Sound Financial Bancorp, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. The company is a bank holding company whose principal business is conducted through Sound Community Bank, serving communities in Washington State.
Financial performance and condition
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Total assets | $919.7 million | $861.4 million |
| Loans held for portfolio, net | $680.1 million | $607.4 million |
| Deposits | $798.3 million | $748.0 million |
| Stockholders’ equity | $93.4 million | $85.5 million |
| Net interest income | $29.9 million | $27.5 million |
| Net interest margin | 3.43% | 3.57% |
| Net income | $9.2 million | $8.9 million |
| Diluted earnings per share | $3.46 | $3.42 |
| Allowance for loan losses | $6.3 million; 0.92% of loans | $6.0 million; 0.98% of loans |
| Nonperforming assets | $6.2 million; 0.68% of assets | $3.5 million; 0.40% of assets |
Interest income was $33.9 million and noninterest income $7.3 million in 2021. Net interest income after the $0.4 million loan-loss provision was $29.5 million. The efficiency ratio increased to 68.18% from 64.92%.
Cash and cash equivalents were $183.6 million and available-for-sale securities were $8.4 million at year-end. Cash flow from operations was $19.1 million, investing activities used $77.9 million, and financing activities provided $48.6 million; cash and cash equivalents declined $10.2 million during the year.
The Bank reported a 10.92% Community Bank Leverage Ratio and was classified as well-capitalized. The company had $11.6 million of subordinated notes outstanding, no year-end FHLB advances, and reported $101.5 million of remaining FHLB borrowing availability, subject to collateral requirements. The parent company had $4.2 million of unrestricted cash.
Material changes versus FY2020
- Net income rose 2.5%, as a $3.5 million reduction in interest expense and a $0.5 million lower loan-loss provision more than offset lower interest income and higher operating expenses.
- Net interest income increased 8.9%, but net interest margin contracted 14 basis points. The average cost of deposits fell to 0.41% from 1.01%.
- Loans held for portfolio, net, grew 12.0%. One-to-four-family loans rose 58.9% to $207.7 million, while floating-home loans rose 48.7% to $59.3 million. Commercial business loans fell 56.4% to $28.0 million, principally as PPP loans were forgiven or repaid.
- Deposits increased 6.7%; noninterest-bearing demand deposits grew to $187.7 million. Certificates of deposit declined to $105.7 million from $235.5 million.
- Nonperforming assets increased 78.6%, largely reflecting a $2.4 million nonperforming commercial and multifamily loan. Nonaccrual loans rose to $5.6 million from $2.9 million.
- Noninterest expense increased 12.0% to $25.4 million, including higher salaries and benefits and data-processing expense. Net gain on loan sales fell to $4.2 million from $6.0 million.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management described plans to grow higher-yielding lending and core deposits, manage problem assets and expenses, and pursue disciplined expansion in its existing and contiguous markets. It expects to continue quarterly dividends subject to Board discretion and regulatory limits.
- Management cited improving local economic conditions and strong housing prices, while continuing to monitor possible pandemic-related borrower and portfolio deterioration. Its discussion also flagged inflation, supply-chain disruption and potential effects of new COVID-19 developments.
- Key exposures include Washington-area real estate and borrower concentration; commercial real estate, construction and land lending; interest-rate and funding risk; cybersecurity and third-party service providers; and the transition away from LIBOR. A substantial portion of loans are real-estate secured. The five largest borrower relationships totaled $86.1 million, including unused commitments.
- Unfunded loan commitments totaled $131.6 million, including $89.8 million of construction commitments. Estimated uninsured deposits were approximately $190.0 million. These figures indicate potential funding and credit exposures, not certain losses or withdrawals.
- The $6.3 million allowance reflects management estimates under the incurred-loss method. The company expects to adopt CECL in 2023; management had not determined the eventual allowance or capital impact.
- PPP activity was significant: the Bank originated $119.2 million of PPP loans in 2020 and 2021 combined; $4.2 million remained at year-end 2021. The year included $3.0 million of recognized PPP fees. The company also purchased $6.1 million of bank-owned life insurance.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to opine on internal control.
Important facts for investors to verify
- Whether the increase in nonperforming loans, especially the commercial and multifamily exposure, leads to further charge-offs or provision increases; allowance coverage of nonaccrual loans fell to 113.6% from 208.0%.
- The performance and concentration of commercial real estate, construction, floating-home and jumbo residential loans, including the large unfunded construction commitments.
- Deposit stability, uninsured-deposit estimates and availability of secured borrowing capacity under stressed conditions.
- The assumptions supporting mortgage servicing rights fair value: the year-end asset was $4.3 million, while the 2021 fair-value adjustment reduced income by $0.8 million.
- The effects of interest-rate changes on margin, loan demand and mortgage-sale income, and the future cost of the subordinated notes when their rate resets after October 2025.
- The eventual CECL allowance and regulatory-capital effects, as well as the continuation of dividends and repurchases within regulatory and liquidity constraints.