Sound Financial Bancorp, Inc. — Q1 2017 10-Q
Business and period. The company is a bank holding company whose wholly owned subsidiary, Sound Community Bank, conducts substantially all business. It attracts deposits and lends primarily in residential and commercial real estate, construction, consumer and commercial business markets. This unaudited report covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Prior comparable period / date |
|---|---|---|
| Net interest income | $5.80; net interest margin 4.28% | $5.35; 4.27% in Q1 2016 |
| Net income | $1.41; diluted EPS $0.54 | $1.11; diluted EPS $0.43 in Q1 2016 |
| Interest income / expense | $6.59 / $0.80 | $6.07 / $0.72 in Q1 2016 |
| Noninterest income / expense | $1.00 / $4.62 | $0.95 / $4.46 in Q1 2016 |
| Provision for loan losses | None | $0.15 in Q1 2016 |
| Total assets | $575.4 | $588.4 at December 31, 2016 |
| Net loans / deposits | $484.5 / $480.8 | $495.2 / $467.7 at December 31, 2016 |
| Cash and cash equivalents | $52.8 | $54.6 at December 31, 2016 |
| Borrowings | $25.6 | $54.8 at December 31, 2016 |
| Stockholders’ equity | $61.6 | $60.3 at December 31, 2016 |
| Operating / investing / financing cash flow | $2.3 / $11.7 / $(15.8) | $4.5 / $(2.5) / $(0.6) in Q1 2016 |
Changes and management commentary
- Net income rose $0.31 million, or about 28%, year over year. Net interest income increased 8.3%, reflecting higher average loan balances and slightly higher loan yields. The effective tax rate was 35.0% versus 34.6%.
- Noninterest income increased $46,000 (4.8%), with higher mortgage servicing income and a less negative mortgage-servicing-rights fair-value adjustment partly offset by lower service charges and loan-sale gains. Noninterest expense rose 3.5%, mainly from salaries and benefits and operating costs.
- Assets declined 2.2% from year-end, primarily as net loans fell $10.7 million. Gross loans declined 2.1%; residential and construction/land balances contracted, while commercial and multifamily loans grew. Management cited paydowns exceeding production, fewer purchase and refinancing transactions, and low housing inventory in the Puget Sound area. First-quarter residential loan closings fell 46.9% from Q4 2016.
- Deposits increased 2.8%, while borrowings fell $29.2 million as deposit growth and loan repayments were used to repay FHLB advances. The weighted-average cost of deposits at quarter-end was 0.60%; the cost of FHLB advances was 1.07%.
- Allowance for loan losses was $4.84 million, 0.99% of loans, versus $4.82 million and 0.96% at year-end. Nonperforming assets were $4.33 million, or 0.8% of assets, compared with $4.52 million. Nonperforming loans were nearly flat at $3.38 million, but nonperforming TDRs increased to $1.46 million and impaired loans rose to $10.4 million from $8.2 million at year-end.
Liquidity, capital, outlook and risks
- Cash, cash equivalents and available-for-sale securities totaled $59.2 million; loans held for sale were $2.0 million. Additional stated borrowing capacity included $164.1 million from the FHLB, $41.8 million through the Federal Reserve discount window, and lines totaling $21.0 million at other banks. Outstanding loan commitments, including unused lines and letters of credit, were $62.8 million; certificates of deposit maturing within one year totaled $58.3 million.
- The Bank exceeded regulatory capital requirements and was classified as well-capitalized. Its total risk-based capital ratio was 13.65%, CET1 ratio 12.58%, and leverage ratio 10.25%.
- No numerical earnings or operating guidance was provided. Management said it believed liquidity was adequate and expected most maturing deposits to remain, based on pricing and historical experience. The filing flags a pending University Place, Washington branch acquisition among forward-looking risks but gives no specific timing or financial impact.
- Key risks cited include economic and interest-rate changes, credit quality and allowance estimates, real estate conditions, funding and deposit retention, loan demand and secondary-market sales, regulatory actions, expense control, competition, cybersecurity, and execution of the pending branch acquisition.
- The company expects the future CECL credit-loss standard to result in earlier loss recognition and an increased allowance, but had not quantified the impact. It said other newly issued accounting standards discussed were not expected to have a material impact or were still under evaluation.
- Subsequent event: a $0.10-per-share quarterly dividend was declared April 25, payable May 26, 2017. Management considered pending legal proceedings not likely to materially adversely affect the company. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the decline in loan balances and residential originations continued, and how the pending branch acquisition affects growth and costs.
- Trends in TDRs, impaired loans, past-due balances, and the allowance, particularly given the absence of a Q1 provision and the expected future CECL impact.
- Deposit mix and pricing, borrowing costs, and the company’s capacity to meet commitments and deposit maturities under changing interest rates.
- The durability of net interest margin and earnings, including the effect of rising funding costs and changes in mortgage servicing rights valuations.
- Regulatory capital and the ability to sustain dividends; confirm subsequent-period results and any material changes in liquidity, credit quality, or legal contingencies.