Sound Financial Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results include Sound Community Bank and Sound Community Insurance Agency. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $8.39 | $7.35 | $16.01 | $13.89 |
| Provision for loan losses | $0.60 | $0.25 | $0.73 | $0.25 |
| Noninterest income | $1.02 | $1.71 | $2.54 | $4.42 |
| Noninterest expense | $6.78 | $5.99 | $13.62 | $12.15 |
| Net income | $1.61 | $2.25 | $3.34 | $4.70 |
| Diluted EPS | $0.61 | $0.85 | $1.26 | $1.78 |
| Net interest margin | 3.83% | 3.36% | 3.67% | 3.23% |
Q2 net income fell 28.3%; first-half net income fell 29.1%. Net interest income improved, but lower gains on loan sales, higher expenses, and a larger loan-loss provision more than offset the improvement. Loan-sale gains were $0.08 million in Q2 and $0.45 million for the first half, down from $1.06 million and $3.12 million, respectively. Salaries and benefits rose 19.8% in Q2 and 16.9% year to date. The efficiency ratio worsened to 72.12% for Q2 and 73.43% for the first half, from 66.07% and 66.38%.
Financial position, cash flow and liquidity
- At June 30, total assets were $937.0 million, up 1.9% from December 31, 2021. Net portfolio loans were $799.0 million, up 17.5%; deposits were $786.0 million, down 1.5%; and stockholders’ equity was $93.1 million, down 0.3%.
- Loan growth was concentrated in construction and land (+60.7%), one-to-four-family (+20.5%), and commercial and multifamily (+10.5%) loans. Management attributed growth to marketing, lending staff, and USDA-guaranteed loan purchases; commercial business loans declined 13.3%, mainly from PPP loan forgiveness.
- Cash and cash equivalents declined $103.5 million to $80.1 million as funds were redeployed into loans and securities. First-half cash flow was $5.5 million provided by operating activities, $122.6 million used in investing, and $13.6 million provided by financing; cash decreased $103.5 million.
- Borrowings were $30.0 million, all under the FHLB facility, versus none at year-end. Subordinated notes were $11.7 million; these are 5.25% fixed-rate until October 2025 and then floating-rate through their 2030 maturity.
- Management reported $89.4 million in cash and available-for-sale securities, $178.5 million of remaining FHLB borrowing capacity, $21.9 million available through the Federal Reserve discount window, and a $20.0 million unused unsecured credit line. Borrowing availability is subject to collateral or facility terms.
- The Bank’s and Company’s Community Bank Leverage Ratios were 11.31% and 10.13%, respectively, above the stated minimum requirements. Total deposits included $17.5 million in time deposits exceeding $250,000, which are not federally insured.
Credit, outlook and material items
- The allowance for loan losses was $7.1 million, or 0.88% of loans, compared with $6.3 million, or 0.92%, at year-end. Nonaccrual loans were $4.5 million (0.56% of loans), down from $5.6 million (0.81%); nonperforming assets were $5.2 million, or 0.55% of assets.
- Management said the higher provision reflected loan growth and noted uncertainty in the economic environment. Allowance estimates may prove inadequate, and regulators may require adjustments. The filing identifies inflation, recession or slower growth, interest rates, real estate conditions, funding access, deposit retention, cybersecurity, and regulatory matters among key risks.
- Available-for-sale securities had $1.25 million of gross unrealized losses at June 30, versus $0.03 million at year-end; accumulated other comprehensive loss was $0.95 million. Management attributed the decline to interest rates and market spreads, not credit deterioration, and said it did not expect to sell the securities before recovery of amortized cost.
- No specific earnings or financial guidance was provided. Management said it expected to continue regular quarterly dividends, subject to Board discretion, and expected to use borrowing facilities as needed. It reported no known events likely to materially adversely affect liquidity, capital resources, or operations.
- After quarter-end, the Board declared a $0.17-per-share dividend and increased the stock repurchase authorization from $2.0 million to $4.0 million, extending the program to January 31, 2023. Approximately $2.1 million remained available as of August 10, 2022. During the first half, the company paid $1.15 million in dividends and repurchased $1.73 million of shares.
- Off-balance-sheet commitments totaled $135.6 million, including $86.5 million of unfunded construction commitments, $37.6 million of unused lines, and $11.5 million of residential mortgage commitments. Management stated that commitments may not be fully drawn.
Investor verification priorities
- Track whether loan growth, particularly construction and land lending, continues and how credit grades, delinquencies, nonaccruals, and provision needs evolve.
- Assess whether deposit trends and funding costs remain favorable as the company relies on borrowings to support loan growth; verify collateral-dependent borrowing capacity.
- Monitor net interest margin and loan yields against rising funding rates, and the effect of lower mortgage originations and loan-sale gains on earnings.
- Review securities valuation and accumulated other comprehensive loss as interest rates change, and assess management’s assumptions about holding securities to recovery.
- Confirm regulatory capital, dividend capacity, and actual repurchases against the announced program; the filing reports effective disclosure controls and no material change in internal control over financial reporting.