SB FINANCIAL GROUP, INC. quarterly report, Q3 FY2013

SB Financial Group, Inc. — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013. The company, a bank holding company with banking and data-processing operations, changed its name from Rurban Financial Corp. effective April 18, 2013. Financial amounts below are in millions unless stated otherwise.

Financial performance

MetricQ3 2013Q3 2012Nine months 2013Nine months 2012
Net interest income$5.18$5.43$15.82$15.58
Provision for loan losses$0.40$0.30$0.90$0.95
Noninterest income$3.71$3.41$11.10$10.20
Noninterest expense$6.56$6.73$20.31$20.27
Net income$1.34$1.30$3.98$3.29
Diluted EPS$0.28$0.27$0.82$0.68
Net interest margin, as discussed by management3.72%3.91%3.81%3.77%

Management reported total revenue growth of 0.6% for the quarter and 4.5% for the nine-month period, using fully taxable-equivalent net interest income. Quarterly margin pressure reflected a 38-basis-point decline in earning-asset yield; year-to-date margin improved slightly. Quarterly noninterest income rose, while expenses edged lower. Year-to-date revenue benefited from loan-sale gains and mortgage-servicing-rights impairment recapture; expenses were approximately flat.

Financial position, cash flow, and capital

  • At September 30, 2013, total assets were $633.4 million, down 0.8% from year-end 2012. Loans, net of unearned income, were $475.2 million, up $11.8 million; deposits were $521.5 million, down $5.5 million.
  • Equity was $55.5 million, or 8.8% of assets, compared with 8.4% at year-end. Available-for-sale securities were $86.6 million, down from $98.7 million; accumulated other comprehensive income fell to $0.4 million from $1.8 million.
  • Cash and cash equivalents were $19.0 million. For the first nine months, operating activities provided $10.4 million, investing activities used $3.1 million, and financing activities used $7.4 million; cash decreased $0.1 million.
  • Borrowings reported as notes payable, FHLB advances, and repurchase agreements totaled $31.5 million, down from $33.0 million at year-end. Trust preferred securities were an additional $20.6 million. Total liabilities were $577.9 million.
  • Consolidated total capital was 13.2% of risk-weighted assets; State Bank’s ratio was 12.4%. The filing states both were well capitalized under applicable requirements.
  • Management reported $27.4 million of additional FHLB borrowing capacity, $17.9 million in unpledged securities, and $11.5 million of unused federal funds lines. It stated current liquidity was sufficient.

Asset quality, risks, and outlook

  • The allowance for loan losses was $7.12 million, 1.50% of loans, versus $6.81 million and 1.47% at year-end. Nonaccrual loans were $5.58 million, or 1.17% of loans; net charge-offs for the first nine months were $0.59 million.
  • Nonperforming assets were reported at $8.77 million, or 1.38% of assets, compared with $9.40 million, or 1.49%, at September 2012. Foreclosed assets declined to $1.43 million from $2.37 million at year-end.
  • Management attributed unrealized securities losses to higher interest rates and considered them temporary; it reported no other-than-temporary impairment. The share of the available-for-sale portfolio with unrealized losses rose to 29.9% from 6.1% at year-end.
  • Interest-rate risk is the primary market risk. The company’s economic-value-of-equity analysis showed a 7.5% decline under a 100-basis-point rate decrease and a 15.4% increase under a 400-basis-point increase. Management reported no material change in market risk from its prior annual filing.
  • The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results. Risks include interest-rate movements, credit losses, competition, regulatory changes, and implementation of Basel III and other Dodd-Frank requirements, which may increase costs and capital or liquidity requirements.
  • Four residential-real-estate TDRs modified in the prior 12 months subsequently defaulted, with a reported balance of $194,000. Management said ordinary-course legal matters were not expected to have a material adverse effect.

Important facts for investors to verify

  • The comprehensive-income statement reports Q3 total comprehensive income as negative $1.263 million, although net income of $1.344 million less the reported $0.081 million OCI loss implies positive $1.263 million.
  • The asset-quality table reports “nonaccruing and restructured loans” of $5.456 million, below nonaccrual loans of $5.580 million; confirm the intended figure and definition.
  • The liquidity discussion says liquid assets were $108.0 million at June 30, 2013, while the balance-sheet amounts at September 30 for cash, available-for-sale securities, and loans held for sale also sum to about $108.0 million. Confirm the stated measurement date.
  • Reconcile management’s statement that quarterly delinquent loans fell $1.4 million year over year with the loan-aging table, which shows $2.253 million past due at September 2013 versus $5.103 million at December 2012.
  • Track the decline in quarterly net interest margin, commercial-and-industrial nonaccruals, mortgage origination and sale volumes, RDSI losses and client attrition, and the effects of securities valuation changes and new capital rules.