SB Financial Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. SB Financial is an Ohio financial holding company whose principal subsidiary is State Bank and Trust Company. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $12.5 | $12.7 | $23.9 | $24.6 |
| Net interest income | $8.8 | $8.4 | $17.2 | $16.1 |
| Net interest margin (FTE) | 3.88% | 4.14% | 3.84% | 3.89% |
| Noninterest income | $3.7 | $4.2 | $6.7 | $8.5 |
| Noninterest expense | $9.1 | $8.6 | $17.7 | $17.2 |
| Net income | $2.6 | $3.1 | $4.9 | $5.6 |
| Diluted EPS | $0.33 | $0.40 | $0.61 | $0.75 |
- For Q2, net income fell 15% and diluted EPS fell 18%; six-month net income decreased 12.7% and diluted EPS decreased 18.7%.
- Net interest income improved, supported by higher earning assets and yields, but higher funding costs compressed margin. Interest-bearing liability costs were 1.28% in Q2 versus 0.80% a year earlier, and 1.24% for the half-year versus 0.75%.
- Mortgage-related revenue weakened: Q2 mortgage banking revenue was $1.2 million versus $2.3 million a year earlier. Mortgage servicing rights (MSR) impairment reduced noninterest income by $0.7 million in Q2 and $1.4 million in the first half.
- Provision for loan losses was $0.2 million in Q2 versus $0.3 million; for the half-year it was $0.2 million versus $0.6 million. Q2 net charge-offs were $0.015 million.
Financial position, cash flow and capital
- At June 30, total assets were $1,029.1 million, up 4.3% from year-end 2018. Loans, net of unearned income, were $814.5 million, up 5.5%; deposits were $839.4 million, up 4.6%.
- Cash and due from banks was $42.8 million, down from $48.4 million at year-end. Management reported liquid assets of $137.6 million, compared with $143.8 million at year-end, and considered liquidity sufficient.
- FHLB advances were $16.0 million, repurchase agreements $14.0 million and trust preferred securities $10.3 million. FHLB advances plus repurchase agreements totaled approximately $30.0 million. The filing cites about $104.0 million of additional FHLB borrowing capacity and $29.9 million of unpledged securities.
- Six-month operating cash flow was $0.8 million, versus $11.7 million in 2018; investing cash outflow was $39.0 million versus $74.7 million, and financing cash inflow was $32.6 million versus $60.9 million. Cash and cash equivalents decreased $5.6 million to $42.8 million.
- Shareholders’ equity was $133.9 million, or 13.0% of assets, versus $130.4 million, or 13.2%, at year-end. State Bank remained “well capitalized”; its total risk-based capital ratio was 13.43%.
Material changes, outlook and risks
- Loan growth was accompanied by higher delinquency: total past-due loans were $5.6 million, or 0.68% of loans, up $3.9 million year over year. Nonaccrual loans were $3.1 million; nonperforming assets were $4.5 million, or 0.43% of assets, versus $3.2 million, or 0.34%, a year earlier. The allowance was $8.3 million, or 1.02% of loans.
- The company purchased an Ohio title agency effective March 15, 2019, adding approximately $1.4 million of goodwill; Q2 included $0.3 million of title revenue. It also formed a captive insurance subsidiary in March.
- Management expects CECL adoption to likely increase the loan-loss allowance and require an allowance for expected credit losses on debt securities, but could not reasonably estimate the impact. The company was preparing for implementation by December 15, 2019.
- No specific earnings or revenue guidance was provided. Management cited banking and regional economic conditions, interest rates, loan demand, competition, regulation, deposit funding costs and credit quality among risks to future results. It reported no material change to the risk factors in its 2018 Form 10-K.
- Management said pending legal matters were not expected to have a material adverse effect. Disclosure controls were considered effective; no material changes to internal control over financial reporting were reported.
- A new share repurchase program authorized up to 400,000 common shares on June 21, 2019. The filing reports 11,395 shares repurchased in Q2 and 398,328 shares remaining under the new program at quarter-end.
Important facts for investors to verify
- How MSR valuation assumptions and prepayment speeds may affect future mortgage servicing income and impairment.
- Whether rising delinquency and nonperforming assets develop into higher charge-offs or provisioning needs, particularly given loan growth and portfolio concentrations.
- Deposit mix, certificate-of-deposit growth and funding costs, and the effect on net interest margin.
- The eventual CECL transition impact on reserves, earnings and regulatory capital.
- The cost, pace and remaining capacity of the newly authorized share repurchase program.
- The equity statement lists a Q2 common dividend of “$0.900 per share,” while the reported cash dividend of $586,000 and roughly 6.5 million shares imply a materially lower per-share amount; verify the stated figure against the original filing.