SB Financial Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company is an Ohio-based financial holding company operating primarily through State Bank. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
- Third quarter: Net income was $3.8 million, up 20.7% from $3.1 million a year earlier. Diluted EPS was $0.48, versus $0.39.
- Revenue, defined as net interest income plus noninterest income, was $14.4 million, up 13.3%. Net interest income was $9.1 million, up $0.6 million; noninterest income was $5.4 million, up $1.2 million. Net interest margin (FTE) was 3.93%, compared with 3.96%.
- Noninterest expense was $9.5 million, up $0.7 million. Income before tax was $4.6 million; the effective tax rate was 18.6%, versus 20.9%.
- First nine months: Net income was $8.6 million, down 0.7% from $8.7 million; diluted EPS was $1.08, down from $1.14. Revenue was $38.3 million, up 2.5%; net interest income was $26.2 million, up 6.4%, while noninterest income was $12.1 million, down 5.0%. Nine-month net interest margin (FTE) was 3.87%, versus 3.96%.
- Nine-month noninterest expense was $27.2 million, up $1.2 million. The filing attributes much of the increase to title agency expense and professional fees.
Financial position, cash flow and capital
- At September 30, total assets were $1,042.8 million, up 5.7% from year-end 2018. Loans, net of unearned income, were $823.4 million, up 6.7%; deposits were $848.0 million, up 5.7%.
- Cash and due from banks was $49.8 million. Management reported liquid assets of $140.5 million, compared with $143.8 million at year-end, and stated that liquidity was sufficient to meet needs. The company reported approximately $106.6 million of additional FHLB borrowing capacity and $17.3 million in unpledged securities.
- Borrowed funds consisting of FHLB advances and repurchase agreements totaled $30.7 million, down from $31.2 million at year-end. Separately, trust preferred securities were $10.3 million. Shareholders’ equity was $134.2 million, or 12.9% of assets, compared with $130.4 million and 13.2% at year-end.
- For the first nine months, operating cash flow was $3.7 million, investing cash outflow was $40.5 million, and financing cash inflow was $38.3 million. Cash and cash equivalents increased $1.5 million to $49.8 million.
- State Bank was classified as well capitalized. At September 30, its total risk-based capital ratio was 12.98%, versus the 10.0% well-capitalized threshold; its Tier 1 leverage ratio was 11.10%, versus a 5.0% threshold.
Changes, outlook and risks
- Quarterly earnings improved, supported by higher earning assets, loan yields and noninterest income. Deposit funding costs rose: 1.33% in Q3 versus 1.00% a year earlier. For the first nine months, the corresponding rates were 1.27% and 0.84%.
- Mortgage originations were $157.9 million in Q3, with $125.4 million sold. For the first nine months, originations were $307.8 million and sales were $239.9 million; both were below the comparable prior-year period.
- Mortgage servicing rights had a $1.4 million valuation allowance increase during the first nine months, described by management as a temporary impairment; management reported an after-tax impact of $1.1 million. The September balance-sheet carrying value of mortgage servicing rights was $10.4 million.
- Credit indicators weakened in some respects: nonperforming assets were $4.6 million, or 0.44% of assets, versus $3.4 million and 0.35% a year earlier. Nonaccrual loans were $3.3 million; loans more than 90 days past due totaled $1.2 million. The allowance was $8.5 million, equal to 1.03% of loans, compared with 1.10% a year earlier. Q3 provision was $0.3 million versus none; nine-month net charge-offs were $0.2 million versus $0.04 million.
- The company acquired an Ohio title agency effective March 15, 2019, recording $1.4 million of goodwill, and formed a captive insurance subsidiary. It repurchased 172,648 shares during Q3 at a weighted-average price of $16.34 under a 400,000-share authorization.
- No specific earnings or financial guidance is provided. Management’s forward-looking statements are subject to risks including economic conditions, interest-rate changes, loan demand and credit quality, competition, regulation, and deposit funding costs. The filing says there were no material changes to the 2018 Form 10-K risk factors and no material change in market risk. Management did not expect pending legal matters to have a material adverse effect.
- The company expects CECL adoption to be delayed to the fiscal year beginning after December 15, 2022, because it is a smaller reporting company. It expects an allowance increase but could not reasonably estimate the adoption impact.
Important facts for investors to verify
- Whether deposit-cost increases and the resulting net interest margin pressure continue.
- Trends in nonperforming assets, delinquency, charge-offs and the adequacy of the loan-loss allowance.
- The assumptions, future valuation and earnings effects of mortgage servicing rights, including the reported temporary impairment.
- The performance and costs of the newly acquired title agency and captive insurance subsidiary.
- The pace of share repurchases, available liquidity and capital ratios, and the eventual financial impact of CECL adoption.