SB Financial Group, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016, with comparisons primarily to 2015. SB Financial is an Ohio bank holding company whose subsidiaries provide commercial and retail banking, mortgage banking, wealth management, insurance and item-processing services, principally in Northwest Ohio and nearby markets in Indiana and Michigan.
Financial performance and condition
Unless otherwise noted, amounts are in millions of dollars.
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total operating revenue | $43.7 | $39.1 | Up 12.0% |
| Net interest income | $25.9 | $23.3 | Up 10.8% |
| Net interest margin | 3.75% | 3.78% | Down 3 basis points |
| Noninterest income | $17.9 | $15.7 | Up 13.9% |
| Noninterest expense | $30.1 | $26.9 | Up 11.8% |
| Net income | $8.8 | $7.6 | Up 15.3% |
| Net income available to common shareholders | $7.8 | $6.7 | Up 17.2% |
| Diluted earnings per share | $1.38 | $1.19 | Up 16.1% |
- Balance sheet growth: Year-end assets were $816.0 million, up 11.3%; loans held for investment were $644.4 million, up 15.6%; and deposits were $673.1 million, up 14.8%. Total shareholders’ equity was $86.5 million, up from $81.2 million.
- Revenue and costs: Mortgage-loan and servicing-rights sale gains rose 30.5% to $8.2 million. Mortgage originations were $382.8 million versus $322.7 million in 2015, and loans serviced for others reached $899.7 million. Expense growth reflected higher mortgage-related staffing and incentive costs, benefits and use of newer locations. RDSI reported a $77,000 loss, compared with a $3,000 loss in 2015.
- Credit quality: Provision for loan losses fell to $0.75 million from $1.10 million. Net charge-offs were $15,000, compared with $881,000 in 2015. Nonperforming assets, including accruing troubled debt restructurings (TDRs), were $5.3 million, or 0.65% of assets, down 36.9%. The allowance for loan losses was $7.7 million, reported as 179% of nonperforming loans. Management also identified approximately $1.2 million of other substandard loans as potential problem credits.
- Cash flow and liquidity: The cash flow statement reports $14.0 million of operating cash flow, $90.7 million used in investing and $73.3 million provided by financing; cash and cash equivalents ended at $17.0 million, down $3.4 million. Liquid assets were $111.6 million. The company cited approximately $48.0 million of additional FHLB borrowing capacity, $23.0 million of available federal funds lines and $31.1 million of unpledged securities. Management stated current liquidity was sufficient for anticipated needs.
- Borrowings: Year-end obligations included $26.5 million of FHLB advances, $10.3 million of trust preferred securities and $10.5 million of repurchase agreements. FHLB advances declined from $35.0 million in 2015; trust preferred securities were unchanged.
- Capital and shareholder returns: State Bank was well-capitalized, with a 9.31% Tier 1 leverage ratio, 10.28% CET1 ratio and 11.35% total risk-based capital ratio. Common dividends declared were $0.24 per share, versus $0.20 in 2015. The company repurchased 87,365 common shares at an average $12.24 per share.
Material changes versus 2015
- Growth in loans and deposits supported higher net interest income and total revenue, while net interest margin edged lower.
- Mortgage production and sale gains increased substantially; mortgage servicing revenue declined 21.0%, partly due to higher servicing-rights amortization.
- Noninterest expense grew nearly as quickly as revenue, increasing 11.8%; the company ended the year with 227 full-time equivalent employees, 13 more than a year earlier.
- Credit indicators improved: nonaccrual loans declined to $2.7 million from $6.6 million, and net charge-offs fell sharply.
- Cash used for loan growth and securities purchases increased investing outflows, while deposit growth contributed to higher financing cash flow.
Outlook, commentary and risks
- Management’s stated strategy is to diversify fee revenue, expand market penetration and customer relationships, improve operating execution and sustain asset quality. Fee-based products generated 40.9% of total operating revenue in 2016. The filing provides no quantified earnings or revenue guidance for 2017.
- Management reported that the year-end goodwill impairment assessment indicated no impairment. State Bank also reported meeting applicable capital requirements, including the capital conservation buffer in its pro forma analysis.
- Key risks include regional economic weakness and real-estate exposure; interest-rate changes and pressure on net interest margin; loan losses exceeding the allowance; deposit competition and funding costs; regulation and FDIC assessments; cybersecurity and confidential-data breaches; litigation and mortgage-loan repurchase or indemnification claims; and the ability to retain key personnel.
- Commercial real estate represented approximately 44.1% of held-for-investment loans. Nearly $479 million of commercial real estate, residential first-mortgage, multifamily and agricultural loans were available to collateralize borrowings; eligible loans were pledged under an FHLB blanket lien.
- Ordinary-course legal matters were not expected by management to materially affect financial condition or results. The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Reconcile the liquidity narrative’s rounded operating cash-flow figure of $14.3 million with the consolidated cash flow statement’s $14.026 million.
- Assess whether mortgage sale gains and mortgage production can be sustained, and monitor servicing-rights valuation, amortization and prepayment assumptions.
- Review commercial real estate concentration, the $1.2 million of identified potential problem loans, and allowance coverage as the loan portfolio grows.
- Confirm funding and liquidity trends, including time-deposit maturities, deposit pricing, FHLB advance repayments and available borrowing capacity.
- Consider potential dilution from the convertible preferred shares: 1,456,442 common shares were issuable upon conversion at year-end, and preferred dividends were $975,000 in 2016.
- Note that the filing’s figures are annual, not standalone fourth-quarter results; the quarterly table is unaudited.