Eye-Catching Stock Buzz: Sound Financial Bancorp, Inc. (NASDAQ: SFBC)

On Monday, Shares of Sound Financial Bancorp, Inc. (NASDAQ: SFBC) showed no change to $35.45. The stock recorded $35.10 as its minimum price and hit the max level of $35.45, during its most recent trading session. It traded total volume of 2,651 shares lower than the average volume of 3.12K shares.

Sound Financial Bancorp, Inc. (SFBC), the holding company for Sound Community Bank, recently stated net income of $5.10M for the year ended December 31, 2017, or diluted earnings per share of $2.00, as contrast to net income of $5.40M, or diluted earnings per share of $2.09, for the year ended December 31, 2016.  Net income for the fourth quarter of 2017 was $1.20M, or $0.46 per diluted share, contrast to $1.60M, or $0.60 per diluted share, for the quarter ended December 31, 2016. The decrease in net income contrast to the same quarter last year was mainly because of a revaluation adjustment of deferred tax assets as a result of the passage of the Tax Cuts and Jobs Act.  The tax revaluation resulted in a boost to the Company’s income tax expense and a $309.0K or $0.12 reduction in earnings per diluted share.  Total assets were $645.20M as of December 31, 2017 contrast to $588.40M as of December 31, 2016.

Operating Results:

Net interest income increased $2.00M, or 8.8%, to $24.10M during the year ended December 31, 2017, contrast to $22.10M during the year ended December 31, 2016.  The increase was mainly a result of increased interest income on loans, because of both higher average balances and loan yields, partially offset by increased interest expense.

Interest income increased $2.40M, or 9.6%, to $27.40M during the year ended December 31, 2017, contrast to $25.10M during the year ended December 31, 2016.  Interest income on loans increased $2.10M, or 8.5%, to $26.70M during the year ended December 31, 2017, contrast to $24.60M during the year ended December 31, 2016.  The change from the comparable period one year ago was mainly because of higher average loan balances.  The average balance of the loan portfolio was $508.50M for the year ended December 31, 2017, contrast to $474.40M for the year ended December 31, 2016.  The weighted-average yield on the loan portfolio was 5.25% for the year ended December 31, 2017, contrast to 5.19% for the year ended December 31, 2016.  Interest income on investments increased $300.0K, or 67.9%, to $742.0K during the year ended December 31, 2017, contrast to $442.0K during the year ended December 31, 2016.  The change from the prior year was because of higher cash balances and higher average yields because of the increase in interest rates over the past year.  Also included in interest income on investments, was a $57.0K discount that was taken into income in July 2017 as a result of an early redemption of a non-agency mortgage-backed security.

Interest expense increased $449.0K, or 15.4%, to $3.40M during the year ended December 31, 2017, contrast to $2.90M during the year ended December 31, 2016.  Interest expense on deposits increased $313.0K, or 11.6%, to $3.00M for the year ended December 31, 2017, contrast to $2.70M for the year ended December 31, 2016.  The increase from the prior year was mainly a result of the higher average deposit balances during 2017.  Average deposits increased to $493.60M at December 31, 2017, as contrast to $452.50M at December 31, 2016.  The increase in deposits was the result of organic growth and the acquisition of $14.50M in deposits in connection with our University Place branch acquisition in July 2017.  The weighted-average cost of deposits increased to 0.61% for 2017 contrast to 0.60% for 2016.  The cost of borrowings increased $136.0K, or 64.5%, to $347.0K during the year ended December 31, 2017, from $211.0K during the year ended December 31, 2016.  The increase in the borrowing cost for 2017 contrast to 2016 was mainly because of the increase in the weighted-average cost of borrowings.  The weighted-average cost of borrowings for the year ended December 31, 2017 was 1.16% contrast to 0.58% for the year ended December 31, 2016.  As the Federal Reserve has increased interest rates over the past year, those increases are reflected in the borrow costs from the Federal Home Loan Bank of Des Moines.

The net interest margin increased to 4.35% for 2017, contrast to 4.26% for 2016.  The increase for the year over year period was because of the combination of increases in both the average balance and yield on loans.  The weighted-average yield on loans increased six basis points during 2017.  The weighted-average gross loan balance increased $34.20M, or 7.2%, in 2017 contrast to $474.40M in 2016.

We recorded a provision for loan losses of $500.0K for the year ended December 31, 2017 contrast to a $454.0K provision for the year ended December 31, 2016.  The increase in the provision for loan losses for the year was mainly a result of the increase in the loan portfolio and also reflects improvements in our asset quality metrics.  The gross loan portfolio increased $48.60M, or 9.7% contrast to December 31, 2016.  Net charge-offs for 2017 totaled $81.0K contrast to $268.0K for 2016.  Nonperforming loans reduced to $2.30M at December 31, 2017 contrast to $3.30M at December 31, 2016.

Noninterest income reduced $1.30M, or 24.6%, to $3.90M for the year ended December 31, 2017, contrast to $5.10M for the year ended December 31, 2016.  The decrease from one year ago was mainly the result of a $613.0K decline in service charges and fee income, a $341.0K decline in mortgage servicing income, and a $295.0K decrease in the gain on sale of loans.  The decrease in service charges and fee income included a decrease in loan fees, as well as overdraft fees.  The decrease in loan fees was because of the deferral of additional loan fees contrast to the same period in 2016 as well as lower loan volumes.  During 2017, we originated and sold $52.00M of loans contrast with $88.10M in 2016.  The decrease in mortgage servicing income contrast to one year ago was because of both the lower underlying principal balance of loans being serviced as well as a slight decrease in the market value of the servicing rights.  Total loans serviced for others was $411.40M at December 31, 2017 contrast to $423.90M at December 31, 2016.  The market value of the servicing rights reduced to 83 basis points as of December 31, 2017 from 84 basis points as of December 31, 2016.  The decline in the gain on sale of loans was because of a lower volume of loans originated and sold on the secondary market reflecting the increase in residential mortgage interest rates over the last year resulting in a decrease in refinance activity.

Noninterest expense increased $526.0K, or 2.8%, to $19.20M for the year ended December 31, 2017, from $18.70M for the year ended December 31, 2016.  The increase from the year ended December 31, 2016 was mainly because of higher occupancy expense, higher salaries and benefits expense and higher losses and expense related to other real estate owned (“OREO”) and repossessed assets, partially offset by lower regulatory expenses.  The increase in occupancy expense was a result of the relocation of the Company’s headquarters to a new location, the costs associated with the acquisition of the University Place branch, as well as amortization expenses resulting from purchases of fixed assets and tenant improvements.  Salaries and benefits expense was higher contrast to 2016 mainly because of higher full-time equivalents (“FTE’s”) at December 31, 2017 contrast to one year ago partially offset by lower benefit expense and higher deferred costs.  FTE’s increased to 116 at December 31, 2017 from 100 at December 31, 2016 mainly because of staffing for our University Place branch as well as staffing in preparation for the opening of our new Belltown branch and for our new loan production office in Sequim.  In addition, we had a number of open positions at the end of 2016 that were filled throughout 2017.  The increase in losses and expenses related to OREO and repossessed assets were principally the result of the sale of one OREO property at a $103.0K loss.

The efficiency ratio for the year ended December 31, 2017 was 68.89%, contrast to 68.71% for the year ended December 31, 2016.  The slight increase in the efficiency ratio contrast to the prior year was because of the reduction in noninterest income and higher noninterest expense in 2017.

The provision for income taxes increased $373.0K, or 13.8% to $3.10M for the year ended December 31, 2017, contrast to $2.70M for the year ended December 31, 2016.  The Tax Cuts and Jobs Act was signed into law on December 22, 2017, which reduced the federal income tax rate from 35% for corporations to 21% effective in 2018.  As a result of this change, we incurred a $309.0K one-time, write-down of our deferred tax asset.

Balance Sheet Review, Capital Management and Credit Quality:

Total assets at December 31, 2017 were $645.20M, contrast to $588.40M at December 31, 2016.  The increase from one year ago was the result of the increase in total loans and higher cash balances.

Cash and cash equivalents increased $6.10M, or 11.2%, to $60.70M at December 31, 2017, contrast to $54.60M at December 31, 2016.  The increase from one year ago mainly was a result of the increase in total deposits.

Investment securities available-for-sale totaled $5.40M at December 31, 2017, contrast to $6.60M at December 31, 2016.  The decrease was because of normal principal pay downs on the investments and the full redemption of a non-agency mortgage-backed security totaling $318.0K in July 2017.

Gross loans totaled $548.60M at December 31, 2017, contrast to $500.00M at December 31, 2016.  The leading increases in the loan portfolio were in the commercial and multifamily real estate portfolio, which increased $30.30M and in the commercial business loan portfolio, which increased $14.50M.  At December 31, 2017, commercial and multifamily real estate loans accounted for 38.5% of the gross loan portfolio and one- to four- family loans accounted for 28.6% of the portfolio.  Consumer loans, consisting of home equity, manufactured and floating homes, and other consumer loans accounted for 14.4% of the portfolio at that date.  Construction and land loans accounted for 11.1% of the portfolio and commercial business loans accounted for the remaining 7.4% of the portfolio at December 31, 2017.

SFBC has the market capitalization of $88.98M and its EPS growth ratio for the past five years was 28.90%. The return on assets ratio of the Company was 1.00% while its return on investment ratio stands at 31.50%. Price to sales ratio was 3.24 while 33.30% of the stock was owned by institutional investors.

Louis Jensen

Editor

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