SB Financial Group, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. SB Financial is an Ohio bank holding company whose subsidiaries provide commercial banking, mortgage, insurance, and data-processing services. This unaudited report covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $11.7 | $10.0 | $32.0 | $29.4 |
| Net interest income | $6.7 | $6.1 | $19.2 | $17.4 |
| Net interest margin | 3.82% | 3.87% | 3.77% | 3.78% |
| Noninterest income | $5.0 | $4.0 | $12.8 | $12.0 |
| Noninterest expense | $7.9 | $6.6 | $22.2 | $20.1 |
| Net income | $2.5 | $2.3 | $6.5 | $5.8 |
| Diluted earnings per share | $0.40 | $0.35 | $1.01 | $0.89 |
| Provision for loan losses | $0.0 | $0.1 | $0.25 | $0.95 |
- Balance sheet: Total assets were $801.8 million, up 9.4% since year-end 2015. Loans net of unearned income were $619.4 million, up 11.1%; deposits were $662.1 million, up 12.9%. Stockholders’ equity was $86.3 million, or 10.8% of assets, compared with $81.2 million and 11.1% at year-end.
- Funding and liquidity: Cash and cash equivalents were $25.2 million. Liquid assets were $123.7 million versus $117.8 million at year-end. FHLB advances were $23.0 million and repurchase agreements $11.4 million; the company reported total borrowed funds of $34.4 million, down from $47.4 million. Management said liquidity was sufficient and reported about $51.4 million of additional FHLB borrowing capacity plus $15.9 million of unpledged securities.
- Cash flow, nine months: Operating activities provided $8.4 million, investing activities used $64.3 million, and financing activities provided $60.5 million. Cash increased $4.7 million to $25.2 million. Loan growth used $61.9 million of investing cash; deposit growth contributed $75.7 million to funding.
- Credit quality: The allowance for loan losses was $7.32 million, or 1.18% of loans, versus $6.99 million at year-end and 1.34% a year earlier. Nonaccrual loans were $2.89 million, down from $6.65 million at year-end 2015. Nonperforming assets were $4.55 million, or 0.57% of assets, versus $8.51 million and 1.18% a year earlier. Total past-due loans were $2.75 million at quarter-end.
- Capital: State Bank was classified as well capitalized. At September 30, its Tier 1 leverage ratio was 9.28%, CET1 and Tier 1 risk-based ratios were 10.36%, and total risk-based capital was 11.41%.
Material changes versus comparable periods
- Q3 net income increased 13% and diluted EPS increased 14%; nine-month net income rose 12% and diluted EPS rose 13%.
- Revenue growth reflected higher net interest income and noninterest income. Loan growth and a 2-basis-point increase in earning-asset yield supported interest income, while the net interest margin edged down and funding costs rose.
- Mortgage banking supported noninterest income: Q3 mortgage originations were $117.2 million, with $101.1 million sold; mortgage gains were $2.5 million, up 48% year over year. Nine-month originations totaled $299.4 million, up 17% year over year.
- Expenses rose 19.7% in Q3 and 10.7% for the nine-month period, with management citing staffing, compliance and mortgage-administration costs, merit increases, and new branch facilities in Dublin and Findlay, Ohio.
- Asset quality improved from year-end 2015, including a decline in nonaccrual loans and lower past-due balances. The allowance increased 4.7% since year-end, less than loan growth.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management notes that nine-month results are not necessarily indicative of full-year results.
- Mortgage servicing rights had a $1.2 million valuation impairment during the first nine months, attributed to increased prepayment speeds; Q3 included a $0.1 million valuation recapture. Nine-month mortgage servicing fees, net, were negative $0.5 million, compared with positive $0.6 million in 2015.
- Management identifies exposure to interest-rate changes, loan demand and credit quality, local and national economic conditions, competition, regulation, deposit-insurance costs, and loss of key personnel. Its economic-value-of-equity analysis showed a 7.69% decrease under a 100-basis-point rate decline at quarter-end; a 400-basis-point increase produced a 22.04% increase in the modeled value.
- The company reported ordinary-course litigation and regulatory examinations, which management did not expect to have a material adverse effect. It reported no material change in risk factors from its 2015 Form 10-K. Management considered securities impairments temporary and reported no other-than-temporary impairment.
- Management stated the Bank met applicable capital requirements, including the capital conservation buffer in its pro forma analysis. The company also describes upcoming accounting standards, including expected-credit-loss and lease rules, whose impacts require further study.
- During the nine months, the company repurchased 54,756 common shares at an average $11.41 per share. Common dividends were $0.175 per share for the nine-month period.
Most important facts for investors to verify
- Whether loan and deposit growth can be sustained without further pressure on net interest margin and funding costs.
- The drivers and future sensitivity of mortgage servicing rights valuations, prepayment assumptions, and mortgage-banking income.
- Credit trends in commercial real estate and construction lending, and the adequacy of the allowance as the portfolio expands.
- Liquidity capacity and pledged collateral availability if deposit growth slows or funding needs rise.
- The filing’s differing quarterly net charge-off disclosures: MD&A cites approximately $0.13 million versus $0.30 million in the prior-year quarter, while the asset-quality table displays $0.13 million versus $0.029 million; confirm the comparable-period figure in the underlying filing.