SB Financial Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. SB Financial is an Ohio-based financial holding company whose principal subsidiary, State Bank, provides commercial banking services. Amounts below are in U.S. dollars; financial statement figures are generally rounded to millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $16.7 million | $19.7 million | $52.9 million | $47.9 million |
| Net interest income | $10.0 million | $9.3 million | $28.8 million | $26.7 million |
| Provision for loan losses | $0.3 million | $1.8 million | $1.1 million | $3.7 million |
| Noninterest income | $6.6 million | $10.4 million | $24.1 million | $21.2 million |
| Noninterest expense | $11.3 million | $11.3 million | $33.2 million | $32.4 million |
| Net income | $4.1 million | $5.3 million | $14.9 million | $9.6 million |
| Diluted EPS | $0.58 | $0.69 | $2.08 | $1.25 |
| Net interest margin, FTE | 3.21% | 3.41% | 3.12% | 3.41% |
- Q3 net income declined 21.8% year over year, while nine-month net income increased 56%. Q3 revenue fell 15.3%; nine-month revenue rose 10.4%.
- Q3 net interest income improved by $0.8 million, including $1.1 million of PPP fees and interest versus $0.6 million a year earlier. Lower funding costs were partly offset by lower yields on earning assets.
- Mortgage banking was a significant Q3 headwind: mortgage gain-on-sale and servicing revenue was lower as originations and loan sales declined. Mortgage loans originated were $153.1 million in Q3 2021 versus $200.2 million in Q3 2020.
- For the first nine months, mortgage servicing rights (MSR) valuation activity included a $2.9 million recapture in 2021, versus a $3.0 million impairment in 2020. In Q3, the respective recaptures were $0.25 million and $0.33 million.
Financial position, cash flow and liquidity
- At September 30, 2021, total assets were $1.330 billion, up 5.7% from year-end 2020. Net loans were $846.5 million, down 3.0%; deposits were $1.112 billion, up 6.0%.
- Cash and due from banks was $138.0 million. Available-for-sale securities were $248.8 million, compared with $149.4 million at year-end; the portfolio carried $2.6 million of gross unrealized losses, which management assessed as temporary.
- For the nine months, operating cash flow was $6.0 million, investing cash flow was negative $77.9 million, and financing cash flow was positive $69.2 million. Cash and cash equivalents decreased $2.7 million from year-end.
- Borrowed funds totaled $56.1 million, including $20.8 million of repurchase agreements, $5.5 million of FHLB advances, $10.3 million of trust preferred securities and $19.5 million of subordinated debt, net of issuance costs. The company issued $20 million principal amount of subordinated notes in May 2021, bearing 3.65% fixed interest through May 2026 and floating thereafter.
- Shareholders’ equity was $144.3 million, or 10.9% of assets, compared with $142.9 million, or 11.4%, at year-end. State Bank was classified as well capitalized; its total risk-based capital ratio was 14.48% and Tier 1 leverage ratio was 9.98%.
- Management reported liquid assets of $399.8 million and approximately $105.2 million of additional FHLB borrowing capacity, plus $161.0 million of unpledged securities available for borrowing. Management stated current liquidity was sufficient.
- Economic value of equity analysis showed an 11.85% decline under a 100-basis-point rate decrease at September 30, versus a 15.19% decline at year-end 2020. The filing says no material change in overall market risk from the 2020 annual report.
Credit quality, material developments and risks
- The allowance for loan losses was $13.8 million, or 1.63% of loans, versus $12.6 million, or 1.44%, at year-end 2020. Nonaccrual loans were $3.2 million, down from $6.4 million at year-end; total delinquent loans were $3.0 million, or 0.35% of loans.
- Nonperforming assets were $5.6 million, or 0.42% of assets, compared with $7.3 million, or 0.60%, a year earlier. Foreclosed assets held for sale increased to $1.6 million from approximately $0.02 million at year-end.
- The company processed $24.6 million of PPP loan forgiveness during Q3; $10.2 million of PPP loans remained outstanding at quarter-end. No loans were on COVID-related deferral. Two HELOCs totaling $42,000 were modified as troubled debt restructurings during the first nine months; none were newly modified in Q3.
- Noninterest expense was nearly flat year over year in Q3. For the nine-month period it increased 2.6%, reflecting staffing, benefits and technology investment; the 2020 comparison included $1.2 million in one-time Edon acquisition costs. The Edon acquisition closed in June 2020.
- The company repurchased 106,911 shares during Q3 at a weighted-average price of $18.32 under its authorization to repurchase up to 750,000 shares through May 31, 2022. Dividends were $0.11 per share in Q2 and Q3.
- No specific earnings or financial guidance was provided. Management’s forward-looking statements identify risks including economic and COVID-19 effects, PPP-related litigation or other risks, interest-rate changes, loan demand and credit performance, competition, regulatory changes, LIBOR transition, operating risks and loss of key personnel.
- CECL adoption is scheduled for January 1, 2023; management expects it may increase credit-loss allowances but could not yet reasonably estimate the impact. Management reported no material pending litigation, no goodwill impairment, and effective disclosure controls.
Important facts for investors to verify
- Whether mortgage production, loan-sale gains and MSR valuation adjustments remain major drivers of quarterly earnings volatility.
- Credit trends behind the lower nonaccrual and delinquency balances, the increased allowance, and the rise in foreclosed assets.
- The quality and duration of the expanded securities portfolio, including interest-rate sensitivity and the unrealized-loss position.
- Deposit composition, available borrowing capacity, and the cost and terms of subordinated debt as it transitions to a floating rate in 2026.
- The eventual effect of CECL adoption on reserves and regulatory capital, and the pace of PPP forgiveness and remaining loan runoff.
- Execution of the share repurchase program and its effect on share count, capital and per-share results.