EDGAR 10-K Filing

Company CIK: 767405
Filing Year: 2022
Filename: 767405_10-K_2022_0001213900-22-010887.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 12 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 22 banking centers, located within the Ohio counties of Allen, Defiance, Franklin, Fulton, Hancock, Lucas, Paulding, Williams and Wood, and one banking center located in Allen County, Indiana. State Bank also presently operates five loan production offices, located in Franklin and Lucas Counties, Ohio, Hamilton and Steuben Counties, Indiana, and Monroe County, Michigan. At December 31, 2021, State Bank had 260 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. SBFG Title provides title insurance and operates three locations located within the Ohio Counties of Franklin and Williams, and in Hamilton County, Indiana. At December 31, 2021, SBFG Title had eight 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, 2021, 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 employees at December 31, 2021.
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, 2021, 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, 2021, 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 SB Captive is to mitigate insurance risk by participating in a pool with other banks. At December 31, 2021, SB Captive 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 summary discussion of the significant statutes and regulations applicable to the Company and its subsidiaries. This discussion 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 Company is subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board (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.
The Bank Holding Company Act requires the prior approval of the 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.
In April 2020, the FRB adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the FRB generally views as supporting a facts-and-circumstances determination that one company controls another company. The FRB’s final rule applies to questions of control under the Bank Holding Company Act, but does not extend to the Change in Bank Control Act.
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 dealing and market-making, insurance underwriting and agency, and merchant banking activities. On January 2, 2019, the Company elected, and received approval from the FRB, to become a financial holding company.
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 (the “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, 2021.
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 (the “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, 2021, State Bank had $27.4 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.
The Company’s ability to pay dividends on its shares is also conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities. In addition, under the terms of the Company’s fixed-to-floating rate subordinated debt, the Company’s ability to pay dividends on its shares is conditioned upon the Company continuing to make required principal and interest payments, and not incurring an event of default, with respect to the subordinated debt.
Transactions with Affiliates and Insiders
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.
COVID-19 Legislation and Initiatives
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 (“PPP”), to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. 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. After previously being extended by Congress, the application deadline for PPP loans expired on May 31, 2021. No collateral or personal guarantees were required for PPP loans. In addition, neither the government nor lenders have been permitted to charge the recipients of PPP loans any fees. On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the “Consolidated Appropriations Act, 2021” that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first-time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending and amending the PPP, the HHSB Act also creates a new grant program for “shuttered venue operators”. 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.
On December 2, 2020, the federal bank regulatory agencies issued an interim final rule that provides temporary relief for specified community banking organizations related to certain regulations and reporting requirements as a result, in large part, of their growth in size from the response to COVID-19. Community banking organizations are subject to different rules and requirements based on their risk profile and asset size. Due to their involvement in federal COVID-19 response programs (such as the PPP) and other lending that supports the U.S. economy, many community banking organizations experienced rapid and unexpected increases in their sizes, which were generally expected to be temporary. The temporary increase in size could have subjected community banking organizations to new regulations or reporting requirements. However, community banking organizations, such as the Company and State Bank, under $10.0 billion in total assets as of December 31, 2019 were permitted to use asset data as of December 31, 2019, to determine the applicability of various regulatory asset thresholds during calendar years 2020 and 2021. As such, it was not until January 1, 2022 that asset growth again triggered new regulatory requirements for these community banking organizations.
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%. 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 provided 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 returned to 9.0% on January 1, 2022. This final rule became effective on October 1, 2020. The Company did not utilize the CBLR in assessing capital adequacy and continued 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, 2021, 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 18 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, 2021, 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 Regulatory Relief Act, 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 (the “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 (the “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. As of June 30, 2020, the DRR fell below the minimum DRR to 1.30%. As a result, the FDIC adopted a restoration plan requiring the restoration of the DRR to 1.35% within eight years (September 30, 2028). This restoration plan maintained the scheduled assessment rates for all insured institutions. As of September 30, 2021, the DRR was 1.27%. 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 (the “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 received a satisfactory rating in its most recent CRA examination.
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 and Anti-Money Laundering 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.
The Anti-Money Laundering Act of 2020 (the “AMLA”), which amends the Bank Secrecy Act of 1970 (the “BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower initiatives and protections.
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.
In June 2010, the FRB, the Office of the Comptroller of the Currency (the “OCC”) and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, described above.
The FRB and the OCC review, as part of their respective regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company and State Bank, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
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.
Financial Privacy Provisions
Federal and state regulations limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
State Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal bank regulatory agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
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.
In November 2021, the OCC, the FRB and the FDIC issued a final rule requiring banking organizations that experience a computer-security incident to notify certain entities. A computer-security incident occurs when actual or potential harm to the confidentiality, integrity, or availability of an information system or the information occurs, or there is a violation or imminent threat of a violation to banking security policies and procedures. The affected bank must notify its respective federal regulator of the computer-security incident as soon as possible and no later than 36 hours after the bank determines a computer-security incident has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into bigger incidents. This rule also requires bank service providers to notify its customers of a computer-security incident.
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.
Effects of Government Monetary Policy
The earnings of the Company are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates to influence general economic conditions, primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. FRB monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including State Bank, and are expected to continue to do so in the future.
Human Capital Resources
At December 31, 2021, the Company had 269 full-time equivalent employees, compared to 244 at December 31, 2020. SB Financial seeks to provide an above peer workplace for our employees, with an emphasis on recognizing performance, quality benefits, a culture of learning and growth. We offer paid time off, medical, dental and vision insurance, along with wellness programs, a 401(k) program, an employee stock ownership plan, programs to assist with education-related costs, reward and recognition programs, as well as other various programs and benefits.
The safety of our employees has been our top priority over the last two years of the COVID-19 pandemic. A portion of our workforce continues to work remotely and we have occasionally closed lobbies to appointment-only during times of heightened transmission of COVID-19 to protect the health of our employees. SB Financial has supported its employees during the pandemic, and provided time off with pay for those who have either tested positive, or those caring for a family member who has tested positive. We will continue to follow all of the appropriate guidance and engage our staff members as needed to deal with new challenges.

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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 the COVID-19 pandemic or any other pandemic could adversely affect our business, financial condition, liquidity, and results of operations.
The ongoing COVID-19 pandemic has negatively impacted global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities and may result in the same or similar restrictions in the future. As a result, the demand for the Company’s products and services has been and may continue to be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the COVID-19 pandemic could result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain required to operate at diminished capacities or are required to close again, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with COVID-19. The extent to which COVID-19 impacts the our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
We originated a significant number of PPP loans in 2020 and 2021 and, as of December 31, 2021, we continued to hold and service a limited number of 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. A great majority of our PPP borrowers have sought and obtained, or are expected to 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, including new variants thereof, 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, including the spread of new variants thereof, 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 fully reopen or experiences additional or new closures or downturns as a result of the COVID-19 pandemic, 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;
● 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, including new variants thereof, 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 or market correction. Our business could be materially and adversely affected by such recession or market correction.
We continue to closely monitor the impact of COVID-19 and related risks as they evolve. 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, an increasing federal government budget deficit, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, 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. 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. 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 FRB, 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. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, to facilitate an orderly LIBOR transition, the OCC, the FDIC, and the FRB jointly announced that entering into new contracts using LIBOR as a reference rate after December 31, 2021, would create a safety and soundness risk. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month LIBOR, and immediately after June 30, 2023, in the case of the remaining LIBOR settings. In the U.S., efforts to identify a set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee (the “ARRC”) has recommended the use of a Secured Overnight Funding Rate (“SOFR”). SOFR is different from LIBOR in that it is a backward looking secured rate rather than a forward looking unsecured rate.
These differences could lead to a greater disconnect between our costs to raise funds for SOFR as compared to LIBOR. For cash products and loans, ARRC has also recommended Term SOFR, which is a forward looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR. There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry. These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit.
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.
The Company has $10.3 million in Trust Preferred Securities that were originated in 2005. These securities are part of a large pool issued to Community Banks and have interest tied to LIBOR (see Note 15 to the Consolidated Financial Statements). The issuers of the Trust Preferred Securities have not yet determined a replacement for the LIBOR-based interest rate.
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 (the “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 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.
We are exposed to a number of operational risks.
We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Many of these risks are heightened in light of COVID-19.
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.
Given the volume of transactions we process, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) consumer compliance, business continuity and data security systems prove to be inadequate.
Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, social media and other marketing activities, the implementation of environmental, social and governance (ESG) practices, and from actions taken by governmental regulators and community organizations in response to any of the foregoing activities. Negative public opinion could adversely affect our ability to attract and keep customers, could expose us to potential litigation and regulatory action, and could have a material adverse effect on the price of our common shares or result in heightened volatility of our stock price.
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. Other businesses have been victims of ransomware attacks in which the business becomes unable to access its own information and is presented with a demand to pay a ransom in order to once again have access to its information.
We could be adversely affected if one of our employees or a third-party service provider 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. We are also at risk of the impact of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others.
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 DIF 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 DIF 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 DIF, 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 DIF 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.
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 (BSA) and other anti-money laundering statutes and regulations could cause a material financial loss.
The BSA and the 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 BSA, as amended by the 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 BSA, 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. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws, which includes a codified risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
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 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.
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.
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 FRB impact us significantly. The FRB 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. FRB 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 FRB 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.
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 30 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 21 of its banking centers and leases two other properties 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, Franklin, Fulton, 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, 2021
($ in thousands) Description/Address Leased/Owned Total Deposits 12/31/21
Main Banking Center & Corporate Office
Clinton Street, Defiance, OH Owned $ 283,626
Banking Centers/Drive-Thru's
West High Street, Bryan, OH Owned 56,577
Third Street, Defiance, OH (Drive-thru) Owned N/A
North Clinton Street, Defiance, OH Leased 44,628
Main Street, Delta, OH Owned 22,297
West Dublin Granville Road, Dublin, OH Owned 71,371
North Michigan Avenue, Edgerton, OH Owned 15,808
East Lincoln Street, Findlay, OH Owned 18,291
South Main Street Suite A, Findlay, OH Leased
Coldwater Road, Fort Wayne, IN Owned 23,214
North Main Street, Bowling Green, OH Owned 15,654
Main Street, Luckey, OH Owned 37,705
East Morenci Street, Lyons, OH Owned 23,633
West Market Street, Lima, OH Owned 55,166
East Main Street, Montpelier, OH Owned 47,903
North First Street, Oakwood, OH Owned 27,373
North Main Street, Paulding, OH Owned 75,379
East South Boundary Street, Perrysburg, OH Owned 17,582
South State Street, Pioneer, OH Owned 42,021
Monroe Street, Sylvania, OH Owned 76,626
Main Street, Walbridge, OH Owned 32,465
North Michigan Street, Edon, OH Owned 58,044
North Shoop Avenue, Wauseon, OH Owned 67,043
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
West Butler Street, Bryan OH Owned N/A
Antares Avenue, Columbus, OH Owned N/A
Baltimore Road, Defiance, OH Leased N/A
Lantern Road, Fishers, IN Leased N/A
Total deposits
$ 1,113,045
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 $0.19 million and $0.18 million for the years ended December 31, 2021 and 2020, respectively.
Future minimum lease payments under operating leases are:
($ in thousands)
$ 177
Thereafter
Total minimum lease payments $ 1,488

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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 22, 2022, 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 Officer of the Company since joining State Bank in November 2017. Prior to joining the Company, he worked as an executive and site leader for GE Capital, and was an independent technology consultant and advisor.
Steven R. Walz
Executive Vice President and Chief Lending Officer of the Company since December 2021; Senior Vice President and Chief Lending Officer from September 2021 (when he rejoined to the Company) through December 2021; Senior Vice President and Chief Credit Officer from November 2017 through November 2019; Vice President and Senior Credit Analyst from September 2012 through November 2017; Assistant Vice President and Commercial Services Officer from September 2011 to September 2012; Assistant Vice President and Credit Analyst from January 2010 through September 2012; Began working for State Bank in October 2007 as a Credit Analyst; left the Company in November 2019. Prior to rejoining the Company in September 2021, he worked as President for K&P Medical Transport, LLC.
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.
David A. Homoelle
Columbus Regional President and Residential Real Estate Executive since May 2021; Columbus Regional President from November 2007 through May 2021. Began working for State Bank in November 2007 as a Columbus Regional President.
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 6,884,330 common shares outstanding as of December 31, 2021, which were held by approximately 1,203 record holders.
The Company paid quarterly dividends on its common shares in the aggregate amounts of $0.44 per share and $0.40 per share in 2021 and 2020, 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. The Company’s ability to pay dividends on its shares is also conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities. In addition, under the terms of the Company’s fixed-to-floating rate subordinated debt, the Company’s ability to pay dividends on its shares is conditioned upon the Company continuing to make required principal and interest payments, and not incurring an event of default, with respect to the subordinated debt.
Period Ending
Index
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
SB Financial Group, Inc.
100.00
117.09
105.96
129.49
123.36
135.95
NASDAQ Composite Index
100.00
129.64
125.96
172.18
249.51
304.85
KBW NASDAQ Bank Index
100.00
118.59
97.58
132.84
119.14
164.80
Source: S&P Global Market Intelligence © 2022
The table below reflects the common shares repurchased by the Company during the three months ended December 31, 2021. As of December 31, 2021, the Company had 495,639 shares remaining of the 750,000 approved under the Company’s existing share repurchase program which was authorized on May 25, 2021 and expires May 31, 2022.
Period
(a)
Total Number of
Shares Purchased
(b)
Weighted Average
Price Paid per
Share
(c)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
(d)
Maximum Number
of Shares that May
Yet be Purchased
Under the Plans or
Programs
10/01/21 - 10/31/21
16,926
$ 18.36
16,926
522,332
11/01/21 - 11/30/21
9,316
19.02
9,316
513,016
12/01/21 - 12/31/21
17,377
19.05
17,377
495,639
Totals
43,619
$ 18.78
43,619
495,639

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved].

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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, 2021 and 2020.
Strategic Discussion
The focus and strategic goal of the Company is to grow into and remain a top decile (>90th percentile) independent financial services company. The Company intends to achieve and maintain that goal by executing our five key initiatives.
Increase profitability through ongoing diversification of revenue streams: For the twelve months ended December 31, 2021, the Company generated $30.7 million in noninterest income, or 44.8 percent of total operating revenue, from fee-based products. These revenue sources include fees generated from saleable residential mortgage loans, retail deposit products, wealth management services, saleable business-based loans (small business and farm service) and title agency revenue. For the twelve months ended December 31, 2020, the Company generated $30.1 million in revenue from fee-based products, or 45.6 percent of total operating revenue.
Strengthen our penetration in all markets served: Over our 119-year history of continuous operation 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 Edgerton 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, 2021, we operated in ten counties in Northwest Ohio and Northeast Indiana with 23 full service offices, 24 full service ATM’s and five loan production offices. Combined in the ten counties of operation, we command 4.47 percent of the deposit market share, which has steadily grown.
Deliver gains in operational excellence: Our management team believes that becoming and remaining a high-performance financial services company will depend upon seamlessly and consistently delivering operational excellence, as demonstrated by the Company’s leadership in the origination and servicing of residential mortgage loans. As of December 31, 2021, the Company serviced 8,614 residential mortgage loans with a principal balance of $1.36 billion. As of December 31, 2020, the Company serviced 8,543 loans with a principal balance of $1.30 billion.
Sustain asset quality: As of December 31, 2021, the Company’s asset quality metrics remained strong. Specifically, total nonperforming assets were $6.5 million, or 0.49 percent of total assets. Total delinquent loans at December 31, 2021 were 0.46 percent of total loans. As of December 31, 2020, the Company had total nonperforming assets of $7.3 million, or 0.58 percent of total assets. Total delinquent loans at December 31, 2020 were 0.75 percent of total loans.
The successful execution of these five strategies have enabled the Company to improve financial performance across a broad series of metrics. These metrics over the last five years are outlined in the following table. Specifically, the Company has increased total assets by $454.3 million, or 52 percent. The growth has been on both sides of the balance sheet over the five year period, with loans growing $126.1 million or 18 percent and deposits growing $383.4 million or 52.6 percent.
The Company has raised capital through the issuance of equity and debt to the market on two separate occasions during the period, which has raised equity capital significantly and expanded liquidity for potential strategic expansion. Strategic expansion has occurred with the acquisition of a small community bank, the opening of three branch offices and the acquisition of two full service title agencies.
Financial Highlights
Year Ended December 31,
($ in thousands, except per share data)
Earnings
Interest income
$ 41,904
$ 42,635
$ 44,400
$ 39,479
$ 32,480
Interest expense
4,020
6,705
9,574
6,212
4,094
Net interest income
37,884
35,930
34,826
33,267
28,386
Provision for loan losses
1,050
4,500
Noninterest income
30,697
30,096
18,016
16,624
17,217
Noninterest expense
44,808
43,087
37,410
34,847
31,578
Provision for income taxes
4,446
3,495
2,659
2,806
2,560
Net income
18,277
14,944
11,973
11,638
11,065
Preferred stock dividends
-
-
Net income available to common shareholders
18,277
14,944
11,023
10,663
10,090
Per Common Share Data
Basic earnings
$ 2.58
$ 1.96
$ 1.71
$ 1.72
$ 2.10
Diluted earnings
2.56
1.96
1.51
1.51
1.74
Cash dividends declared
0.44
0.40
0.36
0.32
0.28
Total equity per share
21.05
19.39
17.53
16.36
15.03
Total tangible equity per share
17.60
16.30
15.23
15.39
13.27
Average Balances
Average total assets
$ 1,322,253
$ 1,161,396
$ 1,027,932
$ 947,266
$ 854,569
Average equity
144,223
139,197
133,190
121,094
89,538
Ratios
Return on average total assets
1.38 %
1.29 %
1.16 %
1.23 %
1.29 %
Return on average equity
12.67
10.74
8.99
9.61
12.36
Cash dividend payout ratio1
17.18
20.54
23.84
19.60
13.50
Average equity to average assets
10.91
11.99
12.96
12.78
10.48
Period End Totals
Total assets
$ 1,330,854
$ 1,257,839
$ 1,038,577
$ 986,828
$ 876,627
Available-for-sale securities
263,259
149,406
100,948
90,969
82,790
Loans held for sale
7,472
7,234
7,258
4,445
3,940
Total loans & leases
822,714
872,723
825,510
771,883
696,615
Allowance for loan losses
13,805
12,574
8,755
8,167
7,930
Total deposits
1,113,045
1,049,011
840,219
802,552
729,600
Advances from FHLB
5,500
8,000
16,000
16,000
18,500
Trust preferred securities
10,310
10,310
10,310
10,310
10,310
Subordinated debt, net
19,546
-
-
-
-
Total equity
144,929
142,923
136,094
130,435
94,000
Cash dividends on common shares divided by net income available to common.
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, 2021 and 2020. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective or complex.
Allowance for Loan Losses: The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in the nature and amount of problem assets and associated collateral, underwriting activities, loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge offs.
The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on each impaired loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.
Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent, but undetected, losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the subjective nature of individual loan valuations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are also factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.
Goodwill and Other Intangibles: The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.
Deferred Tax Liability: The Company has evaluated its deferred tax liability to determine if it is more likely than not that the liability will be realized in the future. The Company’s most recent evaluation has determined that the Company will more likely than not be able to realize the remaining deferred tax liability.
Income Tax Accounting: The Company files a consolidated federal income tax return. The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in rates on the deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
Changes in Financial Condition
Total assets at December 31, 2021, were $1.33 billion, compared to $1.26 billion at December 31, 2020. Loans (excluding loans held for sale) were $822.7 million at December 31, 2021, compared to $872.7 million at December 31, 2020. Total deposits were $1.11 billion at December 31, 2021, compared to $1.05 billion at December 31, 2020. The Company continued to experience elevated levels of liquidity as the balance sheets of both personal and business clients were supplemented by government intervention and support. The increase in liquidity by these parties has resulted in higher deposit levels, which in turn increased the overall asset size of the Company.
The following are the condensed average balance sheets of the Company for the years ending December 31 and includes the interest earned or paid, and the average interest rate, on each asset and liability:
Average
Average
Average
Average
Average
Average
($ in thousands)
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
Assets
Taxable securities/cash
$ 380,770
$ 3,386
0.89 %
$ 185,480
$ 2,328
1.26 %
$ 95,216
$ 3,226
3.39 %
Non-taxable securities
7,802
4.52 %
6,625
5.03 %
10,108
3.41 %
Loans, net1
854,521
38,165
4.47 %
880,338
39,974
4.54 %
809,651
40,829
5.04 %
Total earning assets
1,243,093
41,904
3.37 %
1,072,443
42,635
3.98 %
914,975
44,400
4.85 %
Cash and due from banks
7,290
14,553
47,135
Allowance for loan losses
(13,422 )
(10,165 )
(8,370 )
Premises and equipment
24,710
23,776
23,779
Other assets
60,582
60,789
50,413
Total assets
$ 1,322,253
$ 1,161,396
$ 1,027,932
Liabilities
Savings and interest-bearing demand deposits
$ 672,296
$ 1,813
0.27 %
$ 492,267
$ 3,152
0.64 %
$ 427,858
$ 2,846
0.67 %
Time deposits
177,918
1,316
0.74 %
247,955
2,918
1.18 %
262,040
5,814
2.22 %
Repurchase agreements & other
22,821
0.18 %
22,832
0.31 %
15,288
0.54 %
Advances from FHLB
6,507
2.89 %
14,186
2.18 %
16,066
2.50 %
Trust preferred securities
10,310
1.93 %
10,310
2.48 %
10,310
4.17 %
Subordianted debt
12,057
3.83 %
Total interest-bearing liabilities
901,909
4,020
0.45 %
787,550
6,705
0.85 %
731,562
9,574
1.31 %
Demand deposits
255,908
211,004
146,401
Other liabilities
20,213
23,645
16,779
Total liabilities
1,178,030
1,022,199
894,742
Shareholders’ equity
144,223
139,197
133,190
Total liabilities and shareholders’ equity
$ 1,322,253
$ 1,161,396
$ 1,027,932
Net interest income (tax equivalent basis)
$ 37,884
$ 35,930
$ 34,826
Net interest income as a percent of average interest-earning assets - GAAP measure
3.05 %
3.35 %
3.81 %
Net interest income as a percent of average interest-earning assets - Non-GAAP measure 2
3.06 %
3.36 %
3.82 %
-- Computed on a fully tax equivalent basis (FTE)
Nonaccruing loans and loans held for sale are included in the average balances.
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, $0.15 and $0.17 million in 2021, 2020 and 2019, respectively.
The following tables set forth the effect of volume and rate changes on interest income and expense for the periods indicated. For purposes of these tables, changes in interest due to volume and rate were determined as follows:
● Volume variance - change in volume multiplied by the previous year’s rate.
● Rate variance - change in rate multiplied by the previous year’s volume.
● Rate/volume variance - change in volume multiplied by the change in rate. This variance allocates the volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each.
Total
Variance
Variance Attributable To
($ in thousands)
2021/2020
Volume
Rate
Interest income
Taxable securities
$ 1,058
$ 2,451
$ (1,393 )
Non-taxable securities1
(39 )
Loans, net of unearned income and deferred fees1
(1,809 )
(1,172 )
(637 )
Total interest income
(731 )
1,338
(2,069 )
Interest expense
Savings and interest-bearing demand deposits
(1,339 )
1,153
(2,492 )
Time deposits
(1,602 )
(824 )
(778 )
Repurchase agreements & other
(28 )
(0 )
(28 )
Advances from FHLB
(121 )
(167 )
Trust preferred securities
(57 )
-
(57 )
Subordinated debt
-
Total interest expense
(2,685 )
(3,308 )
Net interest income
$ 1,954
$
$ 1,239
Interest on non-taxable securities and loans has been adjusted to fully tax equivalent
The maturity distribution and weighted-average interest rates of debt securities available-for-sale at December 31, 2021, are set forth in the table below. The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount:
Maturing
($ in thousands)
Within
1 Year
Weighted
Average
Yield
1-5 Years
Weighted
Average
Yield
5-10 Years
Weighted
Average
Yield
After
10 Years
Weighted
Average
Yield
Total
Weighted
Average
Yield
Available for sale:
U.S. Treasury and Government agencies
$
0.44 %
$
2.13 %
$ 7,792
2.02 %
$ -
$ 9,105
1.92 %
Mortgage-backed securities
1.93 %
1,668
3.01 %
31,293
1.49 %
195,110
1.36 %
228,134
1.39 %
State and political subdivisions
-
2,065
3.21 %
2,473
4.28 %
8,341
2.64 %
12,879
3.04 %
Other corporate securities
-
-
13,141
3.47 %
-
13,141
3.47 %
Total securities by maturity
$
0.58 %
$ 4,440
2.96 %
$ 54,699
2.17 %
$ 203,451
1.41 %
$ 263,259
1.59 %
Yields are presented on a tax-equivalent basis.
In June of 2020, we completed the acquisition of The Edon State Bank, which added approximately $50 million in deposits and $15 million in loans. Building on the success of our entry into the city of Edon, we opened an office in nearby Edgerton, Ohio in May of 2021. The Edgerton expansion has also been positive as we ended the year with over $15 million in both loans and deposits in that office.
($ in thousands)
Years Ended December 31,
% Change
Total loans
Commercial business & agriculture
$ 179,653
$ 260,002
-30.9 %
Commercial real estate
381,168
370,820
2.8 %
Residential real estate
206,424
182,165
13.3 %
Consumer & other
55,156
61,157
-9.8 %
Total loans
822,401
874,144
-5.9 %
Net deferred costs (fees)
(1,421 )
-122.0 %
Total loans, net deferred costs (fees)
822,714
872,723
-5.7 %
Loans held for sale
$ 7,472
$ 7,234
3.3 %
% Change
Total deposits
Noninterest bearing demand
$ 247,044
$ 251,649
-1.8 %
Interest-bearing demand
195,464
176,785
10.6 %
Savings & money market
514,033
391,028
31.5 %
Time deposits
156,504
229,549
-31.8 %
Total deposits
1,113,045
1,049,011
6.1 %
Total shareholders’ equity
$ 144,929
$ 142,923
1.4 %
Loans held for investment decreased $50.0 million, or 5.7 percent, to $822.7 million at December 31, 2021, which was due to a decrease in outstanding PPP loans during 2021. The Company participated fully in the PPP initiative in both 2020 and 2021, which in total, encompassed 1,100 loans with an aggregate principal amount of $111.4 million. At year-end 2021, the balance of PPP was down to approximately 50 loans, with an aggregate principal amount of $2 million, as a result of SBA forgiveness of a majority of the PPP loans that we originated. Adjusted for PPP activity, loan growth compared to 2020 was up $18.5 million, or 2.3 percent. In the first quarter of 2021, the Company introduced a Private Client Residential Mortgage product. This product, of which $76 million was originated during 2021, offset the refinance activity that occurred in our portfolio during the year.
Concentrations of Credit Risk: The Company makes commercial, real estate and installment loans to customers located mainly in the Tri-State region of Ohio, Indiana and Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and, in the case of agricultural loans, crops and farm equipment and the loans are expected to be repaid from cash flow from operations of businesses. As of December 31, 2021, commercial business and agricultural loans made up approximately 29.6 percent of the loans held for investment (“HFI”) loan portfolio while commercial real estate loans accounted for approximately 42.5 percent of the HFI loan portfolio. Residential first mortgage loans made up approximately 20.9 percent of the HFI loan portfolio and are secured by first mortgages on residential real estate, while consumer loans to individuals made up approximately 7.0 percent of the HFI loan portfolio and are primarily secured by consumer assets.
Maturities and Sensitivities of Loans to Changes in Interest Rates: The following table shows the maturity distribution of loans outstanding as of December 31, 2021. The amounts have been categorized between loans with a fixed or floating interest rate (floating rate loans have an adjustable interest rate that changes in accordance to a rate index).
($ in thousands)
Within
one year
After one,
but within five years
After five,
but within
fifteen years
After
fifteen years
Total
Loans with fixed interest rates:
Commercial & industrial
$
$ 20,715
$ 28,106
$
$ 49,825
Commercial real estate - owner occupied
9,567
10,302
-
35,051
Commercial real estate - nonowner occupied
6,828
14,246
13,815
20,037
Agricultural
4,094
5,557
1,362
11,135
Residential real estate
1,615
1,915
12,774
25,328
41,632
HELOC
-
-
-
Consumer
2,416
6,364
2,380
-
11,160
Total
$ 12,135
$ 56,901
$ 72,934
$ 26,875
$ 168,845
Loans with floating interest rates:
Commercial & industrial
$ 28,754
$ 6,213
$ 35,464
$ 1,994
$ 72,425
Commercial real estate - owner occupied
-
11,109
44,565
43,180
227,226
Commercial real estate - nonowner occupied
8,739
26,514
120,819
71,154
98,854
Agricultural
1,646
7,846
16,670
20,106
46,268
Residential real estate
4,558
13,294
146,455
164,792
HELOC
30,487
10,498
41,677
Consumer
1,324
-
-
2,314
Total
$ 44,910
$ 53,960
$ 261,299
$ 293,387
$ 653,556
Total loans:
Commercial & industrial
$ 29,735
$ 26,928
$ 63,570
$ 2,017
$ 122,250
Commercial real estate - owner occupied
20,676
54,867
43,180
118,891
Commercial real estate - nonowner occupied
15,567
40,760
134,634
71,316
262,277
Agricultural
1,768
11,940
22,227
21,468
57,403
Residential real estate
6,173
2,400
26,068
171,783
206,424
HELOC
30,487
10,498
41,682
Consumer
3,406
7,688
2,380
-
13,474
Total loans
$ 57,045
$ 110,861
$ 334,233
$ 320,262
$ 822,401
Deposits increased $64.0 million, or 6.1 percent, to $1.11 billion at December 31, 2021. Deposits continued growing in 2021 on top of the over $200 million in growth experienced during 2020. Expanded government support and reduced economic activity has resulted in higher balances in client deposit accounts. During 2021, we experienced a shift in the mix of our deposit balances as more of our clients moved balances to short-term transactional accounts. Specifically, during 2021, time deposits decreased $73.0 million or 32 percent while other deposits increased $137.1 million or 17 percent.
The average amount of deposits and weighted-average rates paid are summarized as follows for the years ended December 31:
Average
Average
Average
Average
Average
Average
($ in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
Savings and interest bearing demand deposits
$ 672,296
0.27 %
$ 492,267
0.64 %
$ 427,858
0.67 %
Time deposits
177,918
0.74 %
247,955
1.18 %
262,040
2.22 %
Non interest bearing demand deposits
255,908
-
211,004
-
146,401
-
Totals
$ 1,106,122
0.28 %
$ 951,226
0.64 %
$ 836,299
1.04 %
Time deposits that exceeded the FDIC insurance limit of $250,000 are summarized as follows:
($ in thousands)
Three months or less
$ 1,033
$
Over three months through six months
4,894
Over six months and through twelve months
3,083
1,658
Over twelve months
2,640
Total
$ 4,769
$ 10,003
Stockholders’ equity at December 31, 2021, was $144.9 million or 10.9 percent of total assets compared to $142.9 million or 11.4 percent of total assets at December 31, 2020. Retained earnings increased during the year by $15.1 million due to earnings of $18.3 million less dividends paid to common shareholders of $3.2 million. The fair market value of the bond portfolio decreased during 2021 due to the rise in interest rates, which resulted in a decrease in Other Comprehensive Income (“OCI”) of $4.1 million.
The Company continued to repurchase its own stock during the year. Specifically, the Company repurchased approximately 500,000 shares during 2021 at an average price of $18.50 per share, which was just slightly below book value. As of December 31, 2021, the Company had 495,639 shares remaining of the 750,000 shares authorized for repurchase under the Company’s existing share repurchase program which was authorized on May 25, 2021 and expires May 21, 2022.
Asset Quality
Years Ended December 31,
($ in thousands)
% Change
Nonaccruing loans
$ 3,652
$ 6,426
-43.2 %
Accruing restructured loans (TDRs)
-10.5 %
Foreclosed assets and other assets held for sale, net
2,104
9047.8 %
Nonperforming assets
6,481
7,259
-10.7 %
Net charge offs (recoveries)
(181 )
-126.6 %
Loan loss provision
1,050
4,500
-76.7 %
Allowance for loan losses
13,805
12,574
9.8 %
Nonaccruing loans/total loans
0.44 %
0.74 %
-39.7 %
Allowance/nonaccruing loans
378.01 %
195.67 %
93.2 %
Nonperforming assets/total assets
0.49 %
0.58 %
-15.6 %
Net charge offs/average loans
-0.02 %
0.08 %
-125.0 %
Allowance/loans
1.68 %
1.44 %
16.5 %
Allowance/nonperforming loans
315.40 %
173.80 %
81.5 %
Nonperforming assets consisting of loans, Other Real Estate Owned (“OREO”) and accruing TDRs totaled $6.5 million, or 0.49 percent of total assets at December 31, 2021, a decrease of $0.8 million or 10.7 percent from 2020. Net charge offs were down significantly during 2021, with total recoveries of $0.18 million, which was a $0.86 million decrease compared to total charge offs of $0.68 million for 2020. The Company’s loan loss allowance at December 31, 2021, now covers nonperforming loans at 315 percent, up from 174 percent at December 31, 2020.
The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios at December 31 for the years indicated:
($ in thousands)
Provision for
Loan Loss
Net (Chargeoffs)
Recoveries
Average
Loans
Ratio of annualized net
(chargeoffs)
recoveries to
average loans
December 31, 2021
Commercial & industrial
$ (1,411 )
$
$ 160,267
0.14 %
Commercial real estate - owner occupied
-
118,713
0.00 %
Commercial real estate - nonowner occupied
-
264,980
0.00 %
Agricultural
-
53,122
0.00 %
Residential real estate
195,277
0.00 %
HELOC
(16 )
-
43,488
0.00 %
Consumer
(52 )
11,546
-0.45 %
Total
$ 1,050
$
$ 847,393
0.02 %
December 31, 2020
Commercial & industrial
$ 1,757
$ (566 )
$ 198,991
-0.28 %
Commercial real estate - owner occupied
-
104,856
0.00 %
Commercial real estate - nonowner occupied
1,128
-
269,924
0.00 %
Agricultural
-
51,840
0.00 %
Residential real estate
(42 )
185,311
-0.02 %
HELOC
(8 )
47,227
-0.02 %
Consumer
(65 )
11,595
-0.56 %
Total
$ 4,500
$ (681 )
$ 869,744
-0.08 %
December 31, 2019
Commercial & industrial
$
$ (134 )
$ 139,616
-0.10 %
Commercial real estate - owner occupied
-
96,106
0.00 %
Commercial real estate - nonowner occupied
257,756
0.00 %
Agricultural
(48 )
-
51,836
0.00 %
Residential real estate
(325 )
(39 )
194,390
-0.02 %
HELOC
(102 )
47,770
0.02 %
Consumer
(50 )
11,862
-0.42 %
Total loans
$
$ (212 )
$ 799,336
-0.03 %
The allowance for loan losses balance and the provision for loan losses are determined by management based upon periodic reviews of the loan portfolio. In addition, management considers the level of charge offs on loans, as well as the fluctuations of charge offs and recoveries on loans, in the factors which caused these changes. Estimating the risk of loss and the amount of loss is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which are subject to change over time.
The Company has substantially increased the reserve level over the last two years. Specifically, since December 31, 2019 the allowance balance has increased from $8.8 million to $13.8 million at December 31, 2021, which is an increase of $5.0 million or 59 percent. This increase was the result of $5.6 million in provision expense during the period ($4.5 million in 2020 and $1.1 million in 2021) and minimal charge-offs, which were just $0.5 million over the two year period.
The following schedule provides a breakdown of the allowance for loan losses allocated by type of loan and related ratios at December 31 for the years indicated:
Allowance
Amount
Percentage
of Loans In
Each
Category to
Total Loans
Allowance
Amount
Percentage
of Loans In
Each
Category to
Total Loans
Allowance
Amount
Percentage
of Loans In
Each
Category to
Total Loans
($ in thousands)
Commercial & industrial
$ 1,890
14.9 %
$ 3,074
23.4 %
$ 1,883
18.3 %
Commercial real estate - owner occupied
2,588
14.5 %
2,059
12.9 %
1,220
11.9 %
Commercial real estate - nonowner occupied
4,193
31.9 %
3,392
29.5 %
2,382
32.5 %
Agricultural
7.0 %
6.3 %
6.2 %
Residential real estate
3,515
25.1 %
2,534
20.8 %
2,203
23.4 %
Home equity line of credit (HELOC)
5.1 %
5.3 %
5.8 %
Consumer
1.6 %
1.7 %
1.8 %
$ 13,805
100.0 %
$ 12,574
100.0 %
$ 8,755
100.0 %
As detailed in the risk factors, the CARES Act provided for significant consumer and small business relief due to the impact of the COVID-19 pandemic. The Company provided payment relief to a number of consumer and small business customers throughout 2020 and 2021, which we believe was successful and enabled our clients to weather the pandemic effectively. All such COVID-related payment deferrals had expired or been removed by December 31, 2021 and all clients were back to contractual terms at such date.
Regulatory capital reporting is required for State Bank only, as the Company is currently exempt from quarterly regulatory capital level measurement pursuant to the Small Bank Holding Company Policy Statement. As of December 31, 2021, State Bank met all regulatory capital levels required to be considered well-capitalized (see Note 18 to the Consolidated Financial Statements).
On May 27, 2021, the Company issued and sold $20.0 million in aggregate principal amount of its 3.65% Fixed to Floating Rate Subordinated Notes due 2031 in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended. The Subordinated Notes bear interest at a fixed rate of 3.65% through May 31, 2026. From June 1, 2026 to the maturity date or earlier redemption of the Subordinated Notes, the interest rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month Secured Overnight Financing Rate (“SOFR”) provided by the Federal Reserve Bank of New York plus 296 basis points. The proceeds from the Subordinated Notes will be used to assist the Company in meeting various corporate obligations, including share buyback, acquisition costs and organic asset growth. The Subordinated Notes have a maturity of 10 years.
Earnings Summary - 2021 vs. 2020
Net income for 2021 was $18.3 million, or $2.56 per diluted share, compared with net income of $14.9 million, or $1.96 per diluted share, for 2020. State Bank reported net income for 2021 of $18.6 million, which was up from the $16.0 million in net income in 2020. SBFG Title reported net income for 2020 of $0.5 million, which was down from net income of $0.6 million in 2020.
Positive results for 2021 included loan growth of $18.5 million when excluding the impact of the PPP initiative, and deposit growth of $64.0 million. The Company fully participated in both phases of PPP, with a total of $111.4 million in loans to over 1,100 clients with revenue of $3.4 million for 2021 compared to $1.4 million for 2020. The mortgage banking business line continued to contribute significant revenues, with residential real estate loan production of $600.0 million for the year, resulting in $17.3 million of revenue from gains on sale. The level of mortgage origination was down from the $694.2 million in 2020. The Company’s loans serviced for others ended the year at $1.36 billion, up from $1.30 billion at December 31, 2020.
Operating revenue increased by $2.6 million, or 3.9 percent, from $66.0 million in 2020 to $68.6 million in 2021 due to increased PPP fees and OMSR recapture which offset lower mortgage gain revenue. SBFG Title increased revenue by $0.1 million of $2.1 million for 2021.
Operating expense increased by $1.7 million, or 4.0 percent, from $43.1 million in 2020 to $44.8 million in 2021, due to compensation and fringe benefit cost increases and higher spend on technology/digital initiatives. These expense increases were offset by lower mortgage commission expense due to lower volume.
Results of Operations
Years Ended December 31,
($ in thousands, except per share data)
% Change
Total assets
$ 1,330,854
$ 1,257,839
5.8 %
Total investments
263,259
149,406
76.2 %
Loans held for sale
7,472
7,234
3.3 %
Loans, net of unearned income
822,714
872,723
-5.7 %
Allowance for loan losses
13,805
12,574
9.8 %
Total deposits
1,113,045
1,049,011
6.1 %
Total operating revenue1
$ 68,581
$ 66,026
3.9 %
Net interest income
37,884
35,930
5.4 %
Loan loss provision
1,050
4,500
-76.7 %
Noninterest income
30,697
30,096
2.0 %
Noninterest expense
44,808
43,087
4.0 %
Net income
18,277
14,944
22.3 %
Diluted earnings per share
2.56
1.96
30.6 %
Operating revenue equals net interest income plus noninterest income.
Net interest income was $37.9 million for 2021 compared to $35.9 million for 2020, an increase of $2.0 million or 5.4 percent. Average earning assets increased to $1.24 billion in 2021, compared to $1.07 billion in 2020, an increase of $170.7 million or 15.9 percent due to a higher bond portfolio, which offset slightly lower loan volume. The consolidated 2021 full year net interest margin on an FTE basis decreased 30 basis points to 3.06 percent compared to 3.36 percent for the full year of 2020. PPP activity during 2021 increased margin revenue by $3.0 million for the full year of 2021.
Provision for loan losses of $1.0 million was taken in 2021 compared to $4.5 million taken for 2020. For 2021, net recoveries totaled $0.18 million, or (0.02) percent of average loans. This charge off level was significantly lower than 2020, in which net charge offs were $0.68 million or 0.08 percent of average loans.
Noninterest Income
Years Ended December 31,
($ in thousands)
% Change
Wealth management fees
$ 3,814
$ 3,245
17.5 %
Customer service fees
3,217
2,807
14.6 %
Gains on sale of residential loans & OMSR’s
17,255
25,350
-31.9 %
Mortgage loan servicing fees, net
2,940
(5,138 )
157.2 %
Gain on sale of non-mortgage loans
-65.1 %
Title Insurance income
2,089
1,913
9.2 %
Other
1,224
1,466
-16.5 %
Total noninterest income
$ 30,697
$ 30,096
2.0 %
Total noninterest income was $30.7 million for 2021 compared to $30.1 million for 2020, representing an increase of $0.6 million, or 2.0 percent, year-over-year. Although mortgage gain on sale was down from the record year in 2020 by $8.1 million, or 31.9 percent, the Company was able to offset that reduction by recapture of mortgage servicing rights of $3.9 million during 2021. The Company sold $489.4 million of originated mortgages into the secondary market in 2021, which allowed our serviced loan portfolio to grow to $1.36 billion at December 31, 2021 from $1.30 billion at December 31, 2020. The higher servicing balance of the portfolio led to the 5.6 percent increase in mortgage loan servicing income. Sales of non-mortgage loans (small business and farm credits) decreased in 2021 as compared to 2020, as SBA activity continued to be focused on the PPP initiative. The Company expanded its wealth management assets under management to $618.3 million, up $59.9 million, which resulted in a 17.5 percent increase in wealth fee income.
Noninterest Expense
Years Ended December 31,
($ in thousands)
% Change
Salaries & employee benefits
$ 26,838
$ 25,397
5.7 %
Net occupancy expense
3,048
2,891
5.4 %
Equipment expense
3,281
3,186
3.0 %
Data processing fees
2,579
3,055
-15.6 %
Professional fees
3,027
3,307
-8.5 %
Marketing expense
19.1 %
Telephone and communications
8.6 %
Postage and delivery expense
-0.2 %
State, local and other taxes
1,175
1,146
2.5 %
Employee expense
23.9 %
Other expense
2,418
1,962
23.2 %
Total noninterest expense
$ 44,808
$ 43,087
4.0 %
Total noninterest expense was $44.8 million for 2021 compared to $43.1 million for 2020, representing a $1.7 million, or 4.0 percent, increase year-over-year. Total full-time equivalent employees ended 2021 at 269, which was up 25 from year end 2020.	
Salaries and benefits were driven by the increase in total full time employees as we filled a number of open positions during the year. We also have seen higher costs in technology as we have continued to add resources and digital options for our clients.
Earnings Summary - 2020 vs. 2019
Net income for 2020 was $14.9 million, or $1.96 per diluted share, compared with net income of $12.0 million and net income available to common of $11.0 million, or $1.51 per diluted share, for 2019. State Bank reported net income for 2020 of $16.0 million, which was up from the $12.5 million in net income in 2020. SBFG Title reported net income for 2020 of $0.6 million, which was up from the $0.3 million in 2019.
Positive results for 2020 included loan growth of $47.2 million, and deposit growth of $208.8 million. The mortgage banking business line continues to contribute significant revenues, with residential real estate loan production of $694.2 million for the year, resulting in $25.4 million of revenue from gains on sale. The level of mortgage origination was up from the $445.3 million in 2019. The Company’s loans serviced for others ended the year at $1.3 billion, up from $1.2 billion 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.
Goodwill, Intangibles and Capital Purchases
The Company completed its most recent annual goodwill impairment review as of December 31, 2021. At December 31, 2021, the Company concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The Company’s goodwill is further discussed in Note 8 to the Consolidated Financial Statements.
Management plans to continue from time to time to purchase additional premises and equipment and improve current facilities to meet the current and future needs of the Company’s customers. These purchases will include buildings, leasehold improvements, furniture and equipment. Management expects that cash on hand and cash generated from current operations will fund these capital expenditures and purchases.
Liquidity
Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Sources used to satisfy these needs consist of cash and due from banks, interest-bearing deposits in other financial institutions, securities available-for-sale, loans held for sale and borrowings from various sources. These assets, excluding the borrowings, are commonly referred to as liquid assets. Liquid assets were $422.9 million at December 31, 2021, compared to $303.2 million at December 31, 2020.
The Company does not have material cash requirements for capital expenditures over the next year. Any cash needs for capital requirements would be funded by cash existing at the Company. It is not anticipated that the Company will be required to initiate external borrowings in order to fund ongoing operations.
The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $645.1 million at December 31, 2021, can and is readily used to collateralize borrowings, which is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its current and anticipated liquidity needs. At December 31, 2021, 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 $110.5 million of additional borrowing capacity existed at December 31, 2021.
At December 31, 2021 and 2020, the Company had $41.0 million in federal funds lines available. The Company also had $184.9 million in unpledged securities at December 31, 2021 available for additional borrowings.
The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2021 and 2020 follows:
The Company experienced positive cash flows from operating activities in 2021 and 2020. Net cash from operating activities was $17.3 million and $23.9 million for the years ended December 31, 2021 and 2020, respectively. Significant operating items for 2021 included gain on sale of loans of $17.4 million and net income of $18.3 million. Cash provided by the sale of loans held for sale were $490.6 million. Cash used in the origination of loans held for sale were $478.1 million.
The Company experienced negative cash flows from investing activities in 2021 and 2020. Net cash used in investing activities was $72.0 million and $57.2 million for the years ended December 31, 2021 and 2020, respectively. The changes for 2021 include the purchase of available-for-sale securities of $170.7 million, and net decrease in loans of $48.5 million. The changes for 2020 include the purchase of available-for-sale securities of $129.8 million and net increase in loans of $31.7 million. The Company had proceeds from repayments, maturities, sales and calls of securities of $50.5 million and $84.0 million in 2021 and 2020, respectively.
The Company experienced positive cash flows from financing activities in 2021 and 2020. Net cash from financing activities was $63.6 million and $146.9 million for the years ended December 31, 2021 and 2020, respectively. Positive cash flows of $64.0 million and $157.7 million is attributable to the change in deposits for 2021 and 2020, respectively.
The Company uses an Economic Value of Equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company’s assets and liabilities in rate shock environments that range from -100 basis points to +400 basis points. The results of this analysis are reflected in the following table.
Economic Value of Equity
December 31, 2021
($ in thousands)
Change in rates
$ Amount
$ Change
% Change
+400 basis points
$ 278,254
$ 35,684
14.71 %
+300 basis points
273,190
30,620
12.62 %
+200 basis points
265,711
23,142
9.54 %
+100 basis points
256,110
13,540
5.58 %
Base Case
242,570
-
-
-100 basis points
217,281
(25,289 )
-10.43 %
Economic Value of Equity
December 31, 2020
($ in thousands)
Change in rates
$ Amount
$ Change
% Change
+400 basis points
$ 243,779
$ 61,586
33.80 %
+300 basis points
231,590
49,398
27.11 %
+200 basis points
217,936
35,743
19.62 %
+100 basis points
202,260
20,067
11.01 %
Base Case
182,193
-
-
-100 basis points
154,509
(27,684 )
-15.19 %

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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 2021 and 2020 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 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.
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 follow.
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for the Years ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the Years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (BKD, LLP) (PCAOB ID: 686)
SB Financial Group, Inc.
Consolidated Balance Sheets
at December 31,
($ in thousands)
Assets
Cash and due from banks
$ 149,511
$ 140,690
Interest bearing time deposits
2,643
5,823
Available-for-sale securities
263,259
149,406
Loans held for sale
7,472
7,234
Loans, net of unearned income
822,714
872,723
Allowance for loan losses
(13,805 )
(12,574 )
Premises and equipment, net
23,212
23,557
Federal Reserve and Federal Home Loan Bank Stock, at cost
5,303
5,303
Foreclosed assets and other assets held for sale, net
2,104
Interest receivable
2,920
3,799
Goodwill
23,191
22,091
Cash value of life insurance
17,867
17,530
Mortgage servicing rights
12,034
7,759
Other assets
12,429
14,475
Total assets
$ 1,330,854
$ 1,257,839
Liabilities and shareholders’ equity
Liabilities
Deposits
Non interest bearing demand
$ 247,044
$ 251,649
Interest bearing demand
195,464
176,785
Savings
237,571
174,864
Money market
276,462
216,164
Time deposits
156,504
229,549
Total deposits
1,113,045
1,049,011
Repurchase agreements
15,320
20,189
Federal Home Loan Bank advances
5,500
8,000
Trust preferred securities
10,310
10,310
Subordinated debt net of issuance costs
19,546
-
Interest payable
Other liabilities
21,905
26,790
Total liabilities
1,185,925
1,114,916
Commitments & Contingent Liabilities
-
-
Shareholders’ Equity
Preferred stock, no par value;
authorized 200,000 shares; 2021 - 0 shares outstanding, 2020 - 0 shares outstanding
-
-
Common stock, no par value;
authorized 10,000,000 shares; 2021 - 8,180,712 shares issued, 2020 - 8,180,712 shares issued
54,463
54,463
Additional paid-in capital
14,944
14,845
Retained earnings
99,716
84,578
Accumulated other comprehensive income (loss)
(1,845 )
2,210
Treasury stock, at cost;
(2021 - 1,296,382 common shares, 2020 - 808,456 common shares)
(22,349 )
(13,173 )
Total shareholders’ equity
144,929
142,923
Total liabilities and shareholders’ equity
$ 1,330,854
$ 1,257,839
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
$ 37,959
$ 39,735
Tax exempt
Securities
Taxable
3,386
2,328
Tax exempt
Total interest income
41,904
42,635
Interest Expense
Deposits
3,129
6,070
Repurchase agreements & other
Federal Home Loan Bank advance expense
Trust preferred securities expense
Subordinated debt expense
-
Total interest expense
4,020
6,705
Net Interest Income
37,884
35,930
Provision for loan losses
1,050
4,500
Net interest income after provision for loan losses
36,834
31,430
Noninterest Income
Wealth management fees
3,814
3,245
Customer service fees
3,217
2,807
Gain on sale of mortgage loans & OMSR
17,255
25,350
Mortgage loan servicing fees, net
2,940
(5,138 )
Gain on sale of non-mortgage loans
Title insurance income
2,089
1,913
Other income
1,224
1,466
Total noninterest income
30,697
30,096
Noninterest Expense
Salaries and employee benefits
26,838
25,397
Net occupancy expense
3,048
2,891
Equipment expense
3,281
3,186
Data processing fees
2,579
3,055
Professional fees
3,027
3,307
Marketing expense
Telephone and communications
Postage and delivery expense
State, local and other taxes
1,175
1,146
Employee expense
Other expense
2,418
1,962
Total noninterest expense
44,808
43,087
Income before income tax
22,723
18,439
Provision for income taxes
4,446
3,495
Net Income
$ 18,277
$ 14,944
Basic earnings per common share
$ 2.58
$ 1.96
Diluted earnings per common share
$ 2.56
$ 1.96
See Notes to Consolidated Financial Statements
SB Financial Group, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31,
($ in thousands)
Net income
$ 18,277
$ 14,944
Other comprehensive income
Available for sale investment securities:
Gross unrealized holding gain (loss) arising in the period
(5,133 )
1,963
Related tax expense (benefit)
1,078
(412 )
Net effect on other comprehensive income (loss)
(4,055 )
1,551
Total comprehensive income
$ 14,222
$ 16,495
See Notes to Consolidated Financial Statements
SB Financial Group, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31,
Additional
Accumulated Other Comprehensive
($ in thousands, except per share data)
Common
Stock
Paid-in
Capital
Retained
Earnings
Income
(Loss)
Treasury
Stock
Total
January 1, 2021
$ 54,463
$ 14,845
$ 84,578
$ 2,210
$ (13,173 )
$ 142,923
Net income
18,277
18,277
Other comprehensive loss
(4,055 )
(4,055 )
Dividends on common, $0.44 per share
(3,139 )
(3,139 )
Restricted stock vesting
(344 )
-
Repurchased stock
(9,520 )
(9,520 )
Stock based compensation expense
December 31, 2021
$ 54,463
$ 14,944
$ 99,716
$ (1,845 )
$ (22,349 )
$ 144,929
Additional
Accumulated Other Comprehensive
($ in thousands, except per share data)
Common
Stock
Paid-in
Capital
Retained
Earnings
Income
(Loss)
Treasury
Stock
Total
January 1, 2020
$ 54,463
$ 15,023
$ 72,704
$
$ (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
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
$ 18,277
$ 14,944
Items not requiring (providing) cash
Depreciation and amortization
2,262
1,937
Provision for loan losses
1,050
4,500
Expense of share-based compensation plan
Amortization of premiums and discounts on securities
1,236
Amortization of intangible assets
Amortization of originated mortgage servicing rights
3,885
4,762
Impairment (recovery) of mortgage servicing rights
(3,436 )
3,586
Deferred income taxes
2,302
(2,444 )
Proceeds from sale of loans held for sale
490,557
603,178
Originations of loans held for sale
(478,119 )
(582,538 )
Gain from sale of loans
(17,413 )
(25,803 )
Changes in
Interest receivable
(693 )
Other assets
2,006
(5,211 )
Interest payable & other liabilities
(6,743 )
6,618
Net cash provided by operating activities
17,257
23,907
Investing Activities
Purchases of available-for-sale securities
(170,694 )
(129,796 )
Proceeds from maturities of interest bearing time deposits
3,180
5,719
Proceeds from maturities of available-for-sale securities
50,471
84,021
Net change in loans
48,503
(31,706 )
Purchase of premises, equipment
(2,427 )
(1,980 )
Proceeds from sales of premises, equipment
-
Purchase of bank owned life insurance
(50 )
-
Purchase of Federal Reserve and Federal Home Loan Bank Stock
-
(538 )
Proceeds from sale of foreclosed assets
Acquisition, net of cash acquired (paid)
(1,100 )
16,263
Net cash used in investing activities
(71,988 )
(57,216 )
Financing Activities
Net increase in demand deposits, money market, interest checking & savings accounts
137,079
195,501
Net increase (decrease) in time deposits
(73,045 )
(37,762 )
Net increase (decrease) in securities sold under agreements to repurchase
(4,869 )
7,244
Repayment of Federal Home Loan Bank advances
(2,500 )
(8,000 )
Net proceeds from subordinated debt
19,546
-
Net proceeds from share-based compensation plans
-
Stock repurchase plan
(9,520 )
(7,166 )
Dividends on common shares
(3,139 )
(3,070 )
Net cash provided by financing activities
63,552
146,935
Increase in cash and cash equivalents
8,821
113,626
Cash and cash equivalents, beginning of year
140,690
27,064
Cash and cash equivalents, end of year
$ 149,511
$ 140,690
Supplemental cash flow information
Interest paid
$ 4,337
$ 7,280
Income taxes paid
$ 4,230
$ 5,180
Supplemental non-cash disclosure
Recognition of right-of-use lease assets
$
$
Transfer of loans to foreclosed assets
$ 1,687
$
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, 2021 and 2020
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, 2021 and 2020, cash equivalents consisted primarily of interest-bearing and noninterest bearing demand deposit balances held by correspondent banks.
At December 31, 2021, the Company’s correspondent cash accounts exceeded federally insured limits by $7.9 million. Additionally, the Company had approximately $129.1 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 and Other 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. The Company has a vacant lot in our Columbus region that was acquired for the construction of our Columbus office location in 2014. Due to an agreement in principle to sell the vacant lot, the Company has reclassified the asset into held for sale.
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, 2021 and 2020, the Company had a share-based employee compensation plan (see Note 20 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 2018. As of December 31, 2021, 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 that may be issued by the Company related solely to outstanding stock options or awards which are determined using the treasury stock 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.
Subordinated Debt
At December 31, 2021, the Company had subordinated debt obligations of $20.0 million related to its 3.65% Fixed to Floating Rate Subordinated Notes due 2031, which were issued and sold by the Company on May 27, 2021. The Subordinated Notes were issued in order to assist the Company in meeting various corporate obligations, including share buybacks, acquisition costs and organic asset growth (see Note 15 to the Consolidated Financial Statements).
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. 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 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. 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 has the potential 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.
The Company will continue to estimate the impact of adopting ASU 2016-13 throughout 2022. We expect the final adoption of the standard will not have a material impact on the Company’s consolidated financial statements. We expect to be fully prepared for implementation by January 1, 2023.
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 dilutive effect of stock compensation using the treasury stock method. EPS for the years ended December 31, 2021 and 2020 is computed as follows:
Twelve Months Ended
Dec. 31,
($ and outstanding shares in thousands - except per share data)
Distributed earnings allocated to common shares
$ 3,139
$ 3,070
Undistributed earnings allocated to common shares
15,117
11,858
Net earnings allocated to common shares
18,256
14,928
Net earnings allocated to participating securities
Net Income allocated to common shares and participating securities
$ 18,277
$ 14,944
Weighted average shares outstanding for basic earnings per share
7,083
7,613
Dilutive effect of stock compensation
Weighted average shares outstanding for diluted earnings per share
7,130
7,635
Basic earnings per common share
$ 2.58
$ 1.96
Diluted earnings per common share
$ 2.56
$ 1.96
There were no anti-dilutive shares in 2021 or 2020.
On January 10, 2022 the Company announced that its board of directors had declared a 5 percent common stock dividend payable on February 4, 2022, to shareholders of record as of January 21, 2022. Holders of the Company’s common shares as of the record date received one additional common share for every twenty common shares held on the record date. No fractional shares were issued, and shareholders received cash for such fractional interests based on the closing price of $19.89 of the Company’s common shares on the record date.
Had the 5 percent common stock dividend been included in the Company’s 2021 financial statements, common shares outstanding would have increased by approximately 345,000 and diluted earnings per share, assuming the shares were outstanding for the entire year would have decreased by $0.11 per share.
On January 25, 2022, the Company filed a Certificate of Amendment with the Ohio Secretary of State to amend Article FIRST of its Amended Articles of Incorporation to increase the authorized number of common shares, without par value, of the Company from 10,000,000 to 10,500,000.The addition of these authorized shares will not have a material impact on the Company’s consolidated financial statements.
Note 3: Business Combination
Effective June 5, 2020, the Company acquired Edon Bancorp and its subsidiary, The Edon State Bank Company of Edon, Ohio (the “Edon State Bank”). Edon Bancorp and Edon State Bank were 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 Bancorp received fixed consideration of $103.50 in cash for each share of Edon Bancorp 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. 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 twelve months ended December 31, 2021 and 2020, as if the Edon State Bank 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 and 2021.
Twelve Months
Ended December 31,
Summary of Operations ($ in thousands)
Net interest income $ 36,429
Provision for loan losses 4,500
Net interest income after provision 31,929
Non interest income 30,140
Non interest expense 44,158
Income before income taxes 17,911
Income tax expense* 3,384
Net income $ 14,527
Basic earnings per share $ -
Diluted earnings per share $ 1.90
* Income tax expense for Edon State Bank calculated using a 21% statuatory rate
Certain nonrecurring costs were included in the pro-forma, specifically $0.7 million was incurred by Edon State Bank prior to the acquisition in the 2020 fiscal year and the Company incurred $1.2 million in nonrecurring costs for the acquisition in the 2020 fiscal year.
Note 4: Available-for-Sale Securities
The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of available-for-sale securities are as follows:
Amortized
Gross
Unrealized
Gross
Unrealized
Fair
($ in thousands)
Cost
Gains
Losses
Value
December 31, 2021:
U.S. Treasury and Government agencies
$ 8,986
$
$ (16 )
$ 9,105
Mortgage-backed securities
231,057
(3,537 )
228,134
State and political subdivisions
12,352
(9 )
12,879
Other corporate securities
13,200
(61 )
13,141
Totals
$ 265,595
$ 1,287
$ (3,623 )
$ 263,259
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
December 31, 2020:
U.S. Treasury and Government agencies
$ 6,541
$
$ -
$ 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
The amortized cost and fair value of securities available-for-sale at December 31, 2021, 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
$
$
Due after one year through five years
2,724
2,772
Due after five years through ten years
23,156
23,406
Due after ten years
8,052
8,341
34,538
35,125
Mortgage-backed securities
231,057
228,134
Totals
$ 265,595
$ 263,259
The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $54.2 million at December 31, 2021, and $53.7 million at December 31, 2020. Securities delivered for repurchase agreements (not included above) were $23.6 million at December 31, 2021 and $28.2 million at December 31, 2020.
There were no realized gains or losses on available-for-sale securities in 2021 and 2020.
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, 2021 and 2020, was $214.2 million and $27.3 million, respectively, which was approximately 81 percent and 18 percent, respectively, of the Company’s available-for-sale investment portfolio.
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
The following tables present securities with unrealized losses at December 31, 2021 and 2020:
($ in thousands)
Less than 12 Months
12 Months or Longer
Total
December 31, 2021
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
U.S. Treasury and Government agencies
$ 3,397
$ (16 )
$ -
$ -
$ 3,397
$ (16 )
Mortgage-backed securities
183,727
(2,856 )
18,566
(681 )
202,293
(3,537 )
State and political subdivisions
1,673
(9 )
-
-
1,673
(9 )
Other corporate securities
6,889
(61 )
-
-
6,889
(61 )
Totals
$ 195,686
$ (2,942 )
$ 18,566
$ (681 )
$ 214,252
$ (3,623 )
Less than 12 Months
12 Months or Longer
Total
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 )
$
$ (3 )
$ 27,299
$ (57 )
The unrealized loss on the securities portfolio increased by $3.6 million as of December 31, 2021, from the prior year. Management reviews these securities on a quarterly basis and has determined that no impairment exists. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Note 5: Loans and Allowance for Loan Losses
The following tables present the categories of loans at December 31, 2021 and 2020:
Total Loans
Nonaccrual Loans
($ in thousands)
December
December
December
December
Commercial & industrial
$ 122,250
$ 204,767
$
$
Commercial real estate - owner occupied
118,891
113,169
1,450
Commercial real estate - nonowner occupied
262,277
257,651
Agricultural
57,403
55,235
-
-
Residential real estate
206,424
182,165
2,484
2,704
Home equity line of credit (HELOC)
41,682
46,310
Consumer
13,474
14,847
Total loans
$ 822,401
$ 874,144
$ 3,652
$ 6,426
Net deferred costs (fees)
$
$ (1,421 )
Total loans, net deferred costs (fees)
$ 822,714
$ 872,723
Allowance for loan losses
$ (13,805 )
$ (12,574 )
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 sale 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, 2021 and 2020.
($ in thousands)
Loan commitments and unused lines of credit
$ 219,618
$ 215,616
Standby letters of credit
2,060
3,161
Totals
$ 221,678
$ 218,777
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, 2021 and 2020:
($ in thousands)
For the Twelve Months Ended
December 31, 2021
Commercial & industrial
Commercial real estate
Agricultural
Residential real estate
Consumer
Total
Beginning balance
$ 3,074
$ 5,451
$
$ 2,534
$ 1,019
$ 12,574
Charge offs
-
-
-
(43 )
(93 )
(136 )
Recoveries
-
-
Provision
(1,411 )
1,330
1,050
Ending balance
$ 1,890
$ 6,781
$
$ 3,515
$ 1,020
$ 13,805
December 31, 2021
Commercial & industrial
Commercial real estate
Agricultural
Residential real estate
Consumer
Total
Allowance:
Ending balance: individually evaluated for impairment
$ -
$
$ -
$
$
$
Ending balance: collectively evaluated for impairment
$ 1,890
$ 6,771
$
$ 3,395
$ 1,017
$ 13,672
Totals
$ 1,890
$ 6,781
$
$ 3,515
$ 1,020
$ 13,805
Loans:
Ending balance: individually evaluated for impairment
$
$
$ -
$ 2,307
$
$ 2,914
Ending balance: collectively evaluated for impairment
$ 122,132
$ 380,814
$ 57,403
$ 204,117
$ 55,021
$ 819,487
Totals
$ 122,250
$ 381,168
$ 57,403
$ 206,424
$ 55,156
$ 822,401
($ 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
$
$ 2,203
$
$ 8,755
Charge offs
(582 )
-
-
(82 )
(79 )
(743 )
Recoveries
-
-
Provision (credit)
1,757
1,849
4,500
Ending balance
$ 3,074
$ 5,451
$
$ 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
$ -
$
$ -
$
$
$
Ending balance: collectively evaluated for impairment
$ 3,074
$ 5,277
$
$ 2,374
$ 1,016
$ 12,237
Totals
$ 3,074
$ 5,451
$
$ 2,534
$ 1,019
$ 12,574
Loans:
Ending balance: individually evaluated for impairment
$
$ 2,202
$ -
$ 2,746
$
$ 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
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, 2021 and 2020:
($ in thousands)
December 31, 2021
Commercial & industrial
Commercial real estate - owner occupied
Commercial real estate - nonowner occupied
Agricultural
Residential real estate
HELOC
Consumer
Total
Pass (1 - 4)
$ 121,285
$ 111,232
$ 253,269
$ 57,403
$ 203,295
$ 41,218
$ 13,467
$ 801,169
Special Mention (5)
7,571
5,694
-
-
-
-
13,924
Substandard (6)
-
2,848
-
3,102
6,609
Doubtful (7)
-
-
-
Loss (8)
-
-
-
-
-
-
-
-
Total Loans
$ 122,250
$ 118,891
$ 262,277
$ 57,403
$ 206,424
$ 41,682
$ 13,474
$ 822,401
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
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, 2021 and 2020:
($ in thousands)
December 31, 2021
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days Past Due
Total Past
Due
Current
Total Loans
Receivable
Commercial & industrial
$
$
$
$
$ 121,941
$ 122,250
Commercial real estate - owner occupied
-
-
118,803
118,891
Commercial real estate - nonowner occupied
261,577
262,277
Agricultural
-
-
-
-
57,403
57,403
Residential real estate
1,344
2,325
204,099
206,424
HELOC
41,301
41,682
Consumer
13,433
13,474
Total Loans
$
$ 1,068
$ 2,051
$ 3,844
$ 818,557
$ 822,401
December 31, 2020
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days Past Due
Total Past
Due
Current
Total Loans
Receivable
Commercial & industrial
$
$ -
$
$
$ 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
45,848
46,310
Consumer
14,662
14,847
Total Loans
$
$ 1,650
$ 4,197
$ 6,560
$ 867,584
$ 874,144
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 a Troubled Debt Restructure (“TDR”) 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, 2021 and 2020:
($ in thousands)
Recorded
Unpaid Principal
Related
Average Recorded
Interest Income
Twelve Months Ended December 31, 2021
Investment
Balance
Allowance
Investment
Recognized
With no related allowance recorded:
Commercial & industrial
$
$
$ -
$
$
Commercial real estate - owner occupied
-
-
Commercial real estate - nonowner occupied
-
Agricultural
-
-
-
-
-
Residential real estate
1,391
1,458
-
1,663
HELOC
Consumer
-
-
-
-
-
With a specific allowance recorded:
Commercial & industrial
-
-
-
-
-
Commercial real estate - owner occupied
-
-
-
-
-
Commercial real estate - nonowner occupied
-
Agricultural
-
-
-
-
-
Residential real estate
HELOC
Consumer
-
-
-
-
-
Totals:
Commercial & industrial
$
$
$ -
$
$
Commercial real estate - owner occupied
$
$
$ -
$
$ -
Commercial real estate - nonowner occupied
$
$
$
$
$
Agricultural
$ -
$ -
$ -
$ -
$ -
Residential real estate
$ 2,307
$ 2,374
$
$ 2,596
$
HELOC
$
$
$
$
$
Consumer
$ -
$ -
$ -
$ -
$ -
($ in thousands)
Recorded
Unpaid Principal
Related
Average Recorded
Interest Income
Twelve Months Ended December 31, 2020
Investment
Balance
Allowance
Investment
Recognized
With no related allowance recorded:
Commercial & industrial
$
$ 1,645
$ -
$ 1,878
$
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
Agricultural
-
-
-
-
-
Residential real estate
1,729
1,774
1,785
HELOC
Consumer
-
-
-
-
-
Totals:
Commercial & industrial
$
$ 1,645
$ -
$ 1,878
$
Commercial real estate - owner occupied
$ 1,441
$ 1,441
$ -
$ 1,573
$
Commercial real estate - nonowner occupied
$
$
$
$
$
Agricultural
$ -
$ -
$ -
$ -
$ -
Residential real estate
$ 2,746
$ 2,858
$
$ 3,028
$
HELOC
$
$
$
$
$
Consumer
$
$
$ -
$
$
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 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.
The following table represents new TDR activity for the twelve months ended December 31, 2021:
($ in thousands)
Number of
Loans
Pre-
Modification
Recorded Balance
Post
Modification
Recorded Balance
HELOC
$
$
Total modifications
$
$
Interest
Only
Term
Combination
Total
Modification
HELOC
$ -
$ -
$
$
Total modifications
$ -
$ -
$
$
There were no new TDRs during the period ended December 31, 2020.
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 encouraged financial institutions to work prudently with borrowers unable to meet the contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provided 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, 2021, all loans previously modified under Section 4013 of the CARES Act had returned to normal payment terms.
The Company was an active participant in the PPP initiative as detailed in the discussion of financial results for 2021 and 2020. The Company originated approximately 1,100 loans with a total balance of $111.4 million. As of December 31, 2021, $2.0 million in balances remained outstanding. Fees for the originations totaled $4.9 million of which $3.4 million and $1.4 million were taken into income during 2021 and 2020, respectively.
Note 6: Accounting for Certain Loans Acquired in an Acquisition
The Company acquired loans in the acquisition of Edon State Bank, effective June 5, 2020. None of the acquired loans had evidence of deterioration of credit quality since origination, and it was probable, at acquisition, that all contractually required payments would be collected.
The following table presents the carrying amount of the acquired loans included in the balance sheet at December 31:
($ in thousands)
Commercial & industrial
$ 1,067
$ 1,499
Commercial real estate - nonowner occupied
Agricultural
6,655
9,180
Residential real estate
2,408
3,176
Consumer
Total loans
$ 10,260
$ 14,453
Accretable yield, or income expected to be collected as of December 31, 2021 is $0.2 million.
Note 7: Premises and Equipment
Major classifications of premises and equipment stated at cost were as follows at December 31:
($ in thousands)
Land
$ 3,549
$ 3,996
Buildings and improvements
27,475
26,743
Equipment
13,398
11,506
Construction in process
45,077
43,242
Less accumulated depreciation
(21,865 )
(19,685 )
Net premises and equipment
$ 23,212
$ 23,557
Note 8: Goodwill and Intangibles
On December 31, 2021, the Company purchased an Ohio based title agency resulting in approximately $1.1 million in goodwill. On June 5, 2020, the Company acquired Edon Bancorp and its subsidiary, Edon State Bank. The acquisition resulted in approximately $4.3 million in goodwill. The balance of goodwill as of December 31, 2021 and December 31, 2020 was $23.2 million and $22.1 million, respectively.
($ in thousands)
Twelve Months Ended
December 31,
Carrying Amount
Twelve Months Ended
December 31,
Carrying Amount
Beginning balance
$ 22,091
$ 17,792
Acquired goodwill
1,100
4,325
Measurement period adjustments
-
(26 )
Ending balance
$ 23,191
$ 22,091
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, 2021, 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
$
$ (104 )
$ 5,359
$ (4,735 )
Customer relationship intangible
(173 )
(170 )
Banking intangibles
$
$ (277 )
$ 5,559
$ (4,905 )
Amortization expense for intangibles for the years ended December 31, 2021 and 2020 was $0.07 million and $0.05 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 $1.4 billion and $1.3 billion at December 31, 2021 and 2020, respectively. Contractually specified servicing fees of approximately $3.1 million and $3.2 million were included in mortgage loan servicing fees in the income statement for the years ended December 31, 2021 and 2020, respectively.
The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance at December 31:
($ in thousands)
Carrying amount, beginning of year
$ 7,759
$ 11,017
Mortgage servicing rights capitalized during the year
4,724
5,090
Mortgage servicing rights amortization during the year
(3,885 )
(4,762 )
Net change in valuation allowance
3,436
(3,586 )
Carrying amount, end of year
$ 12,034
$ 7,759
Valuation allowance:
Beginning of year
$ 4,892
$ 1,306
Increase (reduction)
(3,436 )
3,586
End of year
$ 1,456
$ 4,892
Fair value, beginning of period
$ 7,759
$ 11,864
Fair value, end of period
$ 12,629
$ 7,759
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 at December 31:
Notional
Fair
Notional
Fair
($ in thousands)
Amount
Value
Amount
Value
Asset Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans
$ 84,733
$ 3,655
$ 87,687
$ 7,962
IRLCs
21,391
46,130
Total contracts
$ 106,124
$ 3,677
$ 133,817
$ 8,240
Liability Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans
$ 84,733
$ (3,655 )
$ 87,687
$ (7,962 )
Forward contracts
25,000
(32 )
50,000
(265 )
Total contracts
$ 109,733
$ (3,687 )
$ 137,687
$ (8,227 )
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, 2021 and 2020.
Amount of gain (loss)
($ in thousands)
Statement of income classification
Interest rate swap contracts
Other income
$
$
IRLCs
Gain on sale of mortgage loans & OMSR
(256 )
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, 2021 and 2020.
Gross amounts
Gross
amounts
offset in the
Net
amounts of
assets
presented in
the
Gross amounts not offset in the consolidated balance sheet
($ in thousands)
of recognized
assets
consolidated
balance
sheet
consolidated
balance
sheet
Financial
instruments
Cash
collateral
received
Net
amount
December 31, 2021
Interest rate swaps
$ 3,746
$
$ 3,655
$ -
$ -
$ 3,655
December 31, 2020
Interest rate swaps
$ 7,962
$ -
$ 7,962
$ -
$ -
$ 7,962
The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2021 and 2020.
Gross amounts
Gross
amounts
offset in the
Net
amounts of
liabilities
presented in
the
Gross amounts not offset in the consolidated balance sheet
($ in thousands)
of recognized
liabilities
consolidated
balance
sheet
consolidated
balance
sheet
Financial
instruments
Cash
collateral
pledged
Net
amount
December 31, 2021
Interest rate swaps
$ 3,746
$
$ 3,655
$ -
$ 6,906
$ (3,251 )
December 31, 2020
Interest rate swaps
$ 7,962
$ -
$ 7,962
$ -
$ 8,896
$ (934 )
Note 11: Interest-Bearing Deposits
Interest-bearing time deposits in denominations of $250,000 or more totaled $13.8 million on December 31, 2021 and $27.8 million on December 31, 2020. There were no certificates of deposit from brokers as of December 31, 2021. Certificates of deposit obtained from brokers totaling $5.0 million as of December 31, 2020 subsequently matured in 2021.
At December 31, 2021, the scheduled maturities of time deposits were as follows:
($ in thousands)
$ 104,583
38,438
7,792
2,680
2,829
Thereafter
Total
$ 156,504
Included in time deposits at December 31, 2021 and 2020 were $55.6 million and $73.1 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
$ 15,320
$ 20,189
The Company has retail repurchase agreements to facilitate cash management transactions with commercial customers. These obligations were secured by agency securities of $8.4 million and $10.7 million for 2021 and 2020, respectively, and mortgage-backed securities of $15.2 million and $17.5 million for 2021 and 2020, respectively. The collateral is held at the FHLB and has maturities from 2022 through 2051. At December 31, 2021, these repurchase agreements totaled $15.3 million. The maximum amount of outstanding agreements at any month end during 2021 and 2020 totaled $34.2 million and $25.6 million, respectively, and the monthly average of such agreements totaled $22.8 million and $20.8 million during 2021 and 2020, respectively. The repurchase agreements mature within one month.
The Company has borrowing capabilities at the Federal Reserve Discount Window (“Discount Window”) by pledging either securities or loans as collateral. As of December 31, 2021, there was no collateral pledged or borrowings drawn at the Discount Window.
At December 31, 2021 and December 31, 2020, 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 $153.7 million in mortgage loans at December 31, 2021. Advances, at interest rates from 2.88 to 2.93 percent, are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at December 31, 2021, were:
($ in thousands)
Debt
3,000
2,500
Total
$ 5,500
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. The issuers of these securities have not yet determined the replacement rate index for LIBOR. These securities may be included in Tier 1 capital and may be prepaid at any time without penalty (with certain limitations applicable) under current regulatory guidelines and interpretations. The balance of the Capital Securities as of December 31, 2021 and 2020 was $10.3 million, with a maturity date of September 15, 2035.
Note 15: Subordinated Debt
On May 27, 2021, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreements’’) with qualified institutional buyers and accredited investors (collectively, the “Purchasers”) pursuant to which the Company issued and sold $20.0 million in aggregate principal amount of its 3.65% Fixed to Floating Rate Subordinated Notes due 2031 (the “Notes”). The Notes were sold by the Company in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended.
The Notes mature on June 1, 2031 and bear interest at a fixed rate of 3.65% through May 31, 2026. From June 1, 2026 to the maturity date or earlier redemption of the Notes, the interest rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month Secured Overnight Financing Rate (“SOFR”) provided by the Federal Reserve Bank of New York plus 296 basis points. The Company may redeem the Notes at any time after May 31, 2026, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $0.5 million, which are being amortized over the life of the Notes.
Note 16: Income Taxes
The provision for income taxes includes these components:
For The Year Ended
December 31,
($ in thousands)
Taxes currently payable
$ 2,144
$ 5,939
Deferred provision
2,302
(2,444 )
Income tax expense
$ 4,446
$ 3,495
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%)
$ 4,772
$ 3,872
Increase (decrease) resulting from
Tax exempt interest
(85 )
(91 )
BOLI income
(60 )
(65 )
Stock compensation
-
(39 )
Other
(181 )
(182 )
Actual tax expense
$ 4,446
$ 3,495
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
$ 2,899
$ 2,641
Net deferred loan fees
-
Unrealized losses on available-for-sale securities
-
Section 475 MTM
-
Accrued bonus
Other
4,374
4,673
Deferred tax liabilities
Depreciation
(1,242 )
(1,168 )
Mortgage servicing rights
(2,546 )
(1,668 )
Unrealized gains on available-for-sale securities
-
(587 )
Purchase accounting adjustments
(1,619 )
(1,628 )
Prepaids
(477 )
(465 )
Net deferred loan costs
(66 )
-
Section 475 MTM
(491 )
-
FHLB stock dividends
(288 )
(288 )
(6,729 )
(5,804 )
Net deferred tax liability
$ (2,355 )
$ (1,131 )
Note 17: Accumulated Other Comprehensive Income(Loss)
Accumulated other comprehensive income (Loss) represents reclassifications out of unrealized gains and losses on available-for-sale securities net of income tax. There were no reclassifications for the years ending December 31, 2021 and 2020.
Note 18: Regulatory Matters
As of December 31, 2021, 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, 2021 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:
($ in thousands)
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under Prompt
Corrective Action
Procedures
As of December 31, 2021
Amount
Ratio
Amount
Ratio
Amount
Ratio
Tier I Capital to average assets
$ 133,202
10.18 %
$ 52,324
4.0 %
$ 65,405
5.0 %
Tier I Common equity capital to risk-weighted assets
133,202
13.94 %
42,986
4.5 %
62,090
6.5 %
Tier I Capital to risk-weighted assets
133,202
13.94 %
57,314
6.0 %
76,419
8.0 %
Total Risk-based capital to risk-weighted assets
145,165
15.20 %
76,419
8.0 %
95,523
10.0 %
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 %
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, 2021 and the Company still would have met the minimum capital requirements when the capital buffer is considered. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of December 31, 2021, State Bank met all capital adequacy requirements to which they are subject.
Note 19: Employee Benefits
The Company has a share-based incentive compensation plan that permits the grant of stock options, restricted stock and other share-based awards to employees, directors and advisory board members of the Company and its subsidiaries. In addition, the Company has instituted a long-term incentive program, with the objective of rewarding senior management with restricted shares of the Company (see Note 20 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 2021 and 2020 were $0.7 million and $0.7 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 2021 and 2020, 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 $17.9 million and $17.5 million at December 31, 2021 and 2020, 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, 2021 and 2020, were 380,450 and 412,402, 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, 2021 and 2020 was $0.5 million and $0.2 million, respectively.
Note 20: 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 2017 Plan is 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 2017 Plan 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 five 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. There were no options granted in 2021 or 2020. There were no stock options outstanding, and no compensation expense charged against income with respect to option awards under the Plan as of December 31, 2021 or 2020.
As of December 31, 2021, there was no unrecognized compensation cost related to incentive option share-based compensation arrangements granted under the 2017 Plan.
During 2020, 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.
Pursuant to the Long Term Incentive (“LTI”) Plan, the Company awards restricted stock in the Company to certain key executives under the 2017 Plan. These restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives. During 2021 and 2020, 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 2021 and 2020, 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 2021 and 2020, respectively.
A summary of restricted stock activity under the Company’s LTI Plan as of December 31, 2021 and changes during the year ended is presented below:
Shares
Weighted-
Average
Value per
Share
Nonvested, beginning of year
34,778
$ 18.52
Granted
35,854
18.29
Vested
(23,179 )
18.39
Forfeited
(6,531 )
18.33
Nonvested, end of year
40,922
$ 18.43
As of December 31, 2021, there was $0.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards under the 2017 Plan which were granted in accordance with the LTI Plan. That cost is expected to be recognized over a weighted-average period of 1.83 years.
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, 2021 and 2020:
($ in thousands)
Fair value at
December 31,
(Level 1)
(Level 2)
(Level 3)
U.S. Treasury and Government Agencies
$ 9,105
$ -
$ 9,105
$ -
Mortgage-backed securities
228,134
-
228,134
-
State and political subdivisions
12,879
-
12,879
-
Other corporate securities
13,141
-
13,141
-
Interest rate contracts - assets
3,655
-
3,655
-
Interest rate contracts - liabilities
(3,655 )
-
(3,655 )
-
Forward contracts
(32 )
(32 )
-
-
IRLCs
-
-
($ in thousands)
Fair value at
December 31,
(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
-
-
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, 2021 and 2020.
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, 2021 and 2020:
($ in thousands)
Fair value at
December 31,
(Level 1)
(Level 2)
(Level 3)
Impaired loans
$
$ -
$ -
$
Mortgage servicing rights
3,301
-
-
3,301
($ in thousands)
Fair value at
December 31,
(Level 1)
(Level 2)
(Level 3)
Impaired loans
$ 3,544
$ -
$ -
$ 3,544
Mortgage servicing rights
7,759
-
-
7,759
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, 2021 and 2020:
($ in thousands)
Fair value at
December 31,
Valuation
technique
Unobservable inputs
Range (weighted- average)
Collateral-dependent impaired loans
$
Market comparable
Comparability adjustments (%)
6.4 - 18% (13%)
properties
Mortgage servicing rights
3,301
Discounted cash flow
Discount Rate
8.65%
Constant prepayment rate
10.94%
P&I earnings credit
0.10%
T&I earnings credit
1.25%
Inflation for cost of servicing
1.50%
IRLCs
Discounted cash flow
Loan closing rates
49% - 99%
($ in thousands)
Fair value at
December 31,
Valuation
technique
Unobservable inputs
Range (weighted- average)
Collateral-dependent impaired loans
$ 3,544
Market comparable
Comparability adjustments (%)
0 - 43% (22%)
properties
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%
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. The servicing rights have had a decrease in prepayments and the 9.93 percent decrease in the constant prepayment rate reflects the change in market rates. In addition, the earnings credit rate decreased and the discount rate increased.
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, 2021 and 2020.
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, 2021 and 2020 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.
Subordinated Debt
The fair value for Subordinated Debt 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, 2021
amount
value
(Level 1)
(Level 2)
(Level 3)
Financial assets
Cash and due from banks
$ 149,511
$ 149,511
$ 149,511
$ -
$ -
Interest bearing time deposits
2,643
2,643
-
2,643
-
Loans held for sale
7,472
7,561
-
7,561
-
Loans, net of allowance for loan losses
808,909
813,766
-
-
813,766
Federal Reserve and FHLB Bank stock, at cost
5,303
5,303
-
5,303
-
Interest receivable
2,920
2,920
-
2,920
-
Financial liabilities
Deposits
$ 1,113,045
$ 1,112,710
$ 956,541
$ 156,169
$ -
Short-term borrowings
15,320
15,320
-
15,320
-
FHLB advances
5,500
5,596
-
5,596
-
Trust preferred securities
10,310
9,067
-
9,067
-
Subordinated debt, net of issuance costs
19,546
20,581
-
20,581
-
Interest payable
-
-
($ 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
-
-
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
$ 14,406
$ 2,178
Investment in banking subsidiaries
152,761
143,244
Investment in nonbanking subsidiaries
6,770
5,617
Other assets
2,259
3,229
Total assets
$ 176,196
$ 154,268
Liabilities
Trust preferred securities
$ 10,000
$ 10,000
Sub debt net of issuance cost
19,546
-
Borrowings from nonbanking subsidiaries
Other liabilities & accrued interest payable
1,411
1,035
Total liabilities
31,267
11,345
Stockholders’ equity
144,929
142,923
Total liabilities and stockholders’ equity
$ 176,196
$ 154,268
Condensed Statements of Income
($ in thousands)
Dividends from subsidiaries:
Banking subsidiaries
$ 5,000
$ 24,025
Nonbanking subsidiaries
-
Total income
5,500
24,025
Expenses
Interest expense
Other expense
1,478
2,950
Total expenses
2,139
3,206
Income before income tax
3,361
20,819
Income tax benefit
(450 )
(712 )
Income before equity in undistributed income of subsidiaries
3,811
21,531
Equity in undistributed income of subsidiaries
Banking subsidiaries
13,573
(8,071 )
Nonbanking subsidiaries
1,484
Total
14,466
(6,587 )
Net income
$ 18,277
$ 14,944
Condensed Statements of Comprehensive Income
($ in thousands)
Net income
$ 18,277
$ 14,944
Other comprehensive income:
Available-for-sale investment securities:
Gross unrealized holding gain (loss) arising in the period
(5,133 )
1,963
Related tax (expense) benefit
1,078
(412 )
Net effect on other comprehensive income
(4,055 )
1,551
Total comprehensive income
$ 14,222
$ 16,495
Condensed Statements of Cash Flows
($ in thousands)
Operating activities
Net income
$ 18,277
$ 14,944
Items not requiring (providing) cash
Equity in undistributed net income of subsidiaries
(14,466 )
6,587
Stock compensation expense
Other assets
1,811
(2,287 )
Other liabilities
Net cash provided by operating activities
6,441
20,289
Investing activities
Capital contributed to banking subsidiary
-
(15,520 )
Capital contributed to nonbanking subsidiary
(1,100 )
-
Net cash used in investing activities
(1,100 )
(15,520 )
Financing activities
Dividends on common shares
(3,139 )
(3,070 )
Proceeds from share-based compensation plans
-
Repurchase of common shares
(9,520 )
(7,166 )
Proceeds from sub-debt net of issuance cost
19,546
-
Net cash provided by (used in) financing activities
6,887
(10,048 )
Net change in cash and cash equivalents
12,228
(5,279 )
Cash and cash equivalents at beginning of year
2,178
7,457
Cash and cash equivalents at end of year
$ 14,406
$ 2,178
Note 23: Quarterly Financial Information (unaudited)
($ in thousands, except per share data)
December
September
June
March
Interest income
$ 10,003
$ 11,033
$ 10,163
$ 10,705
Interest expense
1,009
1,006
1,080
Net interest income
9,078
10,024
9,157
9,625
Provision for loan losses
-
-
Noninterest income
6,589
6,649
6,537
10,922
Noninterest expense
11,567
11,256
11,076
10,909
Income tax expense
1,014
1,807
Net income
$ 3,332
$ 4,103
$ 3,761
$ 7,081
Basic earnings per common share
$ 0.49
$ 0.59
$ 0.53
$ 0.97
Diluted earnings per common share
$ 0.49
$ 0.58
$ 0.52
$ 0.97
Dividends per share
$ 0.115
$ 0.110
$ 0.110
$ 0.105
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
$
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
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, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years ended December 31, 2021 and 2020, 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, 2021 and 2020, 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 Public Company Accounting Oversight Board (United States) (“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 audit 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 Matter
The critical audit matter communicated below is a matter 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) relates to accounts or disclosures that is 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 matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowances for Loan Losses
Description of the Matter
As described in Note 5 to the financial statements, the Company’s consolidated allowance for loan and lease losses (ALLL) was $13.8 million at December 31, 2021. The Company also describes in Note 1 of the 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.
/s/ BKD, LLP
We have served as the Company’s auditor since 2002
Indianapolis, Indiana
March 7, 2022

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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, 2021, 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, 2021, the Company’s internal control over financial reporting is effective.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
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, 2021, 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.

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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 20, 2022 (the “2022 Annual Meeting”), is incorporated herein by reference from the disclosure included in the Company’s definitive Proxy Statement relating to the 2022 Annual Meeting (the “2022 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 2022 Proxy Statement under the caption “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 2022 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 2022 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 2022 Proxy Statement under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT”.
Equity Compensation Plan Information
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, 2021, 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
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)
408,327

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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 2022 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 2022 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 2022 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:
● Consolidated Balance Sheets as of December 31, 2021 and 2020
● Consolidated Statements of Income for the Years ended December 31, 2021 and 2020
● Consolidated Statements of Comprehensive Income for the Years ended December 31, 2021 and 2020
● Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2021 and 2020
● Consolidated Statements of Cash Flows for Years ended December 31, 2021 and 2020
● Notes to Consolidated Financial Statements
● Report of Independent Registered Public Accounting Firm (BKD, LLP)
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.