Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 26
Item 1C. Cybersecurity 26
Item 2. Properties 27
Item 3. Legal Proceedings 29
Item 4. Mine Safety Disclosures 29
Supplemental Item: Information about our Executive Officers 29
Item 6. [Reserved] 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 46
Item 9B. Other Information 46
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 46
PART III 47
Item 10. Directors, Executive Officers and Corporate Governance 47
Item 11. Executive Compensation 47
Item 14. Principal Accountant Fees and Services 48
Item 15. Exhibits and Financial Statement Schedules 49
Signatures 54
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 13 of this Annual Report on Form 10-K.
General
SB Financial Group, Inc., an Ohio corporation
(the “SB Financial”), 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” or the “FRB”). SB Financial was organized in 1983. The executive offices of the SB Financial are located at
401 Clinton Street, Defiance, Ohio 43512.
Through its direct and indirect subsidiaries,
SB Financial is engaged in a variety of financial activities, including commercial banking, and wealth management services, as explained
in more detail below.
As used in this Annual Report on Form 10-K, the
“Company” refers to SB Financial and its consolidated subsidiaries collectively, except where the context indicates the reference
relates solely to the registrant, SB Financial.
The State Bank and Trust Company
The State Bank and Trust Company (“State
Bank”) is an Ohio state-chartered bank and wholly owned subsidiary of SB Financial. 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 (“ATMs”); 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 25 banking centers, located within the Ohio counties of Allen, Defiance, Franklin,
Fulton, Hancock, Lucas, Paulding, Ottawa, Williams and Wood, and one banking center located in Allen County, Indiana. State Bank also
presently operates seven loan production offices, located in Franklin and Lucas Counties, Ohio, Boone, Hamilton and Steuben Counties,
Indiana, and Monroe County, Michigan. At December 31, 2024, State Bank had 244 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 January 2019 and purchased all of the assets and real estate of an Ohio-based
title agency effective March 15, 2019. SBFG Title is a wholly owned subsidiary of SB Financial. SBFG Title provides title insurance and
operates two locations within the Ohio Counties of Franklin and Williams. At December 31, 2024, SBFG Title had 8 full-time equivalent
employees.
1
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, 2024, SBI had no employees.
SB Captive
SB Captive, Inc. (“SB Captive”) is
a Nevada corporation and wholly owned subsidiary of SB Financial. SB Captive is a self-insurance company that provides coverage to State
Bank and SB Financial. The purpose of the SB Captive is to mitigate insurance risk by participating in a pool with other banks. At December
31, 2024, SB Captive had no employees.
Rurban Statutory Trust II
Rurban Statutory Trust II (“RST II”)
is a trust that was organized in August 2005. In September 2005, RST II closed a pooled private offering of 10,000 Capital Securities
with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated
debentures with terms similar to the Capital Securities. The sole assets of RST II are the junior subordinated debentures and the back-up
obligations, which in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RST II under
the Capital Securities.
Dissolved Subsidiaries
In December 2024, the Company completed the dissolution
of four of its inactive subsidiaries: RFCBC, Inc., Rurbanc Data Services Inc., Rurban Mortgage Company, and SBFG Mortgage, LLC.
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, finance companies, financial technology companies (“fintechs”) 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, securities
brokerage firms, and fintechs. The primary factors in competing for deposits are interest rates paid on deposits and convenience of office
location. State Bank operates in the highly competitive wealth management services field and its competition consists primarily of other
bank wealth management departments.
Supervision and Regulation
The following is a summary discussion of the
significant statutes and regulations applicable to the Company. This discussion is qualified in its entirety by reference to the full
text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under
review by the U.S. Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory
policies applicable to the Company could have a material effect on our business.
2
Regulation of Bank Holding Companies and Their Subsidiaries in General
SB Financial 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”).
SB Financial 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.
The Bank Holding Company Act requires the prior
approval of the FRB before a financial or bank holding company may acquire direct or indirect ownership or control of more than 5 percent
of the voting shares of any bank (unless the bank is already majority owned by the bank holding company), acquire all or substantially
all of the assets of another bank or another financial or bank holding company, or merge or consolidate with any other bank holding company.
Subject to certain exceptions, the Bank Holding Company Act also prohibits a financial or bank holding company from acquiring 5 percent
or more of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling
banks. The primary exception to this prohibition allows a bank holding company to own shares in any company the activities of which the
FRB had determined, as of November 19, 1999, to be so closely related to banking as to be a proper incident thereto.
In April 2020, the FRB adopted a final rule to
revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another
company for purposes of the Bank Holding Company Act. The final rule expands and codifies the presumptions for use in such determinations.
By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the FRB generally views
as supporting a facts-and-circumstances determination that one company controls another company. The FRB’s final rule applies to
questions of control under the Bank Holding Company Act but does not extend to the Change in Bank Control Act.
As a result of the Gramm-Leach-Bliley Act of 1999,
also known as the Financial Services Modernization Act of 1999, which amended the Bank Holding Company Act, bank holding companies that
are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that
is either (1) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary
of the Treasury), or (2) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness
of depository institutions or the financial system generally. Activities that are financial in nature include securities underwriting
dealing and market-making, insurance underwriting and agency, and merchant banking activities. On January 2, 2019, SB Financial elected,
and received approval from the FRB, to become a financial holding company.
Various requirements and restrictions under the
laws of the United States and the State of Ohio affect the operations of State Bank, including requirements to maintain reserves against
deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon, restrictions relating
to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital
and surplus, limitations on payment of dividends, and limitations on branching.
Various consumer laws and regulations also affect
the operations of State Bank. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”)
established the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services
and certain financial services providers. The CFPB is authorized to prevent unfair, deceptive or abusive acts or practices and ensures
consistent enforcement of laws so that consumers have access to fair, transparent and competitive markets for consumer financial products
and services. Since it was established, the CFPB has exercised extensively its rulemaking and interpretative authority.
The Federal Home Loan Bank (the “FHLB”)
provide credit to their members in the form of advances. As a member of the FHLB of Cincinnati, State Bank must maintain certain minimum
investments in the capital stock of the FHLB of Cincinnati. State Bank was in compliance with these requirements at December 31, 2024.
3
Federal Reserve System
The FRB requires all depository institutions to
maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic,
the FRB reduced reserve requirement ratios to 0 percent effective on March 26, 2020, to support lending to households and businesses.
The reserve requirement ratio remained at 0 percent as of December 31, 2024.
Economic Growth, Regulatory Relief and Consumer Protection Act
On May 25, 2018, the Economic Growth, Regulatory
Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted, which repealed or modified certain provisions
of the Dodd-Frank Act and eased restrictions on all but the largest banks (those with consolidated assets in excess of $250 billion).
Bank holding companies with consolidated assets of less than $100 billion, including the Company, are no longer subject to enhanced prudential
standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion,
including the Company, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied
only to banks with consolidated assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory
Relief Act.
Restrictions on Dividends
There can be no assurance as to the amount of
dividends which may be declared in future periods with respect to the common shares of the Company, since such dividends are subject to
the discretion of the Company’s Board of Directors, cash needs, and general business conditions, dividends from the Company’s
subsidiaries and applicable governmental regulations and policies.
The ability of the Company to obtain funds for
the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared by State
Bank and the Company’s other subsidiaries. State Bank may not pay dividends to the Company if, after paying such dividends, it would
fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. In addition,
State Bank must obtain the approval of the FRB and the Ohio Division of Financial Institutions (the “ODFI”) if a dividend
in any year would cause the total dividends for that year to exceed the sum of the current year’s net profits and the retained net
profits for the preceding two years, less required transfers to surplus. At December 31, 2024, State Bank had $24.7 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 bank, which may require it to retain
capital for further investment in the subsidiary, rather than for dividends to shareholders of the Company.
The Company’s ability to pay dividends on
its shares is also conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying
the Company’s trust preferred securities. In addition, under the terms of the Company’s fixed-to-floating rate subordinated
debt, the Company’s ability to pay dividends on its shares is conditioned upon the Company continuing to make required principal
and interest payments, and not incurring an event of default, with respect to the subordinated debt.
Transactions with Affiliates and Insiders
The Company and State Bank are separate and distinct
legal entities. The FRB’s Regulation W and various other legal limitations restrict State Bank from lending funds to, or engaging
in other “covered transactions” with, the Company (or any other affiliate), generally limiting such covered transactions with
any one affiliate to 10 percent of State Bank’s capital and surplus and limiting all such covered transactions with all affiliates
to 20 percent of State Bank’s capital and surplus. Covered transactions, including extensions of credit, sales of securities or
assets and provision of services, also must be on terms and conditions consistent with safe and sound banking practices, including credit
standards, that are substantially the same or at least as favorable to State Bank as those prevailing at the time for transactions with
unaffiliated companies.
A bank’s authority to extend credit to executive
officers, directors and greater than 10 percent shareholders, as well as entities such persons control, is subject to Sections 22(g) and
22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things, these loans must be made on terms
(including interest rates charged and collateral required) that are substantially the same as those offered to unaffiliated individuals
or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than
normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital
position, and certain approval procedures must be followed in making loans which exceed specified amounts.
Federally insured banks are subject, with certain
exceptions, to certain additional restrictions (including collateralization) on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral
from any borrower. In addition, such banks are prohibited from engaging in certain tying arrangements in connection with any extension
of credit or the providing of any property or service.
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Regulatory Capital
The risk-based capital guidelines adopted by the
federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard” (Basel I),
published by the Basel Committee on Banking Supervision (the “Basel Committee”). In July 2013, the United States banking regulators
issued new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank
Act (the “Basel III Capital Rules”). Community banking organizations, including the Company and State Bank, began transitioning
to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation
buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common
equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.
The Basel III Capital Rules include (a) a minimum
common equity tier 1 capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and
(d) a minimum leverage ratio of 4.0%.
Common equity for the common equity tier 1 capital
ratio generally includes common stock (plus related surplus), retained earnings, accumulated other comprehensive income (unless an institution
elects to exclude such income from regulatory capital), and limited amounts of minority interests in the form of common stock, subject
to applicable regulatory adjustments and deductions.
Tier 1 capital generally includes common equity
as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred
stock and related surplus, trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited
amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total
capital ratio, generally consists of other preferred stock and subordinated debt meeting certain conditions plus limited amounts of the
allowance for credit losses (“ACL”), 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.
5
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 State Bank, the option
to calculate a simple leverage ratio to measure capital adequacy if the community banks met certain requirements. Under the rule, a community
bank was eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it had less than $10 billion in total consolidated
assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage ratio greater than 9.0%. Qualifying institutions
that elected to use the CBLR framework (each, a “CBLR Bank”) and that maintain a leverage ratio of greater than 9.0% will
be considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies’ generally applicable capital
rules and to have met the well-capitalized ratio requirements. No CBLR Bank was required to calculate or report risk-based capital, and
each CBLR Bank could opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital
rule. Pursuant to the CARES Act, on August 26, 2020, the federal banking agencies adopted a final rule that temporarily lowered the CBLR
threshold and provided a gradual transition back to the prior level. Specifically, the CBLR threshold was reduced to 8.0% for the remainder
of 2020, increased to 8.5% for 2021, and returned to 9.0% on January 1, 2022. This final rule became effective on October 1, 2020. The
Company did not utilize the CBLR in assessing capital adequacy and continued to follow existing capital rules.
In December 2018, the federal banking agencies
issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit loss (“CECL”)
model (accounting standard). The rule revised 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. Upon the Company’s
adoption of CECL effective January 1, 2023, the Company recognized a one-time cumulative effect adjustment (increase) to the ACL of $1.4 million and did not elect to utilize the three-year phase in. The Company’s risk-based capital ratios
remained in excess of “well-capitalized” levels after the impact of the one-time cumulative effect adjustment.
At December 31, 2024, 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 16 to the Consolidated
Financial Statements under Item 8 of this Report on Form 10-K (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, 2024, met the standards for the highest capital category, a “well-capitalized” bank.
In April 2015, the FRB issued a final rule which
increased the size limitation for qualifying bank holding companies under the FRB’s Small Bank Holding Company Policy Statement
from $500 million to $1 billion of total consolidated assets. In August 2018, the FRB issued an interim final rule, as required by the
Regulatory Relief Act, to further increase size limitations under the Small Bank Holding Company Policy Statement to $3 billion of total
consolidated assets. The Company continues to qualify under the Small Bank Holding Company Policy Statement for exemption from the FRB’s
consolidated risk-based capital and leverage rules at the holding company level.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (the
“FDIC”) is an independent federal agency, which insures the deposits of federally insured banks and savings associations up
to certain prescribed limits and safeguards the safety and soundness of financial institutions. The general insurance limit is $250,000
per separately insured depositor. This insurance is backed by the full faith and credit of the United States government.
6
As insurer, the FDIC is authorized to conduct
examinations of and to require reporting by insured institutions, including State Bank, to prohibit any insured institution from engaging
in any activity the FDIC determines to pose a threat to the Deposit Insurance Fund (the “DIF”), and to take enforcement actions
against insured institutions. The FDIC may terminate insurance of deposits of any institution if the FDIC finds that the institution has
engaged in unsafe and unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or other regulatory agency.
The FDIC assesses a quarterly deposit insurance
premium on each insured institution based on risk characteristics of the insured institution to the DIF, with institutions deemed less
risky paying lower rates. Currently, assessments for institutions with less than $10 billion of total assets are based on financial measures
and supervisory ratings derived from statistical models that estimate the probability of failure within three years. The FDIC may increase
or decrease the range of assessments uniformly, except that no adjustments can deviate more than two basis points from the base assessment
without notice and comment rule making. The FDIC may also impose special assessments in emergency situations, which fund the DIF. 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 required the FDIC to offset the effect on insured institutions
with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%.
Although the FDIC’s rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more
to be paid until the DRR reached 1.35%. The DRR met the statutory minimum of 1.35% on September 30, 2018. As a result, the previous surcharge
imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits have been determined by the
FDIC for banks with assets of less than $10 billion, which had previously contributed to the increase of the DRR to 1.35%.
On June 30, 2019, the DRR reached 1.40%, and
the FDIC applied credits for banks with assets of less than $10 billion (“small bank credits”) beginning September 30, 2019.
As of June 30, 2020, the DRR fell below the minimum DRR to 1.30%. As a result, the FDIC adopted a restoration plan requiring the restoration
of the DRR to 1.35% within eight years (September 30, 2028). 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. As of September 30, 2022, the DRR was 1.26%. Because the DRR remained below the statutory
minimum, the FDIC adopted a final rule in October 2022 increasing the assessment rate from three basis points to five basis points beginning
with the first quarterly assessment period of 2023. In the FDIC’s most recent semiannual update for the Amended Restoration Plan
in October 2024, the FDIC noted a 6 basis point increase in the reserve ratio, from 1.15% as of December 31, 2023 to 1.21% as of June
30, 2024. The FDIC staff projected that the reserve ratio remains on track to reach the statutory minimum of 1.35% ahead of the deadline
of September 30, 2028. As a result, the FDIC staff recommended no changes to the Amended Restoration Plan and all scheduled assessment
rates were maintained.
On November 16, 2023, the FDIC adopted a final
rule implementing a special assessment to recover the loss to the DIF arising from the protection of uninsured depositors following the
failures of Silicon Valley Bank and Signature Bank. The assessment base for the special assessment is equal to an insured depository
institution’s estimated uninsured deposits reported for the quarter ended December 31, 2022, adjusted to exclude the first $5 billion
in estimated uninsured deposits. The FDIC began collecting the special assessment at an annual rate of approximately 13.4 basis points,
over eight quarterly assessment periods, beginning with the first quarter of 2024. Because State Bank’s uninsured deposits were
less than $5 billion for the quarter ended December 31, 2022, State Bank is not subject to this special assessment.
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.
7
Community Reinvestment Act
The Community Reinvestment Act (the “CRA”)
requires State Bank’s primary federal regulatory agency, the FRB, to assess State Bank’s record in meeting the credit needs
of the communities served by State Bank. The FRB assigns one of four ratings: outstanding, satisfactory; needs to improve or substantial
noncompliance. The rating assigned to a financial institution is considered in connection with various applications submitted by the financial
institution or its holding company to its banking regulators, including applications to acquire another financial institution or to open
or close a branch office. In addition, all subsidiary banks of a financial holding company must maintain a satisfactory or outstanding
rating in order for the financial holding company to avoid limitations on its activities. State Bank received a satisfactory rating in
its most recent CRA examination.
On October 24, 2023, the federal banking agencies,
including the FRB, issued a final rule designed to strengthen and modernize the regulations implementing the CRA. The changes are designed
to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes
in the banking industry, including mobile and internet banking, provide greater clarity and consistency in the application of the CRA
regulations, and tailor CRA evaluations and data collection to bank size and type. The applicability date for the majority of the changes
to the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. The Company is still evaluating
and cannot predict the impact the changes to the CRA may have on its operations at this time.
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 (the “Securities Act”), 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 Overview” and then “Governance Documents”. 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 Overview” and then “Governance Documents”.
USA Patriot Act and Anti-Money Laundering Act
The Uniting and Strengthening of America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) gives the United States government
powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing
and broadened anti-money laundering requirements. Title III of the Patriot Act encourages information sharing among bank regulatory agencies
and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions.
Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying
procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies,
procedures and controls designed to detect and report suspicious activity. State Bank has established policies and procedures that State
Bank believes comply with the requirements of the Patriot Act.
8
The Anti-Money Laundering Act of 2020 (the “AMLA”),
which amends the Bank Secrecy Act of 1970 (the “BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive
reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to
anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal
processes for BSA compliance; expands enforcement-related and investigation-related authority, including increasing available sanctions
for certain BSA violations and instituting BSA whistleblower initiatives and protections.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of
Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and
regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially
designated targets and countries. State Bank is responsible for, among other things, blocking accounts of, and transactions with, such
targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their
occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing
applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit
such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties
against institutions found to be violating these obligations.
Executive and Incentive Compensation
The Dodd-Frank Act requires that the federal
banking agencies, including the FRB and the FDIC, issue a rule related to incentive-based compensation. No final rule implementing this
provision of the Dodd-Frank Act has, as of the date of the filing of this Annual Report on Form 10-K, been adopted, but a proposed rule
was published in 2016, and again in 2024, that expanded upon a prior proposed rule published in 2011. The proposed rule is intended to:
(i) prohibit incentive-based payment arrangements that the banking agencies determine could encourage certain financial institutions
to take inappropriate risks by providing excessive compensation or that could lead to material financial loss; (ii) require the board
of directors of those financial institutions to take certain oversight actions related to incentive-based compensation; and (iii) require
those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal
regulator. Although a final rule has not been issued, the Company has undertaken efforts to ensure that the Company’s incentive
compensation plans do not encourage inappropriate risks, consistent with the principles identified above.
In June 2010, the FRB, the Office of the Comptroller
of the Currency (the “OCC”) and the FDIC issued comprehensive final guidance on incentive compensation policies intended to
ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations
by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile
of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive
compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively
identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate
governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated
into the proposed joint compensation regulations under the Dodd-Frank Act, described above.
The FRB and the OCC review, as part of their respective
regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company and State
Bank, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scope
and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. Deficiencies will be incorporated
into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.
Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management
control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and
effective measures to correct the deficiencies.
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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.
Following the adoption of additional listing requirements
in 2023 to comply with the Dodd-Frank Act and rules adopted by the SEC in October 2022, public companies are now required to adopt and
implement “clawback” policies 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 the three completed
fiscal years immediately preceding the date the issuer is required to prepare a restatement and would cover all executives who received
incentive awards. The Company’s clawback policy adopted in accordance with these listing standards is included as Exhibit 97.
Consumer Protection Laws and Regulations
Banks are subject to regular examination to ensure
compliance with federal consumer protection statutes and regulations, including, but not limited to, the following:
The banking regulators also use their authority
under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices
by banks that may not necessarily fall within the scope of a specific banking or consumer finance law.
Financial Privacy Provisions
Federal and state regulations limit the ability
of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations
require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal
information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors.
State Bank is also subject to regulatory guidelines
establishing standards for safeguarding customer information. These guidelines describe the federal bank regulatory agencies’ expectations
for the creation, implementation and maintenance of an information security program, which would include administrative, technical and
physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards
set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against
any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to any customer.
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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 November 2021, the OCC, the FRB and the FDIC
issued a final rule, which became effective in May 2022, requiring banking organizations that experience a computer-security incident
to notify certain entities. A computer-security incident occurs when actual or potential harm to the confidentiality, integrity, or availability
of an information system or the information occurs, or there is a violation or imminent threat of a violation to banking security policies
and procedures. The affected bank must notify its respective federal regulator of the computer-security incident as soon as possible and
no later than 36 hours after the bank determines a computer-security incident that rises to the level of a notification incident has occurred.
These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats
before they manifest into larger incidents. This rule also requires bank service providers to notify their bank organization customers
of a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four
or more hours.
Furthermore, the Cyber Incident Reporting for
Critical Infrastructure Act, enacted in March 2022, will require, once administrative rules are adopted, certain covered entities, including
those in the financial services industry, to report a covered cyber incident to the U.S. Department of Homeland Security’s Cybersecurity
& Infrastructure Security Agency (“CISA”) within 72 hours after a covered entity reasonably believes an incident has occurred.
Separate reporting to CISA will also be required within 24 hours if a ransom payment is made as a result of a ransomware attack.
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.
On July 26, 2023, the SEC adopted final rules
that require public companies to promptly disclose material cybersecurity incidents in Current Reports on Form 8-K and detailed information
regarding their cybersecurity risk management, strategy, and governance on an annual basis in their Annual Reports on Form 10-K. See
ITEM 1C. CYBERSECURITY. Public companies are now required to report on Form 8-K any cybersecurity incident they determine to be material
within four business days of making that determination. These SEC rules, and related regulatory guidance, are in addition to notification
and disclosure requirements under state and federal banking laws and regulations.
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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 also regularly invests in new products and technology 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, the 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. The Company believes that the nature
of its operations 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 may be required to make capital expenditures
for environmental control facilities related to properties which they may acquire through foreclosure proceedings in the future; however,
the amount of such capital expenditures, if any, is not currently determinable.
Effects of Government Monetary Policy
The earnings of the Company are affected by general
and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the FRB regulates money
and credit conditions and interest rates to influence general economic conditions, primarily through open market acquisitions or dispositions
of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member
and nonmember bank deposits. FRB monetary policies have had a significant effect on the interest income and interest expense of commercial
banks, including State Bank, and are expected to continue to do so in the future.
Human Capital Resources
Our employees are vital to our success in the
financial services industry. As a human-capital intensive business, the long-term success of our company depends on our people. Our goal
is to ensure that we have the right talent, in the right place, at the right time. We do that through our commitment to attracting, developing
and retaining our employees.
We strive to attract individuals who are people-focused
and share our values. We have a comprehensive program dedicated to selecting new talent and enhancing the skills of our employees. In
our recruiting efforts, we strive to have a diverse group of candidates to consider for our roles.
We have designed a compensation structure that
we believe is attractive to our current and prospective employees. We also offer our employees the opportunity to participate in a variety
of professional and leadership development programs. Our programs include a variety of industry, product, technical, professional, business
development, leadership and regulatory topics. These programs are available online and in-person. In addition, we encourage all employees
to be involved in the communities we serve through various volunteer activities.
We seek to retain our employees by using their
feedback to create and continually enhance programs that support their needs. We use company-wide surveys to solicit feedback from our
employees. We have a formal annual goal setting and performance review process for our employees. We promote a values-based culture, an
important factor in retaining our employees. Our training, to share and communicate our culture to all employees, plays an important part
in this process. We are committed to having a diverse workforce, and an inclusive work environment is a natural extension of our culture.
We are committed to ensuring that all our employees feel welcomed, valued, respected and heard so that they can fully contribute their
unique talents for the benefit of our customers, their careers, our company and our communities.
We monitor and evaluate various turnover and attrition
metrics throughout our organization. Our annualized voluntary turnover is relatively low, as is the case for turnover of our top performers,
a record which we attribute to our strong values-based culture, commitment to career development, and attractive compensation and benefit
programs.
At December 31, 2024, the Company employed approximately
252 full-time equivalent employees to whom a variety of benefits are provided. Management considers its relationship with its employees
to be good.
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Item 1A. Risk Factors.
Cautionary Statement Regarding Forward-Looking
Information
Certain statements contained in this Annual Report
on Form 10-K, and in other statements that we make from time to time in filings by the Company with the SEC, in press releases, and in
oral and written statements made by or with the approval of the Company which are not statements of historical fact constitute forward-looking
statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation
Reform Act of 1995. Examples of forward-looking statements include: (a) projections of income or expense, earnings per share, the payment
or non-payment of dividends, capital structure and other financial items; (b) statements of plans and objectives of the Company or our
Board of Directors or management, including those relating to products and services; (c) statements of future economic performance; (d)
statements of future customer attraction or retention; and (e) statements of assumptions underlying these statements. Forward-looking
statements reflect our expectations, estimates or projections concerning future results or events. These statements are generally identified
by the use of forward-looking words or phrases such as “anticipates”, “believes”, “estimates”, “expects”,
“intends”, “may”, “plans”, “projects”, “should”, “will allow”,
“will continue”, “will likely result”, “will remain”, “would be”, or similar expressions.
The Private Securities Litigation Reform Act
of 1995 (the “Reform Act”) provides a “safe harbor” for forward-looking statements to encourage companies to
provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking
statements. We desire to take advantage of the “safe harbor” provisions of the Reform Act.
Forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events,
including those factors discussed in the Risk Factors below. There is also the risk that the Company’s management or Board of Directors
incorrectly analyzes these risks and forces, or that the strategies the Company develops to address them are unsuccessful.
Forward-looking statements speak only as of that
date on which they are made. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which the statement is made. All forward-looking statements attributable to the Company
or any person acting on our behalf are qualified in their entirety by the following cautionary statements.
Risk Factors
The following sets forth certain risk factors
that we are believe are relevant to the Company and its business. These risk factors are not presented in any particular order and do
not constitute all of the risks that may affect our business. Additional risks that are not presently known or that we currently deem
to be immaterial could also have a material adverse impact on our business, financial condition, or results of operations.
Economic, Market and Political Risks:
Changes in economic and political conditions
could adversely affect our earnings through declines in deposits, loan demand, the ability of our customers to repay loans and the value
of collateral securing our loans.
Our success depends to a large extent upon
local and national economic conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation,
recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the
failure of the federal government to raise the federal debt ceiling and/or possible future U.S. government shutdowns over budget
disagreements, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements,
trade wars, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of investment
securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the
collateral securing loans made by us. Disruptions in U.S. and global financial markets, and changes in oil production in the Middle
East also affect the economy and stock prices in the U.S., which can affect our earnings capital, as well as the ability of our
customers to repay loans. Because we have a significant amount of real estate loans, decreases in real estate values could adversely
affect the value of property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the
economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have
an adverse impact on our earnings and cash flows. In addition, our lending and deposit gathering activities are concentrated
primarily in Northwest and Central Ohio. As a result, our success depends in large part on the general economic conditions of these
areas, particularly given that a significant portion of our lending relates to real estate located in this region. Therefore,
adverse changes in the economic conditions in these areas could adversely impact our earnings and cash flows.
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Instability in global economic conditions and
geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on our results of operations and
financial condition.
The macroeconomic environment in the U.S. is susceptible
to global events and volatility in financial markets. In addition, trade negotiations between the U.S. and other nations, including negotiations
related to recent tariffs and threats of tariffs by the U.S., remain uncertain and could adversely impact economic and market conditions
for the Company and our clients and counterparties. Instability in global economic conditions and geopolitical matters, such as military
conflicts in Ukraine and the Middle East, as well as volatility in financial markets, could have a material adverse effect on our results