SB Financial Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company is an Ohio bank holding company; its principal subsidiary, State Bank, provides commercial banking. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $9.16 | $8.89 | $25.09 | $26.91 |
| Net interest income | $5.35 | $5.18 | $15.42 | $15.82 |
| Net interest margin | 3.64% | 3.72% | 3.54% | 3.81% |
| Provision for loan losses | $0.15 | $0.40 | $0.30 | $0.90 |
| Noninterest income | $3.81 | $3.71 | $9.66 | $11.10 |
| Noninterest expense | $6.89 | $6.56 | $19.59 | $20.31 |
| Net income | $1.51 | $1.34 | $3.74 | $3.98 |
| Diluted EPS | $0.31 | $0.28 | $0.76 | $0.82 |
- Q3 revenue increased 3.1% year over year and net income increased 12.6%. For the nine-month period, revenue declined 6.8% and net income declined 6.1%.
- Net interest income rose in Q3 but declined year to date. Management attributed the margin pressure to lower earning-asset yields despite asset growth.
- Nine-month noninterest income fell mainly as mortgage loan-sale gains declined to $3.23 from $4.29 and RDSI data-service fees were lower amid client losses. Mortgage originations were $167.7 versus $209.1.
- Q3 diluted earnings included the effects of early debt redemption: a $0.33 prepayment penalty in noninterest expense and a separate $0.10 penalty in interest expense, totaling approximately $0.43.
Financial position, liquidity and credit
- At September 30, total assets were $664.6, up 5.2% from year-end 2013. Loans, net of unearned income, were $505.9, up 6.0%; deposits were $535.3, up $17.0.
- Cash and due from banks totaled $21.9, compared with $13.1 at year-end. Liquid assets were $109.8 versus $106.3 at year-end.
- Borrowed funds (notes payable, FHLB advances and repurchase agreements) totaled $54.9, versus $31.3 at year-end. The company reported $30.0 of FHLB advances, $17.9 of repurchase agreements, $7.0 of notes payable and $10.3 of trust preferred securities.
- Shareholders’ equity was $60.3, or 9.1% of assets, compared with 8.9% at year-end. The company and State Bank were reported as well-capitalized. State Bank’s total risk-based capital ratio was 12.1%; consolidated total capital ratio was 11.3%.
- The allowance for loan losses was $6.7, or 1.33% of loans, versus $7.0, or 1.46%, at year-end. Nonaccrual loans fell to $3.2 from $4.8; nonperforming assets fell to $5.4 from $7.2. Net charge-offs were $0.004 in Q3 and $0.6 for the nine months.
- Operating cash flow was $0.6 for the nine months, compared with $10.4 in 2013; investing cash use was $21.7, while financing cash provided was $29.8. Cash increased $8.7 to $21.9.
- Management cited approximately $23.4 of additional FHLB borrowing capacity, $8.7 of unpledged securities and $14.0 of unused federal funds lines. It said current liquidity was adequate.
Material developments, outlook and risks
- In September, the company redeemed trust preferred securities before maturity for $11.2, including accrued interest and approximately $0.43 in penalties. It funded the redemption with cash and a new $7.0, five-year variable-rate term loan priced at 90-day LIBOR plus 2.85%. The company reported covenant compliance at quarter-end.
- After quarter-end, the company’s registration statement for a proposed preferred-share offering was declared effective on November 10, 2014. The offering sought $10.0–$15.0 through depositary shares representing 6.5% noncumulative convertible perpetual preferred shares. The company planned to use about $7.0 of net proceeds to repay the new debt, with remaining proceeds for general corporate purposes.
- No specific earnings guidance was provided. Management warned that results are subject to banking-industry and regional economic conditions, interest-rate changes, loan demand, competition, regulation, deposit-insurance costs and other risks. It noted that future provisions may be required if loan-loss estimates differ from actual outcomes.
- Management’s analysis indicated the bank would have met the forthcoming Basel III capital requirements, including the full conservation buffer, based on a September 2013 pro forma assessment. New capital rules were scheduled to take effect beginning in 2015, with phase-in provisions.
- The filing reported no material changes in risk factors, market risk or internal control over financial reporting. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the proposed preferred offering was completed, its final proceeds and terms, and whether proceeds repaid the $7.0 term loan.
- How loan growth, asset yields and funding costs affect net interest margin and earnings in subsequent periods.
- Whether the reduction in nonaccrual loans and nonperforming assets is sustained, and whether the allowance remains adequate as the loan portfolio grows.
- Whether mortgage banking activity and RDSI client retention recover, given year-to-date declines in mortgage gains and data-service fees.
- The ongoing cost and balance-sheet effects of replacing trust preferred securities with new debt and preferred capital.