SB Financial Group, Inc. — 2017 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The interim financial statements are unaudited. SB Financial is an Ohio bank holding company with commercial banking, mortgage, wealth management, insurance, and bank technology services.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
- Second quarter: Total revenue was $11.4, up 6.5% from $10.7 a year earlier. Net interest income was $7.0, up from $6.4; noninterest income was $4.5, versus $4.3. Net income was $2.317, up about 2% from $2.265. Net income available to common shareholders was $2.073. Reported diluted EPS was $0.37, versus $0.35 in Q2 2016.
- First six months: Total revenue was $21.7, up 7.2% from $20.3. Net interest income was $13.5, versus $12.5, and noninterest income was $8.3, versus $7.7. Net income was $4.310, up 9.9% from $3.920; diluted EPS was $0.68, versus $0.61.
- Interest margins and funding: Net interest margin was 3.73% in Q2, versus 3.75% a year earlier, and 3.66% for the six-month period, versus 3.75%. Q2 yield on earning assets increased 6 basis points year over year, while interest-bearing funding cost rose to 0.64% from 0.55%. For the first six months, earning-asset yield declined 1 basis point and funding cost increased to 0.62% from 0.53%.
- Expenses and taxes: Q2 noninterest expense rose to $7.8 from $7.4; six-month expense rose to $15.2 from $14.3, mainly due to staffing in mortgage, wealth management, SBA, and retail. Effective tax rates were 32.2% for Q2 and 32.1% for the six months.
- Cash flow: Six-month operating cash flow was negative $0.4, compared with positive $4.2 in 2016. Investing cash use was $21.9, versus $48.8; financing cash provided was $26.7, versus $54.0. Cash and cash equivalents increased $4.4 to $21.4.
Financial position, credit, and liquidity
- Total assets were $847.7 at June 30, up 3.9% from year-end 2016. Loans, net of unearned income, were $651.6, up 1.1%; deposits were $707.3, up 5.1%.
- Borrowed funds consisting of FHLB advances and repurchase agreements totaled $31.7, down from $37.0 at year-end. The company also had $10.3 of trust preferred securities. Total stockholders’ equity was $89.0, or 10.5% of assets.
- Liquid assets were $134.2, versus $111.6 at year-end. Management said liquidity was sufficient; available sources also included approximately $58.9 of additional FHLB borrowing capacity and $44.9 of unpledged securities. Eligible real estate and mortgage loans were pledged under an FHLB blanket lien.
- The allowance for loan losses was $7.825, equal to 1.20% of loans, versus 1.23% at June 2016. The six-month provision was $0.2; net charge-offs were approximately $0.1, compared with net recoveries of $0.21 in the prior-year period.
- Nonaccrual loans were $2.45, and nonperforming assets were $3.91, or 0.46% of assets, versus $8.23 and 1.04% a year earlier. Total past-due loans were $2.236, or 0.34% of loans. Allowance coverage of nonperforming loans was 205.1%, versus 92.3% in 2016. No new troubled debt restructurings occurred in the quarter or six-month period, and none modified in the prior 12 months subsequently defaulted.
- State Bank was classified as well capitalized. At June 30, its total risk-based capital ratio was 11.40%, compared with the 10.0% well-capitalized threshold; its Tier 1 leverage ratio was 9.15%, compared with the 5.0% threshold.
Changes, outlook, and risks
- Growth in net interest income and loan-sale gains supported revenue. However, funding costs rose and net interest margin narrowed. Mortgage originations and sales declined year over year in the first half; Q2 mortgage originations were $97.8 versus $110.2, and mortgage gain-on-sale income was $2.1 versus $2.3.
- Mortgage servicing fees improved year over year in part because the prior-year period included a large servicing-rights valuation impairment. The Q2 2017 period included a $0.04 impairment attributed to increased prepayment speeds; there was no impairment in the first half of 2017, compared with a $1.2 negative valuation adjustment in first-half 2016.
- Management provided no specific earnings or financial guidance. It said current liquidity was adequate and the allowance level was appropriate for the portfolio’s risk profile. Results for the six-month period are not necessarily indicative of full-year results.
- Key stated risks include economic and competitive conditions, interest-rate changes, loan demand and credit losses, regulatory and supervisory changes, deposit and funding pressures, and loss of key personnel. Management considered unrealized losses on securities temporary and reported no other-than-temporary impairment. Ordinary-course litigation and regulatory examinations were not expected by management to have a material adverse effect. No material changes to the 2016 Form 10-K risk factors were reported.
- Share repurchases totaled $1.425 during the six months. At June 30, 30,157 shares remained authorized for repurchase under the publicly announced program.
Important facts for investors to verify
- Reconcile diluted Q2 2017 EPS: the income statement and management discussion report $0.37, while the detailed EPS footnote reports $0.36.
- Assess the sustainability of margin and earnings growth given higher deposit funding costs, narrower six-month net interest margin, and increased operating expenses.
- Review credit trends and concentrations, particularly commercial real estate and construction exposure, alongside the decline in nonperforming assets and the allowance methodology.
- Monitor mortgage production, servicing-rights valuations, and sensitivity to prepayment speeds and interest rates.
- Consider liquidity and funding needs alongside deposit growth, pledged collateral, time-deposit maturities, and the negative operating cash flow in the first half.