Sound Financial Bancorp, Inc. — Q1 2021 Form 10-Q
Business context and period. The company is a bank holding company operating principally through Sound Community Bank, with an insurance agency subsidiary. This unaudited report covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020, and operating results are compared with Q1 2020. Figures below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $2.45 million; diluted EPS $0.93 | $0.98 million; diluted EPS $0.38 |
| Net interest income | $6.54 million | $6.73 million |
| Net interest margin | 3.09% | 3.96% |
| Noninterest income | $2.70 million | $0.71 million |
| Noninterest expense | $6.16 million | $5.95 million |
| Provision for loan losses | $0 | $0.25 million |
| Cash and cash equivalents | $269.6 million | $193.8 million |
| Total assets | $936.7 million | $861.4 million |
| Net portfolio loans | $608.4 million | $607.4 million |
| Deposits | $816.7 million | $748.0 million |
| Stockholders’ equity | $87.6 million | $85.5 million |
| Subordinated debt, net | $11.6 million | $11.6 million |
Operating cash flow was $7.8 million, investing cash flow was negative $0.05 million, and financing cash flow was $68.0 million. The financing inflow primarily reflected deposit growth. The company reported no outstanding FHLB or other bank-line borrowings at quarter-end. Bank and company Community Bank Leverage Ratios were both 10.32%.
Material changes and drivers
- Net income rose 149.8% year over year, primarily because net gain on loan sales increased to $2.05 million from $0.32 million. Loans sold were $68.1 million versus $14.1 million.
- Net interest income fell 2.9%, and net interest margin declined 87 basis points. Lower yields on loans and cash/investments outweighed lower deposit costs. Average loan yield was 5.09%, compared with 5.43%.
- Deposit expense declined; the reported weighted-average cost of deposits was 0.67% at quarter-end, versus 1.01% at December 31, 2020. Noninterest-bearing demand deposits increased to $188.7 million, or 23.1% of deposits.
- Noninterest expense increased 3.6%, including higher salaries and benefits and data-processing costs. The efficiency ratio improved to 66.69% from 79.95%, mainly because of higher noninterest income.
- Cash grew with deposit inflows, including PPP-related borrower deposits and pandemic stimulus funds. Total assets increased 8.7% from year-end.
- Commercial business loans rose 30.3% from year-end, largely reflecting second-round PPP originations. The allowance for loan losses was $5.94 million, or 0.97% of loans; nonperforming loans were $2.71 million, and nonperforming assets were $3.29 million.
Outlook, risks and unusual items
- The filing provides no quantified earnings or financial guidance. Management described continued pandemic-related uncertainty and said it would monitor borrowers and reassess requests for further relief.
- At March 31, 2021, 28 loans remained under COVID-related payment relief: seven commercial loans totaling $9.1 million and 21 residential loans totaling $3.6 million. Management said most previously modified borrowers had resumed payments. These qualifying modifications were not treated as TDRs under applicable relief guidance.
- The bank had funded $113.9 million of PPP loans in total; $61.2 million remained outstanding. PPP loans are SBA-guaranteed, and $1.9 million of deferred PPP origination fees remained to be accreted into interest income. PPP fee recognition and loan forgiveness affect reported yields and balances.
- Management cited potential risks from pandemic effects, borrower credit deterioration, interest-rate changes, deposit funding, real-estate values, loan-sale market conditions, cybersecurity and third-party providers, regulatory action, and fair-value estimates. The allowance estimate could rise if economic conditions worsen.
- Unusual earnings contribution: gains on loan sales were substantially higher year over year. Mortgage servicing rights were valued at $4.11 million, using significant unobservable assumptions; changes in prepayment speeds or discount rates can affect their value.
- Subsequent events: the board declared a $0.17-per-share quarterly dividend payable May 24, 2021, and approved a new share repurchase program of up to $2.0 million for up to six months. Management reported no material changes to previously disclosed risk factors or market risk, and no material adverse effect expected from routine legal proceedings.
Key facts for investors to verify
- How sustainable loan-sale gains are, given their material contribution to the year-over-year earnings increase.
- Whether lower asset yields and the reduced net interest margin continue to pressure core earnings.
- Credit performance of the $12.7 million of loans still under COVID-related relief, and any resulting allowance changes.
- The pace of PPP forgiveness and recognition of remaining deferred fees, and the effect on loans, interest income, and customer deposits.
- Whether unusually strong deposit growth and the high cash balance persist, and how liquidity and loan commitments evolve.
- Capital, dividends, and execution of the new repurchase authorization; the filing reports a 10.32% CBLR for both the bank and company.