Sound Financial Bancorp, Inc. Q3 2022 Results

SEATTLE, Oct. 25, 2022 (GLOBE NEWSWIRE) -- Sound Financial Bancorp, Inc. (Nasdaq: SFBC), the holding company (the "Company") for Sound Community Bank (the "Bank"), today reported net income of $2.5 million for the quarter ended September 30, 2022, or $0.97 diluted earnings per share, as compared to net income of $1.6 million, or $0.61 diluted earnings per share, for the quarter ended June 30, 2022, and $2.6 million, or $0.98 diluted earnings per share, for the quarter ended September 30, 2021. The Company also announced today that the Board of Directors declared a cash dividend on Company common stock of $0.17 per share, payable on November 23, 2022 to stockholders of record as of the close of business on November 9, 2022.  

*Comments from the President and Chief Executive Officer*

“Consistent loan origination across all categories increased our average loan balance from $742 million for the three months ended June 30, 2022 to $833 million for the three months ended September 30, 2022,” remarked Ms. Stewart, President and Chief Executive Officer. "This portfolio growth contributed to an improved net interest margin of 4.13% for the current quarter, despite deposit pricing and borrowings being higher than they were at the end of the second quarter of 2022," concluded Stewart.

*Q3 2022 Financial Performance*

Total assets increased $45.2 million or 4.8% to $982.2 million at September 30, 2022, from $937.0 million at June 30, 2022, and increased $54.1 million or 5.8% from $928.1 million at September 30, 2021.
    Net interest income increased $1.2 million or 14.4% to $9.6 million for the quarter ended September 30, 2022, from $8.4 million for the quarter ended June 30, 2022, and increased $1.3 million or 15.4% from $8.3 million for the quarter ended September 30, 2021.      Net interest margin ("NIM"), annualized, was 4.13% for the quarter ended September 30, 2022, compared to 3.83% for the quarter ended June 30, 2022 and 3.74% for the quarter ended September 30, 2021.
Loans held-for-portfolio increased $45.4 million or 5.6% to $851.4 million at September 30, 2022, compared to $806.1 million at June 30, 2022, and increased $183.9 million or 27.5% from $667.6 million at September 30, 2021. These increases are the result of organic loan growth and, coupled with a competitive deposit market, increased our loan-to-deposit ratio to 105% at September 30, 2022 from 103% at June 30, 2022 and 83% at September 30, 2021.

      A $375 thousand provision for loan losses was recorded for the quarter ended September 30, 2022, compared to a $600 thousand provision for loan losses for the quarter ended June 30, 2022 and a $175 thousand for the quarter ended September 30, 2021. The allowance for loan losses to total nonperforming loans was 301.24% and to total loans was 0.88% at September 30, 2022.  
Total deposits increased $29.4 million or 3.7% to $815.4 million at September 30, 2022, from $786.0 million at June 30, 2022, and increased $7.7 million or 1.0% from $807.7 million at September 30, 2021. Noninterest-bearing deposits increased $5.7 million or 3.0% to $192.3 million at September 30, 2022 compared to $186.6 million at June 30, 2022, and decreased $2.6 million or 1.3% compared to $194.8 million at September 30, 2021.

      Net gain on sale of loans was $48 thousand for the quarter ended September 30, 2022, compared to $84 thousand for the quarter ended June 30, 2022 and $568 thousand for the quarter ended September 30, 2021.       The Bank continued to maintain capital levels in excess of regulatory requirements and was categorized as "well-capitalized" at September 30, 2022.
Total nonperforming loans decreased $2.0 million or 44.9% to $2.5 million at September 30, 2022, from $4.5 million at June 30, 2022, and decreased $582 thousand or 19.0% from $3.1 million at September 30, 2021.    

*Operating Results*

Net interest income increased $1.2 million, or 14.4%, to $9.6 million for the quarter ended September 30, 2022, compared to $8.4 million for the quarter ended June 30, 2022, and increased $1.3 million, or 15.4%, from $8.3 million for the quarter ended September 30, 2021. The increase from both prior quarters was primarily the result of a higher average balance of and yield earned on average interest-earning assets, partially offset by the higher average balance of and rate paid on average interest-bearing liabilities.

Interest income increased $1.8 million, or 19.9%, to $10.8 million for the quarter ended September 30, 2022, compared to $9.0 million for the quarter ended June 30, 2022 and increased $1.7 million, or 18.4%, from $9.1 million for the quarter ended September 30, 2021. The increase from the prior quarter was primarily due to higher average loan balances, a 22 basis point rate increase in the average yield on loans and a 116 basis point rate increase in the average yield on investments and interest-bearing cash following recent increases in the targeted federal funds rate, partially offset by lower average investments and interest-bearing cash balances. The increase in interest income from the same quarter last year was due primarily to higher average loan balances and a 177 basis point increase in average yield on investments and interest-bearing cash, partially offset by a 54 basis point decline in the average loan yield and a lower average balance of investments and interest-bearing cash.

Interest income on loans increased $1.6 million, or 18.7%, to $10.3 million for the quarter ended September 30, 2022, compared to $8.7 million for the quarter ended June 30, 2022, and increased $1.4 million, or 15.2%, from $9.0 million for the quarter ended September 30, 2021. The average balance of total loans was $833.2 million for the quarter ended September 30, 2022, compared to $741.6 million for the quarter ended June 30, 2022 and $652.3 million for the quarter ended September 30, 2021. The average yield on total loans was 4.92% for the quarter ended September 30, 2022, compared to 4.70% for the quarter ended June 30, 2022 and 5.45% for the quarter ended September 30, 2021. The increase in the average yield on loans during the current quarter compared to the prior quarter was primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates. The decrease in the average yield on loans during the current quarter compared to the same quarter in 2021 was primarily due to lower recognition of net deferred fees due to a reduced volume of PPP loan repayments from U.S. Small Business Administration’s (“SBA”) loan forgiveness. The Bank recognized $24 thousand, $40 thousand, and $1.1 million in deferred fees and interest income related to PPP loan forgiveness repayments during the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively. Refer to the discussion below for the impact of PPP on our net interest margin. Interest income on investments and interest-bearing cash increased $160 thousand to $449 thousand for the quarter ended September 30, 2022, compared to $289 thousand for the quarter ended June 30, 2022, and increased $314 thousand from $135 thousand for the quarter ended September 30, 2021. These increases were both due to a higher average yield for investments and interest-bearing cash, partially offset by a lower average balance as excess cash liquidity was deployed into higher yielding loans.

Interest expense increased $585 thousand, or 98.5%, to $1.2 million for the quarter ended September 30, 2022, compared to $594 thousand for the quarter ended June 30, 2022, and increased $394 thousand, or 50.2%, from $785 thousand for the quarter ended September 30, 2021. The increase in interest expense during the current quarter from the prior quarter was primarily the result of a $44.0 million increase in the average balance of borrowings, comprised of Federal Home Loan Bank ("FHLB") advances, and a $34.6 million increase in the average balance of certificate accounts, as well as higher rates paid on all interest-bearing deposits, partially offset by a $28.9 million decrease in the average balance of interest-bearing deposits other than certificate accounts. Compared to the prior period, total deposit costs were negatively impacted by the 20 basis point increase in the average cost of interest-bearing deposits resulting from higher rates paid on deposits and the $3.5 million decrease in the average balance of noninterest bearing deposits to $189.4 million for the three months ended September 30, 2022, compared to $192.8 million for the three months ended June 30, 2022. The increase in interest expense during the current quarter from the comparable period a year ago was primarily the result of a $46.5 million increase in the average balance of borrowings and higher rates paid on all interest-bearing deposits, partially offset by a $17.3 million decrease in the average balance of interest-bearing deposits. Compared to the same period last year, total deposit costs were negatively impacted by the higher rates paid on deposits and favorably impacted by the $6.9 million increase in the average balance of noninterest bearing deposits from $182.5 million at September 30, 2021. The average cost of total borrowings, comprised of borrowings and subordinated notes, decreased to 3.06% for the quarter ended September 30, 2022, from 5.13% for the quarter ended June 30, 2022, and decreased from 5.74% for the quarter ended September 30, 2021, reflecting the increased use of lower cost FHLB advances during the third quarter to supplement our liquidity needs. The average balance of our total borrowings increased $44.1 million to $58.1 million from $14.1 million for the quarter ended June 30, 2022, and increased $46.5 million from $11.6 million for the quarter ended September 30, 2021.

Net interest margin (annualized) was 4.13% for the quarter ended September 30, 2022, compared to 3.83% for the quarter ended June 30, 2022 and 3.74% for the quarter ended September 30, 2021. These increases in net interest margin were primarily due to the higher interest income earned on interest-earning assets, driven by the higher average balance of loans and the increased average yield earned on investments and interest-bearing cash and, with respect to the same quarter a year ago, partially offset by lower recognition of net deferred fees related to PPP loan repayments from SBA loan forgiveness. During the third quarter of 2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in positive impact of one basis point to the net interest margin, compared to a positive impact of one basis point during the quarter ended June 30, 2022, and a positive impact of 41 basis points during the quarter ended September 30, 2021.

The Company recorded a provision for loan losses of $375 thousand for the quarter ended September 30, 2022, as compared to $600 thousand for the quarter ended June 30, 2022 and $175 thousand for the quarter ended September 30, 2021. The decrease in the provision for loan losses for the quarter ended September 30, 2022 compared to the quarter ended June 30, 2022 resulted primarily from the lower growth in our loans held-for-portfolio, partially offset by a qualitative adjustment to manufactured home loans increasing the amount of the allowance for loan losses attributable to these loans. The provision for loan losses in the third quarter of 2022 also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Noninterest income remained essentially unchanged at $1.0 million for both quarters ended September 30, 2022 and June 30, 2022, and decreased $405 thousand, or 28.3%, from $1.4 million for the quarter ended September 30, 2021. The decrease in noninterest income from the comparable period in 2021 was primarily due to a $520 thousand decrease in net gain on sale of loans as a result of a decline in both the amount of loans originated for sale and gross margins for loans sold and a $45 thousand decrease in earnings on the cash surrender value of bank-owned life insurance ("BOLI"), partially offset by a $134 thousand increase in the fair value adjustment on mortgage servicing rights due primarily from the effects of recent higher market interest rates causing a reduction in prepayment speeds. In addition, service charges and fee income increased $48 thousand primarily resulting from higher commercial loan and consumer deposit activity fees. Loans sold during the quarter ended September 30, 2022, totaled $2.3 million, compared to $2.9 million and $20.3 million during the quarters ended June 30, 2022 and September 30, 2021, respectively.

Noninterest expense increased $252 thousand, or 3.7%, to $7.0 million for the quarter ended September 30, 2022, compared to $6.8 million for the quarter ended June 30, 2022 and increased $718 thousand, or 11.4%, from $6.3 million for the quarter ended September 30, 2021. The increase from the quarter ended June 30, 2022 was a result of an increase in operations expense of $153 thousand primarily due to increases in various expenses including marketing and charitable expenses, insurance costs, and professional fees, and an increase in salaries and benefits expense of $75 thousand resulting from lower deferred compensation, partially offset by a decrease in incentive compensation expense as a result of a lower percentage allocated and changes to the incentive compensation programs. The increase in noninterest expense compared to the quarter ended September 30, 2021 was primarily due to an increase in salaries and benefits of $532 thousand primarily due to higher wages and medical expenses and lower deferred compensation, partially offset by a decrease in incentive compensation as a result of a lower percentage allocated and changes to the incentive compensation programs and lower commission expense related to a decline in mortgage originations. Operations expense increased $115 thousand compared to the quarter ended September 30, 2021 due to increases in various accounts including marketing and travel expenses, legal fees associated with higher commercial loan volume, and debit card processing, partially offset by lower loan origination costs due to lower mortgage origination volume.

The efficiency ratio for the quarter ended September 30, 2022 was 66.23%, compared to 72.12% for the quarter ended June 30, 2022 and 64.81% for the quarter ended September 30, 2021. The improvement in the efficiency ratio for the current quarter compared to the prior quarter is primarily due to higher net interest income from an increase in average balance of loans held-for-portfolio and a higher rate earned on reserve balances, partially offset by higher noninterest expense from reduced salaries and benefits costs. The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense related to increased salaries and benefits and lower noninterest income primarily due to lower gain on sale of loans from mortgage banking, partially offset by higher net interest income primarily as a result of a higher average balance of loans held-for-portfolio at higher yields than prior investments.

*Balance Sheet Review, Capital Management and Credit Quality*

Assets at September 30, 2022 totaled $982.2 million, compared to $937.0 million at June 30, 2022 and $928.1 million at September 30, 2021. The increase in assets from the sequential quarter was primarily due to an increase in loans held-for-portfolio and investments, partially offset by a decrease in cash and cash equivalents. The loan growth primarily was funded by an increase of $29.4 million in deposits and a $44.5 million increase in FHLB advances. The increase from one year ago was primarily a result of increases in loans held-for-portfolio and investment securities, partially offset by lower balances in cash and cash equivalents.

Cash and cash equivalents decreased $4.0 million, or 5.0%, to $76.1 million at September 30, 2022, compared to $80.1 million at June 30, 2022, and decreased $130.6 million, or 63.2%, from $206.7 million at September 30, 2021. The decrease from the prior quarter-end was primarily due to the deployment of excess liquidity into higher yielding loans, partially offset by an increase in deposits, primarily related to increases in certificate accounts. The decrease from one year ago was primarily due to deploying cash earning a nominal yield into higher interest-earning loans and investments securities.

Investment securities increased $1.0 million, or 8.7%, to $12.6 million at September 30, 2022, compared to $11.6 million at June 30, 2022, and increased $5.5 million, or 78.5%, from $7.1 million at September 30, 2021. Held-to-maturity securities totaled $2.2 million at both September 30, 2022 and June 30, 2022, and totaled none at September 30, 2021. Available-for-sale securities totaled $10.4 million at September 30, 2022, compared to $9.4 million at June 30, 2022, and $7.1 million at September 30, 2021. The increase in available-for-sale securities from the prior quarter was primarily due to $1.6 million of investment purchases, partially offset by net unrealized losses resulting from the increases in market interest rates during the year and regularly scheduled payments. The increase from the same period one year ago was primarily due to investment purchases throughout the previous year, partially offset by calls of securities, regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the year.

Loans held-for-portfolio increased to $851.4 million at September 30, 2022, compared to $806.1 million at June 30, 2022 and increased from $667.6 million at September 30, 2021. The increase in loans held-for-portfolio at September 30, 2022, compared to the prior quarter and one year ago, primarily resulted from increases across all loan categories, excluding commercial business loans which decreased between the periods due primarily to PPP loan SBA loan forgiveness payments. The increase in loans held-for-portfolio primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and the addition of experienced lending staff during 2021.

Nonperforming assets ("NPAs"), which are comprised of nonaccrual loans, including nonperforming troubled debt restructurings ("TDRs"), other real estate owned ("OREO"), and other repossessed assets, decreased $2.0 million, or 39.1%, to $3.1 million at September 30, 2022, from $5.2 million at June 30, 2022 and decreased $583 thousand, or 15.6% from $3.7 million at September 30, 2021. The decrease in nonperforming assets during the current quarter compared to the prior quarter primarily was due to the payoff of a $2.3 million nonperforming multifamily loan during the period. Loans classified as TDRs totaled $2.0 million, $2.0 million and $2.6 million at September 30, 2022, June 30, 2022 and September 30, 2021, respectively, of which $108 thousand, $128 thousand and $411 thousand, respectively, were not performing pursuant to their contractual repayment terms at those dates.

NPAs to total assets were 0.32%, 0.55% and 0.40% at September 30, 2022, June 30, 2022 and September 30, 2021, respectively. The allowance for loan losses to total loans outstanding was 0.88%, 0.88% and 0.95% at September 30, 2022, June 30, 2022 and September 30, 2021, respectively. Net loan charge-offs during the third quarter of 2022 totaled $3 thousand compared to net recoveries of $110 thousand for the second quarter of 2022, and net charge-offs of $5 thousand for the third quarter of 2021.

The following table summarizes our NPAs (dollars in thousands):
*September 30, 
**2022*   *June 30, 
**2022*   *March 31, 
**2022*   *December 31, 
**2021*   *September 30, 
**2021*
*Nonperforming Loans:*                  
One-to-four family $ 1,960     $ 1,669     $ 1,676     $ 2,207     $ 1,915  
Home equity loans   133       152       155       140       150  
Commercial and multifamily   —       2,307       2,336       2,380       —  
Construction and land   29       30       31       33       220  
Manufactured homes   99       117       135       122       98  
Floating homes   —       —       —       493       504  
Commercial business   —       —       170       176       182  
Other consumer   265       233       244       —       —  
Total nonperforming loans   2,486       4,509       4,747       5,552       3,069  
*OREO and Other Repossessed Assets:*                  
One-to-four family   84       84       84       84       84  
Commercial and multifamily   575       575       575       575       575  
Total OREO and repossessed assets   659       659       659       659       659  
Total nonperforming assets $ 3,145     $ 5,168     $ 5,406     $ 6,211     $ 3,728                    
*Nonperforming Loans:*                  
One-to-four family   62.3 %     32.3 %     31.0 %     35.5 %     51.4 %
Home equity loans   4.2       2.9       2.9       2.3       4.0  
Commercial and multifamily   —       44.7       43.2       38.3       —  
Construction and land   0.9       0.6       0.6       0.5       5.9  
Manufactured homes   3.2       2.3       2.5       2.0       2.6  
Floating homes   —       —       —       7.9       13.5  
Commercial business   —       —       3.1       2.8       4.9  
Other consumer   8.4       4.5       4.5       —       —  
Total nonperforming loans   79.0       87.3       87.8       89.3       82.3  
*OREO and Other Repossessed Assets:*                  
One-to-four family   2.7       1.6       1.6       1.4       2.3  
Commercial and multifamily   18.3       11.1       10.6       9.3       15.4  
Total OREO and repossessed assets   21.0       12.7       12.2       10.7       17.7  
Total nonperforming assets   100.0 %     100.0 %     100.0 %     100.0 %     100.0 %

The following table summarizes the allowance for loan losses (dollars in thousands, unaudited):
*For the Quarter Ended:* *September 30, 
**2022*   *June 30, 
**2022*   *March 31, 
**2022*   *December 31, 
**2021*   *September 30, 
**2021*
*Allowance for Loan Losses*                  
Balance at beginning of period $ 7,117     $ 6,407     $ 6,306     $ 6,327     $ 6,157  
Provision for loan losses during the period   375       600       125       —       175  
Net recoveries/(charge-offs) during the period   (3 )     110       (24 )     (21 )     (5 )
Balance at end of period $ 7,489     $ 7,117     $ 6,407     $ 6,306     $ 6,327  
Allowance for loan losses to total loans   0.88 %     0.88 %     0.90 %     0.92 %     0.95 %
Allowance for loan losses to total nonperforming loans   301.25 %     157.84 %     134.97 %     113.58 %     206.16 %

Deposits increased $29.4 million, or 3.7%, to $815.4 million at September 30, 2022, compared to $786.0 million at June 30, 2022 and increased $7.7 million, or 1.0%, from $807.7 million at September 30, 2021. The increase in deposits compared to the prior quarter and the same quarter one year ago was primarily a result of an increase in certificate accounts. The increase in our certificate accounts was primarily used to fund organic loan growth. Our noninterest-bearing deposits increased $5.7 million, or 3.0% to $192.3 million at September 30, 2022, compared to $186.6 million at June 30, 2022 and decreased $2.6 million, or 1.3% from $194.8 million at September 30, 2021. Noninterest-bearing deposits represented 23.6%, 23.7% and 24.1% of total deposits at September 30, 2022, June 30, 2022 and September 30, 2021, respectively.

There were $44.5 million of outstanding FHLB advances at September 30, 2022, as compared to $30.0 million at June 30, 2022 and none at September 30, 2021. The increase in FHLB advances was primarily used to support organic loan growth and to maintain liquidity ratios in line with our asset/liability objectives. Subordinated notes, net totaled $11.7 million at each of September 30, 2022, June 30, 2022 and September 30, 2021.

Stockholders’ equity totaled $95.0 million at September 30, 2022, an increase of $1.9 million, or 2.0%, from $93.1 million at June 30, 2022, and an increase of $3.1 million, or 3.3%, from $91.9 million at September 30, 2021. The increase in stockholders’ equity from June 30, 2022 was primarily the result of $2.5 million of net income earned during the current quarter and $110 thousand in proceeds from exercises of common stock, partially offset by the payment of $440 thousand in dividends to Company stockholders and a $316 thousand increase in accumulated other comprehensive loss, net of tax, resulting from the effects of higher interest rates on the fair value of our available-for-sale securities.

*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 filings by Sound Financial Bancorp, Inc. (the "Company") with the Securities and Exchange Commission (the "SEC"), in the Company's 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 illustrated below or because of other important factors that we cannot foresee that could cause our actual results to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

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, 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 increasing oil prices and supply chain disruptions, and any governmental or societal responses to the COVID-19 pandemic, including the possibility of new COVID-19 variants; 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 its wholly owned bank subsidiary 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 Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission – which are available at www.soundcb.com and on the SEC's website at www.sec.gov.

Any of the forward-looking statements that the Company makes in this press release and in the other public statements are based upon management's beliefs and assumptions at the time they are made and may turn out to be incorrect because of the inaccurate assumptions the Company might make, because of the factors illustrated above or because of other factors that cannot be foreseen by the Company. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause the Company’s actual results for 2022 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company and could negatively affect its operating and stock performance.

*CONSOLIDATED INCOME STATEMENTS*
(Dollars in thousands, unaudited)
*For the Quarter Ended* *September 30, 
**2022*   *June 30, 
**2022*   *March 31, 
**2022*   *December 31, 
**2021*   *September 30, 
**2021*
Interest income $ 10,776   $ 8,986     $ 8,213   $ 8,359     $ 9,102  
Interest expense   1,179     594       595     643       785  
Net interest income   9,597     8,392       7,618     7,716       8,317  
Provision for loan losses   375     600       125     —       175  
Net interest income after provision for loan losses   9,222     7,792       7,493     7,716       8,142  
Noninterest income:                  
Service charges and fee income   604     596       549     632       556  
(Earnings) loss on cash surrender value of bank-owned life insurance   59     (35 )     21     135       104  
Mortgage servicing income   306     313       320     323       328  
Fair value adjustment on mortgage servicing rights   9     57       268     (114 )     (125 )
Net gain on sale of loans   48     84       365     507       568  
Total noninterest income   1,026     1,015       1,523     1,483       1,431  
Noninterest expense:                  
Salaries and benefits   4,044     3,969       4,167     3,786       3,512  
Operations   1,581     1,428       1,314     1,732       1,466  
Regulatory assessments   116     99       101     96       91  
Occupancy   447     439       432     451       441  
Data processing   848     849       821     863       808  
Total noninterest expense   7,036     6,784       6,835     6,928       6,318  
Income before provision for income taxes   3,212     2,023       2,181     2,271       3,255  
Provision for income taxes   666     409       458     407       663  
*Net income* $ 2,546   $ 1,614     $ 1,723   $ 1,864     $ 2,592  

*CONSOLIDATED INCOME STATEMENTS*
(Dollars in thousands, unaudited)
*For the **Nine Months Ended 
**September 30* *2022*   *2021*

Interest income $ 27,975   $ 25,517  
Interest expense   2,368     3,311  
Net interest income   25,607     22,206  
Provision for loan losses   1,101     425  
Net interest income after provision for loan losses   24,506     21,781  
Noninterest income:      
Service charges and fee income   1,749     1,615  
Earnings on cash surrender value of bank-owned life insurance   45     281  
Mortgage servicing income   939     961  
Fair value adjustment on mortgage servicing rights   334     (694 )
Net gain on sale of loans   497     3,683  
Total noninterest income   3,564     5,846  
Noninterest expense:      
Salaries and benefits   12,181     10,470  
Operations   4,323     4,033  
Regulatory assessments   316     283  
Occupancy   1,318     1,298  
Data processing   2,518     2,400  
Net gain on OREO and repossessed assets   —     (16 )
Total noninterest expense   20,656     18,468  
Income before provision for income taxes   7,414     9,159  
Provision for income taxes   1,533     1,865  
*Net income* $ 5,881   $ 7,294  

*CONSOLIDATED BALANCE SHEET*
(Dollars in thousands, unaudited)
*September 30, 
**2022*   *June 30, 
**2022*   *March 31, 
**2022*   *December 31, 
**2021*   *September 30, 
**2021*
*ASSETS*                  
Cash and cash equivalents $ 76,064     $ 80,051     $ 197,091     $ 183,590     $ 206,702  
Available-for-sale securities, at fair value   10,396       9,382       10,223       8,419       7,060  
Held-to-maturity securities, at amortized cost   2,207       2,215       2,223       —       —  
Loans held-for-sale   1,908       100       1,297       3,094       3,884  
Loans held-for-portfolio   851,447       806,078       709,485       686,398       667,551  
Allowance for loan losses   (7,489 )     (7,117 )     (6,407 )     (6,306 )     (6,327 )
Total loans held-for-portfolio, net   843,958       798,961       703,078       680,092       661,224  
Accrued interest receivable   2,809       2,350       2,117       2,217       2,231  
Bank-owned life insurance, net   21,140       21,081       21,116       21,095       20,926  
Other real estate owned ("OREO") and other repossessed assets, net   659       659       659       659       659  
Mortgage servicing rights, at fair value   4,787       4,754       4,668       4,273       4,211  
Federal Home Loan Bank ("FHLB") stock, at cost   2,897       2,317       1,117       1,046       1,052  
Premises and equipment, net   5,505       5,632       5,730       5,819       5,941  
Right-of-use assets   5,319       5,548       5,777       5,811       6,033  
Other assets   4,597       3,954       3,758       3,576       8,188  
*TOTAL ASSETS* $ 982,246     $ 937,004     $ 958,854     $ 919,691     $ 928,111  
*LIABILITIES*                  
Interest-bearing deposits $ 623,122     $ 599,377     $ 627,323     $ 607,854     $ 612,805  
Noninterest-bearing deposits   192,275       186,609       208,768       190,466       194,848  
Total deposits   815,397       785,986       836,091       798,320       807,653  
Borrowings   44,500       30,000       —       —       —  
Accrued interest payable   109       194       38       200       48  
Lease liabilities   5,749       5,980       6,211       6,242       6,462  
Other liabilities   8,071       9,210       9,169       8,571       8,711  
Advance payments from borrowers for taxes and insurance   1,799       922       1,851       1,366       1,708  
Subordinated notes, net   11,665       11,655       11,644       11,634       11,623  
*TOTAL LIABILITIES*   887,290       843,947       865,004       826,333       836,205  
*STOCKHOLDERS' EQUITY:*                  
Common stock   26       26       26       26       26  
Additional paid-in capital   27,886       27,777       28,154       27,956       27,835  
Unearned shares – Employee Stock Ownership Plan ("ESOP")   —       —       —       —       (28 )
Retained earnings   68,309       66,203       66,139       65,237       63,905  
Accumulated other comprehensive (loss) income, net of tax   (1,265 )     (949 )     (469 )     139       168  
*TOTAL STOCKHOLDERS' EQUITY*   94,956       93,057       93,850       93,358       91,906  
*TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY* $ 982,246     $ 937,004     $ 958,854     $ 919,691     $ 928,111  

*KEY FINANCIAL RATIOS*
(unaudited)
*For the Quarter Ended* *September 30, 
**2022*   *June 30, 
**2022*   *March 31, 
**2022*   *December 31, 
**2021*   *September 30, 
**2021*
Annualized return on average assets 1.04 %   0.70 %   0.75 %   0.81 %   1.11 %
Annualized return on average equity 10.61     6.86     7.39     7.90     11.21  
Annualized net interest margin^(1) 4.13     3.83     3.49     3.53     3.74  
Annualized efficiency ratio^(2) 66.23 %   72.12 %   74.77 %   75.31 %   64.81 %

(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* *September 30,
2022*   *June 30,
2022*   *March 31,
2022*   *December 31,
2021*   *September 30,
2021*
Basic earnings per share $ 0.99   $ 0.62   $ 0.66   $ 0.72   $ 1.00
Diluted earnings per share $ 0.97   $ 0.61   $ 0.65   $ 0.70   $ 0.98
Weighted-average basic shares outstanding   2,562,551     2,584,179     2,602,168     2,586,570     2,586,966
Weighted-average diluted shares outstanding   2,597,690     2,615,299     2,640,359     2,631,721     2,633,459
Common shares outstanding at period-end   2,581,949     2,578,595     2,621,531     2,613,768     2,617,425
Book value per share $ 36.78   $ 36.09   $ 35.80   $ 35.72   $ 35.11

*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* *September 30, 2022*   *June 30, 2022*   *September 30, 2021* *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 $ 833,195     $ 10,327   4.92 %   $ 741,626     $ 8,697   4.70 %   $ 652,251     $ 8,967   5.45 %
Investments and interest-bearing cash   88,812       449   2.01 %     136,723       289   0.85 %     230,905       135   0.23 %
Total interest-earning assets $ 922,007     $ 10,776   4.64 %   $ 878,349     $ 8,986   4.10 %   $ 883,156     $ 9,102   4.09 %
*Interest-Bearing Liabilities:*                                  
Savings and money market accounts $ 188,276     $ 63   0.13 %   $ 195,339     $ 29   0.06 %   $ 179,164     $ 42   0.09 %
Demand and NOW accounts   290,106       164   0.22 %     311,941       125   0.16 %     311,273       141   0.18 %
Certificate accounts   130,541       503   1.53 %     95,974       260   1.09 %     135,757       434   1.27 %
Subordinated notes   11,658       168   5.72 %     11,648       168   5.79 %     11,616       168   5.74 %
Borrowings   46,462       281   2.40 %     2,418       12   1.99 %     2       —   — %
*Total interest-bearing liabilities* $ 667,043       1,179   0.70 %   $ 617,320       594   0.39 %   $ 637,812       785   0.49 %
Net interest income/spread     $ 9,597   3.94 %       $ 8,392   3.72 %       $ 8,317   3.60 %
Net interest margin         4.13 %           3.83 %           3.74 %                                  
Ratio of interest-earning assets to interest-bearing liabilities   138 %             142 %             138 %        
Noninterest-bearing deposits $ 189,379             $ 192,843             $ 182,503          
Total deposits   798,302     $ 730   0.36 %     796,097     $ 414   0.21 %     808,697     $ 617   0.30 %
Total funding^(1)   856,422       1,179   0.55 %     810,163       594   0.29 %     820,315       785   0.38 %

(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. *Nine Months Ended* *September 30, 2022*   *September 30, 2021* *Average
Outstanding
Balance*   *Interest
Earned/Paid*   *Yield/Rate*   *Average
Outstanding
Balance*   *Interest
Earned/Paid*   *Yield/Rate*
*Interest-Earning Assets:*                      
Loans receivable $ 757,086     $ 27,099   4.79 %   $ 636,352     $ 25,152   5.28 %
Investments and interest-bearing cash   136,899       876   0.86 %     236,495       365   0.21 %
Total interest-earning assets $ 893,985     $ 27,975   4.18 %   $ 872,847     $ 25,517   3.91 %
*Interest-Bearing Liabilities:*                      
Savings and money market accounts $ 193,219     $ 122   0.08 %   $ 167,253     $ 144   0.12 %
Demand and NOW accounts   305,651       412   0.18 %     281,933       485   0.23 %
Certificate accounts   109,713       1,037   1.26 %     174,712       2,178   1.67 %
Subordinated notes   11,648       504   5.79 %     11,606       504   5.81 %
Borrowings   16,463       293   2.38 %     1       —   — %
*Total interest-bearing liabilities* $ 636,694       2,368   0.50 %   $ 635,505       3,311   0.70 %
Net interest income/spread     $ 25,607   3.69 %       $ 22,206   3.21 %
Net interest margin         3.83 %           3.40 %                      
Ratio of interest-earning assets to interest-bearing liabilities   140 %             137 %        
Noninterest-bearing deposits $ 192,240             $ 174,486          
Total deposits   800,823     $ 1,571   0.26 %     798,384     $ 2,807   0.47 %
Total funding^(1)   828,934       2,368   0.38 %     809,991       3,311   0.55 %

(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)
*September 30, 
**2022*   *June 30, 
**2022*   *March 31, 
**2022*   *December 31, 
**2021*   *September 30, 
**2021*
Real estate loans:                  
One-to-four family $ 270,009     $ 250,295     $ 221,832     $ 207,660     $ 194,346  
Home equity   17,642       16,374       13,798       13,250       14,012  
Commercial and multifamily   315,677       307,462       279,892       278,175       246,794  
Construction and land   112,980       101,394       70,402       63,105       81,576  
Total real estate loans   716,308       675,525       585,924       562,190       536,728  
Consumer Loans:                  
Manufactured homes   25,375       23,264       22,179       21,636       21,459  
Floating homes   69,968       66,573       59,784       59,268       58,358  
Other consumer   17,565       18,076       18,370       16,748       15,732  
Total consumer loans   112,908       107,913       100,333       97,652       95,549  
Commercial business loans   23,986       24,302       24,452       28,026       36,620  
Total loans   853,202       807,740       710,709       687,868       668,897  
Less:                  
Premiums/(Discounts)   984       1,010       788       897       —  
Deferred fees, net   (2,739 )     (2,672 )     (2,012 )     (2,367 )     (1,346 )
Allowance for loan losses   (7,489 )     (7,117 )     (6,407 )     (6,306 )     (6,327 )
*Total loans held for portfolio, net* $ 843,958     $ 798,961     $ 703,078     $ 680,092     $ 661,224  

*DEPOSITS*
(Dollars in thousands, unaudited)
*September 30,*
*2022*   *June 30,*
*2022*   *March 31,*
*2022*   *December 31,*
*2021*   *September 30,*
*2021*
Noninterest-bearing $ 192,275   $ 186,609   $ 208,768   $ 190,466   $ 194,848
Interest-bearing   284,267     312,439     333,449     307,061     311,303
Savings   99,602     103,311     106,217     103,401     99,747
Money market   84,692     87,672     89,164     91,670     82,314
Certificates   154,561     95,955     98,493     105,722     119,441
*Total deposits* $ 815,397   $ 785,986   $ 836,091   $ 798,320   $ 807,653

*CREDIT QUALITY DATA*
(Dollars in thousands, unaudited)
*At or For the Quarter Ended* *September 30,
**2022*   *June 30,
**2022*   *March 31,
**2022*   *December 31,
**2021*   *September 30,
**2021*
Nonaccrual loans $ 2,378     $ 4,381     $ 4,474     $ 5,130     $ 2,658  
Nonperforming TDRs   108       128       273       422       411  
Total nonperforming loans   2,486       4,509       4,747       5,552       3,069  
OREO and other repossessed assets   659       659       659       659       659  
*Total nonperforming assets* $ 3,145     $ 5,168     $ 5,406     $ 6,211     $ 3,728  
Performing TDRs   1,912       1,866       2,072       2,174       2,198  
Net (charge-offs) recoveries during the quarter   (3 )     110       (24 )     (21 )     (5 )
Provision for loan losses during the quarter   375       600       125       —       175  
Allowance for loan losses   7,489       7,117       6,407       6,306       6,327  
Allowance for loan losses to total loans   0.88 %     0.88 %     0.90 %     0.92 %     0.95 %
Allowance for loan losses to total nonperforming loans   301.24 %     157.84 %     134.96 %     113.58 %     206.19 %
Nonperforming loans to total loans   0.29 %     0.56 %     0.67 %     0.81 %     0.46 %
Nonperforming assets to total assets   0.32 %     0.55 %     0.56 %     0.68 %     0.40 %

*OTHER STATISTICS*
(Dollars in thousands, unaudited)
*At or For the Quarter Ended* *September 30, 
**2022*   *June 30, 
**2022*   *March 31, 
**2022*   *December 31, 
**2021*   *September 30, 
**2021*
Sound Community Bank:                  
Total loans to total deposits   104.64 %     102.77 %     85.00 %     86.16 %     82.82 %
Noninterest-bearing deposits to total deposits   23.58 %     23.74 %     24.97 %     23.86 %     24.13 %
Sound Financial Bancorp, Inc.:                  
Average total assets for the quarter $ 969,254     $ 920,984     $ 931,094     $ 916,261     $ 928,097  
Average total equity for the quarter $ 95,244     $ 94,397     $ 94,497     $ 93,569     $ 91,766  

Category: Earnings

*Contact*

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