SFBC - Sound Financial Bancorp Inc. Q2 2022 Results

Operating Results

Net interest income increased $774 thousand, or 10.2%, to $8.4 million for the quarter ended June 30, 2022, compared to $7.6 million for the quarter ended March 31, 2022 and increased $1.0 million, or 14.2%, from $7.4 million for the quarter ended June 30, 2021. The increase from the prior quarter was primarily the result of higher interest income earned on loans and investments and interest-bearing cash. The increase from the same quarter last year was primarily the result of lower interest expense paid on deposits and higher interest income earned on loans, investments and interest-bearing cash.

Interest income increased $773 thousand, or 9.4%, to $9.0 million for the quarter ended June 30, 2022, compared to $8.2 million for the quarter ended March 31, 2022 and increased $571 thousand, or 6.8%, from $8.4 million for the quarter ended June 30, 2021. The increase from the prior quarter was primarily due to higher average loan balances and a 55 basis point rate increase in average yield on investments and interest-bearing cash following recent increases in the targeted federal funds rate, partially offset by lower average investments and interest-bearing cash balances. The increase in interest income from the same quarter last year was due primarily to higher average loan balances and a 66 basis point increase in average yield on investments and interest-bearing cash, partially offset by a 60 basis point decline in the average loan yield and lower average investments and interest-bearing cash balances.

Interest income on loans increased $622 thousand, or 7.7%, to $8.7 million for the quarter ended June 30, 2022, compared to $8.1 million for the quarter ended March 31, 2022, and increased $398 thousand, or 4.8%, from $8.3 million for the quarter ended June 30, 2021. The average balance of total loans was $741.6 million for the quarter ended June 30, 2022, compared to $694.9 million for the quarter ended March 31, 2022 and $628.1 million for the quarter ended June 30, 2021. The average yield on total loans was 4.70% for the quarter ended June 30, 2022, compared to 4.71% for the quarter ended March 31, 2022 and 5.30% for the quarter ended June 30, 2021. The slight decline in the average yield on loans during the current quarter compared to the prior quarter primarily was due to lower recognition of net deferred fees due to a reduced volume of PPP loan repayments from U.S. Small Business Administration’s (“SBA”) loan forgiveness, and new loan originations at lower rates, primarily related to fixed rate mortgage loans. The decrease in the average yield on loans during the current quarter compared to the same quarter in 2021 was primarily due to the decrease in the recognition of net deferred fees due to loan repayments from SBA loan forgiveness. The Bank recognized $40 thousand, $98 thousand, and $1.0 million in deferred fees and interest income related to PPP loan forgiveness repayments during the three months ended June 30, 2022, March 31, 2022, and June 30, 2021, respectively. Refer to the discussion below for the impact of PPP on our net interest margin. As of June 30, 2022, total unrecognized fees on PPP loans were $23 thousand. Interest income on investments and interest-bearing cash increased $151 thousand to $289 thousand for the quarter ended June 30, 2022, compared to $138 thousand for the quarter ended March 31, 2022, and increased $173 thousand from $116 thousand for the quarter ended June 30, 2021. This increase compared to the same quarter one year ago was due to a higher average yield for investments and interest-bearing cash, partially offset by lower average balances.

Interest expense remained virtually unchanged at $594 thousand for the quarter ended June 30, 2022, compared to $595 thousand for the quarter ended March 31, 2022, and decreased $470 thousand, or 44.2%, from $1.1 million for the quarter ended June 30, 2021. The decrease in interest expense during the current quarter from the comparable period a year ago was primarily the result of a 24 basis point decline in the average cost of total deposits (including non-interest bearing deposits) reflecting reduced rates paid on all interest-bearing deposits, partially offset by a $55.8 million, or 12.4%, increase in the average balance of interest-bearing deposits other than certificate accounts. Contributing further to this decrease was a $78.8 million, or 45.1%, decline in the average balance of higher costing certificate accounts. In addition, total deposit costs were negatively impacted by the $1.7 million decrease in the average balance of noninterest bearing deposits to $192.8 million for the three months ended June 30, 2022, compared to $194.6 million for the three months ended March 31, 2022, and favorably impacted by the $13.2 million increase in average balance of noninterest bearing deposits from the same period last year. The average cost of total borrowings, including subordinated notes and borrowings, decreased to 5.13% for the quarter ended June 30, 2022, from 5.85% for the quarter ended March 31, 2022, and decreased from 5.81% for the quarter ended June 30, 2021.

Net interest margin (annualized) was 3.83% for the quarter ended June 30, 2022, compared to 3.49% for the quarter ended March 31, 2022 and 3.36% for the quarter ended June 30, 2021. The increase in net interest margin from the prior quarter and the same quarter a year ago was primarily due to the higher interest income earned on interest-earning assets, driven by the higher average balance of loans and the higher average yield earned on investments and interest-bearing cash and, with respect to the same quarter a year ago, the decline in rates paid on interest-bearing liabilities. During the second quarter of 2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of one basis point, compared to a positive impact of three basis points during the quarter ended March 31, 2022, and a positive impact of 24 basis points during the quarter ended June 30, 2021.

The Company recorded a provision for loan losses of $600 thousand for the quarter ended June 30, 2022, as compared to $125 thousand for the quarter ended March 31, 2022 and $250 thousand for the quarter ended June 30, 2021. The increase in the provision for loan losses for the quarter ended June 30, 2022 compared to the quarter ended March 31, 2022 resulted primarily from the growth in our loans held-for-portfolio, partially offset by a shift in the loan portfolio composition to loan types requiring a lower general loan allowance as balances of lower risk one-to-four family loans and multifamily residential loans increased, thereby reducing the related general loan allowance. The provision for loan losses in the second quarter of 2022 also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Noninterest income decreased $508 thousand, or 33.4%, to $1.0 million for the quarter ended June 30, 2022, compared to $1.5 million for the quarter ended March 31, 2022 and decreased $697 thousand, or 40.7%, from $1.7 million for the quarter ended June 30, 2021. The decreased noninterest income for the three months ended June 30, 2022 as compared to the three months ended March 31, 2022, primarily resulted from a $211 thousand decline in the fair value adjustment on mortgage servicing rights primarily due to a smaller servicing portfolio, and a $281 thousand decrease in the net gain on sale of loans as a result of decreased refinance activity over the past quarter, partially offset by a $47 thousand increase in service fees and income primarily resulting from higher commercial loan fees and consumer deposit activity fees as businesses continued to reopen in our market areas. The decrease in noninterest income from the comparable period in 2021 primarily was due to a $979 thousand decrease in net gain on sale of loans as a result of a decline in both the amount of loans originated for sale and gross margins for loans sold, partially offset by a $351 thousand increase in the fair value adjustment on mortgage servicing rights due primarily from the effects of recent higher market interest rates causing a reduction in prepayment speeds, a $131 thousand decline to a $35 thousand loss on cash surrender value of bank-owned life insurance ("BOLI"), and a $70 thousand increase in service fees and income primarily resulting from higher commercial loan fees and consumer deposit activity fees. Loans sold during the quarter ended June 30, 2022, totaled $2.9 million, compared to $12.2 million and $39.9 million during the quarters ended March 31, 2022 and June 30, 2021, respectively.

Noninterest expense decreased $51 thousand, or 0.7%, to $6.8 million for the quarter ended June 30, 2022, compared to $6.8 million for the quarter ended March 31, 2022 and increased $796 thousand, or 13.3%, from $6.0 million for the quarter ended June 30, 2021. The decrease from the quarter ended March 31, 2022 was a result of a decrease in salaries and benefits expense of $198 thousand due to higher costs typically incurred in the first quarter from the impact of annual wage and stock compensation increases, partially offset by an increase in operations expense of $114 thousand primarily due to increases in various expenses including marketing and charitable expenses, insurance costs, and professional fees. The increase in noninterest expense compared to the quarter ended June 30, 2021 was primarily due to an increase in salaries and benefits of $655 thousand primarily due to higher wages and incentive compensation, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage originations. Operations expense increased $67 thousand compared to the quarter ended June 30, 2021 due to increases in various accounts including marketing and travel expenses, legal fees associated with higher commercial loan volume, and debit card processing, partially offset by lower loan origination costs due to lower mortgage origination volume.

The efficiency ratio for the quarter ended June 30, 2022 was 72.12%, compared to 74.77% for the quarter ended March 31, 2022 and 66.07% for the quarter ended June 30, 2021. The improvement in the efficiency ratio for the current quarter compared to the prior quarter is primarily due to higher net interest income from an increase in average balance of loans held-for-portfolio and a higher rate earned on reserve balances, and lower noninterest expense from reduced salaries and benefits costs, partially offset by lower noninterest income primarily as a result of lower gain on sale of loans from mortgage banking and a decline in the fair value adjustment on mortgage servicing rights. The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense related to increased salaries and benefits and lower noninterest income primarily due to lower gain on sale of loans from mortgage bank, partially offset by higher net interest income primarily as a result of a higher average balance of loans held-for-portfolio at higher yields than prior investments and a reduction in rate paid on interest bearing deposits.

Balance Sheet Review, Capital Management and Credit Quality

Assets at June 30, 2022 totaled $937.0 million, compared to $958.9 million at March 31, 2022 and $923.2 million at June 30, 2021. The decrease in assets from the sequential quarter was primarily due to decreases in cash and cash equivalents, which primarily was funded by a $50.1 million reduction in deposits, and a $30.0 million increase in Federal Home Loan Bank ("FHLB") advances, partially offset by an increase in loans held-for-portfolio. The increase from one year ago was primarily a result of increases in loans held-for-portfolio, investment securities, and BOLI, partially offset by lower balances in cash and cash equivalents and a decrease in loans held-for-sale.

Cash and cash equivalents decreased $117.0 million, or 59.4%, to $80.1 million at June 30, 2022, compared to $197.1 million at March 31, 2022, and decreased $156.8 million, or 66.2%, from $236.8 million at June 30, 2021. The decrease from the prior quarter-end was primarily due to the redeployment of excess liquidity into higher yielding loans, and to a lesser extent, to fund a decrease in deposits, primarily related to decreases in lawyer trust accounts and public funds. The decrease from one year ago was due to deploying cash earning a nominal yield into higher interest-earning loans and, to a much lesser extent, investments securities.

Investment securities decreased $849 thousand, or 6.8%, to $11.6 million at June 30, 2022, compared to $12.4 million at March 31, 2022, and increased $4.1 million, or 54.1%, from $7.5 million at June 30, 2021. Held-to-maturity securities totaled $2.2 million at both June 30, 2022 and March 31, 2022, and totaled none at June 30, 2021. Available-for-sale securities totaled $9.4 million at June 30, 2022, compared to $10.2 million at March 31, 2022, and $7.5 million at June 30, 2021. The decrease in available-for-sale securities from the prior quarter was primarily due to higher net unrealized losses resulting from the increases in market interest rates during the year and regularly scheduled payments. The increase from the same period one year ago was primarily due to investment purchases throughout the previous year, partially offset by calls of securities and regularly scheduled payments and maturities.

Loans held-for-sale totaled $100 thousand at June 30, 2022, compared to $1.3 million at March 31, 2022 and $3.7 million at June 30, 2021. The decreases were primarily due to a decline in mortgage originations reflecting reduced refinance activity.

Loans held-for-portfolio increased to $806.1 million at June 30, 2022, compared to $709.5 million at March 31, 2022 and increased from $639.6 million at June 30, 2021. The increase in loans held-for-portfolio at June 30, 2022, compared to the prior quarter and one year ago, primarily resulted from increases across all loan categories, excluding commercial business loans which decreased between the periods due primarily to PPP loan SBA loan forgiveness payments. The increase in loans held-for-portfolio primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools, and the addition of experienced lending staff during 2021, as well as United States Department of Agriculture guaranteed loan purchases of $6.8 million during the second six months of 2021 and the first six months of 2022.

Nonperforming assets ("NPAs"), which are comprised of nonaccrual loans, including nonperforming troubled debt restructurings ("TDRs"), other real estate owned ("OREO"), and other repossessed assets, decreased $238 thousand, or 4.4%, to $5.2 million at June 30, 2022, from $5.4 million at March 31, 2022 and increased $3.0 million, or 140.3% from $2.2 million at June 30, 2021. The decrease in nonperforming assets during the current quarter compared to the prior quarter primarily was due to the pay-off of a $170 thousand nonperforming commercial business loan during the period. Loans classified as TDRs totaled $2.0 million, $2.3 million and $2.6 million at June 30, 2022, March 31, 2022 and June 30, 2021, respectively, of which $128 thousand, $273 thousand and $424 thousand, respectively, were on not performing pursuant to their contractual repayment terms at those dates.

NPAs to total assets were 0.55%, 0.56% and 0.23% at June 30, 2022, March 31, 2022 and June 30, 2021, respectively. The allowance for loan losses to total loans outstanding was 0.88%, 0.90% and 0.96% at June 30, 2022, March 31, 2022 and June 30, 2021, respectively. Excluding PPP loans of $429 thousand which are 100% guaranteed by the SBA, the allowance for loan losses totaled 0.88% of total loans outstanding at June 30, 2022, compared to 0.91% of total loans outstanding at March 31, 2022, excluding PPP loans of $2.1 million, and 1.02% of total loans outstanding at June 30, 2021, excluding PPP loans of $36.0 million (See Non-GAAP reconciliation on page 14). Net loan recoveries during the second quarter of 2022 totaled $110 thousand compared to net charge-offs of $24 thousand for the first quarter of 2022, and net charge-offs of $28 thousand for the second quarter of 2021.

The following table summarizes our NPAs (dollars in thousands):

The following table summarizes the allowance for loan losses (dollars in thousands, unaudited):

(1) Represents a non-GAAP financial measure. See Non-GAAP Financial Measures at the end of this earnings release for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

Deposits decreased $50.1 million, or 6.0%, to $786.0 million at June 30, 2022, compared to $836.1 million at March 31, 2022 and decreased $18.7 million, or 2.3%, from $804.7 million at June 30, 2021. The decrease in deposits compared to the prior quarter was primarily a result of a managed run-off of public funds, the expected outflow of temporary deposits from lawyer trust accounts, and a seasonal decrease in specialty business accounts. The decrease in deposits compared to the year ago quarter was primarily a result of a managed run-off of higher costing maturing certificates of deposits, partially offset by higher balances in all other deposit accounts. Our noninterest-bearing deposits decreased $22.2 million, or 10.6% to $186.6 million at June 30, 2022, compared to $208.8 million at March 31, 2022 and increased $4.8 million, or 2.6% from $181.8 million at June 30, 2021. Noninterest-bearing deposits represented 23.7%, 25.0% and 22.6% of total deposits at June 30, 2022, March 31, 2022 and June 30, 2021, respectively.

There were $30.0 million of outstanding FHLB term advances at June 30, 2022, and no outstanding FHLB advances at March 31, 2022 and June 30, 2021. Subordinated notes, net totaled $11.7 million at each of June 30, 2022, March 31, 2022 and June 30, 2021.

Stockholders’ equity totaled $93.1 million at June 30, 2022, a decrease of $793 thousand, or 0.8%, from $93.9 million at March 31, 2022, and an increase of $3.5 million, or 3.9%, from $89.5 million at June 30, 2021. The decrease in stockholders’ equity from March 31, 2022 was primarily the result of the repurchase of $1.6 million of Company common stock, the payment of $444 thousand in dividends to Company stockholders and a $480 thousand increase in accumulated other comprehensive loss, net of tax, resulting from the effects of higher interest rates on the market value of our available-for-sale securities, partially offset by $1.6 million of net income earned during the current quarter.

Sound Financial Bancorp, Inc. , a bank holding company, is the parent company of Sound Community Bank, and is headquartered in Seattle, Washington with full-service branches in Seattle, Tacoma, Mountlake Terrace, Sequim, Port Angeles, Port Ludlow and University Place. Sound Community Bank is a Fannie Mae Approved Lender and Seller/Servicer with one Loan Production Office located in the Madison Park neighborhood of Seattle, Washington. For more information, please visit www.soundcb.com .

Forward Looking Statement Disclaimer

When used in filings by Sound Financial Bancorp, Inc. (the "Company") with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events, and may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated below or because of other important factors that we cannot foresee that could cause our actual results to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

Factors which could cause actual results to differ materially, include, but are not limited to: potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the COVID-19 pandemic and any governmental or societal responses thereto; changes in consumer spending, borrowing and savings habits; changes in economic conditions, either nationally or in our market area, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; secondary market conditions for loans; results of examinations of the Company or its wholly owned bank subsidiary by their regulators; increased competition; changes in management's business strategies; legislative changes; changes in the regulatory and tax environments in which the Company operates; and other factors described in the Company's latest annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission – which are available at www.soundcb.com and on the SEC's website at www.sec.gov .

Any of the forward-looking statements that the Company makes in this press release and in the other public statements are based upon management's beliefs and assumptions at the time they are made and may turn out to be incorrect because of the inaccurate assumptions the Company might make, because of the factors illustrated above or because of other factors that cannot be foreseen by the Company. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause the Company’s actual results for 2022 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company and could negatively affect its operating and stock performance.

CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, unaudited)

CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, unaudited)

CONSOLIDATED BALANCE SHEET
(Dollars in thousands, unaudited)

KEY FINANCIAL RATIOS
(unaudited)

(1)  Net interest income divided by average interest earning assets.
(2)  Noninterest expense divided by total revenue (net interest income and noninterest income).

PER COMMON SHARE DATA

(unaudited)

AVERAGE BALANCE, AVERAGE YIELD EARNED, AND AVERAGE RATE PAID
(Dollars in thousands, unaudited)

The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).

(1)  Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.

(1)  Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.


LOANS
(Dollars in thousands, unaudited)

DEPOSITS
(Dollars in thousands, unaudited)

CREDIT QUALITY DATA
(Dollars in thousands, unaudited)