SB FINANCIAL GROUP, INC. quarterly report, Q3 FY2015

Vollständiges Dokument

SB Financial Group, Inc. — Q3 2015 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2015. SB Financial is an Ohio bank holding company; its principal business is community banking, with additional mortgage, insurance, wealth management, and data-processing activities. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance and position

  • Q3 earnings: Net income was $2.264 million, versus $1.513 million a year earlier. Income available to common shareholders was $2.020 million; diluted EPS was $0.35, compared with $0.31.
  • Revenue and margin: Q3 total revenue, defined as net interest income plus noninterest income, was approximately $10.0 million, up 9.5%. Net interest income was $6.073 million, up $0.723 million; net interest margin was 3.87%, versus 3.64%. Noninterest income was $3.952 million, up $0.143 million.
  • Costs and credit provision: Q3 noninterest expense was $6.626 million, down from $6.888 million. Provision for loan losses was $0.100 million, compared with $0.150 million; income tax expense was $1.035 million, versus $0.608 million.
  • Nine-month results: Net income was $5.751 million, versus $3.738 million; income available to common shareholders was $5.039 million and diluted EPS was $0.89, versus $0.76. Total revenue was $29.358 million, up 17.0%; net interest income was $17.367 million and noninterest income was $11.991 million. Provision for loan losses rose to $0.950 million from $0.300 million.
  • Balance sheet at September 30: Total assets were $719.2 million; loans, net of unearned income, were $540.9 million; deposits were $573.6 million; and total equity was $80.3 million, or 11.2% of assets.
  • Funding and debt: FHLB advances were $30.0 million, repurchase agreements $16.9 million, and trust preferred securities $10.3 million. Combined FHLB advances and repurchase agreements were $46.9 million, up from $42.7 million at year-end 2014.
  • Cash flow and liquidity: Nine-month operating cash flow was $5.3 million, investing cash flow was negative $40.6 million, and financing cash flow was positive $25.4 million. Cash and cash equivalents ended at $18.4 million, down $9.8 million since year-end. Management reported liquid assets of $122.4 million and additional FHLB borrowing capacity of $32.9 million, plus $14.0 million in unused federal funds lines.
  • Capital: State Bank was classified as well capitalized. September 30 ratios included 8.98% Tier 1 capital to average assets, 10.48% Tier 1 common equity and Tier 1 capital to risk-weighted assets, and 11.66% total risk-based capital. The bank elected to exclude accumulated other comprehensive income from regulatory capital calculations.

Material changes versus comparable periods

  • Q3 net income increased about 50% year over year; nine-month net income increased about 54%. Lower funding costs, including the prior-year redemption of trust preferred securities, contributed to improved net interest margin.
  • Mortgage originations and sales increased: Q3 originations were $87.0 million versus $67.5 million, with mortgage gains of $1.69 million versus $1.44 million. Nine-month originations were $255.5 million versus $167.7 million, and mortgage gains were $4.89 million versus $3.23 million. Non-mortgage loan-sale gains also increased.
  • Loans grew 4.8% from year-end 2014 and deposits grew 4.1%. Available-for-sale securities rose to $95.5 million from $85.2 million.
  • Asset quality weakened: nonperforming assets rose to $8.506 million, or 1.18% of assets, from $5.362 million, or 0.81%, a year earlier. Nonaccrual loans increased to $6.742 million from $3.202 million; management attributed nearly all of the increase to one large commercial real estate credit. Allowance coverage of nonperforming loans declined to 85.1% from 139.2%.

Outlook, risks, and notable items

  • The filing provides no numerical earnings or revenue guidance. Management said current liquidity was sufficient and the allowance was appropriate for the portfolio’s risk profile; results for the first nine months are not necessarily indicative of full-year results.
  • Key stated risks include loan demand and credit quality, economic conditions, interest-rate and liquidity changes, competition, regulation, and dependence on key personnel. Commercial real estate and construction lending carry risks tied to borrower cash flows, property values, economic conditions, and availability of financing.
  • New CFPB mortgage requirements, including TRID disclosures effective October 3, 2015, required operational and technology changes and could increase compliance costs or adversely affect mortgage lending.
  • The allowance for loan losses was $7.076 million, or 1.31% of loans. Nine-month net charge-offs were $0.645 million, versus $0.551 million in 2014. Management’s allowance estimates are judgmental and future provisions could increase if actual losses differ from estimates.
  • Management found no other-than-temporary impairment in securities with unrealized losses; those losses totaled $0.135 million at quarter-end. Mortgage servicing rights are valued using Level 3 assumptions and are tested for impairment quarterly.
  • The company issued $13.983 million of net proceeds from Series A preferred shares in December 2014. Preferred dividends were $0.244 million for Q3 and $0.712 million for nine months; conversion could add approximately 1.45 million common shares. The filing reports 6.390 million diluted average shares for Q3 versus 4.900 million a year earlier.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Ordinary-course legal proceedings were not expected to have a material adverse effect.

Important facts for investors to verify

  • Progress and recoverability of the large commercial real estate credit driving higher nonaccrual loans and nonperforming assets, and any resulting allowance needs.
  • Whether mortgage volume, gains on loan sales, and higher noninterest income are sustainable, especially as TRID compliance takes effect.
  • The drivers and durability of lower funding costs and improved net interest margin, including sensitivity to changing interest rates.
  • Liquidity and funding capacity as loans grow, cash declines, and more than half of time deposits mature beyond one year; confirm pledged collateral and available borrowing lines.
  • Potential dilution and preferred dividend burden, and the basis for the sharp difference between Q3 basic EPS ($0.41) and diluted EPS ($0.35).
  • Credit quality, allowance coverage, and capital headroom under phased-in regulatory requirements; the filing does not provide a consolidated company regulatory capital ratio.