SB Financial Group(SBFG) - 2021 Q4 - Annual Report

PART I Business SB Financial Group, Inc. is an Ohio financial holding company offering commercial banking and wealth management services through its subsidiaries General Overview SB Financial Group, Inc. operates as an Ohio financial holding company, offering commercial banking and wealth management services - SB Financial Group, Inc. is an Ohio corporation and a financial holding company, regulated by the Federal Reserve Board[13] - The Company engages in commercial banking and wealth management services through its direct and indirect subsidiaries[14] Subsidiaries The Company operates through key subsidiaries like State Bank and Trust Company for banking and wealth management, and SBFG Title, LLC for title insurance - State Bank and Trust Company, a wholly-owned subsidiary, offers a full range of commercial banking services, wealth management, and operates 22 banking centers and five loan production offices across Ohio, Indiana, and Michigan[15] - SBFG Title, LLC provides title insurance and operates three locations in Ohio and Indiana[16] - RFCBC, Inc., Rurbanc Data Services, Inc., Rurban Mortgage Company, and SBT Insurance, LLC are currently inactive subsidiaries[17][18][19][20] - SB Captive, Inc. is a self-insurance company providing coverage to State Bank and SB Financial Group[21] Competition The Company faces intense competition from various financial institutions, primarily based on interest rates and service convenience for loans and deposits - The Company faces significant competition in attracting depositors and borrowers from various financial institutions, including commercial banks, savings associations, credit unions, and brokerage firms[23][24] - Primary competitive factors for loans are interest rates and overall banking services, while for deposits, they are interest rates and convenience of office location[23][24] Supervision and Regulation The Company operates under extensive federal and state regulations, including capital requirements, consumer protection laws, and anti-money laundering statutes - The Company is a financial holding company regulated by the Federal Reserve Board under the Bank Holding Company Act of 1956, with extensive enforcement authority[26] - State Bank's operations are affected by various U.S. and Ohio laws, including reserve requirements, loan restrictions, investment limitations, and dividend payment restrictions[30][34][35] - The Dodd-Frank Act established the CFPB to regulate consumer financial products and services, and the Economic Growth, Regulatory Relief and Consumer Protection Act eased restrictions on banks with less than $100 billion in assets[31][33] - Basel III Capital Rules set minimum capital ratios (Common Equity Tier 1, Tier 1, Total Capital, Leverage) and restrict capital distributions if the capital conservation buffer is not met[47][53] - The Company did not utilize the Community Bank Leverage Ratio (CBLR) framework, which temporarily lowered thresholds due to the CARES Act, and continued to follow existing capital rules[54] - The CECL model, effective for smaller reporting companies after December 15, 2022, will replace the incurred loss model, requiring estimation of expected credit losses over the life of the loan[55][111] - State Bank was in compliance with all regulatory capital requirements and met the 'well-capitalized' standards at December 31, 2021[56][57] - The FDIC insures deposits up to $250,000, assesses quarterly premiums, and maintains the Deposit Insurance Fund (DIF), with the Designated Reserve Ratio (DRR) at 1.27% as of September 30, 2021[59][61] - The Community Reinvestment Act (CRA) requires State Bank to meet community credit needs, with State Bank receiving a 'satisfactory' rating in its most recent examination[63] - The Patriot Act and Anti-Money Laundering Act of 2020 (AMLA) impose anti-money laundering and financial transparency obligations on financial institutions[66][67] - OFAC administers and enforces economic sanctions, requiring State Bank to block accounts and transactions with designated targets and report blocked transactions[68] - Dodd-Frank Act requires federal banking agencies to issue rules on incentive-based compensation to prevent excessive risk-taking, and public companies must implement 'clawback' procedures for incentive compensation[69][74] - Banks are subject to federal consumer protection statutes (e.g., Equal Credit Opportunity Act, Truth in Lending Act, Fair Housing Act) and regulations on financial privacy and cybersecurity[75][77][79][81] Effect of Environmental Regulation Environmental regulations have not materially impacted the Company's capital expenditures, earnings, or competitive position, with no significant future expenditures anticipated - Environmental regulations have not had a material effect on the Company's capital expenditures, earnings, or competitive position, with no material future expenditures anticipated[84] Effects of Government Monetary Policy Company earnings are significantly influenced by economic conditions and Federal Reserve Board monetary policies, which directly impact interest rates, income, and expenses - Company earnings are affected by economic conditions and FRB monetary policies, which influence interest rates and thus interest income and expense for State Bank[85] Human Capital Resources The Company employed 269 full-time equivalent employees in 2021, offering competitive benefits and prioritizing employee safety during the COVID-19 pandemic Employee Count (Full-Time Equivalent) | Year | Employees | | :--- | :--- | | 2021 | 269 | | 2020 | 244 | - SB Financial offers competitive benefits including paid time off, medical/dental/vision insurance, wellness programs, 401(k), ESOP, and education assistance[86] - During the COVID-19 pandemic, the Company prioritized employee safety, offering remote work and paid time off for affected individuals[87] Risk Factors The Company faces significant economic, operational, regulatory, and capital risks, including market uncertainties and evolving compliance Cautionary Statement Regarding Forward-Looking Information Forward-looking statements in this report are subject to inherent risks and uncertainties, and the Company does not commit to updating them after their initial publication date - Forward-looking statements in this report are subject to risks and uncertainties, and actual results may differ materially from projections[88][90] - The Company does not undertake to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made[91] Economic, Market and Political Risks Economic, market, and political risks include the impact of the COVID-19 pandemic, interest rate fluctuations, and the transition away from LIBOR, potentially affecting demand and credit quality - The COVID-19 pandemic negatively impacted global and local economies, potentially affecting demand for products, increasing credit losses, and disrupting business operations[92][96] - The Company originated a significant number of PPP loans in 2020 and 2021, retaining credit risk if SBA guarantees are denied due to origination or servicing deficiencies[93] - Changes in economic and political conditions (e.g., inflation, recession, interest rates) could adversely affect deposits, loan demand, borrower repayment ability, and collateral values, particularly in Northwest Ohio where lending is concentrated[99][101] - Inability to manage interest rate risks could reduce net interest income if interest rates on liabilities increase faster than on assets, or if asset and liability rates react differently to market changes[102][103] - The transition away from LIBOR as a reference rate for financial contracts (including $10.3 million in Trust Preferred Securities) could affect income, expenses, and contract values, though the Company does not anticipate a material impact[105][107][108] Risks Related to Our Business Operations Operational risks include potential loan losses, dependence on key personnel, challenges in managing growth, cybersecurity threats, and reliance on third-party vendors - Actual loan losses may exceed the allowance for loan losses, leading to decreased net income, and future provisions for credit losses could materially affect operating results[109] - The transition to the CECL model (effective after December 15, 2022 for the Company) will require estimating expected losses over the life of the loan, potentially increasing the allowance for loan losses and impacting financial condition[111][112] - The Company's success depends on attracting and retaining qualified senior management and financial services personnel, with intense competition for such talent[114] - The Company's growth strategy, including market share expansion and potential acquisitions, carries risks related to managing costs, integrating operations, and retaining employees and customers[116][118][119] - Operational risks include reputational damage, legal/compliance issues, fraud, employee errors, and disruptions from faulty computer or telecommunications systems, heightened by COVID-19[120][121][122] - Cybersecurity threats, including phishing, malware, ransomware, and data breaches, pose a significant risk to information systems, customer data, and financial assets, potentially leading to data loss, financial losses, and reputational harm[124][125][128] - Dependence on third-party vendors for significant operational services exposes the Company to risks of cybersecurity events, operational disruptions, and financial difficulties of these providers[134][135][136] - Strong competition in the market area may reduce the ability to attract and retain deposits and originate loans, potentially affecting net interest margin and profitability[138] - The Company may be required to repurchase loans or indemnify purchasers for breaches of representations/warranties or borrower fraud, adversely affecting liquidity and financial results[139] Legislative, Legal and Regulatory Risks Legislative, legal, and regulatory risks include increased FDIC premiums, evolving accounting standards like CECL, noncompliance with anti-money laundering laws, and various litigation exposures - FDIC insurance premiums may increase, negatively affecting profitability, though recent rules benefited banks with assets under $10 billion[140] - The banking industry is highly regulated, and changes in laws or regulations, or failure to comply, can increase costs, limit business opportunities, and lead to penalties[141][142] - Changes in accounting standards, such as CECL, can materially affect financial reporting, potentially requiring retroactive application or increasing credit loss allowances and impacting regulatory capital[144][146] - Noncompliance with the Bank Secrecy Act (BSA) and other anti-money laundering statutes (AMLA, OFAC) could result in material financial losses, fines, regulatory actions, and reputational damage[147][148] - The Company may be subject to litigation from customers, employees, or others, including class actions and claims related to residential mortgage business, potentially leading to legal liability and reputational harm[150][152] Risks Related to Our Capital and Common Shares Risks related to capital and common shares include dividend limitations, stock price volatility, regulatory ownership restrictions, anti-takeover measures, and future capital availability - The Company's ability to pay cash dividends is limited by regulatory restrictions and the earnings of its subsidiaries, with no guarantee of future dividend payments[153] - A limited trading market for common shares on NASDAQ Capital Market may lead to price volatility and difficulty for shareholders to sell shares at desired volume, price, and time[154][156][157] - Investors could become subject to regulatory restrictions, requiring prior Federal Reserve approval for acquiring 10% or more of common shares or control[158] - Anti-takeover devices under Ohio law and Company regulations could make it difficult for another company to purchase the Company, even if it would increase shareholder value[159] - The Company may need additional capital in the future, but its availability depends on capital market conditions, economic conditions, and financial performance, with no assurance of acceptable terms[160] General Risk Factors General risks include the influence of government monetary policy, changes in tax laws, reliance on financial estimates, fraud, technological updates, and external events like natural disasters - Federal government fiscal and monetary policies, particularly those of the FRB, significantly affect the Company's earnings by influencing interest rates and borrower repayment ability[161] - Changes in federal, state, and local tax laws could adversely affect the Company's results of operations, deferred tax assets, and customer demand for loans and deposit products[162] - Preparation of financial statements requires significant management estimates (e.g., allowance for loan losses, goodwill), which are inherently subjective and may vary from actual results[163] - The Company faces increased risk of losses from sophisticated fraud techniques, including debit card fraud, check fraud, social engineering, and impersonation, despite implemented technologies[164] - Failure to constantly update technology to meet customer demands and compete in the rapidly changing financial services market could negatively affect growth, revenue, and profit[165] - External events such as climate change, severe weather, natural disasters, acts of war or terrorism could significantly impact business operations, deposit base, loan repayment, collateral values, and incur additional expenses[166] Unresolved Staff Comments There are no unresolved staff comments for the Company - The Company has no unresolved staff comments[167] Properties The Company's principal executive offices are in Defiance, Ohio, with State Bank operating 23 banking centers and other facilities across three states - The Company's principal executive offices are located in Defiance, Ohio, and State Bank owns 21 of its 23 banking centers[168] - The Company operates banking centers, loan production offices, and service facilities across Ohio, Indiana, and Michigan[170] Future Minimum Lease Payments Under Operating Leases | Year | Amount ($ thousands) | | :--- | :--- | | 2022 | 177 | | 2023 | 141 | | 2024 | 138 | | 2025 | 134 | | 2026 | 135 | | Thereafter | 763 | | Total | 1,488 | Legal Proceedings The Company is involved in various legal actions incidental to its ordinary business, with management anticipating no material adverse effect on its financial condition or results - The Company is involved in various legal actions, but management believes these are incidental and not likely to have a material adverse effect on financial condition or results[174] Mine Safety Disclosures Mine Safety Disclosures are not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[175] Information about our Executive Officers This section lists the Company's executive officers as of February 22, 2022, including Chairman, President & CEO Mark A. Klein and EVP & CFO Anthony V. Cosentino Executive Officers as of February 22, 2022 | Name | Age | Position(s) Held | | :--- | :--- | :--- | | Mark A. Klein | 67 | Chairman, President and Chief Executive Officer | | Anthony V. Cosentino | 60 | Executive Vice President and Chief Financial Officer | | Ernesto Gaytan | 50 | Executive Vice President and Chief Technology Innovation Officer | | Steven R. Walz | 51 | Executive Vice President and Chief Lending Officer | | Keeta J. Diller | 65 | Executive Vice President and Chief Risk Officer | | David A. Homoelle | 54 | Columbus Regional President and Residential Real Estate Executive | PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common shares trade on NASDAQ under 'SBFG', with 6,884,330 shares outstanding, $0.44 per share in 2021 dividends, and an active share repurchase program - Common shares are traded on NASDAQ Capital Market under the symbol 'SBFG'[179] Common Shares Outstanding and Dividends Declared | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Common Shares Outstanding (as of Dec 31) | 6,884,330 | N/A | | Record Holders (as of Dec 31) | 1,203 | N/A | | Cash Dividends Declared per Share | $0.44 | $0.40 | - Future dividends are subject to Board discretion, cash needs, subsidiary dividends, and governmental regulations[180][181] Common Share Repurchases (Q4 2021) | Period | Total Shares Purchased | Weighted Average Price Paid per Share | | :--- | :--- | :--- | | 10/01/21 - 10/31/21 | 16,926 | $18.36 | | 11/01/21 - 11/30/21 | 9,316 | $19.02 | | 12/01/21 - 12/31/21 | 17,377 | $19.05 | | Totals | 43,619 | $18.78 | - As of December 31, 2021, 495,639 shares remained under the 750,000-share repurchase program authorized on May 25, 2021, expiring May 31, 2022[183] Reserved This item is reserved and contains no information - Item 6 is reserved and contains no information[184] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's strategic goals, financial condition, operating results, and critical accounting policies, highlighting strong 2021 performance Strategic Discussion The Company's strategic goal is to achieve top-decile performance through revenue diversification, market penetration, product utilization, operational excellence, and strong asset quality - The Company aims to be a top decile independent financial services company[188] - Key initiatives include increasing profitability via revenue diversification (44.8% noninterest income in 2021), strengthening market penetration, expanding product utilization, delivering operational excellence (servicing $1.36 billion in residential mortgage loans), and sustaining strong asset quality (nonperforming assets 0.49% of total assets in 2021)[189][190][191][192][193] - Over five years, total assets increased by $454.3 million (52%), loans by $126.1 million (18%), and deposits by $383.4 million (52.6%)[194] Financial Highlights This section presents key financial highlights from 2017 to 2021, including earnings, per common share data, ratios, and period-end totals for assets, deposits, and equity Financial Highlights (2017-2021) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Earnings ($ thousands): | | | | | | | Net interest income | $37,884 | $35,930 | $34,826 | $33,267 | $28,386 | | Provision for loan losses | $1,050 | $4,500 | $800 | $600 | $400 | | Noninterest income | $30,697 | $30,096 | $18,016 | $16,624 | $17,217 | | Noninterest expense | $44,808 | $43,087 | $37,410 | $34,847 | $31,578 | | Net income | $18,277 | $14,944 | $11,973 | $11,638 | $11,065 | | 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 | $15.03 | | Ratios: | | | | | | | Return on average total assets | 1.38% | 1.29% | 1.16% | 1.23% | 1.29% | | Return on average equity | 12.67% | 10.74% | 8.99% | 9.61% | 12.36% | | Period End Totals ($ thousands): | | | | | | | Total assets | $1,330,854 | $1,257,839 | $1,038,577 | $986,828 | $876,627 | | Total deposits | $1,113,045 | $1,049,011 | $840,219 | $802,552 | $729,600 | | Total equity | $144,929 | $142,923 | $136,094 | $130,435 | $94,000 | Critical Accounting Policies Critical accounting policies, including the Allowance for Loan Losses, Goodwill, and Deferred Tax Liability, involve significant subjective management estimates that can materially affect financial reporting - Critical accounting policies include the Allowance for Loan Losses, Goodwill and Other Intangibles, Deferred Tax Liability, and Income Tax Accounting, all requiring significant, subjective management estimates[199] - The ALLL is evaluated quarterly based on problem assets, collateral, portfolio composition, loan performance, regulatory guidance, and economic factors[200] - Goodwill is tested annually for impairment, and other intangibles are amortized over their useful lives, with impairment analysis relying on subjective judgments about future performance[203] Changes in Financial Condition In 2021, total assets grew by 5.8% to $1.33 billion, deposits increased by 6.1% to $1.11 billion, while loans decreased due to PPP forgiveness, and equity rose by 1.4% Key Financial Condition Changes (2020 vs. 2021) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Total assets | $1,330,854 | $1,257,839 | 5.8% | | Loans, net of unearned income | $822,714 | $872,723 | -5.7% | | Total deposits | $1,113,045 | $1,049,011 | 6.1% | | Total shareholders' equity | $144,929 | $142,923 | 1.4% | - Loans held for investment decreased by $50.0 million (5.7%) due to PPP loan forgiveness, but excluding PPP, loan growth was $18.5 million (2.3%)[211] - Deposits increased by $64.0 million (6.1%), with a shift from time deposits (down 32%) to other deposits (up 17%) due to expanded government support and reduced economic activity[214] - Stockholders' equity increased by $2.0 million, driven by $15.1 million in retained earnings from net income less dividends, partially offset by a $4.1 million decrease in OCI due to rising interest rates affecting the bond portfolio[216] - The Company repurchased approximately 500,000 shares in 2021 at an average price of $18.50 per share, with 495,639 shares remaining under the repurchase program[217] Asset Quality Asset quality remained strong in 2021, with nonaccruing loans decreasing by 43.2%, nonperforming assets by 10.7%, and the allowance for loan losses increasing by 9.8% Asset Quality Metrics (2020 vs. 2021) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Nonaccruing loans | $3,652 | $6,426 | -43.2% | | Nonperforming assets | $6,481 | $7,259 | -10.7% | | Net charge offs (recoveries) | $(181) | $681 | -126.6% | | Loan loss provision | $1,050 | $4,500 | -76.7% | | Allowance for loan losses | $13,805 | $12,574 | 9.8% | | Nonperforming assets/total assets | 0.49% | 0.58% | -15.6% | | Allowance/nonaccruing loans | 378.01% | 195.67% | 93.2% | | Allowance/loans | 1.68% | 1.44% | 16.5% | - The allowance for loan losses increased by $5.0 million (59%) since December 31, 2019, reaching $13.8 million at December 31, 2021, due to provision expense and minimal charge-offs[221] - All COVID-related payment deferrals had expired or been removed by December 31, 2021, with clients returning to contractual terms[222] Earnings Summary – 2021 vs. 2020 In 2021, net income increased by 22.3% to $18.3 million, with diluted EPS rising to $2.56, driven by higher net interest income and noninterest income, despite increased noninterest expenses Earnings Summary (2021 vs. 2020) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Net income | $18,277 | $14,944 | 22.3% | | Diluted earnings per share | $2.56 | $1.96 | 30.6% | | Total operating revenue | $68,581 | $66,026 | 3.9% | | Net interest income | $37,884 | $35,930 | 5.4% | | Provision for loan losses | $1,050 | $4,500 | -76.7% | | Noninterest income | $30,697 | $30,096 | 2.0% | | Noninterest expense | $44,808 | $43,087 | 4.0% | - Loan growth, excluding PPP, was $18.5 million, and deposit growth was $64.0 million[226] - Mortgage banking contributed $17.3 million in revenue from gains on sale, with $600.0 million in residential real estate loan production[226] - Net interest margin (FTE basis) decreased 30 basis points to 3.06% in 2021, despite a $3.0 million increase in margin revenue from PPP activity[230] - Noninterest income increased by $0.6 million (2.0%), with mortgage servicing rights recapture offsetting lower mortgage gain on sale revenue[233] - Wealth management assets under management grew to $618.3 million, leading to a 17.5% increase in wealth fee income[233] - Noninterest expense increased by $1.7 million (4.0%), driven by higher salaries and employee benefits (due to increased FTEs) and technology/digital initiatives[234][235] Earnings Summary – 2020 vs. 2019 In 2020, net income increased to $14.9 million ($1.96 diluted EPS), driven by $47.2 million loan growth and $208.8 million deposit growth, despite a lower net interest margin - Net income for 2020 was $14.9 million ($1.96 diluted EPS), up from $12.0 million ($1.51 diluted EPS) in 2019[236] - Loan growth was $47.2 million and deposit growth was $208.8 million in 2020[237] - Mortgage banking generated $25.4 million in revenue from gains on sale, with residential real estate loan production of $694.2 million[237] - Operating revenue increased by $13.2 million (25.0%), impacted by a $3.6 million temporary OMSR impairment[238] - Net interest margin (FTE basis) for 2020 was 3.36%, down 46 basis points from 2019[238] - Noninterest expense increased by $5.7 million (15.2%) due to compensation and fringe benefit cost increases from higher mortgage commission levels[239] - Net charge-offs for 2020 were $0.68 million, resulting in a loan loss provision of $4.5 million[239] Goodwill, Intangibles and Capital Purchases The Company's annual goodwill impairment review found no impairment as of December 31, 2021, with future capital expenditures funded by existing cash and operating cash flow - The Company's annual goodwill impairment review as of December 31, 2021, found no impairment[240] - Capital expenditures for premises and equipment are planned and will be funded by existing cash and operating cash flow[241] Liquidity The Company maintains strong liquidity with $422.9 million in liquid assets, $110.5 million in FHLB borrowing capacity, and $184.9 million in unpledged securities as of December 31, 2021 Liquid Assets | Year | Amount ($ millions) | | :--- | :--- | | 2021 | $422.9 | | 2020 | $303.2 | - The Company has $110.5 million in additional FHLB borrowing capacity and $184.9 million in unpledged securities as of December 31, 2021[245] Net Cash Flows by Activity ($ millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Operating Activities | $17.3 | $23.9 | | Investing Activities | $(72.0) | $(57.2) | | Financing Activities | $63.6 | $146.9 | Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk is interest rate risk, managed through asset-liability strategies and Economic Value of Equity (EVE) analysis to mitigate the impact of interest rate fluctuations - Interest rate risk is the Company's primary market risk exposure, managed through asset liability strategies to optimize net interest income and mitigate interest rate fluctuations[252][253] - The Company uses an Economic Value of Equity (EVE) analysis to measure balance sheet risk, calculating the net present value of assets and liabilities in rate shock environments from -100 to +400 basis points[249] Economic Value of Equity (EVE) Analysis (December 31, 2021) | Change in rates | $ Amount ($ thousands) | $ Change ($ thousands) | % 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 | $(25,289) | -10.43% | - The Company manages interest rate risk by matching repricing periods for assets and liabilities, using variable rate loans, diverse deposit terms, and FHLB borrowings[258] Financial Statements and Supplementary Data This section presents the Company's consolidated financial statements for 2021 and 2020, with detailed notes and an unqualified independent auditor's report Index to Consolidated Financial Statements This index outlines the included consolidated financial statements, notes, and the independent registered public accounting firm's report for the Company - The section includes Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Stockholders' Equity, Cash Flows, Notes to Consolidated Financial Statements, and the Report of Independent Registered Public Accounting Firm[263] Consolidated Balance Sheets The consolidated balance sheets highlight key financial positions for 2021 and 2020, including total assets, loans, deposits, and shareholders' equity Consolidated Balance Sheet Highlights ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total assets | $1,330,854 | $1,257,839 | | Loans, net of unearned income | $822,714 | $872,723 | | Allowance for loan losses | $(13,805) | $(12,574) | | Total deposits | $1,113,045 | $1,049,011 | | Subordinated debt net of issuance costs | $19,546 | $- | | Total shareholders' equity | $144,929 | $142,923 | Consolidated Statements of Income The consolidated statements of income present the Company's financial performance for 2021 and 2020, detailing interest income, expenses, noninterest items, and net income Consolidated Statements of Income Highlights ($ thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total interest income | $41,904 | $42,635 | | Total interest expense | $4,020 | $6,705 | | Net Interest Income | $37,884 | $35,930 | | Provision for loan losses | $1,050 | $4,500 | | Total noninterest income | $30,697 | $30,096 | | Total noninterest expense | $44,808 | $43,087 | | Net Income | $18,277 | $14,944 | | Diluted earnings per common share | $2.56 | $1.96 | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income present net income and other comprehensive income (loss) for 2021 and 2020, reflecting total comprehensive income Consolidated Statements of Comprehensive Income ($ thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net income | $18,277 | $14,944 | | Net effect on other comprehensive income (loss) | $(4,055) | $1,551 | | Total comprehensive income | $14,222 | $16,495 | Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity detail changes in equity for 2021 and 2020, including net income, other comprehensive income, dividends, and stock repurchases Consolidated Statements of Stockholders' Equity Highlights ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Stockholders' Equity | $144,929 | $142,923 | | Net income | $18,277 | $14,944 | | Other comprehensive loss (income) | $(4,055) | $1,551 | | Dividends on common shares | $(3,139) | $(3,070) | | Repurchased stock | $(9,520) | $(7,166) | Consolidated Statements of Cash Flows The consolidated statements of cash flows present net cash provided by or used in operating, investing, and financing activities for 2021 and 2020 Consolidated Statements of Cash Flows Highlights ($ thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $17,257 | $23,907 | | Net cash used in investing activities | $(71,988) | $(57,216) | | Net cash provided by financing activities | $63,552 | $146,935 | | Increase in cash and cash equivalents | $8,821 | $113,626 | | Cash and cash equivalents, end of year | $149,511 | $140,690 | Notes to Consolidated Financial Statements These notes provide detailed explanations of the Company's accounting policies, financial statement line items, and other disclosures essential for understanding its financial position Note 1: Organization and Summary of Significant Accounting Policies This note outlines the Company's organizational structure and summarizes its significant accounting policies for securities, loans, ALLL, goodwill, derivatives, and MSRs - SB Financial Group, Inc. is a financial holding company with wholly-owned subsidiaries including State Bank and Trust Company, SBFG Title, SB Captive, RFCBC, RDSI, RMC, RST II, and SBI, primarily offering banking and wealth management services[277] - Significant accounting policies cover available-for-sale securities (fair value, unrealized gains/losses in OCI), mortgage loans held for sale (lower of cost or fair value), and loans held for investment (outstanding principal, adjusted for ALLL)[282][285][286] - The Allowance for Loan Losses (ALLL) is a critical estimate for probable losses, evaluated quarterly based on historical experience, portfolio composition, economic factors, and collateral values[287][288] - Goodwill is tested annually for impairment, and other intangible assets are amortized over 1-15 years[297][298] - The Company uses derivative financial instruments (interest rate swaps, forward contracts, IRLCs) to manage interest rate risk, not for trading, with fair value changes recognized in noninterest income[299][300][383][384] - Mortgage Servicing Rights (MSRs) are measured at fair value and amortized over estimated net servicing income, with impairment assessed quarterly[302][304] - The Company accounts for income taxes using the liability method, recognizing deferred tax assets and liabilities for temporary differences[308] - ASU 2016-13 (CECL) will replace the incurred loss model, requiring estimation of expected credit losses over the life of the loan, with adoption expected by January 1, 2023, and no material impact anticipated[319][321] Note 2: Earnings Per Share This note details the calculation of basic and diluted earnings per common share for 2021 and 2020, including weighted average shares outstanding Earnings Per Common Share (2021 vs. 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Basic earnings per common share | $2.58 | $1.96 | | Diluted earnings per common share | $2.56 | $1.96 | | Weighted average shares outstanding for basic EPS | 7,083 | 7,613 | | Weighted average shares outstanding for diluted EPS | 7,130 | 7,635 | - A 5% common stock dividend declared in January 2022 would have decreased 2021 diluted EPS by $0.11 if included[324][325] - Authorized common shares increased from 10,000,000 to 10,500,000 in January 2022, with no material impact on financial statements[326] Note 3: Business Combination This note details the Company's $15.5 million acquisition of Edon Bancorp and The Edon State Bank in June 2020, which expanded its presence and added goodwill and intangible assets - On June 5, 2020, the Company acquired Edon Bancorp and The Edon State Bank for $15.5 million cash, adding approximately $50 million in deposits and $15 million in loans[327][210] - The acquisition resulted in $4.3 million of goodwill and $0.7 million of intangible assets (core deposits amortized over 10 years)[328] - The acquisition was strategic for expanding presence in Northwest Ohio and increasing profitability through new customer base and product offerings[328] Note 4: Available-for-Sale Securities This note provides a breakdown of available-for-sale securities by category and their fair values, along with gross unrealized gains and losses for 2021 and 2020 Available-for-Sale Securities (Fair Value, $ thousands) | Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | U.S. Treasury and Government agencies | $9,105 | $6,864 | | Mortgage-backed securities | $228,134 | $127,761 | | State and political subdivisions | $12,879 | $12,275 | | Other corporate securities | $13,141 | $2,506 | | Totals | $263,259 | $149,406 | Available-for-Sale Securities Gross Unrealized Gains and Losses ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Gross Unrealized Gains | $1,287 | $2,854 | | Gross Unrealized Losses | $(3,623) | $(57) | | Net Unrealized (Loss) Gain | $(2,336) | $2,797 | - The unrealized loss on the securities portfolio increased by $3.6 million as of December 31, 2021, due to rising interest rates, but management believes the declines are temporary and no impairment exists[216][338][339][341] Note 5: Loans and Allowance for Loan Losses This note details the Company's loan portfolio by category and the allowance for loan losses, including risk classifications and COVID-19 deferral status Total Loans by Category ($ thousands) | Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Commercial & industrial | $122,250 | $204,767 | | Commercial real estate - owner occupied | $118,891 | $113,169 | | Commercial real estate - nonowner occupied | $262,277 | $257,651 | | Agricultural | $57,403 | $55,235 | | Residential real estate | $206,424 | $182,165 | | Home equity line of credit (HELOC) | $41,682 | $46,310 | | Consumer | $13,474 | $14,847 | | Total loans | $822,401 | $874,144 | Allowance for Loan Losses by Category ($ thousands) | Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Commercial & industrial | $1,890 | $3,074 | | Commercial real estate - owner occupied | $2,588 | $2,059 | | Commercial real estate - nonowner occupied | $4,193 | $3,392 | | Agricultural | $599 | $496 | | Residential real estate | $3,515 | $2,534 | | Home equity line of credit (HELOC) | $631 | $647 | | Consumer | $389 | $372 | | Total Allowance | $13,805 | $12,574 | - The Company uses risk categories (Pass, Special Mention, Substandard, Doubtful, Loss) to classify loans based on borrower's ability to service debt and collateral protection[354][355][356][357][358] - All loans previously modified under Section 4013 of the CARES Act due to COVID-19 had returned to normal payment terms by December 31, 2021[371] - The Company originated approximately 1,100 PPP loans totaling $111.4 million, with $2.0 million remaining outstanding as of December 31, 2021, and recognized $4.9 million in fees[373] Note 6: Accounting for Certain Loans Acquired in an Acquisition This note details the acquired loan portfolio from Edon State Bank, including categories and the accretable yield, as of December 31, 2021 and 2020 Acquired Loans from Edon State Bank ($ thousands) | Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Commercial & industrial | $1,067 | $1,499 | | Commercial real estate - nonowner occupied | $97 | $505 | | Agricultural | $6,655 | $9,180 | | Residential real estate | $2,408 | $3,176 | | Consumer | $33 | $93 | | Total loans | $10,260 | $14,453 | - Accretable yield (income expected to be collected) on acquired loans was $0.2 million as of December 31, 2021[374] Note 7: Premises and Equipment This note provides a breakdown of premises and equipment, net of accumulated depreciation, by category for 2021 and 2020 Premises and Equipment, Net ($ thousands) | Category | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Land | $3,549 | $3,996 | | Buildings and improvements | $27,475 | $26,743 | | Equipment | $13,398 | $11,506 | | Construction in process | $655 | $997 | | Less accumulated depreciation | $(21,865) | $(19,685) | | Net premises and equipment | $23,212 | $23,557 | Note 8: Goodwill and Intangibles This note details the carrying amounts of goodwill and intangible assets, including the impact of a 2021 acquisition and the annual impairment review Goodwill Carrying Amount ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Beginning balance | $22,091 | $17,792 | | Acquired goodwill | $1,100 | $4,325 | | Ending balance | $23,191 | $22,091 | - Goodwill increased by $1.1 million in 2021 due to the acquisition of an Ohio-based title agency[376] - A qualitative assessment determined no goodwill impairment as of December 31, 2021[377] Intangible Assets Carrying Basis and Accumulated Amortization ($ thousands) | Category | Gross Carrying Amount (2021) | Accumulated Amortization (2021) | Gross Carrying Amount (2020) | Accumulated Amortization (2020) | | :--- | :--- | :--- | :--- | :--- | | Core deposits intangible | $660 | $(104) | $5,359 | $(4,735) | | Customer relationship intangible | $200 | $(173) | $200 | $(170) | | Banking intangibles | $860 | $(277) | $5,559 | $(4,905) | Note 9: Mortgage Banking and Servicing Rights This note details mortgage loans serviced for others and Mortgage Servicing Rights (MSR) activity, including capitalization, amortization, and valuation changes for 2021 and 2020 Mortgage Loans Serviced for Others and MSR Activity ($ thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Unpaid principal balance of mortgage loans serviced for others | $1,400,000 | $1,300,000 | | 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 | | Fair value, end of period | $12,629 | $7,759 | Note 10: Derivative Financial Instruments This note describes the Company's use of derivative financial instruments, such as interest rate swaps and forward contracts, to manage interest rate risk, not for trading - The Company uses derivative financial instruments (interest rate swaps, IRLCs, forward contracts) to manage interest rate risk, not for trading or speculation[382][383][384] Derivative Financial Instruments (Notional and Fair Value, $ thousands) | Category | Notional Amount (2021) | Fair Value (2021) | Notional Amount (2020) | Fair Value (2020) | | :--- | :--- | :--- | :--- | :--- | | Asset Derivatives: | | | | | | Interest rate swaps associated with loans | $84,733 | $3,655 | $87,687 | $7,962 | | IRLCs | $21,391 | $22 | $46,130 | $278 | | Total Asset Contracts | $106,124 | $3,677 | $133,817 | $8,240 | | Liability Derivatives: | | | | | | Interest rate swaps associated with loans | $84,733 | $(3,655) | $87,687 | $(7,962) | | Forward contracts | $25,000 | $(32) | $50,000 | $(265) | | Total Liability Contracts | $109,733 | $(3,687) | $137,687 | $(8,227) | Note 11: Interest-Bearing Deposits This note provides details on interest-bearing time deposits, including those over $250,000, and their scheduled maturities, as well as CDARS deposits Interest-Bearing Time Deposits ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Time deposits $250,000 or more | $13,800 | $27,800 | Scheduled Maturities of Time Deposits (Dec 31, 2021, $ thousands) | Year | Amount | | :--- | :--- | | 2022 | $104,583 | | 2023 | $38,438 | | 2024 | $7,792 | | 2025 | $2,680 | | 2026 | $2,829 | | Thereafter | $182 | | Total | $156,504 | - The Company uses the Certificate of Deposit Account Registry Service (CDARS) for fully insured balances exceeding FDIC limits, with $55.6 million in CDARS deposits at year-end 2021[392] Note 12: Short-Term Borrowings This note details short-term borrowings, specifically securities sold under repurchase agreements, and available federal funds lines for 2021 and 2020 Short-Term Borrowings ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Securities Sold Under Repurchase Agreements | $15,320 | $20,189 | - The Company had $41.0 million in federal funds lines available, with none drawn, at December 31, 2021 and 2020[395] Note 13: Federal Home Loan Bank Advances This note provides details on Federal Home Loan Bank (FHLB) advances, including total amounts, collateral, and scheduled maturities as of December 31, 2021 FHLB Advances and Maturities ($ thousands) | Metric | Dec 31, 2021 | | :--- | :--- | | Total FHLB Advances | $5,500 | | Secured by mortgage loans | $153,700 | | Maturities: | | | 2022 | $3,000 | | 2023 | $2,500 | Note 14: Trust Preferred Securities This note details the $10.3 million Trust Preferred Securities, maturing in 2035, with interest based on 3-month LIBOR, awaiting a replacement rate index - Trust Preferred Securities totaled $10.3 million at December 31, 2021 and 2020, maturing September 15, 2035[398] - Interest is based on 3-month LIBOR plus 1.80%, with the replacement rate index for LIBOR yet to be determined[398] Note 15: Subordinated Debt This note details the $20.0 million in 3.65% Fixed to Floating Rate Subordinated Notes issued in May 2021, with proceeds used for corporate obligations - The Company issued $20.0 million in 3.65% Fixed to Floating Rate Subordinated Notes due 2031 on May 27, 2021[399] - Notes bear a fixed rate of 3.65% until May 31, 2026, then reset quarterly to 3-month SOFR plus 296 basis points[400] - Proceeds are for corporate obligations, including share buybacks, acquisition costs, and organic asset growth[400] Note 16: Income Taxes This note presents the Company's income tax expense and net deferred tax liability for 2021 and 2020, detailing current and deferred provisions Income Tax Expense ($ thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Taxes currently payable | $2,144 | $5,939 | | Deferred provision | $2,302 | $(2,444) | | Income tax expense | $4,446 | $3,495 | Net Deferred Tax Liability ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Deferred tax assets | $4,374 | $4,673 | | Deferred tax liabilities | $(6,729) | $(5,804) | | Net deferred tax liability | $(2,355) | $(1,131) | Note 17: Accumulated Other Comprehensive Income(Loss) This note clarifies that accumulated other comprehensive income (loss) comprises cumulative unrealized gains and losses on available-for-sale securities, net of income tax - Accumulated other comprehensive income (loss) consists of cumulative unrealized gains and losses on available-for-sale securities, net of income tax[403] Note 18: Regulatory Matters This note confirms State Bank's 'well capitalized' status as of December 31, 2021, meeting all regulatory capital requirements, and details its capital ratios - State Bank was classified as 'well capitalized' at December 31, 2021, meeting all regulatory capital requirements[404][405] State Bank Capital Ratios (December 31, 2021, $ thousands) | Capital Ratio | Actual Amount | Actual Ratio | To Be Well Capitalized Amount | To Be Well Capitalized Ratio | | :--- | :--- | :--- | :--- | :--- | | Tier I Capital to average assets | $133,202 | 10.18% | $65,405 | 5.0% | | Tier I Common equity capital to risk-weighted assets | $133,202 | 13.94% | $62,090 | 6.5% | | Tier I Capital to risk-weighted assets | $133,202 | 13.94% | $76,419 | 8.0% | | Total Risk-based capital to risk weighted assets | $145,165 | 15.20% | $95,523 | 10.0% | Note 19: Employee Benefits This note outlines the Company's employee benefits, including a 401(k) plan, Supplemental Executive Retirement Plan (SERP), Bank-owned life insurance (BOLI), and an Employee Stock Ownership Plan (ESOP) - The Company offers a 401(k) plan with a 100% safe harbor matching contribution up to 4% of eligible compensation[408] - Supplemental Executive Retirement Plan (SERP) agreements provide monthly payments to certain active and retired officers[409] - Bank-owned life insurance (BOLI) provides additional life insurance to certain officers, with a cash surrender value of $17.9 million at year-end 2021[410] - A noncontributory Employee Stock Ownership Plan (ESOP) covers substantially all employees, with contributions determined annually by the Board[411][413] Note 20: Share-Based Compensation Plan This note details the 2017 Stock Incentive Plan, which permits equity-based awards, and reports on restricted stock activity and associated compensation costs for 2021 and 2020 - The 2017 Stock Incentive Plan permits grants of various equity-based awards to employees, directors, and advisory board members[415][416] - No stock options were granted or outstanding in 2021 or 2020, and no compensation expense was charged for option awards[417] - Restricted stock awards under the LTI Plan vest over four years, with compensation costs of $0.4 million in both 2021 and 2020[419] Restricted Stock Activity (December 31, 2021) | Metric | 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 | $18.43 | Note 21: Disclosures About Fair Value of Assets and Liabilities This note categorizes fair value measurements into a three-level hierarchy, detailing valuation methods for securities, derivatives, impaired loans, and MSRs - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted active market prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[422][423] - Available-for-sale securities, U.S. government agencies, mortgage-backed securities, state and political subdivisions, and corporate securities are primarily Level 2[424][429] - Interest rate contracts are valued based on estimated termination amounts using market interest rates and creditworthiness[425] - IRLCs and collateral-dependent impaired loans are classified as Level 3, relying on unobservable inputs like projected sale prices, pull-through rates, and appraised collateral values[427][430][433] - Mortgage servicing rights are also Level 3, valued using discounted cash flow models incorporating discount rates, prepayment speeds, and default rates[431][434] Note 22: Parent Company Financial Information This note provides condensed financial statements for the Parent Company, including balance sheets, statements of income, and cash flows for 2021 and 2020 Parent Company Condensed Balance Sheets ($ thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total assets | $176,196 | $154,268 | | Trust preferred securities | $10,000 | $10,000 | | Sub debt net of issuance cost | $19,546 | $- | | Total liabilities | $31,267 | $11,345 | | Stockholders' equity | $144,929 | $142,923 | Parent Company Condensed Statements of Income ($ thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Dividends from subsidiaries | $5,500 | $24,025 | | Total expenses | $2,139 | $3,206 | | Net income | $18,277 | $14,944 | Parent Company Condensed Statements of Cash Flows ($ thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,441 | $20,289 | | Net cash used in investing activities | $(1,100) | $(15,520) | | 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 end of year | $14,406 | $2,178 | Note 23: Quarterly Financial Information (unaudited) This note presents unaudited quarterly financial information for 2021 and 2020, including interest income, net interest income, provision for loan losses, noninterest income, net income, and EPS Quarterly Financial Information (2021, $ thousands, except per share data) | Metric | Dec | Sep | Jun | Mar | | :--- | :--- | :--- | :--- | :--- | | Interest income | $10,003 | $11,033 | $10,163 | $10,705 | | Net interest income | $9,078 | $10,024 | $9,157 | $9,625 | | Provision for loan losses | $- | $300 | $- | $750 | | Noninterest income | $6,589 | $6,649 | $6,537 | $10,922 | | Net income | $3,332 | $4,103 | $3,761 | $7,081 | | Diluted earnings per common share | $0.49 | $0.58 | $0.52 | $0.97 | | Dividends per share | $0.115 | $0.110 | $0.110 | $0.105 | Quarterly Financial Information (2020, $ thousands, except per share data) | Metric | Dec | Sep | Jun | Mar | | :--- | :--- | :--- | :--- | :--- | | Interest income | $10,589 | $10,807 | $10,595 | $10,644 | | Net interest income | $9,251 | $9,259 | $8,872 | $8,548 | | Provision for loan losses | $800 | $1,800 | $1,300 | $600 | | Noninterest income | $8,902 | $10,418 | $8,615 | $2,161 | | Net income | $5,358 | $5,250 | $3,655 | $681 | | 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 (BKD, LLP) BKD, LLP issued an unqualified opinion on the Company's 2021 and 2020 consolidated financial statements, identifying the Allowance for Loan Losses as a critical audit matter - BKD, LLP issued an unqualified opinion on the Company's consolidated financial statements for 2021 and 2020[453] - The valuation of the Allowance for Loan Losses (ALLL) was identified as a critical audit matter due to the high subjectivity in management's estimates, including economic conditions, historical loss rates, and specific reserves for impaired loans[458][459] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[461] Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2021[463][466] - Management assessed and concluded that the Company's internal control over financial reporting was effective as of December 31, 2021[465] - This Annual Report does not include an attestation report from the registered public accounting firm regarding internal control over financial reporting, as permitted by SEC rules[466] Other Information This item is not applicable to the Company - Item 9B is not applicable[470] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the Company - Item 9C is not applicable[471] PART III [Directors, Executive Officers and Corporate Governance](index=105&type=section&id=Item%2010.%2