SB Financial Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with 2016. The company is an Ohio bank holding company operating State Bank and Trust Company, with commercial banking, mortgage, wealth management and data-processing activities concentrated in the Midwest.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets at year-end | $876.6 million | $816.0 million | +7.4% |
| Loans held for investment | $696.6 million | $644.4 million | +8.1% |
| Total deposits | $729.6 million | $673.1 million | +8.4% |
| Net interest income | $28.4 million | $25.9 million | +9.8% |
| Net interest margin, fully tax-equivalent | 3.78% | 3.75% | +3 basis points |
| Noninterest income | $17.2 million | $17.9 million | -3.8% |
| Noninterest expense | $31.6 million | $30.1 million | +4.9% |
| Net income | $11.1 million | $8.8 million | +26.0% |
| Net income available to common shareholders | $10.1 million | $7.8 million | +29.2% |
| Diluted earnings per common share | $1.74 | $1.38 | +26.2% |
| Operating cash flow | $9.8 million | $14.0 million | Down |
Total operating revenue was $45.6 million, up 4.3%. Return on average assets was 1.29% (1.11% in 2016) and return on average equity was 12.36% (10.39%). Common dividends declared were $0.28 per share, versus $0.24.
Cash and due from banks were $26.6 million at year-end. Liquid assets, as defined by management, were $113.3 million. Available additional funding included approximately $72.6 million of FHLB capacity, $38.0 million in undrawn federal funds lines and $24.6 million in unpledged securities. Year-end borrowings included $18.5 million of FHLB advances, $15.1 million of repurchase agreements and $10.3 million of trust preferred securities.
Cash flows were $9.8 million from operating activities, negative $49.5 million from investing activities and positive $49.3 million from financing activities. Financing inflows principally reflected $56.5 million of deposit growth.
Material changes and business developments
- Commercial real estate loans rose 16.9% to $332.2 million and represented approximately 47.7% of held-for-investment loans; residential real estate loans increased 5.9%. Commercial and agricultural loans declined.
- Asset quality improved by some measures: nonperforming assets fell 27.5% to $3.9 million, or 0.44% of assets, from $5.3 million, or 0.65%. Accruing troubled debt restructurings declined to $1.1 million. Net charge-offs increased to approximately $0.20 million from approximately $0.02 million.
- The allowance for loan losses was $7.9 million, 1.14% of loans and 206.9% of nonperforming loans. Management considered it adequate; estimates are inherently judgmental.
- Mortgage originations were $315.8 million, down from $382.8 million. Gains on mortgage loan sales declined 12.7% to $7.1 million, while net mortgage servicing fees increased to $1.3 million. Loans serviced for others reached $994.9 million.
- Fee-based products generated $17.2 million, or 37.8% of operating revenue, compared with 40.9% in 2016. RDSI data service fees fell 19.5%, and RDSI reported a $0.2 million net loss.
- Effective January 1, 2018, the company sold customer contracts and certain assets of RDSI’s DCM processing business; management expected a minimal positive 2018 financial impact.
- On February 9, 2018, the company issued 1,666,666 common shares at $18 per share, raising $30.0 million gross and $27.9 million net for general corporate purposes, potentially including bank capital contributions.
Outlook, risks and unusual items
- No quantified earnings, revenue or margin guidance is provided. Management’s stated strategy is to grow profitability, market penetration, customer relationships and fee-based revenue while maintaining asset quality. It planned additional premises and equipment purchases, funded from cash and operations, without specified amounts.
- 2017 net income benefited from a $1.7 million one-time reduction in tax expense following enactment of the Tax Cuts and Jobs Act, including remeasurement of deferred tax balances. The company reported $2.6 million of income tax expense, compared with $4.1 million in 2016.
- Key risks include regional economic weakness, real estate collateral values and the concentration in commercial real estate, credit losses exceeding the allowance, interest-rate and deposit-cost movements, competition, regulatory and tax changes, and cybersecurity, operational and litigation risks. The company also identifies potential mortgage repurchase or indemnification obligations.
- State Bank was classified as well-capitalized at year-end. Its reported ratios included a 9.72% Tier 1 leverage ratio, 10.54% Tier 1 common equity ratio and 11.54% total risk-based capital ratio. Management said the bank met the applicable capital conservation buffer requirements.
- The company stated that ordinary-course legal matters were not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and on internal control over financial reporting; management also concluded disclosure controls were effective.
- The company expects adoption of the expected-credit-loss standard (CECL) to likely increase the allowance, but said the impact could not yet be reasonably estimated. Its expected adoption date was in 2020.
Most important facts for investors to verify
- How much of the 2017 earnings increase is sustainable after excluding the $1.7 million tax benefit.
- Credit performance and underwriting concentrations in commercial real estate, including the adequacy of the allowance as loan balances grow.
- Deposit pricing, funding mix and net interest margin sensitivity as rates and competitive conditions change.
- The profitability and transition costs associated with the DCM sale, and the use and impact of the February 2018 share offering, including dilution.
- The eventual CECL allowance impact, and the availability of liquidity and regulatory capital under adverse conditions.
- The filing contains some inconsistent or unclear presentation in selected tables; verify detailed values against the audited financial statements and notes.