Update: Sound Financial Bancorp Q2 2014 Earnings

| About: Sound Financial (SFBC)


Sound Financial Bancorp reported Q2 '14 earnings.

The earnings were positive with deposits growing faster than the loan portfolio, one major growth constraint that I covered recently.

This is a high performing regional bank with one of the cleanest balance sheets around, but liquidity is still a concern as it continues to grow at a rapid pace.

For 2Q 2014, Sound Financial Bancorp (NASDAQ:SFBC) reported net income up 9% from the prior year period. Margins are still suffering from low yields, but assets keep flowing inward, and this time loan growth was supported by a faster growing deposit base - one growth constraint that I wrote about late last month.

For the quarter, the company earned $0.47 per share, or $1.2 million. Net interest income from the larger loan portfolio (up 12.8% YOY) was a main contributor to the bank's higher earnings, but this quarter also had help from a lower provision expense; $200 thousand compared to $450 thousand during the same period last year. A larger loan book typically warrants a larger allowance balance, so eventually this provisional charge will increase, but for now the bank is operating true to its name with nonperforming assets as a percentage of total assets dropping down to 0.5% (very impressive). And, more importantly, this move was not helped by charge-offs, evidenced by a moderate increase in the allowance account.

Going forward, the bank will need more of the same, but I still have concerns that the high loan to deposit ratio (106.9%) will limit what the bank is able to do with the small percentage of cash that it has on hand. Building up loans, rather than the investment portfolio, will hide interest rate risk but it does not eliminate it. And, this could lead to over reported assets that could be damaged by pre-payments and rising rates, which would decrease reported gains on the sale of loans (a non-interest item that coincidentally dropped 64.5% YOY), or even cause losses. Some things to watch out for, this bank remains on my watch list.

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