SB Financial Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. SB Financial is an Ohio bank holding company whose principal banking subsidiary is The State Bank and Trust Company. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $12.7 | $12.1 | $37.3 | $33.9 |
| Net interest income | $8.5 | $7.3 | $24.7 | $20.7 |
| Net income | $3.1 | $2.7 | $8.7 | $7.0 |
| Net income available to common shareholders | $2.9 | $2.5 | $7.9 | $6.3 |
| Diluted earnings per common share | $0.39 | $0.43 | $1.14 | $1.11 |
| Noninterest income | $4.2 | $4.9 | $12.7 | $13.1 |
| Noninterest expense | $8.8 | $8.3 | $26.0 | $23.5 |
| Provision for loan losses | $0.0 | $0.0 | $0.6 | $0.2 |
- Margins and funding: Net interest margin was 3.95% in Q3, up from 3.76%; for the nine months it was 3.94%, up from 3.67%. The cost of interest-bearing liabilities also rose: 1.00% versus 0.68% in Q3 and 0.84% versus 0.64% year to date.
- Cash flow: For the nine months, operating activities provided $6.9 million, investing activities used $80.0 million, and financing activities provided $92.0 million. Cash and cash equivalents increased $18.9 million to $45.5 million.
- Balance sheet and liquidity: At September 30, assets were $979.2 million, loans net of unearned income were $771.7 million, deposits were $789.4 million, and stockholders’ equity was $127.1 million. Liquid assets were $136.5 million. Management reported approximately $87.2 million of additional FHLB borrowing capacity and $21.0 million in unpledged securities.
- Borrowings: FHLB advances were $24.5 million, repurchase agreements $15.5 million, and trust preferred securities $10.3 million. FHLB advances and repurchase agreements totaled $40.0 million, up from $33.6 million at year-end 2017.
- Capital: State Bank reported a 11.26% Tier 1 leverage ratio and a 13.13% total risk-based capital ratio and was classified as well capitalized. The company’s equity increased substantially following its February 2018 common-share offering.
Material changes versus comparable periods
- Q3 net income rose 14.5%, but diluted EPS fell 9.3% to $0.39. Management attributed the per-share decline to approximately 1.7 million additional shares issued in February 2018.
- Nine-month net income increased 23.4%; diluted EPS increased 2.7%. Net interest income rose with growth in earning assets and higher asset yields, while noninterest income declined.
- Loans grew $75.1 million, or 10.8%, and deposits grew $59.8 million, or 8.2%, from December 31, 2017. Total assets rose 11.7% to $979.2 million.
- On February 9, 2018, the company sold 1,666,666 common shares at $18 per share, generating $30.0 million gross and $27.9 million net proceeds. The filing says proceeds may support general corporate purposes, including bank capital contributions or holding-company investments.
- The allowance for loan losses was $8.5 million, or 1.10% of loans, versus $7.9 million and 1.15% at year-end 2017. Nonaccrual loans were $2.4 million; total past-due loans were $1.9 million, compared with $3.0 million past due at December 2017.
Management commentary, outlook and risks
- Q3 mortgage loan originations were $95.3 million, with $80.6 million sold. Mortgage banking revenue was $2.3 million versus $2.4 million a year earlier; mortgage gain on sale was $2.1 million. Q3 servicing-rights valuation impairment was $0.06 million, attributed to increased prepayment speeds.
- Noninterest expense increased, which management attributed to staffing growth in mortgage, SBA and support areas. For the first nine months, staffing increases were also reported in wealth management.
- Lower effective tax rates supported earnings: 20.9% for Q3 versus 29.1%, and 19.3% for nine months versus 30.9%. Management attributed the reductions to the Tax Cuts and Jobs Act.
- Available-for-sale securities had $2.3 million of gross unrealized losses at September 30, 2018, up from $0.8 million at year-end. Management considered the declines temporary and reported no other-than-temporary impairment.
- Management said current liquidity was sufficient. Key stated risks include economic and market changes, interest-rate movements, loan demand and credit quality, regulatory actions, competition, funding costs, tax or accounting changes, and loss of significant customers or key personnel. The filing reports no material change to previously disclosed risk factors.
- No specific earnings or revenue guidance is provided. Management cautions that nine-month results are not necessarily indicative of full-year results. The filing reports no new troubled debt restructurings during the quarter or nine-month period; one consumer TDR had defaulted on its modified terms during the preceding 12 months.
- Management believes ordinary-course claims, lawsuits and regulatory examinations will not materially adversely affect the company. Disclosure controls were assessed as effective, and no material internal-control changes were reported for the quarter.
Important facts for investors to verify
- Whether loan and deposit growth can be sustained without materially increasing funding costs or weakening underwriting quality.
- How the February share issuance and higher share count affect future per-share earnings and returns on equity.
- Whether the increase in unrealized securities losses remains temporary, particularly if interest rates or market conditions change.
- The future effects of staffing-related expense growth, mortgage activity and prepayment speeds on operating leverage and servicing-rights valuations.
- The amount and timing of any allowance increase upon adoption of the expected-credit-loss standard; management said the impact was not yet reasonably estimable and anticipated readiness by December 15, 2019.