• Sound Financial Bancorp, Inc. Q2 2023 Results

    Source: Nasdaq GlobeNewswire / 25 Jul 2023 19:10:47   America/New_York

    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.  

    Q2 2023 Financial Performance
    Total assets increased $6.4 million or 0.6% to $1.01 billion at June 30, 2023, from $1.00 billion at March 31, 2023, and increased $73.8 million or 7.9% from $937.0 million at June 30, 2022.
    		  Net interest income decreased $627 thousand or 6.7% to $8.7 million for the quarter ended June 30, 2023, from $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.
      
      
    Net interest margin ("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.
    Loans held-for-portfolio decreased $15.1 million or 1.7% to $855.4 million at June 30, 2023, compared to $870.5 million at March 31, 2023, and increased $49.4 million or 6.1% from $806.1 million at June 30, 2022.

    		  
      A $331 thousand reversal of credit losses was recorded for the quarter ended June 30, 2023, compared to a $10 thousand provision for credit losses for the quarter ended March 31, 2023 and a $592 thousand provision for credit losses for the quarter ended June 30, 2022. At June 30, 2023, the allowance for credit losses on loans to total nonperforming loans was 543.94%.
    Total 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. 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% compared to $186.6 million at June 30, 2022.  
         
    Loan-to-deposit ratio was 104% at June 30, 2023, compared to 104% at March 31, 2023 and 103% at June 30, 2022.
    		  Earnings on bank-owned life insurance (“BOLI”) were $718 thousand for the quarter ended June 30, 2023, compared to $151 thousand for the quarter ended March 31, 2023 and a loss of $35 thousand for the quarter ended June 30, 2022. The current quarter earnings included a non-recurring death benefit related to our BOLI policies.
      Net gain on sale of loans was $110 thousand for the quarter ended June 30, 2023, compared to $78 thousand for the quarter ended March 31, 2023 and $84 thousand for the quarter ended June 30, 2022.
    Total nonperforming loans increased $218 thousand or 16.8% to $1.5 million at June 30, 2023, from $1.3 million at March 31, 2023, and decreased $3.0 million or 66.5% from $4.5 million at June 30, 2022. Nonperforming loans to total loans were 0.18% and the allowance for credit losses on loans to total loans outstanding was 0.96% at June 30, 2023.

    		  
      The Bank continued to maintain capital levels in excess of regulatory requirements and was categorized as "well-capitalized" at June 30, 2023.
         

    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):

     June 30,
    2023    		 March 31,
    2023    		 December 31,
    2022    		 September 30,
    2022    		 June 30,
    2022
    Nonperforming Loans:         
    One-to-four family$914  $697  $2,136  $1,960  $1,669 
    Home equity loans 88   138   142   133   152 
    Commercial and multifamily 323   —   —   —   2,307 
    Construction and land 25   322   324   29   30 
    Manufactured homes 156   134   96   99   117 
    Other consumer 5   1   262   265   233 
    Total nonperforming loans 1,511   1,293   2,959   2,486   4,509 
    OREO and Other Repossessed Assets:         
    One-to-four family —   —   84   84   84 
    Commercial and multifamily 575   575   575   575   575 
    Total OREO and repossessed assets 575   575   659   659   659 
    Total NPAs$2,086  $1,868  $3,618  $3,145  $5,168 
              
    Percentage of Nonperforming Loans:         
    One-to-four family 43.8%  37.3%  59.0%  62.3%  32.3%
    Home equity loans 4.2   7.4   3.9   4.2   2.9 
    Commercial and multifamily 15.5   —   —   —   44.7 
    Construction and land 1.2   17.3   9.0   0.9   0.6 
    Manufactured homes 7.5   7.2   2.7   3.2   2.3 
    Other consumer 0.2   —   7.2   8.4   4.5 
    Total nonperforming loans 72.4   69.2   81.8   79.0   87.3 
    Percentage of OREO and Other Repossessed Assets:         
    One-to-four family —   —   2.3   2.7   1.6 
    Commercial and multifamily 27.6   30.8   15.9   18.3   11.1 
    Total OREO and repossessed assets 27.6   30.8   18.2   21.0   12.7 
    Total NPAs 100.0%  100.0%  100.0%  100.0%  100.0%

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

     At or For the Quarter Ended:
     June 30,
    2023    		 March 31,
    2023    		 December 31,
    2022    		 September 30,
    2022    		 June 30,
    2022
    Allowance for Credit Losses on Loans         
    Balance at beginning of period$8,532  $7,599  $7,489  $7,117  $6,407 
    Adoption of ASU 2016-13(1) —   760   —   —   — 
    (Reversal of) provision for credit losses during the period (242)  245   125   375   600 
    Net (charge-offs)/recoveries during the period (73)  (72)  (15)  (3)  110 
    Balance at end of period$8,217  $8,532  $7,599  $7,489  $7,117 
    Reserve for unfunded loan commitments         
    Balance at beginning of period$795  $335  $382  $411  $419 
    Adoption of ASU 2016-13(1) —   695   —   —   — 
    Provision for (reversal of) credit losses (89)  (235)  (47)  (29)  (8)
    Balance at end of period 706   795   335   382   411 
    Allowance for credit losses$8,923  $9,327  $7,934  $7,871  $7,528 
    Allowance for credit losses on loans to total loans 0.96%  0.98%  0.88%  0.88%  0.88%
    Allowance for credit losses to total loans 1.04%  1.07%  0.92%  0.92%  0.93%
    Allowance for credit losses on loans to total nonperforming loans 543.81%  659.86%  256.81%  301.25%  157.84%
    Allowance for credit losses to total nonperforming loans 590.54%  721.46%  268.14%  316.60%  166.97%

    (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)

      For the Quarter Ended
      June 30,
    2023    		 March 31,
    2023    		 December 31,
    2022    		 September 30,
    2022    		 June 30,
    2022
    Interest income $12,412  $12,174  $11,819  $10,776 $8,986 
    Interest expense  3,668   2,803   2,131   1,179  594 
    Net interest income  8,744   9,371   9,688   9,597  8,392 
    (Release of) provision for credit losses(1)  (331)  10   78   346  592 
    Net interest income after (release of) provision for credit losses  9,075   9,361   9,610   9,251  7,800 
    Noninterest income:          
    Service charges and fee income  670   581   618   604  596 
    Earnings (loss) on bank-owned life insurance  718   151   175   59  (35)
    Mortgage servicing income  297   299   303   306  313 
    Fair value adjustment on mortgage servicing rights  96   (140)  (127)  9  57 
    Net gain on sale of loans  110   78   49   48  84 
    Total noninterest income  1,891   969   1,018   1,026  1,015 
    Noninterest expense:          
    Salaries and benefits  4,700   4,485   4,234   4,044  3,969 
    Operations  1,491   1,441   1,536   1,610  1,436 
    Regulatory assessments  154   153   136   116  99 
    Occupancy  435   459   418   447  439 
    Data processing  788   993   841   848  849 
    Total noninterest expense  7,497   7,615   7,165   7,065  6,792 
    Income before provision for income taxes  3,469   2,715   3,463   3,212  2,023 
    Provision for income taxes  577   547   539   666  409 
    Net income $2,892  $2,168  $2,924  $2,546 $1,614 

    (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)

      For theSix Months EndedJune 30,
       2023   2022 
    Interest income $24,586  $17,199 
    Interest expense  6,470   1,189 
    Net interest income  18,116   16,010 
    (Release of) provision for credit losses(1)  (321)  725 
    Net interest income after (release of) provision for credit losses  18,437   15,285 
    Noninterest income:    
    Service charges and fee income  1,251   1,146 
    Earnings on bank-owned life insurance  868   (14)
    Mortgage servicing income  596   633 
    Fair value adjustment on mortgage servicing rights  (44)  325 
    Net gain on sale of loans  187   450 
    Total noninterest income  2,858   2,540 
    Noninterest expense:    
    Salaries and benefits  9,185   8,137 
    Operations  2,933   2,743 
    Regulatory assessments  307   200 
    Occupancy  894   872 
    Data processing  1,780   1,670 
    Net gain on OREO and repossessed assets  13   — 
    Total noninterest expense  15,112   13,622 
    Income before provision for income taxes  6,183   4,203 
    Provision for income taxes  1,124   867 
    Net income $5,059  $3,336 

    (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)

      June 30,
    2023    		 March 31,
    2023    		 December 31,
    2022    		 September 30,
    2022    		 June 30,
    2022
    ASSETS          
    Cash and cash equivalents $100,169  $81,580  $57,836  $76,064  $80,051 
    Available-for-sale securities, at fair value  8,398   8,601   10,207   10,396   9,382 
    Held-to-maturity securities, at amortized cost  2,182   2,190   2,199   2,207   2,215 
    Loans held-for-sale  1,716   1,414   —   1,908   100 
    Loans held-for-portfolio  855,429   870,545   865,981   851,447   806,078 
    Allowance for credit losses - loans  (8,217)  (8,532)  (7,599)  (7,489)  (7,117)
    Total loans held-for-portfolio, net  847,212   862,013   858,382   843,958   798,961 
    Accrued interest receivable  3,100   3,152   3,083   2,809   2,350 
    Bank-owned life insurance, net  21,550   21,465   21,314   21,140   21,081 
    Other real estate owned ("OREO") and other repossessed assets, net  575   575   659   659   659 
    Mortgage servicing rights, at fair value  4,726   4,587   4,687   4,787   4,754 
    Federal Home Loan Bank ("FHLB") stock, at cost  3,583   2,583   2,832   2,897   2,317 
    Premises and equipment, net  5,321   5,370   5,513   5,505   5,632 
    Right-of-use assets  4,966   5,200   5,102   5,319   5,548 
    Other assets  7,276   5,633   4,537   4,597   3,954 
    TOTAL ASSETS $1,010,774  $1,004,363  $976,351  $982,246  $937,004 
    LIABILITIES          
    Interest-bearing deposits $663,765  $668,568  $635,567  $623,122  $599,377 
    Noninterest-bearing deposits  158,488   173,079   173,196   192,275   186,609 
    Total deposits  822,253   841,647   808,763   815,397   785,986 
    Borrowings  60,000   35,000   43,000   44,500   30,000 
    Accrued interest payable  619   385   395   109   194 
    Lease liabilities  5,306   5,543   5,448   5,749   5,980 
    Other liabilities  10,243   9,398   8,318   8,071   9,210 
    Advance payments from borrowers for taxes and insurance  732   2,099   1,046   1,799   922 
    Subordinated notes, net  11,697   11,686   11,676   11,665   11,655 
    TOTAL LIABILITIES  910,850   905,758   878,646   887,290   843,947 
    STOCKHOLDERS' EQUITY:          
    Common stock  25   26   26   26   26 
    Additional paid-in capital  28,070   28,251   28,004   27,886   27,777 
    Retained earnings  72,923   71,362   70,792   68,309   66,203 
    Accumulated other comprehensive loss, net of tax  (1,094)  (1,034)  (1,117)  (1,265)  (949)
    TOTAL STOCKHOLDERS' EQUITY  99,924   98,605   97,705   94,956   93,057 
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,010,774  $1,004,363  $976,351  $982,246  $937,004 

    KEY FINANCIAL RATIOS
    (unaudited)

      For the Quarter Ended
      June 30,
    2023    		  March 31,
    2023    		  December 31,
    2022    		  September 30,
    2022    		  June 30,
    2022
    Annualized return on average assets 1.17%  0.88%  1.16%  1.04%  0.70%
    Annualized return on average equity 11.66   8.88   11.94   10.61   6.86 
    Annualized net interest margin(1) 3.71   4.01   4.05   4.13   3.83 
    Annualized efficiency ratio(2) 70.49%  73.65%  66.93%  66.51%  72.20%

    (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)

      At or For the Quarter Ended
      June 30, 2023
    		  March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022
    Basic earnings per share $1.12  $0.84  $1.13  $0.99  $0.62 
    Diluted earnings per share $1.11  $0.83  $1.12  $0.97  $0.61 
    Weighted-average basic shares outstanding  2,574,677   2,578,413   2,565,407   2,562,551   2,584,179 
    Weighted-average diluted shares outstanding  2,591,233   2,604,043   2,600,905   2,597,690   2,615,299 
    Common shares outstanding at period-end  2,573,223   2,601,443   2,583,619   2,581,949   2,578,595 
    Book value per share $38.83  $37.90  $37.82  $36.78  $36.09 


     

    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).

     Three Months Ended
     June 30, 2023 March 31, 2023 June 30, 2022
     Average Outstanding Balance Interest Earned/Paid Yield/Rate Average Outstanding Balance Interest Earned/Paid Yield/Rate Average Outstanding Balance Interest Earned/Paid Yield/Rate
    Interest-Earning Assets:                 
    Loans receivable$866,438  $11,551 5.35% $867,724  $11,381 5.32% $741,626  $8,697 4.70%
    Investments and interest-bearing cash 79,001   861 4.37%  80,244   793 4.01%  138,943   289 0.83%
    Total interest-earning assets$945,439  $12,412 5.27% $947,968  $12,174 5.21% $880,569  $8,986 4.09%
    Interest-Bearing Liabilities:                 
    Savings and money market accounts$163,165  $350 0.86% $164,270  $93 0.23% $195,339  $29 0.06%
    Demand and NOW accounts 215,120   182 0.34%  241,088   267 0.45%  311,941   125 0.16%
    Certificate accounts 279,774   2,421 3.47%  246,578   1,776 2.92%  95,974   260 1.09%
    Subordinated notes 11,693   168 5.76%  11,683   168 5.83%  11,648   168 5.79%
    Borrowings 48,138   547 4.56%  44,911   499 4.51%  2,418   12 1.99%
    Total interest-bearing liabilities$717,890   3,668 2.05% $708,530   2,803 1.60% $617,320   594 0.39%
    Net interest income/spread  $8,744 3.22%   $9,371 3.60%   $8,392 3.71%
    Net interest margin    3.71%     4.01%     3.82%
                      
    Ratio of interest-earning assets to interest-bearing liabilities 132%      134%      143%    
    Noninterest-bearing deposits$159,284      $172,805      $192,843     
    Total deposits 817,343  $2,953 1.45%  824,741  $2,136 1.05%  796,097  $414 0.21%
    Total funding(1) 877,174   3,668 1.68%  881,335   2,803 1.29%  810,163   594 0.29%

    (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.

     Six Months Ended
     June 30, 2023 June 30, 2022
     Average Outstanding Balance Interest Earned/Paid Yield/Rate Average Outstanding Balance Interest Earned/Paid Yield/Rate
    Interest-Earning Assets:           
    Loans receivable$867,078  $22,932 5.33% $718,402  $16,772 4.71%
    Investments and interest-bearing cash 78,499   1,654 4.25%  162,304   427 0.53%
    Total interest-earning assets$945,577  $24,586 5.24% $880,706  $17,199 3.94%
    Interest-Bearing Liabilities:           
    Savings and money market accounts$163,714  $477 0.59% $195,731  $59 0.06%
    Demand and NOW accounts 228,032   414 0.37%  313,552   247 0.16%
    Certificate accounts 263,268   4,197 3.21%  99,127   535 1.09%
    Subordinated notes 11,688   336 5.80%  11,643   336 5.82%
    Borrowings 46,533   1,046 4.53%  1,215   12 1.99%
    Total interest-bearing liabilities$713,235   6,470 1.83% $621,268   1,189 0.39%
    Net interest income/spread  $18,116 3.41%   $16,010 3.55%
    Net interest margin    3.86%     3.67%
                
    Ratio of interest-earning assets to interest-bearing liabilities 133%      142%    
    Noninterest-bearing deposits$166,007      $193,695     
    Total deposits 821,021  $5,088 1.25%  802,105  $841 0.21%
    Total funding (1) 879,242   6,470 1.48%  814,963   1,189 0.29%

    (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)

      June 30,
    2023    		 March 31,
    2023    		 December 31,
    2022    		 September 30,
    2022    		 June 30,
    2022
    Real estate loans:          
    One-to-four family $273,720  $274,687  $274,638  $270,009  $250,295 
    Home equity  19,760   19,631   19,548   17,642   16,374 
    Commercial and multifamily  301,828   307,558   313,358   315,677   307,462 
    Construction and land  117,382   125,983   116,878   112,980   101,394 
    Total real estate loans  712,690   727,859   724,422   716,308   675,525 
    Consumer Loans:          
    Manufactured homes  31,619   27,904   26,953   25,375   23,264 
    Floating homes  70,596   73,579   74,443   69,968   66,573 
    Other consumer  17,915   17,378   17,923   17,565   18,076 
    Total consumer loans  120,130   118,861   119,319   112,908   107,913 
    Commercial business loans  23,939   25,192   23,815   23,986   24,302 
    Total loans  856,759   871,912   867,556   853,202   807,740 
    Less:          
    Premiums  884   946   973   984   1,010 
    Deferred fees, net  (2,214)  (2,313)  (2,548)  (2,739)  (2,672)
    Allowance for credit losses - loans  (8,217)  (8,532)  (7,599)  (7,489)  (7,117)
    Total loans held-for-portfolio, net $847,212  $862,013  $858,382  $843,958  $798,961 

    DEPOSITS
    (Dollars in thousands, unaudited)

      June 30,
    2023    		  March 31,
    2023    		  December 31,
    2022    		  September 30,
    2022    		  June 30,
    2022
    Noninterest-bearing $158,488  $173,079  $173,196  $192,275  $186,609 
    Interest-bearing  208,571   235,836   254,982   284,267   312,439 
    Savings  79,349   83,991   95,641   99,602   103,311 
    Money market  87,360   77,624   74,639   84,692   87,672 
    Certificates  288,485   271,117   210,305   154,561   95,955 
    Total deposits $822,253  $841,647  $808,763  $815,397  $785,986 

    CREDIT QUALITY DATA
    (Dollars in thousands, unaudited)

      At or For the Quarter Ended
      June 30,
    2023    		 March 31,
    2023    		 December 31,
    2022    		 September 30,
    2022    		 June 30,
    2022
    Total nonperforming loans $1,511  $1,293  $2,958  $2,486  $4,509 
    OREO and other repossessed assets  575   575   659   659   659 
    Total nonperforming assets $2,086  $1,868  $3,617  $3,145  $5,168 
    Net (charge-offs) recoveries during the quarter $(73) $(72) $(15) $(3) $110 
    (Release of) provision for credit losses during the quarter  (331)  10   78   346   592 
    Allowance for credit losses - loans  8,217   8,532   7,599   7,489   7,117 
    Allowance for credit losses - loans to total loans  0.96%  0.98%  0.88%  0.88%  0.88%
    Allowance for credit losses - loans to total nonperforming loans  543.94%  659.83%  256.89%  301.25%  157.84%
    Nonperforming loans to total loans  0.18%  0.15%  0.34%  0.29%  0.56%
    Nonperforming assets to total assets  0.21%  0.19%  0.37%  0.32%  0.55%

    OTHER STATISTICS
    (Dollars in thousands, unaudited)

      At or For the Quarter Ended
      June 30,
    2023    		 March 31,
    2023    		 December 31,
    2022    		 September 30,
    2022    		 June 30,
    2022
               
    Total loans to total deposits  104.20%  103.60%  107.27%  104.64%  102.77%
    Noninterest-bearing deposits to total deposits  19.27%  20.56%  21.41%  23.58%  23.74%
               
    Average total assets for the quarter $992,822  $996,516  $996,042  $969,254  $920,984 
    Average total equity for the quarter $99,503  $99,028  $97,119  $95,244  $94,397 

    Contact

    Financial:  
    Wes Ochs   
    Executive Vice President/CFO  
    (206) 436-8587   
        
    Media:  
    Laurie Stewart   
    President/CEO  
    (206) 436-1495   

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