SB Financial Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. SB Financial is a financial holding company whose principal subsidiary, State Bank, conducts commercial banking. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $14.2 million | $14.3 million | $28.2 million | $28.5 million |
| Net interest income | $9.8 million | $9.6 million | $20.2 million | $18.1 million |
| Net interest margin | 3.15% | 3.16% | 3.24% | 2.91% |
| Noninterest income | $4.4 million | $4.7 million | $8.0 million | $10.5 million |
| Noninterest expense | $10.3 million | $10.8 million | $21.1 million | $21.7 million |
| Net income | $3.1 million | $2.8 million | $5.5 million | $5.6 million |
| Diluted earnings per share | $0.44 | $0.40 | $0.79 | $0.79 |
| Provision for credit losses | $0.15 million | — | $0.40 million | — |
Q2 net income rose 8.5% year over year, supported by higher loan income and lower expenses, while sharply higher deposit and wholesale funding costs offset much of the benefit. Interest expense for the quarter increased to $4.6 million from $0.9 million. The six-month net income decline of 2.2% reflected lower noninterest income, especially mortgage-related revenue, despite higher net interest income.
Balance sheet, liquidity and capital
- At June 30, 2023, total assets were $1.34 billion, loans were $984.8 million, deposits were $1.07 billion, and shareholders’ equity was $117.7 million.
- Since year-end 2022, loans increased $22.7 million (2.4%), while deposits declined $15.5 million (1.4%). Uninsured deposits were estimated at $160.0 million, down from $220.1 million at year-end.
- Borrowed funds totaled $132.3 million, up from $104.8 million at year-end, primarily due to higher Federal Home Loan Bank advances. FHLB advances were $81.3 million; repurchase agreements were $21.1 million. Trust preferred securities and subordinated debt totaled approximately $29.9 million.
- Cash and due from banks was $21.0 million. Management reported liquid assets of $255.9 million, versus $270.8 million at year-end. Additional disclosed capacity included approximately $91.5 million of FHLB borrowing capacity and $150.1 million of unpledged securities available to pledge.
- For the first six months, operating cash flow was negative $0.9 million, investing cash flow was negative $14.0 million, and financing cash flow was positive $8.1 million. Cash and cash equivalents fell $6.8 million to $21.0 million.
- State Bank was classified as “well capitalized.” At June 30, its Tier 1 leverage ratio was 10.74%, common equity Tier 1 and Tier 1 risk-based ratios were each 13.18%, and total risk-based capital was 14.43%.
Asset quality and securities
- The allowance for credit losses on loans was $15.8 million, or 1.60% of loans, compared with $13.8 million at year-end. The company adopted CECL on January 1, 2023; adoption increased the loan allowance by $1.4 million and established a $1.1 million reserve for unfunded commitments, with a $2.0 million reduction to retained earnings.
- Nonperforming assets were $3.5 million, or 0.26% of total assets, versus $4.7 million and 0.37% a year earlier. Nonaccrual loans were $2.9 million. Total past-due loans were $2.4 million, or approximately 0.24% of loans.
- Net charge-offs were $22,000 for Q2 and $83,000 for the first half, compared with $3,000 and $4,000, respectively, in the comparable 2022 periods. Management reported no loan modifications to borrowers experiencing financial difficulty during the first half of 2023.
- Available-for-sale securities had a fair value of $228.0 million against amortized cost of $269.6 million, including $41.6 million of gross unrealized losses. Management considered the declines temporary and reported no credit-loss allowance on the portfolio. Accumulated other comprehensive loss was $32.9 million; management said equity would be $150.6 million, or 11.2% of assets, excluding the temporary AOCI impairment.
Material changes and management commentary
- Q2 net interest income increased modestly year over year, but the net interest margin was nearly unchanged. Average earning assets rose $32.7 million and their average yield increased 116 basis points; the cost of interest-bearing liabilities rose to 1.90% from 0.39%.
- Mortgage origination volume was down more than 31% year over year in Q2 and more than 40% for the first half. First-half mortgage banking revenue fell to $2.8 million from $4.7 million. Management cited higher interest rates, limited housing supply, and a lower share of originated loans sold as contributing factors.
- First-half noninterest income declined $2.4 million, including the effect of a much smaller mortgage-servicing-rights impairment recapture than in 2022. Management reported lower staffing levels and expense reductions as it resized the mortgage business.
- Available-for-sale securities declined $10.8 million in carrying value from year-end, while the portfolio’s gross unrealized loss widened by approximately $1.0 million. These valuation changes affect reported equity through AOCI.
- The company repurchased 91,260 shares in Q2 at a weighted-average price of $13.67 under its share repurchase program. A further 333,622 shares remained authorized for repurchase at June 30, 2023.
Outlook, risks and contingencies
The filing provides no specific numerical earnings, margin, loan-growth, or deposit-growth guidance. Management said current liquidity was sufficient to meet needs and that additional borrowing sources were available; these statements are not a guarantee of future funding availability.
Key stated risks include interest-rate changes and deposit competition, liquidity pressures and customer confidence following bank failures, economic and real-estate conditions affecting borrowers and collateral, mortgage-market volatility, and operational, cybersecurity, regulatory, legal, and LIBOR-transition risks. Management cautioned that CECL estimates rely on assumptions and forecasts and that changed conditions could require additional credit-loss provisions. Ordinary-course litigation and regulatory matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether deposit trends, uninsured-deposit balances, funding costs, and reliance on FHLB advances changed after June 30.
- Whether higher interest expense continues to pressure net interest margin and earnings as deposits reprice.
- Whether loan delinquencies, nonaccruals, charge-offs, and the CECL allowance indicate worsening credit quality, particularly in commercial real estate.
- Whether the $41.6 million securities unrealized loss remains temporary and how changes in rates affect AOCI, capital, and liquidity.
- Whether mortgage production and mortgage-servicing-rights valuations recover, and whether expense reductions offset lower related revenue.
- Whether disclosed liquidity sources and capital ratios remain adequate under deposit outflows or adverse economic conditions.