Sound Financial Bancorp, Inc. — Q1 2020 10-Q
Business context and period. The company is a bank holding company operating Sound Community Bank and an insurance agency, primarily in Washington. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $737.6 | $719.9 at Dec. 31, 2019; up 2.5% |
| Net loans held for portfolio | $619.5 | $614.2 at Dec. 31, 2019; up 0.9% |
| Deposits | $634.6 | $616.7 at Dec. 31, 2019; up 2.9% |
| Borrowings | $7.5 | Unchanged from Dec. 31, 2019 |
| Stockholders’ equity | $78.2 | $77.7 at Dec. 31, 2019 |
| Net interest income | $6.7 | $7.0 in Q1 2019; down 3.7% |
| Net income | $1.0 | $1.4 in Q1 2019; down 32.1% |
| Diluted earnings per share | $0.38 | $0.56 in Q1 2019 |
| Provision for loan losses | $0.25 | $0.20 recapture in Q1 2019 |
| Cash and cash equivalents | $62.0 | $55.8 at Dec. 31, 2019 |
| Net cash from operating activities | $(3.3) | $2.8 provided in Q1 2019 |
| Net cash from investing activities | $(7.7) | $34.8 provided in Q1 2019 |
| Net cash from financing activities | $17.2 | $(26.9) in Q1 2019 |
Total interest income was $8.6 million versus $8.8 million; interest expense was $1.9 million versus $1.8 million. The efficiency ratio was 79.95%, essentially flat against 79.97% in Q1 2019. The allowance for loan losses was $5.9 million, or 0.93% of total loans, compared with 0.91% at year-end. The bank reported a 10.41% Community Bank Leverage Ratio at March 31.
Changes versus the prior comparable period
- Net income declined $0.46 million. Lower net interest income, lower noninterest income, a $0.45 million adverse swing in loan-loss provision, and higher interest expense were partly offset by lower noninterest expense.
- Noninterest income fell 29.7% to $0.71 million, mainly because loan-sale gains declined to $0.32 million from $0.54 million; the prior-year quarter included a $16.2 million portfolio loan sale.
- Noninterest expense decreased 7.0% to $5.95 million, including lower salaries and benefits and operations costs; regulatory assessments increased.
- Deposit balances rose, including a $12.8 million increase in noninterest-bearing deposits. Commercial and multifamily real estate loans increased $18.8 million, while one-to-four-family loans decreased $8.9 million.
- Reported nonperforming assets decreased to $4.83 million, or 0.65% of assets, from $5.23 million, or 0.73%, at year-end.
Outlook, management commentary and risks
- Management expects the low-rate environment and COVID-19 effects to adversely affect net interest income and net interest margin in 2020; the filing provides no specific numerical forecast.
- Management increased the loan-loss provision because of pandemic-related uncertainty and warns that further economic deterioration could require higher reserves. Hospitality exposure was reported as 16 direct loans totaling $7.6 million and $12.0 million of indirect exposure.
- At March 31, 17 loans totaling $6.7 million had COVID-related payment deferrals. By April 30, the company reported $42.8 million of loan modifications, or 6.8% of loans, and requests to modify $48.0 million. Most modifications were payment deferrals; qualifying short-term modifications were not treated as troubled debt restructurings under applicable guidance.
- As of April 30, the company had funded $48.5 million of PPP loans, with $19.4 million approved and awaiting funding. It intended to use the Federal Reserve’s PPP Liquidity Facility. PPP lending brings SBA guarantee and forgiveness conditions, as well as potential servicing, litigation and reputational risks.
- Liquidity sources at March 31 included $73.2 million in cash and available-for-sale securities, $5.9 million in loans held for sale, $216.3 million of additional FHLB borrowing capacity, $38.2 million of Federal Reserve discount-window capacity, and $20.0 million in other credit lines. Outstanding loan commitments totaled $120.0 million.
- The board declared a $0.15-per-share quarterly dividend on April 27, payable May 22, 2020. The company paid $0.35 per share in dividends during Q1.
- COVID-19 risks include borrower stress, delinquencies and charge-offs, reduced demand, funding and market uncertainty, operational and cybersecurity risks from remote work, and reliance on third-party providers. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s differing nonaccrual loan figures: the loan note reports $3.672 million at March 31, while the MD&A nonperforming-assets table reports $4.254 million. The filing text does not explain the difference.
- Track subsequent loan modification volumes, borrower performance after relief expires, credit grades, delinquencies and allowance adequacy as pandemic impacts develop.
- Confirm actual PPP funding, fee recognition, forgiveness outcomes and any SBA guarantee or litigation issues; April 30 activity is subsequent to the reporting date.
- Monitor deposit costs, net interest margin, loan-sale income and liquidity against management’s stated sensitivity to lower rates and uncertain economic conditions.
- Review the basis and continued availability of borrowing capacity, capital ratios and dividend capacity as commitments and credit losses evolve.