PART I Financial Statements The company's total assets grew to $1.33 billion by September 30, 2021, with nine-month net income increasing 56% to $14.9 million, though third-quarter net income declined 21.8% due to lower mortgage loan sale gains Condensed Consolidated Balance Sheet Highlights | ($ in thousands) | September 2021 (unaudited) | December 2020 (audited) | Change | | :--- | :--- | :--- | :--- | | Total assets | $ 1,329,725 | $ 1,257,839 | +5.7% | | Loans, net | $ 832,736 | $ 860,149 | -3.2% | | Available-for-sale securities | $ 248,815 | $ 149,406 | +66.5% | | Total deposits | $ 1,111,660 | $ 1,049,011 | +6.0% | | Total shareholders' equity | $ 144,292 | $ 142,923 | +1.0% | Condensed Consolidated Income Statement Highlights | ($ in thousands, except per share data) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $ 10,024 | $ 9,259 | $ 28,806 | $ 26,679 | | Provision for loan losses | $ 300 | $ 1,800 | $ 1,050 | $ 3,700 | | Total noninterest income | $ 6,649 | $ 10,418 | $ 24,108 | $ 21,194 | | Net Income | $ 4,103 | $ 5,250 | $ 14,945 | $ 9,586 | | Diluted earnings per common share | $ 0.58 | $ 0.69 | $ 2.08 | $ 1.25 | Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended) | ($ in thousands) | September 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $ 6,010 | $ 5,369 | | Net cash used in investing activities | $ (77,909) | $ (54,086) | | Net cash provided by financing activities | $ 69,224 | $ 116,294 | | Increase (Decrease) in cash and cash equivalents | $ (2,675) | $ 67,577 | Note 3 – Business Combination On June 5, 2020, the Company acquired Edon Bancorp for $15.5 million in cash, recording $4.3 million in goodwill and $0.7 million in core deposit intangibles to expand its Northwest Ohio presence - The Company acquired Edon Bancorp and its subsidiary, The Edon State Bank Company of Edon, Ohio, effective June 5, 202038 Edon Bancorp Acquisition Details | Metric | Value ($ in millions) | | :--- | :--- | | Total Purchase Price (cash) | $15.5 | | Goodwill Recorded | $4.3 | | Core Deposit Intangible Recorded | $0.7 | | Direct Acquisition Costs Expensed | $1.2 | Note 5 – Loans and Allowance for Loan Losses Total loans decreased to $846.5 million by September 30, 2021, while the allowance for loan losses increased to $13.8 million, and nonaccrual loans significantly declined to $3.2 million, indicating improved credit quality Loan Portfolio Composition | ($ in thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial & industrial | $ 138,377 | $ 204,767 | | Commercial real estate | $ 387,720 | $ 370,820 | | Agricultural | $ 57,318 | $ 55,235 | | Residential real estate | $ 207,675 | $ 182,165 | | Consumer & HELOC | $ 55,660 | $ 61,157 | | Total loans | $ 846,750 | $ 874,144 | Allowance for Loan Losses (ALLL) Activity (Nine Months Ended Sep 30, 2021) | ($ in thousands) | Amount | | :--- | :--- | | Beginning balance (Jan 1, 2021) | $ 12,574 | | Charge offs | $ (102) | | Recoveries | $ 290 | | Provision | $ 1,050 | | Ending balance (Sep 30, 2021) | $ 13,812 | - Nonaccrual loans decreased significantly from $6.4 million at the end of 2020 to $3.2 million as of September 30, 202159 - As of September 30, 2021, the Company had no loans on COVID-related deferral, down from the relief provided under the CARES Act87 Note 7 – Mortgage Servicing Rights Mortgage servicing rights increased to $11.2 million by September 30, 2021, driven by capitalized MSRs and a $2.9 million recapture of impairment, with $1.3 billion in unpaid principal balance of serviced mortgage loans - The unpaid principal balance of mortgage loans serviced for others was approximately $1.3 billion at both September 30, 2021, and December 31, 202090 Mortgage Servicing Rights Activity (Nine Months Ended Sep 30) | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Balance at beginning of period | $ 7,759 | $ 11,017 | | MSRs capitalized | $ 3,658 | $ 3,971 | | MSRs amortization | $ (3,078) | $ (3,479) | | Net change in valuation allowance | $ 2,855 | $ (2,974) | | Balance at end of period | $ 11,194 | $ 8,535 | Note 13 – Subordinated Debt On May 27, 2021, the Company issued $20.0 million in 3.65% Fixed to Floating Rate Subordinated Notes due 2031, with net proceeds of approximately $19.5 million - On May 27, 2021, the Company issued $20.0 million in aggregate principal amount of its 3.65% Fixed to Floating Rate Subordinated Notes due 2031111 - The interest rate is fixed at 3.65% through May 31, 2026, and then resets quarterly to SOFR + 296 basis points. Net proceeds were approximately $19.5 million after $0.5 million in issuance costs111 Management's Discussion and Analysis of Financial Condition and Results of Operations Net income for the first nine months of 2021 increased 56% to $14.9 million, despite a 21.8% decline in Q3 net income, while total assets grew 5.7% to $1.33 billion and the bank maintained a 'well capitalized' status Results of Operations Third-quarter 2021 net income decreased 21.8% to $4.1 million due to lower mortgage banking revenue, while nine-month net income increased 56% to $14.9 million, driven by a lower provision for loan losses and MSR impairment recapture Q3 2021 vs Q3 2020 Performance | Metric | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Net Income | $4.1M | $5.3M | -21.8% | | Diluted EPS | $0.58 | $0.69 | -15.9% | | Provision for Loan Losses | $0.3M | $1.8M | -83.3% | | Net Mortgage Banking Revenue | $4.1M | $7.9M | -48.1% | Nine Months 2021 vs 2020 Performance | Metric | Nine Months 2021 | Nine Months 2020 | Change | | :--- | :--- | :--- | :--- | | Net Income | $14.9M | $9.6M | +56.0% | | Diluted EPS | $2.08 | $1.25 | +66.4% | | Provision for Loan Losses | $1.1M | $3.7M | -70.3% | | MSR Impairment (Recapture) | $2.9M Recapture | ($3.0M) Impairment | Favorable | - The company continued its participation in the PPP lending program, processing $24.6 million in forgiveness during Q3 2021 and holding an outstanding balance of $10.2 million at September 30, 2021159 Changes in Financial Condition Total assets increased 5.7% to $1.33 billion by September 30, 2021, supported by a 6.0% rise in deposits, while total loans decreased 3.0% to $846.5 million Financial Condition at Sep 30, 2021 vs Dec 31, 2020 | ($ in billions) | Sep 30, 2021 | Dec 31, 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $1.33 | $1.26 | +5.7% | | Total Loans | $0.847 | $0.873 | -3.0% | | Total Deposits | $1.11 | $1.05 | +6.0% | | Total Equity | $0.144 | $0.143 | +1.0% | - The allowance for loan loss increased by $1.2 million from year-end 2020 to reach $13.8 million178 Capital Resources As of September 30, 2021, State Bank was classified as 'well capitalized,' with all capital ratios exceeding minimum regulatory requirements, demonstrating a strong capital position - State Bank was classified as 'well capitalized' under the regulatory framework for prompt corrective action as of September 30, 2021179 State Bank Capital Ratios (September 30, 2021) | Capital Ratio | Actual Ratio | 'Well Capitalized' Minimum | | :--- | :--- | :--- | | Tier I Capital to average assets | 9.98% | 5.0% | | Tier I Common equity capital to risk-weighted assets | 13.23% | 6.5% | | Tier I Capital to risk-weighted assets | 13.23% | 8.0% | | Total Risk-based capital to risk-weighted assets | 14.48% | 10.0% | Liquidity The company maintained a strong liquidity position with liquid assets increasing to $399.8 million by September 30, 2021, supplemented by significant off-balance-sheet borrowing capacity and unpledged securities - Liquid assets increased to $399.8 million at September 30, 2021, from $303.2 million at December 31, 2020181 - The company has significant additional off-balance-sheet liquidity, including approximately $105.2 million in additional FHLB borrowing capacity and $161.0 million in unpledged securities available to pledge for borrowings194 - For the nine months ended September 30, 2021, net cash from financing activities was $69.2 million, primarily from a $133.7 million increase in transaction deposits and $19.5 million in proceeds from new subordinated debt, partially offset by a $71.0 million decrease in time deposits187 Quantitative and Qualitative Disclosures About Market Risk Management states that there has been no material change in the Company's market risk since the information provided in its Annual Report on Form 10-K for the year ended December 31, 2020 - There has been no material change in the Company's market risk from the information contained in the Annual Report on Form 10-K for the year ended December 31, 2020203 Controls and Procedures The company's principal executive officer and principal financial officer concluded that as of the end of the quarter, the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of the end of the quarterly period204206 - No changes occurred during the fiscal quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting205 PART II – OTHER INFORMATION Legal Proceedings The company is involved in various legal actions incidental to its ordinary course of business, with management believing their ultimate resolution will not materially adversely affect financial position or results - In the opinion of management, any liability from pending legal actions is not likely to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows208 Risk Factors There have been no material changes to the risk factors previously disclosed, referring to the detailed discussion in prior Form 10-K and Form 10-Q reports - The report states there are no material changes to the risk factors from those disclosed in the 2020 Form 10-K and the Q2 2021 Form 10-Q209 Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, the company repurchased 106,911 common shares at a weighted average price of $18.32, as part of a new program authorizing up to 750,000 shares, with 539,258 shares remaining available - On May 25, 2021, the board of directors approved a new share repurchase program for up to 750,000 common shares through May 31, 2022210 Share Repurchases for Q3 2021 | Period | Total Shares Purchased | Weighted Average Price Paid per Share | | :--- | :--- | :--- | | July 2021 | 54,542 | $18.49 | | August 2021 | 29,542 | $18.15 | | September 2021 | 22,827 | $18.15 | | Total Q3 | 106,911 | $18.32 | - As of September 30, 2021, a maximum of 539,258 shares may yet be purchased under the current plan211 Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and Inline XBRL data files
SB Financial Group(SBFG) - 2021 Q3 - Quarterly Report