SB Financial Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparison is primarily with Q1 2020. Balance-sheet changes are compared with December 31, 2020. SB Financial is an Ohio-based financial holding company whose principal subsidiary is State Bank.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $20.5 million | $10.7 million; up 92% |
| Net interest income | $9.6 million | $8.5 million |
| Net interest margin, FTE | 3.21% | 3.48% |
| Provision for loan losses | $0.75 million | $0.60 million |
| Noninterest income | $10.9 million | $2.2 million |
| Noninterest expense | $10.9 million | $9.4 million |
| Net income / diluted EPS | $7.1 million / $0.97 | $0.7 million / $0.09 |
| Net cash from operating / investing / financing activities | $(0.9) million / $(5.6) million / $71.8 million | $(4.6) million / $(11.3) million / $45.2 million |
Net income rose sharply, with management identifying a $2.7 million reversal of prior mortgage servicing rights (MSR) valuation impairment as a positive factor. Mortgage banking revenue was $8.2 million versus negative $0.1 million in Q1 2020. Mortgage originations were $155.8 million, with $136.7 million sold; gains on mortgage loan sales and MSR totaled $5.9 million. Lower funding costs also supported net interest income: interest-bearing liability costs were 0.50% versus 1.12%, while earning-asset yields declined 76 basis points.
Financial position, liquidity and capital
- Assets: $1.326 billion at March 31, up $68.0 million, or 5.4%, from year-end. Cash and due from banks was $206.0 million; available-for-sale securities were $177.9 million.
- Loans and deposits: Loans, net of unearned income, were $848.2 million, down $24.5 million, or 2.8%, since year-end. Deposits were $1.120 billion, up $71.2 million, or 6.8%. PPP loans contributed $54.4 million to period-end loans.
- Debt and equity: Borrowed funds totaled $32.3 million, comprising $24.3 million of repurchase-agreement borrowings and $8.0 million of FHLB advances; trust preferred securities were $10.3 million. Shareholders’ equity was $144.0 million, or 10.9% of assets, versus $142.9 million, or 11.4%, at year-end.
- Liquidity: Reported liquid assets were $396.2 million, up from $303.2 million at year-end. Management said liquidity was sufficient. Additional disclosed capacity included approximately $100.7 million of FHLB borrowing capacity and $83.5 million of unpledged securities; $41.0 million of federal funds lines were undrawn.
- Regulatory capital: State Bank was classified as well capitalized. At March 31, Tier 1 leverage was 9.75%, Tier 1 common equity to risk-weighted assets was 13.08%, and total risk-based capital was 14.34%.
Changes, credit quality and other notable items
- The revenue and earnings comparison benefited substantially from mortgage production and the $2.7 million MSR valuation recapture; Q1 2020 instead included a $2.2 million MSR impairment. Higher mortgage commissions, incentives and technology investment contributed to the $1.5 million increase in noninterest expense.
- Loans declined from year-end despite $22.5 million of new PPP lending in the quarter; the company processed forgiveness on approximately $39.9 million of PPP loans, with $1.2 million in fees.
- The allowance for loan losses increased to $13.3 million from $12.6 million, equal to 1.57% of loans versus 1.08% at year-end. Nonaccrual loans were $5.6 million; total past-due loans were $5.0 million, or 0.58% of loans. Net recoveries were approximately $0.02 million, versus $0.4 million of net charge-offs in Q1 2020.
- Nonperforming assets were $6.5 million, or 0.49% of assets, compared with $6.7 million, or 0.61%, in Q1 2020. The filing reports no new troubled debt restructurings during Q1; four CARES Act deferral requests for two clients totaled $4.9 million and were not classified as TDRs.
- Available-for-sale securities increased to $177.9 million from $149.4 million at year-end. Net unrealized losses were $2.4 million, versus $0.06 million at year-end; management considered the declines temporary and reported no other-than-temporary impairment.
- The company repurchased 142,094 shares in Q1 at a weighted average price of $18.69, for approximately $2.7 million. The filing showed 111,266 shares remaining under the repurchase authorization at quarter-end.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements are subject to risks including COVID-19 effects and government responses, PPP-related litigation or other risks, regional economic conditions, loan demand and credit performance, interest-rate movements, competition, regulatory and accounting changes, LIBOR transition, and retention of key personnel. Management stated that it believed current liquidity was adequate and that State Bank remained well capitalized. It also said the expected impact of adopting CECL in 2023 could not yet be reasonably estimated and would depend on portfolio characteristics and economic conditions. Ordinary-course litigation and regulatory examinations were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How much of the exceptional Q1 earnings reflects sustainable core performance versus the MSR valuation recapture and elevated mortgage production.
- Whether mortgage origination volumes, gain-on-sale margins and MSR valuations persist as interest rates and refinance activity change.
- Credit trends underlying the allowance, including commercial real estate exposures, past-due and nonaccrual loans, and pandemic-related borrower deferrals.
- Deposit growth, funding costs, available borrowing capacity and sensitivity to interest-rate changes; the filing’s EVE analysis showed a 13.55% decline under a 100-basis-point rate decrease at March 31.
- Effects of share repurchases, dividends and the remaining authorization on capital and share count; also verify future CECL transition impacts and any material developments in litigation or PPP-related risks.