SB Financial Group, Inc. — Q2 2014 Form 10-Q
Business context and reporting period
SB Financial Group is an Ohio bank holding company. Its principal subsidiary, The State Bank and Trust Company, conducts commercial banking; RDSI provides data-processing services. This unaudited quarterly report covers the three and six months ended June 30, 2014. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net income | $1.245 | $1.319 | $2.225 | $2.637 |
| Diluted EPS | $0.25 | $0.27 | $0.46 | $0.54 |
| Net interest income, FTE | $5.3 | $5.4 | $10.3 | $10.8 |
| Noninterest income | $3.3 | $3.8 | $5.9 | $7.4 |
| Noninterest expense | $6.6 | $7.1 | $12.7 | $13.8 |
Management reported total revenue of $8.6 million for Q2, down 6.8%, and $16.1 million for the first half, down 11.5%. Net interest margin was 3.60% in Q2 and 3.57% for the first half, versus 3.86% in both prior-year periods. Lower earning-asset yields outweighed growth in earning assets. The filing does not provide a clear consolidated net profit margin.
At June 30, total assets were $662.5 million, up 4.9% from year-end 2013. Loans were $506.1 million, up 6.0% since year-end; deposits were $524.1 million, up $5.8 million. Shareholders’ equity was $59.0 million, or 8.9% of assets. The allowance for loan losses was $6.6 million, 1.30% of loans, compared with 1.46% at year-end.
Borrowed funds excluding trust preferred securities were $54.2 million, up from $31.3 million at year-end, including $37.0 million of FHLB advances and $17.2 million of repurchase agreements. Trust preferred securities added $20.6 million. The company and State Bank were categorized as well capitalized; State Bank’s total risk-based capital ratio was 12.0%, above the 10.0% well-capitalized threshold.
For the six months, operating cash flow was negative $2.3 million and investing cash flow was negative $25.5 million, mainly reflecting loan growth. Financing activities provided $28.4 million, including increased FHLB advances; cash rose $0.6 million to $13.8 million. Liquid assets were $107.7 million. Additional reported funding capacity included $12.7 million of FHLB borrowing capacity and $16.5 million in unused federal funds lines.
Material changes versus comparable periods
- Q2 net income fell 5.6% year over year; first-half net income declined 15.6%. First-half diluted EPS decreased from $0.54 to $0.46.
- Noninterest income fell, principally reflecting lower mortgage activity and continued RDSI fee weakness from client losses. First-half mortgage originations were $100.3 million versus $153.9 million a year earlier.
- Lower noninterest expenses partly offset weaker revenue, reflecting reduced mortgage-related commissions and incentives and lower state tax expense.
- Nonaccrual loans declined to $4.0 million from $4.8 million at year-end. Nonperforming assets were $6.2 million, or 0.93% of assets, versus $7.2 million and 1.14% at year-end.
- First-half net charge-offs rose to $0.55 million from $0.30 million in the prior-year period, despite a lower provision. Management attributed charge-offs exceeding provision to a partial charge-off of a commercial loan with an existing allowance.
Outlook, risks and unusual items
The filing gives no specific earnings or revenue guidance. Management cites uncertainty from economic conditions, interest-rate movements, loan demand, competition, regulation, deposit insurance costs, and other banking-sector risks. Results for the six months are not necessarily indicative of full-year results. Management reported no material change in risk factors from the 2013 Form 10-K and no material change in market risk.
Management said available liquidity was sufficient for expected needs; eligible commercial real estate and mortgage loans were pledged under an FHLB blanket lien. The economic-value-of-equity model showed an 8.26% decline under a 100-basis-point rate decrease, versus 6.53% at year-end. Management also noted that Basel III capital requirements begin taking effect in 2015, with phased capital-buffer requirements thereafter.
Subsequent event: On July 3, 2014, the company announced plans to redeem $10.0 million of 10.6% fixed-rate RST I junior subordinated debentures on September 7, 2014, at 103.180% of principal plus accrued interest. It expected to use cash and a correspondent-bank term loan tied to 90-day LIBOR. The company would retain $10.3 million of variable-rate RST II trust preferred securities.
Other items: No TDR modifications were reported in the first half of 2014; four residential TDRs with a recorded balance of $67,000, modified in the prior 12 months, had subsequently defaulted by June 30. Management considered unrealized securities losses temporary and reported no other-than-temporary impairment. Ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material internal-control changes.
Important facts for investors to verify
- Whether loan and deposit growth can offset continued margin pressure and lower mortgage and RDSI revenues.
- Credit quality trends, including commercial charge-offs, past-due exposures, TDR defaults, and the adequacy of the allowance as loans grow.
- Funding and liquidity after the planned RST I redemption, including the terms and cost of the new LIBOR-linked borrowing.
- Exposure to interest-rate changes, including the assumptions behind the EVE sensitivity analysis and the future effect of Basel III capital rules.
- Whether the reported cash-flow pattern and available borrowing capacity remain sufficient as lending and funding needs change.