Business context and reporting period
SB Financial Group, Inc. is an Ohio financial holding company whose principal subsidiary, The State Bank and Trust Company, provides commercial banking services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods unless otherwise noted. Amounts are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $14.3 | $15.7 | $28.5 | $36.2 |
| Net interest income | $9.6 | $9.2 | $18.1 | $18.8 |
| Noninterest income | $4.7 | $6.5 | $10.5 | $17.5 |
| Noninterest expense | $10.8 | $11.1 | $21.7 | $22.0 |
| Net income | $2.8 | $3.8 | $5.6 | $10.8 |
| Diluted EPS | $0.40 | $0.52 | $0.79 | $1.49 |
- Net income fell 24.6% in Q2 and 47.9% for the first half. Total revenue declined 9.1% and 21.2%, respectively.
- Net interest margin was 3.16% in Q2 versus 2.93% a year earlier; for the first half it was 2.91% versus 3.06%. Q2 average earning assets declined, while yield improved; first-half margin was affected by lower earning-asset yields and reduced PPP fees and interest.
- Mortgage banking was weaker: first-half mortgage originations were $192.8 million versus $320.7 million, and gains on mortgage loan sales were $2.9 million versus $10.1 million. Management cited higher interest rates reducing refinancing and limited housing inventory constraining purchase activity. Q2 mortgage loan volume was down nearly 42% year over year; first-half volume was down nearly 40%.
- Provision for loan losses was zero in Q2 and for the first half, compared with $0.75 million in the first half of 2021. The allowance was $13.8 million, or 1.54% of loans. First-half net charge-offs were $4,000.
- At June 30, total assets were $1.294 billion, down 2.8% from year-end 2021. Loans, net of unearned income, were $895.6 million, up 8.9%; deposits were $1.072 billion, down 3.77%.
- Cash and due from banks was $29.6 million versus $149.5 million at year-end. Management reported liquid assets of $301.7 million versus $422.9 million. First-half operating cash flow was $3.7 million; investing cash flow was negative $111.3 million and financing cash flow negative $12.3 million. Cash and cash equivalents fell $119.9 million to $29.6 million.
- Borrowed funds totaled $85.7 million, up from $50.7 million at year-end, including $30.8 million of short-term borrowings and $25.0 million of FHLB advances. Shareholders’ equity was $124.6 million, 9.6% of assets, compared with $144.9 million and 10.9% at year-end.
- State Bank was classified as well capitalized. Its June 30 capital ratios included 10.72% Tier I capital to average assets and 14.46% total risk-based capital to risk-weighted assets.
Material changes, outlook and risks
- Available-for-sale securities had $28.1 million of net unrealized losses at June 30, versus $3.6 million at December 31, 2021. The resulting first-half after-tax other comprehensive loss was $20.4 million and reduced equity. Management considered the declines temporary and reported no other-than-temporary impairment.
- Q2 and first-half earnings included mortgage servicing rights (MSR) impairment recaptures of $0.24 million and $1.1 million, respectively; the comparable first-half 2021 recapture was $2.6 million. These items partly offset weaker mortgage activity.
- Management said current liquidity was sufficient and identified additional FHLB borrowing capacity of approximately $96.6 million and $176.9 million of unpledged securities. The company also reported $15.5 million of commitments to sell mortgage loans. A specific earnings or revenue forecast was not provided.
- Key stated risks include interest-rate and liquidity changes, inflation and broader economic conditions, borrower repayment and collateral values, mortgage banking volatility, cyber and operational risks, competition, regulatory changes, and the LIBOR transition. The company expected to be prepared to adopt CECL on January 1, 2023; the adoption impact was still being estimated.
- The board extended the share repurchase program through December 31, 2022. The company repurchased 94,211 shares during Q2 at a weighted-average price of $18.07.
- Management stated that pending ordinary-course claims, lawsuits and regulatory examinations were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether mortgage production and gains on loan sales stabilize as interest rates and housing-market conditions change, and how much reported income depends on MSR valuation adjustments.
- Whether deposit trends, cash balances and increased borrowings remain manageable, including access to pledged collateral and contingent funding sources.
- How securities unrealized losses evolve and whether management’s assessment that they are temporary remains supportable; a required sale or credit deterioration could change the accounting outcome.
- Whether loan growth affects credit quality, delinquencies and allowance adequacy, particularly in real estate portfolios; nonaccrual loans were $4.0 million at quarter-end.
- The eventual effect of CECL adoption on the allowance, earnings and disclosures, and the company’s ability to maintain capital and dividends under changing conditions.