SB Financial Group, Inc. — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; quarterly figures are unaudited. Ohio-based SB Financial Group provides commercial banking, mortgage, wealth-management and item-processing services, primarily in Northwest Ohio and Northeast Indiana. The company changed its name from Rurban Financial Corp. on April 18, 2013.
Financial performance
Amounts below are in millions except per-share data and ratios.
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $34.859 | $35.577 | -2.0% |
| Net interest income | $20.813 | $20.732 | +0.4% |
| Net interest margin | 3.75% | 3.76% | -1 basis point |
| Provision for loan losses | $0.900 | $1.350 | -33.3% |
| Noninterest income | $14.046 | $14.845 | -5.4% |
| Noninterest expense | $26.511 | $27.484 | -3.5% |
| Net income | $5.205 | $4.814 | +8.1% |
| Diluted earnings per share | $1.07 | $0.99 | +8.1% |
- Year-end assets were $631.754 million, down 1.0%; loans were $477.303 million, up 3.0%; deposits were $518.234 million, down 1.7%.
- Shareholders’ equity was $56.269 million, or 8.9% of assets. The filing reports consolidated total risk-based capital of 13.4% in its regulatory-capital table; State Bank’s ratio was 12.5%. State Bank’s Tier 1 leverage ratio was 8.8%.
- Operating cash flow was $13.946 million, investing cash use $8.909 million and financing cash use $11.045 million. Cash and cash equivalents ended the year at $13.137 million, compared with $19.144 million a year earlier.
- Liquid assets were $106.3 million, versus $124.0 million in 2012. Additional stated capacity included $28.5 million of FHLB borrowing capacity, $11.5 million in unused federal funds lines and $27.0 million in unpledged securities.
- Year-end borrowings included $16.0 million of FHLB advances, $20.620 million of trust preferred securities, $0.589 million of notes payable and $14.696 million of repurchase agreements.
- Net charge-offs were $0.747 million, or 0.16% of average loans. The allowance for loan losses was $6.964 million, equal to 1.46% of loans and 143.8% of nonaccrual loans.
Material changes and management commentary
- Annual net income rose 8.1%, helped by lower loan-loss provisioning, reduced expenses and improved asset quality. State Bank earned $7.1 million; data-processing subsidiary RDSI recorded a $0.2 million loss, compared with $0.4 million of income in 2012.
- Loans grew $13.9 million, while deposits declined $8.8 million, principally because of lower time deposits. Noninterest-bearing deposits increased to $81.6 million from $77.8 million.
- Nonperforming assets fell to $7.234 million, or 1.14% of assets, from $8.930 million, or 1.40%. Delinquency was reported at 0.72%, compared with 1.08% a year earlier. Management said the allowance was adequate; it also identified approximately $5.2 million of additional substandard loans with possible repayment concerns.
- Mortgage originations and sales remained significant: the company sold $228 million of originated mortgages, reported $5.651 million in gains on loan sales, and ended the year servicing $606 million for others, up from $528.1 million. Mortgage servicing fee income rose to $1.246 million from $0.124 million.
- Data-service fees fell 40.4% to $1.5 million as RDSI narrowed its operations to item and statement processing. Company staffing declined by four full-time-equivalent positions to 200.
- Fourth-quarter 2013 net income was $1.224 million, versus $1.524 million in fourth-quarter 2012; diluted EPS was $0.25 versus $0.31.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management expected approximately $2.3 million of premises, equipment and software purchases in 2014, funded from cash and operations.
- Management highlighted sensitivity to interest rates, continued low-rate margin pressure, local economic and real-estate conditions, competition, and the risk that credit losses could exceed the allowance. Commercial real estate was 43.0% of the loan portfolio; commercial and agricultural loans were 26.1%.
- New Basel III capital requirements were scheduled to phase in beginning in 2015, with a capital conservation buffer phased in from 2016 through 2019. A company pro forma analysis indicated State Bank would meet the new requirements, including the full buffer, based on September 30, 2013 data.
- Available-for-sale securities declined to $89.793 million from $98.702 million. The company recorded a $1.756 million after-tax other comprehensive loss, largely reflecting unrealized securities losses; management considered the declines temporary. The filing reports $35.8 million of securities in an unrealized-loss position at year-end, compared with $6.0 million in 2012.
- The company reinstated quarterly cash dividends in 2013 after not paying them since November 2009, declaring $0.12 per share for the year. Future dividends remain subject to board discretion, subsidiary earnings, capital needs and regulatory limits.
- Legal matters arising in the ordinary course were not expected by management to have a material effect. Commitments to extend credit and unused lines totaled $93.286 million; standby letters of credit were $1.021 million. Auditors issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective, with no auditor attestation of internal controls.
Most important facts for investors to verify
- Reconcile the reported consolidated total risk-based capital ratio: the MD&A cites 12.6%, while the regulatory-capital table reports 13.4%.
- Review the $5.2 million of additional substandard loans, commercial real-estate exposure, and the adequacy of the $6.964 million allowance as local conditions evolve.
- Assess deposit trends and concentration, including the $175.559 million of time deposits and the $76.8 million of deposits of $100,000 or more.
- Track mortgage-sale gains, servicing-rights valuation and revenue, and RDSI’s return to profitability or continued losses.
- Confirm that liquidity, capital and subsidiary dividend capacity can support planned 2014 spending and any future shareholder distributions.