SB Financial Group, Inc. — Q1 2023 Form 10-Q
Business context and period. SB Financial is an Ohio financial holding company whose principal subsidiary, State Bank, conducts commercial banking. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. Dollar amounts are in millions unless stated otherwise.
Financial performance and condition
- Earnings and revenue: Net income was $2.45 million, down 12.9% from $2.81 million; diluted EPS was $0.35 versus $0.40. Total revenue was $14.0 million, down 2.0%. Net interest income rose to $10.32 million from $8.48 million, while noninterest income fell to $3.67 million from $5.80 million.
- Margins and expenses: Net interest margin increased to 3.35% from 2.67%; management attributed the improvement to higher asset yields and a greater share of earning assets in loans. Funding costs also increased: the cost of interest-bearing liabilities was 1.46% versus 0.39%. Noninterest expense was nearly unchanged at $10.77 million versus $10.86 million. The effective tax rate was 17.4% versus 17.7%.
- Mortgage business: Mortgage originations were $49.4 million versus $97.4 million a year earlier; $25.8 million was sold, versus $72.2 million. Net mortgage banking revenue decreased to $1.2 million from $2.9 million.
- Cash flow: Operating activities used $4.14 million, investing activities used $9.36 million, and financing activities provided $7.31 million. Cash and cash equivalents decreased $6.19 million to $21.63 million. The filing reports negative operating cash flow in both comparable quarters.
- Balance sheet and liquidity: Assets were $1.341 billion, up 0.4% from year-end. Loans were $976.3 million, up 1.5%, and deposits were $1.110 billion, up 2.2%. Management reported liquid assets of $266.2 million. Estimated uninsured deposits were $121.1 million, down from $154.5 million at year-end.
- Debt and capital: Borrowed funds totaled $90.4 million, down from $104.8 million at year-end, primarily due to net repayment of FHLB advances. At quarter-end, FHLB advances were $44.5 million and repurchase agreements $16.0 million; trust preferred securities and subordinated debt were $10.3 million and $19.6 million, respectively. Shareholders’ equity was $119.8 million, or 8.9% of assets. State Bank was classified as well capitalized; its total risk-based capital ratio was 14.69%.
- Credit quality: The allowance for credit losses was $15.44 million, or 1.58% of loans. Nonaccrual loans were $3.40 million and nonperforming assets were $4.69 million, or 0.35% of assets. Net charge-offs were $61,000. The quarter included a $250,000 provision for credit losses.
Material changes and notable items
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $1.37 million and established a $1.15 million reserve for unfunded commitments; the cumulative retained-earnings reduction was approximately $2.0 million. The company did not elect to phase in the capital effect.
- Mortgage-related income declined amid higher interest rates, sharply lower mortgage volume, reduced refinance activity, and constrained housing inventory. Mortgage servicing rights impairment recapture was $56,000 in Q1 2023, compared with $890,000 in Q1 2022.
- Available-for-sale securities had $37.6 million of gross unrealized losses at March 31, 2023, down from $40.7 million at year-end. Management considered the declines temporary and reported no securities credit-loss allowance. Accumulated other comprehensive loss was $29.7 million.
- The company repurchased 55,800 shares for $865,000 during the quarter under its authorized repurchase program. The quarterly common dividend was $0.125 per share.
Outlook, risks, and contingencies
The filing provides no quantified earnings, revenue, or margin guidance. Management said current liquidity was sufficient and cited additional FHLB borrowing capacity of approximately $109.2 million, plus $152.3 million of unpledged securities available to pledge. Management also noted that higher funding costs compressed net interest income relative to the second half of 2022.
Risks highlighted include deposit outflows and funding pressure amid recent bank failures and potential changes in customer confidence; interest-rate, liquidity, and market risks; credit deterioration or collateral-value declines, including in commercial real estate; mortgage-banking volatility; and operational, cybersecurity, regulatory, and economic risks. The company reported ordinary-course legal matters and said their resolution was not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Deposit mix, uninsured-deposit estimates, deposit pricing, and the company’s ability to retain funding if customer confidence or market conditions change.
- Whether CECL assumptions and reserves remain adequate as economic forecasts, borrower performance, and collateral values evolve.
- Trends in net interest margin and funding costs, especially as deposits reprice and borrowings mature.
- Mortgage originations, secondary-market sales, servicing income, and mortgage servicing rights valuations.
- The size and duration of unrealized securities losses, available liquidity and borrowing capacity, and regulatory capital levels.