SB Financial Group, Inc. — Q1 2022 Form 10-Q
Business and period: Ohio-based financial holding company, principally operating State Bank and related mortgage, title, and insurance businesses. This unaudited report covers the three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless noted.
Financial performance
| Metric | Q1 2022 | Prior comparable period / change |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $14.3 million | $20.5 million; down 30.5% |
| Net interest income | $8.5 million | $9.6 million; down $1.1 million |
| Net interest margin (FTE) | 2.68% | 3.21%; down 53 basis points |
| Noninterest income | $5.8 million | $10.9 million |
| Noninterest expense | $10.9 million | $10.9 million; approximately flat |
| Net income / diluted EPS | $2.8 million / $0.40 | $7.1 million / $0.97; net income down 60.3% |
| Provision for loan losses | $0 | $0.75 million |
| Net cash from operating / investing / financing activities | $(1.5) million / $(43.3) million / $25.3 million | $(0.9) million / $(5.6) million / $71.8 million |
Mortgage banking was the primary earnings headwind: originations fell more than 37% year over year, and gains on mortgage loan sales and servicing rights declined to $1.7 million from $5.9 million. Management attributed the decrease to higher rates reducing refinancing and limited housing inventory constraining purchase activity. Results in both periods benefited from recaptures of mortgage servicing rights impairment: $0.9 million in Q1 2022 versus $2.7 million in Q1 2021.
Financial position, liquidity, and capital
- Total assets were $1.335 billion, up $4.3 million from year-end. Loans, net of unearned income, were $850.7 million, up 3.4%; deposits were $1.138 billion, up 2.2%.
- Cash and due from banks ended at $130.0 million, down from $149.5 million. Management reported liquid assets of $401.9 million, compared with $422.9 million at year-end, and considered liquidity adequate.
- Total shareholders’ equity was $132.6 million, or 9.9% of assets, versus $144.9 million, or 10.9%, at year-end. The decline primarily reflected an $11.8 million increase in unrealized losses on available-for-sale securities. The securities portfolio had $17.5 million of gross unrealized losses at quarter-end versus $3.6 million at year-end; management considered the declines temporary and reported no other-than-temporary impairment.
- Borrowed funds totaled $54.4 million, including $19.0 million in repurchase agreements, $5.5 million in FHLB advances, $10.3 million in trust preferred securities, and $19.6 million in subordinated debt, net of issuance costs. The $20 million subordinated notes carry a 3.65% fixed rate through May 2026, then float at three-month SOFR plus 296 basis points. The trust preferred securities reference three-month LIBOR; the replacement index had not yet been determined.
- State Bank was classified as well capitalized. At March 31, its Tier 1 capital-to-average-assets ratio was 10.35%, Tier 1 common equity-to-risk-weighted-assets ratio was 13.71%, and total risk-based capital ratio was 14.96%.
- Additional stated liquidity sources included approximately $108.9 million of FHLB borrowing capacity, $173.6 million in unpledged securities, and $41.0 million of undrawn federal funds lines.
Credit quality and other changes
- Total loans grew $28.0 million in the quarter. Nonaccrual loans were $4.3 million; total past-due loans were $5.0 million, or about 0.59% of loans. Nonperforming assets were $5.6 million, or 0.42% of assets, versus $6.5 million and 0.49% a year earlier.
- The allowance for loan losses was $13.8 million, or 1.62% of loans, versus 1.57% a year earlier. Net charge-offs were approximately $0.01 million. No new troubled debt restructurings were reported in the quarter, and previously COVID-modified loans had returned to normal payment terms.
- Net interest income also faced lower PPP-related income ($0.1 million versus $0.8 million a year earlier) and a lower yield on earning assets. Interest expense declined, while funding costs on interest-bearing liabilities were 0.39% versus 0.50%.
- The company repurchased 130,848 shares for $2.6 million in the quarter. A 5% stock dividend was paid in February; the quarterly cash dividend was $0.115 per share.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements are subject to uncertainty, including interest-rate and inflation changes, economic and geopolitical conditions, mortgage market volatility, borrower and collateral performance, competition, LIBOR transition, regulatory and accounting changes, and operational, cybersecurity, legal, and staffing risks. Management expected CECL implementation on January 1, 2023 and anticipated no material financial-statement impact, while continuing to estimate the effect. Ordinary-course legal matters were not expected by management to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether mortgage origination and sale activity, servicing-rights valuations, and related impairment recaptures remain at levels that support earnings.
- How rising rates affect net interest margin, deposit costs, securities values, and the value of shareholders’ equity; the filing reports substantial growth in unrealized securities losses.
- Trends in delinquencies, nonaccrual loans, criticized credit grades, and allowance adequacy as the portfolio grows and CECL adoption approaches.
- Availability and cost of liquidity, including deposit stability, pledged collateral, borrowing capacity, and the funding profile of time deposits.
- The LIBOR replacement for trust preferred securities and the future floating-rate terms of subordinated debt beginning in 2026.