SB Financial Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. SB Financial is an Ohio bank holding company; its principal banking subsidiary is The State Bank and Trust Company. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior period |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $10.7 million | $11.3 million in Q1 2019; down 5.6% |
| Net interest income | $8.5 million | $8.3 million in Q1 2019 |
| Net interest margin (FTE) | 3.48% | 3.81% in Q1 2019 |
| Provision for loan losses | $0.6 million | None in Q1 2019 |
| Net income | $0.7 million; diluted EPS $0.09 | $2.2 million; diluted EPS $0.28 in Q1 2019 |
| Total assets | $1,088.3 million | $1,038.6 million at December 31, 2019 |
| Loans, net of unearned income | $830.8 million | $825.5 million at December 31, 2019 |
| Deposits | $863.9 million | $840.2 million at December 31, 2019 |
| Cash and due from banks | $56.4 million | $27.1 million at December 31, 2019 |
| Shareholders’ equity | $135.9 million; 12.5% of assets | $136.1 million; 13.1% of assets at year-end |
Q1 operating cash flow was negative $4.6 million, investing cash flow negative $11.3 million, and financing cash flow positive $45.2 million; cash increased $29.3 million to $56.4 million. Liquid assets were $175.4 million, versus $135.3 million at year-end. Short-term borrowings were $36.9 million, including $20.0 million borrowed at the Federal Reserve Discount Window; FHLB advances were $16.0 million and trust preferred securities were $10.3 million. Total borrowed funds, as defined by management, were $63.2 million.
State Bank was classified as well capitalized. Its March 31 ratios included 11.35% Tier 1 capital to average assets, 12.17% Tier 1 capital to risk-weighted assets, and 13.10% total risk-based capital to risk-weighted assets.
Material changes and unusual items
- Net income fell 69.4% year over year. Net interest income increased modestly, but the $0.6 million loan-loss provision, higher noninterest expenses, and weaker noninterest income weighed on earnings.
- Noninterest income declined to $2.2 million from $3.0 million. Mortgage servicing rights impairment increased to $2.2 million from $0.7 million; management reported net mortgage banking revenue of negative $0.1 million, compared with positive $0.9 million in Q1 2019. Mortgage originations rose to $101.5 million from $51.4 million.
- Noninterest expense rose to $9.4 million from $8.6 million, including higher mortgage-sale commissions and title agency expenses. The effective tax rate was 3.1%, versus 18.0% a year earlier; management cited lower pretax income, the captive insurance operation, and higher stock compensation.
- Loan quality indicators weakened year over year: nonaccrual loans were $5.8 million versus $3.1 million, nonperforming assets were $6.7 million versus $4.3 million, and net charge-offs were $0.4 million versus $0.05 million. Total delinquent loans were $5.4 million, or 0.65% of loans. The allowance was $9.0 million, or 1.08% of loans.
- Available-for-sale securities increased to $107.7 million from $100.9 million at year-end. Unrealized losses were $0.01 million at quarter-end versus $0.2 million at year-end; management reported no other-than-temporary impairment.
- The company repurchased 98,609 shares during the quarter for approximately $1.8 million. At March 31, 90,762 shares remained authorized for repurchase under the program.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Management said COVID-19-related customer distress could increase and adversely affect loan repayment, collateral values, the balance sheet, income, and cash flows. The company had disbursed nearly $82 million through the Paycheck Protection Program and approved over $136 million in loan forbearances; their later financial effects were not yet determinable.
- On February 6, 2020, the company agreed to acquire Edon Bancorp for approximately $15.5 million in cash. It anticipated regulatory and shareholder approvals and expected closing in Q2 2020; completion remained subject to those approvals.
- Management said current liquidity was sufficient. It reported approximately $113.8 million of additional FHLB borrowing capacity and $22.0 million in unpledged securities; eligible real estate and agricultural mortgage loans were pledged under an FHLB blanket lien.
- Management identified pandemic-related economic disruption, lower interest rates, borrower performance, collateral values, deposit stability, and the execution of government programs as risks. It also noted that allowance estimates are judgmental and actual losses may require additional provisions. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Subsequent trends in delinquencies, nonaccrual loans, charge-offs, allowance coverage, and borrower forbearances—especially for sectors exposed to travel restrictions and reduced demand.
- Actual PPP loan disbursements, forgiveness and fee income, and the financial impact of the approved forbearances.
- Mortgage servicing rights valuation and impairment assumptions, given the sharp increase in Q1 impairment.
- Whether the Edon transaction received approvals, closed on the expected timetable, and was funded on the disclosed terms.
- Liquidity and funding trends, including use of short-term Federal Reserve borrowing, deposit flows, and available borrowing capacity.
- Reported results and capital figures should be read with the filing’s interim, unaudited basis and its stated COVID-19 uncertainties in mind.