SB Financial Group, Inc. — Q3 2017 Form 10-Q
Business context and period. SB Financial is an Ohio bank holding company whose subsidiaries provide commercial banking, mortgage, wealth management, insurance and bank technology services. This unaudited report covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $12.1 | $11.7 | $33.9 | $32.0 |
| Net interest income | $7.3 | $6.7 | $20.7 | $19.2 |
| Net interest margin | 3.81% | 3.82% | 3.71% | 3.77% |
| Noninterest income | $4.9 | $5.0 | $13.1 | $12.8 |
| Noninterest expense | $8.3 | $7.9 | $23.5 | $22.2 |
| Provision for loan losses | $0 | $0 | $0.2 | $0.25 |
| Net income | $2.7 | $2.5 | $7.0 | $6.5 |
| Diluted EPS | $0.43 | $0.40 | $1.11 | $1.01 |
Financial position, liquidity and capital
- At September 30, total assets were $860.5 million, up $44.5 million (5.5%) from year-end 2016. Net loans were $667.3 million; loans before the allowance and unearned income were $675.1 million, up $30.6 million (4.8%) from year-end.
- Deposits were $716.8 million, up $43.7 million (6.5%). FHLB advances were $20.5 million, repurchase agreements $11.3 million and trust preferred securities $10.3 million. FHLB advances plus repurchase agreements totaled $31.8 million, compared with $37.0 million at year-end.
- Cash and due from banks was $28.3 million. Management reported liquid assets of $121.3 million, approximately $58.9 million of additional FHLB borrowing capacity and $38.0 million in unpledged securities. Management considered liquidity sufficient for its needs.
- For the first nine months, operating cash flow was $3.9 million, investing cash flow was negative $28.0 million, and financing cash flow was positive $35.4 million. Cash increased $11.2 million to $28.3 million.
- Equity was $90.9 million, or 10.6% of assets. State Bank was classified as well capitalized; its total risk-based capital ratio was 11.41% and Tier 1 leverage ratio was 9.45% at September 30.
- The allowance for loan losses was $7.8 million, 1.15% of loans, versus 1.18% at September 30, 2016. Nonaccrual loans were $2.4 million; nonperforming assets were $3.7 million, or 0.43% of assets.
Material changes versus comparable periods
- Q3 net income rose 6.9% and diluted EPS rose 7.5%; nine-month net income rose 8.8% and diluted EPS rose 9.9%. Higher net interest income supported growth, while expense growth partly offset it.
- Net interest margin eased year over year in both the quarter and nine-month period. Funding costs on interest-bearing liabilities rose to 0.68% in Q3 from 0.56%, and to 0.64% for nine months from 0.54%.
- Q3 mortgage originations were $89.2 million versus $117.2 million a year earlier; mortgage-sale gains declined to $2.2 million from $2.5 million. For nine months, originations were $243.7 million, down 18.6% year over year. Mortgage servicing rights impairment was $0.04 million in Q3; the nine-month period included a $0.04 million valuation recapture, compared with $1.2 million of impairment in the prior-year period.
- Noninterest expense increased, which management attributed primarily to staffing growth in mortgage and support areas for Q3, and mortgage, wealth management and retail divisions for the nine-month period. The Q3 effective tax rate fell to 29.1% from 32.2%, which management attributed to adoption of stock-compensation accounting guidance; the nine-month rate was 30.9% versus 31.8%.
- Loan growth was concentrated in commercial real estate and construction: that portfolio increased to $319.8 million from $284.1 million at year-end. Total deposits also grew, including time deposits, which reached $217.3 million.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management cautions that nine-month results are not necessarily indicative of full-year results.
- Risks identified include changing interest rates, economic and competitive conditions, loan demand and credit quality, regulatory or accounting changes, deposit funding costs, and loss of key customers or personnel. Management reported no material change in market risk or in the risk factors from the 2016 Form 10-K.
- The company’s economic-value-of-equity model showed a 6.86% decline under a 100-basis-point rate decrease and a 19.15% increase under a 400-basis-point increase at September 30. Management said a rate decrease was considered unlikely in the prevailing environment.
- Management considered the $0.37 million of unrealized losses on investment securities temporary and reported no other-than-temporary impairment. It also noted that the expected-credit-loss accounting standard will require further study to assess its impact.
- No new troubled debt restructurings were reported in 2017 through September 30, and none modified in the prior 12 months subsequently defaulted. Management stated that ordinary-course litigation and regulatory examinations were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Most important facts for investors to verify
- Whether loan growth, particularly commercial real estate and construction lending, remains consistent with underwriting standards and whether asset-quality measures continue to improve.
- Whether deposit growth and funding costs support net interest income and margin as rates change.
- Whether mortgage production, sale gains and servicing-right valuations recover or remain pressured.
- Whether available liquidity and capital remain adequate under adverse funding, credit or interest-rate conditions.
- The eventual effects of expected-credit-loss accounting and any developments in securities impairment, legal matters or regulatory examinations.