Sound Financial Bancorp, Inc. Q2 2023 Results

SEATTLE, July 25, 2023 (GLOBE NEWSWIRE) -- Sound Financial Bancorp, Inc. (the "Company") (Nasdaq: SFBC), the holding company for Sound Community Bank (the "Bank"), today reported net income of $2.9 million for the quarter ended June 30, 2023, or $1.11 diluted earnings per share, as compared to net income of $2.2 million, or $0.83 diluted earnings per share, for the quarter ended March 31, 2023, and $1.6 million, or $0.61 diluted earnings per share, for the quarter ended June 30, 2022. The Company also announced today that its Board of Directors declared a cash dividend on Company common stock of $0.19 per share, payable on August 23, 2023 to stockholders of record as of the close of business on August 9, 2023.

Comments from the President and Chief Executive Officer

“Strong earnings for the quarter were fueled by both a recovery from credit losses and a non-recurring death benefit payment received from bank-owned life insurance. While both loans and deposits declined this quarter, the loan contraction was primarily the result of decreases in commercial construction loans based on successful completion of projects,” remarked Laurie Stewart, President and Chief Executive Officer. "Deposit balances increased during the first quarter, but seasonal outflows for tax and business planning needs, primarily by our business clients in the second quarter, offset the earlier gains. As a result our loan-to-deposit ratio remained at 104%," concluded Ms. Stewart.

Operating Results

Net interest income decreased $627 thousand, or 6.7%, to $8.7 million for the quarter ended June 30, 2023, compared to $9.4 million for the quarter ended March 31, 2023, and increased $352 thousand, or 4.2%, from $8.4 million for the quarter ended June 30, 2022. The decrease in the current quarter compared to the prior quarter, was primarily the result of rates paid on and balances of certificate accounts increasing faster than we were able to redeploy the funds into higher earning assets. The increase compared to the second quarter of 2022 was 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 $238 thousand, or 2.0%, to $12.4 million for the quarter ended June 30, 2023, compared to $12.2 million for the quarter ended March 31, 2023, and increased $3.4 million, or 38.1%, from $9.0 million for the quarter ended June 30, 2022. The increase from the prior quarter was primarily due to a three basis point increase in the average yield on loans and a 36 basis point increase in the average yield on investments and interest-bearing cash following continued increases in the targeted federal funds rate, partially offset by lower average balances of loans and 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 64 basis point increase in the average loan yield and a 354 basis point increase in the 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 $170 thousand, or 1.5%, to $11.6 million for the quarter ended June 30, 2023, compared to $11.4 million for the quarter ended March 31, 2023, and increased $2.9 million, or 32.8%, from $8.7 million for the quarter ended June 30, 2022. The average balance of total loans was $866.4 million for the quarter ended June 30, 2023, compared to $867.7 million for the quarter ended March 31, 2023 and $741.6 million for the quarter ended June 30, 2022. The average yield on total loans was 5.35% for the quarter ended June 30, 2023, compared to 5.32% for the quarter ended March 31, 2023 and 4.70% for the quarter ended June 30, 2022. The increase in the average loan yield during the current quarter compared to the prior quarter and second quarter of 2022 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 $68 thousand to $861 thousand for the quarter ended June 30, 2023, compared to $793 thousand for the quarter ended March 31, 2023, and increased $572 thousand from $289 thousand for the quarter ended June 30, 2022, 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 loans during the past year.

Interest expense increased $865 thousand, or 30.9%, to $3.7 million for the quarter ended June 30, 2023, from $2.8 million for the quarter ended March 31, 2023, and increased $3.1 million, or 517.5%, from $594 thousand for the quarter ended June 30, 2022. The increase in interest expense during the current quarter from the prior quarter was primarily the result of a $33.2 million increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, (other than demand and NOW accounts), partially offset by a $27.1 million decrease in the average balance of interest-bearing deposits other than certificate accounts and a $3.2 million decrease in the average balance of borrowings, which were comprised of Federal Home Loan Bank ("FHLB") advances. The increase in interest expense during the current quarter from the comparable period a year ago was primarily the result of a $45.7 million increase in the average balance of borrowings and a $183.8 million increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing liabilities (excluding subordinate notes), partially offset by a $129.0 million decrease in the average balance of interest-bearing deposits other than certificate accounts. The average cost of FHLB advances increased to 4.56% for the quarter ended June 30, 2023, from 4.51% for the quarter ended March 31, 2023, from 1.99% for the quarter ended June 30, 2022. The average balance of our total borrowings, which included FHLB advances and subordinated notes, increased $3.2 million to $59.8 million from $56.6 million for the quarter ended March 31, 2023, as we used FHLB advances to supplement the decrease in deposits during the quarter, and the average balance of our total borrowings increased $45.8 million from $14.1 million for the quarter ended June 30, 2022 as we used FHLB advances to fund loan growth.

NIM (annualized) was 3.71% for the quarter ended June 30, 2023, compared to 4.01% for the quarter ended March 31, 2023 and 3.82% for the quarter ended June 30, 2022. The decrease in NIM from the prior quarter was primarily due to the cost of funding increasing at a faster pace than the yield earned on interest-earning assets, driven by the higher average balance of certificate accounts at higher interest rates. 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.

A release of credit losses of $331 thousand was recorded for the quarter ended June 30, 2023, consisting of a release of credit losses on loans of $242 thousand and a release of reserve for unfunded loan commitments of $89 thousand. This compared to a provision for credit losses of $10 thousand for the quarter ended March 31, 2023, consisting of a provision for loan losses of $245 thousand and a release of the reserve for unfunded loan commitments of $235 thousand, and a provision for credit losses of $592 thousand for the quarter ended June 30, 2022, consisting of a provision for loan losses of $600 thousand and a release of the reserve for unfunded loan commitments of $8 thousand. The Company adopted the CECL standard as of January 1, 2023. All amounts prior to January 1, 2023 reflect our use of the incurred loss methodology to compute our allowance for credit losses, which is not directly comparable to the new, current expected credit loss methodology. The decrease in the provision for credit losses for the quarter ended June 30, 2023 compared to the quarter ended March 31, 2023 resulted primarily from the decrease in our loans held-for-portfolio, with most of the decline occurring within our commercial construction portfolio as projects were completed. In addition, expected loss estimates consider various factors including customer specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay.

Noninterest income increased $876 thousand, or 86.3%, to $1.9 million for the quarter ended June 30, 2023, compared to $1.0 million for both the quarter ended March 31, 2023, and the quarter ended June 30, 2022. The increase from both prior periods was primarily related to $568 thousand in earnings on death benefits paid under our BOLI policies and an insurance settlement received during the current quarter on a prior OREO property included in service charges and fee income. Additionally, the increase in noninterest income from the prior quarter was due to a $236 thousand increase in the fair value adjustment on mortgage servicing rights. The increase in noninterest income from the comparable period in 2022 was also the result of a $26 thousand increase in net gain on sale of loans as a result of an increase in the amount of loans originated for sale and a $39 thousand increase in the fair value adjustment on mortgage servicing rights, partially offset by a decrease in our mortgage servicing income due to the size of the servicing portfolio shrinking at a faster rate than we can replace the loans due to the current interest rate environment. Loans sold during the quarter ended June 30, 2023, totaled $6.2 million, compared to $3.9 million and $2.9 million of loans sold during the quarters ended March 31, 2023 and June 30, 2022, respectively.

Noninterest expense decreased $118 thousand, or 1.5%, to $7.5 million for the quarter ended June 30, 2023, compared to $7.6 million for the quarter ended March 31, 2023, and increased $705 thousand, or 10.4%, from $6.8 million for the quarter ended June 30, 2022. The decrease from the quarter ended March 31, 2023 was primarily a result of lower stock compensation expense due to annual grants occurring during the first quarter of the year, partially offset by higher medical expense as a result of an increase in claims. Data processing expense decreased as a result of the full recovery of the write off of one large project during the first quarter of 2023. The increase in noninterest expense compared to the quarter ended June 30, 2022 was primarily due to an increase in salaries and benefits of $731 thousand reflecting higher wages, lower deferred compensation and higher medical expense, 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. Data processing expense decreased as a result of the recovery of expenses written off in the first quarter of 2023, partially offset by higher expenses as a result of increased data processing costs related to inflationary increases.

Balance Sheet Review, Capital Management and Credit Quality

Assets at June 30, 2023 totaled $1.01 billion, compared to $1.00 billion at March 31, 2023 and $937.0 million at June 30, 2022. The increase in total assets from March 31, 2023 was primarily due to an increase in cash and cash equivalents, partially offset by a decrease in loans held-for-portfolio. The increase from one year ago was primarily a result of increases in loans held-for-portfolio, partially offset by lower balances in cash and cash equivalents and investment securities.

Cash and cash equivalents increased $18.6 million, or 22.8%, to $100.2 million at June 30, 2023, compared to $81.6 million at March 31, 2023, and increased $20.1 million, or 25.1%, from $80.1 million at June 30, 2022, consistent with management's strategy to increase liquidity in light of the recent volatility in the banking sector. The increase from the prior quarter-end was primarily due to an increase in FHLB advances and a decrease in loans held-for-portfolio, partially offset by a decrease in deposits. The increase from one year ago was primarily due to increases in deposits and FHLB advances, partially offset by an increase in loans held-for-portfolio.

Investment securities decreased $211 thousand, or 2.0%, to $10.6 million at June 30, 2023, compared to $10.8 million at March 31, 2023, and decreased $1.0 million, or 8.8%, from $11.6 million at June 30, 2022. Held-to-maturity securities totaled $2.2 million at June 30, 2023, March 31, 2023, and June 30, 2022. Available-for-sale securities totaled $8.4 million at June 30, 2023, compared to $8.6 million at March 31, 2023 and $9.4 million at June 30, 2022. The decrease in available-for-sale securities from the prior quarter-end was primarily due to regularly scheduled payments, partially offset by a lower net unrealized losses resulting from an increase in market values during the quarter. The decrease from one year ago was primarily due to the call of one municipal bond in the fourth quarter of 2022, regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months.

Loans held-for-portfolio decreased to $855.4 million at June 30, 2023, from $870.5 million at March 31, 2023 and $806.1 million at June 30, 2022. The decrease in loans held-for-portfolio at June 30, 2023, compared to March 31, 2023, primarily resulted from decreases in all real estate loans (excluding home equity), commercial business loans and floating home loans, with the largest decreases occurring in commercial and multifamily loans and construction and land loans. The decreases in commercial and multifamily loans and construction and land loans from March 31, 2023 primarily resulted from the completion of commercial construction projects and the repayment of a large multifamily loan. These decreases were partially offset by increases in manufactured homes and other consumer loans. The increase in loans held-for-portfolio at June 30, 2023, compared to one year ago, primarily resulted from increases across all loan categories, excluding commercial and multifamily real estate loans, and other consumer loans. The increase from June 30, 2022 in loans held-for-portfolio primarily resulted from greater economic and lending activity in our market area during the second-half of 2022.

Nonperforming assets (“NPAs”), which are comprised of nonaccrual loans, including nonperforming loan modifications, other real estate owned (“OREO”) and other repossessed assets, increased $218 thousand, or 11.7%, to $2.1 million at June 30, 2023, from $1.9 million at March 31, 2023 and decreased $3.1 million, or 59.6%, from $5.2 million at June 30, 2022. The increase in NPAs from the prior quarter-end was primarily due to the addition of a nonaccrual commercial real estate loan, partially offset by payoffs and normal payment amortization. The decrease from one year ago was primarily due to the payoff of a $2.3 million nonperforming multifamily loan during 2022, the payoff of $1.5 million in nonperforming one-to-four family loans related to a single borrower, the payoff of a $243 thousand other consumer loan, and the write-off of one residential property for $84 thousand, partially offset by additions during the same period.

NPAs to total assets were 0.21%, 0.19% and 0.55% at June 30, 2023, March 31, 2023 and June 30, 2022, respectively. The allowance for credit losses on loans to total loans outstanding was 0.96%, 0.98% and 0.88% at June 30, 2023, March 31, 2023 and June 30, 2022, respectively. Net loan charge-offs for the second quarter of 2023 totaled $73 thousand, compared to $72 thousand for the first quarter of 2023, and $110 thousand for the second quarter of 2022.

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

The following table summarizes the allowance for credit losses at the dates and for the periods indicated (dollars in thousands, unaudited):

(1) Represents the impact of adopting ASU 2016-13, Financial Instruments — Credit Losses on January 1, 2023. Since that date, as a result of adopting ASU 2016-13, our methodology to compute our allowance for credit losses has been based on a current expected credit loss methodology, rather than the previously applied incurred loss methodology.

Deposits decreased $19.4 million, or 2.3%, to $822.3 million at June 30, 2023, from $841.6 million at March 31, 2023 and increased $36.3 million, or 4.6%, from $786.0 million at June 30, 2022. The decrease in deposits compared to the prior quarter-end was primarily a result of decreases in noninterest-bearing, interest-bearing and savings accounts, partially offset by higher balances in certificate and money market accounts. The overall decrease was largely driven by seasonal payments made for federal, state and employment taxes in April and a decrease in escrow custodial accounts. The increase in our deposits compared to one year ago was mainly a result of an increase in certificate accounts, which was primarily used to fund organic loan growth. Our noninterest-bearing deposits decreased $14.6 million, or 8.4%, to $158.5 million at June 30, 2023, compared to $173.1 million at March 31, 2023 and decreased $28.1 million, or 15.1%, from $186.6 million at June 30, 2022. Noninterest-bearing deposits represented 19.3%, 20.6% and 23.7% of total deposits at June 30, 2023, March 31, 2023 and June 30, 2022, respectively.

There were $60.0 million of outstanding FHLB advances at June 30, 2023, as compared to $35.0 million at March 31, 2023 and $30.0 million at June 30, 2022. FHLB advances are primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. Of the $60.0 million of FHLB advances outstanding at June 30, 2023, $20.0 million were overnight advances and $40.0 million were long-term with maturities ranging from late 2024 through early 2028. Subordinated notes, net totaled $11.7 million at each of June 30, 2023, March 31, 2023 and June 30, 2022.

Stockholders’ equity totaled $99.9 million at June 30, 2023, an increase of $1.3 million, or 1.3%, from $98.6 million at March 31, 2023, and an increase of $6.9 million, or 7.4%, from $93.1 million at June 30, 2022. The increase in stockholders’ equity from March 31, 2023 was primarily the result of $2.9 million of net income earned during the current quarter, a $60 thousand decrease in accumulated other comprehensive loss, net of tax, and $56 thousand in proceeds from exercises of stock options, partially offset by $1.2 million in stock repurchases and the payment of $494 thousand in cash dividends to Company stockholders. In addition, stockholders' equity at both June 30, 2023 and March 31, 2023 was negatively impacted by the adoption of CECL in the first quarter of 2023, which resulted in an after-tax decrease to opening retained earnings of $1.1 million.

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; higher inflation and impact of current and future monetary policies of the Federal Reserve in response thereto; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; 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 the Bank 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 subsequent 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)

(1) Amounts for periods prior to January 1, 2023 include the reclassification of the provision for (release of) unfunded loan commitment expense from operations expense for comparability purposes. However, these prior period amounts were calculated using the previously applied incurred loss methodology, rather than the current expected credit loss methodology adopted on January 1, 2023, and the balances are not directly comparable.

CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, unaudited)

(1) Amounts for the six months ended June 30, 2022 include the reclassification of the provision for (release of) unfunded loan commitment expense from operations expense for comparability purposes. However, the prior period amount was calculated using the previously applied incurred loss methodology, rather than the current expected credit loss methodology adopted on January 1, 2023, and the balance is not directly comparable.

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)

OTHER STATISTICS
(Dollars in thousands, unaudited)

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