SB FINANCIAL GROUP INC

Previous wording

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Information

Current wording

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Previous wording

SB Financial Group, Inc. (“SB Financial”) is an Ohio corporation and a financial holding company registered with the Federal Reserve Board. SB Financial’s wholly owned subsidiary, The State Bank and Trust Company (“State Bank”), is an Ohio-chartered bank engaged in commercial banking.

Current wording

SB Financial Group, Inc. (“SB Financial”) is an Ohio corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). SB Financial’s wholly owned subsidiary, The State Bank and Trust Company (“State Bank”), is an Ohio-chartered bank engaged in commercial banking.

Previous wording

Net Income: Net income for the first quarter of 2024 was $2.4 million compared to net income of $2.5 million for the first quarter of 2023, a decrease of 3.3 percent. Diluted earnings per share (“DEPS”) of $0.35 for the first quarter of 2024 were level to the DEPS of $0.35 for the first quarter of 2023. Net income for the first quarter of 2024 was positively impacted by higher loan income, which was offset by significantly higher interest expense cost on deposits and wholesale borrowings. Mortgage loan volume was down 13.1 percent compared to the prior year first quarter, but sales of originated loans were up 41.9 percent when compared to the first quarter of 2023.

Current wording

Net Income: Net income for the second quarter of 2024 was $3.1 million compared to net income of $3.1 million for the second quarter of 2023, an increase of 1.2 percent. Diluted earnings per share (“DEPS”) of $0.47 for the second quarter of 2024 were slightly higher compared to the DEPS of $0.44 for the second quarter of 2023. Net income for the second quarter of 2024 was positively impacted by higher loan income, which was offset by higher interest expense on deposits and wholesale borrowings. Interest income continues to improve and was up 2.3% compared to the linked quarter. Mortgage loan volume was up 14.9 percent compared to the prior year second quarter, while sales of originated loans were up 16.5 percent when compared to the second quarter of 2023.

Previous wording

Provision for Credit Losses: The first quarter provision for credit losses was zero as compared to $250,000 provision for the prior year quarter. Net charge-offs for the quarter were $57,000 compared to net charge-offs of $61,000 for the year-ago quarter. Total delinquent loans (consisting of nonaccruing loans and loans greater than 30 days past due) ended the quarter at $2.7 million, or 0.27 percent of total loans. The Company adopted ASC 326 on January 1, 2023, which increased the allowance for credit losses (“ACL”) by $1.4 million.

Current wording

Provision for Credit Losses: The second quarter provision for credit losses was zero as compared to $145,000 provision for the prior year quarter. The Company had net recoveries of $16,000 for the second quarter of 2024 compared to net charge-offs of $22,000 for the year-ago quarter. Total delinquent loans (consisting of nonaccruing loans and loans greater than 30 days past due) ended the quarter at $5.3 million, or 0.52 percent of total loans. The Company adopted ASC 326 on January 1, 2023, which increased the allowance for credit losses (“ACL”) by $1.4 million.

Previous wording

Consolidated Revenue: Total revenue, consisting of net interest income and noninterest income, was $13.1 million for the first quarter of 2024, a decrease of $0.9 million, or 6.1 percent, from the $14.0 million generated during the first quarter of 2023.

Current wording

Consolidated Revenue: Total revenue, consisting of net interest income and noninterest income, was $14.0 million for the second quarter of 2024, a decrease of $0.2 million, or 1.0 percent, from the $14.2 million generated during the second quarter of 2023.

Previous wording

Net interest income (“NII”) for the first quarter of 2024 was $9.2 million, which was down $1.1 million from the prior year first quarter’s $10.3 million. Comparing the first quarter of 2024 to the prior year first quarter, the Company’s earning assets decreased $1.3 million, and the average yield on earning assets increased by 48 basis points. The net interest margin for the first quarter of 2024 was 2.99 percent compared to 3.37 percent for the first quarter of 2023. Funding costs (interest paid to consumers and other entities) for deposits and other interest bearing liabilities for the first quarter of 2024 were 2.55 percent compared to 1.46 percent for the prior year first quarter. The increase in funding costs has been driven by the rapid increase in the Federal Funds borrowing rate and the increased competition among banks for funding sources.

Current wording

Net interest income (“NII”) for the second quarter of 2024 was $9.7 million, which was down $0.2 million from the prior year second quarter’s $9.8 million. Comparing the second quarter of 2024 to the prior year second quarter, the Company’s earning assets decreased $2.7 million, and the average yield on earning assets increased by 41 basis points. The net interest margin for the second quarter of 2024 was 3.11 percent compared to 3.16 percent for the second quarter of 2023. Funding costs (interest paid to consumers and other entities) for deposits and other interest-bearing liabilities for the second quarter of 2024 were 2.47 percent compared to 1.90 percent for the prior year second quarter. The increase in funding costs has been driven by the increased competition among banks for funding sources, although interest expense did decline from the linked quarter for the first time in over two years.

Previous wording

Noninterest income was $4.0 million for the first quarter of 2024, which was up $0.3 million, or 7.8 percent, from the prior year first quarter’s $3.7 million. In addition to the mortgage revenue detailed below, wealth management revenue was $0.9 million for the first quarter of 2024. Recapture of mortgage servicing rights increased noninterest income by $0.2 million in the quarter, compared to a recapture of $0.1 million in the prior year first quarter. Our title agency contributed revenue of $0.3 million in the first quarter of 2024, down $0.1 million from the prior year. Noninterest income as a percentage of average assets for the first quarter of 2024 was 1.19 percent compared to 1.10 percent for the prior year first quarter.

Current wording

Noninterest income was $4.4 million for the second quarter of 2024, which was level to the prior year second quarter. In addition to the mortgage revenue detailed below, wealth management revenue was slightly down from the prior year. Recapture of mortgage servicing rights increased noninterest income by $0.04 million in the quarter, compared to an impairment of $0.02 million in the prior year second quarter. SBFG Title contributed revenue of $0.4 million in the second quarter of 2024, down $0.05 million from the prior year. Noninterest income as a percentage of average assets for the second quarter of 2024 was 1.31 percent compared to 1.30 percent for the prior year second quarter.

Previous wording

State Bank originated $42.9 million of mortgage loans during the first quarter of 2024, of which $36.6 million were sold with the remainder of loans held for investment. This compares to $49.4 million originated for the first quarter of 2023, of which $25.8 million were sold with the remainder of loans held for investment. These first quarter 2024 originations and subsequent sales resulted in $0.8 million of gains, up $0.2 million from the gains for the first quarter of 2023. Net mortgage banking revenue was $1.45 million for the first quarter of 2024 compared to $1.21 million for the first quarter of 2023. The economic headwinds of higher interest rates and limited housing supply in our markets has kept overall production down below historical levels.

Current wording

State Bank originated $75.1 million of mortgage loans during the second quarter of 2024, of which $55.8 million were sold with the remainder of loans held for investment. This compares to $65.4 million originated for the second quarter of 2023, of which $47.9 million were sold with the remainder of loans held for investment. These second quarter 2024 originations and subsequent sales resulted in $1.3 million of gains, up $0.2 million from the gains for the second quarter of 2023. Net mortgage banking revenue was $1.84 million for the second quarter of 2024 compared to $1.55 million for the second quarter of 2023. The economic headwinds of higher interest rates and limited housing supply in our markets has kept overall production down below historical levels.

Previous wording

Consolidated Noninterest Expense: Noninterest expense for the first quarter of 2024 was $10.3 million, which was down $0.5 million compared to $10.8 million in the prior-year first quarter. Overall head count is down from the prior year quarter by 3.9 percent as we continue to right size the mortgage business line. Commission expense for both mortgage and Small Business Administration (“SBA”) is down compared to the prior year due to the lower total origination volume.

Current wording

Consolidated Noninterest Expense: Noninterest expense for the second quarter of 2024 was $10.7 million, which was up $0.4 million compared to $10.3 million in the prior-year second quarter. Commission expense for both mortgage and Small Business Administration (“SBA”) is higher compared to the prior year due to the total origination volume.

Previous wording

Income Taxes: Income taxes for the first quarter of 2024 were $0.5 million (effective rate of 16.9 percent) compared to $0.5 million (effective rate of 17.4 percent) for the first quarter of 2023.

Current wording

Income Taxes: Income taxes for the first six months of 2024 were $0.7 million (effective rate of 11.9 percent) compared to $1.1 million (effective rate of 17.2 percent) for the first six months of 2023.

Previous wording

Total assets at March 31, 2024, were $1.34 billion, and were largely unchanged since December 31, 2023. Total loans, net of unearned income, were $991.6 million as of March 31, 2024, down $8.7 million, or 0.7 percent, from year-end.

Current wording

Total assets at June 30, 2024, were $1.34 billion, still largely unchanged since December 31, 2023. Total loans, net of unearned income, were $1.01 billion as of June 30, 2024, up $5.2 million, or 0.5 percent, from year-end. Total deposits at June 30, 2024, were $1.11 billion, an increase of $45.0 million, or 3.9 percent, since 2023 year end.

Previous wording

Borrowed funds (consisting of FHLB advances, repurchase (“REPO”) agreements, trust preferred securities and subordinated debt) totaled $77.9 million at March 31, 2024. This is down from year-end 2023 when borrowed funds totaled $126.9 million due to the paydown of FHLB advances. Total equity for the Company of $123.7 million now stands at 9.3 percent of total assets compared to the December 31, 2023, level of $124.3 million or 9.3 percent of total assets. Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total equity would increase to $155.3 million or 11.6% of total assets.

Current wording

Borrowed funds (consisting of FHLB advances, repurchase (“REPO”) agreements, trust preferred securities and subordinated debt) totaled $80.2 million at June 30, 2024. This is down from year-end 2023 when borrowed funds totaled $126.9 million due to the paydown of FHLB advances. Total equity for the Company of $125.5 million now stands at 9.4 percent of total assets compared to the December 31, 2023, level of $124.3 million or 9.3 percent of total assets. Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total equity would increase to $157.3 million or 11.7% of total assets.

Previous wording

The allowance for credit losses of $15.6 million is down $0.1 million from the December 2023 year-end level due to $0.06 million of net charge-offs and negative provision of $.09 million for the quarter. The Company has had stable to slightly improving asset quality through the first three months of 2024, with the non-performing asset ratio at 22 basis points and coverage on non-performing loans at 643 percent.

Current wording

The allowance for credit losses of $15.6 million is down $0.2 million from the December 2023 year-end level due to $0.04 million of net charge-offs and zero provision for the year. The Company has had stable to slightly weaker asset quality through the first six months of 2024, with the non-performing asset ratio at 39 basis points and coverage on non-performing loans at 330 percent.

Previous wording

Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions, securities available-for-sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets totaled $247.0 million at March 31, 2024, compared to $246.7 million at December 31, 2023.

Current wording

Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions, securities available-for-sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets totaled $240.1 million at June 30, 2024, compared to $246.7 million at December 31, 2023.

Previous wording

The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $806.4 million at March 31, 2024, and $807.8 million at December 31, 2023, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs. At March 31, 2024, all eligible commercial real estate, first mortgage residential, agricultural and multi-family mortgage loans were pledged under an FHLB blanket lien.

Current wording

The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $815.5 million at June 30, 2024, and $807.8 million at December 31, 2023, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs. At June 30, 2024, all eligible commercial real estate, first mortgage residential, agricultural and multi-family mortgage loans were pledged under an FHLB blanket lien.

Previous wording

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for the three months ended March 31, 2024, and 2023 follows.

Current wording

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for the six months ended June 30, 2024, and June 30, 2023 follows.

Previous wording

The Company experienced positive cash flows from operating activities for the three months ended March 31, 2024, and negative cash flows from operating activities for the three months ended March 31, 2023. Net cash provided by operating activities was $.3 million for the three months ended March 31, 2024, and net cash used from operating activities was $4.1 million for the three months ended March 31, 2023. Highlights for the current year include $36.6 million in proceeds from the sale of loans, which is up from $25.8 million from the prior year. Originations of loans held for sale was a use of cash of $38.4 million, which is up from the prior year of $29.0 million. For the three months ended March 31, 2024, there was a gain on sale of loans of $.8 million, and depreciation and amortization on premises and equipment of $.6 million.

Current wording

The Company experienced negative cash flows from operating activities for the six months ended June 30, 2024, and June 30, 2023. Net cash used in operating activities was $.1 million for the six months ended June 30, 2024, and $.9 million for the six months ended June 30, 2023. Highlights for the current year include $92.5 million in proceeds from the sale of loans, which is up $18.8 million from the prior year. Originations of loans held for sale was a use of cash of $96.7 million, which is up $20.4 million from the prior year . For the six months ended June 30, 2024, there was a gain on sale of loans of $2.2 million, and depreciation and amortization on premises and equipment of $1.1 million.

Previous wording

The Company experienced positive cash flows from investing activities for the three months ended March 31, 2024, and negative cash flows from investing activities for the three months ended March 31, 2023. Net cash provided by investing activities was $11.7 million for the three months ended March 31, 2024, and net cash used in investing activities was $9.4 million for the three months ended March 31, 2023. Highlights for the current year include an increase of $8.6 million in loans, which is up $22.9 million from the prior year three-month period. These cash payments were offset by $4.2 million in proceeds from maturities and sales of securities, which is down from $4.9 million from the prior year three-month period.

Current wording

The Company experienced positive cash flows from investing activities for the six months ended June 30, 2024, and negative cash flows from investing activities for the six months ended June 30, 2023. Net cash provided by investing activities was $3.7 million for the six months ended June 30, 2024, and net cash used in investing activities was $14.0 million for the six months ended June 30, 2023. Highlights for the current year include an increase of $5.2 million in loans, which is down $17.7 million from the prior year six-month period. These cash payments were offset by $9.1 million in proceeds from maturities and sales of securities, which is down $1.2 million from the prior year six-month period.

Previous wording

The Company experienced negative cash flows from financing activities for the three months ended March 31, 2024, and positive cash flows from financing activities for the three months ended March 31, 2023. Net cash used by financing activities was $8.4 million for the three months ended March 31, 2024, and net cash provided by financing activities was $7.3 million for the three months ended March 31, 2023. Highlights for the current period include a $44.9 million increase in transaction deposits and a $2.7 million decrease in time deposits for the three months ended March 31, 2024. This compares to the prior year three-month period where transaction deposits decreased by $19.9 million and time deposits increased by $43.4 million. Net repayments of Federal Home Loan Bank advances for the three months ended March 31, 2024, were $48.6 million, compared to $15.5 million for the prior year three-month period.

Current wording

The Company experienced negative cash flows from financing activities for the six months ended June 30, 2024, and positive cash flows from financing activities for the six months ended June 30, 2023. Net cash used by financing activities was $4.6 million for the six months ended June 30, 2024, and net cash provided by financing activities was $8.1 million for the six months ended June 30, 2023. Highlights for the current period include a $41.9 million increase in transaction deposits and a $3.1 million increase in time deposits for the six months ended June 30, 2024. This compares to the prior year six-month period where transaction deposits decreased by $64.3 million and time deposits increased by $48.8 million. Net repayments of Federal Home Loan Bank advances for the six months ended June 30, 2024, were $48.6 million, compared to net proceeds of $21.3 million for the prior year six-month period.

Previous wording

The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $806.4 million were pledged to meet FHLB collateralization requirements as of March 31, 2024. Based on the current collateralization requirements of the FHLB, the Company had approximately $139.0 million of additional borrowing capacity at March 31, 2024. The Company also had $100.5 million in unpledged securities available to pledge for additional borrowings.

Current wording

The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $815.5 million were pledged to meet FHLB collateralization requirements as of June 30, 2024. Based on the current collateralization requirements of the FHLB, the Company had approximately $144.7 million of additional borrowing capacity at June 30, 2024. The Company also had $62.0 million in unpledged securities available to pledge for additional borrowings.

Previous wording

The Company has contractual obligations consisting of long-term debt obligations and operating lease obligations. In addition, as of March 31, 2024, the Company had commitments to sell mortgage loans totaling $19.3 million. The Company believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings and time deposits to retain deposits in changing interest rate environments. If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

Current wording

The Company has contractual obligations consisting of long-term debt obligations and operating lease obligations. In addition, as of June 30, 2024, the Company had commitments to sell mortgage loans totaling $18.1 million. The Company believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings and time deposits to retain deposits in changing interest rate environments. If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.