Sound Financial Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results cover Sound Financial Bancorp and its wholly owned subsidiary, Sound Community Bank. Amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $5.754 | $5.434 | $11.551 | $10.758 |
| Provision for loan losses | $0 | $0.100 | $0 | $0.250 |
| Noninterest income | $0.983 | $1.210 | $1.980 | $2.187 |
| Noninterest expense | $4.798 | $4.657 | $9.417 | $9.118 |
| Net income | $1.303 | $1.254 | $2.717 | $2.360 |
| Diluted EPS | $0.50 | $0.49 | $1.04 | $0.92 |
- Q2 net income increased 3.9% year over year; first-half net income increased 15.1%. Management attributed the improvement primarily to higher net interest income after provision.
- Net interest margin was 4.33% in Q2 and 4.30% for the first half, versus 4.26% in both prior-year periods. The efficiency ratio was 71.22% for Q2 (69.51% prior year) and 69.60% for the first half (69.88% prior year).
- At June 30, total assets were $588.3; net loans $489.1; deposits $493.7; cash and cash equivalents $60.0; borrowings $25.0; and stockholders’ equity $62.9. Assets were essentially unchanged from year-end 2016.
- First-half cash flows: operating activities provided $4.3, investing activities provided $19.1, and financing activities used $18.0. Cash rose $5.4 to $60.0.
Changes versus comparable periods and year-end
- Gross loans declined $6.1 (1.2%) from December 31, 2016. Commercial and multifamily loans rose $14.5, while construction and land loans fell $18.1; the latter was attributed primarily to normal repayments.
- Deposits increased $26.0 (5.6%) from year-end, including $14.5 associated with the University Place branch acquisition. FHLB borrowings fell $29.8 (54.4%) to $25.0 as deposit growth and acquisition cash were used to repay advances.
- Noninterest income fell 18.8% in Q2 and 9.5% for the first half, reflecting lower service charges and loan-sale gains, partly offset by higher mortgage servicing income. Noninterest expense rose 3.0% and 3.3%, respectively; management cited higher occupancy costs and, for the first half, salaries and benefits.
- The loan-loss allowance was $4.835 at June 30, versus $4.822 at year-end; no provision was recorded in the first half of 2017. Nonperforming assets were $4.220, or 0.72% of assets, versus $4.521, or 0.77%, at year-end. Nonaccrual loans declined, while nonperforming TDRs increased, including a $1.3 million residential loan modified as a TDR.
Liquidity, capital, outlook and risks
- Management reported $66.2 of cash and available-for-sale securities, $160.2 of remaining FHLB borrowing capacity, $44.6 of Federal Reserve discount-window capacity, and $21.0 of other credit facilities available at June 30. Outstanding loan commitments totaled $78.8, including $39.6 of undisbursed construction and land loans; $60.4 of certificates of deposit were due within one year.
- The Bank was classified as well-capitalized. At June 30, its Tier 1 leverage ratio was 10.53%, CET1 and Tier 1 risk-based ratios were 12.57%, and total risk-based capital was 13.63%.
- The Bank completed its University Place, Washington branch acquisition on June 30. It assumed approximately $14.5 of deposits and paid a $0.485 deposit premium; acquisition fair values were preliminary and could be refined for up to one year.
- On July 25, the company declared a $0.10 quarterly dividend and a $0.20 special dividend per share, payable August 25 to shareholders of record August 11.
- No specific earnings or balance-sheet guidance was provided. Management said occupancy expenses were expected to remain higher due to the branch lease, new Sequim loan production office, headquarters relocation, and related amortization.
- Key stated risks include changes in interest rates and local economic or real-estate conditions; loan credit quality and allowance estimates; deposit retention and funding costs; mortgage servicing-rights valuation; acquisition integration; regulatory actions; competition; cybersecurity and third-party risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commercial-real-estate exposure, construction and land repayments, impaired loans, and TDR balances evolve as expected; impaired loans increased to $10.0 from $8.2 at year-end.
- Whether deposit growth is sustained and funding costs remain manageable as interest rates change, given higher deposit costs and the decline in borrowings.
- Whether mortgage servicing income and servicing-rights fair values remain resilient; valuation depends on assumptions including prepayment speeds and discount rates.
- How the University Place branch performs and whether preliminary acquisition valuations or integration costs change.
- Whether capital, liquidity, and dividend capacity remain adequate, including after the declared special dividend and in light of outstanding loan commitments.