OREANDA-NEWS. Sound Financial Bancorp, Inc. (Nasdaq:SFBC), the holding company (the "Company") for Sound Community Bank (the "Bank"), today reported net income of $1.3 million for the quarter ended June 30, 2016, or diluted earnings per share of $0.49, as compared to net income of $1.1 million, or diluted earnings per share of $0.43, for the quarter ended March 31, 2016 and $1.2 million, or diluted earnings per share of $0.48, for the quarter ended June 30, 2015.

“We are pleased with the Company’s performance for the first half of 2016.  The Company continues to experience growth in net interest income and loan losses remain near all-time lows,” said Laurie Stewart, President and CEO of the Company and the Bank.  Ms. Stewart continued, “The local economy is one of the strongest in the nation with robust job growth.  This strong environment helps us continue to offer products to businesses and consumers that allow us to diversify our balance sheet and grow revenues.”

In addition, the Company announced today that the Board of Directors has declared a cash dividend on Company common stock of $0.075 per share, payable on August 26, 2016 to stockholders of record as of the close of business on August 12, 2016.

Highlights for the quarter include:

  • ?Net interest income increased $110,000, or 2.1%, to $5.4 million during the quarter ended June 30, 2016, compared to $5.3 million during the quarter ended March 31, 2016 and increased $704,000, or 14.9%, from $4.7 million during the quarter ended June 30, 2015 
  • Total assets decreased 0.3% to $541.8 million at June 30, 2016, from $543.5 million at March 31, 2016 and increased 7.6% from $503.4 million at June 30, 2015
  • Net loans increased 0.5% to $459.8 million at June 30, 2016, from $457.7 million at March 31, 2016 and increased 6.9% from $430.0 million at June 30, 2015
  • Deposits decreased 0.9% to $443.9 million at June 30, 2016, from $448.1 million at March 31, 2016 and increased 6.0% from $418.6 million at June 30, 2015
  • The gain on the sale of loans was $341,000 for the three months ended June 30, 2016 compared to $210,000 for the three months ended March 31, 2016 and $390,000 at June 30, 2015
  • The mortgage servicing asset decreased in value by $69,000, or 2.2%, to $3.0 million at June 30, 2016, from $3.1 million at March 31, 2016 and decreased in value by $245,000, or 7.5%, from $3.3 million at June 30, 2015

Capital ratios at June 30, 2016 exceeded regulatory requirements for a well-capitalized financial institution.

Operating Results

Net interest income increased $110,000, or 2.1%, to $5.4 million during the quarter ended June 30, 2016, compared to $5.3 million during the quarter ended March 31, 2016 and increased $704,000, or 14.9%, from $4.7 million during the quarter ended June 30, 2015.  The change from the prior quarter was primarily a result of higher average loan balances and loan yields. The higher yields resulted from a change to the loan mix during the most recent quarter, with an increase in the one-to four- family portfolio and a decrease in the commercial and multifamily portfolio. The change from the comparable period a year ago was primarily a result of higher average loan balances partially offset by higher borrowing rates and average balances.  The weighted average yield on the loan portfolio was 5.17% for the quarter ended June 30, 2016, compared to 5.18% for the quarter ended March 31, 2016 and 5.01% for the quarter ended June 30, 2015.

Interest expense decreased $8,000, or 1.1%, to $709,000 during the quarter ended June 30, 2016, compared to $717,000 during the quarter ended March 31, 2016 and increased $29,000, or 4.3%, compared to the quarter ended June 30, 2015.  Interest expense on deposits decreased $33,000, or 4.8% to $655,000 for the quarter ended June 30, 2016, compared to $688,000 for the quarter ended March 31, 2016 and decreased $6,000, or 0.9%, from $661,000 during the quarter ended June 30, 2015.  The decrease from both comparative periods was primarily the result of lower overall deposit funding costs for the period ended June 30, 2016 which declined to 0.66% at June 30, 2016, as compared to  0.68 % and  0.70% at March 31, 2016 and June 30, 2015, respectively.  The total cost of borrowings increased $25,000, or 86.2%, to $54,000 during the quarter ended June 30, 2016, from $29,000 during the quarter ended March 31, 2016 and increased $35,000, or 184.2%, from $19,000 for the quarter ended June 30, 2015.  This increase was primarily a result of an increase in average borrowings in the current period compared to the prior periods and as compared to last year, an increase in overnight borrowing rates reflecting the recent increase in the federal funds rate. Average borrowings, consisting of Federal Home Loan Bank advances, increased to $38.9 million for the quarter ended June 30, 2016, compared to $22.5 million for the quarter ended March 31, 2016 and $15.1 during the quarter ended June 30, 2015.

Net interest margin was 4.26% for the quarter ended June 30, 2016, compared to 4.25% for the quarter ended March 31, 2016 and 4.11% for the quarter ended June 30, 2015.  The increase from the year ago period was primarily a result of higher loan yields.

The provision for loan losses in the quarter ended June 30, 2016 was $100,000, compared to $150,000 for the quarter ended March 31, 2016 and $200,000 for the quarter ended June 30, 2015.  The decrease from the prior quarter was primarily due to a net recovery of $29,000 during the quarter ended June 30, 2016.

Noninterest income increased $233,000, or 23.8%, to $1.2 million for the quarter ended June 30, 2016, compared to $1.0 million for the quarter ended March 31, 2016.  Noninterest income decreased $496,000, or 29.1%, from $1.7 million for the quarter ended June 30, 2015.  This increase from the preceding quarter was primarily the result of higher gains on the sale of mortgage loans. The decrease from the year ago period was due a reduction in in the fair market value of mortgage servicing rights as compared to an increase in  value and a decrease in the gains on sale of mortgage loans. The negative fair value adjustment on mortgage servicing rights for the quarter ended June 30, 2016 was due to lower mortgage interest rates as compared to the same period last year.

Noninterest expense increased $196,000, or 4.4%, to $4.7 million for the quarter ended June 30, 2016, compared to $4.5 million for the quarter ended March 31, 2016.  The increase was primarily a result of increased operations and data processing expenses during the current period.  Noninterest expense increased $257,000, or 5.8% for the quarter ended June 30, 2016, compared to $4.4 million for the quarter ended June 30, 2015, primarily from higher salaries and benefits due to an increase in full time equivalent employees and operations expense, partially offset by lower regulatory and occupancy expense.

The efficiency ratio for the quarter ended June 30, 2016 was 69.51%, compared to 70.27% for the quarter ended March 31, 2016 and 68.21% for the quarter ended June 30, 2015.  The decrease in the efficiency ratio compared to the prior quarter was primarily due to higher net interest income and higher noninterest income.  The increase in the efficiency ratio compared to the year ago quarter was primarily due to higher salaries and benefits, operations expense and lower noninterest income, partially offset by higher net interest income.

Balance Sheet Review, Capital Management and Credit Quality

Total assets at June 30, 2016 were $541.8 million, compared to $543.5 million at March 31, 2016 and $503.4 million at June 30, 2015.  The decrease from the prior quarter was primarily a result of lower cash balances.  The increase from a year ago was primarily a result of higher gross loan and cash balances which increased $30.1 million and $11.1 million, respectively, from June 30, 2015. 

Investment securities available-for-sale totaled $7.4 million at June 30, 2016, compared to $6.3 million at March 31, 2016 and $7.9 million at June 30, 2015.  The quarter over quarter increase was a result of the purchase of $1.4 million in municipal bonds offset by normal principal pay downs. The year over year decrease was due to normal principal paydowns.

Gross loans totaled $464.6 million at June 30, 2016, compared to $462.4 million at March 31, 2016 and $434.6 million at June 30, 2015.  At June 30, 2016, commercial and multifamily real estate loans accounted for 35.3% of the gross loan portfolio and one- to four-family loans accounted for 32.2% of the portfolio.  Home equity, manufactured, and other consumer loans accounted for 15.4% of the portfolio.  Construction and land loans accounted for 12.4% of the portfolio and commercial and industrial loans accounted for the remaining 4.7% of the portfolio.

Nonperforming assets ("NPAs"), which includes non-accrual loans, accruing loans 90 days and more delinquent, nonperforming troubled debt restructurings (“TDRs”), other real estate owned (“OREO”) and other repossessed assets increased to $5.3 million, or 0.97% of total assets, at June 30, 2016 compared to $3.0 million, or 0.54% of total assets at March 31, 2016 and increased from $2.6 million, or 0.52% of total assets at June 30, 2015.   The increase in the current period reflects the inclusion of a $2.3 million multifamily property in Port Angeles, WA, which was placed on non-accrual status during the three months ended June 30, 2016.  There is a specific reserve for this loan totaling $389,000 as of June 30, 2016. This is our largest nonperforming loan as of June 30, 2016.

The following table summarizes our NPAs:

Nonperforming Loans:   At June 30, 2016   At March 31, 2016   At June 30, 2015
(in $000s, unaudited)   Balance   % of Total   Balance   % of Total   Balance   % of Total
One- to four- family   $   1,244       23.6 %   $   1,576       53.4 %   $   1,295       49.5 %
Home equity loans     661       12.6       435       14.8       503       19.2  
Commercial and multifamily     2,144       40.7       -       0.0       249       9.5  
Construction and land     -       0.0       -       0.0       41       1.6  
Manufactured homes     150       2.9       78       2.6       54       2.1  
Other consumer     22       0.4       24       0.8       91       3.5  
Commercial business     261       5.0       7       0.2       -       -  
Total nonperforming loans     4,482       85.2       2,120       71.8       2,233       85.4  
OREO and Other Repossessed Assets:                        
One- to four- family     153       2.9       205       7.0       325       12.4  
Commercial and multifamily     600       11.4       600       20.3       -       -  
Manufactured homes     27       0.5       27       0.9       57       2.2  
Total OREO and other repossessed assets     780       14.8       832       28.2       382       14.6  
Total nonperforming assets   $   5,262       100.0 %   $   2,952       100.0 %   $   2,614       100.0 %
                                                 

The following table summarizes the allowance for loan losses:

    For the Quarter Ended:
Allowance for Loan Losses   June
30,		   March
31,		   June
30,
(in $000s, unaudited)     2016       2016       2015  
Balance at beginning of period   $ 4,709      $ 4,636      $   4,436  
Provision for loan losses during the period     100       150       200  
Net loan recoveries (charge-offs) during the period     29       (77 )     (64 )
Balance at end of period   $   4,838     $   4,709     $   4,572  
             
Allowance for loan losses to total loans     1.04 %     1.02 %     1.05 %
Allowance for loan losses to total nonperforming loans     107.94 %     222.12 %     204.75 %
                         

The allowance for loan losses to total loans increased to 1.04% for the quarter ended June 30, 2016, compared to 1.02% for the quarter ended March 31, 2016 and from 1.05% for the quarter ended June 30, 2015.  There was a net recovery of $29,000 for the quarter ended June 30, 2016, compared to net charge-offs of $77,000 for the quarter ended March 31, 2016 and $64,000 for the quarter ended June 30, 2015.

Deposits decreased to $443.9 million at June 30, 2016, compared to $448.1 million at March 31, 2016 and increased from $418.6 million at June 30, 2015.  Borrowings increased to $35.6 million at June 30, 2016, compared to $31.4 million at March 31, 2016 and from $26.3 million at June 30, 2015.  An increase in total loans and a decrease in total deposits during the quarter ended June 30, 2016 led to the increase in borrowings.

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 and Port Ludlow. Sound Community Bank is a Fannie Mae Approved Lender and Seller/Servicer with an additional Loan Production Office in the Madison Park neighborhood of Seattle, Washington.

CONSOLIDATED INCOME STATEMENTS   Quarter Ended   Sequential
Quarter
% Change		   Year over
Year
% Change
(in $000s, unaudited)   June 30,
2016		   March 31,
2016		   June 30,
2015		    
Interest income   $   6,143     $ 6,041      $   5,410       1.7 %     13.5 %
Interest expense     709       717       680       (1.1 )     4.3  
Net interest income     5,434       5,324       4,730       2.1       14.9  
Provision for loan losses     100       150       200       (33.3 )     (50.0 )
Net interest income after provision for loan losses     5,334       5,174       4,530       3.1       17.7  
Noninterest income:                    
Service charges and fee income     652       593       671       9.9       (2.8 )
Increase in cash surrender value of life insurance     85       84       84       1.2       1.2  
Mortgage servicing income     208       204       214       2.0       (2.8 )
Fair value adjustment on mortgage servicing rights     (76 )     (114 )     347       (33.3 )     (121.9 )
Gain on sale of loans     341       210       390       62.4       (12.6 )
Total noninterest income     1,210       977       1,706       23.8       (29.1 )
Noninterest expense:                    
Salaries and benefits     2,618       2,563       2,205       2.1       18.7  
Operations expense     1,084       972       1,053       11.15       2.9  
Data processing     444       386       454       15.0       (2.2 )
Net loss on OREO and repossessed assets     6       -       10       nm       (40.0 )
Other noninterest expense     505       540       678       (6.5 )     (25.5 )
Total noninterest expense     4,657       4,461       4,400       4.4       5.8  
Income before provision for income taxes     1,887       1,690       1,836       11.7       2.8  
Provision for income taxes     633       584       589       8.4       7.5  
Net income   $   1,254     $   1,106     $   1,247       13.4 %     0.6 %
_______                                        
Nm = not meaningful                                        
    Quarter Ended   Sequential
Quarter
% Change		   Year over
Year
% Change
    June 30,
2016		   March 31,
2016		   June 30,
2015		    
KEY FINANCIAL RATIOS (unaudited)                    
Annualized return on average assets     0.94 %     0.83 %     1.01 %     13.3 %     (6.9 )%
Annualized return on average equity     9.04       8.05       9.56       13.3       (5.4 )
Annualized net interest margin     4.26       4.25       4.11       0.2       3.6  
Annualized efficiency ratio     69.51 %     70.27 %     68.21 %     (1.1 )%     2.6 %
PER COMMON SHARE DATA   Quarter Ended   Sequential
Quarter
% Change		   Year over
Year
% Change
(in 000s, except per share data, unaudited)   June 30,
2016		   March 31,
2016		   June 30,
2015		    
Basic earnings per share   $   0.51      $   0.45     $   0.50        13.3 %     2.0 %
Diluted earnings per share   $   0.49      $   0.43     $   0.48        14.0       2.1  
Weighted average basic shares outstanding     2,481       2,478       2,511       0.1       (1.2 )
Weighted average diluted shares outstanding     2,579       2,572       2,602       0.3       (0.9 )
Common shares outstanding at period-end     2,481       2,481       2,466       -       0.6  
Book value per share   $   22.90      $   22.39     $   21.02        2.3 %     8.9 %
CONSOLIDATED BALANCE SHEET               Sequential
Quarter
% Change		   Year over
Year
% Change
(in $000's, unaudited)   June 30,
2016		   March 31,
2016		   June 30,
2015		    
ASSETS                    
Cash and cash equivalents   $ 45,187      $   49,679     $ 34,087        (9.0 )%     32.6 %
Securities available-for-sale, at fair value     7,393       6,286       7,901       17.6       (6.4 )
Loans held-for-sale     687       1,186       3,061       (42.1 )     (77.6 )
Total loans, gross     464,648       462,432       434,597       0.5       6.9  
Allowance for loan losses     (4,838 )     (4,709 )     (4,572 )     2.7       5.8  
Loans, net     459,810       457,723       430,025       0.5       6.9  
Accrued interest receivable     1,592       1,595       1,494       (0.2 )     6.6  
Bank-owned life insurance, net     11,914       11,830       11,576       0.7       2.9  
OREO and other repossessed assets, net     780       832       382       (6.3 )     104.2  
Mortgage servicing rights, at fair value     3,026       3,095       3,271       (2.2 )     (7.5 )
FHLB stock, at cost     2,073       1,903       1,645       8.9       26.0  
Premises and equipment, net     5,088       5,252       5,739       (3.1 )     (11.3 )
Other assets     4,209       4,157       4,266       1.3       (1.3 )
Total assets     541,759       543,538       503,447       (0.3 )     7.6  
LIABILITIES AND SHAREHOLDERS' EQUITY                    
Liabilities:                    
Interest-bearing deposits     384,323       393,473       367,172       (2.3 )     4.7  
Noninterest-bearing deposits     59,544       54,648       51,457       9.0       15.7  
Total deposits     443,867       448,121       418,629       (0.9 )     6.0  
Accrued interest payable and other liabilities     5,468       8,489       6,774       (35.6 )     (19.3 )
Borrowings     35,613       31,374       26,256       13.5       35.6  
Total liabilities     484,948       487,984       451,659       (0.6 )     7.4  
Shareholders' equity:                    
Common stock     25       25       25       -       -  
Paid-in capital     23,247       23,110       22,515       2.8       5.5  
Unearned shares – ESOP     (911 )     (911 )     (1,140 )     -       (20.1 )
Retained earnings     34,228       33,160       30,202       1.7       11.7  
Accumulated other comprehensive gain     222       170       186       30.6       19.4  
Total shareholders' equity     56,811       55,554       51,788       2.3       9.7  
Total liabilities and shareholders' equity   $   541,759     $   543,538     $   503,447       (0.3 )%     7.6 %