SB Financial Group, Inc. — Q3 2023 Form 10-Q
Business context and period: Ohio-based bank holding company operating primarily through The State Bank and Trust Company. This filing covers the quarter and nine months ended September 30, 2023. Financial amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2023 / Sep. 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.7; diluted EPS $0.39 | Q3 2022: $3.3; diluted EPS $0.47 |
| Net interest income | Q3: $9.5; nine months: $29.7 | Q3 2022: $10.4; nine months 2022: $28.5 |
| Net interest margin | Q3: 3.08%; nine months: 3.18% | Q3 2022: 3.45%; nine months 2022: 3.08% |
| Total revenue | Q3: $13.7; nine months: $41.9 | Q3 2022: $14.5; nine months 2022: $43.0 |
| Noninterest income / expense | Q3: $4.2 / $10.5; nine months: $12.2 / $31.6 | Q3 2022: $4.0 / $10.4; nine months 2022: $14.5 / $32.0 |
| Total assets | $1,326.5 | Dec. 31, 2022: $1,335.6 |
| Loans, gross of allowance | $989.0 | Dec. 31, 2022: $962.1 |
| Deposits | $1,085.3 | Dec. 31, 2022: $1,086.7 |
| Shareholders’ equity | $112.3; 8.5% of assets | Dec. 31, 2022: $118.4; 8.9% of assets |
For the nine months, net income was $8.2 million, down 8.6%, and diluted EPS was $1.18 versus $1.27. The filing reports nine-month operating cash flow of $7.2 million, investing cash outflow of $10.3 million, and financing cash outflow of $5.6 million. Cash and cash equivalents ended the period at $19.0 million, down from $27.8 million at year-end 2022.
At September 30, borrowings comprised $59.5 million of FHLB advances, $16.5 million of repurchase agreements, $10.3 million of trust preferred securities, and $19.6 million of subordinated debt, totaling about $106.0 million. Liquid assets were $236.2 million, compared with $270.8 million at year-end. Management reported approximately $100.5 million of additional FHLB borrowing capacity and $110.5 million of unpledged securities available to pledge.
Material changes versus comparable periods
- Q3 net income declined 19.6% year over year. Higher loan income was more than offset by sharply higher deposit and wholesale funding costs. Q3 net interest margin fell to 3.08% from 3.45%; the reported cost of interest-bearing liabilities rose to 2.18% from 0.58%.
- For the first nine months, net interest income increased $1.2 million, but total revenue declined 2.6% as noninterest income fell $2.3 million. Mortgage banking revenue was $4.4 million versus $6.1 million a year earlier; mortgage originations were $176.0 million versus $261.4 million.
- Loan balances increased 2.8% from year-end, while deposits were nearly unchanged overall. Transaction deposits declined, partly offset by growth in time deposits.
- Shareholders’ equity fell $6.1 million from year-end, including the effect of a $7.4 million nine-month other comprehensive loss, primarily from unrealized losses on available-for-sale securities.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management describes continued pressure from higher rates, funding competition, and a constrained mortgage market; actual results remain subject to economic and market uncertainty.
- Credit and asset quality: The allowance for credit losses was $15.8 million, or 1.60% of loans; coverage was 474.3% of nonperforming loans. Nonperforming assets were $4.0 million, or 0.30% of assets. Past-due loans totaled $3.3 million. The company adopted CECL on January 1, 2023, increasing the loan allowance by $1.4 million and establishing a $1.1 million reserve for unfunded commitments, with a $2.0 million reduction to retained earnings. Nine-month provision for credit losses was $0.4 million.
- Market and funding exposure: Available-for-sale securities had $50.0 million of gross unrealized losses at quarter-end, compared with $40.7 million at year-end 2022; fair value was $212.8 million against $262.8 million amortized cost. Management considered declines temporary, and no securities credit-loss allowance was recorded. Regulatory capital excludes AFS unrealized gains and losses under the company’s elected treatment.
- Capital: State Bank was classified as well capitalized. Its September 30 ratios included 10.99% Tier 1 capital to average assets and 14.81% total risk-based capital. Management said there had been no change in that classification since quarter-end.
- Unusual items: Management said Q3 other operating expense included nonrecurring items related to check fraud and a contingent liability identified in a portfolio review. The filing does not quantify each item separately. Nine-month results also compared with a $1.19 million mortgage-servicing-rights impairment recapture in 2022; 2023 had a $0.04 million temporary impairment.
- Contingencies and controls: The company is involved in ordinary-course legal matters; management does not expect their resolution 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
- Whether deposit pricing and funding costs continue to rise, and how that affects net interest margin and earnings.
- Trends in uninsured deposits, liquidity, borrowing capacity, and the mix between transaction and time deposits.
- Credit quality, particularly commercial real estate exposure, delinquency trends, nonperforming loans, and the adequacy of the CECL allowance.
- The size and duration of securities’ unrealized losses, and the potential effect of interest rates or liquidity needs on the company’s ability to hold those securities.
- Further details and financial impact of the Q3 check-fraud matter and portfolio-review contingent liability.
- Mortgage origination and sale volumes, mortgage servicing rights valuations, and the sustainability of noninterest income.