Financial Analysis: Sound Financial Bancorp (NASDAQ:SFBC) & Heritage Commerce (NASDAQ:HTBK)

Sound Financial Bancorp (NASDAQ:SFBC) and Heritage Commerce (NASDAQ:HTBK) are both small-cap finance companies, but which is the superior stock? We will contrast the two businesses based on the strength of their dividends, analyst recommendations, profitability, risk, earnings, valuation and institutional ownership.

Risk & Volatility

Sound Financial Bancorp has a beta of 0.05, suggesting that its share price is 95% less volatile than the S&P 500. Comparatively, Heritage Commerce has a beta of 0.69, suggesting that its share price is 31% less volatile than the S&P 500.

Institutional and Insider Ownership

68.9% of Sound Financial Bancorp shares are owned by institutional investors. Comparatively, 75.6% of Heritage Commerce shares are owned by institutional investors. 12.4% of Sound Financial Bancorp shares are owned by insiders. Comparatively, 2.7% of Heritage Commerce shares are owned by insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a stock will outperform the market over the long term.

Analyst Recommendations

This is a breakdown of recent ratings and recommmendations for Sound Financial Bancorp and Heritage Commerce, as reported by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Sound Financial Bancorp	0	1	0	0	2.00
Heritage Commerce	0	5	3	0	2.38

Heritage Commerce has a consensus price target of $12.25, indicating a potential downside of 8.92%. Given Heritage Commerce’s stronger consensus rating and higher probable upside, analysts plainly believe Heritage Commerce is more favorable than Sound Financial Bancorp.

Profitability

This table compares Sound Financial Bancorp and Heritage Commerce’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Sound Financial Bancorp	11.64%	6.70%	0.67%
Heritage Commerce	17.77%	8.07%	1.01%

Valuation and Earnings

This table compares Sound Financial Bancorp and Heritage Commerce”s revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Sound Financial Bancorp	$61.52 million	1.81	$7.16 million	$2.77	15.63
Heritage Commerce	$197.46 million	4.20	$47.83 million	$0.78	17.24

Heritage Commerce has higher revenue and earnings than Sound Financial Bancorp. Sound Financial Bancorp is trading at a lower price-to-earnings ratio than Heritage Commerce, indicating that it is currently the more affordable of the two stocks.

Dividends

Sound Financial Bancorp pays an annual dividend of $0.84 per share and has a dividend yield of 1.9%. Heritage Commerce pays an annual dividend of $0.52 per share and has a dividend yield of 3.9%. Sound Financial Bancorp pays out 30.3% of its earnings in the form of a dividend. Heritage Commerce pays out 66.7% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. Sound Financial Bancorp has raised its dividend for 2 consecutive years.

Summary

Heritage Commerce beats Sound Financial Bancorp on 13 of the 17 factors compared between the two stocks.

About Sound Financial Bancorp

Sound Financial Bancorp, Inc. operates as the bank holding company for Sound Community Bank that provides banking and other financial services for consumers and businesses. It accepts various deposits products comprising savings, money market deposit, NOW, and demand accounts, as well as certificates of deposit. The company also offers loans secured by first and second mortgages on one-to four-family residences; home equity loans, including fixed-rate loans and variable-rate lines of credit; commercial and multifamily real estate loans; construction loans secured by single-family residences, and commercial and multifamily real estate; land loans; commercial business loans to finance commercial vehicles and equipment, as well as loans secured by accounts receivable and/or inventory; and secured and unsecured consumer loans, such as new and used manufactured homes, floating homes, automobiles, boats, and recreational vehicle loans, and loans secured by deposit accounts. The company was founded in 1953 and is headquartered in Seattle, Washington.

About Heritage Commerce

Heritage Commerce Corp operates as the bank holding company for Heritage Bank of Commerce that provides various commercial and personal banking services to residents and the business/professional community in California. Its deposit products for business banking and retail markets include interest and non-interest-bearing demand, savings, and money market accounts, as well as certificates of deposit and time deposits. The company’s loan portfolio comprises commercial loans, such as operating secured and unsecured loans advanced for working capital, equipment purchases, and other business purposes; commercial real estate loans; commercial construction loans for rental properties, commercial buildings, and homes; small business administration loans; home equity lines of credit; multifamily loans on residential properties; residential mortgage loans; and consumer loans consisting of loans for financing automobiles, various consumer goods, and other personal purposes. In addition, it offers other banking services, including cashier’s checks, bank by mail, night depositories, safe deposit boxes, direct deposit, automated payroll, electronic funds transfer, online bill pay, homeowner association, remote deposit capture, automated clearing house origination, electronic data interchange, and check imaging services, as well as other customary banking, factoring financing, and electronic banking services. Heritage Commerce Corp was founded in 1994 and is headquartered in San Jose, California.