SB Financial Group, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Ohio-based financial holding company and community banking group; quarter and six-month periods ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Results are unaudited.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $15.7 | $17.5 | $36.2 | $28.2 |
| Net interest income | $9.2 | $8.9 | $18.8 | $17.4 |
| Provision for loan losses | $0 | $1.3 | $0.8 | $1.9 |
| Noninterest income | $6.5 | $8.6 | $17.5 | $10.8 |
| Noninterest expense | $11.1 | $11.7 | $22.0 | $21.1 |
| Net income | $3.8 | $3.7 | $10.8 | $4.3 |
| Diluted EPS | $0.52 | $0.47 | $1.49 | $0.56 |
| Net interest margin, FTE | 2.94% | 3.32% | 3.07% | 3.40% |
Q2 net income increased 2.9% year over year; six-month net income increased 150%. The filing reports total revenue down 10.3% in Q2 and up 28.5% for the first half. FTE funding costs declined year over year (Q2 0.44% versus 0.89%; first half 0.47% versus 1.00%), while earning-asset yields also fell.
Financial position, cash flow and asset quality
- At June 30, total assets were $1.313 billion, deposits $1.091 billion, loans net of unearned income $850.5 million, and shareholders’ equity $144.0 million. Assets rose 4.3% from year-end; deposits rose 4.0%, while loans declined 2.5%.
- Cash and due from banks were $155.0 million, versus $140.7 million at December 31, 2020. Liquid assets, as defined by management, were $378.4 million, up from $303.2 million. The filing states management considered liquidity sufficient. It also reports approximately $100.1 million of additional FHLB borrowing capacity and $132.7 million of unpledged securities available to pledge.
- For the first half, operating cash flow was $2.0 million (versus cash used of $0.3 million); investing cash use was $43.4 million; financing cash provided was $55.6 million. Cash and cash equivalents increased $14.3 million to $155.0 million.
- Borrowed funds totaled $60.4 million, including $25.1 million in repurchase agreements, $5.5 million in FHLB advances, $10.3 million in trust preferred securities, and $19.5 million net subordinated debt. The company issued $20 million of 3.65% fixed-to-floating subordinated notes in May 2021, due 2031.
- State Bank was classified as well capitalized. Its June 30 ratios included 9.68% Tier I capital to average assets and 14.36% total risk-based capital.
- The allowance for loan losses was $13.3 million, or 1.56% of loans, versus $12.6 million, or 1.44%, at year-end. Nonaccrual loans were $3.6 million, down from $6.4 million at year-end; nonperforming assets were $6.0 million, or 0.46% of assets. Q2 net charge-offs were $0.02 million.
Material changes and notable items
- Q2 net interest income improved $0.3 million, but noninterest income fell $2.1 million, mainly reflecting lower mortgage banking revenue. Mortgage gains were $4.3 million, down $3.9 million year over year; mortgage originations and sales were also lower. Q2 mortgage servicing rights impairment was $0.1 million, compared with $1.1 million in Q2 2020.
- First-half noninterest income benefited from a $2.6 million mortgage servicing rights valuation recapture, compared with a $3.3 million impairment in the prior-year period. The prior-year comparison also included $1.2 million in Edon acquisition costs; 2021 noninterest expense increased partly due to staffing, benefits and Title operations.
- The company originated $26.2 million of PPP loans in Q2; $34.8 million of PPP loans remained outstanding at quarter-end. It reported no COVID-related loan deferrals at June 30.
- Available-for-sale securities increased to $211.8 million from $149.4 million at year-end. Unrealized losses were $1.5 million versus $0.06 million; management considered the declines temporary and reported no other-than-temporary impairment.
- Foreclosed assets held for sale increased to $1.6 million from $0.02 million at year-end. The company repurchased 215,097 shares in Q2 at an average $18.71 per share under a program authorizing up to 750,000 shares through May 2022.
- The board declared common dividends of $0.105 per share in Q1 and $0.11 per share in Q2. Goodwill was $22.1 million; management reported no impairment as of June 30.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue or margin guidance. Management described portfolio risk as stabilized and considered a zero Q2 loan-loss provision appropriate given reserve levels. The company expects to be prepared for CECL adoption by January 1, 2023, but could not reasonably estimate its impact and expects the allowance may increase.
Disclosed risks include COVID-19 and economic conditions, PPP-related litigation or other risks, borrower credit quality and loan demand, interest-rate and liquidity exposure, regulatory changes, competition, key-personnel loss, and the transition away from LIBOR. Management’s economic-value-of-equity model showed a 12.91% decline under a 100-basis-point rate decrease at June 30. The company also identified a proposed federal corporate tax-rate increase from 21% to 28% as a potential adverse factor if enacted. Ordinary-course legal claims and regulatory examinations were not expected by management to have a material adverse effect.
Investor verification priorities
- Verify the sustainability of mortgage banking revenue and the first-half MSR valuation recapture, including sensitivity to interest rates and prepayments.
- Review loan growth and mix, PPP forgiveness and runoff, delinquency trends, the rise in foreclosed assets, and whether the allowance remains adequate.
- Assess net interest margin compression and the balance-sheet impact of rate movements, including management’s EVE assumptions.
- Monitor deposit composition, liquidity capacity, and the cost and terms of the new subordinated notes and other borrowings.
- Confirm the share repurchase pace, capital implications, and progress toward CECL implementation.