SB Financial Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. SB Financial is an Ohio bank holding company; its principal subsidiary, State Bank, conducts commercial banking, and RDSI provides data-processing services. Dollar amounts below are in millions unless noted otherwise.
Financial performance and condition
| Metric | Q1 2014 / Mar. 31, 2014 | Comparable period / Dec. 31, 2013 |
|---|---|---|
| Total revenue (FTE net interest income plus noninterest income) | $7.5 | $9.0 in Q1 2013 |
| Net interest income | $4.825 | $5.292 in Q1 2013 |
| Net interest margin (FTE) | 3.46% | 3.86% in Q1 2013 |
| Net income / diluted EPS | $0.980 / $0.20 | $1.318 / $0.27 in Q1 2013 |
| Net cash from operating activities | $(3.021) | $(0.805) in Q1 2013 |
| Total assets | $646.3 | $631.8 |
| Total loans, net of unearned income | $481.9 | $477.3 |
| Total deposits | $532.7 | $518.2 |
| Total equity | $57.4; 8.9% of assets | $56.3; 8.9% of assets |
- Interest expense declined to $0.916 from $1.115 year over year, but interest income fell to $5.741 from $6.407. Management attributed lower net interest income primarily to a 55-basis-point decline in earning-asset yield, despite $10.1 million of earning-asset growth.
- Noninterest income was $2.560 versus $3.567. Mortgage-loan originations were $33.6 million versus $72.0 million, and gains on mortgage-loan sales and originated servicing rights fell to $0.572 from $1.484. RDSI fees remained below the prior year because of client losses; RDSI recorded a $68,000 loss versus $24,000 of income.
- Noninterest expense decreased to $6.079 from $6.670, primarily reflecting lower volume-related mortgage commissions and balance-growth incentives, partly offset by higher weather-related costs. Income tax expense was $0.326 versus $0.572.
- No loan-loss provision was recorded, compared with $0.299 million in Q1 2013. Net charge-offs were $0.238 million. The allowance was $6.726 million, or 1.40% of loans, compared with $6.964 million, or 1.46%, at year-end.
- Nonperforming assets declined to $6.814 million (1.05% of assets) from $7.233 million (1.14%) at year-end and $8.354 million (1.30%) a year earlier. Nonaccrual loans were $4.406 million. Delinquent loans totaled $2.978 million, versus $3.467 million at year-end.
- Cash and cash equivalents increased $1.723 million during the quarter to $14.860 million. Investing activities used $9.198 million, while financing activities provided $13.942 million, mainly reflecting growth in transaction deposits. Operating activities used $3.021 million.
- Balance-sheet funding included $532.7 million of deposits, $14.0 million of FHLB advances, $16.9 million of repurchase agreements, and $20.6 million of trust preferred securities; notes payable were zero. Management separately reported borrowed funds, excluding trust preferred securities, of $30.9 million, down from $31.3 million at year-end.
- Liquid assets were $115.3 million, up from $106.3 million at year-end. The company reported approximately $33.0 million of additional FHLB borrowing capacity, $16.5 million of unpledged securities, and $11.5 million of unused federal-funds lines. Management considered liquidity adequate.
- Both the company and State Bank were categorized as well capitalized. State Bank’s total risk-based capital ratio was 12.4%; the company’s consolidated ratio was 13.4%.
Material changes and outlook
- Year-over-year net income decreased about 26%, and total revenue fell 16.5%. Lower mortgage activity and yields contributed to the decline; RDSI client losses also weighed on noninterest income.
- Loans and deposits each increased $14.5 million from year-end, while reported borrowing excluding trust preferred securities decreased slightly. The allowance and nonperforming-asset ratios improved from year-end.
- The filing provides no specific earnings, revenue, or margin guidance. Management stated that first-quarter results are not necessarily indicative of full-year results and believed available resources were adequate to fund liquidity needs and commitments.
- Interest-rate risk remains a key exposure. Economic value of equity analysis showed a 7.30% decline under a 100-basis-point rate decrease at March 31, compared with a 6.53% decline at year-end; management considered lower rates unlikely in the prevailing environment.
- Management identified interest-rate changes, competition, and banking regulation as risks. Basel III requirements were scheduled to begin taking effect in 2015, with transition provisions and a capital-conservation buffer phased in over subsequent years. The company’s September 2013 pro forma analysis indicated State Bank would have met the new requirements, including the full buffer, at that date.
- Management reported no material change in risk factors from the 2013 Form 10-K. Ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were considered effective, and no material change in internal controls was reported.
Most important facts for investors to verify
- Whether lower mortgage originations and sales gains, and RDSI client attrition, persist or reverse.
- Whether net interest margin and earning-asset yields stabilize, particularly under changing interest rates.
- Whether loan growth, delinquency trends, charge-offs, and the allowance remain consistent with credit risk; the filing notes that allowance estimates are subjective.
- Whether deposit growth and available borrowing capacity continue to support liquidity, including the use and collateralization of FHLB funding.
- How implementation of Basel III, including treatment of accumulated other comprehensive income and mortgage servicing rights, affects capital and future dividend capacity.
- Management’s reported absence of other-than-temporary impairment in securities despite $0.739 million of unrealized losses, and the valuation assumptions for Level 3 mortgage servicing rights.