Sound Financial Bancorp(SFBC) - 2025 Q1 - Quarterly Results

Executive Summary & Dividend Announcement Q1 2025 financial highlights include net income and diluted EPS trends, a declared cash dividend, and management commentary on financial performance and credit quality Q1 2025 Financial Highlights Sound Financial Bancorp, Inc. reported net income of $1.2 million for Q1 2025, or $0.45 diluted EPS, a decrease from Q4 2024 but an increase from Q1 2024, and declared a cash dividend of $0.19 per share Net Income and Diluted EPS Trends (Dollars in thousands) | Metric | Q1 2025 | Q4 2024 | Q1 2024 | | :------------ | :------ | :------ | :------ | | Net Income | $1,200 | $1,900 | $770 | | Diluted EPS | $0.45 | $0.74 | $0.30 | - A cash dividend of $0.19 per share was declared, payable on May 23, 2025, to stockholders of record as of May 9, 2025[1] Management Commentary Management highlighted efforts to improve net interest margin by lowering deposit costs and originating higher-rate loans, alongside a focus on expense management, achieving year-over-year reductions through technology investments despite quarter-over-quarter increases, and noted an increase in nonperforming loans primarily due to two specific credits - The President and CEO, Laurie Stewart, noted a 12-basis point improvement in net interest margin (NIM) compared to the prior quarter, driven by efforts to lower deposit costs and originate new loans at higher rates[2] - CFO Wes Ochs explained that quarter-over-quarter expense increases were due to typical year-end accrual adjustments and annual first-quarter expenses, however, year-over-year, combined salaries and benefits, and operational expenses decreased due to technology investments[3] - Nonperforming loans (NPLs) increased by $2.2 million (28.9%) to $9.7 million at March 31, 2025, mainly due to two specific credits, one of which has since been repaid, with 83% of NPLs tied to four well-secured loans, and the company actively working towards resolutions[4] Financial Performance Overview This section details key financial metrics, operating results, and income statement components, including net interest income, noninterest income, and noninterest expense Key Financial Metrics The company's total assets increased by 7.6% quarter-over-quarter to $1.07 billion, while loans held-for-portfolio decreased by 1.5%, and total deposits grew by 8.7% QoQ, improving the loans-to-deposits ratio to 98%, with net interest margin improving to 3.25% and a significant release of provision for credit losses recorded Q1 2025 Key Financial Performance | Metric | Q1 2025 Value (Millions) | Change QoQ (%) | Change YoY (%) | | :------------------------------------------ | :----------------------- | :------------- | :------------- | | Total assets | $1070.0 | +7.6% | -1.6% | | Loans held-for-portfolio | $886.2 | -1.5% | -1.3% | | Total deposits | $910.3 | +8.7% | -0.7% | | Loans-to-deposits ratio | 98% | -10% | 0% | | Net interest income | $8.1 | -1.8% | +8.2% | | Net interest margin (NIM), annualized | 3.25% | +0.12% | +0.30% | | Provision for credit losses | $-0.203 | -1550% | +515.2% | | Total noninterest income | $1.1 | -5.3% | +0.2% | | Total noninterest expense | $7.9 | +12.1% | +3.4% | | Total nonperforming loans | $9.7 | +28.9% | +6.6% | | Nonperforming loans to total loans | 1.09% | +0.26% | +0.08% | | Allowance for credit losses on loans to total loans | 0.95% | +0.01% | -0.01% | Operating Results Operating results for Q1 2025 showed a decrease in net interest income quarter-over-quarter but an increase year-over-year, primarily driven by changes in interest income and expense dynamics, with noninterest income experiencing a slight decrease QoQ due to mortgage servicing rights adjustments and loan sales, while noninterest expense increased QoQ due to annual accruals and data processing costs, but saw some YoY reductions in operations Operating Results (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------------------------------ | :------------- | :---------------- | :------------- | | Interest income | $13,706 | $14,736 | $13,760 | | Interest expense | $6,300 | $5,635 | $6,516 | | Net interest income | $7,460 | $8,071 | $8,220 | | (Release of) provision for credit losses | $(203) | $14 | $(33) | | Net interest income after (release of) provision for credit losses | $7,493 | $8,274 | $8,206 | Net Interest Income after (Release of) Provision for Credit Losses Net interest income after provision for credit losses decreased quarter-over-quarter but increased year-over-year, with the QoQ decrease due to lower interest income from reduced loan/investment balances and yields, partially offset by lower interest expense from reduced deposit costs, and the YoY increase driven by higher loan yields and lower interest expense from reduced deposit balances and rates, despite lower interest-bearing cash income - The decrease in interest income from Q4 2024 was primarily due to a lower average balance of loans, investments, and interest-earning cash, along with declines in average yields on loans (8 bps), interest-bearing cash (41 bps), and investments (57 bps)[8] - Interest expense decreased QoQ due to lower average balances and rates paid on all categories of interest-bearing deposits, with the average cost of deposits falling from 2.58% to 2.37%[10] - A release of provision for credit losses of $203 thousand was recorded in Q1 2025, compared to a $14 thousand provision in Q4 2024 and a $33 thousand release in Q1 2024, mainly due to a smaller loan portfolio and reduced unfunded commitments[11][14] Noninterest Income Total noninterest income decreased slightly quarter-over-quarter but remained stable year-over-year, with the QoQ decline mainly due to a downward adjustment in mortgage servicing rights and fewer loan sales, partially offset by increased earnings from bank-owned life insurance (BOLI) and service charges, and the YoY stability driven by increases in service charges and BOLI earnings, offset by decreases in mortgage servicing income and net gain on loan sales Noninterest Income (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :-------------------------------------- | :------------- | :---------------- | :------------- | | Service charges and fee income | $684 | $619 | $612 | | Earnings on bank-owned life insurance | $195 | $127 | $177 | | Mortgage servicing income | $269 | $277 | $282 | | Fair value adjustment on mortgage servicing rights | $(99) | $77 | $(65) | | Net gain on sale of loans | $49 | $53 | $90 | | Other income | $0 | $7 | $0 | | Total noninterest income | $1,098 | $1,160 | $1,096 | - QoQ decrease in noninterest income was primarily due to a $176 thousand downward adjustment in fair value of mortgage servicing rights and lower loan sales ($2.0 million in Q1 2025 vs $3.5 million in Q4 2024)[16][17] - QoQ decrease was partially offset by a $68 thousand increase in BOLI earnings (due to strategic policy exchange) and a $65 thousand increase in service charges and fee income (due to Mastercard volume incentive and higher interchange income)[17] Noninterest Expense Total noninterest expense increased both quarter-over-quarter and year-over-year, with the QoQ increase mainly driven by higher salaries and benefits (due to accrual reversals, annual deferred compensation, 401(k) contributions, and payroll taxes), regulatory assessments, occupancy, data processing, and OREO additions, and the YoY increase primarily due to higher data processing expenses from project amortizations and increased regulatory assessments, partially offset by a decrease in operations expense due to Mastercard reimbursements and cost-saving initiatives Noninterest Expense (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :-------------------------- | :------------- | :---------------- | :------------- | | Salaries and benefits | $4,595 | $3,920 | $4,543 | | Operations | $1,365 | $1,329 | $1,457 | | Regulatory assessments | $221 | $189 | $189 | | Occupancy | $437 | $409 | $444 | | Data processing | $1,293 | $1,232 | $1,017 | | Net loss (gain) on OREO and repossessed assets | $3 | $(21) | $6 | | Total noninterest expense | $7,914 | $7,058 | $7,656 | - QoQ increase in noninterest expense was primarily due to a $675 thousand increase in salaries and benefits (accrual reversals, annual deferred compensation, 401(k), payroll taxes), and increases in regulatory assessments, occupancy, data processing, and OREO[20] - YoY increase in noninterest expense was mainly due to a $276 thousand increase in data processing expenses (project amortizations) and a $32 thousand increase in regulatory assessments, partially offset by a $92 thousand decrease in operations expense (Mastercard reimbursements, cost savings)[20][21] Balance Sheet, Capital Management & Credit Quality This section provides an overview of assets, liabilities, stockholders' equity, nonperforming assets, and credit quality, including the allowance for credit losses Assets Total assets increased by $75.6 million (7.6%) quarter-over-quarter to $1.07 billion, primarily due to a significant increase in cash and cash equivalents, partially offset by a decrease in loans held-for-portfolio, with the QoQ increase in cash being a strategic reversal of reciprocal deposit sales from year-end 2024, and loans held-for-portfolio decreasing due to the payoff of a $17.0 million special mention loan - Total assets increased $75.6 million (7.6%) to $1.07 billion at March 31, 2025, from $993.6 million at December 31, 2024[22] - Cash and cash equivalents increased $87.9 million (201.3%) to $131.5 million at March 31, 2025, primarily due to the return of reciprocal deposits to the balance sheet that were strategically sold at the end of 2024[23] - Loans held-for-portfolio decreased $13.9 million to $886.2 million at March 31, 2025, mainly due to the payoff of a $17.0 million special mention loan[25] Nonperforming Assets (NPAs) and Credit Quality Nonperforming assets (NPAs) increased by 29.4% quarter-over-quarter to $9.7 million, primarily due to the addition of six loans to nonaccrual status, including two commercial real estate loans, while the allowance for credit losses on loans to total loans remained stable at 0.95% - Nonperforming assets (NPAs) increased $2.2 million (29.4%) to $9.7 million at March 31, 2025, from $7.5 million at December 31, 2024, primarily due to the addition of six loans totaling $2.4 million to nonaccrual status, including two commercial real estate loans[26] - NPAs to total assets were 0.91% at March 31, 2025, compared to 0.75% at December 31, 2024, and 0.90% at March 31, 2024[27] Nonperforming Assets (Dollars in thousands) | Category | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------ | :------------- | :---------------- | :------------- | | Total nonperforming loans | $9,653 | $7,491 | $9,053 | | OREO and Other Repossessed Assets | $41 | $0 | $690 | | Total NPAs | $9,694 | $7,491 | $9,743 | Allowance for Credit Losses The allowance for credit losses on loans decreased slightly to $8.39 million at March 31, 2025, reflecting a release of provision during the quarter, with the ratio of allowance for credit losses on loans to total loans remaining stable at 0.95% Allowance for Credit Losses (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------------------------------ | :------------- | :---------------- | :------------- | | Allowance for Credit Losses on Loans (end of period) | $8,393 | $8,499 | $8,598 | | (Release of) provision for credit losses during the period | $(85) | $(73) | $(106) | | Net charge-offs during the period | $(21) | $(13) | $(56) | | Allowance for credit losses on loans to total loans | 0.95% | 0.94% | 0.96% | | Allowance for credit losses on loans to total nonperforming loans | 86.95% | 113.46% | 94.97% | Liabilities Total deposits increased by 8.7% quarter-over-quarter to $910.3 million, primarily due to the return of reciprocal deposits and a strategic reduction in high-cost money market deposits, with noninterest-bearing deposits representing 13.9% of total deposits - Total deposits increased $72.5 million (8.7%) to $910.3 million at March 31, 2025, from $837.8 million at December 31, 2024, primarily due to the return of reciprocal deposits and a decrease in one high-cost money market deposit relationship[30] - Noninterest-bearing deposits decreased $5.8 million (4.4%) to $126.7 million at March 31, 2025, representing 13.9% of total deposits[30] - FHLB advances totaled $25.0 million at March 31, 2025, consistent with prior periods, and subordinated notes, net, totaled $11.8 million[31] Stockholders' Equity Stockholders' equity increased by $765 thousand (0.7%) quarter-over-quarter to $104.4 million, driven by net income, share-based compensation, and common stock options exercised, partially offset by cash dividends and an increase in accumulated other comprehensive loss - Stockholders' equity totaled $104.4 million at March 31, 2025, an increase of $765 thousand (0.7%) from December 31, 2024[32] - The increase in equity was primarily due to $1.2 million of net income, $81 thousand in share-based compensation, and $21 thousand from common stock options exercised, partially offset by $487 thousand in cash dividends and a $17 thousand increase in accumulated other comprehensive loss[32] Company Information & Forward-Looking Statements This section outlines the company's profile and includes a disclaimer regarding forward-looking statements and associated risks Company Profile Sound Financial Bancorp, Inc. is the holding company for Sound Community Bank, headquartered in Seattle, Washington, with several full-service branches and a loan production office, and is a Fannie Mae Approved Lender and Seller/Servicer - Sound Financial Bancorp, Inc. is the parent company of Sound Community Bank, headquartered in Seattle, Washington[33] - Sound Community Bank operates full-service branches in Seattle, Tacoma, Mountlake Terrace, Sequim, Port Angeles, Port Ludlow, and University Place, and is a Fannie Mae Approved Lender and Seller/Servicer[33] Forward-Looking Statements Disclaimer The report contains forward-looking statements, identified by terms like 'will likely result' or 'are expected to,' which are based on assumptions and subject to various risks and uncertainties, cautioning readers not to place undue reliance on these statements as actual results may differ materially due to factors such as economic conditions, interest rate changes, inflation, bank failures, regulatory changes, and cybersecurity risks, with the Company disclaiming any obligation to revise these statements - The press release contains 'forward-looking statements' as defined by the Private Securities Litigation Reform Act of 1995, based on assumptions and expectations, and subject to risks and uncertainties[34] - Factors that could cause actual results to differ materially include adverse economic conditions, changes in interest rates, inflation, bank failures, changes in consumer habits, lending risks, real estate fluctuations, regulatory changes, IT disruptions, and geopolitical tensions[35] - The Company 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[36] Financial Statements & Ratios This section presents consolidated income statements, balance sheets, key financial ratios, per common share data, average balance and yield information, and detailed loan, deposit, and credit quality data Consolidated Income Statements The consolidated income statement provides a detailed breakdown of revenues and expenses over the past five quarters, showing trends in interest income, interest expense, net interest income, provision for credit losses, noninterest income, noninterest expense, and ultimately net income Consolidated Income Statements (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | | :------------------------------------------------ | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Interest income | $13,706 | $14,736 | $14,838 | $14,039 | $13,760 | | Interest expense | $5,635 | $6,516 | $6,965 | $6,591 | $6,300 | | Net interest income | $8,071 | $8,220 | $7,873 | $7,448 | $7,460 | | (Release of) provision for credit losses | $(203) | $14 | $8 | $(109) | $(33) | | Net interest income after (release of) provision for credit losses | $8,274 | $8,206 | $7,865 | $7,557 | $7,493 | | Total noninterest income | $1,098 | $1,160 | $1,235 | $1,162 | $1,096 | | Total noninterest expense | $7,914 | $7,058 | $7,679 | $7,737 | $7,656 | | Income before provision for income taxes | $1,458 | $2,308 | $1,421 | $982 | $933 | | Provision for income taxes | $291 | $389 | $267 | $187 | $163 | | Net income | $1,167 | $1,919 | $1,154 | $795 | $770 | Consolidated Balance Sheets The consolidated balance sheet presents the company's financial position at the end of the past five quarters, detailing assets, liabilities, and stockholders' equity, with key changes including an increase in cash and cash equivalents and total deposits, alongside a decrease in loans held-for-portfolio Consolidated Balance Sheets (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | | :------------------------------------------------ | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Cash and cash equivalents | $131,494 | $43,641 | $148,930 | $135,111 | $137,977 | | Loans held-for-portfolio, net | $877,833 | $891,672 | $893,148 | $880,781 | $889,279 | | Total Assets | $1,069,186 | $993,633 | $1,100,930 | $1,074,859 | $1,086,685 | | Total deposits | $910,347 | $837,799 | $930,197 | $906,769 | $916,883 | | Total Liabilities | $964,755 | $889,967 | $998,691 | $973,512 | $985,693 | | Total Stockholders' Equity | $104,431 | $103,666 | $102,239 | $101,347 | $100,992 | Key Financial Ratios Key financial ratios for Q1 2025 show an annualized return on average assets of 0.45% and return on average equity of 4.53%, with the annualized net interest margin improving to 3.25%, while the efficiency ratio increased to 86.31% Key Financial Ratios (unaudited) | Metric | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | | :-------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Annualized return on average assets | 0.45% | 0.70% | 0.42% | 0.30% | 0.29% | | Annualized return on average equity | 4.53% | 7.40% | 4.50% | 3.17% | 3.06% | | Annualized net interest margin | 3.25% | 3.13% | 2.98% | 2.92% | 2.95% | | Annualized efficiency ratio | 86.31% | 75.25% | 84.31% | 89.86% | 89.48% | Per Common Share Data Per common share data for Q1 2025 shows basic and diluted earnings per share at $0.45, with book value per share increasing to $40.70 Per Common Share Data (unaudited) | Metric | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | | :------------------------------------ | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Basic earnings per share | $0.45 | $0.75 | $0.45 | $0.31 | $0.30 | | Diluted earnings per share | $0.45 | $0.74 | $0.45 | $0.31 | $0.30 | | Weighted-average basic shares outstanding | 2,554,265 | 2,547,210 | 2,544,233 | 2,540,538 | 2,539,213 | | Weighted-average diluted shares outstanding | 2,578,609 | 2,578,771 | 2,569,368 | 2,559,015 | 2,556,958 | | Common shares outstanding at period-end | 2,566,069 | 2,564,907 | 2,564,095 | 2,557,284 | 2,558,546 | | Book value per share | $40.70 | $40.42 | $39.87 | $39.63 | $39.47 | Average Balance, Average Yield Earned, and Average Rate Paid This section provides a detailed breakdown of average balances, interest earned/paid, and yields/rates for interest-earning assets and interest-bearing liabilities over the past three quarters, highlighting the average yield on loans at 5.69% and the average cost of total funding at 2.46% for Q1 2025 Average Balance, Average Yield Earned, and Average Rate Paid (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------------------ | :------------- | :---------------- | :------------- | | Average Outstanding Balance - Loans receivable | $896,822 | $900,832 | $895,430 | | Interest Earned - Loans receivable | $12,588 | $13,070 | $12,233 | | Yield - Loans receivable | 5.69% | 5.77% | 5.49% | | Total interest earning assets | $1,005,745 | $1,044,507 | $1,016,829 | | Total interest bearing liabilities | $803,050 | $838,560 | $811,436 | | Net interest income/spread | $8,071 | $8,220 | $7,460 | | Net interest margin | 3.25% | 3.13% | 2.95% | | Average cost of total funding | 2.46% | 2.68% | 2.68% | Loans The loan portfolio decreased slightly to $887.8 million at March 31, 2025, with notable decreases in one-to-four family and construction and land loans, partially offset by increases in commercial and multifamily and home equity loans Loans by Type (Dollars in thousands, unaudited) | Loan Type | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------ | :------------- | :---------------- | :------------- | | One-to-four family | $262,457 | $269,684 | $279,213 | | Home equity | $28,112 | $26,686 | $24,380 | | Commercial and multifamily| $392,798 | $371,516 | $324,483 | | Construction and land | $42,492 | $73,077 | $111,726 | | Manufactured homes | $42,448 | $41,128 | $37,583 | | Floating homes | $86,626 | $86,411 | $84,237 | | Other consumer | $18,224 | $17,720 | $18,847 | | Commercial business loans | $14,690 | $15,605 | $19,075 | | Total loans | $887,847 | $901,827 | $899,544 | Deposits Total deposits increased to $910.3 million at March 31, 2025, with a notable increase in money market deposits, while noninterest-bearing demand deposits decreased slightly Deposits by Type (Dollars in thousands, unaudited) | Deposit Type | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------ | :------------- | :---------------- | :------------- | | Noninterest-bearing demand| $126,687 | $132,532 | $128,666 | | Interest-bearing demand | $143,595 | $142,126 | $159,178 | | Savings | $63,533 | $61,252 | $65,723 | | Money market | $287,058 | $206,067 | $241,976 | | Certificates | $289,474 | $295,822 | $321,340 | | Total deposits | $910,347 | $837,799 | $916,883 | Credit Quality Data Credit quality data shows an increase in total nonperforming loans and assets quarter-over-quarter, with the allowance for credit losses on loans to total nonperforming loans decreasing to 86.95%, indicating a lower coverage ratio compared to the previous quarter Credit Quality Data (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------------------------------ | :------------- | :---------------- | :------------- | | Total nonperforming loans | $9,653 | $7,491 | $9,053 | | OREO and other repossessed assets | $41 | $0 | $690 | | Total nonperforming assets | $9,694 | $7,491 | $9,743 | | Net charge-offs during the quarter | $(21) | $(13) | $(56) | | Provision for (release of) credit losses during the quarter | $(203) | $14 | $(33) | | Allowance for credit losses - loans | $8,393 | $8,499 | $8,598 | | Allowance for credit losses - loans to total loans | 0.95% | 0.94% | 0.96% | | Allowance for credit losses - loans to total nonperforming loans | 86.95% | 113.46% | 94.97% | | Nonperforming loans to total loans | 1.09% | 0.83% | 1.01% | | Nonperforming assets to total assets | 0.91% | 0.75% | 0.90% | Other Statistics Other key statistics for Q1 2025 include a loans-to-deposits ratio of 97.53% and noninterest-bearing deposits representing 13.92% of total deposits, with average total assets for the quarter at $1.05 billion and average total equity at $104.5 million Other Statistics (Dollars in thousands, unaudited) | Metric | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | | :---------------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Total loans to total deposits | 97.53% | 107.64% | 97.13% | 98.27% | 98.11% | | Noninterest-bearing deposits to total deposits | 13.92% | 15.82% | 13.95% | 13.78% | 14.03% | | Average total assets for the quarter | $1,051,135 | $1,089,067 | $1,095,404 | $1,070,579 | $1,062,036 | | Average total equity for the quarter | $104,543 | $103,181 | $102,059 | $100,961 | $101,292 | Contact Information Contact information for financial inquiries and media inquiries is provided Contact Details Contact information for financial inquiries is provided for Wes Ochs, Executive Vice President/CFO, and for media inquiries for Laurie Stewart, President/CEO - For financial inquiries, contact Wes Ochs, Executive Vice President/CFO at (206) 436-8587[49] - For media inquiries, contact Laurie Stewart, President/CEO at (206) 436-1495[49]