SFBC - Sound Financial Bancorp Inc. Q4 2022 Results

SEATTLE, Jan. 27, 2023 (GLOBE NEWSWIRE) -- Sound Financial Bancorp, Inc. (Nasdaq: SFBC), the holding company (the "Company") for Sound Community Bank (the "Bank"), today reported net income of $2.9 million for the quarter ended December 31, 2022, or $1.12 diluted earnings per share, as compared to net income of $2.5 million, or $0.97 diluted earnings per share, for the quarter ended September 30, 2022, and $1.9 million, or $0.70 diluted earnings per share, for the quarter ended December 31, 2021. The Company also announced today that its Board of Directors declared a cash dividend on Company common stock of $0.17 per share, payable on February 23, 2023 to stockholders of record as of the close of business on February 9, 2023.

Comments from the President and Chief Executive Officer

“Despite the continual increase in interest rates, and significant economic uncertainty, we sustained our loan origination efforts and posted our eighth consecutive quarter of loan growth,” remarked Ms. Stewart, President and Chief Executive Officer. "Organic funding via deposits remains very competitive but we continue our emphasis on the development of full relationships and generation of business and consumer deposits," concluded Stewart.

Operating Results

Net interest income increased $91 thousand, or 0.9%, to $9.7 million for the quarter ended December 31, 2022, compared to $9.6 million for the quarter ended September 30, 2022, and increased $2.0 million, or 25.6%, from $7.7 million for the quarter ended December 31, 2021. The increase in the current quarter, compared to the prior quarter and the fourth quarter of 2021 were primarily the result of a higher average balance of and yield earned on average interest-earning assets, partially offset by a higher average balance of and rate paid on average interest-bearing liabilities.

Interest income increased $1.0 million, or 9.7%, to $11.8 million for the quarter ended December 31, 2022, compared to $10.8 million for the quarter ended September 30, 2022, and increased $3.5 million, or 41.4%, from $8.4 million for the quarter ended December 31, 2021. The increase from the prior quarter was primarily due to higher average loan balances, an 18 basis point rate increase in the average yield on loans and a 131 basis point rate increase in the average yield on investments and interest-bearing cash following increases in the targeted federal funds rate throughout 2022, partially offset by lower average balances of investments and interest-bearing cash. The increase in interest income from the same quarter last year was due primarily to higher average loan balances, a 37 basis point increase in the average loan yield and a 305 basis point increase in average yield on investments and interest-bearing cash, partially offset by a lower average balance of investments and interest-bearing cash.

Interest income on loans increased $751 thousand, or 7.3%, to $11.1 million for the quarter ended December 31, 2022, compared to $10.3 million for the quarter ended September 30, 2022, and increased $2.8 million, or 34.5%, from $8.2 million for the quarter ended December 31, 2021. The average balance of total loans was $861.4 million for the quarter ended December 31, 2022, compared to $833.2 million for the quarter ended September 30, 2022 and $690.7 million for the quarter ended December 31, 2021. The average yield on total loans was 5.10% for the quarter ended December 31, 2022, compared to 4.92% for the quarter ended September 30, 2022 and 4.73% for the quarter ended December 31, 2021. The increase in the average loan yield during the current quarter compared to the prior quarter and fourth quarter of 2021 was primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates. Interest income on investments and interest-bearing cash increased $292 thousand to $741 thousand for the quarter ended December 31, 2022, compared to $449 thousand for the quarter ended September 30, 2022, and increased $620 thousand from $121 thousand for the quarter ended December 31, 2021, due to a higher average yield on investments and interest-bearing cash, partially offset by a lower average balance as excess cash liquidity was deployed into higher yielding loans during the current quarter.

Interest expense increased $952 thousand, or 80.7%, to $2.1 million for the quarter ended December 31, 2022, from $1.2 million for the quarter ended September 30, 2022, and increased $1.5 million, or 231.4%, from $643 thousand for the quarter ended December 31, 2021. The increase in interest expense during the current quarter from the prior quarter was primarily the result of a $12.9 million increase in the average balance of borrowings, comprised of Federal Home Loan Bank ("FHLB") advances, and a $55.7 million increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $36.9 million decrease in the average balance of interest-bearing deposits other than certificate accounts. The increase in interest expense during the current quarter from the comparable period a year ago was primarily the result of a $59.3 million increase in the average balance of borrowings and a $75.3 million increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $52.6 million decrease in the average balance of interest-bearing deposits other than certificate accounts. The average cost of total borrowings, comprised of FHLB advances and subordinated notes, increased to 4.20% for the quarter ended December 31, 2022, from 3.06% for the quarter ended September 30, 2022, and decreased from 5.73% for the quarter ended December 31, 2021, reflecting the increased use of lower cost FHLB advances during the second half of 2022 to supplement our liquidity needs. The average balance of our total borrowings increased $12.9 million to $71.0 million from $58.1 million for the quarter ended September 30, 2022, and increased $59.4 million from $11.6 million for the quarter ended December 31, 2021 as we used FHLB advances to fund loan growth.

Net interest margin (annualized) was 4.05% for the quarter ended December 31, 2022, compared to 4.13% for the quarter ended September 30, 2022 and 3.53% for the quarter ended December 31, 2021. The decrease in net interest margin from the prior quarter was primarily due to cost of funding increasing at a faster pace than the yield earned on interest-earning assets, driven by the higher average balance of borrowings and certificate accounts, partially offset by the increase in the average balance of loans. The increase from the same quarter a year ago was the result of an increase in interest income on interest-earning assets, driven by the higher average balance of and yield earned on loans, partially offset by an increase in the cost of funding during the second half of 2022.

The Company recorded a provision for loan losses of $125 thousand for the quarter ended December 31, 2022, as compared to $375 thousand for the quarter ended September 30, 2022 and no provision for the quarter ended December 31, 2021. The decrease in the provision for loan losses for the quarter ended December 31, 2022 compared to the quarter ended September 30, 2022 resulted primarily from the lower growth in our loans held-for-portfolio. The provision for loan losses in the fourth quarter of 2022 also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Noninterest income remained essentially unchanged at $1.0 million for the quarters ended December 31, 2022 and September 30, 2022, and decreased $465 thousand, or 31.4%, from $1.5 million for the quarter ended December 31, 2021. The decrease in noninterest income from the comparable period in 2021 was primarily due to a $458 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 and a $13 thousand decrease in the fair value adjustment on mortgage servicing rights, partially offset by a $40 thousand increase in earnings on the cash surrender value of bank-owned life insurance (“BOLI”). Loans sold during the quarter ended December 31, 2022, totaled $3.5 million, compared to $2.3 million and $19.1 million during the quarters ended September 30, 2022 and December 31, 2021, respectively.

Noninterest expense increased $82 thousand, or 1.2%, to $7.1 million for the quarter ended December 31, 2022, compared to $7.0 million for the quarter ended September 30, 2022 and increased $190 thousand, or 2.7%, from $6.9 million for the quarter ended December 31, 2021. The increase from the quarter ended September 30, 2022 was primarily a result of an increase in salaries and benefits expense of $190 thousand resulting from lower deferred compensation and higher medical expenses, partially offset by a decrease in incentive compensation expense as a result of lower loan and deposit growth. Operations expense decreased $92 thousand primarily due to decreases in various expenses including marketing expenses and charitable contributions, insurance costs, and office expenses, partially offset by an increase in audit and professional fees. The increase in noninterest expense compared to the quarter ended December 31, 2021 was primarily due to an increase in salaries and benefits of $448 thousand primarily due to higher wages and medical expenses and lower deferred compensation, partially offset by a decrease in incentive compensation as a result of a lower percentage earned on loans originated, changes to incentive compensation programs, such as the addition of non-production performance requirements, and lower commission expense related to a decline in mortgage originations. Operations expense decreased $243 thousand compared to the quarter ended December 31, 2021 due to lower loan origination costs due to lower mortgage origination volume, a lower reserve for unfunded commitments and decreases in various accounts including marketing, charitable contributions and professional fees. These decreases were partially offset by increases in various accounts including travel expenses, debit card processing, audit fees, fixed assets and office expenses.

The efficiency ratio for the quarter ended December 31, 2022 was 66.49%, compared to 66.23% for the quarter ended September 30, 2022 and 75.31% for the quarter ended December 31, 2021. The improvement in the efficiency ratio for the current quarter compared to the same period in the prior year was primarily due to higher net interest income, partially offset by higher noninterest expense and lower noninterest income.

Balance Sheet Review, Capital Management and Credit Quality

Assets at December 31, 2022 totaled $976.4 million, compared to $982.2 million at September 30, 2022 and $919.7 million at December 31, 2021. The decrease in total assets from the sequential quarter was primarily due to a decrease in cash and cash equivalents as a result of a decrease in deposits and to repay borrowings. The increase from one year ago was primarily a result of increases in loans held-for-portfolio and investment securities, partially offset by lower balances in cash and cash equivalents.

Cash and cash equivalents decreased $18.2 million, or 24.0%, to $57.8 million at December 31, 2022, compared to $76.1 million at September 30, 2022, and decreased $125.8 million, or 68.5%, from $183.6 million at December 31, 2021. The decrease from the prior quarter-end was primarily due to the deployment of excess liquidity into higher yielding loans. The decrease from one year ago was primarily due to deploying cash earning a nominal yield into higher interest-earning loans and investments securities, partially offset by an increase in deposits, primarily certificate accounts.

Investment securities decreased $197 thousand, or 1.6%, to $12.4 million at December 31, 2022, compared to $12.6 million at September 30, 2022, and increased $4.0 million, or 47.4%, from $8.4 million at December 31, 2021. Held-to-maturity securities totaled $2.2 million at both December 31, 2022 and September 30, 2022, compared to zero at December 31, 2021. Available-for-sale securities totaled $10.2 million at December 31, 2022, compared to $10.4 million at September 30, 2022, and $8.4 million at December 31, 2021. The decrease in available-for-sale securities from the prior quarter-end was primarily due to the call of a municipal bond for $260 thousand and regularly scheduled payments, partially offset by a lower net unrealized losses resulting from an increase in market values during the quarter. The increase from one year ago was primarily due to investment purchases during the year, partially offset by the call of one municipal bond, regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the year.

Loans held-for-portfolio increased to $866.0 million at December 31, 2022, compared to $851.4 million at September 30, 2022 and increased from $686.4 million at December 31, 2021. The increase in loans held-for-portfolio at December 31, 2022, compared to the prior quarter-end, primarily resulted from increases in residential, construction and land, and consumer loans, partially offset by a decline in commercial real estate and multifamily loans. The increase in loans held-for-portfolio at December 31, 2022, compared to one year ago, primarily resulted from increases across all loan categories, excluding commercial business loans which decreased between the periods primarily due to SBA loan forgiveness payments on Paycheck Protection Program loans. 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.

Nonperforming assets (“NPAs”), which are comprised of nonaccrual loans, including nonperforming troubled debt restructurings (“TDRs”), other real estate owned (“OREO”) and other repossessed assets, increased $473 thousand, or 15.0%, to $3.6 million at December 31, 2022, from $3.1 million at September 30, 2022 and decreased $2.6 million, or 41.7% from $6.2 million at December 31, 2021. The increase in nonperforming assets from the prior quarter-end was primarily due to the addition of four nonaccrual loans during the current quarter, including two one-to-four family loans, one home equity loan and one land loan. The decrease from one year ago was primarily due to the payoff of a $2.3 million nonperforming multifamily loan during 2022. Loans classified as TDRs totaled $2.0 million, $2.0 million and $2.6 million at December 31, 2022, September 30, 2022 and December 31, 2021, respectively, of which $103 thousand, $108 thousand and $422 thousand, respectively, were classified as nonperforming at those dates.

NPAs to total assets were 0.37%, 0.32% and 0.68% at December 31, 2022, September 30, 2022 and December 31, 2021, respectively. The allowance for loan losses to total loans outstanding was 0.88%, 0.88% and 0.92% at December 31, 2022, September 30, 2022 and December 31, 2021, respectively. Net loan charge-offs for the fourth quarter of 2022 totaled $15 thousand, compared to $3 thousand for the third quarter of 2022, and $21 thousand for the fourth quarter of 2021.

The following table summarizes our NPAs at the dates indicated (dollars in thousands):

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

Deposits decreased $6.6 million, or 0.8%, to $808.8 million at December 31, 2022, from $815.4 million at September 30, 2022 and increased $10.4 million, or 1.3%, from $798.3 million at December 31, 2021. The decrease in deposits compared to the prior quarter-end was primarily a result of lower balances in all deposit products, excluding certificate accounts, largely driven by seasonal declines in escrow accounts and year end distributions in business accounts. The increase in our deposits compared to one year ago was a result of an increase in certificate accounts, which was primarily used to fund organic loan growth in 2022. Our noninterest-bearing deposits decreased $19.1 million, or 9.9% to $173.2 million at December 31, 2022, compared to $192.3 million at September 30, 2022 and decreased $17.3 million, or 9.1% from $190.5 million at December 31, 2021. Noninterest-bearing deposits represented 21.4%, 23.6% and 23.9% of total deposits at December 31, 2022, September 30, 2022 and December 31, 2021, respectively.

There were $43.0 million of outstanding FHLB advances at December 31, 2022, as compared to $44.5 million at September 30, 2022 and none at December 31, 2021. During 2022, FHLB advances were primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. Subordinated notes, net totaled $11.7 million at each of December 31, 2022, September 30, 2022 and December 31, 2021.

Stockholders’ equity totaled $97.7 million at December 31, 2022, an increase of $2.7 million, or 2.9%, from $95.0 million at September 30, 2022, and an increase of $4.3 million, or 4.7%, from $93.4 million at December 31, 2021. The increase in stockholders’ equity from September 30, 2022 was primarily the result of $2.9 million of net income earned during the current quarter, a $148 thousand decrease in accumulated other comprehensive loss, net of tax, and $28 thousand in proceeds from exercises of stock options, partially offset by the payment of $441 thousand in dividends to Company stockholders .

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 this press release and in documents filed or furnished by Sound Financial Bancorp, Inc. (the "Company") with the Securities and Exchange Commission (the "SEC"), in the Company's other 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 listed below or because of other factors that we cannot foresee that could cause our actual results to be materially different from historical results or from any future results expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made.

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, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation or deflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as supply chain disruptions and any governmental or societal responses to new COVID-19 variants; changes in consumer spending, borrowing and savings habits; 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 documents filed with or furnished to the Securities and Exchange Commission, which are available at www.soundcb.com and on the SEC's website at www.sec.gov . The risks inherent in these factors could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company and could negatively affect the Company's operating and stock performance.

The Company does not undertake—and specifically disclaims any obligation—to revise any forward-looking statement to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statement.

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)