SB Financial Group, Inc. — Q1 2019 Form 10-Q
Business context and period: The Ohio-based financial holding company, principally operating through The State Bank and Trust Company, reported the three months ended March 31, 2019. The filing is unaudited; balance-sheet comparisons are with December 31, 2018, and operating results are compared with Q1 2018. Amounts below are in millions unless noted.
Financial results and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $11.34 | $11.94 in Q1 2018 |
| Net interest income | $8.34 | $7.70 in Q1 2018 |
| Net interest margin | 3.81% | 3.86% in Q1 2018 |
| Net income | $2.23 | $2.45 in Q1 2018 |
| Net income available to common shareholders | $1.98 | $2.21 in Q1 2018 |
| Diluted EPS | $0.28 | $0.35 in Q1 2018 |
| Noninterest income / expense | $3.00 / $8.63 | $4.24 / $8.63 in Q1 2018 |
| Operating cash flow | $4.05 | $3.35 in Q1 2018 |
| Cash and due from banks | $62.96 | $48.36 at Dec. 31, 2018 |
| Total assets | $1,021.27 | $986.83 at Dec. 31, 2018 |
| Loans, net of unearned income | $782.52 | $771.88 at Dec. 31, 2018 |
| Total deposits | $827.66 | $802.55 at Dec. 31, 2018 |
| Borrowings: FHLB advances, repurchase agreements and trust preferred securities | $46.57 | $41.49 at Dec. 31, 2018 |
| Shareholders’ equity | $131.51; 12.9% of assets | $130.44; 13.2% of assets |
Net interest income increased as earning assets grew $77 million and their yield rose 37 basis points, but funding costs also rose: the cost of interest-bearing liabilities was 1.20%, versus 0.71% a year earlier. Total revenue declined 5%, while net income declined about 9% and diluted EPS about 20%.
Q1 cash flows were $4.05 million provided by operations, $17.69 million used in investing and $28.23 million provided by financing; cash increased $14.60 million. Financing included $25.11 million of deposit growth and $8.00 million of FHLB advances, partly offset by share repurchases and dividends. Management reported $163.1 million of liquid assets, about $94 million of additional FHLB borrowing capacity, and $34.6 million of unpledged securities. State Bank was classified as well capitalized; its total risk-based capital ratio was 13.63% at quarter-end.
Material changes and unusual items
- Noninterest income fell $1.24 million. Mortgage servicing rights recorded a $0.71 million temporary impairment, attributed to faster prepayments and marginally higher rates; net mortgage banking revenue was $0.9 million versus $1.6 million in Q1 2018.
- Mortgage originations were $51.4 million, with $43.4 million sold, compared with $58.5 million originated and $40.6 million sold a year earlier. Gains on mortgage loan sales and servicing rights were $1.19 million versus $1.10 million.
- The loan-loss provision was zero, versus $0.30 million in Q1 2018. The allowance was $8.12 million, or 1.04% of loans; net charge-offs were $47,000 versus $10,000. Nonperforming assets were $4.29 million (0.42% of assets), up from $3.51 million (0.38%) a year earlier. Delinquent loans were $1.8 million, or 0.23% of loans, down $0.5 million year over year.
- On March 15, the company acquired an Ohio title agency’s assets and real estate for cash and 7,500 common shares; the transaction added about $1.44 million of goodwill and had minimal Q1 earnings impact. It also activated a captive insurance subsidiary, with minimal Q1 impact.
- The company repurchased 69,464 shares during the quarter, including 65,277 under its announced program, at a reported weighted-average price of $18.64. The program authorized repurchases of approximately 75,000 shares.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said current liquidity was sufficient and described available borrowing sources for additional funding needs. Management expected CECL adoption to likely increase the allowance for loan losses and require an allowance for expected credit losses on debt securities, but said the impact could not yet be reasonably estimated; implementation was expected by December 15, 2019. Interest-rate risk is a key exposure: the company’s economic value of equity model showed a 14.82% decline in a 200-basis-point rate decrease at March 31, 2019, compared with a 12.18% decline at year-end.
Other disclosed risks include credit and collateral-value uncertainty, changing economic conditions, interest-rate and funding-cost movements, competition, regulatory and accounting changes, and mortgage-servicing valuation sensitivity. Management stated that ordinary-course litigation and regulatory examinations were not expected to have a material adverse effect, and reported no material changes to the risk factors in its 2018 Form 10-K. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile the Q1 2018 net-income comparison: the income statement reports $2.453 million, while the MD&A narrative says $2.50 million.
- Track mortgage servicing rights valuation and impairment, including the effects of prepayment speeds and interest rates on mortgage banking revenue.
- Monitor credit quality, particularly nonaccrual loans, nonperforming assets, delinquencies, charge-offs and the adequacy of the allowance as CECL approaches.
- Assess deposit pricing, funding costs and reliance on FHLB advances as loans and deposits grow.
- Review the title-agency acquisition’s subsequent performance and the company’s progress and estimated financial impact from CECL adoption.