SB Financial Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited interim results. SB Financial is an Ohio bank holding company; its businesses include community banking, mortgage lending and servicing, insurance, and bank data processing.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $10.7 million | $10.2 million | $20.3 million | $19.3 million |
| Net interest income | $6.423 million | $5.763 million | $12.535 million | $11.294 million |
| Net income | $2.265 million | $1.991 million | $3.920 million | $3.487 million |
| Diluted EPS | $0.35 | $0.31 | $0.61 | $0.54 |
| Net interest margin | 3.75% | 3.76% | 3.75% | 3.74% |
| Noninterest expense | $7.407 million | $6.818 million | $14.302 million | $13.462 million |
| Provision for loan losses | $0 | $0.500 million | $0.250 million | $0.850 million |
Q2 net income rose 14% and diluted EPS rose 13%; six-month net income increased 12% and diluted EPS increased 13%. Revenue growth reflected higher net interest income, supported by larger earning assets and modestly higher asset yields. Noninterest income declined year over year, while higher deposit funding costs and operating expenses tempered growth.
Financial position, cash flow, and liquidity
- At June 30, total assets were $793.2 million, up 8.2% from year-end 2015. Loans, net of unearned income, were $604.8 million, up 8.5%; deposits were $648.3 million, up 10.6%.
- Cash and due from banks were $29.9 million, versus $20.5 million at December 31, 2015. Liquid assets were $130.9 million, versus $117.8 million. Management said liquidity was sufficient; reported additional FHLB borrowing capacity was approximately $47.1 million, with $16.8 million of unpledged securities.
- Borrowed funds (FHLB advances and repurchase agreements) totaled $40.8 million, down from $47.4 million at year-end. FHLB advances were $23.0 million; trust preferred securities were $10.3 million. Total equity was $85.0 million, or 10.7% of assets, compared with $81.2 million, or 11.1%, at year-end.
- For the six months, operating cash flow was $4.2 million, investing cash flow was negative $48.8 million, and financing cash flow was positive $54.0 million. Cash increased $9.5 million to $29.9 million. Loan growth was the principal investing cash use; deposit growth was the main financing source.
- The Bank was described as well capitalized. However, the capital-ratio table in the filing labels its latest figures “As of March 31, 2016,” while the surrounding discussion refers to June 30; verify the applicable period before relying on those ratios.
Asset quality and material changes
- The allowance for loan losses was $7.45 million, or 1.23% of loans, versus 1.34% a year earlier. The filing attributes the lower ratio to loan growth and improved asset quality. Six-month net recoveries were $0.21 million, compared with net charge-offs of $0.62 million in the prior-year period.
- Credit indicators were mixed: nonaccrual loans were $6.69 million versus $3.61 million a year earlier; nonperforming assets were $8.23 million, or 1.04% of assets, versus $5.38 million, or 0.76%. Allowance coverage of nonperforming loans was 92.3%, down from 134.6%.
- Mortgage originations and sales increased. Q2 originations were $110.2 million, of which $95.2 million was sold. Mortgage gains on sale were $2.3 million, up 27%, but net mortgage banking revenue fell to $2.0 million from $2.3 million because of servicing-rights valuation adjustments.
- Mortgage servicing rights incurred a $0.5 million Q2 impairment and $1.2 million impairment for the first six months, attributed to faster prepayments. Six-month mortgage servicing fees, net, were negative $0.7 million, compared with positive $0.5 million a year earlier.
- One consumer loan modification classified as a troubled debt restructuring, with a recorded balance of $221,000, was reported as subsequently defaulted. No TDR modifications were reported in Q2.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management cautions that six-month results are not necessarily indicative of full-year results.
- Management identified interest-rate, credit, liquidity, economic, regulatory, competitive, and funding risks. The economic value of equity analysis showed a 7.80% decline under a 100-basis-point rate decrease and a 21.29% increase under a 400-basis-point increase; management considered further rate decreases unlikely in the prevailing environment.
- Management said there were no material changes to the risk factors in the 2015 Form 10-K. Ordinary-course claims, lawsuits, and regulatory examinations were not expected by management to have a material adverse effect. No material change in market risk was reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the capital-ratio table’s March 31, 2016 date with the filing’s June 30 capital discussion.
- Track whether nonaccrual loans and nonperforming assets continue to rise, and assess allowance coverage against the growing loan portfolio.
- Monitor mortgage servicing-rights impairment, prepayment assumptions, and the effect on mortgage banking revenue.
- Assess whether deposit growth and available borrowing capacity can continue to fund loan growth while containing funding costs.
- Review the subsequent performance of the $221,000 restructured consumer loan and any resulting credit-loss implications.