SB Financial Group, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Ohio-based financial holding company with commercial banking, mortgage, title and insurance operations. This unaudited filing covers the quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions below.
Financial results and condition
- Q3 earnings: Net income was $5.25 million, up 40% from $3.76 million a year earlier. Diluted EPS was $0.69 versus $0.48.
- Nine-month earnings: Net income was $9.59 million, compared with $8.62 million; diluted EPS was $1.25 versus $1.08.
- Revenue and margins: Q3 total revenue, defined as net interest income plus noninterest income, was $19.68 million, up 36%. Net interest income was $9.26 million, while noninterest income was $10.42 million. Nine-month revenue was $47.87 million, up 25%. Net interest margin (FTE) was 3.41% for both Q3 and the nine-month period, down from 3.93% and 3.87%, respectively, in 2019.
- Mortgage and expenses: Q3 gain on sale of mortgage loans and servicing rights was $8.09 million, versus $2.50 million. Noninterest expense was $11.34 million, up from $9.50 million. Nine-month noninterest expense was $32.40 million, including $1.2 million of Edon acquisition costs.
- Credit costs: Provision for loan losses was $1.80 million in Q3 and $3.70 million for nine months, compared with $0.30 million and $0.50 million, respectively, in 2019. The allowance was $11.79 million, or 1.33% of loans (1.47% excluding PPP balances).
- Balance sheet: At September 30, total assets were $1.218 billion, loans net of unearned income were $885.9 million, and deposits were $1.014 billion. Since year-end 2019, assets rose 17.3%, loans 7.3% and deposits 20.7%. Shareholders’ equity was $141.3 million, 11.6% of assets.
- Cash flow and liquidity: For nine months, operating cash flow was $5.37 million, investing cash flow was negative $54.09 million, and financing cash flow was positive $116.29 million. Cash and due from banks ended at $94.64 million. Management reported $247.9 million of liquid assets, approximately $107.8 million of additional FHLB borrowing capacity and $60.3 million of unpledged securities.
- Debt and capital: Short-term borrowings were $20.71 million, FHLB advances $8.0 million and trust preferred securities $10.31 million. State Bank was classified as well capitalized; its total risk-based capital ratio was 13.96% and Tier 1 leverage ratio was 10.43%.
Material changes versus comparable periods
- Q3 net income increased, driven principally by substantially higher mortgage banking gains; the increase was partly offset by higher credit provision and operating expenses.
- Lower market rates supported mortgage refinancing volumes but reduced asset yields and net interest margin. Management cited $82.1 million of PPP loans outstanding at quarter-end, bearing a 1.0% coupon.
- Nonaccrual loans were $6.41 million, compared with $3.28 million at September 30, 2019. Nonperforming assets were $7.27 million, or 0.60% of assets, versus $4.59 million, or 0.44%, a year earlier.
- The June 5 acquisition of Edon Bancorp involved $15.5 million cash consideration and added $4.3 million of goodwill. The acquisition contributed less than $0.1 million of revenue and earnings in the reported quarter and nine-month period, according to the filing.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said the effects of further government action related to COVID-19 on 2020 results could not then be determined.
- Management described COVID-19 as constraining business-development activity. The company had disbursed nearly $83 million of PPP loans and approved $38.4 million of customer loan deferrals; it also reported $42.3 million of deferrals on sold mortgages. The company said the $38.4 million in loan deferrals did not constitute TDRs under the CARES Act.
- Management increased reserves because of uncertainty about the pandemic’s future effects. Loan delinquencies ended Q3 at $5.9 million, or 0.66% of loans; the filing also reports $4.57 million of loans 90 days past due. Credit quality, borrower conditions and collateral values remain key risks.
- Mortgage servicing rights had a $2.97 million impairment charge for the first nine months, while Q3 included a $0.3 million recapture of prior impairment. Refinancing activity, prepayment speeds and MSR valuation assumptions may affect future results.
- Other stated risks include regional and national economic conditions, interest-rate and liquidity risk, PPP-related litigation or other exposure, competition, regulatory or accounting changes, and loan demand. Management reported no material change to previously disclosed risk factors and said pending ordinary-course legal matters were not expected to have a material adverse effect.
- The company repurchased 73,517 shares in Q3 at a weighted-average price of $13.67 under a new program authorizing up to 500,000 shares through December 31, 2021.
Important facts for investors to verify
- Whether mortgage gains and elevated refinancing volumes are sustainable, and how mortgage servicing rights respond to prepayments and valuation changes.
- Trends in delinquencies, nonaccrual loans, charge-offs, deferrals and reserve adequacy, including the effect of PPP loans on reported loan and allowance ratios.
- Deposit growth and funding costs, net interest margin under changing rates, and actual availability of stated borrowing capacity and collateral.
- Integration, realized synergies and final purchase accounting for Edon, including potential measurement-period adjustments.
- Capital and shareholder returns after acquisition, dividends and share repurchases; reported regulatory capital ratios are for State Bank, not the holding company.
- The filing reports no quarterly cash-flow statement; cash-flow figures above are for the nine months ended September 30, 2020.