Sound Financial Bancorp, Inc. Q2 2023 Results

SEATTLE, July 25, 2023 (GLOBE NEWSWIRE) -- Sound Financial Bancorp, Inc. (the "Company") ( 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):