SB Financial Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions unless stated otherwise. The company is an Ohio-based financial holding company operating primarily through State Bank and Trust Company. The filing is unaudited; interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net interest income | $8.9 | $8.8 | $17.4 | $17.2 |
| Provision for loan losses | $1.3 | $0.2 | $1.9 | $0.2 |
| Noninterest income | $8.6 | $3.7 | $10.8 | $6.7 |
| Noninterest expense | $11.7 | $9.1 | $21.1 | $17.7 |
| Net income | $3.7 | $2.6 | $4.3 | $4.9 |
| Diluted EPS | $0.47 | $0.33 | $0.56 | $0.61 |
- Q2 total revenue, defined as net interest income plus noninterest income, was $17.5 million, up 40% year over year. First-half revenue was $28.2 million, up 18.2%.
- Q2 net interest margin (FTE) was 3.32%, versus 3.88%; first-half margin was 3.40%, versus 3.84%. Lower asset yields and low-coupon PPP loans weighed on margin; funding costs declined.
- Q2 mortgage loan sale gains were $8.1 million, compared with $1.7 million a year earlier, amid increased refinance volume. First-half mortgage originations were $325.0 million; $289.1 million was sold.
- Six-month operating cash flow was negative $0.3 million, investing cash flow negative $43.8 million, and financing cash flow positive $102.8 million. Cash and cash equivalents increased $58.6 million to $85.7 million.
Financial position, liquidity and credit
- At June 30, total assets were $1,202.9 million, loans (before allowance) $901.5 million, deposits $990.6 million, and shareholders’ equity $137.9 million. Since year-end 2019, assets rose 15.8%, loans 9.2%, and deposits 17.9%; the company attributed balance-sheet growth partly to the Edon acquisition and PPP lending.
- Cash and due from banks were $85.7 million; available-for-sale securities were $104.3 million. Management reported liquid assets of $214.2 million, versus $135.3 million at year-end.
- Borrowings included $23.8 million of short-term repurchase agreements, $13.0 million of FHLB advances, and $10.3 million of trust preferred securities. The bank reported $116.5 million of additional FHLB borrowing capacity, $39.7 million of unpledged securities, and unused federal funds lines of $41.0 million. Discount-window and PPPLF borrowings were zero.
- The allowance for loan losses was $10.0 million, or 1.11% of loans, versus $8.8 million and 1.06% at year-end. Nonaccrual loans were $6.5 million; nonperforming assets were $7.7 million, or 0.64% of assets. Q2 net charge-offs were $0.24 million; first-half net charge-offs were $0.64 million.
- State Bank was classified as well capitalized. At June 30, its total risk-based capital ratio was 12.99%, versus the 10.0% well-capitalized threshold; Tier 1 leverage was 10.36%, versus 5.0%.
Material changes and unusual items
- On June 5, 2020, the company acquired Edon Bancorp for $15.5 million cash. The acquisition added approximately $66.8 million of assets and $51.3 million of liabilities, including $16.3 million of loans and $51.1 million of deposits. It added $4.3 million of goodwill and $0.7 million of core-deposit intangibles. Edon contributed less than $0.1 million of Q2 revenue and earnings during the period owned.
- Q2 results included mortgage servicing rights (MSR) impairment, acquisition-related costs, and higher mortgage commissions. The filing reports a $1.1 million Q2 MSR impairment in MD&A, while the cash-flow/servicing-rights disclosures show $3.3 million of impairment for the first half. The filing gives differing acquisition-cost figures: approximately $1.2 million in the notes and $1.4 million included in Q2 expenses in MD&A.
- Despite higher Q2 earnings, first-half net income declined 10.7% year over year, reflecting higher credit-loss provisions and expenses; first-half diluted EPS fell 8.2%.
- The company repurchased 90,762 shares in Q2 for an average $14.38 per share. A new authorization announced July 21 permits repurchases of up to 500,000 shares through December 31, 2021.
Outlook, commentary and risks
- Management gave no quantitative earnings or revenue guidance. It said the pandemic and anticipated government actions would affect the remainder of 2020, but the specific effects could not be determined.
- State Bank had disbursed nearly $83 million of PPP loans, with approximately $82.7 million outstanding at quarter-end per MD&A. The filing reports 262 approved loan deferrals totaling $153.3 million in one disclosure, but MD&A says approved deferrals exceeded $195 million.
- Management increased credit reserves because of uncertainty about COVID-19’s effects on borrowers. Risks cited include worsening economic conditions, PPP eligibility or servicing disputes and possible SBA guarantee denials, operational and cybersecurity risks from remote work, service-provider disruption, and volatile interest rates.
- Management said available liquidity was sufficient and no goodwill impairment triggering event had occurred at June 30. It considered unrealized securities losses temporary. These assessments depend on economic conditions and management estimates.
- Management stated that ordinary-course litigation and pending regulatory examinations were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Reconcile the deferral totals ($153.3 million versus over $195 million) and PPP balances ($82.7 million versus $82.9 million) across disclosures.
- Confirm the Q2 Edon acquisition expense amount ($1.2 million versus $1.4 million) and distinguish the quarter’s MSR impairment from the first-half total.
- Track credit performance, allowance adequacy, delinquency and nonaccrual trends as pandemic-related borrower support and deferrals evolve.
- Assess whether exceptionally strong mortgage gains and refinance activity persist, and how low rates affect net interest margin and MSR valuations.
- Monitor acquisition integration, deposit and loan growth, capital ratios, liquidity availability, and potential PPP-related legal or SBA-guarantee exposure.