SB Financial Group, Inc. — 2019 Form 10-K
Business context and reporting period. SB Financial Group is an Ohio-based financial holding company operating State Bank and related financial-services subsidiaries, primarily in Ohio, Indiana and Michigan. The filing reports the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. State Bank operated 19 banking centers and seven loan-production offices.
Financial performance and condition
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total assets | $1.039 billion | $986.8 million | Up 5.2% |
| Loans held for investment | $825.5 million | $771.9 million | Up 6.9%; commercial real estate and business/agriculture led growth |
| Total deposits | $840.2 million | $802.6 million | Up 4.7% |
| Net interest income | $34.8 million | $33.3 million | Up 4.7% |
| Net interest margin, FTE | About 3.8% | About 4.0% | Down approximately 12–13 basis points; the filing reports 3.82% in one section and 3.83% in another for 2019 |
| Noninterest income | $18.0 million | $16.6 million | Up 8.4%; includes $1.12 million of title income |
| Noninterest expense | $37.4 million | $34.8 million | Up 7.4% |
| Net income | $12.0 million | $11.6 million | Up 2.9% |
| Net income available to common; diluted EPS | $11.0 million; $1.51 | $10.7 million; $1.51 | Common income rose 3.4%; diluted EPS was unchanged |
| Cash from operating activities | $18.8 million | $13.9 million | Investing used $67.6 million; financing provided $27.5 million |
Margins and costs. Average earning assets rose 8.2%, but deposit interest costs increased substantially: total interest expense rose to $9.6 million from $6.2 million. Higher compensation, professional fees and taxes contributed to expense growth. Return on average assets was 1.16% (1.23% in 2018); return on average equity was 8.99% (9.61%).
Credit quality. The allowance for loan losses was $8.8 million, or 1.06% of loans, versus $8.2 million and 1.06% in 2018. Provision expense increased to $0.8 million; net charge-offs declined to $0.21 million. Nonaccrual loans rose to $5.5 million from $2.9 million, and accruing troubled debt restructurings were $0.9 million. The detailed asset-quality table reports nonperforming assets of $6.7 million, or 0.64% of assets, versus $4.0 million, or 0.40%, in 2018.
Debt and liquidity. Year-end borrowings included $16.0 million of FHLB advances, $10.3 million of trust-preferred securities and $12.9 million of repurchase agreements. Management reported $135.3 million of liquid assets, $41.0 million of undrawn federal-funds lines, $45.6 million of unpledged securities and approximately $117.4 million of additional FHLB borrowing capacity. Management considered liquidity adequate. State Bank was classified as well-capitalized, with a 13.40% total risk-based capital ratio and an 11.36% leverage ratio.
Material changes versus 2018
- Loans, deposits and total assets grew, while net interest income and operating revenue increased. Total operating revenue was $52.8 million, up 5.9%.
- Profitability improved modestly, but diluted EPS remained $1.51 and return ratios declined.
- Credit indicators weakened on reported nonperforming assets and nonaccrual loans, despite lower net charge-offs.
- Mortgage production increased to $445.3 million from $342.1 million; mortgage gains on sale rose to $8.4 million. Mortgage servicing rights incurred a $1.1 million impairment, and reported net mortgage servicing fees were negative $0.4 million, compared with positive $1.3 million.
- The company acquired a title agency in March 2019, adding $1.12 million of title income and approximately $1.4 million of goodwill. SB Captive contributed $0.9 million of net income, according to management.
- On December 26, 2019, the company converted its Series A preferred shares into common shares, issuing approximately 1.40 million common shares. The filing reports no preferred shares outstanding at year-end.
Outlook, commentary and risks
- Management’s strategy emphasizes revenue diversification, deeper market penetration, broader customer-product relationships, operational efficiency and asset quality. It anticipated quarterly common dividends at similar levels, while cautioning that future dividends depend on board discretion, subsidiary earnings and regulatory limits.
- After year-end, SB Financial agreed to acquire Edon Bancorp for approximately $15.5 million in cash. The transaction was subject to regulatory and shareholder approvals and was expected to close in the second quarter of 2020; specified termination circumstances could trigger a $465,000 fee.
- CECL adoption was delayed for the company to the fiscal year beginning after December 15, 2022. Management expected an allowance increase but could not reasonably estimate the impact; it was preparing for implementation.
- Key risks include interest-rate and margin pressure, regional economic and real-estate exposure, loan losses and allowance-estimation uncertainty, deposit competition, regulation, cybersecurity and reliance on third-party service providers. The company identified LIBOR transition risk and said it was managing the transition through a project team.
- The company reported no material legal-proceeding exposure in management’s view. The independent auditor gave unqualified opinions on the financial statements and internal control; management also concluded internal control was effective.
Important facts for investors to verify
- Reconcile the MD&A strategic summary’s nonperforming-asset figure of $5.3 million (0.51%) with the detailed asset-quality table’s $6.7 million (0.64%); confirm the definitions and components used.
- Confirm the reported 2019 FTE net interest margin (3.82% versus 3.83%) and assess sensitivity to deposit repricing and rates.
- Review the rise in nonaccrual loans and nonperforming assets, the commercial real-estate concentration, and allowance coverage, including the effect of CECL adoption.
- Assess the mortgage-servicing-rights impairment and servicing-fee volatility, and whether mortgage production and gains are sustainable.
- Track Edon acquisition approvals, completion, integration costs and expected benefits; assess dividend capacity and capital after the transaction.