SB Financial Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. SB Financial is an Ohio bank holding company; its operations include State Bank, mortgage banking, data services, and insurance. Unless noted, amounts below are in U.S. dollars.
Financial performance and condition
- Q2 revenue and earnings: Total revenue was $10.2 million, up 19.5% year over year. Net interest income was $5.76 million; noninterest income was $4.44 million. Net income was $1.99 million, versus $1.25 million; net income available to common shareholders was $1.75 million, or diluted EPS of $0.31, versus $1.25 million and $0.25.
- First-half results: Revenue was $19.3 million, up 21.4%. Net income was $3.49 million versus $2.23 million; common-shareholder income was $3.02 million, or diluted EPS of $0.54, versus $2.23 million and $0.46.
- Interest margin and costs: Net interest margin was 3.76% in Q2 versus 3.60%; for the first half it was 3.74% versus 3.51%. Management attributed lower funding costs—0.49% versus 0.72% in Q2—to the 2014 redemption of trust preferred securities.
- Noninterest items and expenses: Q2 noninterest income benefited from mortgage banking and non-mortgage loan-sale gains. Mortgage originations were $93.6 million in Q2 and $168.6 million for the half; mortgage gains were $1.8 million and $3.2 million, respectively. Noninterest expense rose 2.9% in Q2 to $6.82 million and 6.0% for the half to $13.46 million, primarily due to commissions tied to mortgage and SBA originations. Provision for loan losses was $0.50 million in Q2 and $0.85 million for the half, compared with $0.15 million in each 2014 period.
- Balance sheet at June 30: Assets were $707.2 million, up 3.4% from year-end 2014; loans net of unearned income were $522.4 million, up 1.2%; deposits were $562.9 million, up $12.0 million. Equity was $78.1 million, or 11.0% of assets, compared with 11.1% at year-end.
- Debt and liquidity: FHLB advances were $34.0 million, repurchase agreements $15.2 million, and trust preferred securities $10.3 million. Cash and due from banks was $21.7 million. Management reported $130.6 million of liquid assets, approximately $27.0 million of additional FHLB capacity, $28.9 million of unpledged securities, and $14.0 million of unused federal funds lines.
- Cash flow, first half: Operating activities provided $0.3 million, compared with $2.3 million used in 2014; investing activities used $24.3 million; financing activities provided $17.5 million. Cash and cash equivalents declined $6.5 million to $21.7 million.
- Capital and credit quality: State Bank was classified as well capitalized. Its June 30 ratios included Tier 1 capital to average assets of 8.65%, common equity Tier 1 to risk-weighted assets of 10.72%, and total risk-based capital of 11.96%. The allowance was $7.0 million, or 1.34% of loans. Nonperforming assets were $5.4 million (0.76% of assets), down from $6.2 million a year earlier; past-due loans were $6.6 million, which management said was elevated by two commercial real estate credits being restructured.
Material changes versus comparable periods
- Earnings and revenue increased in both the quarter and first half, supported by higher net interest income and materially stronger mortgage-related and other loan-sale income.
- First-half loan-loss provision increased to $0.85 million from $0.15 million, while net charge-offs were $0.62 million versus $0.55 million. Nonaccrual loans declined to $3.6 million from $4.0 million a year earlier.
- Deposits and loans grew from year-end, while borrowings rose to $49.2 million from $42.7 million. Securities available for sale increased to $98.8 million from $85.2 million.
- Preferred dividends of $0.469 million were recorded in the first half of 2015; none were reported for the 2014 comparative period. The 2014 public offering of convertible preferred shares also affects diluted share count and common-shareholder earnings.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said current liquidity was sufficient and the allowance level was appropriate for the portfolio’s risk profile. It cautioned that interim results are not necessarily indicative of full-year results.
- Management identified sensitivity to interest rates, local economic and loan demand conditions, credit quality, competition, regulatory changes, and compliance costs as risks. It reported no material change in market risk or risk factors from the 2014 Form 10-K.
- Unrealized losses on securities were $0.398 million at June 30, compared with $0.289 million at year-end. Management considered the declines temporary and reported no other-than-temporary impairment. Mortgage servicing rights and collateral-dependent impaired loans include Level 3 fair-value estimates.
- The filing reports no TDR modifications in Q2; one residential mortgage modification totaling $24,000 occurred in the first half. No TDR modified in the preceding twelve months had subsequently defaulted as of June 30. Ordinary-course legal matters were not expected by management to have a material adverse effect.
- The company adopted Basel III capital requirements in 2015 and elected to exclude accumulated other comprehensive income from State Bank’s regulatory capital calculations. The filing describes a phased-in capital conservation buffer beginning in 2016.
Important facts for investors to verify
- Whether the two commercial real estate credits in restructuring are resolved and whether past-due loans, nonaccruals, charge-offs, and the allowance trend change.
- How sustainable mortgage originations, loan-sale gains, and related commission expenses are; these were significant contributors to reported revenue growth.
- Deposit growth, borrowing levels, available borrowing capacity, and the impact of pledged collateral on liquidity.
- The effect of preferred-share conversion and dividends on diluted EPS and common-shareholder returns.
- Exposure to interest-rate changes, securities valuation, and the assumptions underlying Level 3 mortgage servicing rights and impaired-loan measurements.