Sound Financial Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company is a bank holding company operating primarily through Sound Community Bank. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $8.32 | $6.66 | $22.21 | $20.29 |
| Provision for loan losses | $0.18 | $0.28 | $0.43 | $0.93 |
| Noninterest income | $1.43 | $2.07 | $5.85 | $4.36 |
| Noninterest expense | $6.32 | $5.53 | $18.47 | $16.88 |
| Net income | $2.59 | $2.34 | $7.29 | $5.44 |
| Diluted EPS | $0.98 | $0.90 | $2.76 | $2.09 |
- Net interest margin was 3.74% in Q3 2021 versus 3.27% a year earlier; for the nine-month period it was 3.40% versus 3.61%.
- Efficiency ratio was 64.81% for Q3 (63.36% prior year) and 65.83% year to date (68.51% prior year).
- At September 30, total assets were $928.1, net portfolio loans $661.2, deposits $807.7, and stockholders’ equity $91.9.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $12.0; investing cash outflow was $57.6, principally from loan growth and a $6.1 purchase of bank-owned life insurance; financing cash inflow was $58.4, primarily from deposit growth. Cash and equivalents ended at $206.7, up $12.9 from year-end 2020.
- Deposits increased $59.7, or 8.0%, from December 31, 2020. Noninterest-bearing demand deposits rose $62.4, and the reported average cost of total deposits fell to 0.47% for the nine months from 1.06%.
- The company had no FHLB advances outstanding. It reported $11.6 of subordinated notes, with a 5.25% fixed rate through September 2025 before resetting to a floating rate. Available liquidity included $121.6 of additional FHLB borrowing capacity, $22.6 through the Federal Reserve Discount Window, and $20.0 in other credit facilities; these sources are subject to their terms and collateral availability.
- Loan commitments totaled $84.5, including $43.1 of unfunded construction commitments. The Bank and company reported Community Bank Leverage Ratios of 10.56% and 9.80%, respectively, above applicable minimum requirements.
Material changes and credit position
- Net portfolio loans grew $53.9, or 8.9%, since year-end. Growth in one-to-four-family, construction and land, and floating-home loans was partly offset by lower commercial and multifamily lending and PPP-related commercial business loan runoff.
- Q3 net income increased 11.0%; nine-month net income increased 34.0%. Lower deposit expense and lower loan-loss provisions supported results. Nine-month noninterest income rose 34.2%, while Q3 noninterest income fell 30.8%, mainly because loan-sale gains declined.
- Q3 loan-sale volume was $20.3 versus $89.5 a year earlier; nine-month volume was $128.3 versus $176.0. PPP fee recognition materially supported reported loan yields: the Q3 average PPP yield was 22.37%, including deferred-fee recognition.
- The allowance for loan losses was $6.3, or 0.95% of total loans, versus $6.0 and 0.98% at year-end. Nine-month net charge-offs were $0.10, compared with $0.58 a year earlier. Nonperforming loans were $3.1, up 6.4% from year-end; nonperforming assets were $3.7, or 0.40% of assets.
- Six residential loans totaling $0.93 remained under COVID-related payment relief at quarter-end. TDRs totaled $2.6; no loans were newly modified as TDRs during the 2021 quarter or nine-month period.
Outlook, risks and unusual items
- The filing provides no numerical earnings or growth guidance. Management noted ongoing COVID-19 and Delta-variant uncertainty, while reporting that all branch lobbies were open at quarter-end. Most borrowers previously receiving pandemic relief had resumed payments.
- Management identifies credit quality, allowance-estimation uncertainty, real estate values, interest rates, deposit retention and funding costs, loan demand and secondary-market conditions, operating expenses, regulatory actions, cybersecurity and third-party service providers as risks. A renewed increase in business restrictions could increase credit costs. Management said market-risk disclosures had not materially changed from the 2020 Form 10-K; previously reported risk factors were unchanged.
- PPP loans outstanding were $11.8 at September 30 and were fully SBA-guaranteed. Management excluded them from the allowance calculation on that basis. The filing cautions that actual credit losses and required provisions may differ from estimates.
- After quarter-end, the board declared a $0.17-per-share dividend and authorized a new share repurchase program of up to $2.0 over six months, beginning October 29, 2021. The prior program ended October 28; the company reported $0.03 of repurchases under it.
- Management stated that any liability from ordinary-course legal proceedings was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether PPP fee recognition and forgiveness timing continue to affect loan yields and earnings as the remaining PPP balance runs off.
- Whether loan growth, credit grades, nonperforming assets and the allowance remain consistent with management’s assumptions, particularly in commercial real estate and construction lending.
- Whether deposit growth is durable and how excess cash earning low yields affects net interest margin as rates and deposit costs change.
- The availability of borrowing capacity against eligible collateral, and the effect of $84.5 in loan commitments and $57.8 of certificates of deposit maturing within one year on liquidity.
- Execution and funding of the new repurchase authorization and the continuing capacity to pay dividends, including the Bank’s capital position and ability to distribute funds to the parent.