SB Financial Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 8, 2021. SB Financial is an Ohio-based financial holding company focused on commercial and retail banking, mortgage banking, wealth management, and title services in Ohio, Indiana, and Michigan.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total operating revenue | $66.0 million | $52.8 million | +24.9% |
| Net interest income | $35.9 million | $34.8 million | +3.2% |
| Noninterest income | $30.1 million | $18.0 million | +67.1% |
| Provision for loan losses | $4.5 million | $0.8 million | + $3.7 million |
| Noninterest expense | $43.1 million | $37.4 million | +15.2% |
| Net income | $14.9 million | $12.0 million | +24.8% |
| Diluted earnings per share | $1.96 | $1.51 | +29.8% |
| Net interest margin, FTE | 3.36% | 3.82% | Down 46 basis points |
Mortgage banking drove much of the increase in fee income: gains on residential mortgage sales and originations were $25.4 million versus $8.4 million. Residential mortgage production was $694.2 million, and $598.5 million of originated mortgages were sold. Mortgage servicing income was pressured by a $3.6 million mortgage servicing rights impairment; reported net mortgage servicing fees were negative $5.1 million. Salaries and benefits rose with mortgage commissions; acquisition-related costs also contributed to higher expenses.
Balance sheet, cash flow, and credit
- Year-end assets were $1.258 billion, up 21.1%; loans held for investment were $872.7 million, up 5.7%; deposits were $1.049 billion, up 24.8%; and shareholders’ equity was $142.9 million, up 5.0%.
- Operating, investing, and financing cash flows were respectively $23.9 million, negative $57.2 million, and positive $146.9 million. Cash and cash equivalents ended the year at $140.7 million, versus $27.1 million in 2019; deposit growth was a major financing source.
- Management reported $303.2 million of liquid assets, approximately $103.5 million of additional FHLB borrowing capacity, $41.0 million of available federal funds lines, and $67.5 million of unpledged securities.
- Year-end borrowings included $20.2 million of repurchase agreements, $8.0 million of FHLB advances, and $10.3 million of trust preferred securities. The filing does not provide a conventional corporate debt ratio.
- The allowance for loan losses was $12.6 million, or 1.44% of loans. Net charge-offs were $0.68 million, up from $0.21 million. Nonaccrual loans were $6.4 million; accruing troubled debt restructurings were $0.8 million. Nonperforming assets were reported at $7.3 million.
- At year-end, $23.2 million of on-balance-sheet loans remained in payment deferral, plus $11.7 million of sold mortgage relationships in deferral. Management also identified approximately $12.0 million of other loans with potential credit concerns.
Material changes and unusual items
- The June 2020 acquisition of Edon Bancorp and The Edon State Bank Company added approximately $51.1 million of deposits and $16.4 million of loans at acquisition. Cash consideration was $15.5 million; the company recorded $4.3 million of goodwill and $1.2 million of acquisition expenses.
- State Bank originated approximately 700 Paycheck Protection Program loans totaling $83.6 million. $70.6 million remained outstanding at year-end; $3.2 million of fees were generated, of which $1.4 million was recognized in 2020. Management expected to recognize further forgiveness-related fees in 2021 and began the program’s second phase in early 2021.
- Net income available to common shareholders benefited from the absence of preferred dividends in 2020; the Series A preferred shares were converted into common shares in December 2019.
- The company declared $0.40 per common share in dividends in 2020, versus $0.36 in 2019, and said it anticipated similar quarterly dividends, subject to regulatory and other constraints. It repurchased $7.2 million of shares during 2020.
Outlook, risks, and contingencies
The filing gives no specific earnings or revenue guidance. Management emphasized growth, revenue diversification, market expansion, customer relationships, operational performance, and asset quality. It expects continued PPP fee income in 2021. The company’s reported risk priorities include COVID-19-related borrower stress, loan-loss estimates, commercial real estate and regional economic concentration, interest-rate and margin sensitivity, mortgage servicing right valuations, cybersecurity and third-party service providers, and competition. CECL adoption is scheduled for 2023; management expects a possible increase in credit-loss allowances but says the impact cannot yet be reasonably estimated.
State Bank was reported as well-capitalized, with a 9.94% Tier 1 leverage ratio and a 14.16% total risk-based capital ratio at year-end. The auditor issued an unqualified opinion on the financial statements and identified the loan-loss allowance, the Edon acquisition valuation, and goodwill impairment analysis as critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective. Management said ordinary-course legal matters were not expected to materially affect the company.
Important facts for investors to verify
- How much of the exceptional 2020 fee-income increase is repeatable, particularly mortgage sale gains, PPP fees, and title-related income; assess the MSR impairment and servicing economics.
- Whether credit quality and payment deferrals improve or worsen as pandemic relief ends; examine allowance assumptions, the $12.0 million of potential problem loans, and commercial real estate concentrations.
- Reconcile the filing’s differing 2019 nonperforming-asset ratios: one discussion states 0.51%, while the comparative table reports 0.64%.
- Assess the durability and cost of deposit growth, the effect of low interest rates on net interest margin, and liquidity after substantial 2020 deposit inflows.
- Review the Edon purchase-price allocation, goodwill, and integration performance, and confirm the company’s ability to sustain dividends and share repurchases within regulatory limits.