SB Financial Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. SB Financial is an Ohio-based financial holding company; its principal subsidiary, State Bank, provides commercial banking services. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $14.5 | $16.7 | $43.0 | $52.9 |
| Net interest income | $10.4 | $10.0 | $28.5 | $28.8 |
| Net interest margin | 3.46% | 3.21% | 3.09% | 3.12% |
| Noninterest income | $4.0 | $6.6 | $14.5 | $24.1 |
| Noninterest expense | $10.4 | $11.3 | $32.0 | $33.2 |
| Net income | $3.3 | $4.1 | $9.0 | $14.9 |
| Diluted EPS | $0.47 | $0.58 | $1.27 | $2.08 |
- Q3 net income declined 18.5%; nine-month net income declined 39.9% year over year.
- No loan-loss provision was recorded in Q3 or the first nine months of 2022, versus $0.3 million and $1.05 million, respectively, in the comparable 2021 periods.
- Mortgage banking revenue was materially lower: Q3 net mortgage banking revenue was $1.4 million versus $4.1 million; nine-month revenue was $6.1 million versus $16.4 million. Mortgage originations fell about 55% in Q3 and nearly 45% year to date, as rising rates reduced refinancing and limited housing inventory constrained purchases.
- Net interest margin improved in Q3, but was slightly lower year to date. Management attributed the year-to-date comparison in part to PPP fees and interest falling to $0.1 million from $3.3 million.
Financial position, cash flow and liquidity
- At September 30, total assets were $1.303 billion, down 2.1% from year-end 2021. Loans were $925.2 million, up $102.7 million (12.5%); deposits were $1.086 billion, down $27.2 million (2.4%).
- Cash and due from banks fell to $27.9 million from $149.5 million at year-end. Liquid assets, as defined by management, totaled $276.3 million versus $422.9 million. Management stated liquidity was sufficient; additional reported capacity included about $92.3 million of FHLB borrowing capacity and $154.6 million in unpledged securities.
- Nine-month operating cash flow was $12.8 million versus $6.0 million. Investing used $133.0 million, primarily reflecting loan growth and securities purchases; financing used $1.4 million, compared with $69.2 million provided in 2021. Cash and cash equivalents ended the period at $27.9 million.
- Borrowed funds totaled $84.6 million, up from $50.7 million at year-end. Balance-sheet obligations included $35.0 million of FHLB advances, $19.8 million of short-term borrowings, $10.3 million of trust preferred securities and $19.6 million of subordinated debt net of issuance costs.
- Shareholders’ equity was $114.6 million, or 8.8% of assets, versus $144.9 million, or 10.9%, at year-end. The decline primarily reflected a $31.6 million increase in unrealized losses on the securities portfolio. AFS securities had $42.3 million of gross unrealized losses versus $3.6 million at year-end; management considered the declines temporary and reported no other-than-temporary impairment.
- State Bank was classified as well capitalized. Its September 30 capital ratios included 10.95% Tier 1 capital to average assets and 14.58% total risk-based capital.
Asset quality, outlook and risks
- Past-due loans totaled $2.9 million, or 0.31% of loans. Nonaccrual loans were $3.7 million; nonperforming assets were $5.2 million, or 0.40% of assets. The allowance was $13.8 million, or 1.49% of loans. The filing reports no new TDR activity; one residential TDR with a $62,000 recorded balance defaulted during the prior 12 months.
- The filing provides no quantitative earnings or revenue guidance. Management highlighted mortgage-volume pressure from higher rates and constrained housing inventory, continued loan growth, and the importance of managing funding, interest-rate and credit risks.
- Key disclosed risks include inflation and economic weakness, changing interest rates and margins, borrower repayment and collateral values, mortgage revenue volatility, deposit trends, cybersecurity and operational risks, competition, regulatory changes, and the LIBOR transition. The company expected to be prepared to adopt CECL on January 1, 2023 and was continuing to estimate its impact.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether mortgage production and sale margins stabilize after the sharp year-over-year decline, and how rate changes affect mortgage servicing rights and related income.
- Whether loan growth can be funded sustainably given lower deposits, reduced cash balances and increased FHLB borrowing.
- Whether unrealized securities losses remain temporary and how they affect equity, liquidity and access to funding.
- Credit trends—including delinquencies, nonaccruals, criticized loans and the allowance—particularly as economic conditions change.
- The eventual impact of CECL adoption and the company’s ability to maintain capital and dividend capacity.