SB Financial Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. SB Financial is an Ohio bank holding company whose principal subsidiary, State Bank, provides commercial banking services. The company also operates mortgage, insurance, loan-servicing and technology businesses.
Financial performance and condition
- Revenue and earnings: Total revenue was $11.9 million, up 16% from $10.3 million. Net income was $2.45 million versus $1.99 million, up 23%; diluted EPS was $0.35 versus $0.31. Net income available to common shareholders was $2.21 million.
- Interest income and margins: Net interest income was $7.7 million, up from $6.5 million. Net interest margin rose to 3.86% from 3.59%; the yield on earning assets increased 37 basis points, while the cost of interest-bearing liabilities rose to 0.71% from 0.60%.
- Noninterest income and expenses: Noninterest income rose to $4.24 million from $3.80 million. Noninterest expense increased to $8.63 million from $7.38 million. The company reported $0.66 million in gains on non-mortgage loan sales and $1.10 million in mortgage-loan and servicing-rights sale gains.
- Taxes: Income tax expense was $0.56 million, an 18.7% effective rate, compared with $0.93 million and 31.9%. Management attributed the lower rate primarily to the Tax Cuts and Jobs Act.
- Loans and credit quality: Loans, net of unearned income, were $707.2 million, up $10.6 million from year-end. The allowance for loan losses was $8.22 million, or 1.16% of loans, versus $7.93 million at year-end. The quarter included a $0.30 million provision and $0.01 million of net charge-offs. Nonaccrual loans were $2.32 million; total past-due loans were $2.28 million. Nonperforming assets were $3.51 million, or 0.38% of assets, compared with $4.72 million, or 0.56%, a year earlier.
- Cash flow and liquidity: Operating activities provided $3.35 million, investing activities used $27.42 million, and financing activities provided $45.78 million. Cash and due from banks ended at $48.33 million, up $21.71 million during the quarter. Management reported liquid assets of $149.7 million and approximately $75.6 million of additional FHLB borrowing capacity, plus $27.0 million in unpledged securities.
- Deposits and borrowings: Deposits were $748.8 million, up $19.2 million from year-end. FHLB advances and repurchase agreements totaled $33.0 million, down from $33.6 million. Trust preferred securities were $10.31 million. Total liabilities were $802.7 million.
- Capital: Total stockholders’ equity was $122.9 million, or 13.3% of assets, compared with $94.0 million, or 10.7%, at year-end. State Bank was classified as well capitalized; its total risk-based capital ratio was 13.24% and Tier 1 leverage ratio was 11.25%.
Material changes and notable items
- On February 9, the company issued 1,666,666 common shares at $18 per share, raising $30.0 million gross and $27.9 million net. Management said proceeds may support bank capital or other general corporate purposes. The added shares affected quarterly EPS.
- Effective January 1, the company sold customer contracts and certain assets of RDSI’s remaining DCM processing business. The sale had a minimal positive first-quarter financial impact; a 180-day transition agreement supports client conversion. Management included $0.4 million of DCM-related revenue and $0.2 million of sale-related expenses in its discussion.
- Higher expenses also reflected increased SBA-sale commissions and costs associated with tax initiatives. Mortgage originations were $58.5 million, of which $43.4 million were sold; mortgage banking revenue was approximately $1.6 million, similar to the prior-year quarter.
- Available-for-sale securities had $1.60 million of unrealized losses at quarter-end, compared with $0.78 million at year-end. Management considered the declines temporary and reported no other-than-temporary impairment. The loss reduced other comprehensive income by $0.80 million after tax.
- Adoption of the new revenue and financial-instrument accounting standards did not materially affect the statements. The company expects the upcoming credit-loss standard (CECL) to likely increase the allowance, but said it could not yet reasonably estimate the impact; implementation was expected by December 15, 2019.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described liquidity as sufficient and State Bank as well capitalized. It identified banking and regional economic conditions, interest-rate fluctuations, loan demand and credit losses, regulatory or accounting changes, competition, funding costs, and customer or key-personnel losses as risks. Management reported no material change in market risk from the 2017 Form 10-K and no material change in internal control over financial reporting. Ordinary-course legal claims and regulatory examinations were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How the $27.9 million net equity proceeds are deployed and their effect on per-share earnings and regulatory capital.
- Loan growth, delinquency trends, allowance adequacy, and the potential CECL-driven increase in credit-loss reserves.
- Whether the increase in securities’ unrealized losses remains temporary as interest rates and portfolio values change.
- The financial contribution and transition costs associated with the DCM divestiture after the 180-day conversion period.
- The filing reports mortgage servicing rights of $10.196 million on the balance sheet and $10.255 million in Note 5; investors may wish to confirm the reported carrying value and reconciliation.