EDGAR 10-K Filing

Company CIK: 767405
Filing Year: 2021
Filename: 767405_10-K_2021_0001213900-21-013974.json

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ITEM 1. BUSINESS
Item 1. Business.
Certain statements contained in this Annual Report on Form 10-K which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Cautionary Statement Regarding Forward-Looking Information” under Item 1A. Risk Factors on page 17 of this Annual Report on Form 10-K.
General
SB Financial Group, Inc., an Ohio corporation (the “Company”), is a financial holding company subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company was organized in 1983. The executive offices of the Company are located at 401 Clinton Street, Defiance, Ohio 43512.
Through its direct and indirect subsidiaries, the Company is engaged in a variety of financial activities, including commercial banking, and wealth management services, as explained in more detail below.
State Bank and Trust Company
The State Bank and Trust Company (“State Bank”) is an Ohio state-chartered bank and wholly owned subsidiary of the Company. State Bank offers a full range of commercial banking services, including checking accounts, savings accounts, money market accounts and time certificates of deposit; automatic teller machines; commercial, consumer, agricultural and residential mortgage loans; personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; internet banking; private client group services; and other personalized banking services. The trust and financial services division of State Bank offers various trust and financial services, including asset management services for individuals and corporate employee benefit plans, as well as brokerage services through Cetera Investment Services, an unaffiliated company. State Bank presently operates 21 banking centers, located within the Ohio counties of Allen, Defiance, Franklin, Fulton, Hancock, Lucas, Paulding, Wood and Williams, and one banking center located in Allen County, Indiana. State Bank also presently operates five loan production offices, located in Franklin, Lucas and Seneca Counties, Ohio, Hamilton County, Indiana and Monroe County, Michigan. At December 31, 2020, State Bank had 238 full-time equivalent employees.
SBFG Title, LLC
SBFG Title, LLC dba Peak Title Agency (“SBFG Title”) was formed as an Ohio limited liability company in March 2019 and purchased all of the assets and real estate of an Ohio-based title agency effective March 15, 2019. At December 31, 2020, SBFG Title, LLC had six full-time equivalent employees.
RFCBC
RFCBC, Inc. (“RFCBC”) is an Ohio corporation and wholly owned subsidiary of the Company that was incorporated in August 2004. RFCBC operates as a loan subsidiary in servicing and working out problem loans and is presently inactive. At December 31, 2020, RFCBC had no employees.
Rurbanc Data Services
Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”) was formed in 1964 and became an Ohio corporation in June 1976. In September 2006, RDSI acquired Diverse Computer Marketers, Inc. (“DCM”), which was merged into RDSI effective December 31, 2007. Effective January 1, 2018, the Company completed the sale of the customer contracts and certain other assets of RDSI’s remaining check and statement processing business operated through the DCM division. As a result of the sale, RDSI is presently inactive and had no material operations or employees at December 31, 2020.
Rurban Mortgage Company
Rurban Mortgage Company (“RMC”) is an Ohio corporation and wholly owned subsidiary of State Bank. RMC is a mortgage company and is presently inactive. At December 31, 2020, RMC had no employees.
SBT Insurance
SBT Insurance, LLC (“SBI”) is an Ohio corporation and wholly owned subsidiary of State Bank. SBI is an insurance company that engages in the sale of insurance products to retail and commercial customers of State Bank. At December 31, 2020, SBI had no employees.
SB Captive
SB Captive, Inc. (“SB Captive”) is a Nevada corporation and wholly owned subsidiary of SB Financial Group, Inc. SB Captive is a self-insurance company that provides coverage to State Bank and SB Financial Group. The purpose of the Captive is to mitigate insurance risk by participating in a pool with other banks. At December 31, 2020, SB Captive, Inc. had no employees.
Rurban Statutory Trust II
Rurban Statutory Trust II (“RST II”) is a trust that was organized in August 2005. In September 2005, RST II closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole assets of RST II are the junior subordinated debentures and the back-up obligations, which in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RST II under the Capital Securities.
Competition
The Company experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks in the lending areas of State Bank, and to a lesser extent, from savings associations, insurance companies, governmental agencies, credit unions, securities brokerage firms and pension funds. The primary factors in competing for loans are interest rates and overall banking services.
State Bank’s competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance companies and securities brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits and convenience of office location. State Bank operates in the highly competitive wealth management services field and its competition consists primarily of other bank wealth management departments.
Supervision and Regulation
The following is a description of the significant statutes and regulations applicable to the Company and its subsidiaries. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by the U.S. Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company or its subsidiaries could have a material effect on our business.
Regulation of Bank Holding Companies and Their Subsidiaries in General
The Company is a financial holding company and, as such, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Bank Holding Company Act requires the prior approval of the Federal Reserve Board (“FRB”) before a financial or bank holding company may acquire direct or indirect ownership or control of more than 5 percent of the voting shares of any bank (unless the bank is already majority owned by the bank holding company), acquire all or substantially all of the assets of another bank or another financial or bank holding company, or merge or consolidate with any other bank holding company. Subject to certain exceptions, the Bank Holding Company Act also prohibits a financial or bank holding company from acquiring 5 percent or more of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. The primary exception to this prohibition allows a bank holding company to own shares in any company the activities of which the FRB had determined, as of November 19, 1999, to be so closely related to banking as to be a proper incident thereto.
As a result of the Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act of 1999, which amended the Bank Holding Company Act, bank holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury), or (2) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. On January 2, 2019, the Company elected, and received approval from the FRB, to become a financial holding company.
The Company is subject to the reporting requirements of, and examination and regulation by, the FRB. The FRB has extensive enforcement authority over bank holding companies, including, without limitation, the ability to assess civil money penalties, issue cease and desist or removal orders, and require that a bank holding company divest subsidiaries, including its subsidiary banks. In general, the FRB may initiate enforcement actions for violations of laws and regulations and for unsafe or unsound practices. A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the bank holding company or its subsidiaries.
Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of State Bank, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching.
Various consumer laws and regulations also affect the operations of State Bank. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) established the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services and certain financial services providers. The CFPB is authorized to prevent unfair, deceptive or abusive acts or practices and ensures consistent enforcement of laws so that consumers have access to fair, transparent and competitive markets for consumer financial products and services. Since it was established, the CFPB has exercised extensively its rulemaking and interpretative authority.
The Federal Home Loan Bank (“FHLB”) provide credit to their members in the form of advances. As a member of the FHLB of Cincinnati, State Bank must maintain certain minimum investments in the capital stock of the FHLB of Cincinnati. State Bank was in compliance with these requirements at December 31, 2020.
Economic Growth, Regulatory Relief and Consumer Protection Act
On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted, which repealed or modified certain provisions of the Dodd-Frank Act and eased restrictions on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including the Company, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including the Company, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with consolidated assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.
Restrictions on Dividends
There can be no assurance as to the amount of dividends which may be declared in future periods with respect to the common shares of the Company, since such dividends are subject to the discretion of the Company’s Board of Directors, cash needs, and general business conditions, dividends from the Company’s subsidiaries and applicable governmental regulations and policies.
The ability of the Company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared by State Bank and the Company’s other subsidiaries. State Bank may not pay dividends to the Company if, after paying such dividends, it would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. In addition, State Bank must obtain the approval of the FRB and the Ohio Division of Financial Institutions (“ODFI”) if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year’s net profits and the retained net profits for the preceding two years, less required transfers to surplus. At December 31, 2020, State Bank had $26.9 million of excess earnings over the preceding three years.
Payment of dividends by State Bank may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice. Moreover, the FRB expects the Company to serve as a source of strength to its subsidiary banks, which may require it to retain capital for further investment in the subsidiary, rather than for dividends to shareholders of the Company.
Affiliate Transactions
The Company and State Bank are separate and distinct legal entities. The FRB’s Regulation W and various other legal limitations restrict State Bank from lending funds to, or engaging in other “covered transactions” with, the Company (or any other affiliate), generally limiting such covered transactions with any one affiliate to 10 percent of State Bank’s capital and surplus and limiting all such covered transactions with all affiliates to 20 percent of State Bank’s capital and surplus. Covered transactions, including extensions of credit, sales of securities or assets and provision of services, also must be on terms and conditions consistent with safe and sound banking practices, including credit standards, that are substantially the same or at least as favorable to State Bank as those prevailing at the time for transactions with unaffiliated companies.
A bank’s authority to extend credit to executive officers, directors and greater than 10 percent shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things, these loans must be made on terms (including interest rates charged and collateral required) that are substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and certain approval procedures must be followed in making loans which exceed specified amounts.
Federally insured banks are subject, with certain exceptions, to certain additional restrictions (including collateralization) on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. In addition, such banks are prohibited from engaging in certain tying arrangements in connection with any extension of credit or the providing of any property or service.
The Coronavirus Aid, Relief, and Economic Security Act of 2020
In response to the novel COVID-19 pandemic (“COVID-19”), the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Company and State Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the FRB and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and State Bank. Furthermore, as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. For example, on December 27, 2020, the Consolidated Appropriations Act, 2021 (the “CAA”) was signed into law, which, among other things, allowed certain banks to temporarily postpone implementation of the current expected credit loss model (accounting standard), which is described below. The Company is continuing to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to COVID-19.
The CARES Act amended the loan program of the Small Business Administration (the “SBA”), in which State Bank participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program (the “PPP”), to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds.
Shortly thereafter, and due to the evolving impact of COVID-19, additional legislation was enacted authorizing the SBA to resume accepting PPP applications on July 6, 2020, and extending the PPP application deadline to August 8, 2020. As a participating lender in the PPP, State Bank continues to monitor legislative, regulatory, and supervisory developments related thereto. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19.
The CARES Act encouraged the FRB, in coordination with the Secretary of the Treasury, to establish or implement various programs to help mitigate the adverse effects of COVID-19 on midsize businesses, nonprofits, and municipalities. In April 2020, the Federal Reserve established the Main Street Lending Program (“MSLP”) to implement certain of these recommendations. The MSLP supported lending to small and medium-sized businesses that were in sound financial condition before the onset of COVID-19. On November 19, 2020, Treasury Secretary Steven Mnuchin indicated that he would not reauthorize extending the MSLP past December 31, 2020. However, the FRB extended the program to January 8, 2021, in order to process loans that were submitted on or before December 14, 2020. The program ended on January 8, 2021.
Regulatory Capital
The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard” (Basel I), published by the Basel Committee on Banking Supervision (the “Basel Committee”). In July 2013, the United States banking regulators issued new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including the Company and State Bank, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.
The Basel III Capital Rules include (a) a minimum common equity tier 1 capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum leverage ratio of 4.0%.
Common equity for the common equity tier 1 capital ratio generally includes common stock (plus related surplus), retained earnings, accumulated other comprehensive income (unless an institution elects to exclude such income from regulatory capital), and limited amounts of minority interests in the form of common stock, subject to applicable regulatory adjustments and deductions.
Tier 1 capital generally includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, generally consists of other preferred stock and subordinated debt meeting certain conditions plus limited amounts of the allowance for loan and lease losses, subject to specified eligibility criteria, less applicable deductions.
The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).
Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Basel III Capital Rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the banking organization does not hold a capital conservation buffer of greater than 2.5 percent composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter.
In September 2019, the FRB, along with other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gave community banks, including the Company, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks met certain requirements. Under the rule, a community bank was eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it had less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage ratio greater than 9.0%. Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it had less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage ratio greater than 9.0%. Qualifying institutions that elected to use the CBLR framework (each, a CBLR Bank”) and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well-capitalized ratio requirements. No CBLR Bank was required to calculate or report risk-based capital, and each CBLR Bank could opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule. Pursuant to the CARES Act, on August 26, 2020, the federal banking agencies adopted a final rule that temporarily lowered the CBLR threshold and provides a gradual transition back to the prior level. Specifically, the CBLR threshold was reduced to 8.0% for the remainder of 2020, increased to 8.5% for 2021, and will return to 9.0% beginning January 1, 2022. This final rule became effective on October 1, 2020. The Company does not intend to elect utilization of the CBLR in assessing capital adequacy and intends to continue to follow existing capital rules.
In December 2018, the federal banking agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit loss (“CECL”) model (accounting standard). The rule revises the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model. The Company currently anticipates recording a one-time cumulative effect adjustment upon adoption, and does not anticipate utilizing the three year phase in. The Company expects to maintain risk-based capital ratios in excess of “well-capitalized” after the impact of the one-time cumulative effect adjustment.
At December 31, 2020, State Bank was in compliance with all of the regulatory capital requirements to which it was subject. For State Bank’s capital ratios, see Note 17 to the Consolidated Financial Statements under Item of 8 of this report (the “Consolidated Financial Statements”).
The FRB has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled state-chartered member banks. At each successively lower defined capital category, a bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the FRB has less flexibility in determining how to resolve the problems of the institution. In addition, the FRB generally can downgrade a bank’s capital category, notwithstanding its capital level, if, after notice and opportunity for hearings, the bank is deemed to be engaged in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. State Bank’s capital at December 31, 2020, met the standards for the highest capital category, a “well-capitalized” bank.
In April 2015, the FRB issued a final rule which increased the size limitation for qualifying bank holding companies under the FRB’s Small Bank Holding Company Policy Statement from $500 million to $1 billion of total consolidated assets. In August 2018, the FRB issued an interim final rule, as required by the Economic Growth Regulatory Relief, and consumer Protection Act of 2018, to further increase size limitations under the Small Bank Holding Company Policy Statement to $3 billion of total consolidated assets. The Company continues to qualify under the Small Bank Holding Company Policy Statement for exemption from the FRB’s consolidated risk-based capital and leverage rules at the holding company level.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (“FDIC”) is an independent federal agency, which insures the deposits of federally insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States Government.
As insurer, the FDIC is authorized to conduct examinations of and to require reporting by insured institutions, including State Bank, to prohibit any insured institution from engaging in any activity the FDIC determines to pose a threat to the Deposit Insurance Fund (“DIF”), and to take enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any institution if the FDIC finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or other regulatory agency.
The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations, which fund the DIF. Pursuant to the Dodd-Frank Act, the FDIC has established 2 percent as the Designated Reserve Ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35 percent by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on insured institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. Although the FDIC’s rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reached 1.35%.The DRR met the statutory minimum of 1.35% on September 30, 2018. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits have been determined by the FDIC for banks with assets of less than $10 billion, which had previously contributed to the increase of the DRR to 1.35%. On June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion (“small bank credits”) beginning September 30, 2019. The FDIC will continue to apply small bank credits so long as the DRR is at least 1.35%. State Bank utilized its $0.2 million assessment credit during the [third and fourth quarters of 2019]. The FDIC rules further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.
The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against a bank, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.
Community Reinvestment Act
The Community Reinvestment Act (“CRA”) requires State Bank’s primary federal regulatory agency, the FRB, to assess State Bank’s record in meeting the credit needs of the communities served by State Bank. The FRB assigns one of four ratings: outstanding, satisfactory; needs to improve or substantial noncompliance. The rating assigned to a financial institution is considered in connection with various applications submitted by the financial institution or its holding company to its banking regulators, including applications to acquire another financial institution or to open or close a branch office. In addition, all subsidiary banks of a financial holding company must maintain a satisfactory or outstanding rating in order for the financial holding company to avoid limitations on its activities. State Bank currently maintains a satisfactory CRA rating.
SEC and NASDAQ Regulation
The Company is subject to the jurisdiction of the Securities and Exchange Commission (the “SEC”) and certain state securities authorities relating to the offering and sale of its securities. The Company is subject to the registration, reporting and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules adopted by the SEC under those acts. The Company’s common shares are listed on The NASDAQ Capital Market (“NASDAQ”) under the symbol “SBFG”. As a result, the Company is subject to NASDAQ rules and regulations applicable to listed companies.
The SEC has adopted rules and regulations governing, among other matters, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. The SEC has also approved corporate governance rules promulgated by NASDAQ. The Company has adopted and implemented a Code of Conduct and Ethics and a copy of that policy can be found on the Company’s website at www.YourSBFinancial.com by first clicking “Corporate Governance” and then “Code of Conduct”. The Company has also adopted charters of the Audit Committee, the Compensation Committee and the Governance and Nominating Committee, which charters are available on the Company’s website at www.YourSBFinancial.com by first clicking “Corporate Governance” and then “Supplementary Info”.
USA Patriot Act
The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) gives the United States government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act encourages information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. State Bank has established policies and procedures that State Bank believes comply with the requirements of the Patriot Act.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. State Bank is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
Executive and Incentive Compensation
The Dodd-Frank Act requires that the federal banking agencies, including the FRB and the FDIC, issue a rule related to incentive-based compensation. No final rule implementing this provision of the Dodd-Frank Act has, as of the date of the filing of this Annual Report on Form 10-K, been adopted, but a proposed rule was published in 2016 that expanded upon a prior proposed rule published in 2011. The proposed rule is intended to: (i) prohibit incentive-based payment arrangements that the banking agencies determine could encourage certain financial institutions to take inappropriate risks by providing excessive compensation or that could lead to material financial loss; (ii) require the board of directors of those financial institutions to take certain oversight actions related to incentive-based compensation; and (iii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator. Although a final rule has not been issued, the Company has undertaken efforts to ensure that the Company’s incentive compensation plans do not encourage inappropriate risks, consistent with the principles identified above.Public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee. A compensation committee must have the authority to hire advisors and to have the public company fund reasonable compensation of such advisors.
SEC regulations require public companies to provide various disclosures about executive compensation in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of executive compensation.
Public companies will be required, once stock exchanges impose additional listing requirements under the Dodd-Frank Act, to implement “clawback” procedures for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives who received incentive awards.
Consumer Protection Laws and Regulations
Banks are subject to regular examination to ensure compliance with federal consumer protection statutes and regulations, including, but not limited to, the following:
● The Equal Credit Opportunity Act (prohibiting discrimination in any credit transaction on the basis of any of various criteria);
● The Truth in Lending Act (requiring that credit terms are disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably);
● The Fair Housing Act (making it unlawful for a lender to discriminate in housing-related lending activities against any person on the basis of certain criteria);
● The Home Mortgage Disclosure Act (requiring financial institutions to collect data that enables regulatory agencies to determine whether financial institutions are serving the housing credit needs of the communities in which they are located); and
● The Real Estate Settlement Procedures Act (requiring that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs);
● Privacy provisions of the Gramm-Leach-Bliley Act (requiring financial institutions to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer information from unauthorized access).
The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of a specific banking or consumer finance law.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If State Bank fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. The Company expects this trend of state-level activity in those areas to continue, and is continually monitoring developments in the states in which our customers are located.
In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its operations and to store sensitive data. The Company employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. The Company employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. The Company has also invested over the last eighteen months to further enhance these tools and mechanisms. Notwithstanding the strength of the Company’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, the Company has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
Effect of Environmental Regulation
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Company and its subsidiaries. The Company believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. The Company, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the near future. The Company’s subsidiaries may be required to make capital expenditures for environmental control facilities related to properties which they may acquire through foreclosure proceedings in the future; however, the amount of such capital expenditures, if any, is not currently determinable.
Human Capital Resources
At December 31, 2020, we employed 244 full time equivalent employees. Approximately 69% of our team are female with an average tenure for our entire team of 8.80 years. The success of our business is highly dependent on our team members, who provide value to our customers and communities through their dedication to our Value Proposition - “Your lifetime provider of convenient and innovative financial services, delivered by a passionate and caring staff”. We seek to hire a well-qualified team who are a good fit for our organization, and our selection and promotion processes are without bias and include the active recruitment of minorities and women.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
The following are the condensed average balance sheets of the Company for the years ending December 31 and includes the interest earned or paid, and the average interest rate, on each asset and liability:
Average
Average Average
Average Average
Average
($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets
Taxable securities/cash $ 185,480 $ 2,328 1.26 % $ 95,216 $ 3,226 3.39 % $ 85,238 $ 2,618 3.07 %
Non-taxable securities 6,625 5.03 % 10,108 3.41 % 11,379 3.86 %
Loans, net1 880,338 39,974 4.54 % 809,651 40,829 5.04 % 749,055 36,422 4.86 %
Total earning assets 1,072,443 42,635 3.98 % 914,975 44,400 4.85 % 845,672 39,479 4.67 %
Cash and due from banks 14,553
47,135
38,990
Allowance for loan losses (10,165 )
(8,370 )
(8,361 )
Premises and equipment 23,776
23,779
21,795
Other assets 60,789
50,413
49,170
Total assets $ 1,161,396
$ 1,027,932
$ 947,266
Liabilities
Savings and interest-bearing demand deposits $ 492,267 $ 3,152 0.64 % $ 427,858 $ 2,846 0.67 % $ 401,577 $ 1,754 0.44 %
Time deposits 247,955 2,918 1.18 % 262,040 5,814 2.22 % 225,467 3,560 1.58 %
Repurchase agreements & other 22,832 0.31 % 15,288 0.54 % 16,458 0.22 %
Advances from FHLB 14,186 2.18 % 16,066 2.50 % 22,108 2.08 %
Trust preferred securities 10,310 2.48 % 10,310 4.17 % 10,310 3.89 %
Total interest-bearing liabilities 787,550 6,705 0.85 % 731,562 9,574 1.31 % 675,920 6,212 0.92 %
Demand deposits 211,004
146,401
137,253
Other liabilities 23,645
16,779
12,999
Total liabilities 1,022,199
894,742
826,172
Shareholders’ equity 139,197
133,190
121,094
Total liabilities and shareholders’ equity $ 1,161,396
$ 1,027,932
$ 947,266
Net interest income (tax equivalent basis)
$ 35,930
$ 34,826
$ 33,267
Net interest income as a percent of average interest-earning assets - GAAP measure
3.35 %
3.81 %
3.93 %
Net interest income as a percent of average interest-earning assets - Non-GAAP measure2
3.36 %
3.82 %
3.95 %
-- Computed on a fully tax equivalent basis (FTE)
1 Nonaccruing loans and loans held for sale are included in the average balances.
2 Interest on tax exempt securities and loans is computed on a tax equivalent basis using a 21 percent statutory tax rate, and added to the net interest income. The tax equivalent adjustment was $0.15, $0.17 and $0.14 million in 2020, 2019 and 2018, respectively.
The following tables set forth the effect of volume and rate changes on interest income and expense for the periods indicated. For purposes of these tables, changes in interest due to volume and rate were determined as follows:
● Volume variance - change in volume multiplied by the previous year’s rate.
● Rate variance - change in rate multiplied by the previous year’s volume.
● Rate/volume variance - change in volume multiplied by the change in rate. This variance allocates the volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each.
Total
Variance Variance Attributable To
($ in thousands) 2020/2019 Volume Rate
Interest income
Taxable securities $ (898 ) $ 3,058 $ (3,956 )
Non-taxable securities1 (12 ) (119 )
Loans, net of unearned income and deferred fees1 (855 ) 3,565 (4,420 )
Total interest income (1,765 ) 6,504 (8,269 )
Interest expense
Savings and interest-bearing demand deposits $ 306 $ 428 $ (122 )
Time deposits (2,896 ) (313 ) (2,583 )
Repurchase agreements & other (12 ) (52 )
Advances from FHLB (93 ) (48 ) (45 )
Trust preferred securities (174 ) - (174 )
Total interest expense (2,869 ) (2,976 )
Net interest income $ 1,104 $ 6,397 $ (5,293 )
1 Interest on non-taxable securities and loans has been adjusted to fully tax equivalent
II. INVESTMENT PORTFOLIO
A. The fair value of securities available-for-sale as of December 31 in each of the following years are summarized as follows:
($ in thousands)
U.S. Treasury and government agencies $ 6,864 $ 12,202 $ 18,670
Mortgage-backed securities 127,761 78,182 60,943
State and political subdivisions 12,275 10,564 11,356
Other corporate securities 2,506 - -
Totals $ 149,406 $ 100,948 $ 90,969
B. The maturity distribution and weighted-average interest rates of securities available-for-sale at December 31, 2020, 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
($ in thousands) Within
One Year After One
Year but
within
Five Years After Five
Years but
within
Ten Years After
Ten Years Total
U.S. Treasury and government agencies $ 2,558 $ 1,057 $ 3,249 $ - $ 6,864
Mortgage-backed securities 2,966 12,377 112,386 127,761
State and political subdivisions 1,072 2,703 2,658 5,842 12,275
Other corporate securities - - 2,506 - 2,506
Total securities by maturity $ 3,662 $ 6,726 $ 20,790 $ 118,228 $ 149,406
Weighted-average yield by maturity1 2.85 % 2.99 % 2.75 % 1.59 % 1.85 %
1 Yields are presented on a tax-equivalent basis.
C. Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies of the U.S. Government, there were no other securities of any one issuer, which exceeded 10 percent of the shareholders’ equity of the Company at December 31, 2020.
III. LOAN PORTFOLIO
A. Types of Loans: Total loans on the balance sheet were comprised of the following classifications at December 31 for the years indicated:
($ in thousands) 2017
Loans held for investment (HFI)
Commercial business and agricultural $ 260,002 $ 202,041 $ 179,053 $ 153,501 $ 161,227
Commercial real estate 370,820 366,782 340,791 332,154 284,084
Residential real estate 182,165 193,159 187,104 150,854 142,452
Consumer & other loans 61,157 62,808 64,336 59,619 56,335
Total loans 874,144 824,790 771,284 696,128 644,098
Unearned income (1,421 ) 335
Total loans, net of unearned income $ 872,723 $ 825,510 $ 771,883 $ 696,615 $ 644,433
Concentrations of Credit Risk: The Company makes commercial, real estate and installment loans to customers located mainly in the Tri-State region of Ohio, Indiana and Michigan. 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 of December 31, 2020, 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.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates: The following tables show the amounts of commercial, business and agricultural loans and commercial real estate loans outstanding as of December 31, 2020, which, based on remaining scheduled repayments of principal, are due in the periods indicated. Also, the amounts have been classified according to sensitivity to changes in interest rates for loans due after one year (variable-rate loans are those loans with floating or adjustable interest rates).
Maturing
Commercial Commercial
($ in thousands) Business & Ag. Real Estate Total
Within one year $ 50,709 $ 30,370 $ 81,079
After one year but within five years 108,820 111,556 220,376
After five years 100,473 228,894 329,367
Totals $ 260,002 $ 370,820 $ 630,822
Interest Sensitivity
($ in thousands) Fixed Variable
Rate Rate Total
Commercial Business & Agricultural
Within one year $ 32,494 $ 18,215 $ 50,709
Due after one year but within five years 75,580 33,240 108,820
Due after five years 15,163 85,310 100,473
Totals 123,237 136,765 260,002
Commercial RE & Construction
Within one year 8,723 21,647 30,370
Due after one year but within five years 48,988 62,568 111,556
Due after five years 59,040 169,854 228,894
Totals 116,751 254,069 370,820
Total
Within one year 41,217 39,862 81,079
Due after one year but within five years 124,568 95,808 220,376
Due after five years 74,203 255,164 329,367
Totals $ 239,988 $ 390,834 $ 630,822
C. Risk Elements:
1. The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful. When interest accruals are discontinued, interest income accrued in the current period is reversed. Loans that are past due 90 days or more as to interest or principal payments are considered for nonaccrual status. The following schedule summarizes nonaccrual, past due, and troubled debt restructured (TDR) loans at December 31 for the years indicated:
($ in thousands) 2017
Loans accounted for on a nonaccrual basis $ 6,426 $ 5,500 $ 2,906 $ 2,704 $ 2,737
Accruing troubled debt restructurings 1,129 1,590
Total nonperforming loans and TDRs $ 7,236 $ 6,374 $ 3,834 $ 3,833 $ 4,327
Listed below is the interest income on impaired and nonaccrual loans greater than $100,000 at December 31 for the years indicated:
($ in thousands)
Cash basis interest income recognized on impaired loans outstanding $ 218 $ 340
Interest income actually recorded on impaired loans and included in net income for the period
Unrecorded interest income on nonaccrual loans
2. As of December 31, 2020, in addition to the $7.2 million of nonperforming loans reported under Item III.C above (which amount includes all loans classified by management as doubtful or loss), there were approximately $12.0 million in other outstanding loans where known information about possible credit problems of the borrowers caused management to have concerns as to the ability of such borrowers to comply with the present loan repayment terms (loans classified as substandard by management) and which may result in disclosure of such loans pursuant to Item III.C.1. at some future date. In regard to loans classified as substandard, management believes that such potential problem loans have been adequately evaluated in the allowance for loan losses.
3. Foreign Loans Outstanding
None
4. Loan Concentrations
At December 31, 2020, loans outstanding related to agricultural operations or collateralized by agricultural real estate and equipment aggregated approximately $55.2 million, or 6.3 percent of total HFI loans.
D. Other Interest Bearing Assets
There were no other interest bearing assets as of December 31, 2020, which would be required to be disclosed under Item III.C.1 or Item III.C.2. if such assets were loans.
Management believes the allowance for loan losses at December 31, 2020 was adequate to absorb any losses on nonperforming loans, as the allowance balance is maintained by management at a level considered adequate to cover losses that are probable based on past loss experience, general economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which are subject to change over time.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios at December 31 for the years indicated:
($ in thousands) 2017
Loans
Loans outstanding at end of period $ 872,723 $ 825,510 $ 771,883 $ 696,615 $ 644,433
Average loans outstanding during period $ 880,338 $ 809,651 $ 749,055 $ 660,675 $ 603,875
Allowance for loan losses
Balance at beginning of period $ 8,755 $ 8,167 $ 7,930 $ 7,725 $ 6,990
Loans charged off:
Commercial business and agricultural (582 ) (143 ) (227 ) (50 ) (135 )
Commercial real estate - - (42 ) (26 ) (241 )
Residential real estate (82 ) (53 ) (30 ) (61 ) (20 )
Consumer & other loans (79 ) (63 ) (108 ) (94 ) (105 )
(743 ) (259 ) (407 ) (231 ) (501 )
Recoveries of loans previously charged off:
Commercial business and agricultural 10
Commercial real estate - 5
Residential real estate 6
Consumer & other loans 18
36
Net loans charged off (681 ) (212 ) (363 ) (195 ) (15 )
Provision for loan losses 4,500 750
Balance at end of period $ 12,574 $ 8,755 $ 8,167 $ 7,930 $ 7,725
Ratio of net charge offs to average loans 0.08 % 0.03 % 0.05 % 0.03 % 0.00 %
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.
B. The following schedule provides a breakdown of the allowance for loan losses allocated by type of loan and related ratios at December 31 for the years indicated:
Allowance
Amount Percentage of Loans In Each Category to Total Loans Allowance
Amount Percentage of Loans In Each Category to Total Loans Allowance
Amount Percentage of Loans In Each Category to Total Loans Allowance
Amount Percentage of Loans In Each Category to Total Loans Allowance
Amount Percentage of Loans In Each Category to Total Loans
($ in thousands) 2017
Commercial business and agricultural $ 3,570 29.6 % $ 2,317 24.6 % $ 1,917 23.3 % $ 1,328 22.1 % $ 1,551 25.1 %
Commercial real estate 5,451 42.5 % 3,602 44.4 % 2,923 44.2 % 3,779 47.7 % 3,321 44.1 %
Residential real estate 2,534 20.9 % 2,203 23.4 % 2,567 24.2 % 2,129 21.7 % 1,963 22.1 %
Consumer & other loans 1,019 7.0 % 7.6 % 8.3 % 8.6 % 8.7 %
Totals $ 12,574 100.0 % $ 8,755 100.0 % $ 8,167 100.0 % $ 7,930 100.0 % $ 7,725 100.0 %
While management’s periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge offs that occur.
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as follows for the years ended December 31:
Average Average Average Average Average Average
($ in thousands) Amount Rate Amount Rate Amount Rate
Savings and interest bearing demand deposits $ 492,267 0.64 % $ 427,858 0.67 % $ 401,577 0.44 %
Time deposits 247,955 1.18 % 262,040 2.22 % 225,467 1.58 %
Demand deposits (non interest bearing) 211,004 - 146,401 - 137,253 -
Totals $ 951,226
$ 836,299
$ 764,297
Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 2020, are summarized as follows:
($ in thousands) Amount
Three months or less $ 36,639
Over three months through six months 28,948
Over six months and through twelve months 37,780
Over twelve months 36,407
Total $ 139,774
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders’ equity and average total assets and certain other ratios are as follows for the periods ended December 31:
($ in thousands)
Average total assets $ 1,161,396 $ 1,027,932 $ 947,266
Average shareholders’ equity $ 139,197 $ 133,190 $ 121,094
Net income $ 14,944 $ 11,973 $ 11,638
Net income available to common shareholders $ 14,944 $ 11,023 $ 10,663
Cash dividends declared $ 0.40 $ 0.36 $ 0.32
Return on average total assets 1.29 % 1.16 % 1.23 %
Return on average shareholders’ equity 10.74 % 8.99 % 9.61 %
Dividend payout ratio1 20.54 % 23.84 % 19.60 %
Average shareholders’ equity to average assets 11.99 % 12.96 % 12.78 %
1 Cash dividends declared on common shares divided by net income available to common.
VII. SHORT-TERM BORROWINGS
The following information is reported for short-term borrowings, which are comprised of retail repurchase agreements for the periods noted:
($ in thousands)
Amount outstanding at end of year $ 20,189 $ 12,945 $ 15,184
Weighted-average interest rate at end of year 0.20 % 0.51 % 0.49 %
Maximum amount outstanding at any month end $ 25,600 $ 22,675 $ 18,312
Average amount outstanding during the year $ 21,794 $ 15,288 $ 16,458
Weighted-average interest rate during the year 0.32 % 0.54 % 0.22 %

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in this Annual Report on Form 10-K, and in other statements that we make from time to time in filings by the Company with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include: (a) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial items; (b) statements of plans and objectives of the Company or our Board of Directors or management, including those relating to products and services; (c) statements of future economic performance; (d) statements of future customer attraction or retention; and (d) statements of assumptions underlying these statements. Forward-looking statements reflect our expectations, estimates or projections concerning future results or events. These statements are generally identified by the use of forward-looking words or phrases such as “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “should”, “will allow”, “will continue”, “will likely result”, “will remain”, “would be”, or similar expressions.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the “safe harbor” provisions of the Act.
Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including those factors discussed in the Risk Factors below. There is also the risk that the Company’s management or Board of Directors incorrectly analyzes these risks and forces, or that the strategies the Company develops to address them are unsuccessful.
Forward-looking statements speak only as of that date on which they are made. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made. All forward-looking statements attributable to the Company or any person acting on our behalf are qualified in their entirety by the following cautionary statements.
Economic, Market and Political Risks:
The economic impact of COVID-19 or any other pandemic could adversely affect our business, financial condition, liquidity, and results of operations.
In March 2020, the World Health Organization declared COVID-19 a pandemic and the President of the United States declared COVID-19 a national emergency. COVID-19 has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal bank regulatory agencies have encouraged financial institutions to prudently work with affected borrowers, and new legislation has provided relief from reporting loan classifications due to modifications related to COVID-19.
Given the ongoing and dynamic nature of COVID-19, it is difficult to predict the full impact of the outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. As of December 31, 2020, we hold and service PPP loans. These PPP loans are subject to the provisions of the CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. We have credit risk on the PPP loans if the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan. We could face additional risks in our administrative capabilities to service our PPP loans, and risk with respect to the determination of loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency.
The spread of COVID-19 has also caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to such employees to be more limited or less reliable. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.
COVID-19 or a new pandemic could subject us to any of the following risks, any of which could, individually or in the aggregate, have a material adverse effect on our business, financial condition, liquidity, and results of operations:
● demand for our products and services may decline, making it difficult to grow assets and income;
● if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
● collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
● our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
● the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
● as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
● a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
● a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;
● we rely on third party vendors for certain services and the unavailability of a critical service due to COVID-19 could have an adverse effect on us; and
● continued adverse economic conditions could result in protracted volatility in the price of our Common Shares.
Moreover, our future success and profitability substantially depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to COVID-19 or any similar pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover, the length of which is unknown and during which the United States may experience a recession. Our business could be materially and adversely affected by such recession.
To the extent the effects of COVID-19 adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this section.
Changes in economic and political conditions could adversely affect our earnings through declines in deposits, loan demand, the ability of our customers to repay loans and the value of collateral securing our loans.
Our success depends to a large extent upon local and national economic conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, the election of a new U.S. President and changes in the membership of Congress in 2020, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans made by us. Recent political developments have resulted in substantial changes in economic and political conditions for the U.S. and the remainder of the world. Disruptions in U.S. and global financial markets, and changes in oil production in the Middle East also affect the economy and stock prices in the U.S., which can affect our earnings capital, as well as the ability of our customers to repay loans. The potential effects of the United Kingdom leaving the European Union (Brexit) on the United States are still unknown. Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings and cash flows. In addition, our lending and deposit gathering activities are concentrated primarily in Northwest Ohio. As a result, our success depends in large part on the general economic conditions of these areas, particularly given that a significant portion of our lending relates to real estate located in this region. Therefore, adverse changes in the economic conditions in these areas, including those resulting from COVID-19, could adversely impact our earnings and cash flows.
We may be unable to manage interest rate risks, which could reduce our net interest income.
Our results of operations are affected principally by net interest income, which is the difference between interest earned on loans and investments and interest expense paid on deposits and other borrowings. The spread between the yield on our interest-earning assets and our overall cost of funds may be compressed, and our net interest income may continue to be adversely impacted by changing rates. We cannot predict or control changes in interest rates. National, regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect the movement of interest rates and our interest income and interest expense. If the interest rates paid on deposits and other borrowed funds increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest paid for deposits rises more quickly than the interest received on loans and other investments.
In addition, certain assets and liabilities may react in different degrees to changes in market interest rates. For example, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while interest rates on other types may lag behind. While the bulk of our variable rate commercial assets have interest rate floors, some of our assets, such as adjustable rate mortgages, have features that restrict changes in their interest rates, including rate caps.
Interest rates are highly sensitive to many factors that are beyond our control. Some of these factors include: inflation, recession, unemployment, money supply, international disorders, and instability in domestic and foreign financial markets. Changes in interest rates may affect the level of voluntary prepayments on our loans and may also affect the level of financing or refinancing by customers. We believe that the impact on our cost of funds will depend on a number of factors, including but not limited to, the competitive environment in the banking sector for deposit pricing, opportunities for clients to invest in other markets such as fixed income and equity markets, and the propensity of customers to invest in their businesses. The effect on our net interest income from a change in interest rates will ultimately depend on the extent to which the aggregate impact of loan re-pricings exceeds the impact of increases in our cost of funds.
A transition away from London Inter-Bank Offered Rate (“LIBOR”) as a reference rate for financial contracts could negatively affect our income and expenses and the value of various financial contracts.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. In November 2020, the Federal Reserve Board issued a statement supporting the release of a proposal and supervisory statements designed to provide a clear end date for U.S. Dollar LIBOR (“USD LIBOR”), and the federal banking agencies issued a release encouraging banks to stop entering into USD LIBOR contracts by the end of 2021, noting that most legacy contracts will mature prior to the date LIBOR ceases to be issued. It is uncertain at this time the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may perform differently than LIBOR or other alternative benchmarks or may have other consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if LIBOR ceases to exist.
The Company’s primary exposure to LIBOR relates to its promissory notes with borrowers, swap contracts with clients, offsetting swap contracts with third parties related to the swap contracts with clients, and the Company’s LIBOR-based borrowings (if any). The Company’s contracts generally include a LIBOR term (for example, one month, three month, or one year) plus an incremental margin rate. The Company is working through this transition via a multi-disciplinary project team. We do not believe the change to a benchmark like SOFR will have a material impact on our financial condition, results of operations or cash flows.
Risks Related to Our Business Operations:
If our actual loan losses exceed our allowance for loan losses, our net income will decrease.
Our loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which could have a material adverse effect on our operating results. In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance, which when combined, we refer to as the allowance for loan losses. Our allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could have a material adverse effect on our operating results. Our allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. We cannot guarantee that we will not further increase the allowance for loan losses or that regulators will not require us to increase this allowance. Either of these occurrences could have a material adverse effect on our financial condition and results of operations.
Moreover, the Financial Accounting Standards Board (“FASB”) has changed its requirements for establishing the allowance for loan losses.
On June 16, 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13 “Financial Instruments - Credit Losses”, which replaces the incurred loss model with an expected loss model, and is referred to as the current expected credit loss (“CECL”) model. Under the incurred loss model, loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. The new accounting guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019. However, the FASB has deferred the effective date for this ASU for smaller reporting companies, such as the Company, to annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2022. Under the CECL model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters. If the methodologies and assumptions that we use in the CECL model are proven to be incorrect or inadequate, the allowance for credit losses may not be sufficient, resulting in the need for additional allowance for credit losses to be established, which could have a material adverse impact on our financial condition and results of operations.
We may further experience increased delinquencies, credit losses, and corresponding charges to capital, which could require us to increase our provision for loan losses associated with impacts related to the coronavirus outbreak due to quarantines, market downturns, increased unemployment rates, changes in consumer behavior related to pandemic fears, and related emergency response legislation. We cannot predict the full impact of the coronavirus outbreak or any other future global pandemic on our business, but we may experience increased delinquencies and credit losses as a result of the outbreak. Further, if real estate markets or the economy in general deteriorate (due to the coronavirus outbreak or otherwise), State Bank may experience increased delinquencies and credit losses. The allowance for loan losses may not be sufficient to cover actual loan-related losses. Additionally, banking regulators may require State Bank to increase its allowance for loan losses in the future, which could have a negative effect on the Company’s financial condition and results of operations. Additions to the allowance for loan losses will result in a decrease in net earnings and capital and could hinder our ability to grow our assets.
Any significant increase in our allowance for loan losses or loan charge offs, including increases required by applicable regulatory authorities, might have a material adverse effect on the Company’s financial condition and results of operations.
Our success depends upon our ability to attract and retain key personnel.
Our success depends upon the continued service of our senior management team and upon our ability to attract and retain qualified financial services personnel. Competition for qualified employees is intense. We cannot guarantee that we will be able to retain our existing key personnel or attract additional qualified personnel. If we lose the services of our key personnel, or are unable to attract additional qualified personnel, our business, financial condition and results of operations could be adversely affected.
We depend upon the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter into other transactions with customers, we may rely on information provided to us by customers, including financial statements and other financial information. We may also rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customer’s audited financial statements conform to generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer, and we may also rely on the audit report covering those financial statements. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with generally accepted accounting principles or that are materially misleading.
We may not be able to grow, and if we do, we may have difficulty managing that growth.
Our business strategy is to continue to grow our assets and expand our operations, including through potential strategic acquisitions. Our ability to grow depends, in part, upon our ability to expand our market share, successfully attract core deposits, and to identify loan and investment opportunities as well as opportunities to generate fee-based income. We can provide no assurance that we will be successful in increasing the volume of our loans and deposits at acceptable levels and upon terms acceptable to us. We also can provide no assurance that we will be successful in expanding our operations organically or through strategic acquisitions while managing the costs and implementation risks associated with this growth strategy.
We expect to continue to experience growth in the number of our employees and customers and the scope of our operations, but we may not be able to sustain our historical rate of growth or continue to grow our business at all. Our success will depend upon the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships, and to hire, train and manage our employees. In the event that we are unable to perform all these tasks and meet these challenges effectively, including continuing to attract core deposits, our operations, and consequently our earnings, could be adversely impacted.
Future acquisitions or other expansion may adversely impact our financial condition and results of operations.
In the future, we may acquire other financial institutions or branches or assets of other financial institutions. We may also open new branches, enter into new lines of business, or offer new products or services. Any such acquisition or expansion of our business will involve a number of expenses and risks, which may include some or all of the following:
● the time and expense associated with identifying and evaluating potential acquisitions or expansions;
● the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to target institutions;
● the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion;
● any financing required in connection with an acquisition or expansion;
● the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;
● entry into unfamiliar markets and the introduction of new products and services into our existing business;
● the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and
● the risk of loss of key employees and customers.
We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we expect. Neither can we assure that integration efforts for any future acquisitions will be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders.
Our information systems may experience an interruption or security breach.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.
Unauthorized disclosure of sensitive or confidential client information, or breaches in security of our systems, could severely harm our business.
We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both third-party service providers and us. State Bank’s necessary dependence upon automated systems to record and process State Bank’s transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to detect. We have security and backup and recovery systems in place, as well as a business continuity plan, to ensure the computer systems will not be inoperable, to the extent possible. We also routinely review documentation of such controls and backups related to third party service providers. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. In recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions.
We could be adversely affected if one of our employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. State Bank is further exposed to the risk that the third-party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risks as we are). These disruptions may interfere with service to our customers, cause additional regulatory scrutiny and result in a financial loss or liability.
Misconduct by employees could include fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential information. We may not be able to prevent employee errors or misconduct, and the precautions we take to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject us to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on our business.
In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. The massive breach of the systems of a credit bureau in 2019 presents additional threats as criminals now have more information than ever before about a larger portion of our country’s population, which could be used by criminals to pose as customers initiating transfers of money from customer accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers.
We have implemented security controls to prevent unauthorized access to our computer systems, and we require that our third-party service providers maintain similar controls. However, the Company’s management cannot be certain that these measures will be successful. A security breach of the computer systems and loss of confidential information, such as customer account numbers and related information, could result in a loss of customers’ confidence and, thus, loss of business. We could also lose revenue if competitors gain access to confidential information about our business operations and use it to compete with us. While we maintain specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage.
Further, we may be affected by data breaches at retailers and other third parties who participate in data interchanges with us and our customers that involve the theft of customer credit and debit card data, which may include the theft of our debit card PIN numbers and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in us incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on our results of operations.
To date, we have not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks or attempted breaches, or incur resulting losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, and our plans to continue to implement internet and mobile banking capabilities to meet customer demand. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance its protective measures or to investigate and remediate any security vulnerabilities.
Our assets at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-party vendors who have access to our assets via electronic media. Certain cyber security risks arise due to this access, including cyber espionage, blackmail, ransom, and theft. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance our protective measures or to investigate and remediate any security vulnerabilities.
Our business could be adversely affected through third parties who perform significant operational services on our behalf.
The third parties performing operational services for the Company are subject to risks similar to those faced by the Company relating to cybersecurity, breakdowns or failures of their own systems, or misconduct of their employees. Like many other community banks, State Bank also relies, in significant part, on a single vendor for the systems which allow State Bank to provide banking services to State Bank’s customers.
One or more of the third parties utilized by us may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by such third party. Further, the operations of our third-party vendors could fail or otherwise become delayed as a result of COVID-19. Certain of these third parties may have limited indemnification obligations to us in the event of a cybersecurity event or operational disruption, or may not have the financial capacity to satisfy their indemnification obligations.
Financial or operational difficulties of a third party provider could also impair our operations if those difficulties interfere with such third party’s ability to serve the Company. If a critical third-party provider is unable to meet the needs of the Company in a timely manner, or if the services or products provided by such third party are terminated or otherwise delayed and if the Company is not able to develop alternative sources for these services and products quickly and cost-effectively, our business could be materially adversely effected.
Additionally, regulatory guidance adopted by federal banking regulators addressing how banks select, engage and manage their third-party relationships, affects the circumstances and conditions under which we work with third parties and the cost of managing such relationships.
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.
We face competition both in originating loans and in attracting deposits within our market area. We compete for clients by offering personal service and competitive rates on our loans and deposit products. The type of institutions we compete with include large regional financial institutions, community banks, thrifts and credit unions operating within our market areas. Nontraditional sources of competition for loan and deposit dollars come from captive auto finance companies, mortgage banking companies, internet banks, brokerage companies, insurance companies and direct mutual funds. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. We expect competition to remain intense in the future due to legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.
We may be required to repurchase loans we have sold or indemnify loan purchasers under the terms of the sale agreements, which could adversely affect our liquidity, results of operations and financial statements.
When State Bank sells a mortgage loan, it agrees to repurchase or substitute a mortgage loan if it is later found to have breached any representation or warranty State Bank made about the loan or if the borrower is later found to have committed fraud in connection with the origination of the loan. While we have underwriting policies and procedures designed to avoid breaches of representations and warranties as well as borrower fraud, there can be no assurance that no breach or fraud will ever occur. Required repurchases, substitutions or indemnifications could have an adverse impact on our liquidity, results of operations and financial statements.
Legislative, Legal and Regulatory Risks:
FDIC insurance premiums may increase materially, which could negatively affect our profitability.
The FDIC insures deposits at FDIC insured financial institutions, including State Bank. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. During 2008 and 2009, there were higher levels of bank failures which dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. The FDIC collected a special assessment in 2009 to replenish the Deposit Insurance Fund and also required a prepayment of an estimated amount of future deposit insurance premiums. The FDIC recently adopted rules revising the assessments in a manner benefiting banks with assets totaling less than $10 billion. There can be no assurance, however, that assessments will not be changed in the future.
We operate in a highly regulated industry, and the laws and regulations that govern our operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in, or failure to comply with the same, may adversely affect the Company.
The banking industry is highly regulated. We are subject to supervision, regulation and examination by various federal and state regulators, including the FRB, the SEC, the CFPB, the FDIC, Financial Industry Regulatory Authority, Inc. (“FINRA”), and various state regulatory agencies. The statutory and regulatory framework that governs the Company is generally designed to protect depositors and customers, the Deposit Insurance Fund, the U.S. banking and financial system, and financial markets as a whole and not to protect shareholders. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities (including foreclosure and collection practices), limit the dividends or distributions that we can pay, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in capital than would otherwise be required under generally accepted accounting principles in the United States of America. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years in response to the perceived state of the financial services industry, as well as other factors such as technological and market changes. Such regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject the Company to restrictions on business activities, fines, and other penalties, any of which could adversely affect results of operations, the capital base, and the price of our common shares. Further, any new laws, rules, or regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
Legislative or regulatory changes or actions could adversely impact our business.
The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, borrowers, the Deposit Insurance Fund and the banking system as a whole, and not to benefit our shareholders. Regulations affecting banks and financial services businesses are undergoing continuous change, especially in light of COVID-19 and the stimulus programs issued in connection therewith, and management cannot predict the effect of these changes. While such changes are generally intended to lessen the regulatory burden on financial institutions, the impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets held by a financial institution, the adequacy of a financial institution’s allowance for loan losses and the ability to complete acquisitions. Additionally, actions by regulatory agencies against us could cause us to devote significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders. Even the reduction of regulatory restrictions could have an adverse effect on us and our shareholders if such lessening of restrictions increases competition within our industry or our market area.
In light of conditions in the global financial markets and the global economy that occurred in the last decade, regulators have increased their focus on the regulation of the financial services industry. In the last several years, Congress and the federal bank regulators have acted on an unprecedented scale in responding to the stresses experienced in the global financial markets. Some of the laws enacted by Congress and regulations promulgated by federal bank regulators subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business and results of operations. In addition to laws, regulations and supervisory and enforcement actions directed at the operations of financial institutions, proposals to reform the housing finance market consider significant changes to Fannie Mae and Freddie Mac, which could negatively affect our sales of loans.
Changes in accounting standards could influence our results of operations.
The accounting standard setters, including the FASB, the SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be difficult to predict and can materially affect how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, which would result in the restatement of our financial statements for prior periods.
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make significant estimates that affect the financial statements. Due to the inherent nature of these estimates, actual results may vary materially from management’s estimates. In June 2016, FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL. CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. The Company will be required to comply with the new standard in the first quarter of 2023. Upon adoption of CECL, credit loss allowances may increase, which would decrease retained earnings and regulatory capital. The federal banking regulators have adopted a regulation that will allow banks to phase in the day-one impact of CECL on regulatory capital over three years. CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to call report errors, financial misstatements, or operational losses.
Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could cause a material financial loss.
The Bank Secrecy Act and the USA Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. The Bank Secrecy Act, as amended by the USA Patriot Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. Financial Crimes Enforcement Network (“FinCEN”), a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service.
There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (“OFAC”). If the Company’s policies, procedures, and systems are deemed deficient, or if the policies, procedures, and systems of the financial institutions that the Company has already acquired or may acquire in the future are deficient, the Company may be subject to liability, including fines and regulatory actions such as restrictions on State Bank’s ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition plans, which could negatively impact our business, financial condition, and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the Company.
We could face legal and regulatory risk arising out of our residential mortgage business.
Numerous federal and state governmental, legislative and regulatory authorities are investigating practices in the business of mortgage and home equity lending and servicing and in the mortgage-related insurance and reinsurance industries. We could face the risk of class actions, other litigation and claims from: the owners of or purchasers of such loans originated or serviced by us, homeowners involved in foreclosure proceedings or various mortgage-related insurance programs, downstream purchasers of homes sold after foreclosure, title insurers, and other potential claimants. Included among these claims are claims from purchasers of mortgage and home equity loans seeking the repurchase of loans where the loans allegedly breached origination covenants, representations, and warranties made to the purchasers in the purchase and sale agreements. The CFPB has issued new rules for mortgage origination and mortgage servicing. Both the origination and servicing rules create new private rights of action for consumers against lenders and servicers in the event of certain violations.
Risks Related to Our Capital and Common Shares:
Our ability to pay cash dividends is limited, and we may be unable to pay cash dividends in the future even if we elect to do so.
We are dependent primarily upon the earnings of our operating subsidiaries for funds to pay dividends on our common and depositary shares. The payment of dividends by us is also subject to regulatory restrictions. As a result, any payment of dividends in the future will be dependent, in large part, on our ability to satisfy these regulatory restrictions and our subsidiaries’ earnings, capital requirements, financial condition and other factors. There can be no assurance as to if or when the Company may pay dividends or as to the amount of any dividends which may be declared and paid to shareholders in future periods. Failure to pay dividends on our shares could have a material adverse effect on the market price of our shares.
A limited trading market exists for our common shares, which could lead to price volatility.
The ability to sell our common shares depends upon the existence of an active trading market for those shares. While our shares are listed for trading on the NASDAQ Capital Market, there is moderate trading volume in these shares. As a result, shareholders may be unable to sell our shares at the volume, price and time desired. The limited trading market for our shares may cause fluctuations in the market value of our shares to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. In addition, even if a more active market of our shares should develop, we cannot guarantee that such a market will continue.
The market price of our common shares may be subject to fluctuations and volatility.
The market price of our common shares may fluctuate significantly due to, among other things, changes in market sentiment regarding our operations, financial results or business prospects, the banking industry generally or the macroeconomic outlook. Certain events or changes in the market or banking industry generally are beyond our control. In addition to the other risk factors contained or incorporated by reference herein, factors that could affect our trading price:
● our actual or anticipated operating and financial results, including how those results vary from the expectations of management, securities analysts and investors;
● changes in financial estimates or publications of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institution;
● failure to declare dividends on our common shares from time to time;
● reports in the press or investment community generally or relating to our reputation or the financial services industry;
● developments in our business or operations or in the financial sector generally;
● any future offerings by us of our common shares;
● any future offerings by us of debt or preferred shares, which would be senior to our common shares upon liquidation and for purposes of dividend distributions;
● legislative or regulatory changes affecting our industry generally or our business and operations specifically;
● the operating and share price performance of companies that investors consider to be comparable to us;
● announcements of strategic developments, acquisitions, restructurings, dispositions, financings and other material events by us or our competitors;
● actions by our current shareholders, including future sales of common shares by existing shareholders, including our directors and executive officers;
● proposed or final regulatory changes or developments;
● anticipated or pending regulatory investigations, proceedings, or litigation that may involve or affect us; and
● other changes in U.S. or global financial markets, global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.
Equity markets in general and our shares have experienced volatility over the past few years. The market price of our shares may continue to be subject to volatility unrelated to our operating performance or business prospects, which could result in a decline in the market price of our shares.
Investors could become subject to regulatory restrictions upon ownership of our common shares.
Under the Federal Change in Bank Control Act, a person may be required to obtain prior approval from the Federal Reserve before acquiring 10 percent or more of our common shares or the power to directly or indirectly control our management, operations, or policies.
We have implemented anti-takeover devices that could make it more difficult for another company to purchase us, even though such a purchase may increase shareholder value.
In many cases, shareholders may receive a premium for their shares if we were purchased by another company. Ohio law and our Articles and Amended and Restated Regulations, as amended (“Regulations”), make it difficult for anyone to purchase us without the approval of our Board of Directors. Consequently, a takeover attempt may prove difficult, and shareholders may not realize the highest possible price for their securities.
We may be compelled to seek additional capital in the future, but capital may not be available when needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, federal banking agencies have proposed extensive changes to their capital requirements; including raising required amounts and eliminating the inclusion of certain instruments from the calculation of capital. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.
We may be the subject of litigation, which could result in legal liability and damage to our business and reputation.
From time to time, we may be subject to claims or legal action from customers, employees or others. Financial institutions like the Company and State Bank are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. We are also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding our business. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other large financial institutions, we are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information.
Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operations. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.
General Risk Factors:
Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.
The policies of the Federal Reserve Board impact us significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits, and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are difficult to predict. Federal Reserve Board policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations.
A default by another larger financial institution could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of relationships between and among the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect our business.
Changes in tax laws could adversely affect our performance.
We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to tax laws could have a material adverse effect on our results of operations; fair values of net deferred tax assets and obligations of state and political subdivisions held in our investment securities portfolio. In addition, our customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by our customers may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for our loans and deposit products. In addition, such negative effects on our customers could result in defaults on the loans we have made.
The preparation of our financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make significant estimates that affect the financial statements. Two of our most critical estimates are the level of the allowance for loan losses and the accounting for goodwill and other intangibles. Because of the inherent nature of these estimates, we cannot provide complete assurance that we will not be required to adjust earnings for significant unexpected loan losses, nor that we will not recognize a material provision for impairment of our goodwill. For additional information regarding these critical estimates, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 36 of this Annual Report on Form 10-K.
We are at risk of increased losses from fraud.
Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more effective. Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud even involves the creation of synthetic identification in which fraudsters “create” individuals for the purpose of perpetrating fraud. Further, in addition to fraud committed directly against the Company, the Company may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.
We need to constantly update our technology in order to compete and meet customer demands.
The financial services market, including banking services, is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable us to reduce costs. Our future success will depend, in part, on our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations. Some of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect our growth, revenue and profit.
Climate change, severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.
Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us or our customers. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
The Company’s principal executive offices are located at 401 Clinton Street, Defiance, Ohio. State Bank owns this facility, with a portion of the facility utilized as a retail banking center. In addition, State Bank owns the land and buildings occupied by twenty-one of its banking centers and leases one other property used as a banking center. The Company also occupies office space from various parties for loan production and other business purposes on varying lease terms. There is no outstanding mortgage debt on any of the properties which are owned by State Bank.
Listed below are the banking centers, loan production offices and service facilities of the Company and their addresses, all of which are located in Allen, Defiance, Delaware, Fulton, Franklin, Hancock, Lucas, Paulding, Williams and Wood counties of Ohio; Allen and Hamilton counties of Indiana; and Monroe county of Michigan:
SB Financial Group, Inc. Property List as of December 31, 2020
($ in thousands) Description/Address Leased/
Owned Total
Deposits
12/31/20
Main Banking Center & Corporate Office
Clinton Street, Defiance, OH Owned $ 266,066
Banking Centers/Drive-Thru’s
West High Street, Bryan, OH Owned 55,266
Third Street, Defiance, OH (Drive-thru) Owned N/A
North Clinton Street, Defiance, OH Leased 40,370
Main Street, Delta, OH Owned 22,147
West Dublin Granville Road, Dublin, OH Owned 68,074
East Lincoln Street, Findlay, OH Owned 16,443
South Main Street Suite A, Findlay, OH Leased -
Coldwater Road, Fort Wayne, IN Owned 25,742
North Main Street, Bowling Green, OH Owned 13,513
Main Street, Luckey, OH Owned 36,662
East Morenci Street, Lyons, OH Owned 23,099
West Market Street, Lima, OH Owned 65,239
East Main Street, Montpelier, OH Owned 46,885
North First Street, Oakwood, OH Owned 25,021
North Main Street, Paulding, OH Owned 63,184
East South Boundary Street, Perrysburg, OH Owned 16,641
South State Street, Pioneer, OH Owned 36,343
Monroe Street, Sylvania, OH Owned 80,093
Main Street, Walbridge, OH Owned 34,437
North Michigan Street, Edon, OH Owned 53,931
North Shoop Avenue, Wauseon, OH Owned 59,854
Loan Production Offices
North Wayne Street, Angola, IN Owned N/A
Lantern Road, Suite 240, Fishers, IN Leased N/A
Granville Street, Gahanna, OH Owned N/A
Secor Road, Lambertville, MI Leased N/A
Monroe Street, Suite 108, Toledo, OH Leased N/A
Service Facilities (SBT/ SBFG Title)
Depot Street, Archbold, OH Leased N/A
East Holland Street, Archbold, OH Leased N/A
Baltimore Road, Defiance, OH Leased N/A
Antares Avenue, Columbus, OH Owned N/A
Total deposits
$ 1,049,011
SB Captive operates from office space located at 101 Convention Center Dr.,
Suite 850, Las Vegas, NV 89109.
The Company’s subsidiaries have several noncancellable leases for business use that expire over the next five years. Aggregate rental expense for these leases was $0.18 million and $0.19 million for the years ended December 31, 2020 and 2019, respectively.
Future minimum lease payments under operating leases are:
($ in thousands)
$ 195
Thereafter
Total minimum lease payments $ 1,611

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
In the ordinary course of our business, the Company and its subsidiaries are parties to various legal actions, which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not Applicable
Supplemental Item: Information about our Executive Officers
The following table lists the names and ages of the executive officers of the Company as of February 26, 2021, the positions presently held by each executive officer, and the business experience of each executive officer during their employment at the Company. Unless otherwise indicated, each person has held his or her principal occupation(s) for more than five years.
Name
Age
Position(s) Held with the Company and
its Subsidiaries and Principal Occupation(s)
Mark A. Klein
Chairman of the Company since April 2015; Director of the Company since February 2010; President and Chief Executive Officer of the Company since January 2010 and of State Bank since January 2006; Director of State Bank since 2006; President of RDSI since October 2011; Member of State Bank Trust Investment Review Committee since March 2007.
Anthony V. Cosentino
Executive Vice President and Chief Financial Officer of the Company and State Bank since March 2010; Chief Financial Officer of RDSI since October 2011; Member of State Bank Trust Investment Review Committee since June 2010.
Ernesto Gaytan
Executive Vice President and Chief Technology Innovation and Operations Officer of the Company since July 2018; Chief Technology Innovation Officer since November 2017.
Jonathan R. Gathman
Executive Vice President and Senior Lending Officer of the Company since October 2005; Senior Vice President and Commercial Lending Manager from June 2005 through October 2005; Vice President and Commercial Lender from February 2003 through June 2005. Began working for State Bank in May 1996.
Keeta J. Diller
Executive Vice President and Chief Risk Officer of the Company since July 2019; Senior Vice President and Chief Enterprise Risk Management Officer from August 2018 through July 2019; Senior Vice President and Audit Coordinator and Director of Operations from December 2011 through August 2018; Vice President and Internal Auditor from January 2010 through December 2011; Corporate Secretary for the Company since 1996; Began working for State Bank in February 1990 as the Accounting Supervisor.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common shares are traded on the NASDAQ Capital Market under the symbol “SBFG”. There were 7,407,034 common shares outstanding as of December 31, 2020, which were held by approximately 1,236 record holders.
The Company paid quarterly dividends on its common shares in the aggregate amounts of $0.40 per share and $0.36 per share in 2020 and 2019, respectively. The Company presently anticipates continuing to pay quarterly dividends in the future at similar levels. However, there is no guarantee that dividends on our common shares will continue in the future.
Payment of dividends by State Bank may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice. These provisions could have the effect of limiting the Company’s ability to pay dividends on its outstanding shares. Moreover, the Federal Reserve Board expects the Company to serve as a source of strength to its subsidiary banks, which may require it to retain capital for further investment in State Bank, rather than for dividends to shareholders of the Company.
Period Ending
Index 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20
SB Financial Group, Inc. 100.00 147.20 172.30 155.92 190.51 181.48
NASDAQ Composite Index 100.00 108.87 141.13 137.12 187.44 271.64
SNL U.S. Bank NASDAQ Index 100.00 138.65 145.97 123.04 154.47 132.56
Source: S&P Global Market Intelligence
© 2021
The table below reflects the common shares repurchased by the Company during the three months ended December 31, 2020. The Company has 253,360 shares remaining of the 500,000 approved under the existing share repurchase program which was authorized on July 21, 2020 and expires December 31, 2021.
(a) (b) (c) (d)
Period Total Number of Shares Purchased Weighted Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
10/01/20 - 10/31/20 44,641 $ 15.50 118,158 381,842
11/01/20 - 11/30/20 62,349 18.20 180,507 319,493
12/01/20 - 12/31/20 66,133 18.38 246,640 253,360
Totals 173,123 $ 17.57 246,640 253,360

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
Financial Highlights
Year Ended December 31,
($ in thousands, except per share data)
2017
Earnings
Interest income $ 42,635 $ 44,400 $ 39,479 $ 32,480 $ 29,051
Interest expense 6,705 9,574 6,212 4,094 3,198
Net interest income 35,930 34,826 33,267 28,386 25,853
Provision for loan losses 4,500 750
Noninterest income 30,096 18,016 16,624 17,217 17,889
Noninterest expense 43,087 37,410 34,847 31,578 30,091
Provision for income taxes 3,495 2,659 2,806 2,560 4,117
Net income 14,944 11,973 11,638 11,065 8,784
Preferred stock dividends - 975
Net income available to common 14,944 11,023 10,663 10,090 7,809
Per Common Share Data
Basic earnings $ 1.96 $ 1.71 $ 1.72 $ 2.10 $ 1.60
Diluted earnings 1.96 1.51 1.51 1.74 1.38
Cash dividends declared 0.40 0.36 0.32 0.28 0.24
Total equity per share 19.39 17.53 16.36 15.03 13.75
Total tangible equity per share 16.30 15.23 15.39 13.27 11.59
Average Balances
Average total assets $ 1,161,396 $ 1,027,932 $ 947,266 $ 854,569 $ 789,045
Average equity 139,197 133,190 121,094 89,538 84,540
Ratios
Return on average total assets 1.29 % 1.16 % 1.23 % 1.29 % 1.11 %
Return on average equity 10.74 8.99 9.61 12.36 10.39
Cash dividend payout ratio1 20.54 23.84 19.60 13.50 15.11
Average equity to average assets 11.99 12.96 12.78 10.48 10.71
Period End Totals
Total assets $ 1,257,839 $ 1,038,577 $ 986,828 $ 876,627 $ 816,005
Total investments; fed funds sold 149,406 100,948 90,969 82,790 90,128
Loans held for sale 7,234 7,258 4,445 3,940 4,434
Total loans & leases 872,723 825,510 771,883 696,615 644,433
Allowance for loan losses 12,574 8,755 8,167 7,930 7,725
Total deposits 1,049,011 840,219 802,552 729,600 673,073
Advances from FHLB 8,000 16,000 16,000 18,500 26,500
Trust preferred securities 10,310 10,310 10,310 10,310 10,310
Total equity 142,923 136,094 130,435 94,000 86,548
1 Cash dividends on common shares divided by net income available to common.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
SB Financial Group, Inc. (“SB Financial”), is a financial holding company registered with the Federal 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 of SB 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 ended December 31, 2020 and 2019.
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 ended December 31, 2020, the Company generated $30.1 million in noninterest income, or 45.6 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 ended December 31, 2019, the Company generated $18.0 million in revenue from fee-based products, or 34.1 percent of total operating revenue.
Strengthen our penetration in all markets served: Over our 118-year history of continuous operation in Northwest Ohio, we have established a significant presence in our traditional markets in Defiance, Fulton, Paulding and Williams counties in Ohio. In our newer markets of Bowling 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 the Findlay and Wauseon 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 of December 31, 2020, we served 32,519 households and provided 95,210 products and services (2.93 products & services per household) to these households. Our strategy is to continue to expand the scope of our relationship with each household via our dynamic “on-boarding” process. Proactively identifying client needs is a key ingredient of our value proposition. As of December 31, 2019, we served 30,377 households and provided 91,154 products and services (3.00 products & services per household) to these households.
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 of December 31, 2020, the Company serviced 8,543 residential mortgage loans with a principal balance of $1.3 billion. As of December 31, 2019, the Company serviced 8,155 loans with a principal balance of $1.2 billion.
Sustain asset quality: As of December 31, 2020, the Company’s asset quality metrics remained strong. Specifically, total nonperforming assets were $7.3 million, or 0.58 percent of total assets. Total delinquent loans at December 31, 2020 were 0.75 percent of total loans. As of December 31, 2019, the Company had total nonperforming assets of $5.3 million, or 0.51 percent of total assets. Total delinquent loans at December 31, 2019 were 0.28 percent of total loans.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with generally accepted accounting principles in the 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 ended December 31, 2020 and 2019. 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.
Changes in Financial Condition
Total assets at December 31, 2020, were $1.26 billion, compared to $1.04 billion at December 31, 2019. Loans (excluding loans held for sale) were $872.7 million at December 31, 2020, compared to $825.5 million at December 31, 2019. Total deposits were $1.05 billion at December 31, 2020, compared to $840.2 million at December 31, 2019. Deposit and loan balances were elevated due to the PPP initiative and the acquisition of the Edon State Bank.
Total equity was $142.9 million at December 31, 2020, up 5.0 percent from $136.1 million at December 31, 2019. Net income less dividends increase retained earnings by $11.8 million for 2020.
($ in thousands) Years Ended December 31,
Total loans % Change
Commercial business & agriculture $ 258,507 $ 202,761 27.5 %
Commercial real estate 370,984 366,782 1.1 %
Residential real estate 182,076 193,159 -5.7 %
Consumer & other 61,156 62,808 -2.6 %
Loans held for investment $ 872,723 $ 825,510 5.7 %
Loans held for sale $ 7,234 $ 7,258 -0.3 %
Total deposits % Change
Noninterest bearing demand $ 251,649 $ 158,357 58.9 %
Interest-bearing demand 176,785 131,084 34.9 %
Savings & money market 391,028 293,025 33.4 %
Time deposits 229,549 257,753 -10.9 %
Total deposits $ 1,049,011 $ 840,219 24.8 %
Total shareholders’ equity $ 142,923 $ 136,094 5.0 %
Loans held for investment increased $47.2 million, or 5.7 percent, to $872.7 million at December 31, 2020. The largest component of this increase was in commercial business loans, which rose $55.7 million. The 2020 results were impacted by the Company’s participation in the PPP, which increased commercial balances by approximately $70.5 million. In addition, the Company acquired the Edon State Bank in June of 2020 that increased loan balances by $16.4 million.
Deposits increased $208.8 million, or 24.9 percent, to $1.05 billion at December 31, 2020. Deposit growth for the year included $139.0 million in demand deposits and $98.0 million in savings and money market deposits. The Company added approximately $51.0 million in deposit balances from the Edon State Bank acquisition in 2020.
Stockholders’ equity at December 31, 2020, was $142.9 million or 11.4 percent of total assets compared to $136.1 million or 13.1 percent of total assets at December 31, 2019.
Asset Quality Years Ended December 31,
($ in thousands) % Change
Nonaccruing loans $ 6,426 $ 5,500 16.8 %
Accruing restructured loans (TDRs) -7.3 %
OREO & repossessed assets -92.5 %
Nonperforming assets 7,259 6,679 8.7 %
Net charge offs 221.2 %
Loan loss provision 4,500 462.5 %
Allowance for loan losses 12,574 8,755 43.6 %
Nonperforming assets/total assets 0.58 % 0.64 % -9.3 %
Net charge offs/average loans 0.08 % 0.03 % 166.7 %
Allowance/loans 1.44 % 1.06 % 35.9 %
Allowance/nonperforming loans 173.22 % 137.35 % 26.1 %
Nonperforming assets consisting of loans, Other Real Estate Owned (“OREO”) and accruing TDRs totaled $7.3 million, or 0.58 percent of total assets at December 31, 2020, an increase of $0.6 million or 8.7 percent from 2019. Net charge offs were up during 2020, at $0.68 million, which was a $0.47 million increase compared to 2019. The Company’s loan loss allowance at December 31, 2020, now covers nonperforming loans at 174 percent, up from 137 percent at December 31, 2019.
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. As detailed in the table below, loans in forbearance/deferral status as of December 31, 2020 were $23.2 million. An additional $11.7 million of sold mortgage relationships were also in deferral at year-end.
Loans in Deferral Status
Linked Qtr.
($ in thousands, except ratios) Dec. 2020 Sep. 2020 Jun. 2020 Change
Total Commercial $ 23,175 $ 36,366 $ 142,682 $ (13,191 )
Total Consumer - (28 )
Total Portfolio Mortgage - 1,959 10,274 (1,959 )
Total Balance Sheet Deferrals $ 23,175 $ 38,353 $ 153,306 $ (15,178 )
% of Total loans 2.66 % 4.33 % 17.00 % -1.67 %
Total Sold Mortgage $ 11,685 $ 42,317 $ 41,751 $ (30,632 )
Regulatory capital reporting is required for State Bank only, as the Company is now exempt from quarterly regulatory capital level measurement pursuant to the Small Bank Holding Company Policy Statement. As of December 31, 2020, State Bank met all regulatory capital levels required to be considered well-capitalized (See Note 17 to the Consolidated Financial Statements).
Earnings Summary - 2020 vs.
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 2019. 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 at December 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 $0.8 million loan loss provision in 2019.
Results of Operations
Years Ended December 31,
($ in thousands, except per share data) % Change
Total assets $ 1,257,839 $ 1,038,577 21.1 %
Total investments 149,406 100,948 48.0 %
Loans held for sale 7,234 7,258 -0.3 %
Loans, net of unearned income 872,723 825,510 5.7 %
Allowance for loan losses 12,574 8,755 43.6 %
Total deposits 1,049,011 840,219 24.8 %
Total operating revenue1 $ 66,026 $ 52,842 24.9 %
Net interest income 35,930 34,826 3.2 %
Loan loss provision 4,500 462.5 %
Noninterest income 30,096 18,016 67.1 %
Noninterest expense 43,087 37,410 15.2 %
Net income 14,944 11,973 24.8 %
Net income available to common shareholders 14,944 11,023 35.6 %
Diluted earnings per share 1.96 1.51 29.8 %
1 Operating revenue equals net interest income plus noninterest income.
Net Interest Income Years Ended December 31,
($ in thousands) % Change
Total net interest income $ 35,930 $ 34,826 3.2 %
Net interest income was $35.9 million for 2020 compared to $34.8 million for 2019, an increase of $1.1 million or 3.2 percent. Average earning assets increased to $1.07 billion in 2020, compared to $915.0 million in 2019, an increase of $157.4 million or 17.2 percent due to higher loan volume. The consolidated 2020 full year net interest margin on an FTE basis decreased 46 basis points to 3.36 percent compared to 3.82 percent for the full year of 2019. PPP activity during 2020 increased margin revenue by $2.0 million for the full year of 2020. We will continue to realize fee income from the forgiveness of these Phase I PPP loans throughout 2021 and we are beginning Phase II of the program in early 2021.
Provision for loan losses of $4.5 million was taken in 2020 compared to $0.8 million taken for 2019. For 2020, net charge offs totaled $0.68 million, or 0.08 percent of average loans. This charge off level was higher than 2019, in which net charge offs were $0.21 million or 0.03 percent of average loans.
Noninterest Income Years Ended December 31,
($ in thousands) % Change
Wealth management fees $ 3,245 $ 3,093 4.9 %
Customer service fees 2,807 2,761 1.7 %
Gains on sale of residential loans & OMSR’s 25,350 8,413 201.3 %
Mortgage loan servicing fees, net (5,138 ) (397 ) 1194.2 %
Gain on sale of non-mortgage loans 1,255 -63.9 %
Title Insurance income 1,913 1,120 70.8 %
Net gain on sale of securities - N/M
Gain (loss) on sale/disposal of assets (5 ) -160.0 %
Other 1,463 1,570 -6.8 %
Total noninterest income $ 30,096 $ 18,016 67.1 %
Total noninterest income was $30.1 million for 2020 compared to $18.0 million for 2019, representing an increase of $12.1 million, or 67.0 percent, year-over-year. This increase was driven by a 201.3 percent increase in gains on sale of residential real estate loans and the addition of our title agency. The Company sold $598.5 million of originated mortgages into the secondary market in 2020, which allowed our serviced loan portfolio to grow to $1.3 billion at December 31, 2020 from $1.2 billion at December 31, 2019. The higher servicing balance of the portfolio led to the 13.7 percent increase in mortgage loan servicing income. Sales of non-mortgage loans (small business and farm credits) decreased in 2020 as compared to 2019, as SBA activity was focused on the PPP initiative. The Company continued to expand its wealth management assets under care, which resulted in a 4.9 percent increase in wealth fee income.
Noninterest Expense Years Ended December 31,
($ in thousands) % Change
Salaries & employee benefits $ 25,397 $ 22,064 15.1 %
Net occupancy expense 2,891 2,603 11.1 %
Equipment expense 3,186 2,828 12.7 %
Data processing fees 3,055 1,973 54.8 %
Professional fees 3,307 2,476 33.6 %
Marketing expense -26.5 %
Telephone and communications 14.8 %
Postage and delivery expense 22.1 %
State, local and other taxes 1,146 1,092 4.9 %
Employee expense -32.7 %
Other expense 1,962 1,878 4.5 %
Total noninterest expense $ 43,087 $ 37,410 15.2 %
Total noninterest expense was $43.1 million for 2020 compared to $37.4 million for 2019, representing a $5.7 million, or 15.2 percent, increase year-over-year. Total full-time equivalent employees ended 2020 at 244, which was down 8 from year end 2019.
Salaries and benefits were driven by higher compensation costs in the mortgage division. Professional fees were higher due to higher spending on legal in connection with acquisition activities. The addition of our title agency added $0.5 million in operating expense for the year. Our acquisition of The Edon State Bank Company of Edon, Ohio in June 2020 added $1.2 million in merger related non-recurring expense and a minimal amount of ongoing operating expense. (See Notes 3 and 8 to the Consolidated Financial Statements for additional information)
Earnings Summary - 2019 vs.
Net income for 2019 was $12.0 million, and net income available to common shareholders was $11.0 million, or $1.51 per diluted share, compared with net income of $11.6 million and net income available to common of $10.7 million, or $1.51 per diluted share, for 2018. State Bank reported net income for 2019 of $12.5 million, which was down from the $12.9 million in net income in 2018. SBFG Title reported net income for 2019 of $0.3 million.
Positive results for 2019 included loan growth of $53.6 million, and deposit growth of $37.7 million. The mortgage banking business line continues to contribute significant revenues, with residential real estate loan production of $445.3 million for the year, resulting in $8.4 million of revenue from gains on sale. The level of mortgage origination was up from the $342.1 million in 2018. The Company’s loans serviced for others ended the year at $1.2 billion, up from $1.1 billion at December 31, 2018.
Operating revenue was up compared to the prior year by $3.0 million, or 5.9 percent, which was impacted by a $1.1 million temporary OMSR impairment. Our 2019 results include the impact from our two new subsidiaries: SBFG Title with net income of $0.3 million and SB Captive with net income of $0.9 million. Net interest margin on a fully tax equivalent basis (“FTE”) for 2019 was 3.82 percent, down 13 basis points from 2018.
Operating expense was up compared to the prior year by $2.6 million, or 7.4 percent, due to compensation and fringe benefit cost increases as a result of higher mortgage commission levels.
Net charge offs for 2019 of $0.21 million resulted in a loan loss provision of $0.8 million, compared to net charge offs of $0.36 million and a $0.6 million loan loss provision in 2018.
Goodwill, Intangibles and Capital Purchases
The Company completed its most recent annual goodwill impairment test as of December 31, 2020. At December 31, 2020, the Company’s reporting unit was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The main changes to goodwill for the year included the purchase of the Edon State Bank. The Company’s goodwill is further reviewed 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 $303.2 million at December 31, 2020, compared to $135.3 million at December 31, 2019.
The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $608.4 million at December 31, 2020, 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. At December 31, 2020, all eligible commercial real estate, residential first, multi-family mortgage and agricultural loans were pledged under a Federal 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 $103.5 million of additional borrowing capacity existed at December 31, 2020.
At December 31, 2020 and 2019, the Company had $41.0 million in federal funds lines available. The Company also had $67.5 million in unpledged securities at December 31, 2020 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 2020 and 2019 follows:
The Company experienced positive cash flows from operating activities in 2020 and 2019. Net cash from operating activities was $23.9 million and $18.8 million for the years ended December 31, 2020 and 2019, respectively. Significant operating items for 2020 included gain on sale of loans of $25.8 million and net income of $14.9 million. Cash provided by the sale of loans held for sale were $603.2 million. Cash used in the origination of loans held for sale were $582.5 million.
The Company experienced negative cash flows from investing activities in 2020 and 2019. Net cash used in investing activities was $57.2 million and $67.6 million for the years ended December 31, 2020 and 2019, respectively. 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 changes for 2019 include the purchase of available-for-sale securities of $22.5 million and net increase in loans of $65.5 million. The Company had proceeds from repayments, maturities, sales and calls of securities of $84.0 million and $22.5 million in 2020 and 2019, respectively.
The Company experienced positive cash flows from financing activities in 2020 and 2019. Net cash from financing activities was $146.9 million and $27.5 million for the years ended December 31, 2020 and 2019, respectively. Positive cash flows of $157.7 million and $37.7 million is attributable to the change in deposits for 2020 and 2019, respectively.
The Company uses an Economic Value of Equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The results of this analysis are reflected in the following table.
Economic Value of Equity
December 31, 2020
($ 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 %
Economic Value of Equity
December 31, 2019
($ in thousands)
Change in rates $ Amount $ Change % Change
+400 basis points $ 222,686 $ 26,861 13.72 %
+300 basis points 218,252 22,427 11.45 %
+200 basis points 212,838 17,013 8.69 %
+100 basis points 205,405 9,580 4.89 %
Base Case 195,825 - -
-100 basis points 180,152 (15,673 ) -8.00 %
-200 basis points 156,430 (39,395 ) -20.12 %
Tabular Disclosure of Contractual Obligations
The following table details the Company’s contractual obligations as of December 31, 2020, which were comprised of long-term debt obligations, other debt obligations, operating lease obligations and other long-term liabilities. Long-term debt obligations are comprised of FHLB Advances of $8.0 million. Other debt obligations are comprised of Trust Preferred securities of $10.3 million and operating leases of $1.6 million. The other long-term liabilities include time deposits of $229.5 million.
Payment due by period
($ in thousands)
Less than 1 - 3 3 - 5 More than
Contractual obligations Total 1 year years years 5 years
Long-term debt obligations $ 8,000 $ 2,500 $ 5,500 $ - $ -
Other debt obligations 10,310 - - - 10,310
Operating lease obligations 1,611 883
Other long-term liabilities Reflected on the registrant’s balance sheet under GAAP 229,549 156,761 65,917 6,689
Totals $ 249,470 $ 159,456 $ 71,693 $ 6,946 $ 11,375

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Asset liability management involves developing, executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the impact that significant fluctuations in market interest rates would have on current and future earnings. The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available-for-sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings). With the exception of specific loans which are originated and held for sale, all of the financial instruments of the Company are for other than trading purposes. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Company has limited exposure to commodity prices related to agricultural loans. The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant. The Company’s financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Company’s primary market risk exposure; to a lesser extent, liquidity risk also impacts market risk exposure.
Interest rate risk is the exposure of a banking institution’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Company’s safety and soundness.
Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization’s quantitative level of exposure. When assessing the interest rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and asset quality (when appropriate).
The FRB together with the OCC and the FDIC adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies, measures and controls interest rate risk.
Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution’s assets carry intermediate or long-term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment.
There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening or lengthening terms of new loans, investments, or liabilities; 2) selling existing assets or repaying certain liabilities; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contracts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management’s expertise to be effective. The Company has not purchased derivative financial instruments in the past, but during 2019 and 2018 the Company entered into interest rate swap agreements as an accommodation to certain loan customers (see Note 10 to the Consolidated Financial Statements). The Company may purchase such instruments in the future if market conditions are favorable.
The following table details quantitative disclosures of market risk and provides information about the Company’s financial instruments used for purposes other than trading that are sensitive to changes in interest rates as of December 31, 2020. The table does not present when these items may actually reprice. For loans receivable, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the historical impact of interest rate fluctuations on the prepayment of loans and mortgage backed securities. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the table presents principal cash flows and applicable related weighted-average interest rates based upon the Company’s historical experience, management’s judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. The current historical interest rates for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted-average variable rates are based upon contractual rates existing at the reporting date.
Principal/Notional Amount Maturing or Assumed to be Withdrawn in:
($ in thousands) 2024 Thereafter Total
Rate sensitive assets
Variable rate loans $ 77,748 $ 27,786 $ 14,253 $ 11,861 $ 13,649 $ 74,207 $ 219,504
Average interest rate 3.91 % 3.61 % 3.50 % 3.12 % 3.10 % 2.71 % 3.35 %
Adjustable rate loans 29,892 27,155 25,048 24,771 23,568 220,525 350,959
Average interest rate 4.41 % 4.42 % 4.27 % 4.20 % 4.17 % 4.07 % 4.15 %
Fixed rate loans 49,655 76,172 32,715 16,641 15,855 111,222 302,260
Average interest rate 3.51 % 2.25 % 4.57 % 4.44 % 4.13 % 3.89 % 3.53 %
Total loans 157,295 131,113 72,016 53,273 53,072 405,954 872,723
Average interest rate 3.88 % 2.99 % 4.25 % 4.03 % 3.88 % 3.77 % 3.73 %
Fixed rate investment securities 32,367 13,758 8,658 8,318 6,540 83,065 152,706
Average interest rate 1.17 % 1.60 % 1.81 % 2.09 % 2.07 % 1.91 % 1.73 %
Variable rate investment securities 105 1,522 2,004
Average interest rate 2.74 % 2.75 % 2.74 % 2.73 % 2.61 % 3.34 % 3.19 %
Fed funds sold & other - - - - - - -
Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
Total rate sensitive assets $ 189,758 $ 144,967 $ 80,775 $ 61,696 $ 59,696 $ 490,541 $ 1,027,433
Average interest rate 3.41 % 2.85 % 3.99 % 3.77 % 3.68 % 3.45 % 3.44 %
Rate sensitive liabilities
Demand - noninterest bearing $ 35,520 $ 30,506 $ 26,201 $ 22,501 $ 19,327 $ 117,594 $ 251,649
Demand - interest-bearing 21,032 18,529 16,326 14,383 12,673 93,842 176,785
Average interest rate 0.04 % 0.04 % 0.04 % 0.04 % 0.04 % 0.04 % 0.04 %
Money market accounts 27,097 23,702 20,731 18,131 15,859 110,644 216,164
Average interest rate 0.29 % 0.29 % 0.29 % 0.29 % 0.29 % 0.29 % 0.29 %
Savings 75,796 12,833 11,168 9,722 8,461 56,884 174,864
Average interest rate 0.13 % 0.13 % 0.13 % 0.13 % 0.13 % 0.13 % 0.13 %
Certificates of deposit 156,843 47,367 18,253 4,328 2,482 229,549
Average interest rate 1.51 % 1.57 % 1.65 % 1.09 % 0.62 % 0.99 % 1.51 %
Fixed rate FHLB advances 2,500 3,000 2,500 - - - 8,000
Average interest rate 2.77 % 2.88 % 2.93 % 0.00 % 0.00 % 0.00 % 2.86 %
Variable rate FHLB advances - - - - - - -
Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
Fixed rate notes payable - - - - - - -
Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
Variable rate notes payable - - - - - 10,310 10,310
Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 2.02 % 2.02 %
Fed funds purchased, repos & other 20,189 - - - - - 20,189
Average interest rate 0.20 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.20 %
Total rate sensitive liabilities $ 338,977 $ 135,937 $ 95,179 $ 69,065 $ 58,802 $ 389,550 $ 1,087,510
Average interest rate 0.78 % 0.68 % 0.48 % 0.17 % 0.13 % 0.17 % 0.45 %
Comparison of 2020 to 2019
First Years
($ in thousands) Year 2 - 5 Thereafter Total
Total rate sensitive assets:
December 31, 2020 $ 189,758 $ 347,134 $ 490,541 $ 1,027,433
December 31, 2019 164,736 300,359 466,010 931,105
Increase (decrease) $ 25,022 $ 46,775 $ 24,531 $ 96,328
Total rate sensitive liabilities:
December 31, 2020 $ 338,977 $ 358,983 $ 389,550 $ 1,087,510
December 31, 2019 286,957 310,950 281,567 879,474
Increase (decrease) $ 52,020 $ 48,033 $ 107,983 $ 208,036
The above table reflects expected maturities, not expected repricing. The contractual maturities adjusted for anticipated prepayments and anticipated renewals at current interest rates, as shown in the preceding table, are only part of the Company’s interest rate risk profile. Other important factors include the ratio of rate-sensitive assets to rate-sensitive liabilities (which takes into consideration loan repricing frequency but not when deposits may be repriced) and the general level and direction of market interest rates. For core deposits, the repricing frequency is assumed to be longer than when such deposits actually reprice. For some rate-sensitive liabilities, their repricing frequency is the same as their contractual maturity. For variable-rate loans receivable, repricing frequency can be daily or monthly. For adjustable-rate loans receivable, repricing can be as frequent as annually for loans whose contractual maturities range from one to thirty years.
The Company manages its interest rate risk by the employment of strategies to assure that desired levels of both interest-earning assets and interest-bearing liabilities mature or reprice with similar time frames. Such strategies include: 1) loans receivable which are renewed (and repriced) annually, 2) variable rate loans, 3) certificates of deposit with terms from one month to six years, 4) securities available-for-sale which mature at various times primarily from one through ten years, 5) federal funds borrowings with terms of one day to 90 days, and 6) FHLB borrowings with terms of one day to ten years.
The majority of assets and liabilities of the Company are monetary in nature, and therefore the Company differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation.
Management believes the most significant impact on financial results is the Company’s ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages loan, security, and liability maturities in order to protect against the effects of wide interest rate fluctuations on net income and shareholders’ equity.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements and notes thereto and other supplementary data begin on the following page.
SB Financial Group, Inc.
Consolidated Balance Sheets
at December 31,
($ in thousands)
Assets
Cash and due from banks $ 140,690 $ 27,064
Interest bearing time deposits 5,823 -
Available-for-sale securities 149,406 100,948
Loans held for sale 7,234 7,258
Loans, net of unearned income 872,723 825,510
Allowance for loan losses (12,574 ) (8,755 )
Premises and equipment, net 23,557 23,385
Federal Reserve and Federal Home Loan Bank Stock, at cost 5,303 4,648
Foreclosed assets held for sale, net
Interest receivable 3,799 3,106
Goodwill 22,091 17,792
Cash value of life insurance 17,530 17,221
Mortgage servicing rights 7,759 11,017
Other assets 14,475 9,078
Total assets $ 1,257,839 $ 1,038,577
Liabilities and shareholders’ equity
Liabilities
Deposits
Non interest bearing demand $ 251,649 $ 158,357
Interest bearing demand 176,785 131,084
Savings 174,864 119,359
Money market 216,164 173,666
Time deposits 229,549 257,753
Total deposits 1,049,011 840,219
Repurchase agreements 20,189 12,945
Federal Home Loan Bank advances 8,000 16,000
Trust preferred securities 10,310 10,310
Interest payable 1,191
Other liabilities 26,790 21,818
Total liabilities 1,114,916 902,483
Commitments & Contingent Liabilities - -
Shareholders’ Equity
Preferred stock, no par value; authorized 200,000 shares; 2020 - 0 shares outstanding, 2019 - 0 shares outstanding - -
Common stock, no par value; authorized 10,000,000 shares; 2020 - 8,180,712 shares issued, 2019 - 8,180,712 shares issued 54,463 54,463
Additional paid-in capital 14,845 15,023
Retained earnings 84,578 72,704
Accumulated other comprehensive income 2,210
Treasury stock, at cost; (2020 - 808,456 common shares, 2019 - 417,785 common shares) (13,173 ) (6,755 )
Total shareholders’ equity 142,923 136,094
Total liabilities and shareholders’ equity $ 1,257,839 $ 1,038,577
See Notes to Consolidated Financial Statements
SB Financial Group, Inc.
Consolidated Statements of Income
Years Ended December 31,
($ in thousands, except per share data)
Interest Income
Loans
Taxable $ 39,735 $ 40,529
Tax exempt
Securities
Taxable 2,328 3,226
Tax exempt
Total interest income 42,635 44,400
Interest Expense
Deposits 6,070 8,660
Repurchase agreements & other
Federal Home Loan Bank advance expense
Trust preferred securities expense
Total interest expense 6,705 9,574
Net Interest Income 35,930 34,826
Provision for loan losses 4,500
Net interest income after provision for loan losses 31,430 34,026
Noninterest Income
Wealth management fees 3,245 3,093
Customer service fees 2,807 2,761
Gain on sale of mortgage loans & OMSR 25,350 8,413
Mortgage loan servicing fees, net (5,138 ) (397 )
Gain on sale of non-mortgage loans 1,255
Title insurance income 1,913 1,120
Net gain on sale of securities -
Other income 1,466 1,565
Total noninterest income 30,096 18,016
Noninterest Expense
Salaries and employee benefits 25,397 22,064
Net occupancy expense 2,891 2,603
Equipment expense 3,186 2,828
Data processing fees 3,055 1,973
Professional fees 3,307 2,476
Marketing expense
Telephone and communications
Postage and delivery expense
State, local and other taxes 1,146 1,092
Employee expense
Other expense 1,962 1,878
Total noninterest expense 43,087 37,410
Income before income tax 18,439 14,632
Provision for income taxes 3,495 2,659
Net Income $ 14,944 $ 11,973
Preferred share dividends -
Net income available to common shareholders $ 14,944 $ 11,023
Basic earnings per common share $ 1.96 $ 1.71
Diluted earnings per common share $ 1.96 $ 1.51
See Notes to Consolidated Financial Statements
SB Financial Group, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31,
($ in thousands)
Net income $ 14,944 $ 11,973
Other comprehensive income
Available for sale investment securities:
Gross unrealized holding gain arising in the period 1,963 1,327
Related tax expense (412 ) (279 )
Less: reclassification adjustment for gain realized in income -
Related tax expense - (43 )
Net effect on other comprehensive income 1,551 1,211
Total comprehensive income $ 16,495 $ 13,184
See Notes to Consolidated Financial Statements
SB Financial Group, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31,
Preferred Common Additional
Paid-in Retained Accumulated
Other
Comprehensive Treasury
($ in thousands, except per share data) Stock Stock Capital Earnings Income (Loss) Stock Total
January 1, 2020 $ - $ 54,463 $ 15,023 $ 72,704 $ 659 $ (6,755 ) $ 136,094
Net income
14,944
14,944
Other comprehensive income
1,551
1,551
Dividends on common, $0.40 per share
(3,070 )
(3,070 )
Restricted stock vesting
(307 )
-
Stock options exercised
(253 )
Repurchased stock
(7,166 ) (7,166 )
Stock based compensation expense
December 31, 2020 $ - $ 54,463 $ 14,845 $ 84,578 $ 2,210 $ (13,173 ) $ 142,923
Preferred Common Additional
Paid-in Retained Accumulated
Other
Comprehensive Treasury
($ in thousands, except per share data) Stock Stock Capital Earnings Income (Loss) Stock Total
January 1, 2019 $ 13,979 $ 40,485 $ 15,226 $ 64,012 $ (552 ) $ (2,715 ) $ 130,435
Net income
11,973
11,973
Other comprehensive income
1,211
1,211
Conversion of preferred to common (13,979 ) 13,978
(1 )
Stock reissue for purchase of Peak Title
Dividends on common, $0.36 per share
(2,331 )
(2,331 )
Dividends on preferred, $0.65 per share
(950 )
(950 )
Restricted stock vesting
(321 )
-
Stock options exercised
(321 )
Repurchased stock
(5,050 ) (5,050 )
Stock based compensation expense
December 31, 2019 $ - $ 54,463 $ 15,023 $ 72,704 $ 659 $ (6,755 ) $ 136,094
See Notes to Consolidated Financial Statements
SB Financial Group, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
($ in thousands)
Operating Activities
Net Income $ 14,944 $ 11,973
Items not requiring (providing) cash
Depreciation and amortization 1,937 1,879
Provision for loan losses 4,500
Expense of share-based compensation plan
Amortization of premiums and discounts on securities
Amortization of intangible assets
Amortization of originated mortgage servicing rights 4,762 2,126
Impairment of mortgage servicing rights 3,586 1,094
Deferred income taxes (2,444 ) (279 )
Proceeds from sale of loans held for sale 603,178 368,154
Originations of loans held for sale (582,538 ) (364,472 )
Gain from sale of loans (25,803 ) (9,668 )
Loss (gain) on sales of assets (2 )
Net gains on sales of securities - (206 )
Changes in
Interest receivable (693 ) (284 )
Other assets (5,209 ) (3,680 )
Interest payable & other liabilities 6,618 10,648
Net cash provided by operating activities 23,907 18,829
Investing Activities
Purchases of available-for-sale securities (129,796 ) (38,455 )
Proceeds from maturities of interest bearing time deposits 5,719 -
Proceeds from maturities of available-for-sale securities 84,021 22,527
Proceeds from sales of available-for-sale securities - 7,375
Proceeds from sales of portfolio loans - 11,265
Net change in loans (31,706 ) (65,504 )
Purchase of premises, equipment (1,980 ) (2,043 )
Proceeds from sales of premises, equipment
Purchase of bank owned life insurance - (50 )
Purchase of Federal Reserve and Federal Home Loan Bank Stock (538 ) (525 )
Proceeds from sale of foreclosed assets
Acquisition, net of cash acquired 16,263 (2,600 )
Net cash used in investing activities (57,216 ) (67,614 )
Financing Activities
Net increase in demand deposits, money market, interest checking & savings accounts 195,501 21,376
Net increase (decrease) in time deposits (37,762 ) 16,291
Net increase (decrease) in securities sold under agreements to repurchase 7,244 (2,239 )
Repayment of Federal Home Loan Bank advances (8,000 ) -
Net proceeds from share-based compensation plans
Stock repurchase plan (7,166 ) (5,050 )
Issuance of common shares -
Conversion of preferred stock - (1 )
Dividends on common shares (3,070 ) (2,331 )
Dividends on preferred shares - (950 )
Net cash provided by financing activities 146,935 27,486
Increase (decrease) in cash and cash equivalents 113,626 (21,299 )
Cash and cash equivalents, beginning of year 27,064 48,363
Cash and cash equivalents, end of year $ 140,690 $ 27,064
Supplemental cash flow information
Interest paid $ 7,280 $ 9,292
Income taxes paid $ 5,180 $ 3,084
Fair value of assets acquired - premises and equipment (Peak Title) $ - $ 1,161
Supplemental non-cash disclosure
Initial recognition of right-of-use lease assets $ 248 $ 293
Transfer of loans to loans held for sale $ - $ 11,114
Transfer of loans to foreclosed assets $ 207 $ 551
In conjunction with the Edon acquisition, liabilities assumed were:
Fair value of assets acquired $ 66,769 $ -
Cash paid in acquisition (15,493 ) -
Liabilities assumed $ 51,276 $ -
See Notes to Consolidated Financial Statements
SB Financial Group, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Note 1: Organization and Summary of Significant Accounting Policies
Organization and Nature of Operations
SB Financial Group, Inc. (the “Company”) is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), SBFG Title, LLC dba Peak Title Agency (“SBFG Title”), SB Captive, Inc. (“SB Captive”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”). State Bank owns all the outstanding stock of Rurban Mortgage Company (“RMC”), and State Bank Insurance, LLC (“SBI”). The Company is primarily engaged in providing a full range of banking and wealth management services to individual and corporate customers primarily located in Ohio, Indiana, and Michigan. The Company is subject to competition from other financial institutions, and regulated by certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company, State Bank, SBFG Title, SB Captive, RFCBC, RDSI, RMC, RST II, and SBI. All significant intercompany accounts and transactions were eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, loan servicing rights, and fair value of financial instruments.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2020 and 2019, cash equivalents consisted primarily of interest-bearing and noninterest bearing demand deposit balances held by correspondent banks.
At December 31, 2020, the Company’s correspondent cash accounts exceeded federally insured limits by $10.6 million. Additionally, the Company had approximately $115.9 million of cash held by the FRB and the FHLB, which is not federally insured.
Securities
Available-for-sale securities, which include any debt security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.
Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.
For debt securities with fair value below carrying value when the Company does not intend to sell the debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, the Company recognizes the credit component of an other-than-temporary impairment of the debt security in earnings and the remaining portion in other comprehensive income.
Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income. The Company utilizes third-party hedges to minimize the impact of interest rate risk fluctuations, and their impact is realized through noninterest income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on nonaccrual status not later than 90 days past due. Past due status is based on the contractual terms of the loan. All interest accrued, but not collected for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected on the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
When a loan moves to nonaccrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.
Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method for buildings and equipment over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line method over the terms of the respective leases.
Long-lived Asset Impairment
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset’s cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Federal Reserve Bank and Federal Home Loan Bank Stock
FRB and FHLB stock are required investments for institutions that are members of the FRB and FHLB systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less cost to sell. Revenue and expenses from operations related to foreclosed assets and changes in the valuation allowance are included in net income or expense from foreclosed assets.
Goodwill
Goodwill is tested for impairment annually. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value.
Core Deposits and Other Intangibles
Intangible assets are being amortized on a straight-line basis over weighted-average periods ranging from one to fifteen years. Such assets are periodically evaluated as to the recoverability of their carrying value. Purchased software is being amortized using the straight-line method over periods ranging from one to three years.
Derivatives
The Company utilizes derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into interest rate lock commitments (“IRLCs”) with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.
The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with the changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while the derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets.
For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.
Mortgage Servicing Rights
Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance, (Accounting Standards Codification “ASC” 806-50), servicing rights from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost of service, the discount rate, the custodial earning rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income.
Each class of separately recognized servicing assets subsequently measured using the amortization method is evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with “Mortgage loan servicing fees, net” in the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Share-Based Employee Compensation Plan
At December 31, 2020 and 2019, the Company had a share-based employee compensation plan (see Note 19 to the Consolidated Financial Statements).
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company - put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before the maturity or the ability to unilaterally cause the holder to return specific assets.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term “upon examination” also includes resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiaries. With a few exceptions, the Company is no longer subject to U.S. Federal, State and Local examinations by tax authorities for the years before 2017. As of December 31, 2020, the Company had no uncertain income tax positions.
Treasury Shares
Treasury stock is stated at cost. Cost is determined by the weighted-average cost method.
Earnings Per Share
Earnings per common share is computed using the two-class method. Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflect additional potential common shares and convertible preferred shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options which are determined using the treasury stock method and convertible preferred shares which are determined using the converted method. Treasury stock shares are not deemed outstanding for earnings per share calculations.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities. AOCI consists solely of the cumulative unrealized gains and losses on available-for-sale securities net of income tax.
Revenue Recognition
The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered through State Bank.
Interest income is the largest source of revenue for the Company which is primarily recognized on an accrual basis.
Noninterest income is earned through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking and insurance.
New and applicable accounting pronouncements:
ASU No. 2017-04: Intangibles - Goodwill and Other (Topic 350)
This ASU simplifies the test for goodwill impairment. Specifically, these amendments eliminate Step 2 from the goodwill impairment test, and also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Company has adopted this ASU, and management did not believe the changes will have a material effect on the Company’s accounting and disclosures.
ASU No. 2018-13: Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)
The updated guidance improves the disclosure requirements for fair value measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted- average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. The impact of this new guidance did not have a material impact on the Company’s consolidated financial statements.
Accounting standards not yet adopted:
ASU No. 2020-04: Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)
This guidance provides temporary options to ease the potential burden in accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective as of March 12, 2020 through December 31, 2022. The Company anticipates being fully prepared to implement a replacement for the reference rate and has determined that any change will not have a material impact to the consolidated financial statements.
ASU No. 2020-01: Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323 and Topic 815
This guidance was issued in January 2020 to clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective beginning after December 15, 2020. The Company is currently assessing the impact on its accounting and disclosures.
ASU No. 2016-13: Financial Instruments - Credit Losses (Topic 326)
This ASU, which is commonly known as “CECL,” replaces the current GAAP incurred impairment methodology regarding credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP.
The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities.
In December 2018, the OCC, the Federal Reserve Board, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.
On November 15, 2019, the FASB delayed the effective date for certain small public companies and other private companies. As the Company is currently a smaller reporting company, the amendment will delay the effective date of ASU No. 2016-13 to the fiscal year beginning January 1, 2023.
While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date. The Company implemented a process to track required data by utilizing accounting software in preparation for compliance. We anticipate being fully prepared for implementation by January 1, 2023.
Reclassifications:
Certain reclassifications have been made to prior period financial statements to conform to the current financial statement presentation. These reclassifications had no effect on net income.
Note 2: Earnings Per Share
Earnings per common share (“EPS”) is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common shares. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share plus the convertible impact of preferred shares and the dilutive effect of stock compensation using the treasury stock method. EPS for the years ended December 31, 2020 and 2019 is computed as follows:
Twelve Months Ended Dec. 31,
($ and outstanding shares in thousands - except per share data)
Distributed earnings allocated to common shares $ 3,070 $ 2,331
Undistributed (in excess of) earnings allocated to common shares 11,858 8,675
Net earnings allocated to common shares 14,928 11,006
Net earnings allocated to participating securities
Dividends on convertible preferred shares -
Net Income allocated to common shares and participating securities $ 14,944 $ 11,973
Weighted average shares outstanding for basic earnings per share 7,613 6,456
Dilutive effect of stock compensation
Dilutive effect of convertible shares - 1,433
Weighted average shares outstanding for diluted earnings per share 7,635 7,935
Basic earnings per common share $ 1.96 $ 1.71
Diluted earnings per common share $ 1.96 $ 1.51
There were no anti-dilutive shares in 2020 or 2019.
Note 3: Business Combination
Effective June 5, 2020, the Company acquired Edon Bancorp and its subsidiary, The Edon State Bank Company of Edon, Ohio. Edon Bancorp was headquartered in Edon, Ohio and had one retail banking office. The Edon State Bank was merged with and into State Bank, with State Bank surviving. Under the terms of the merger agreement, shareholders of Edon received fixed consideration of $103.50 in cash for each share of Edon common stock for total consideration of $15.5 million. The Company accounted for the transaction under the acquisition method of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.
In accordance with ASC 805, the Company expensed approximately $1.2 million of direct acquisition costs during the twelve months ended December 31, 2020. The $1.2 million in merger expense was split between data processing and professional fees expense. As a result of the acquisition, the Company recorded $4.3 million of goodwill and $0.7 million of intangible assets in the second quarter of 2020. The Company was able to increase both its deposit and loan base and acquire new households in a new market. It is expected that this transaction will result in business synergies and economies of scale. The acquisition was consistent with the Company’s strategy to expand its presence in Northwest Ohio and to increase profitability by introducing existing products and services to the acquired customer base. The intangible assets are related to core deposits, which are being amortized over 10 years on a straight-line basis. For tax purposes, goodwill is non-deductible but will be evaluated annually for impairment.
The following table summarizes the fair value of the total consideration transferred as part of the acquisition as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction based on assumptions that are subject to change as management continues to evaluate relevant information as it becomes available. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, relevant information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be recorded in the reporting period in which the adjustment amounts are determined. Potential adjustments, if any, will be related to assets that may have changes to valuation amounts that were not readily determinable at the acquisition date.
The contractual principal of loans at the acquisition date was $16.8 million and the estimate of the contractual cash flows not expected to be collected is $0.4 million.
($ in thousands) June 5,
Fair value of assets acquired
Cash and cash equivalents $ 31,756
Interest bearing time deposits 11,542
Investment securities 1,362
Federal Home Loan Bank stock
Loans held for investment 16,395
Premises and equipment
Goodwill 4,299
Core deposit intangible
Other assets
Total assets acquired $ 66,769
Fair value of liabilities assumed
Deposits $ 51,053
Other liabilities
Total liabilities assumed 51,276
Total purchase price (cash) $ 15,493
Pro Forma Financial Information
The results of operations of Edon Bancorp have been included in the Company’s consolidated financial statements since the acquisition date of June 5, 2020. The following schedule includes the pro forma results for the three and twelve months ended December 31, 2020 and 2019, as if the Edon acquisition had occurred as of the beginning of the reporting periods presented. The acquisition’s impact was immaterial to the Company’s operating performance for the twelve months ended December 31, 2020.
Twelve Months Ended
December 31
Summary of Operations ($ in thousands)
Net interest income $ 36,429 $ 36,307
Provision for loan losses 4,500
Net interest income after provision $ 31,929 $ 35,501
Non interest income 30,140 18,132
Non interest expense 44,158 38,484
Income before income taxes $ 17,911 $ 15,149
Income tax expense* 3,384 2,768
Net income $ 14,527 $ 12,381
Preferred share dividends -
Net income to common shareholders $ 14,527 $ 11,894
Basic earnings per share $ 1.90 $ 1.84
Diluted earnngs per share $ 1.90 $ 1.56
* Income tax expense for Edon calculated using a 21% statuatory rate
Certain nonrecurring costs were included in the pro-forma, specifically $0.7 million was incurred by Edon prior to the acquisition in the 2020 fiscal year and the Company incurred $1.2 million in nonrecurring costs for the acquisition in the 2020 fiscal year. The Company and Edon incurred no acquisition related costs for the 2019 fiscal year.
Note 4: Available-for-Sale Securities
The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of available-for-sale securities are as follows:
Gross Gross
Amortized Unrealized Unrealized
($ in thousands) Cost Gains Losses Fair Value
December 31, 2020:
U.S. Treasury and Government agencies $ 6,541 $ 323 $ - $ 6,864
Mortgage-backed securities 125,973 1,845 (57 ) 127,761
State and political subdivisions 11,595 - 12,275
Other corporate securities 2,500 - 2,506
Totals $ 146,609 $ 2,854 $ (57 ) $ 149,406
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
December 31, 2019:
U.S. Treasury and Government agencies $ 12,023 $ 181 $ (2 ) $ 12,202
Mortgage-backed securities 77,892 (202 ) 78,182
State and political subdivisions 10,199 (1 ) 10,564
Totals $ 100,114 $ 1,039 $ (205 ) $ 100,948
The amortized cost and fair value of securities available-for-sale at December 31, 2020, by contractual maturity, are shown below. Expected maturities differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
($ in thousands) Cost Value
Within one year $ 3,560 $ 3,630
Due after one year through five years 3,681 3,760
Due after five years through ten years 8,011 8,413
Due after ten years 5,384 5,842
20,636 21,645
Mortgage-backed securities 125,973 127,761
Totals $ 146,609 $ 149,406
The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $53.7 million at December 31, 2020, and $34.8 million at December 31, 2019. Securities delivered for repurchase agreements (not included above) were $28.2 million at December 31, 2020 and $19.5 million at December 31, 2019.
There were no realized gains or losses on available-for-sale securities in 2020. Gross gains of $0.2 million was a reclassification from accumulated other comprehensive income and is included in the net gain on sales of securities for 2019. The related tax expense for net security gains for 2019 was $0.04 million and was a reclassification from accumulated other comprehensive income and is included in the income tax expense line in the income statement.
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2020 and 2019, was $27.3 million and $38.8 million, respectively, which was approximately 18 percent and 38 percent, respectively, of the Company’s available-for-sale investment portfolio.
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
The following tables present securities with unrealized losses at December 31, 2020 and 2019:
Less than 12 Months 12 Months or Longer Total
($ in thousands)
December 31, 2020 Fair Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses
U.S. Treasury and Government agencies $ - $ - $ - $ - $ - $ -
Mortgage-backed securities 26,582 (54 ) (3 ) 27,299 (57 )
State and political subdivisions - - - - - -
Other corporate securities - - - - - -
Totals $ 26,582 $ (54 ) $ 717 $ (3 ) $ 27,299 $ (57 )
Less than 12 Months 12 Months or Longer Total
December 31, 2019 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. Treasury and Government agencies $ 872 $ (1 ) $ 2,598 $ (1 ) $ 3,470 $ (2 )
Mortgage-backed securities 30,692 (157 ) 4,264 (45 ) 34,956 (202 )
State and political subdivisions (1 ) - - (1 )
Totals $ 31,903 $ (159 ) $ 6,862 $ (46 ) $ 38,765 $ (205 )
The unrealized loss on the securities portfolio decreased by $0.15 million as of December 31, 2020, from the prior year. Management reviews these securities on a quarterly basis and has determined that no impairment exists. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Note 5: Loans and Allowance for Loan Losses
The following tables present the categories of loans at December 31, 2020 and 2019:
Total Loans Nonaccrual Loans
($ in thousands) December 2020 December 2019 December 2020 December 2019
Commercial & industrial $ 204,767 $ 151,047 $ 902 $ 1,772
Commercial real estate - owner occupied 113,169 98,488 1,450 1,362
Commercial real estate - nonowner occupied 257,651 268,294
Agricultural 55,235 50,994 - -
Residential real estate 182,165 193,159 2,704 1,635
Home equity line of credit (HELOC) 46,310 48,070
Consumer 14,847 14,738
Total loans $ 874,144 $ 824,790 $ 6,426 $ 5,500
Net deferred costs (fees) $ (1,421 ) $ 720
Total loans, net deferred costs (fees) $ 872,723 $ 825,510
Allowance for loan losses $ (12,574 ) $ (8,755 )
The Company makes commercial, agri-business, consumer and residential loans to customers throughout its defined market area. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
Forward sale commitments are commitments to sell groups of residential mortgage loans that the Company originates or purchases as part of its mortgage banking activities. The Company commits to sell the loans at specified prices in a future period, typically within forty-five days. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held-for-sales since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sales of the loan into the secondary market.
Listed below is a summary of loan commitments, unused lines of credit and standby letters of credit as of December 31, 2020 and 2019.
($ in thousands)
Loan commitments and unused lines of credit $ 215,616 $ 187,855
Standby letters of credit 3,161 2,657
Totals $ 218,777 $ 190,512
There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.
The risk characteristics of each loan portfolio segment are as follows:
Commercial & Industrial and Agricultural
Commercial & industrial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial Real Estate (Owner and Nonowner Occupied)
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Residential Real Estate, Home Equity Line of Credit (“HELOC”) and Consumer
Residential and consumer loans consist of two segments - residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers.
The following tables present the balance of the allowance for loan and lease losses (“ALLL”) and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2020 and 2019:
($ in thousands)
For the Twelve Months Ended December 31, 2020 Commercial
& industrial Commercial
real estate Agricultural Residential
real estate Consumer Total
Beginning balance $ 1,883 $ 3,602 $ 434 $ 2,203 $ 633 $ 8,755
Charge offs (582 ) - - (82 ) (79 ) (743 )
Recoveries - -
Provision 1,757 1,849 4,500
Ending balance $ 3,074 $ 5,451 $ 496 $ 2,534 $ 1,019 $ 12,574
December 31, 2020 Commercial
& industrial Commercial
real estate Agricultural Residential
real estate Consumer Total
Allowance:
Ending balance:
individually evaluated for impairment $ - $ 174 $ - $ 160 $ 3 $ 337
Ending balance:
collectively evaluated for impairment $ 3,074 $ 5,277 $ 496 $ 2,374 $ 1,016 $ 12,237
Totals $ 3,074 $ 5,451 $ 496 $ 2,534 $ 1,019 $ 12,574
Loans:
Ending balance:
individually evaluated for impairment $ 849 $ 2,202 $ - $ 2,746 $ 162 $ 5,959
Ending balance:
collectively evaluated for impairment $ 203,918 $ 368,618 $ 55,235 $ 179,419 $ 60,995 $ 868,185
Totals $ 204,767 $ 370,820 $ 55,235 $ 182,165 $ 61,157 $ 874,144
($ in thousands)
For the Twelve Months Ended December 31, 2019 Commercial
& industrial Commercial
real estate Agricultural Residential
real estate Consumer Total
Beginning balance $ 1,435 $ 2,923 $ 482 $ 2,567 $ 760 $ 8,167
Charge offs (143 ) - - (53 ) (63 ) (259 )
Recoveries -
Provision (credit) (48 ) (325 ) (87 )
Ending balance $ 1,883 $ 3,602 $ 434 $ 2,203 $ 633 $ 8,755
December 31, 2019 Commercial
& industrial Commercial real estate Agricultural Residential real estate Consumer Total
Allowance:
Ending balance:
individually evaluated for impairment $ 511 $ 147 $ - $ 68 $ - $ 726
Ending balance:
collectively evaluated for impairment $ 1,372 $ 3,455 $ 434 $ 2,135 $ 633 $ 8,029
Totals $ 1,883 $ 3,602 $ 434 $ 2,203 $ 633 $ 8,755
Loans:
Ending balance:
individually evaluated for impairment $ 1,722 $ 1,558 $ - $ 2,274 $ 31 $ 5,585
Ending balance:
collectively evaluated for impairment $ 149,325 $ 365,224 $ 50,994 $ 190,885 $ 62,777 $ 819,205
Totals $ 151,047 $ 366,782 $ 50,994 $ 193,159 $ 62,808 $ 824,790
Credit Risk Profile
The Company categorizes loans into risk categories (loan grades) based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Pass (grades 1 - 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination.
Special Mention (grade 5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.
Substandard (grade 6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardized the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful (grade 7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.
Loss (grade 8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not feasible. Loans will be classified as loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of December 31, 2020 and 2019:
($ in thousands)
December 31, 2020 Commercial & industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total
Pass (1 - 4) $ 202,543 $ 108,726 $ 250,405 $ 55,227 $ 178,575 $ 45,866 $ 14,807 $ 856,149
Special Mention (5) 1,485 2,993 3,338 - - - 7,830
Substandard (6) - 3,026 3,560 7,215
Doubtful (7) 1,450 - - - 2,950
Loss (8) - - - - - - - -
Total Loans $ 204,767 $ 113,169 $ 257,651 $ 55,235 $ 182,165 $ 46,310 $ 14,847 $ 874,144
December 31, 2019 Commercial
& industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total
Pass (1 - 4) $ 147,667 $ 96,836 $ 265,839 $ 50,994 $ 190,438 $ 47,787 $ 14,706 $ 814,267
Special Mention (5) - - - - - 1,140
Substandard (6) 1,444 1,663 - 2,689 6,401
Doubtful (7) 1,339 1,362 - - - 2,982
Loss (8) - - - - - - - -
Total Loans $ 151,047 $ 98,488 $ 268,294 $ 50,994 $ 193,159 $ 48,070 $ 14,738 $ 824,790
The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. The Company uses a five-year average of historical losses for the general component of the allowance for loan loss calculation. No significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the periods presented.
The following tables present the Company’s loan portfolio aging analysis as of December 31, 2020 and 2019:
($ in thousands) 30-59 Days 60-89 Days Greater Than
90 Days Total Past
Total Loans
December 31, 2020 Past Due Past Due Past Due Due Current Receivable
Commercial & industrial $ 380 $ - $ 618 $ 998 $ 203,769 $ 204,767
Commercial real estate - owner occupied - - 1,450 1,450 111,719 113,169
Commercial real estate - nonowner occupied - 256,811 257,651
Agricultural - - 55,227 55,235
Residential real estate 1,393 1,212 2,617 179,548 182,165
HELOC 462 45,848 46,310
Consumer 185 14,662 14,847
Total Loans $ 713 $ 1,650 $ 4,197 $ 6,560 $ 867,584 $ 874,144
30-59 Days 60-89 Days Greater Than
90 Days Total Past
Total Loans
December 31, 2019 Past Due Past Due Past Due Due Current Receivable
Commercial & industrial $ 64 $ - $ 312 $ 376 $ 150,671 $ 151,047
Commercial real estate - owner occupied - - - - 98,488 98,488
Commercial real estate - nonowner occupied - - 268,079 268,294
Agricultural - - 50,981 50,994
Residential real estate 1,368 191,791 193,159
HELOC 313 47,757 48,070
Consumer 172 14,566 14,738
Total Loans $ 617 $ 599 $ 1,241 $ 2,457 $ 822,333 $ 824,790
All loans past due 90 days are systematically placed on nonaccrual status.
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
The following tables present impaired loan activity for the twelve months ended December 31, 2020 and 2019:
($ in thousands)
Twelve Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income
December 31, 2020 Investment Balance Allowance Investment Recognized
With no related allowance recorded:
Commercial & industrial $ 849 $ 1,645 $ - $ 1,878 $ 50
Commercial real estate - owner occupied 1,441 1,441 - 1,573
Commercial real estate - nonowner occupied -
Agricultural - - - - -
Residential real estate 1,017 1,084 - 1,243
HELOC
Consumer -
With a specific allowance recorded:
Commercial & industrial - - - - -
Commercial real estate - owner occupied - - - - -
Commercial real estate - nonowner occupied 579
Agricultural - - - - -
Residential real estate 1,729 1,774 1,785
HELOC 83
Consumer - - - - -
Totals:
Commercial & industrial $ 849 $ 1,645 $ - $ 1,878 $ 50
Commercial real estate - owner occupied $ 1,441 $ 1,441 $ - $ 1,573 $ 11
Commercial real estate - nonowner occupied $ 761 $ 761 $ 174 $ 837 $ 17
Agricultural $ - $ - $ - $ - $ -
Residential real estate $ 2,746 $ 2,858 $ 160 $ 3,028 $ 78
HELOC $ 155 $ 155 $ 3 $ 181 $ 10
Consumer $ 7 $ 7 $ - $ 12 $ 1
($ in thousands)
Twelve Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income
December 31, 2019 Investment Balance Allowance Investment Recognized
With no related allowance recorded:
Commercial & industrial $ 722 $ 1,092 $ - $ 1,377 $ 114
Commercial real estate - owner occupied - - - - -
Commercial real estate - nonowner occupied -
Agricultural - - - - -
Residential real estate 1,621 1,687 - 2,001
HELOC
Consumer -
With a specific allowance recorded:
Commercial & industrial 1,000 1,000
Commercial real estate - owner occupied 1,362 1,362 1,362
Commercial real estate - nonowner occupied - - - - -
Agricultural - - - - -
Residential real estate 666
HELOC - - - - -
Consumer - - - - -
Totals:
Commercial & industrial $ 1,722 $ 2,092 $ 511 $ 2,200 $ 163
Commercial real estate - owner occupied $ 1,362 $ 1,362 $ 147 $ 1,362 $ 38
Commercial real estate - nonowner occupied $ 196 $ 197 $ - $ 259 $ 21
Agricultural $ - $ - $ - $ - $ -
Residential real estate $ 2,274 $ 2,340 $ 68 $ 2,667 $ 137
HELOC $ 16 $ 16 $ - $ 18 $ 1
Consumer $ 15 $ 15 $ - $ 19 $ 1
Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.
Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.
Troubled Debt Restructured (TDR) Loans
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.
TDR Concession Types
The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. The types of concessions provided to borrowers include:
● Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.
● Amortization or maturity date change beyond what the collateral supports, including a change that does any of the following:
(1) Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
(2) Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
(3) Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.
● Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.
There were no new TDRs during the period ended December 31, 2020.
The following table represents new TDR activity for the twelve months ended December 31, 2019:
($ in thousands) Number of Loans Pre-Modification
Recorded
Balance Post Modification
Recorded Balance
Commercial & industrial $ 763 $ 763
Total modifications $ 763 $ 763
Interest
Total
Only Term Combination Modification
Commercial & industrial $ 150 $ 613 $ - $ 763
Total modifications $ 150 $ 613 $ - $ 763
There were no TDRs modified during the past twelve months that have subsequently defaulted.
On March 22, 2020, a statement was issued by the Company’s bank regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are unable to meet the contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2021 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. As of December 31, 2020, the Company had nine loans with a total balance of $23.2 million still on payment deferral.
The Company was an active participant in the Paycheck Protection Program (“PPP”) initiative as detailed in the discussion of financial results for 2020. The Company originated approximately 700 loans with a total balance of $83.6 million. As of December 31, 2020, $70.6 million in balances remained outstanding. Fees for the originations were $3.2 million of which $1.4 million was taken into income during 2020.
Note 6: Accounting for Certain Loans Acquired in a Transfer
The Company acquired loans in the acquisition of The Edon State Bank Company of Edon, Ohio, effective June 5, 2020. None of the acquired loans had evidence of deterioration of credit quality since origination, and it was probable, at acquisition, that all contractually required payments would be collected.
The following table presents the carrying amount of the acquired loans included in the balance sheet as of December 31, 2020:
($ in thousands) December 31,
Commercial & industrial $ 1,499
Commercial real estate - owner occupied -
Commercial real estate - nonowner occupied
Agricultural 9,180
Residential real estate 3,176
Home equity line of credit (HELOC) -
Consumer
Total loans $ 14,453
Accretable yield, or income expected to be collected as of December 31, 2020 is $0.3 million.
Note 7: Premises and Equipment
Major classifications of premises and equipment stated at cost were as follows at December 31:
($ in thousands)
Land $ 3,996 $ 3,945
Buildings and improvements 26,743 26,953
Equipment 11,506 10,786
Construction in process
43,242 41,812
Less accumulated depreciation (19,685 ) (18,427 )
Net premises and equipment $ 23,557 $ 23,385
Note 8: Goodwill and Intangibles
On June 5, 2020, the Company acquired Edon Bancorp (“Edon”) and its subsidiary, The Edon State Bank Company of Edon, Ohio. The acquisition resulted in approximately $4.3 million in goodwill. On March 15, 2019, the Company formed SBFG Title, LLC (“Title”) and purchased all of the assets and real estate of an Ohio based title agency. The purchase resulted in approximately $1.4 million in goodwill. The balance of goodwill as of December 31, 2020 and December 31, 2019 was $22.1 million and $17.8 million, respectively.
Twelve
Months Ended
December 31,
Twelve
Months Ended
December 31,
($ in thousands) Carrying Amount Carrying Amount
Beginning balance $ 17,792 $ 16,353
Acquired goodwill 4,325 1,439
Measurement period adjustments (26 ) -
Ending balance $ 22,091 $ 17,792
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Goodwill is tested on the last day of the last quarter of each calendar year. At December 31, 2020, the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.
Carrying basis and accumulated amortization of intangible assets were as follows at December 31:
Gross Carrying Accumulated Gross Carrying Accumulated
($ in thousands) Amount Amortization Amount Amortization
Core deposits intangible $ 5,359 $ (4,735 ) $ 4,698 $ (4,692 )
Customer relationship intangible (170 ) (166 )
Banking intangibles $ 5,559 $ (4,905 ) $ 4,898 $ (4,858 )
Amortization expense for intangibles for the years ended December 31, 2020 and 2019 was $0.05 million and $0.01 million, respectively. Estimated amortization expense for each of the following five years is immaterial.
Note 9: Mortgage Banking and Servicing Rights
Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $1.3 billion and $1.2 billion at December 31, 2020 and 2019, respectively. Contractually specified servicing fees of approximately $3.2 million and $2.6 million were included in mortgage loan servicing fees in the income statement for the years ended December 31, 2020 and 2019, respectively.
The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance:
($ in thousands)
Carrying amount, beginning of year $ 11,017 $ 11,365
Mortgage servicing rights capitalized during the year 5,090 2,872
Mortgage servicing rights amortization during the year (4,762 ) (2,126 )
Net change in valuation allowance (3,586 ) (1,094 )
Carrying amount, end of year $ 7,759 $ 11,017
Valuation allowance:
Beginning of year $ 1,306 $ 212
Increase (reduction) 3,586 1,094
End of year $ 4,892 $ 1,306
Fair value, beginning of period $ 11,864 $ 12,672
Fair value, end of period $ 7,759 $ 11,864
Note 10: Derivative Financial Instruments
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable-rate assets.
The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets.
The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of December 31, 2020 and 2019.
December 31, 2020 December 31, 2019
Notional Fair Notional Fair
($ in thousands) Amount Value Amount Value
Asset Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans $ 87,687 $ 7,962 $ 82,826 $ 2,846
IRLCs 46,130 16,347
Total contracts $ 133,817 $ 8,240 $ 99,173 $ 2,901
Liability Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans $ 87,687 $ (7,962 ) $ 82,826 $ (2,846 )
Forward contracts 50,000 (265 ) 22,000 (32 )
Total contracts $ 137,687 $ (8,227 ) $ 104,826 $ (2,878 )
The fair value of interest rate swaps were estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date.
The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the twelve months ended December 31, 2020 and 2019.
Amount of gain (loss)
($ in thousands) Statement of income classification
Interest rate swap contracts Other income $ 355 $ 513
Interest rate swap contracts Other expense - (41 )
IRLCs Gain on sale of mortgage loans & OMSR (28 )
Forward contracts Gain on sale of mortgage loans & OMSR (233 )
The following table shows the offsetting of financial assets and derivative assets at December 31, 2020 and 2019.
Gross Gross amounts offset in the Net amounts of assets
presented in Gross amounts not offset in the consolidated balance sheet
($ in thousands) amounts of
recognized
assets consolidated
balance
sheet the consolidated
balance
sheet Financial
instruments Cash
collateral
received Net amount
December 31, 2020
Interest rate swaps $ 7,962 $ - $ 7,962 $ - $ - $ 7,962
December 31, 2019
Interest rate swaps $ 2,901 $ 55 $ 2,846 $ - $ - $ 2,846
The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2020 and 2019.
Gross Gross amounts offset in the Net amounts of liabilities presented in Gross amounts not offset in the consolidated balance sheet
($ in thousands) amounts of
recognized
liabilities consolidated
balance
sheet the consolidated
balance
sheet Financial
instruments Cash
collateral
pledged Net amount
December 31, 2020
Interest rate swaps $ 7,962 $ - $ 7,962 $ - $ 8,896 $ (934 )
December 31, 2019
Interest rate swaps $ 2,901 $ 55 $ 2,846 $ - $ 3,242 $ (396 )
Note 11: Interest-Bearing Deposits
Interest-bearing time deposits in denominations of $250,000 or more totaled $27.8 million on December 31, 2020 and $36.2 million on December 31, 2019. Certificates of deposit obtained from brokers totaled approximately $5.0 million and $5.2 million at December 31, 2020 and 2019, respectively, and mature in 2021.
At December 31, 2020, the scheduled maturities of time deposits were as follows:
($ in thousands)
$ 156,761
47,518
18,399
4,338
2,351
Thereafter
Total $ 229,549
Included in time deposits at December 31, 2020 and 2019 were $73.1 million and $88.3 million, respectively, of deposits which were obtained through the Certificate of Deposit Account Registry Service (“CDARS”). This service allows deposit customers to maintain fully insured balances in excess of the $250,000 FDIC limit without the inconvenience of having multi-banking relationships. Under the reciprocal program that the Company is currently participating in, customers agree to allow their deposits to be placed with other participating banks in the CDARS program in insurable amounts under $250,000. In exchange, other banks in the program agree to place their deposits with the Company also in insurable amounts under $250,000.
Note 12: Short-Term Borrowings
($ in thousands)
Securities Sold Under Repurchase Agreements $ 20,189 $ 12,945
The Company has retail repurchase agreements to facilitate cash management transactions with commercial customers. Securing these obligations are agency securities of $10.7 million and $4.5 million for 2020 and 2019, respectively, and mortgage-backed securities of $17.5 million and $15.0 million for 2020 and 2019, respectively, which are held at FHLB. This collateral has maturities from 2022 through 2061. At December 31, 2020, these repurchase agreements totaled $20.2 million. The maximum amount of outstanding agreements at any month end during 2020 and 2019 totaled $25.6 million and $22.7 million, respectively, and the monthly average of such agreements totaled $20.8 million and $15.3 million, respectively. The repurchase agreements mature within one month.
The Company has borrowing capabilities at the Federal Reserve Discount Window by pledging either securities or loans as collateral. As of December 31, 2020, there was no collateral pledged or borrowings drawn at the Discount Window.
The Company participated in the PPP initiative and also has the ability to borrow from the Federal Reserve’s special purpose Paycheck Protection Program Liquidity Facility (“PPPLF”) for additional funding. At December 31, 2020, the Company had no borrowings from the PPPLF.
At December 31, 2020 and December 31, 2019, the Company had $41.0 million in federal funds lines, of which none were drawn.
Note 13: Federal Home Loan Bank Advances
The FHLB advances were secured by $147.1 million in mortgage loans at December 31, 2020. Advances, at interest rates from 2.77 to 2.93 percent, are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at December 31, 2020, were:
($ in thousands) Debt
$ 2,500
3,000
2,500
Total $ 8,000
Note 14: Trust Preferred Securities
On September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is based upon the 3-month LIBOR plus 1.80 percent and are included in interest expense in the consolidated financial statements. These securities may be included in Tier 1 capital and may be prepaid at anytime without penalty (with certain limitations applicable) under current regulatory guidelines and interpretations. The balance of the Capital Securities as of December 31, 2020 and 2019 was $10.3 million, with a maturity date of September 15, 2035.
Note 15: Income Taxes
The provision for income taxes includes these components:
For The Year Ended
December 31,
($ in thousands)
Taxes currently payable $ 5,939 $ 2,938
Deferred provision (2,444 ) (279 )
Income tax expense $ 3,495 $ 2,659
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
For The Year Ended
December 31,
($ in thousands)
Computed at the statutory rate (21%) $ 3,872 $ 3,073
Increase (decrease) resulting from
Tax exempt interest (91 ) (113 )
BOLI income (65 ) (71 )
Stock compensation (39 ) (45 )
Other (182 ) (185 )
Actual tax expense $ 3,495 $ 2,659
The tax effects of temporary differences related to deferred taxes shown on the balance sheets are:
For The Year Ended
December 31,
($ in thousands)
Deferred tax assets
Allowance for loan losses $ 2,641 $ 1,838
Net deferred loan fees
Section 475 MTM
Accrued bonus
Other
4,673 2,550
Deferred tax liabilities
Depreciation (1,168 ) (1,009 )
Mortgage servicing rights (1,668 ) (2,378 )
Unrealized gains on available-for-sale securities (587 ) (175 )
Purchase accounting adjustments (1,628 ) (1,227 )
Prepaids (465 ) (447 )
FHLB stock dividends (288 ) (288 )
(5,804 ) (5,524 )
Net deferred tax liability $ (1,131 ) $ (2,974 )
Note 16: Accumulated Other Comprehensive Income
The following table presents reclassifications out of accumulated other comprehensive income related to unrealized gains and losses on available-for-sale securities for the two years ending December 31:
($ in thousands) Affected Line Item in Income Statement
Realized gains included in net income $ - $ 206 Gains on investment securities
- Income before income taxes
Tax effect - (43 ) Provision for income taxes
Net of Tax $ - $ 163 Net income
Note 17: Regulatory Matters
As of December 31, 2020, based on its call report computations, State Bank was classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since December 31, 2020 that management believes have changed State Bank’s capital classification.
State Bank’s actual capital amounts and ratios are presented in the following table. Capital levels are presented for the State Bank only as the Company is exempt from quarterly reporting at the holding company level:
Actual For Capital Adequacy Purposes To Be Well Capitalized
Under Prompt
Corrective Action
Procedures
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2020
Tier I Capital to average assets $ 119,480 9.94 % $ 48,099 4.0 % $ 60,123 5.0 %
Tier I Common equity capital to risk-weighted assets 119,480 12.91 % 41,651 4.5 % 60,162 6.5 %
Tier I Capital to risk-weighted assets 119,480 12.91 % 55,534 6.0 % 74,046 8.0 %
Total Risk-based capital to risk-weighted assets 131,062 14.16 % 74,046 8.0 % 92,557 10.0 %
As of December 31, 2019
Tier I Capital to average assets $ 116,884 11.36 % $ 41,165 4.0 % $ 51,456 5.0 %
Tier I Common equity capital to risk-weighted assets 116,884 12.46 % 42,204 4.5 % 60,962 6.5 %
Tier I Capital to risk-weighted assets 116,884 12.46 % 56,273 6.0 % 75,030 8.0 %
Total Risk-based capital to risk-weighted assets 125,639 13.40 % 75,030 8.0 % 93,788 10.0 %
The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was 2.50 percent at December 31, 2020. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of December 31, 2020, State Bank met all capital adequacy requirements to which they are subject.
Note 18: Employee Benefits
The Company has instituted a long-term incentive program, with the objective of rewarding senior management with restricted shares of the Company, in addition to the existing stock option program (see Note 19 to the Consolidated Financial Statements).
The Company has a retirement savings 401(k) plan covering substantially all employees. The Company contributes a safe harbor matching contribution equal to 100% of an employees’ salary deferral amounts up to 4% of the employees’ eligible compensation. Employees are immediately vested in their voluntary contributions and in any Company safe harbor matching contributions. Any discretionary contribution made by the Company is fully vested after three years of credited service. Employer contributions charged to expense for 2020 and 2019 were $0.7 million and $0.6 million, respectively.
Also, the Company has Supplemental Executive Retirement Plan (“SERP”) Agreements with certain active and retired officers. The agreements provide monthly payments for up to 15 years that equal 15 percent to 25 percent of average compensation prior to retirement or death. The charges to expense for the current agreements were $0.3 million and $0.3 million for 2020 and 2019, respectively.
Additional life insurance is provided to certain officers through a bank-owned life insurance policy (“BOLI”). By way of a separate split-dollar agreement, the policy interests are divided between the Company and the insured’s beneficiary. The Company owns the policy cash value and a portion of the policy net death benefit, over and above the cash value assigned to the insured’s beneficiary. The cash surrender value of all life insurance policies totaled $17.5 million and $17.2 million at December 31, 2020 and 2019, respectively.
The Company has a noncontributory employee stock ownership plan (“ESOP”) covering substantially all employees of the Company and its subsidiaries. Voluntary contributions are made by the Company to the plan. Each eligible employee is vested based upon years of service, including prior years of service. The Company’s contributions to the account of each employee become fully vested after three years of service.
Benefit expense for the value of the stock purchased is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. Allocated shares in the ESOP at December 31, 2020 and 2019, were 412,402 and 415,286, respectively.
Dividends on allocated shares are recorded as dividends and charged to retained earnings. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. ESOP expense for the years ended December 31, 2020 and 2019 was $0.2 million and $0.0 million, respectively.
Note 19: Share Based Compensation Plan
In April 2017, the shareholders approved a new share-based incentive compensation plan, the SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which replaced the Company’s 2008 Stock Incentive Plan. This plan permits the grant or award of incentive stock options, nonqualified stock options, stock appreciation rights (“SAR’s”), restricted stock, and restricted stock units (“RSU’s”) for up to 500,000 Common Shares of the Company.
The Company’s 2008 Stock Incentive Plan (the “2008 Plan”), which was approved by the shareholders in April 2008, permitted the grant or award of incentive stock options, nonqualified stock options, stock appreciation rights, and restricted stock for up to 250,000 Common Shares of the Company.
The 2008 and 2017 Plans are intended to advance the interests of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards. The 2008 and 2017 Plans permit equity-based awards to be used to attract, motivate, reward and retain highly competent individuals upon whose judgment, initiative, leadership and efforts are key to the success of the Company by encouraging those individuals to become shareholders of the Company.
Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on 5 years of continuous service and have 10-year contractual terms. The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. No options were granted in 2020 or 2019. There was no compensation expense charged against income with respect to option awards under the Plans for 2020 or 2019.
A summary of incentive stock option activity under the 2008 and 2017 Plans as of December 31, 2020 and changes during the year ended is presented below:
Shares Weighted-Average Exercise Price Weighted-Average Remaining Term Aggregate Intrinsic Value
Outstanding, beginning of year 28,250 $ 6.98
Granted - -
Exercised (26,950 ) 6.98
Forfeited - -
Expired (1,300 ) 6.98
Outstanding, end of year - $ - - $ -
Exercisable, end of year - $ - - $ -
During 2020, the 26,950 option shares exercised had a total intrinsic value of $0.3 million and the cash received from these exercised options was $0.2 million. The tax benefit from these transactions was immaterial.
As of December 31, 2020, there was no unrecognized compensation cost related to incentive option share-based compensation arrangements granted under the 2008 Plan.
The Long Term Incentive (“LTI”) Plan awards restricted stock in the Company to certain key executives under the 2008 and 2017 Plans. These restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives. During 2020 and 2019, the Company met certain performance targets and restricted stock awards were approved by the Board. The compensation cost charged against income for the LTI Plan was $0.4 million and $0.4 million for 2020 and 2019, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.1 million and $0.1 million for 2020 and 2019, respectively.
A summary of restricted stock activity under the Company’s LTI Plan as of December 31, 2020 (issued under both the 2008 and 2017 plan) and changes during the year ended is presented below:
Shares Weighted-Average Value per Share
Nonvested, beginning of year 43,741 $ 17.41
Granted 16,442 19.57
Vested (22,451 ) 17.18
Forfeited (2,954 ) 18.01
Nonvested, end of year 34,778 $ 18.52
As of December 31, 2020, there was $0.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards under the 2008 and 2017 Plans which were granted in accordance with the LTI Plan. That cost is expected to be recognized over a weighted-average period of 1.66 years.
Note 20: Preferred Stock
On December 23, 2014, the Company completed its public offering of 1,500,000 depositary shares, each representing a 1/100th ownership interest in a 6.50 percent Noncumulative Convertible Perpetual Preferred Share, Series A (“Series A Preferred Shares”), of the Company with a liquidation preference of $1,000 per share (equivalent to $10.00 per depositary shares). The Company sold the maximum of 1,500,000 depositary shares in the offering, resulting in gross proceeds to the Company of $15.0 million. Net proceeds to the Company after all expenses related to the offering were $14.0 million.
On December 26, 2019, the Company exercised its right to convert all of its Series A Preferred Shares and all of its depositary shares, representing interests in the Series A Preferred Shares, into common shares, no par value, of the Company (“Common Shares”) in accordance with the terms of the Series A Preferred Shares and depositary shares.
Each outstanding Series A Preferred Share converted into the right to receive 990 Common Shares, and each outstanding depositary share converted into the right to receive 0.9908093 Common Shares based on the December 26th conversion price of $10.09276. There were 1,412,425 depositary shares and 1,412 underlying Series A Preferred Shares issued and outstanding. A total of 1,399,443 Common Shares were issued as a result of the conversion. No fractional Common Shares were issued upon conversion of the depositary shares and Series A Preferred Shares; instead, cash was paid in lieu of any fractional Common Share in an amount equal to the fraction multiplied by $18.49, which was the average closing price of the Common Shares during the previous 30 consecutive trading days.
The Company paid its last dividend on the depositary shares (and underlying Series A Preferred Shares) on December 15, 2019. No further dividends were accrued, declared or paid on the depositary shares or underlying Series A Preferred Shares following the December 26, 2019 Conversion Date.
Note 21: Disclosures About Fair Value of Assets and Liabilities
Pursuant to ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy exists in ASC 820 for fair value measurements based upon the inputs to the valuation of an asset or liability:
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Following is a description of the valuation methodologies, inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale securities
The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. government agencies, mortgage-backed securities, obligations of political and state subdivisions, and corporate securities. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.
Interest rate contracts
The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.
Forward contracts
The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1).
Interest Rate Lock Commitments
The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).
The following table presents the fair value measurements of securities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2020 and 2019:
($ in thousands) Fair Values at 12/31/2020 (Level 1) (Level 2) (Level 3)
U.S. Treasury and Government Agencies $ 6,864 $ - $ 6,864 $ -
Mortgage-backed securities 127,761 - 127,761 -
State and political subdivisions 12,275 - 12,275 -
Other corporate securities 2,506 - 2,506 -
Interest rate contracts - assets 7,962 - 7,962 -
Interest rate contracts - liabilities (7,962 ) - (7,962 ) -
Forward contracts (265 ) (265 ) - -
IRLCs - -
($ in thousands) Fair Values at 12/31/2019 (Level 1) (Level 2) (Level 3)
U.S. Treasury and Government Agencies $ 12,202 $ - $ 12,202 $ -
Mortgage-backed securities 78,182 - 78,182 -
State and political subdivisions 10,564 - 10,564 -
Interest rate contracts - assets 2,846 - 2,846 -
Interest rate contracts - liabilities (2,846 ) - (2,846 ) -
Forward contracts (32 ) (32 ) - -
IRLCs - -
Level 1 - quoted prices in active markets for identical assets
Level 2 - significant other observable inputs
Level 3 - significant unobservable inputs
The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Collateral-dependent Impaired Loans, Net of ALLL
Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The estimated fair value of collateral-dependent impaired loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining independent appraisals of the collateral from a list of preapproved appraisers, which are reviewed for accuracy and consistency by the Company. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All impaired loans held by the Company were collateral dependent at December 31, 2020 and 2019.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.
The following table presents the fair value measurements of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2020 and 2019:
($ in thousands) Fair values at
12/31/2020 (Level 1) (Level 2) (Level 3)
Impaired loans $ 3,544 $ - $ - $ 3,544
Mortgage servicing rights 7,759 - - 7,759
($ in thousands) Fair values at
12/31/2019 (Level 1) (Level 2) (Level 3)
Impaired loans $ 2,527 $ - $ - $ 2,527
Mortgage servicing rights 5,084 - - 5,084
Level 1 - quoted prices in active markets for identical assets
Level 2 - significant other observable inputs
Level 3 - significant unobservable inputs
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2020 and 2019:
Fair value at Valuation
Range (weighted-
($ in thousands) 31-12-2020 technique Unobservable inputs average)
Collateral-dependent impaired loans $ 3,544 Market comparable properties Comparability adjustments (%) 0 - 43% (22 )%
Mortgage servicing rights 7,759 Discounted cash flow Discount Rate 8.28 %
Constant prepayment rate 20.87 %
P&I earnings credit 0.14 %
T&I earnings credit 0.24 %
Inflation for cost of servicing 1.50 %
IRLCs Discounted cash flow Loan closing rates 49% - 100 %
Fair Value at Valuation
Range (weighted-
($ in thousands) 31-12-2019 technique Unobservable inputs average)
Collateral-dependent impaired loans $ 2,527 Market comparable properties Comparability adjustments (%) 2 - 62% (28 )%
Mortgage servicing rights 5,084 Discounted cash flow Discount Rate 9.36 %
Constant prepayment rate 10.19 %
P&I earnings credit 1.78 %
T&I earnings credit 1.93 %
Inflation for cost of servicing 1.50 %
IRLCs Discounted cash flow Loan closing rates 66% - 100 %
The mortgage servicing rights portfolio is measured for fair value by an independent third party. The valuation of the portfolio hinges on a number of quantitative factors. These factors include, but are not limited to, a discount rate applied to the cash flows, and an assumption of future principal prepayments. The prepayment assumptions are based upon the historical performance of the Company’s portfolio as well as market metrics. With interest rates decreasing during 2020, the mortgage servicing rights have decreased in value. The servicing rights have had an increase in prepayments and the 10.68 percent increase in the constant prepayment rate reflects the change in market rates. In addition, the earnings credit rates decreased as did the discount rate.
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.
Cash and Due From Banks, Interest Bearing Time Deposits, Federal Reserve and Federal Home Loan Bank Stock and Interest Receivable and Payable
Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns.
Loans Held for Sale
The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.
Loans
The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.
Deposits, Repurchase Agreements & FHLB Advances
Deposits include demand deposits, savings accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate the Company could pay on similar instruments with similar terms and maturities at December 31, 2020 and 2019.
Loan Commitments
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at December 31, 2020 and 2019 and are not considered significant to this presentation.
Trust Preferred Securities
The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate.
The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.
($ in thousands) Carrying Fair Fair value measurements using
December 31, 2020 amount value (Level 1) (Level 2) (Level 3)
Financial assets
Cash and due from banks $ 140,690 $ 140,690 $ 140,690 $ - $ -
Interest bearing time deposits 5,823 5,823 - 5,823 -
Loans held for sale 7,234 7,508 - 7,508 -
Loans, net of allowance for loan losses 860,149 853,294 - - 853,294
Federal Reserve and FHLB Bank stock, at cost 5,303 5,303 - 5,303 -
Interest receivable 3,799 3,799 - 3,799 -
Financial liabilities
Deposits $ 1,049,011 $ 1,050,558 $ 819,462 $ 231,096 $ -
Short term borrowings 20,189 20,189 - 20,189 -
FHLB advances 8,000 8,257 - 8,257 -
Trust preferred securities 10,310 8,394 - 8,394 -
Interest payable - -
($ in thousands) Carrying Fair Fair value measurements using
December 31, 2019 amount value (Level 1) (Level 2) (Level 3)
Financial assets
Cash and due from banks $ 27,064 $ 27,064 $ 27,064 $ - $ -
Loans held for sale 7,258 7,419 - 7,419 -
Loans, net of allowance for loan losses 816,755 804,808 - - 804,808
Federal Reserve and FHLB Bank stock, at cost 4,648 4,648 - 4,648 -
Interest receivable 3,106 3,106 - 3,106 -
Financial liabilities
Deposits $ 840,219 $ 840,272 $ 582,466 $ 257,806 $ -
Repurchase agreements 12,945 12,945 - 12,945 -
FHLB advances 16,000 16,149 - 16,149 -
Trust preferred securities 10,310 9,201 - 9,201 -
Interest payable 1,191 1,191 - 1,191 -
Note 22: Parent Company Financial Information
Presented below is condensed financial information of the parent company only:
Condensed Balance Sheets
($ in thousands)
Assets
Cash & cash equivalents $ 2,178 $ 7,457
Investment in banking subsidiaries 143,244 134,244
Investment in nonbanking subsidiaries 5,617 4,883
Other assets 3,229
Total assets $ 154,268 $ 146,776
Liabilities
Trust preferred securities $ 10,000 $ 10,000
Borrowings from nonbanking subsidiaries
Other liabilities & accrued interest payable 1,035
Total liabilities 11,345 10,682
Stockholders’ equity 142,923 136,094
Total liabilities and stockholders’ equity $ 154,268 $ 146,776
Condensed Statements of Income
($ in thousands)
Dividends from subsidiaries:
Banking subsidiaries $ 24,025 $ 6,000
Nonbanking subsidiaries -
Total income 24,025 6,575
Expenses
Interest expense
Other expense 2,950 1,773
Total expenses 3,206 2,187
Income before income tax 20,819 4,388
Income tax benefit (712 ) (508 )
Income before equity in undistributed income of subsidiaries 21,531 4,896
Equity in undistributed income of subsidiaries
Banking subsidiaries (8,071 ) 6,526
Nonbanking subsidiaries 1,484
Total (6,587 ) 7,077
Net income 14,944 11,973
Preferred stock dividends -
Net income available to common shareholders $ 14,944 $ 11,023
Condensed Statements of Comprehensive Income
($ in thousands)
Net income $ 14,944 $ 11,973
Other comprehensive income:
Available-for-sale investment securities:
Gross unrealized holding gain (loss) arising in the period 1,963 1,327
Related tax (expense) benefit (412 ) (279 )
Less: reclassification adjustment for gain realized in income -
Related tax expense - (43 )
Net effect on other comprehensive income 1,551 1,211
Total comprehensive income $ 16,495 $ 13,184
Condensed Statements of Cash Flows
($ in thousands)
Operating activities
Net income $ 14,944 $ 11,973
Items not requiring (providing) cash
Equity in undistributed net income of subsidiaries 6,587 (7,077 )
Stock compensation expense
Other assets (2,287 )
Other liabilities (884 )
Net cash provided by operating activities 20,289 4,461
Investing activities
Capital contributed to banking subsidiary (15,520 ) -
Capital contributed to nonbanking subsidiary - (3,100 )
Net cash used in investing activities (15,520 ) (3,100 )
Financing activities
Dividends on common shares (3,070 ) (2,331 )
Dividends on preferred shares - (950 )
Proceeds from issuance of common shares -
Conversion of preferred shares - (1 )
Proceeds from share-based compensation plans
Repurchase of common shares (7,166 ) (5,050 )
Net cash used in financing activities (10,048 ) (7,942 )
Net change in cash and cash equivalents (5,279 ) (6,581 )
Cash and cash equivalents at beginning of year 7,457 14,038
Cash and cash equivalents at end of year $ 2,178 $ 7,457
Note 23: Quarterly Financial Information
Quarterly Financial Information (unaudited)
Years ended December 31,
($ in thousands, except per share data)
December September June March
Interest income $ 10,589 $ 10,807 $ 10,595 $ 10,644
Interest expense 1,338 1,548 1,723 2,096
Net interest income 9,251 9,259 8,872 8,548
Provision for loan losses 1,800 1,300
Noninterest income 8,902 10,418 8,615 2,161
Noninterest expense 10,684 11,335 11,662 9,406
Income tax expense 1,311 1,292
Net income 5,358 5,250 3,655
Preferred share dividend - - - -
Net income available to common $ 5,358 $ 5,250 $ 3,655 $ 681
Basic earnings per common share $ 0.71 $ 0.69 $ 0.47 $ 0.09
Diluted earnings per common share $ 0.71 $ 0.69 $ 0.47 $ 0.09
Dividends per share $ 0.105 $ 0.100 $ 0.100 $ 0.095
December September June March
Interest income $ 11,205 $ 11,546 $ 11,151 $ 10,498
Interest expense 2,609 2,488 2,319 2,158
Net interest income 8,596 9,058 8,832 8,340
Provision for loan losses -
Noninterest income 5,959 5,366 3,691 3,000
Noninterest expense 10,176 9,500 9,108 8,626
Income tax expense 488
Net income 3,358 3,762 2,627 2,226
Preferred share dividend 244
Net income available to common $ 3,128 $ 3,529 $ 2,384 $ 1,982
Basic earnings per common share $ 0.48 $ 0.55 $ 0.37 $ 0.31
Diluted earnings per common share $ 0.42 $ 0.48 $ 0.33 $ 0.28
Dividends per share $ 0.095 $ 0.090 $ 0.090 $ 0.085
Report of Independent Registered Public Accounting Firm
To the Stockholders, Board of Directors and Audit Committee
SB Financial Group, Inc.
Defiance, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SB Financial Group, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years ended December 31, 2020 and 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowances for Loan Losses
Description of the Matter
As described in Note 5 to the consolidated financial statements, the Company’s consolidated allowance for loan and lease losses (ALLL) was $12.6 million at December 31, 2020. The Company also describes in Note 1 of the consolidated financial statements the accounting policy around this estimate. The ALLL is an estimate of losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses. The estimate consists of several key elements, which include: specific reserves for impaired loans, general reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogenous loans and leases, among others. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.
We identified the valuation of the ALLL as a critical audit matter. Auditing the ALLL involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific reserves associated with impaired loans and assessing the appropriateness of loan grades.
How We Addressed the Matter in Our Audit
Our audit procedures related to the estimated allowance for loan losses included:
● Testing the design of internal controls, including those related to technology, over the ALLL including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of a loss rate, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans and management’s review controls over the ALLL balance
● Testing clerical/computational accuracy of the formulas within the ALLL model.
● Testing of completeness and accuracy of the information and reports utilized in the ALLL, including reports used in management review controls over the ALLL.
● Computing an independent calculation of an acceptable range and comparing it to the Company’s estimate.
● Evaluating the qualitative adjustment to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions.
● Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal loan grading professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans.
● Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years.
Acquisition
Description of the Matter
As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of a bank holding company and its wholly owned subsidiary during the year ended December 31, 2020 with total consideration of $15.5 million, including the recognition of $4.3 million of goodwill. As part of the acquisition, management determined that the acquisition qualified as a business and accordingly all identifiable assets and liabilities acquired were valued at fair value as part of the purchase price allocation as of the acquisition date. The identification and valuation of such acquired assets and assumed liabilities required management to exercise significant judgment and the use of third-party specialists to estimate the fair value allocations.
We identified the acquisition and the valuation of acquired assets and assumed liabilities a critical audit matter. Auditing the acquisition transaction involved a high degree of subjectivity in evaluating management’s operational assumptions, fair value estimates, purchase price allocations and assessing the appropriateness of valuation models.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
● Obtaining and reviewing executed Plan and Agreement of Merger documents to gain an understanding of the underlying terms of the consummated acquisition;
● Obtaining and reviewing management’s reconciliation procedures of significant accounts and testing of completion procedures performed and asset/liability identification considerations made;
● Testing management’s computation of purchase price and determination of goodwill recognized focusing on the completeness and accuracy of the balance sheet acquired and related fair value purchase price allocations made to identified assets acquired and liabilities assumed;
● Obtaining and reviewing valuation estimates prepared by specialists engaged by the Company, and challenging management’s review of the appropriateness of the valuations assessed and allocation to assets acquired and liabilities assumed. The procedures included but were not limited to, testing critical inputs, including key assumptions applied and the valuation models utilized by the Company’s specialists;
● Utilization of our internal specialists to assist with testing and challenging the related fair value purchase price allocations made to identified assets acquired and liabilities assumed;
● Reviewing and evaluating the adequacy of the disclosures made in the footnotes related to the acquisition.
Goodwill Impairment Analysis
The Company’s goodwill totaled $22.1 million at December 31, 2020. As discussed in Notes 1 and 8 to the consolidated financial statements, goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. During the third quarter of 2020, the Company’s market value fell below book value, which caused the Company to engage a third-party valuation specialist to perform a quantitative assessment of the reporting unit’s value as of September 30, 2020. The Company performed an additional qualitative assessment as of March 31, 2020, June 30, 2020 and December 31, 2020. Based on each of these assessments, the Company’s reporting segment’s fair value exceeded the carrying value and no goodwill impairment was recorded.
We identified the valuation of goodwill as a critical audit matter due to the subjective nature of the assumptions used to estimate the reporting unit’s fair value. The Company’s estimate of future cash flows is based on multiple assumptions, such as revenue growth projections and the ability to adhere to anticipated expense levels, as well as the selected discount rate and terminal value, which are sensitive to changes in expectations about future market or economic conditions, including uncertainty resulting from the COVID-19 pandemic.
To test the estimated fair value of the Company’s reporting unit, with the support from our internal valuation specialists, we performed audit procedures that included, among others:
● Assessing methodologies selected by management and testing the significant assumptions discussed above.
● Testing the accuracy of the underlying data used by the Company in its analysis.
● Comparing the significant assumptions used by management to current industry and economic trends.
● Performing sensitivity analyses of significant assumptions to evaluate changes in the fair value estimate of the reporting unit resulting from changes in the assumptions.
● Testing management’s reconciliation of the fair value of the reporting unit to the market capitalization of the Company.
/s/ BKD, LLP
We have served as the Company’s auditor since 2002.
Indianapolis, IN
March 8, 2021

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
With the participation of the Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of the Company, the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer have concluded that:
● Information required to be disclosed by the Company in this Annual Report on Form 10-K and other reports which the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;
● Information required to be disclosed by the Company in the Annual Report on Form 10-K and other reports which the Company files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
● The Company’s disclosure controls and procedures were effective as of the end of the fiscal year covered by this Annual Report on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting
The Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in conformity with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
● Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company and its consolidated subsidiaries;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of the Company; and
● Provide reasonable assurance regarding prevention of timely detection of unauthorized acquisition, use or disposition of the assets of the Company and its consolidated subsidiaries that could have a material effect on the financial statements.
With the supervision and participation of our Chief Executive Officer and our Chief Financial Officer, management assessed the effectiveness of the Company’s internal controls over financial reporting as of December, 31, 2020, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting is effective.
This Annual Report includes an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Controls Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
Not Applicable.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The information required by Item 401 of SEC Regulation S-K concerning the directors of the Company and the nominees for election as directors of the Company at the Annual Meeting of Shareholders to be held on April 21, 2021 (the “2021 Annual Meeting”), is incorporated herein by reference from the disclosure included in the Company’s definitive Proxy Statement relating to the 2021 Annual Meeting (the “2021 Proxy Statement”), under the caption “PROPOSAL NO. 1 - ELECTION OF DIRECTORS”. The information concerning the executive officers of the Company required by Item 401 of SEC Regulation S-K is set forth in the portion of Part I of this Annual Report on Form 10-K entitled “Supplemental Item: Information about our Executive Officers.”
Compliance with Section 16(a) of the Exchange Act
The information required by Item 405 of SEC Regulation S-K is incorporated herein by reference from the disclosure included in the Company’s 2020 Proxy Statement under the caption “DELINQUENT SECTION 16(a) REPORTS.”
Committee Charters and Code of Conduct and Ethics
The Company’s Board of Directors has adopted charters for each of the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. Copies of these charters are available on the Company’s Internet website at www.YourSBFinancial.com by first clicking “Corporate Governance” and then “Supplementary Info”. The Company has adopted a Code of Conduct and Ethics that applies to the Company’s directors, officers and employees. A copy of the Code of Conduct and Ethics is available on the Company’s Internet website at www.YourSBFinancial.com under the “Corporate Governance” tab. Interested persons may also obtain copies of the Code of Conduct and Ethics, the Audit Committee charter, the Compensation Committee charter and the Governance and Nominating Committee charter, without charge, by writing to SB Financial Group, Inc., Attn: Keeta J. Diller, 401 Clinton Street, Defiance, OH 43512.
Audit Committee
The information required by Items 407(d)(4) and 407(d)(5) of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “MEETINGS AND COMMITTEES OF THE BOARD - Audit & Risk Management Committee” in the Company’s 2021 Proxy Statement.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The executive compensation information required by this item is incorporated herein by reference to the information contained in the Company’s 2021 Proxy Statement under the captions “COMPENSATION OF EXECUTIVE OFFICERS”, “EQUITY INCENTIVE PLAN INFORMATION”, “DIRECTOR COMPENSATION”, and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION”.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 403 of SEC Regulation S-K is incorporated herein by reference from the disclosure included in the Company’s 2021 Proxy Statement under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT”.
Equity Compensation Plan Information
The SB Financial Group, Inc. 2008 Stock Incentive Plan (the “2008 Plan”) was approved by the shareholders of the Company at the 2008 Annual Meeting of Shareholders.
The SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”) was approved by the shareholders of the Company at the 2017 Annual Meeting of Shareholders.
The following table shows, as of December 31, 2020, the number of common shares issuable upon exercise of outstanding stock options, the weighted-average exercise price of those stock options, and the number of common shares remaining for future issuance under the Company’s equity compensation plans (excluding common shares issuable upon exercise of outstanding stock options):
Equity compensation plans
approved by security holders
($ in thousands, except per share data) 2017 Plan 2008 Plan Total
a) Number of securities to be issued upon exercise of outstanding options, warrants and rights - - -
b) Weighted-average exercise price of outstanding options, warrants and rights $ - $ - $ -
c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in row a) 444,541 - 444,541

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 404 of SEC Regulation S-K is incorporated herein by reference from the disclosure contained in the Company’s 2021 Proxy Statement under the caption “TRANSACTIONS WITH RELATED PERSONS”.
The information required by Item 407(a) of SEC Regulation S-K is incorporated herein by reference from the disclosure contained in the Company’s 2021 Proxy Statement under the caption “CORPORATE GOVERNANCE - Director Independence”.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required to be disclosed in this Item 14 is incorporated herein by reference from the disclosure contained in the Company’s 2021 Proxy Statement under the caption “AUDIT & RISK MANAGEMENT COMMITTEE DISCLOSURE” - Pre-Approval of Services Performed by Independent Registered Public Accounting Firm” and “AUDIT & RISK MANAGEMENT COMMITTEE DISCLOSURE” - Services of Independent Registered Public Accounting Firm”.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements
The following consolidated financial statements are incorporated by reference from Item 8 hereof:
● Report of Independent Registered Public Accounting Firm (BKD, LLP), Opinion on Financial Statements
● Consolidated Balance Sheets as of December 31, 2020 and 2019
● Consolidated Statements of Income for the Years ended December 31, 2020 and 2019
● Consolidated Statements of Comprehensive Income for the Years ended December 31, 2020 and 2019
● Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2020 and 2019
● Consolidated Statements of Cash Flows for Years ended December 31, 2020 and 2019
● Notes to Consolidated Financial Statements
Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.