Sound Financial Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited and consolidated with Sound Community Bank. The company is a Washington-focused bank holding company; it primarily earns revenue from lending, deposit services and loan sales.
Financial performance
| Metric | Third quarter 2014 | Third quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $4.783 million | $4.407 million | $14.020 million | $12.816 million |
| Provision for loan losses | $0.200 million | $0.450 million | $0.600 million | $1.150 million |
| Noninterest income | $1.431 million | $1.026 million | $3.336 million | $3.751 million |
| Noninterest expense | $4.194 million | $3.566 million | $11.701 million | $11.150 million |
| Net income | $1.235 million | $0.994 million | $3.438 million | $2.934 million |
| Diluted earnings per share | $0.47 | $0.38 | $1.32 | $1.11 |
| Net interest margin | 4.43% | 4.55% | 4.43% | 4.58% |
- Third-quarter net income increased 24% year over year; nine-month net income increased 17%. Higher net interest income and lower loan-loss provisions supported earnings. Higher expenses partly offset those gains.
- For the nine months, operating cash flow was $2.5 million versus $5.2 million in 2013. Investing used $22.3 million, principally reflecting net loan growth; financing provided $26.6 million. Cash and cash equivalents ended at $22.1 million, up from $15.3 million at year-end 2013.
- At September 30, total assets were $478.7 million, net loans $413.1 million, deposits $403.2 million, borrowings $20.7 million and stockholders’ equity $49.4 million. Compared with December 31, 2013, loans grew 6.8%, deposits 15.7%, and borrowings fell 52.0%.
- Deposit cost was 0.60% at September 30 versus 0.64% at year-end. The nine-month weighted average cost of deposits was 0.61%, compared with 0.63% in 2013. Loan yields declined, contributing to a lower net interest margin.
- Sound Community Bank reported regulatory capital ratios of 10.26% for Tier 1 capital to average assets, 12.82% for Tier 1 capital to risk-weighted assets, and 13.98% for total capital to risk-weighted assets. Management said the Bank was well-capitalized.
Material changes and business developments
- On August 25, 2014, the Bank acquired three Columbia State Bank branches on Washington’s North Olympic Peninsula. It assumed approximately $21.6 million of deposits and paid a 2.35% deposit premium; the filing reports approximately $22.2 million of deposits acquired. The acquisition contributed to deposit growth and increased operating, data-processing and staffing costs. Branch consolidations followed in September and November.
- Gross loans rose $26.4 million from year-end. Commercial business loans increased 75.6% and other consumer loans increased 26.4%, consistent with the stated strategy to expand non-real-estate-secured lending. Commercial and multifamily real estate remained the largest loan category at 38.0% of the portfolio.
- Noninterest income rose 39.5% in the quarter, led by service charges, mortgage servicing income and gains on loan sales. It fell 11.1% for the nine months, mainly due to lower mortgage servicing income and loan-sale gains amid reduced refinance activity.
- Stockholders’ equity increased $2.9 million during the nine months, including $3.4 million of net income and $456,000 of other comprehensive income, partly offset by $904,000 of share repurchases and $378,000 of dividends.
Credit, liquidity, risks and outlook
- Nonperforming assets were $3.8 million, or 0.80% of assets, versus $3.1 million, or 0.70%, at year-end. Nonperforming loans were $3.6 million, or 0.85% of gross loans, versus $1.9 million, or 0.49%. Management attributed much of the increase to a $1.5 million commercial real estate loan modified as a TDR; it was performing under modified terms at quarter-end.
- The allowance for loan losses was $4.23 million, or 1.01% of loans, compared with 1.07% at year-end. Nine-month net charge-offs declined to $547,000 from $1.283 million. Allowance coverage of nonperforming loans fell to 119.05% from 206.58%, reflecting higher nonperforming loans.
- Available-for-sale securities were $12.9 million, including $2.5 million of non-agency mortgage-backed securities. No OTTI charge was recorded in 2014, but management cautioned that deteriorating market or underlying loan conditions could require impairment; limited market liquidity may constrain sales. Fair-value estimates for servicing rights and certain securities rely on significant assumptions.
- Liquidity included $35.1 million of cash and available-for-sale securities, plus borrowing capacity of $67.2 million from the FHLB, $19.2 million from the Federal Reserve discount window, and $11.0 million across two Fed Funds lines. Loan commitments, unused lines and letters of credit totaled $59.0 million; certificates maturing within one year totaled $104.9 million. Management believed most maturing deposits would remain, but deposit flows and loan prepayments are sensitive to rates, economic conditions and competition.
- Key stated risks include credit losses and collateral values, interest-rate changes, funding and deposit competition, securities impairment, acquisition integration, regulatory changes, operating costs, and reliance on estimates and third-party providers. Management reported no material change in market risk and no material change in internal control over financial reporting. It said disclosure controls were effective.
- The filing provides no earnings or other financial guidance. A $0.05-per-share quarterly dividend was declared October 28, payable November 26, 2014. Management stated that legal proceedings in the normal course were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the branch acquisition delivers durable deposit growth and revenue sufficient to offset conversion, staffing and ongoing operating costs.
- Trends in nonperforming loans, TDR performance, commercial real estate exposures and allowance coverage as the loan portfolio expands.
- Assumptions and marketability underlying the $2.5 million non-agency securities portfolio and $3.1 million mortgage servicing rights valuation.
- Ability to retain deposits and meet upcoming certificate maturities and $59.0 million of commitments while funding loan growth.
- Whether pressure on loan yields and net interest margin continues, and how expenses and loan-sale activity affect earnings.