SB Financial Group, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. The company is an Ohio-based bank holding company, operating State Bank and Trust Company, RDSI item-processing services, and wealth-management businesses. Its banking footprint is concentrated in Northwest Ohio and Northeast Indiana.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $33.8 million | $34.9 million |
| Net interest income | $20.9 million | $20.8 million |
| Net interest margin | 3.62% | 3.75% |
| Net income | $5.26 million | $5.21 million |
| Diluted earnings per share | $1.07 | $1.07 |
| Total assets at year-end | $684.2 million | $631.8 million |
| Loans held for investment, net of unearned income | $516.3 million | $477.3 million |
| Deposits | $550.9 million | $518.2 million |
| Shareholders’ equity | $75.7 million | $56.3 million |
| Cash and due from banks | $28.2 million | $13.1 million |
- Noninterest income declined 8.7% to $12.8 million, mainly due to lower mortgage-loan sale gains and servicing fees. Noninterest expense fell 2.1% to $26.0 million.
- Cash flow from operations was $5.0 million, versus $13.9 million in 2013. Investing activities used $36.6 million, primarily reflecting loan growth and securities purchases; financing activities provided $46.7 million, including deposit growth and preferred-stock proceeds.
- Year-end liquidity included $118.6 million in liquid assets, up from $106.3 million. Management said available liquidity and borrowing sources were adequate for anticipated needs; additional FHLB borrowing capacity was approximately $23.3 million, with $14.0 million in available federal funds lines.
- Year-end borrowings included $30.0 million of FHLB advances, $12.7 million of repurchase agreements, and $10.3 million of trust preferred securities. The company redeemed $10.6 million of fixed-rate trust preferred securities during 2014.
- State Bank’s capital ratios were 8.6% Tier 1 leverage and 12.0% risk-based capital. The company reported a 14.0% consolidated total risk-based capital ratio.
Material changes versus 2013
- Loans grew 8.2%, led by residential real estate, commercial real estate, and agricultural lending. Deposits increased 6.3%; noninterest-bearing demand deposits grew 20.0%.
- Net interest income edged up, but net interest margin contracted 13 basis points. Management cited deposit mix, including 31% growth in money-market deposits, as a margin factor.
- Asset quality improved overall: nonperforming assets declined to $6.3 million from $7.2 million, or 0.92% of assets versus 1.14%. Net charge-offs fell to $0.64 million from $0.75 million, and the loan-loss provision declined to $0.45 million from $0.90 million. Loans past due 30 days or more increased to 1.36% from 0.72%.
- Mortgage originations were $220 million, down from $249 million; $182 million of originated mortgages were sold. Loans serviced for others increased to approximately $663 million from $606 million.
- Shareholders’ equity rose substantially, including $14.0 million of net proceeds from a December preferred-share offering. The offering created 6.50% noncumulative convertible preferred shares; conversion could dilute common shareholders.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management expected approximately $5.7 million of 2015 capital spending, including completion of a Columbus-area facility and purchase of a Findlay retail location, funded with cash and operating cash generation.
- The trust-preferred redemption resulted in approximately $0.43 million of total prepayment penalties, including $0.33 million in operating expense and $0.10 million in interest expense; management estimated the after-tax impact at $0.28 million.
- Key exposures include sensitivity of net interest income to rate changes; concentrated lending in the local market and commercial real estate; credit losses and collateral values; competition for deposits and loans; and regulatory, compliance, and deposit-insurance costs. Management also identified risks involving personnel, litigation, information systems, and estimates for loan-loss allowances and goodwill.
- New Basel III capital rules took effect beginning January 1, 2015, with requirements phased in through 2019. Management’s pro forma analysis indicated the company and State Bank would meet the new requirements, including the full capital conservation buffer, using December 31, 2014 data.
- Management reported no goodwill impairment at year-end. Ordinary-course legal matters were not expected to have a material adverse effect. The external auditor issued an unqualified opinion on the consolidated financial statements; the auditor did not attest to internal control, while management concluded controls were effective.
Important facts for investors to verify
- Review the sustainability of earnings as mortgage-related income declined and the net interest margin narrowed.
- Assess credit quality, including rising early-stage delinquencies, commercial-real-estate concentration, and the adequacy of the $6.8 million allowance.
- Confirm the terms, dividend treatment, conversion mechanics, and potential dilution associated with the Series A preferred shares.
- Track funding and liquidity after loan growth, the trust-preferred redemption, and the planned 2015 capital expenditures.
- Reconcile asset-quality coverage figures: the filing reports allowance coverage of nonperforming assets at 107.9% in a table and separately states coverage of nonperforming loans at 113%.