SB Financial Group Announces Second Quarter 2020 Results

DEFIANCE, Ohio, July 27, 2020 /PRNewswire/ -- SB Financial Group, Inc. (NASDAQ: SBFG) ("SB Financial" or the "Company"), a diversified financial services company providing full-service community banking, mortgage banking, wealth management, private client and title insurance services today reported earnings for the second quarter and six months ended June 30, 2020.

Second quarter 2020 highlights over prior-year second quarter include:

• Net income of $3.7 million; diluted earnings per share ("EPS") of $0.47
• Adjusted net income, excluding the impact of the Originated Mortgage Servicing Rights ("OMSR") impairment of $1.1 million and Edon merger costs of $1.2 million with a combined after-tax impact of $1.8 million, was $5.5 million, with EPS of $0.71
• Mortgage origination volume of $223.7 million, an increase of $125.2 million, or 127.2 percent

Six months ended June 30, 2020, highlights over prior-year six months include:

• Net income of $4.3 million; adjusted for OMSR and merger costs of $3.6 million after-tax net income rises to $7.9 million, which was up $2.0 million, or 33.0 percent
• Diluted EPS of $0.56; adjusted EPS of $1.03
• Return on Average Assets ("ROA") of 0.78 percent; adjusted ROA of 1.42 percent

Second quarter 2020 trailing twelve-month highlights include:

• Loan growth of $87.0 million, or 10.7 percent, which includes Paycheck Protection Program ("PPP") loan balances of $82.9 million and loans acquired in the Edon acquisition of $16.3 million.
• Deposit growth of $151.2 million, or 18.0 percent, driven by PPP balances and the Edon acquisition
• Mortgage origination volume of $620.5 million; servicing portfolio of $1.26 billion, which is up $0.15 billion, or 13.4 percent

"SB Financial's second quarter results reflect the efforts of our staff working at full capacity to best serve our residential mortgage and small business clients and to integrate the Edon acquisition.  Despite an OMSR impairment of $1.1 million and merger costs of $1.2 million, our GAAP diluted EPS were up 42 percent from the prior year.  Adjusting for those events, EPS of $0.71 were up 78 percent from $0.40 in the prior year, reflecting the success of our balance sheet growth and revenue diversity strategies" said Mark A. Klein, Chairman, President, and CEO of SB Financial.   "Our offices are back open and we remain committed to serving all of our clients in a safe and productive manner as we monitor the COVID-19 situation."

RESULTS OF OPERATIONS

Consolidated Revenue

Total operating revenue, consisting of net interest income and noninterest income, was up 39.6 percent from the second quarter of 2019, and up 63.3 percent to the linked quarter.

• Net interest income was flat from the year-ago quarter, and up 3.8 percent from the linked quarter. 
• Net interest margin on a fully taxable equivalent basis (FTE) was down from both year-ago and linked quarters by 56 and 16 basis points, respectively as cash balances were higher and the PPP loans held down loan yields.  
• Noninterest income was up 133 and 299 percent from the year ago and linked quarters, respectively.       

Mortgage Loan Business

Mortgage loan originations for the second quarter of 2020 were $223.7 million, up $125.2 million, or 127.2 percent, from the year-ago quarter.  Total sales of originated loans were $204.6 million, up $133.6 million, or 188.2 percent, from the year-ago quarter.  Refinance activity accelerated in the quarter, with total internal refinance volume of $88.4 million or 39 percent, compared to 19 percent for all of 2019.  For the first six months, SB Financial had total volume of $325.0 million, of which $113.1 million (35 percent) was internal refinance, $100.7 million was external refinance (31 percent), and the remaining $111.2 million was new purchase/construction lending.

Net mortgage banking revenue, consisting of gains on the sale of mortgage loans and net loan servicing fees, was $6.2 million for the second quarter of 2020, compared to $1.2 million for the year-ago quarter.  The mortgage servicing valuation adjustment for the second quarter of 2020 was a negative $1.1 million, compared to a negative adjustment of $0.7 million for the second quarter of 2019.  For the first six months, the impairment on servicing rights was $3.3 million compared to $1.4 million for the prior year six months.  The aggregate servicing valuation impairment ended the quarter at $4.6 million.  The servicing portfolio at June 30, 2020, was $1.26 billion, up $0.15 billion, or 13.4 percent, from $1.11 billion at June 30, 2019.  Normal amortization is up 242 percent from the prior year due to higher refinance activity.

Mr. Klein noted, "Mortgage volume accelerated again in the quarter as we originated over $223 million in volume.  Given the volatility in the mortgage markets early in the quarter, our disciplined approach was critical in achieving the record number of originations and sales in the quarter.  We remain very bullish on the mortgage business and our pipelines in all markets are near capacity."

Noninterest Income and Noninterest Expense

SB Financial's noninterest income includes revenue from a diverse group of services, such as wealth management, deposit fees, residential loan sales and the sale of Small Business Administration (SBA) and U.S. Department of Agriculture (USDA) loans.  SBA and USDA activity outside of the PPP program for the quarter consisted of total origination volume of $0.1 million, with sales volume of $0.4 million resulting in gains of $0.07 million.  Wealth management assets under the Company's care rebounded to $495.0 million as of June 30, 2020.  For the second quarter of 2020, noninterest income as a percentage of total operating revenue was 49.3 percent.  Reflective of the robust mortgage market, SB Financial's Title Agency provided revenue in the quarter of $0.6 million, up 98 percent from the prior year. 

For the second quarter of 2020, noninterest expense of $11.7 million was up $2.6 million compared to the prior year or 28.0 percent.  Excluding the $1.2 million of legal, technology and processing costs incurred for the Edon merger, year-over-year growth was 15.4 percent, which is driven by higher mortgage commission and higher expenses in the Title Agency.

Mr. Klein stated, "We actively participated in the SBA's PPP program and helped nearly 650 small business clients with $83 million in loans on our way to help preserve over 9,000 jobs.  Our efforts rested exclusively with the small business owner as our average loan size was $124 thousand and our median loan size was $42 thousand;  just 15 clients borrowed in excess of $1.0 million.  Interest and fees from these loans increased revenue in the quarter by $450,000; the remaining deferred fees associated with the PPP initiative now stands at $2.7 million.  We were especially pleased with the nearly 200 new relationships we were able to garner by our participation in the program.  In the aggregate, net non-interest expense was the lowest ever at -1.0 percent and led to a positive adjusted operating leverage for the first half of 2020."

Balance Sheet

Total assets as of June 30, 2020, were $1.2 billion, up $173.8 million, or 16.9 percent, from the year ago quarter due to the impact of the Edon acquisition ($68.1 million) and the PPP activity.  Total equity as of June 30, 2020, was $137.9 million, up 2.9 percent from a year ago, and comprised 11.5 percent of total assets. 

Total loans held for investment were $901.5 million at June 30, 2020, up $87.0 million, or 10.7 percent, from June 30, 2019.  Commercial loans were up $78.3 million, or 54.5 percent, commercial real estate up $15.0 million or 4.1 percent and agricultural loans increasing $4.5 million or 8.3 percent.   The Edon acquisition added $16.3 million in loan balances.  Absent the effects of the Edon acquisition and PPP loans, loan balances were down $12.0 million from the year ago quarter.

The investment portfolio of $109.1 million, including shares in the Federal Reserve Bank and Federal Home Loan Bank, represented 9.1 percent of assets at June 30, 2020, and was up 21.4 percent from the year-ago period.  Deposit balances of $990.6 million at June 30, 2020, increased by $151.2 million, or 18.0 percent, since June 30, 2019.  Growth from the prior year included $112.2 million in checking and $39.0 million in savings and time deposit balances. The Edon acquisition added $52.3 million in deposit balances and retention of PPP funding in the Bank increased checking deposits significantly.

Mr. Klein continued, "A large percentage of our PPP clients have retained their loan balances in their operating accounts and the successful integration of the Edon acquisition added to our deposit balances in the quarter.  Like all banks we have seen some weakness in certain industries and our nonperforming assets to total assets increased to 64 basis points at quarter end, up 21 basis points from the prior year.  We did set aside much higher reserves in the quarter, totaling $1.3 million."

Asset Quality

SB Financial reported nonperforming assets of $7.7 million as of June 30, 2020, up $3.3 million from the year-ago quarter.  The Company took $0.2 million in charge-offs in the quarter and expects further pressure on the portfolio due to the COVID-19 impact.  The coverage of problem loans by the loan loss allowance was at 136 percent at June 30, 2020, down from 212 percent at June 30, 2019.  The Company continued to provide payment relief to clients as needed, with total forbearance  as of June 30, 2020 of 510 loans at $195.1 million.  The detail on these deferrals; 200 commercial at $142.7 million, 62 portfolio residential and consumer at $10.6 million and 248 sold residential real estate at $41.8 million.  

Webcast and Conference Call

The Company will hold a related conference call and webcast on July 28, 2020, at 11:00 a.m. EDT.  Interested parties may access the conference call by dialing 1-888-338-9469.  The webcast can be accessed at ir.yourstatebank.com.  An audio replay of the call will be available on the Company's website.

About SB Financial Group                                                                          

Headquartered in Defiance, Ohio, SB Financial is a diversified financial services holding company for the State Bank & Trust Company (State Bank) and SBFG Title, LLC dba Peak Title (Peak Title).  State Bank provides a full range of financial services for consumers and small businesses, including wealth management, private client services, mortgage banking and commercial and agricultural lending, operating through a total of 21 offices; 20 in nine Ohio counties and one in Fort Wayne, Indiana, and 23 full-service ATMs. State Bank has five loan production offices located throughout the Tri-State region of Ohio, Indiana and Michigan.  Peak Title provides title insurance and opinions throughout the Tri-State region. SB Financial's common stock is listed on the NASDAQ Capital Market under the symbol "SBFG".

In May 2020, SB Financial was ranked #125 on the American Banker Magazine's list of Top 200 Publicly Traded Community Banks and Thrifts based on three-year average return on equity ("ROE").

Forward-Looking Statements

Certain statements within this document, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties and actual results may differ materially from those predicted by the forward-looking statements. These risks and uncertainties include, but are not limited to, the duration and scope of the COVID-19 outbreak in the United States and the market areas in which SB Financial and its subsidiaries operate, including the impact to the state and local economies of prolonged shelter in place orders and the pandemic generally, risks and uncertainties inherent in the national and regional banking industry, changes in economic conditions in the market areas in which SB Financial and its subsidiaries operate, changes in policies by regulatory agencies, changes in accounting standards and policies, changes in tax laws, fluctuations in interest rates, demand for loans in the market areas in SB Financial and its subsidiaries operate, increases in FDIC insurance premiums, changes in the competitive environment, losses of significant customers, geopolitical events, the loss of key personnel and other risks identified in SB Financial's Annual Report on Form 10-K and documents subsequently filed by SB Financial with the Securities and Exchange Commission.  Forward-looking statements speak only as of the date on which they are made, and SB Financial undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made, except as required by law. All subsequent written and oral forward-looking statements attributable to SB Financial or any person acting on its behalf are qualified by these cautionary statements.

Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles ("GAAP"). Non-GAAP financial measures, specifically pre-tax, pre-provision income, tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, return on average tangible common equity, total interest income – FTE, net interest income – FTE and net interest margin – FTE are used by the Company's management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.  In addition, the Company excludes the non-GAAP items of OMSR impairment and merger related costs from net income to report an adjusted net income level.  Although management believes these non-GAAP measures are useful to investors by providing a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Investor Contact Information:Mark A. KleinChairman, President and Chief Executive OfficerMark.Klein@YourStateBank.com

Anthony V. CosentinoExecutive Vice President and Chief Financial OfficerTony.Cosentino@YourStateBank.com