SB Financial Group, Inc. ("SB Financial"), is a financial holding company registered with theFederal Reserve Board and subject to regulation under the Bank Holding Company Act of 1956, as amended. Through its direct and indirect subsidiaries,SB Financial is engaged in commercial and retail banking, wealth management and private client financial services. The following discussion provides a review of the consolidated financial condition and results of operations ofSB Financial and its subsidiaries (collectively, the "Company"). This discussion should be read in conjunction with the Company's consolidated financial statements and related footnotes as of and for the years endedDecember 31, 2021 and 2020.
strategic discussion
The focus and strategic goal of the Company is to grow into and remain a top decile (>90th percentile) independent financial services company. The Company intends to achieve and maintain that goal by executing our five key initiatives. Increase profitability through ongoing diversification of revenue streams: For the twelve months endedDecember 31, 2021 , the Company generated$30.7 million in noninterest income, or 44.8 percent of total operating revenue, from fee-based products. These revenue sources include fees generated from saleable residential mortgage loans, retail deposit products, wealth management services, saleable business-based loans (small business and farm service) and title agency revenue. For the twelve months endedDecember 31, 2020 , the Company generated$30.1 million in revenue from fee-based products, or 45.6 percent of total operating revenue. Strengthen our penetration in all markets served: Over our 119-year history of continuous operation inNorthwest Ohio , we have established a significant presence in our traditional markets inDefiance ,Fulton ,Paulding andWilliams counties inOhio . In our newer markets ofBowling Green ,Columbus ,Findlay ,Toledo (Ohio ) and Ft.Wayne (Indiana) , our current market penetration is minimal but we believe our potential for growth is significant. We have expanded and committed additional resources to our presence in theFindlay andEdgerton markets. We continue to seek to expand the presence and penetration in all of our markets. Expand product utilization by new and existing customers: As ofDecember 31, 2021 , we operated in ten counties inNorthwest Ohio andNortheast Indiana with 23 full service offices, 24 full service ATM's and five loan production offices. Combined in the ten counties of operation, we command 4.47 percent of the deposit market share, which has steadily grown. Deliver gains in operational excellence: Our management team believes that becoming and remaining a high-performance financial services company will depend upon seamlessly and consistently delivering operational excellence, as demonstrated by the Company's leadership in the origination and servicing of residential mortgage loans. As ofDecember 31, 2021 , the Company serviced 8,614 residential mortgage loans with a principal balance of$1.36 billion . As ofDecember 31, 2020 , the Company serviced 8,543 loans with a principal balance of$1.30 billion . Sustain asset quality: As ofDecember 31, 2021 , the Company's asset quality metrics remained strong. Specifically, total nonperforming assets were$6.5 million , or 0.49 percent of total assets. Total delinquent loans atDecember 31, 2021 were 0.46 percent of total loans. As ofDecember 31, 2020 , the Company had total nonperforming assets of$7.3 million , or 0.58 percent of total assets. Total delinquent loans atDecember 31, 2020 were 0.75 percent of total loans. The successful execution of these five strategies have enabled the Company to improve financial performance across a broad series of metrics. These metrics over the last five years are outlined in the following table. Specifically, the Company has increased total assets by$454.3 million , or 52 percent. The growth has been on both sides of the balance sheet over the five year period, with loans growing$126.1 million or 18 percent and deposits growing$383.4 million or 52.6 percent. The Company has raised capital through the issuance of equity and debt to the market on two separate occasions during the period, which has raised equity capital significantly and expanded liquidity for potential strategic expansion. Strategic expansion has occurred with the acquisition of a small community bank, the opening of three branch offices and the acquisition of two full service
title agencies.
30
Financial Highlights
Year Ended December 31,
($ in thousands, except per
share data)
Earnings 2021 2020 2019 2018 2017
Interest income $ 41,904 $ 42,635 $ 44,400 $ 39,479 $ 32,480
Interest expense 4,020 6,705 9,574 6,212 4,094
Net interest income 37,884 35,930 34,826 33,267 28,386
Provision for loan losses 1,050 4,500 800 600 400
Noninterest income 30,697 30,096 18,016 16,624 17,217
Noninterest expense 44,808 43,087 37,410 34,847 31,578
Provision for income taxes 4,446 3,495 2,659 2,806 2,560
Net income 18,277 14,944 11,973 11,638 11,065
Preferred stock dividends - - 950 975 975
Net income available to common
shareholders 18,277 14,944 11,023 10,663 10,090
Per Common Share Data
Basic earnings $ 2.58 $ 1.96 $ 1.71 $ 1.72 $ 2.10
Diluted earnings 2.56 1.96 1.51 1.51 1.74
Cash dividends declared 0.44 0.40 0.36 0.32 0.28
Total equity per share 21.05 19.39 17.53 16.36 15.03
Total tangible equity per share 17.60 16.30 15.23 15.39 13.27
Average Balances
Average total assets $ 1,322,253 $ 1,161,396 $ 1,027,932 $ 947,266 $ 854,569
Average equity 144,223 139,197 133,190 121,094 89,538
Ratios
Return on average total assets 1.38 % 1.29 % 1.16 % 1.23 % 1.29 %
Return on average equity 12.67 10.74 8.99 9.61 12.36
Cash dividend payout ratio1 17.18 20.54 23.84 19.60 13.50
Average equity to average
assets 10.91 11.99 12.96 12.78 10.48
Period End Totals
Total assets $ 1,330,854 $ 1,257,839 $ 1,038,577 $ 986,828 $ 876,627
Available-for-sale securities 263,259 149,406 100,948 90,969 82,790
Loans held for sale 7,472 7,234 7,258 4,445 3,940
Total loans & leases 822,714 872,723 825,510 771,883 696,615
Allowance for loan losses 13,805 12,574 8,755 8,167 7,930
Total deposits 1,113,045 1,049,011 840,219 802,552 729,600
Advances from FHLB 5,500 8,000 16,000 16,000 18,500
Trust preferred securities 10,310 10,310 10,310 10,310 10,310
Subordinated debt, net 19,546 - - - -
Total equity 144,929 142,923 136,094 130,435 94,000
1 Cash dividends on common shares divided by net income available to common.
31
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with generally accepted accounting principles inthe United States and conform to general practices within the banking industry. The Company's significant accounting policies are described in detail in the notes to the Company's Consolidated Financial Statements for the years endedDecember 31, 2021 and 2020. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company's financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective or complex. Allowance for Loan Losses: The allowance for loan losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in the nature and amount of problem assets and associated collateral, underwriting activities, loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on each impaired loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate. Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent, but undetected, losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the subjective nature of individual loan valuations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are also factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.Goodwill and Other Intangibles: The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required.Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. Deferred Tax Liability: The Company has evaluated its deferred tax liability to determine if it is more likely than not that the liability will be realized in the future. The Company's most recent evaluation has determined that the Company will more likely than not be able to realize the remaining deferred tax liability. Income Tax Accounting: The Company files a consolidated federal income tax return. The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in rates on the deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. 32
Changes in Financial Position
Total assets atDecember 31, 2021 , were$1.33 billion , compared to$1.26 billion atDecember 31, 2020 . Loans (excluding loans held for sale) were$822.7 million atDecember 31, 2021 , compared to$872.7 million atDecember 31, 2020 . Total deposits were$1.11 billion atDecember 31, 2021 , compared to$1.05 billion atDecember 31, 2020 . The Company continued to experience elevated levels of liquidity as the balance sheets of both personal and business clients were supplemented by government intervention and support. The increase in liquidity by these parties has resulted in higher deposit levels, which in turn increased the overall asset size of the Company.
The following are the Company’s summarized average balance sheets for the years ended
2021 2020 2019
Average Average Average Average Average Average
($ in thousands) Balance Interest Rate
Balance Interest Rate Balance Interest
rate
financial assets
Taxable securities/cash$ 380,770 $ 3,386 0.89 %
3.39 % Non-taxable securities 7,802 353 4.52 % 6,625 333 5.03 % 10,108 345 3.41 % Loans, net1 854,521 38,165 4.47 % 880,338 39,974 4.54 % 809,651 40,829 5.04 %
Total earning assets 1,243,093 41,904 3.37 %
1,072,443 42,635 3.98% 914,975 44,400
4.85 % Cash and due from banks 7,290 14,553 47,135 Allowance for loan losses (13,422 ) (10,165 ) (8,370 ) Premises and equipment 24,710 23,776 23,779 Other assets 60,582 60,789 50,413 Total assets$ 1,322,253 $ 1,161,396 $ 1,027,932 Liabilities Savings and interest-bearing demand deposits$ 672,296 $ 1,813 0.27 %$ 492,267 $ 3,152 0.64 %$ 427,858 $ 2,846 0.67 % Time deposits 177,918 1,316 0.74 % 247,955 2,918 1.18 % 262,040 5,814 2.22 %
Repurchase agreements & other 22,821 42 0.18 %
22,832 70 0.31 % 15,288 82 0.54 % Advances from FHLB 6,507 188 2.89 % 14,186 309 2.18 % 16,066 402 2.50 % Trust preferred securities 10,310 199 1.93 % 10,310 256 2.48 % 10,310 430 4.17 % Subordianted debt 12,057 462 3.83 % Total interest-bearing liabilities 901,909 4,020 0.45 % 787,550 6,705 0.85 % 731,562 9,574 1.31 % Demand deposits 255,908 211,004 146,401 Other liabilities 20,213 23,645 16,779 Total liabilities 1,178,030 1,022,199 894,742 Shareholders' equity 144,223 139,197 133,190 Total liabilities and shareholders' equity$ 1,322,253 $ 1,161,396 $ 1,027,932 Net interest income (tax equivalent basis)$ 37,884 $ 35,930 $ 34,826 Net interest income as a percent of average interest-earning assets - GAAP measure 3.05 % 3.35 % 3.81 % Net interest income as a percent of average interest-earning assets - Non-GAAP measure 2 3.06 % 3.36 % 3.82 % -- Computed on a fully tax equivalent basis (FTE)
1 Non-recurring loans and loans held for sale are included in average balances.
2 Interest on tax-exempt securities and loans is calculated on a tax-equivalent basis
calculated at a statutory tax rate of 21 percent and added to the net interest
Income. The tax equivalent adjustment was
2021, 2020 and 2019, respectively.
33
The following tables show the impact of changes in volume and rate on interest income and expense for the periods shown. For the purposes of these tables, volume and price related interest rate changes were determined as follows:
? Volume Deviation – Volume change multiplied by the year-on-year rate.
? Course deviation – price change multiplied by the previous year’s volume.
? Rate/Volume Variance – Volume change multiplied by the rate change. this
Variance allocates volume variance and rate variance proportionally to that
relationship of the absolute dollar amount of the change in each.
Total
Variance Variance Attributable To
($ in thousands) 2021/2020 Volume Rate
Interest income
Taxable securities $ 1,058 $ 2,451 $ (1,393 )
Non-taxable securities1 20 59 (39 )
Loans, net of unearned income and deferred fees1 (1,809) (1,172)
(637 ) Total interest income (731 ) 1,338 (2,069 ) Interest expense Savings and interest-bearing demand deposits (1,339 )
1,153 (2,492 ) Time deposits (1,602 ) (824 ) (778 ) Repurchase agreements & other (28 ) (0 ) (28 ) Advances from FHLB (121 ) (167 ) 46 Trust preferred securities (57 ) - (57 ) Subordinated debt 462 462 - Total interest expense (2,685 ) 623 (3,308 ) Net interest income$ 1,954 $ 715 $ 1,239
1 Interest on non-taxable securities and loans has been adjusted for full taxation
equivalent The maturity distribution and weighted-average interest rates of debt securities available-for-sale atDecember 31, 2021 , are set forth in the table below. The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount: Maturing Weighted Weighted Weighted Weighted Weighted Within Average Average Average After Average Average ($ in thousands) 1 Year Yield 1-5 Years Yield 5-10 Years Yield 10 Years Yield Total Yield Available for sale: U.S. Treasury and Government agencies$ 606 0.44 %$ 707 2.13 %$ 7,792 2.02 % $ -$ 9,105 1.92 % Mortgage-backed securities 63 1.93 % 1,668 3.01 % 31,293 1.49 % 195,110 1.36 % 228,134 1.39 % State and political subdivisions - 2,065 3.21 % 2,473 4.28 % 8,341 2.64 % 12,879 3.04 % Other corporate securities - - 13,141 3.47 % - 13,141 3.47 % Total securities by maturity$ 669 0.58 %$ 4,440 2.96 %$ 54,699 2.17 %$ 203,451 1.41 %$ 263,259 1.59 %
1 Returns are presented on a tax-equivalent basis.
34
In June of 2020, we completed the acquisition ofThe Edon State Bank , which added approximately$50 million in deposits and$15 million in loans. Building on the success of our entry into the city ofEdon , we opened an office in nearbyEdgerton, Ohio in May of 2021. TheEdgerton expansion has also been positive as we ended the year with over$15 million in both loans and deposits in that
office.
($ in thousands) Years Ended December 31,
2021 2020 % Change
Total loans
Commercial business & agriculture $ 179,653 $ 260,002 -30.9 %
Commercial real estate 381,168 370,820 2.8 %
Residential real estate 206,424 182,165 13.3 %
Consumer & other 55,156 61,157 -9.8 %
Total loans 822,401 874,144 -5.9 %
Net deferred costs (fees) 313 (1,421 ) -122.0 %
Total loans, net deferred costs (fees) 822,714 872,723 -5.7 %
Loans held for sale $ 7,472 $ 7,234 3.3 %
2021 2020 % Change
Total deposits
Noninterest bearing demand $ 247,044 $ 251,649 -1.8 %
Interest-bearing demand 195,464 176,785 10.6 %
Savings & money market 514,033 391,028 31.5 %
Time deposits 156,504 229,549 -31.8 %
Total deposits 1,113,045 1,049,011 6.1 %
Total shareholders' equity $ 144,929 $ 142,923 1.4 %
Loans held for investment decreased $50.0 million , or 5.7 percent, to $822.7
million at December 31, 2021 , which was due to a decrease in outstanding PPP
loans during 2021. The Company participated fully in the PPP initiative in both
2020 and 2021, which in total, encompassed 1,100 loans with an aggregate
principal amount of $111.4 million . At year-end 2021, the balance of PPP was
down to approximately 50 loans, with an aggregate principal amount of $2
million , as a result of SBA forgiveness of a majority of the PPP loans that we
originated. Adjusted for PPP activity, loan growth compared to 2020 was up $18.5
million , or 2.3 percent. In the first quarter of 2021, the Company introduced a
Private Client Residential Mortgage product. This product, of which $76 million
was originated during 2021, offset the refinance activity that occurred in
our portfolio during the year. Concentrations of Credit Risk: The Company makes commercial, real estate and installment loans to customers located mainly in the Tri-State region ofOhio , Indiana andMichigan . Commercial loans include loans collateralized by commercial real estate, business assets and, in the case of agricultural loans, crops and farm equipment and the loans are expected to be repaid from cash flow from operations of businesses. As ofDecember 31, 2021 , commercial business and agricultural loans made up approximately 29.6 percent of the loans held for investment ("HFI") loan portfolio while commercial real estate loans accounted for approximately 42.5 percent of the HFI loan portfolio. Residential first mortgage loans made up approximately 20.9 percent of the HFI loan portfolio and are secured by first mortgages on residential real estate, while consumer loans to individuals made up approximately 7.0 percent of the HFI loan portfolio and are primarily secured by consumer assets. 35 Maturities and Sensitivities of Loans to Changes in Interest Rates: The following table shows the maturity distribution of loans outstanding as ofDecember 31, 2021 . The amounts have been categorized between loans with a fixed or floating interest rate (floating rate loans have an adjustable interest rate that changes in accordance to a rate index). After one, After five, Within but within but within After ($ in thousands) one year five years fifteen years fifteen years Total Loans with fixed interest rates: Commercial & industrial$ 981 $ 20,715 $ 28,106 $ 23$ 49,825 Commercial real estate - owner occupied 168 9,567 10,302 - 35,051 Commercial real estate - nonowner occupied 6,828 14,246 13,815 162 20,037 Agricultural 122 4,094 5,557 1,362 11,135 Residential real estate 1,615 1,915 12,774 25,328 41,632 HELOC 5 - - - 5 Consumer 2,416 6,364 2,380 - 11,160 Total$ 12,135 $ 56,901 $ 72,934 $ 26,875 $ 168,845 Loans with floating interest rates: Commercial & industrial$ 28,754 $ 6,213 $ 35,464 $ 1,994$ 72,425 Commercial real estate - owner occupied - 11,109 44,565 43,180 227,226 Commercial real estate - nonowner occupied 8,739 26,514 120,819 71,154 98,854 Agricultural 1,646 7,846 16,670 20,106 46,268 Residential real estate 4,558 485 13,294 146,455 164,792 HELOC 223 469 30,487 10,498 41,677 Consumer 990 1,324 - - 2,314 Total$ 44,910 $ 53,960 $ 261,299 $ 293,387 $ 653,556 Total loans: Commercial & industrial$ 29,735 $ 26,928 $ 63,570 $ 2,017$ 122,250 Commercial real estate - owner occupied 168 20,676 54,867 43,180 118,891 Commercial real estate - nonowner occupied 15,567 40,760 134,634 71,316 262,277 Agricultural 1,768 11,940 22,227 21,468 57,403 Residential real estate 6,173 2,400 26,068 171,783 206,424 HELOC 228 469 30,487 10,498 41,682 Consumer 3,406 7,688 2,380 - 13,474 Total loans$ 57,045 $ 110,861 $ 334,233 $ 320,262 $ 822,401 Deposits increased$64.0 million , or 6.1 percent, to$1.11 billion atDecember 31, 2021 . Deposits continued growing in 2021 on top of the over$200 million in growth experienced during 2020. Expanded government support and reduced economic activity has resulted in higher balances in client deposit accounts. During 2021, we experienced a shift in the mix of our deposit balances as more of our clients moved balances to short-term transactional accounts. Specifically, during 2021, time deposits decreased$73.0 million or 32 percent while other deposits increased$137.1 million or 17 percent.
The average deposit amounts and weighted average rates paid are summarized as follows for the years ended
2021 2020 2019
Average Average Average Average Average Average
($ in thousands) Amount Rate Amount Rate Amount Rate
Savings and interest
bearing demand
deposits $ 672,296 0.27 % $ 492,267 0.64 % $ 427,858 0.67 %
Time deposits 177,918 0.74 % 247,955 1.18 % 262,040 2.22 %
Non interest bearing
demand deposits 255,908 - 211,004 - 146,401 -
Totals $ 1,106,122 0.28 % $ 951,226 0.64 % $ 836,299 1.04 %
36
Time deposits that exceeded the FDIC insurance limit of $250,000 are summarized
as follows:
($ in thousands) 2021 2020
Three months or less $ 1,033 $ 811
Over three months through six months 415 4,894
Over six months and through twelve months 3,083 1,658
Over twelve months 238 2,640
Total $ 4,769 $ 10,003
Stockholders' equity at December 31, 2021 , was $144.9 million or 10.9 percent of
total assets compared to $142.9 million or 11.4 percent of total assets at
December 31, 2020 . Retained earnings increased during the year by $15.1 million
due to earnings of $18.3 million less dividends paid to common shareholders of
$3.2 million . The fair market value of the bond portfolio decreased during 2021
due to the rise in interest rates, which resulted in a decrease in Other
Comprehensive Income ("OCI") of $4.1 million .
The Company continued to repurchase its own stock during the year. Specifically,
the Company repurchased approximately 500,000 shares during 2021 at an average
price of $18.50 per share, which was just slightly below book value. As of
December 31, 2021 , the Company had 495,639 shares remaining of the 750,000
shares authorized for repurchase under the Company's existing share repurchase
program which was authorized on May 25, 2021 and expires May 21, 2022 .
Asset Quality Years Ended December 31,
($ in thousands) 2021 2020 % Change
Nonaccruing loans $ 3,652 $ 6,426 -43.2 %
Accruing restructured loans (TDRs) 725 810 -10.5 % Foreclosed assets and other assets held for sale, net 2,104
23 9047.8 % Nonperforming assets 6,481 7,259 -10.7 % Net charge offs (recoveries) (181 ) 681 -126.6 % Loan loss provision 1,050 4,500 -76.7 % Allowance for loan losses 13,805 12,574 9.8 % Nonaccruing loans/total loans 0.44 % 0.74 % -39.7 % Allowance/nonaccruing loans 378.01 % 195.67 % 93.2 %
Nonperforming assets/total assets 0.49 %
0.58 % -15.6 % Net charge offs/average loans -0.02 % 0.08 % -125.0 % Allowance/loans 1.68 % 1.44 % 16.5 % Allowance/nonperforming loans 315.40 % 173.80 % 81.5 %
Nonperforming assets consisting of loans, Other Real Estate Owned ("OREO") and
accruing TDRs totaled $6.5 million , or 0.49 percent of total assets at December
31, 2021 , a decrease of $0.8 million or 10.7 percent from 2020. Net charge offs
were down significantly during 2021, with total recoveries of $0.18 million ,
which was a $0.86 million decrease compared to total charge offs of $0.68
million for 2020. The Company's loan loss allowance at December 31, 2021 , now
covers nonperforming loans at 315 percent, up from 174 percent at December
31,
2020.
37
The following schedule presents an analysis of the allowance for loan losses,
average loan data and related ratios at December 31 for the years indicated:
Ratio of
annualized net
(chargeoffs)
Provision for Net (Chargeoffs) Average recoveries to
($ in thousands) Loan Loss Recoveries Loans average loans
December 31, 2021
Commercial & industrial $ (1,411 ) $ 227 $ 160,267 0.14 %
Commercial real estate - owner occupied 505 - 118,713 0.00 %
Commercial real estate - nonowner occupied 825
- 264,980 0.00 % Agricultural 103 - 53,122 0.00 % Residential real estate 975 6 195,277 0.00 % HELOC (16 ) - 43,488 0.00 % Consumer 69 (52 ) 11,546 -0.45 % Total $ 1,050 $ 181$ 847,393 0.02 % December 31, 2020 Commercial & industrial $ 1,757 $ (566 )$ 198,991 -0.28 %
Commercial real estate - owner occupied 721 - 104,856 0.00 % Commercial real estate - nonowner occupied 1,128
- 269,924 0.00 % Agricultural 62 - 51,840 0.00 % Residential real estate 373 (42 ) 185,311 -0.02 % HELOC 203 (8 ) 47,227 -0.02 % Consumer 256 (65 ) 11,595 -0.56 % Total $ 4,500 $ (681 )$ 869,744 -0.08 % December 31, 2019 Commercial & industrial $ 582 $ (134 )$ 139,616 -0.10 %
Commercial real estate - owner occupied 210 - 96,106 0.00 % Commercial real estate - nonowner occupied 468
1 257,756 0.00 % Agricultural (48 ) - 51,836 0.00 % Residential real estate (325 ) (39 ) 194,390 -0.02 % HELOC (102 ) 10 47,770 0.02 % Consumer 15 (50 ) 11,862 -0.42 % Total loans $ 800 $ (212 )$ 799,336 -0.03 %
The allowance for loan losses balance and the provision for loan losses are determined by management based upon periodic reviews of the loan portfolio. In addition, management considers the level of charge offs on loans, as well as the fluctuations of charge offs and recoveries on loans, in the factors which caused these changes. Estimating the risk of loss and the amount of loss is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which are subject to change over time. The Company has substantially increased the reserve level over the last two years. Specifically, sinceDecember 31, 2019 the allowance balance has increased from$8.8 million to$13.8 million atDecember 31, 2021 , which is an increase of$5.0 million or 59 percent. This increase was the result of$5.6 million in provision expense during the period ($4.5 million in 2020 and$1.1 million in 2021) and minimal charge-offs, which were just$0.5 million over the two year period. 38 The following schedule provides a breakdown of the allowance for loan losses allocated by type of loan and related ratios atDecember 31 for the years indicated: Percentage Percentage Percentage of Loans In of Loans In of Loans In Each Each Each Allowance Category to Allowance Category to Allowance Category to Amount Total Loans Amount Total Loans Amount Total Loans ($ in thousands) 2021 2020 2019
Commercial & industrial$ 1,890 14.9 %$ 3,074 23.4 %$ 1,883 18.3 % Commercial real estate - owner occupied 2,588 14.5 % 2,059 12.9 % 1,220 11.9 % Commercial real estate - nonowner occupied 4,193 31.9 % 3,392 29.5 % 2,382 32.5 % Agricultural 599 7.0 % 496 6.3 % 434 6.2 % Residential real estate 3,515 25.1 % 2,534
20.8 % 2,203 23.4 %
Home equity line of
credit (HELOC) 631 5.1 % 647 5.3 % 454 5.8 %
Consumer 389 1.6 % 372 1.7 % 179 1.8 %
$ 13,805 100.0 % $ 12,574 100.0 % $ 8,755 100.0 %
As detailed in the risk factors, the CARES Act provided for significant consumer
and small business relief due to the impact of the COVID-19 pandemic. The
Company provided payment relief to a number of consumer and small business
customers throughout 2020 and 2021, which we believe was successful and enabled
our clients to weather the pandemic effectively. All such COVID-related payment
deferrals had expired or been removed by December 31, 2021 and all clients were
back to contractual terms at such date.
Regulatory capital reporting is required for State Bank only, as the Company is
currently exempt from quarterly regulatory capital level measurement pursuant to
the Small Bank Holding Company Policy Statement. As of December 31, 2021 , State
Bank met all regulatory capital levels required to be considered
well-capitalized (see Note 18 to the Consolidated Financial Statements).
On May 27, 2021 , the Company issued and sold $20.0 million in aggregate
principal amount of its 3.65% Fixed to Floating Rate Subordinated Notes due 2031
in a private placement exempt from the registration requirements under the
Securities Act of 1933, as amended. The Subordinated Notes bear interest at a
fixed rate of 3.65% through May 31, 2026 . From June 1, 2026 to the maturity date
or earlier redemption of the Subordinated Notes, the interest rate will reset
quarterly to an interest rate per annum, equal to the then-current-three-month
Secured Overnight Financing Rate ("SOFR") provided by the Federal Reserve Bank
of New York plus 296 basis points. The proceeds from the Subordinated Notes will
be used to assist the Company in meeting various corporate obligations,
including share buyback, acquisition costs and organic asset growth. The
Subordinated Notes have a maturity of 10 years.
Summary of results – 2021 vs. 2020
Net income for 2021 was$18.3 million , or$2.56 per diluted share, compared with net income of$14.9 million , or$1.96 per diluted share, for 2020.State Bank reported net income for 2021 of$18.6 million , which was up from the$16.0 million in net income in 2020. SBFG Title reported net income for 2020 of$0.5 million , which was down from net income of$0.6 million in 2020. Positive results for 2021 included loan growth of$18.5 million when excluding the impact of the PPP initiative, and deposit growth of$64.0 million . The Company fully participated in both phases of PPP, with a total of$111.4 million in loans to over 1,100 clients with revenue of$3.4 million for 2021 compared to$1.4 million for 2020. The mortgage banking business line continued to contribute significant revenues, with residential real estate loan production of$600.0 million for the year, resulting in$17.3 million of revenue from gains on sale. The level of mortgage origination was down from the$694.2 million in 2020. The Company's loans serviced for others ended the year at$1.36 billion , up from$1.30 billion atDecember 31, 2020 . 39 Operating revenue increased by$2.6 million , or 3.9 percent, from$66.0 million in 2020 to$68.6 million in 2021 due to increased PPP fees and OMSR recapture which offset lower mortgage gain revenue. SBFG Title increased revenue by$0.1 million of$2.1 million for 2021. Operating expense increased by$1.7 million , or 4.0 percent, from$43.1 million in 2020 to$44.8 million in 2021, due to compensation and fringe benefit cost increases and higher spend on technology/digital initiatives. These expense increases were offset by lower mortgage commission expense due to lower volume. Results of Operations Years EndedDecember 31 ,
($ in thousands, except per share data) 2021 2020
% Change Total assets$ 1,330,854 $ 1,257,839 5.8 % Total investments 263,259 149,406 76.2 % Loans held for sale 7,472 7,234 3.3 % Loans, net of unearned income 822,714 872,723 -5.7 % Allowance for loan losses 13,805 12,574 9.8 % Total deposits 1,113,045 1,049,011 6.1 % Total operating revenue1$ 68,581 $ 66,026 3.9 % Net interest income 37,884 35,930 5.4 % Loan loss provision 1,050 4,500 -76.7 % Noninterest income 30,697 30,096 2.0 % Noninterest expense 44,808 43,087 4.0 % Net income 18,277 14,944 22.3 % Diluted earnings per share 2.56 1.96 30.6 %
1 Operating income corresponds to net interest income plus noninterest income.
Net interest income was$37.9 million for 2021 compared to$35.9 million for 2020, an increase of$2.0 million or 5.4 percent. Average earning assets increased to$1.24 billion in 2021, compared to$1.07 billion in 2020, an increase of$170.7 million or 15.9 percent due to a higher bond portfolio, which offset slightly lower loan volume. The consolidated 2021 full year net interest margin on an FTE basis decreased 30 basis points to 3.06 percent compared to 3.36 percent for the full year of 2020. PPP activity during 2021 increased margin revenue by$3.0 million for the full year of 2021. Provision for loan losses of$1.0 million was taken in 2021 compared to$4.5 million taken for 2020. For 2021, net recoveries totaled$0.18 million , or (0.02) percent of average loans. This charge off level was significantly lower than 2020, in which net charge offs were$0.68 million or 0.08 percent of average loans. Noninterest Income Years Ended December 31, ($ in thousands) 2021 2020 % Change Wealth management fees$ 3,814 $ 3,245 17.5 % Customer service fees 3,217 2,807 14.6 %
Gains on sale of residential loans & OMSR's 17,255 25,350 -31.9 % Mortgage loan servicing fees, net 2,940 (5,138 ) 157.2 % Gain on sale of non-mortgage loans 158 453
-65.1 % Title Insurance income 2,089 1,913 9.2 % Other 1,224 1,466 -16.5 % Total noninterest income$ 30,697 $ 30,096 2.0 % 40 Total noninterest income was$30.7 million for 2021 compared to$30.1 million for 2020, representing an increase of$0.6 million , or 2.0 percent, year-over-year. Although mortgage gain on sale was down from the record year in 2020 by$8.1 million , or 31.9 percent, the Company was able to offset that reduction by recapture of mortgage servicing rights of$3.9 million during 2021. The Company sold$489.4 million of originated mortgages into the secondary market in 2021, which allowed our serviced loan portfolio to grow to$1.36 billion atDecember 31, 2021 from$1.30 billion atDecember 31, 2020 . The higher servicing balance of the portfolio led to the 5.6 percent increase in mortgage loan servicing income. Sales of non-mortgage loans (small business and farm credits) decreased in 2021 as compared to 2020, as SBA activity continued to be focused on the PPP initiative. The Company expanded its wealth management assets under management to$618.3 million , up$59.9 million , which resulted in a 17.5 percent increase in wealth fee income. Noninterest Expense Years Ended December 31, ($ in thousands) 2021 2020 % Change Salaries & employee benefits$ 26,838 $ 25,397 5.7 % Net occupancy expense 3,048 2,891 5.4 % Equipment expense 3,281 3,186 3.0 % Data processing fees 2,579 3,055 -15.6 % Professional fees 3,027 3,307 -8.5 % Marketing expense 784 658 19.1 % Telephone and communications 581 535 8.6 % Postage and delivery expense 414 415 -0.2 % State, local and other taxes 1,175 1,146 2.5 % Employee expense 663 535 23.9 % Other expense 2,418 1,962 23.2 % Total noninterest expense$ 44,808 $ 43,087 4.0 % Total noninterest expense was$44.8 million for 2021 compared to$43.1 million for 2020, representing a$1.7 million , or 4.0 percent, increase year-over-year. Total full-time equivalent employees ended 2021 at 269, which was up 25 from year end 2020. Salaries and benefits were driven by the increase in total full time employees as we filled a number of open positions during the year. We also have seen higher costs in technology as we have continued to add resources and digital options for our clients.
Summary of results – 2020 vs. 2019
Net income for 2020 was$14.9 million , or$1.96 per diluted share, compared with net income of$12.0 million and net income available to common of$11.0 million , or$1.51 per diluted share, for 2019.State Bank reported net income for 2020 of$16.0 million , which was up from the$12.5 million in net income in 2020. SBFG Title reported net income for 2020 of$0.6 million , which was up from the$0.3 million in 2019. Positive results for 2020 included loan growth of$47.2 million , and deposit growth of$208.8 million . The mortgage banking business line continues to contribute significant revenues, with residential real estate loan production of$694.2 million for the year, resulting in$25.4 million of revenue from gains on sale. The level of mortgage origination was up from the$445.3 million in 2019. The Company's loans serviced for others ended the year at$1.3 billion , up from$1.2 billion atDecember 31, 2019 . The Company realized over$1.4 million in revenue from the PPP initiative. Operating revenue was up compared to the prior year by$13.2 million , or 25.0 percent, which was impacted by a$3.6 million temporary OMSR impairment. Our 2020 results include the full year impact from SBFG Title with net income of$0.6 million , and SB Captive, with net income of$0.9 million . Net interest margin on a fully tax equivalent basis ("FTE") for 2020 was 3.36 percent, down 46 basis points from 2019. Operating expense was up compared to the prior year by$5.7 million , or 15.2 percent, due to compensation and fringe benefit cost increases as a result of higher mortgage commission levels. Operating leverage (growth in revenue divided by growth in operating expense) for the year was a positive 1.6 times. Net charge offs for 2020 of$0.68 million resulted in a loan loss provision of$4.5 million , compared to net charge offs of$0.21 million and a$0.8 million loan loss provision in 2019. 41
The Company completed its most recent annual goodwill impairment review as ofDecember 31, 2021 . AtDecember 31, 2021 , the Company concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The Company's goodwill is further discussed in Note 8 to the Consolidated Financial Statements. Management plans to continue from time to time to purchase additional premises and equipment and improve current facilities to meet the current and future needs of the Company's customers. These purchases will include buildings, leasehold improvements, furniture and equipment. Management expects that cash on hand and cash generated from current operations will fund these capital expenditures and purchases.
liquidity
Liquidity relates primarily to the Company's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Sources used to satisfy these needs consist of cash and due from banks, interest-bearing deposits in other financial institutions, securities available-for-sale, loans held for sale and borrowings from various sources. These assets, excluding the borrowings, are commonly referred to as liquid assets. Liquid assets were$422.9 million atDecember 31, 2021 , compared to$303.2 million atDecember 31, 2020 . The Company does not have material cash requirements for capital expenditures over the next year. Any cash needs for capital requirements would be funded by cash existing at the Company. It is not anticipated that the Company will be required to initiate external borrowings in order to fund ongoing operations. The Company's commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of$645.1 million atDecember 31, 2021 , can and is readily used to collateralize borrowings, which is an additional source of liquidity. Management believes the Company's current liquidity level, without these borrowings, is sufficient to meet its current and anticipated liquidity needs. AtDecember 31, 2021 , all eligible commercial real estate, residential first, multi-family mortgage and agricultural loans were pledged under aFederal Home Loan Bank ("FHLB") blanket lien. Significant additional off-balance-sheet liquidity is available in the form of FHLB advances, unused federal funds lines from correspondent banks and the national certificate of deposit market. Management expects the risk of changes in off-balance-sheet arrangements to be immaterial to earnings. Based on the current collateralization requirements of the FHLB, approximately$110.5 million of additional borrowing capacity existed atDecember 31, 2021 . AtDecember 31, 2021 and 2020, the Company had$41.0 million in federal funds lines available. The Company also had$184.9 million in unpledged securities atDecember 31, 2021 available for additional borrowings. 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 2021 and 2020 follows: The Company experienced positive cash flows from operating activities in 2021 and 2020. Net cash from operating activities was$17.3 million and$23.9 million for the years endedDecember 31, 2021 and 2020, respectively. Significant operating items for 2021 included gain on sale of loans of$17.4 million and net income of$18.3 million . Cash provided by the sale of loans held for sale were$490.6 million . Cash used in the origination of loans held for sale were$478.1 million . The Company experienced negative cash flows from investing activities in 2021 and 2020. Net cash used in investing activities was$72.0 million and$57.2 million for the years endedDecember 31, 2021 and 2020, respectively. The changes for 2021 include the purchase of available-for-sale securities of$170.7 million , and net decrease in loans of$48.5 million . The changes for 2020 include the purchase of available-for-sale securities of$129.8 million and net increase in loans of$31.7 million . The Company had proceeds from repayments, maturities, sales and calls of securities of$50.5 million and$84.0 million in 2021 and 2020, respectively. The Company experienced positive cash flows from financing activities in 2021 and 2020. Net cash from financing activities was$63.6 million and$146.9 million for the years endedDecember 31, 2021 and 2020, respectively. Positive cash flows of$64.0 million and$157.7 million is attributable to the change in deposits for 2021 and 2020, respectively. 42 The Company uses an Economic Value of Equity ("EVE") analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company's assets and liabilities in rate shock environments that range from -100 basis points to +400 basis points. The results of this analysis are reflected in the following table. Economic Value of Equity December 31, 2021 ($ in thousands) Change in rates $ Amount $ Change % Change +400 basis points$ 278,254 $ 35,684 14.71 % +300 basis points 273,190 30,620 12.62 % +200 basis points 265,711 23,142 9.54 % +100 basis points 256,110 13,540 5.58 % Base Case 242,570 - - -100 basis points 217,281 (25,289 ) -10.43 % Economic Value of Equity December 31, 2020 ($ in thousands) Change in rates $ Amount $ Change % Change +400 basis points$ 243,779 $ 61,586 33.80 % +300 basis points 231,590 49,398 27.11 % +200 basis points 217,936 35,743 19.62 % +100 basis points 202,260 20,067 11.01 % Base Case 182,193 - - -100 basis points 154,509 (27,684 ) -15.19 %
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