to January 31, 2024. The company repurchased 31,477 shares for approximately $1.16 million during Q2. The filing also identifies BOLI death-benefit income as a notable Q2 contributor.
Important facts for investors to verify
- Whether deposit pricing and the shift toward time deposits continue to pressure net interest margin and earnings.
- The composition and trend of uninsured deposits, deposit retention, and available borrowing capacity subject to eligible collateral.
- Credit performance in commercial real estate, construction and land, and other loan segments, and the adequacy of CECL allowances as economic assumptions change.
- How much Q2 earnings depended on the nonrecurring BOLI death benefit and whether future earnings can sustain the reported improvement.
- Future dividend and repurchase decisions, including regulatory limits and the company’s capital and liquidity needs.