Sound Financial Bancorp, Inc. annual report, FY2022

Sound Financial Bancorp, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. The company is a Washington-focused bank holding company operating primarily through Sound Community Bank.

Financial and operating highlights

Metric20222021
Total assets at year-end$976.4 million$919.7 million
Net interest income$35.3 million$29.9 million
Net income$8.8 million$9.2 million
Diluted earnings per share$3.35$3.46
Net interest margin3.89%3.43%
Net cash provided by operating activities$10.1 million$19.1 million
  • Balance sheet and lending: Net loans held for portfolio rose 26.2% to $858.4 million. Gross loans were $867.6 million, with commercial and multifamily real estate at 36.1% of the portfolio, one-to-four family and home equity at about 33.9%, construction and land at 13.5%, and consumer loans at 13.8%.
  • Funding and liquidity: Deposits increased 1.3% to $808.8 million; certificates of deposit nearly doubled to $210.3 million, while non-maturity deposits declined. Year-end cash and cash equivalents were $57.8 million, down from $183.6 million. The bank had $43.0 million of FHLB advances outstanding and reported $199.0 million of remaining FHLB borrowing availability, subject to collateral. It also reported $20.8 million of unused Federal Reserve borrowing capacity and a $20.0 million available credit facility with another financial institution.
  • Debt and capital: Subordinated notes, net, were $11.7 million. Stockholders’ equity was $97.7 million. The bank’s Community Bank Leverage Ratio was 10.83% and it was considered well-capitalized.
  • Credit quality: Nonperforming assets fell to $3.6 million, or 0.37% of assets, from $6.2 million, or 0.68%. The allowance for loan losses rose to $7.6 million, equal to 0.88% of gross loans, from $6.3 million, or 0.92%. The 2022 provision for loan losses was $1.2 million; net recoveries were $68,000.
  • Cash flows: Investing activities used $185.6 million, chiefly reflecting net loan growth; financing activities provided $49.8 million. Cash and cash equivalents declined by $125.8 million during the year.

Changes versus 2021

  • Net interest income increased 18.0%, as loan growth and higher yields on investments and cash more than offset increased interest expense. Net interest margin improved by 46 basis points.
  • Net income declined 3.8%. Noninterest income fell 37.5% to $4.6 million, mainly because loan-sale gains dropped to $546,000 from $4.2 million as mortgage originations and loan sales slowed. Noninterest expense rose 9.4% to $27.8 million, led by higher salaries and benefits.
  • Gross loans grew 26.1%; construction and land loans increased 85.2%. Loan originations fell to $308.2 million from $538.5 million, while one-to-four-family loan sales declined to $20.3 million from $147.4 million.
  • Deposits grew more slowly than in 2021, and the mix shifted toward time deposits. The company used FHLB advances to help fund lending and liquidity needs.
  • Stockholders’ equity increased 4.7%. Net income and stock-based compensation were partly offset by $2.0 million of cash dividends, $1.7 million of share repurchases, and $1.3 million of after-tax unrealized securities losses.

Outlook, risks, and unusual items

  • Management said rising rates could pressure mortgage-sale gains and increase funding costs, potentially weighing on net interest income and margin in 2023. The filing gives no formal earnings or revenue guidance.
  • The company adopted CECL on January 1, 2023 and estimated an aggregate $1.0–$2.0 million increase in its allowance for credit losses and reserve for unfunded commitments; management said the estimate could change as its methodology is refined.
  • Commercial real estate concentrations were elevated: construction, land development, and land loans were 101.5% of CBLR capital; total commercial real estate loans, as defined by the FDIC, were 364.2%. Management noted potential additional regulatory scrutiny.
  • Interest-rate sensitivity is material. The company reported a liability-sensitive position: its modeled economic value of equity declined 26.95% under an immediate 400-basis-point rate increase. The filing cautions that this measure is hypothetical and does not directly predict near-term earnings.
  • Other key risks include local economic and property-market deterioration, construction-loan exposure, competition for deposits, uninsured deposits, cyber and third-party service-provider risks, and the transition from LIBOR. At year-end, estimated uninsured deposits were $161.9 million; $53.9 million of variable-rate loans were indexed to LIBOR.
  • The company paid regular quarterly dividends of $0.17 per share and a $0.10 special dividend during 2022. Management expected regular quarterly dividends to continue, subject to board discretion, capital, regulatory limits, and the bank’s ability to upstream funds. The parent company reported $2.2 million of unrestricted cash.
  • The auditor issued an unqualified opinion on the financial statements and identified allowance-for-loan-loss grading and qualitative assumptions as critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor’s opinion on internal control effectiveness.

Important facts for investors to verify

  • How CECL adoption affected reported reserves, retained earnings, and regulatory capital in 2023 compared with the estimated $1.0–$2.0 million increase.
  • Whether deposit retention, certificate repricing, and available borrowing capacity remain adequate as loan growth and market rates evolve.
  • Performance, collateral values, and refinancing or completion risk in the growing construction and commercial real estate portfolios, including concentrated borrower relationships.
  • Whether credit quality and the allowance remain adequate as economic conditions, property prices, and borrower payment burdens change.
  • How continuing mortgage-volume weakness and funding-cost changes affect net interest margin, loan-sale income, and dividend capacity.