Item 1A. Risk Factors 17
Item 1B. Unresolved Staff Comments 31
Item 2. Properties 31
Item 3. Legal Proceedings 33
Item 4. Mine Safety Disclosures 33
Supplemental Item: Information about our Executive Officers 33
PART II
Item 6. Selected Financial Data 35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 45
Item 8. Financial Statements and Supplementary Data 47
Item 9A. Controls and Procedures 48
Item 9B. Other Information 48
PART III
Item 10. Directors, Executive Officers and Corporate Governance 49
Item 11. Executive Compensation 50
Item 14. Principal Accountant Fees and Services 50
PART IV
Item 15. Exhibits and Financial Statement Schedules 51
Signatures and Certifications 56
i
PART I
Item
1. Business.
Certain statements contained in this Annual
Report on Form 10-K which are not statements of historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. See “Cautionary Statement Regarding Forward-Looking Information”
under Item 1A. Risk Factors on page 17 of this Annual Report on Form 10-K.
General
SB Financial Group, Inc., an Ohio corporation
(the “Company”), is a financial holding company subject to regulation under the Bank Holding Company Act of 1956,
as amended, and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal
Reserve Board”). The Company was organized in 1983. The executive offices of the Company are located at 401 Clinton Street,
Defiance, Ohio 43512.
Through its direct and indirect subsidiaries,
the Company is engaged in a variety of financial activities, including commercial banking, and wealth management services, as
explained in more detail below.
State Bank and Trust Company
The State Bank and Trust Company (“State
Bank”) is an Ohio state-chartered bank and wholly owned subsidiary of the Company. State Bank offers a full range of commercial
banking services, including checking accounts, savings accounts, money market accounts and time certificates of deposit; automatic
teller machines; commercial, consumer, agricultural and residential mortgage loans; personal and corporate trust services; commercial
leasing; bank credit card services; safe deposit box rentals; internet banking; private client group services; and other personalized
banking services. The trust and financial services division of State Bank offers various trust and financial services, including
asset management services for individuals and corporate employee benefit plans, as well as brokerage services through Cetera Investment
Services, an unaffiliated company. State Bank presently operates 21 banking centers, located within the Ohio counties of Allen,
Defiance, Franklin, Fulton, Hancock, Lucas, Paulding, Wood and Williams, and one banking center located in Allen County, Indiana.
State Bank also presently operates five loan production offices, located in Franklin, Lucas and Seneca Counties, Ohio, Hamilton
County, Indiana and Monroe County, Michigan. At December 31, 2020, State Bank had 238 full-time equivalent employees.
SBFG Title, LLC
SBFG Title, LLC dba Peak Title Agency
(“SBFG Title”) was formed as an Ohio limited liability company in March 2019 and purchased all of the assets and real
estate of an Ohio-based title agency effective March 15, 2019. At December 31, 2020, SBFG Title, LLC had six full-time equivalent
employees.
RFCBC
RFCBC, Inc. (“RFCBC”) is an
Ohio corporation and wholly owned subsidiary of the Company that was incorporated in August 2004. RFCBC operates as a loan subsidiary
in servicing and working out problem loans and is presently inactive. At December 31, 2020, RFCBC had no employees.
Rurbanc Data Services
Rurbanc Data Services, Inc. dba RDSI Banking
Systems (“RDSI”) was formed in 1964 and became an Ohio corporation in June 1976. In September 2006, RDSI acquired
Diverse Computer Marketers, Inc. (“DCM”), which was merged into RDSI effective December 31, 2007. Effective January
1, 2018, the Company completed the sale of the customer contracts and certain other assets of RDSI’s remaining check and
statement processing business operated through the DCM division. As a result of the sale, RDSI is presently inactive and had no
material operations or employees at December 31, 2020.
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Rurban Mortgage Company
Rurban Mortgage Company (“RMC”)
is an Ohio corporation and wholly owned subsidiary of State Bank. RMC is a mortgage company and is presently inactive. At December
31, 2020, RMC had no employees.
SBT Insurance
SBT Insurance, LLC (“SBI”) is an Ohio corporation
and wholly owned subsidiary of State Bank. SBI is an insurance company that engages in the sale of insurance products to retail
and commercial customers of State Bank. At December 31, 2020, SBI had no employees.
SB Captive
SB Captive, Inc. (“SB Captive”)
is a Nevada corporation and wholly owned subsidiary of SB Financial Group, Inc. SB Captive is a self-insurance company that provides
coverage to State Bank and SB Financial Group. The purpose of the Captive is to mitigate insurance risk by participating in a
pool with other banks. At December 31, 2020, SB Captive, Inc. had no employees.
Rurban Statutory Trust II
Rurban Statutory Trust II (“RST
II”) is a trust that was organized in August 2005. In September 2005, RST II closed a pooled private offering of 10,000
Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in
exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole assets of RST II are the junior
subordinated debentures and the back-up obligations, which in the aggregate, constitute a full and unconditional guarantee by
the Company of the obligations of RST II under the Capital Securities.
Competition
The Company experiences significant competition
in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks in the
lending areas of State Bank, and to a lesser extent, from savings associations, insurance companies, governmental agencies, credit
unions, securities brokerage firms and pension funds. The primary factors in competing for loans are interest rates and overall
banking services.
State Bank’s competition for deposits
comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance companies
and securities brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits and convenience
of office location. State Bank operates in the highly competitive wealth management services field and its competition consists
primarily of other bank wealth management departments.
Supervision and Regulation
The following is a description of the
significant statutes and regulations applicable to the Company and its subsidiaries. The description is qualified in its entirety
by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and
policies are continually under review by the U.S. Congress and state legislatures and federal and state regulatory agencies. A
change in statutes, regulations or regulatory policies applicable to the Company or its subsidiaries could have a material effect
on our business.
Regulation of Bank Holding Companies and Their Subsidiaries
in General
The Company is a financial holding company
and, as such, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company
Act”). The Bank Holding Company Act requires the prior approval of the Federal Reserve Board (“FRB”) before
a financial or bank holding company may acquire direct or indirect ownership or control of more than 5 percent of the voting shares
of any bank (unless the bank is already majority owned by the bank holding company), acquire all or substantially all of the assets
of another bank or another financial or bank holding company, or merge or consolidate with any other bank holding company. Subject
to certain exceptions, the Bank Holding Company Act also prohibits a financial or bank holding company from acquiring 5 percent
or more of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing
or controlling banks. The primary exception to this prohibition allows a bank holding company to own shares in any company the
activities of which the FRB had determined, as of November 19, 1999, to be so closely related to banking as to be a proper incident
thereto.
2
As a result of the Gramm-Leach-Bliley
Act of 1999, also known as the Financial Services Modernization Act of 1999, which amended the Bank Holding Company Act, bank
holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of a company
engaged in any activity, that is either (1) financial in nature or incidental to such financial activity (as determined by the
FRB in consultation with the Secretary of the Treasury), or (2) complementary to a financial activity, and that does not pose
a substantial risk to the safety and soundness of depository institutions or the financial system generally. Activities that are
financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.
On January 2, 2019, the Company elected, and received approval from the FRB, to become a financial holding company.
The Company is subject to the reporting
requirements of, and examination and regulation by, the FRB. The FRB has extensive enforcement authority over bank holding companies,
including, without limitation, the ability to assess civil money penalties, issue cease and desist or removal orders, and require
that a bank holding company divest subsidiaries, including its subsidiary banks. In general, the FRB may initiate enforcement
actions for violations of laws and regulations and for unsafe or unsound practices. A bank holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other
property or services to a customer by the bank holding company or its subsidiaries.
Various requirements and restrictions
under the laws of the United States and the State of Ohio affect the operations of State Bank, including requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged
thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations
on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching.
Various consumer laws and regulations
also affect the operations of State Bank. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank
Act”) established the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial
products and services and certain financial services providers. The CFPB is authorized to prevent unfair, deceptive or abusive
acts or practices and ensures consistent enforcement of laws so that consumers have access to fair, transparent and competitive
markets for consumer financial products and services. Since it was established, the CFPB has exercised extensively its rulemaking
and interpretative authority.
The Federal Home Loan Bank (“FHLB”)
provide credit to their members in the form of advances. As a member of the FHLB of Cincinnati, State Bank must maintain certain
minimum investments in the capital stock of the FHLB of Cincinnati. State Bank was in compliance with these requirements at December
31, 2020.
Economic Growth, Regulatory Relief and Consumer Protection
Act
On May 25, 2018, the Economic Growth,
Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted, which repealed or modified
certain provisions of the Dodd-Frank Act and eased restrictions on all but the largest banks (those with consolidated assets in
excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including the Company, are
no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with
consolidated assets of less than $100 billion, including the Company, from certain record-keeping, reporting and disclosure requirements.
Certain other regulatory requirements applied only to banks with consolidated assets in excess of $50 billion and so did not apply
to the Company even before the enactment of the Regulatory Relief Act.
3
Restrictions on Dividends
There can be no assurance as to the amount
of dividends which may be declared in future periods with respect to the common shares of the Company, since such dividends are
subject to the discretion of the Company’s Board of Directors, cash needs, and general business conditions, dividends from
the Company’s subsidiaries and applicable governmental regulations and policies.
The ability of the Company to obtain funds
for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared
by State Bank and the Company’s other subsidiaries. State Bank may not pay dividends to the Company if, after paying such
dividends, it would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage
ratio requirements. In addition, State Bank must obtain the approval of the FRB and the Ohio Division of Financial Institutions
(“ODFI”) if a dividend in any year would cause the total dividends for that year to exceed the sum of the current
year’s net profits and the retained net profits for the preceding two years, less required transfers to surplus. At December
31, 2020, State Bank had $26.9 million of excess earnings over the preceding three years.
Payment of dividends by State Bank may
be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe
and/or unsound banking practice. Moreover, the FRB expects the Company to serve as a source of strength to its subsidiary banks,
which may require it to retain capital for further investment in the subsidiary, rather than for dividends to shareholders of
the Company.
Affiliate Transactions
The Company and State Bank are separate
and distinct legal entities. The FRB’s Regulation W and various other legal limitations restrict State Bank from lending
funds to, or engaging in other “covered transactions” with, the Company (or any other affiliate), generally limiting
such covered transactions with any one affiliate to 10 percent of State Bank’s capital and surplus and limiting all such
covered transactions with all affiliates to 20 percent of State Bank’s capital and surplus. Covered transactions, including
extensions of credit, sales of securities or assets and provision of services, also must be on terms and conditions consistent
with safe and sound banking practices, including credit standards, that are substantially the same or at least as favorable to
State Bank as those prevailing at the time for transactions with unaffiliated companies.
A bank’s authority to extend credit
to executive officers, directors and greater than 10 percent shareholders, as well as entities such persons control, is subject
to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things,
these loans must be made on terms (including interest rates charged and collateral required) that are substantially the same as
those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available
to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to
these persons is based, in part, on the bank’s capital position, and certain approval procedures must be followed in making
loans which exceed specified amounts.
Federally insured banks are subject, with
certain exceptions, to certain additional restrictions (including collateralization) on extensions of credit to their parent holding
companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or
securities as collateral from any borrower. In addition, such banks are prohibited from engaging in certain tying arrangements
in connection with any extension of credit or the providing of any property or service.
4
The Coronavirus Aid, Relief, and Economic
Security Act of 2020
In response to the novel COVID-19 pandemic
(“COVID-19”), the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”),
was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs
are dependent upon the direct involvement of U.S. financial institutions, such as the Company and State Bank, and have been implemented
through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the FRB and
other federal banking agencies, including those with direct supervisory jurisdiction over the Company and State Bank. Furthermore,
as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation,
lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for
COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments
to the CARES Act or new bills comparable in scope to the CARES Act. For example, on December 27, 2020, the Consolidated Appropriations
Act, 2021 (the “CAA”) was signed into law, which, among other things, allowed certain banks to temporarily postpone
implementation of the current expected credit loss model (accounting standard), which is described below. The Company is continuing
to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to COVID-19.
The CARES Act amended the loan program
of the Small Business Administration (the “SBA”), in which State Bank participates, to create a guaranteed, unsecured
loan program, the Paycheck Protection Program (the “PPP”), to fund operational costs of eligible businesses, organizations
and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among
other things, gave borrowers additional time and flexibility to use PPP loan proceeds.
Shortly thereafter, and due to the evolving
impact of COVID-19, additional legislation was enacted authorizing the SBA to resume accepting PPP applications on July 6, 2020,
and extending the PPP application deadline to August 8, 2020. As a participating lender in the PPP, State Bank continues to monitor
legislative, regulatory, and supervisory developments related thereto. On September 29, 2020, the federal bank regulatory agencies
issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19
liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities.
As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19.
The CARES Act encouraged the FRB, in coordination
with the Secretary of the Treasury, to establish or implement various programs to help mitigate the adverse effects of COVID-19
on midsize businesses, nonprofits, and municipalities. In April 2020, the Federal Reserve established the Main Street Lending
Program (“MSLP”) to implement certain of these recommendations. The MSLP supported lending to small and medium-sized
businesses that were in sound financial condition before the onset of COVID-19. On November 19, 2020, Treasury Secretary Steven
Mnuchin indicated that he would not reauthorize extending the MSLP past December 31, 2020. However, the FRB extended the program
to January 8, 2021, in order to process loans that were submitted on or before December 14, 2020. The program ended on January
8, 2021.
Regulatory Capital
The risk-based capital guidelines adopted
by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard”
(Basel I), published by the Basel Committee on Banking Supervision (the “Basel Committee”). In July 2013, the United
States banking regulators issued new capital rules applicable to smaller banking organizations which also implement certain of
the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including the
Company and State Bank, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective
on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January
1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through
January 1, 2019.
The Basel III Capital Rules include (a)
a minimum common equity tier 1 capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital
ratio of 8.0%, and (d) a minimum leverage ratio of 4.0%.
Common equity for the common equity tier
1 capital ratio generally includes common stock (plus related surplus), retained earnings, accumulated other comprehensive income
(unless an institution elects to exclude such income from regulatory capital), and limited amounts of minority interests in the
form of common stock, subject to applicable regulatory adjustments and deductions.
5
Tier 1 capital generally includes common
equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus,
cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not permitted
going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included
in the total capital ratio, generally consists of other preferred stock and subordinated debt meeting certain conditions plus
limited amounts of the allowance for loan and lease losses, subject to specified eligibility criteria, less applicable deductions.
The deductions from common equity tier
1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels,
gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments
in the capital of unconsolidated financial institutions (above certain levels).
Under the guidelines, capital is compared
to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights
is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty.
The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings
and other factors.
The Basel III Capital Rules also place
restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive
officers if the banking organization does not hold a capital conservation buffer of greater than 2.5 percent composed of common
equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that
quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter.
In September 2019, the FRB, along with
other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gave community banks, including the
Company, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks met certain requirements.
Under the rule, a community bank was eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it had
less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage
ratio greater than 9.0%. Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio (“CBLR”)
framework if it had less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet
exposures, and a leverage ratio greater than 9.0%. Qualifying institutions that elected to use the CBLR framework (each, a CBLR
Bank”) and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage
capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well-capitalized ratio
requirements. No CBLR Bank was required to calculate or report risk-based capital, and each CBLR Bank could opt out of the framework
at any time, without restriction, by reverting to the generally applicable risk-based capital rule. Pursuant to the CARES Act,
on August 26, 2020, the federal banking agencies adopted a final rule that temporarily lowered the CBLR threshold and provides
a gradual transition back to the prior level. Specifically, the CBLR threshold was reduced to 8.0% for the remainder of 2020,
increased to 8.5% for 2021, and will return to 9.0% beginning January 1, 2022. This final rule became effective on October 1,
2020. The Company does not intend to elect utilization of the CBLR in assessing capital adequacy and intends to continue to follow
existing capital rules.
In December 2018, the federal banking
agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit
loss (“CECL”) model (accounting standard). The rule revises the federal banking agencies’ regulatory capital
rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide
banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result
from the adoption of the CECL model. The Company currently anticipates recording a one-time cumulative effect adjustment upon
adoption, and does not anticipate utilizing the three year phase in. The Company expects to maintain risk-based capital ratios
in excess of “well-capitalized” after the impact of the one-time cumulative effect adjustment.
6
At December 31, 2020, State Bank was in
compliance with all of the regulatory capital requirements to which it was subject. For State Bank’s capital ratios, see
Note 17 to the Consolidated Financial Statements under Item of 8 of this report (the “Consolidated Financial Statements”).
The FRB has adopted regulations governing
prompt corrective action to resolve the problems of capital deficient and otherwise troubled state-chartered member banks. At
each successively lower defined capital category, a bank is subject to more restrictive and numerous mandatory or discretionary
regulatory actions or limits, and the FRB has less flexibility in determining how to resolve the problems of the institution.
In addition, the FRB generally can downgrade a bank’s capital category, notwithstanding its capital level, if, after notice
and opportunity for hearings, the bank is deemed to be engaged in an unsafe or unsound practice, because it has not corrected
deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is
deemed to be in an unsafe or unsound condition. State Bank’s capital at December 31, 2020, met the standards for the highest
capital category, a “well-capitalized” bank.
In April 2015, the FRB issued a final
rule which increased the size limitation for qualifying bank holding companies under the FRB’s Small Bank Holding Company
Policy Statement from $500 million to $1 billion of total consolidated assets. In August 2018, the FRB issued an interim final
rule, as required by the Economic Growth Regulatory Relief, and consumer Protection Act of 2018, to further increase size limitations
under the Small Bank Holding Company Policy Statement to $3 billion of total consolidated assets. The Company continues to qualify
under the Small Bank Holding Company Policy Statement for exemption from the FRB’s consolidated risk-based capital and leverage
rules at the holding company level.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation
(“FDIC”) is an independent federal agency, which insures the deposits of federally insured banks and savings associations
up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The general insurance limit
is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States Government.
As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by insured institutions, including State Bank, to prohibit any insured institution
from engaging in any activity the FDIC determines to pose a threat to the Deposit Insurance Fund (“DIF”), and to take
enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any institution if the FDIC
finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or other regulatory agency.
The FDIC assesses a quarterly deposit
insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments
in emergency situations, which fund the DIF. Pursuant to the Dodd-Frank Act, the FDIC has established 2 percent as the Designated
Reserve Ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016,
the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35 percent by September 30, 2020, the deadline imposed
by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on insured institutions with assets of less than
$10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. Although the FDIC’s
rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until
the DRR reached 1.35%.The DRR met the statutory minimum of 1.35% on September 30, 2018. As a result, the previous surcharge imposed
on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits have been determined by the
FDIC for banks with assets of less than $10 billion, which had previously contributed to the increase of the DRR to 1.35%. On
June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion (“small
bank credits”) beginning September 30, 2019. The FDIC will continue to apply small bank credits so long as the DRR is at
least 1.35%. State Bank utilized its $0.2 million assessment credit during the [third and fourth quarters of 2019]. The FDIC rules
further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets
to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.
7
The FDIC is authorized to prohibit any
insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement
actions against a bank, after first giving the institution’s primary regulatory authority an opportunity to take such action.
The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by
the FDIC.
Community Reinvestment Act
The Community Reinvestment Act (“CRA”)
requires State Bank’s primary federal regulatory agency, the FRB, to assess State Bank’s record in meeting the credit
needs of the communities served by State Bank. The FRB assigns one of four ratings: outstanding, satisfactory; needs to improve
or substantial noncompliance. The rating assigned to a financial institution is considered in connection with various applications
submitted by the financial institution or its holding company to its banking regulators, including applications to acquire another
financial institution or to open or close a branch office. In addition, all subsidiary banks of a financial holding company must
maintain a satisfactory or outstanding rating in order for the financial holding company to avoid limitations on its activities.
State Bank currently maintains a satisfactory CRA rating.
SEC and NASDAQ Regulation
The Company is subject to the jurisdiction
of the Securities and Exchange Commission (the “SEC”) and certain state securities authorities relating to the offering
and sale of its securities. The Company is subject to the registration, reporting and other regulatory requirements of the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules adopted
by the SEC under those acts. The Company’s common shares are listed on The NASDAQ Capital Market (“NASDAQ”)
under the symbol “SBFG”. As a result, the Company is subject to NASDAQ rules and regulations applicable to listed
companies.
The SEC has adopted rules and regulations
governing, among other matters, corporate governance, auditing and accounting, executive compensation, and enhanced and timely
disclosure of corporate information. The SEC has also approved corporate governance rules promulgated by NASDAQ. The Company has
adopted and implemented a Code of Conduct and Ethics and a copy of that policy can be found on the Company’s website at
www.YourSBFinancial.com by first clicking “Corporate Governance” and then “Code of Conduct”. The Company
has also adopted charters of the Audit Committee, the Compensation Committee and the Governance and Nominating Committee, which
charters are available on the Company’s website at www.YourSBFinancial.com by first clicking “Corporate Governance”
and then “Supplementary Info”.
USA Patriot Act
The Uniting and Strengthening of America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) gives
the United States government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act encourages
information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations
require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from
customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect
and report suspicious activity. State Bank has established policies and procedures that State Bank believes comply with the requirements
of the Patriot Act.
8
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office
of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign
countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes
lists of specially designated targets and countries. State Bank is responsible for, among other things, blocking accounts of,
and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting
blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational
consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when
regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have
imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
Executive and Incentive Compensation
The Dodd-Frank Act requires that the federal
banking agencies, including the FRB and the FDIC, issue a rule related to incentive-based compensation. No final rule implementing
this provision of the Dodd-Frank Act has, as of the date of the filing of this Annual Report on Form 10-K, been adopted, but a
proposed rule was published in 2016 that expanded upon a prior proposed rule published in 2011. The proposed rule is intended
to: (i) prohibit incentive-based payment arrangements that the banking agencies determine could encourage certain financial institutions
to take inappropriate risks by providing excessive compensation or that could lead to material financial loss; (ii) require the
board of directors of those financial institutions to take certain oversight actions related to incentive-based compensation;
and (iii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to
the appropriate federal regulator. Although a final rule has not been issued, the Company has undertaken efforts to ensure that
the Company’s incentive compensation plans do not encourage inappropriate risks, consistent with the principles identified
above.Public company compensation committee members must meet heightened independence requirements and consider the independence
of compensation consultants, legal counsel and other advisors to the compensation committee. A compensation committee must have
the authority to hire advisors and to have the public company fund reasonable compensation of such advisors.
SEC regulations require public companies
to provide various disclosures about executive compensation in annual reports and proxy statements and to present to their shareholders
a non-binding vote on the approval of executive compensation.
Public companies will be required, once
stock exchanges impose additional listing requirements under the Dodd-Frank Act, to implement “clawback” procedures
for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation
that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial
reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of
the restatement and would cover all executives who received incentive awards.
Consumer Protection Laws and Regulations
Banks are subject to regular examination
to ensure compliance with federal consumer protection statutes and regulations, including, but not limited to, the following:
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The banking regulators also use their
authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive
acts or practices by banks that may not necessarily fall within the scope of a specific banking or consumer finance law.
Cybersecurity
In March 2015, federal regulators issued
two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers
of security controls to establish several lines of defense and to ensure that their risk management processes also address the
risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based
services of the financial institution. The other statement indicates that a financial institution’s management is expected
to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the
financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected
to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities
and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If
State Bank fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial
penalties.
In February 2018, the SEC published interpretive
guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and
any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law
and regulations.
State regulators have also been increasingly
active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations
requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect
to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach
notification and data privacy requirements. The Company expects this trend of state-level activity in those areas to continue,
and is continually monitoring developments in the states in which our customers are located.
In the ordinary course of business, the
Company relies on electronic communications and information systems to conduct its operations and to store sensitive data. The
Company employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain
cybersecurity controls. The Company employs a variety of preventative and detective tools to monitor, block, and provide alerts
regarding suspicious activity, as well as to report on any suspected advanced persistent threats. The Company has also invested
over the last eighteen months to further enhance these tools and mechanisms. Notwithstanding the strength of the Company’s
defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers
respond rapidly to changes in defensive measures. While to date, the Company has not detected a significant compromise, significant
data loss or any material financial losses related to cybersecurity attacks, Company’s systems and those of its customers
and third-party service providers are under constant threat and it is possible that the Company could experience a significant
event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future
due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking,
mobile banking and other technology-based products and services by us and our customers.
Effect of Environmental Regulation
Compliance with federal, state and local
provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment,
has not had a material effect upon the capital expenditures, earnings or competitive position of the Company and its subsidiaries.
The Company believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. The Company,
therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for
the near future. The Company’s subsidiaries may be required to make capital expenditures for environmental control facilities
related to properties which they may acquire through foreclosure proceedings in the future; however, the amount of such capital
expenditures, if any, is not currently determinable.
Human Capital Resources
At December 31, 2020, we employed 244
full time equivalent employees. Approximately 69% of our team are female with an average tenure for our entire team of 8.80 years.
The success of our business is highly dependent on our team members, who provide value to our customers and communities through
their dedication to our Value Proposition – “Your lifetime provider of convenient and innovative financial services,
delivered by a passionate and caring staff”. We seek to hire a well-qualified team who are a good fit for our organization,
and our selection and promotion processes are without bias and include the active recruitment of minorities and women.
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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
Assets
Liabilities
--
Computed on a fully tax equivalent basis (FTE)
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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.
Total
Variance Variance Attributable To
Interest income
Loans, net of unearned income and deferred fees1 (855 ) 3,565 (4,420 )
Interest expense
Savings and interest-bearing demand deposits $ 306 $ 428 $ (122 )
Repurchase agreements & other (12 ) 40 (52 )
Advances from FHLB (93 ) (48 ) (45 )
Trust preferred securities (174 ) - (174 )
II. INVESTMENT PORTFOLIO
Other corporate securities 2,506 - -
Maturing
Other corporate securities - - 2,506 - 2,506
1 Yields are presented on a tax-equivalent basis.
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III. LOAN PORTFOLIO
Loans held for investment (HFI)
Concentrations of Credit Risk:
The Company makes commercial, real estate and installment loans to customers located mainly in the Tri-State region of Ohio, Indiana
and Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and, in the case of agricultural
loans, crops and farm equipment and the loans are expected to be repaid from cash flow from operations of businesses. As of December
31, 2020, commercial business and agricultural loans made up approximately 29.6 percent of the loans held for investment (“HFI”)
loan portfolio while commercial real estate loans accounted for approximately 42.5 percent of the HFI loan portfolio. Residential
first mortgage loans made up approximately 20.9 percent of the HFI loan portfolio and are secured by first mortgages on residential
real estate, while consumer loans to individuals made up approximately 7.0 percent of the HFI loan portfolio and are primarily
secured by consumer assets.
Maturing
Commercial Commercial
($ in thousands) Business & Ag. Real Estate Total
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Interest Sensitivity
($ in thousands) Fixed Variable
Rate Rate Total
Commercial Business & Agricultural
Commercial RE & Construction
Total
C. Risk Elements:
Listed below is the interest
income on impaired and nonaccrual loans greater than $100,000 at December 31 for the years indicated:
Cash basis interest income recognized on impaired loans outstanding $ 218 $ 340
Unrecorded interest income on nonaccrual loans 326 76
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3. Foreign Loans Outstanding
None
4. Loan Concentrations
At December 31, 2020, loans
outstanding related to agricultural operations or collateralized by agricultural real estate and equipment aggregated approximately
$55.2 million, or 6.3 percent of total HFI loans.
D. Other Interest Bearing Assets
There were no other interest
bearing assets as of December 31, 2020, which would be required to be disclosed under Item III.C.1 or Item III.C.2. if such assets
were loans.
Management believes the allowance
for loan losses at December 31, 2020 was adequate to absorb any losses on nonperforming loans, as the allowance balance is maintained
by management at a level considered adequate to cover losses that are probable based on past loss experience, general economic
conditions, information about specific borrower situations, including their financial position and collateral values, and other
factors and estimates which are subject to change over time.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
Loans
Allowance for loan losses
Loans charged off:
Commercial real estate - - (42 ) (26 ) (241 )
Residential real estate (82 ) (53 ) (30 ) (61 ) (20 )
Recoveries of loans previously charged off:
Commercial business and agricultural 16 9 1 10 420
Commercial real estate - 1 28 2 5
Ratio of net charge offs to average loans 0.08 % 0.03 % 0.05 % 0.03 % 0.00 %
The allowance for loan losses
balance and the provision for loan losses are determined by management based upon periodic reviews of the loan portfolio. In addition,
management considers the level of charge offs on loans, as well as the fluctuations of charge offs and recoveries on loans, in
the factors which caused these changes. Estimating the risk of loss and the amount of loss is necessarily subjective. Accordingly,
the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on
past loss experience, economic conditions, information about specific borrower situations, including their financial position and
collateral values, and other factors and estimates which are subject to change over time.
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While management’s periodic analysis
of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem loan situations, the
entire allowance is available for any loan charge offs that occur.
V. DEPOSITS
The average amount of deposits and average
rates paid are summarized as follows for the years ended December 31:
Average Average Average Average Average Average
($ in thousands) Amount Rate Amount Rate Amount Rate
Maturities of time certificates
of deposit and other time deposits of $100,000 or more outstanding at December 31, 2020, are summarized as follows:
($ in thousands) Amount
Three months or less $ 36,639
Over three months through six months 28,948
Over six months and through twelve months 37,780
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VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders’
equity and average total assets and certain other ratios are as follows for the periods ended December 31:
Return on average total assets 1.29 % 1.16 % 1.23 %
Return on average shareholders’ equity 10.74 % 8.99 % 9.61 %
Average shareholders’ equity to average assets 11.99 % 12.96 % 12.78 %
VII. SHORT-TERM BORROWINGS
The following information is reported for short-term borrowings,
which are comprised of retail repurchase agreements for the periods noted:
Weighted-average interest rate at end of year 0.20 % 0.51 % 0.49 %
Weighted-average interest rate during the year 0.32 % 0.54 % 0.22 %
Item
1A. Risk Factors.
Cautionary Statement Regarding Forward-Looking