Sound Financial Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. The company is a bank holding company operating primarily through Sound Community Bank in Washington, with an insurance agency subsidiary. This unaudited report covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable / prior date |
|---|---|---|
| Net interest income | $7.62 million | $6.54 million, Q1 2021 |
| Net income | $1.72 million; diluted EPS $0.65 | $2.45 million; diluted EPS $0.93, Q1 2021 |
| Net interest margin | 3.49% | 3.09%, Q1 2021 |
| Efficiency ratio | 74.77% | 66.69%, Q1 2021 |
| Total assets | $958.9 million | $919.7 million, December 31, 2021 |
| Net loans held for portfolio | $703.1 million | $680.1 million, December 31, 2021 |
| Total deposits | $836.1 million | $798.3 million, December 31, 2021 |
| Cash and cash equivalents | $197.1 million | $183.6 million, December 31, 2021 |
| Allowance for loan losses | $6.4 million; 0.90% of loans | $6.3 million; 0.92%, December 31, 2021 |
| Nonaccrual loans | $4.7 million; 0.67% of loans | $5.6 million; 0.81%, December 31, 2021 |
| Stockholders’ equity | $93.9 million | $93.4 million, December 31, 2021 |
Operating cash flow was $2.9 million; investing activities used $26.3 million and financing activities provided $36.9 million. Cash increased $13.5 million during the quarter. Subordinated notes, net, were $11.6 million; there were no outstanding FHLB advances or PCBB borrowings. The notes mature in 2030 and carry a 5.25% fixed rate until October 2025, then a floating rate.
The Bank and the holding company reported Community Bank Leverage Ratios of 10.96% and 10.05%, respectively, above applicable minimum requirements. The company reported $207.3 million in cash and available-for-sale securities, $1.3 million in loans held for sale, and access to borrowing facilities, subject to collateral requirements.
Material changes versus the prior comparable period
- Net income fell 29.7% year over year. Net interest income increased 16.6%, mainly as deposit interest expense declined by $868,000; this more than offset a $214,000 increase in interest income.
- Noninterest income declined 43.7% to $1.52 million, chiefly because gains on loan sales fell to $365,000 from $2.05 million as mortgage originations and sale margins declined. Loans sold were $12.2 million versus $68.1 million.
- Noninterest expense rose 10.9% to $6.84 million, including higher salaries and benefits. The efficiency ratio consequently worsened.
- Portfolio loans grew 3.4% from year-end, with increases in most categories; commercial business loans declined 12.8%, primarily from SBA forgiveness of PPP loans. Deposits rose 4.7%, including growth in noninterest-bearing accounts. Management noted that some growth reflected temporary lawyer trust account balances.
- Nonperforming assets declined to $5.4 million from $6.2 million. Net charge-offs were $24,000 versus $65,000 a year earlier; the company recorded a $125,000 loan-loss provision, compared with none in Q1 2021.
- Available-for-sale securities had $682,000 of gross unrealized losses at quarter-end, versus $25,000 at year-end. The resulting after-tax other comprehensive loss was $608,000; management attributed the securities losses to market rates and spreads, not issuer or collateral credit quality.
Outlook, commentary, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management said it expects to continue regular quarterly cash dividends, subject to board discretion. On April 26, 2022, the board declared a $0.17-per-share dividend and extended authorization to repurchase up to $2.0 million of shares through October 29, 2022.
- Management described the bank’s branches as open with normal hours and substantially all employees back in routine working environments. It continued to monitor COVID-19 impacts.
- Key disclosed risks include changes in interest rates and deposit costs, loan demand and credit performance, real estate values, funding access, mortgage secondary-market conditions, regulation, cybersecurity and third-party provider disruptions. Results also depend on estimates for credit losses and mortgage servicing rights. The company cautioned that interim results are not necessarily indicative of full-year results.
- Commitments to extend credit totaled $138.7 million, including $90.6 million of unfunded construction commitments. These are off-balance-sheet exposures and do not necessarily represent expected cash outflows.
- The company had $2.1 million of PPP loans outstanding, fully guaranteed by the SBA. Adoption of the current expected credit loss standard was deferred until the applicable fiscal year beginning after December 15, 2022; management had not determined the size of any adoption impact.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting, no material change in previously disclosed risk factors, and no legal proceedings expected to have a material adverse effect.
Investor verification priorities
- Confirm whether deposit growth from lawyer trust and specialty-business accounts is sustained, and review uninsured time deposits and deposit concentration.
- Track loan growth and credit quality, particularly commercial and multifamily real estate and construction lending, nonperforming loans, and the adequacy of the allowance.
- Assess sensitivity of net interest income and securities values to further interest-rate changes, including the impact of unrealized securities losses.
- Monitor mortgage production and sale gains, servicing-rights valuation assumptions, and whether lower mortgage activity continues to weigh on noninterest income.
- Review liquidity and capital availability alongside credit commitments, dividend payments, and the extended share-repurchase authorization.