SB Financial Group, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included. SB Financial is an Ohio financial holding company operating State Bank and related wealth management, title and insurance businesses, primarily in Ohio, Indiana and Michigan.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets at year-end | $1.331 billion | $1.258 billion |
| Total deposits at year-end | $1.113 billion | $1.049 billion |
| Loans held for investment, net of deferred costs | $822.7 million | $872.7 million |
| Net interest income | $37.9 million | $35.9 million |
| Net interest margin, fully tax-equivalent | 3.06% | 3.36% |
| Noninterest income | $30.7 million | $30.1 million |
| Noninterest expense | $44.8 million | $43.1 million |
| Provision for loan losses | $1.1 million | $4.5 million |
| Net income | $18.3 million | $14.9 million |
| Diluted earnings per share | $2.56 | $1.96 |
| Return on average assets / equity | 1.38% / 12.67% | 1.29% / 10.74% |
- Revenue and earnings: Operating revenue (net interest income plus noninterest income) rose 3.9% to $68.6 million; net income increased 22.3%. Lower deposit and borrowing costs lifted net interest income, although margin contracted as asset yields declined.
- Fee income: Mortgage gains on sale and related income fell 31.9% to $17.3 million as originations declined from the unusually strong prior year. A $3.9 million mortgage-servicing-rights valuation allowance recovery helped offset the decline. Wealth management fees rose 17.5% to $3.8 million.
- Cash flow: Operating activities provided $17.3 million, investing activities used $72.0 million, and financing activities provided $63.6 million. Cash and due from banks ended at $149.5 million, versus $140.7 million.
- Liquidity: Management reported liquid assets of $422.9 million, approximately $110.5 million of additional FHLB borrowing capacity, $41.0 million of unused federal funds lines, and $184.9 million of unpledged securities. It said liquidity was sufficient for anticipated needs and did not expect external borrowing to fund ongoing operations.
- Debt and capital: Year-end obligations included $19.5 million net subordinated debt, $10.3 million trust preferred securities, $5.5 million FHLB advances and $15.3 million in repurchase agreements. State Bank was well-capitalized: total risk-based capital was 15.20%, against a 10.0% well-capitalized threshold. Consolidated shareholders’ equity was $144.9 million, or 10.9% of assets.
Material changes versus 2020
- Deposits increased 6.1%, while loans held for investment decreased 5.7%. The loan decline primarily reflected PPP forgiveness; excluding PPP activity, management reported loan growth of $18.5 million, or 2.3%.
- Available-for-sale securities increased to $263.3 million from $149.4 million, contributing to asset growth and a larger securities portfolio.
- The allowance for loan losses rose 9.8% to $13.8 million, while the provision declined to $1.1 million. Nonperforming assets decreased 10.7% to $6.5 million, or 0.49% of assets; year-end delinquencies were 0.46% of loans. Net recoveries were $0.18 million.
- Higher rates reduced the fair value of the bond portfolio; other comprehensive income declined $4.1 million. Total equity increased 1.4% despite the securities-related loss and share repurchases.
- The Company issued $20.0 million of 3.65% fixed-to-floating subordinated notes due 2031 and repurchased approximately 500,000 shares during the year, according to management’s discussion. Common dividends were $0.44 per share, up from $0.40.
Outlook, commentary and risks
- Management’s strategic priorities are revenue diversification, deeper market penetration, increased product use, operational efficiency and maintaining asset quality. It anticipated continuing quarterly dividends at similar levels, but gave no earnings or revenue guidance; future dividends remain subject to board discretion, subsidiary earnings and regulatory limits.
- PPP activity comprised approximately 1,100 loans totaling $111.4 million; about $2.0 million remained outstanding at year-end. All COVID-related payment deferrals had expired or returned to contractual terms by December 31, 2021.
- Key risks include local economic weakness and real estate exposure, credit losses, interest-rate and net-interest-margin sensitivity, competition, cybersecurity and reliance on third-party service providers, regulatory and compliance obligations, and the continued recovery of mortgage-banking income. The filing also identifies transition risk for LIBOR-linked contracts and $10.3 million of trust preferred securities whose replacement rate had not yet been determined.
- CECL adoption was expected in 2023. Management expected no material financial-statement impact, but continued to assess the effect. Interest-rate scenarios showed modeled economic value of equity rising 14.71% under a 400-basis-point increase and falling 10.43% under a 100-basis-point decrease.
- Ordinary-course legal matters were not expected by management to materially affect financial position, results or cash flows. The auditor issued an unqualified opinion and identified the allowance for loan losses as a critical audit matter. Management concluded internal controls were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Review the quality and sustainability of earnings, especially the contribution from PPP fees, mortgage servicing-rights valuation changes and mortgage gains on sale.
- Assess loan concentrations, credit grades, collateral values and the allowance methodology ahead of CECL adoption; the allowance estimate was the auditor’s critical audit matter.
- Check the sensitivity of net interest income and securities values to changing rates, including the effect of the lower reported net interest margin and unrealized securities losses.
- Confirm the terms, use of proceeds and future cost of the 2031 subordinated notes, and the LIBOR replacement for the trust preferred securities.
- Reconcile share repurchase disclosures and outstanding shares across the filing; confirm dividend capacity and the effect of regulatory limits.