10-Q 1 f10q0920_sbfinancialgroup.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________to___________________________

 

Commission file number 1-36785

 

SB FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Ohio   34-1395608
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

  401 Clinton Street, Defiance, Ohio 43512  
  (Address of principal executive offices)  
  (Zip Code)  

 

  (419) 783-8950  
  (Registrant’s telephone number, including area code)  

 

  N/A  
  (Former name, former address and former fiscal year, if changed since last report.)  

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Shares, No Par Value   SBFG   The NASDAQ Stock Market, LLC
7,546,804 Outstanding at November 9, 2020       (NASDAQ Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerate Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☒ Smaller Reporting Company ☐ Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

 

 

 

 

 

SB FINANCIAL GROUP, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
Item 4. Controls and Procedures 42
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 43
Item 1A. Risk Factors 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3. Defaults Upon Senior Securities 44
Item 4. Mine Safety Disclosures 44
Item 5. Other Information 44
Item 6. Exhibits 44
     
Signatures 45

 

i

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SB Financial Group, Inc.

Condensed Consolidated Balance Sheets

 

   September 30,
2020
   December 31,
2019
 
 ($ in thousands)  (unaudited)   (audited) 
Assets        
Cash and due from banks  $94,641   $27,064 
Interest bearing time deposits   8,956    - 
Available-for-sale securities   130,315    100,948 
Loans held for sale   13,943    7,258 
Loans, net of unearned income   885,850    825,510 
Allowance for loan losses   (11,793)   (8,755)
Premises and equipment, net   23,785    23,385 
Federal Reserve and Federal Home Loan Bank Stock, at cost   5,303    4,648 
Foreclosed assets held for sale, net   76    305 
Interest receivable   4,159    3,106 
Goodwill   22,091    17,792 
Cash value of life insurance   17,453    17,221 
Mortgage servicing rights   8,535    11,017 
Other assets   14,927    9,078 
           
Total assets  $1,218,241   $1,038,577 
           
Liabilities and shareholders’ equity          
           
Liabilities          
Deposits          
Non interest bearing demand  $225,003   $158,357 
Interest bearing demand   164,248    131,084 
Savings   169,474    119,359 
Money market   204,862    173,666 
Time deposits   250,428    257,753 
Total deposits   1,014,015    840,219 
           
Short term borrowings   20,710    12,945 
Federal Home Loan Bank advances   8,000    16,000 
Trust preferred securities   10,310    10,310 
Interest payable   946    1,191 
Other liabilities   22,913    21,818 
Total liabilities   1,076,894    902,483 
           
Commitments & Contingent Liabilities   -    - 
           
Shareholders’ Equity          
Common stock, no par value; (authorized 10,000,000 shares; 2020 - 8,180,712 shares issued, 2019 - 8,180,712 shares issued)   54,463    54,463 
Additional paid-in capital   14,782    15,023 
Retained earnings   80,012    72,704 
Accumulated other comprehensive income   2,221    659 
Treasury stock, at cost; (2020 - 599,440 common shares, 2019 - 417,785 common shares)   (10,131)   (6,755)
Total shareholders’ equity   141,347    136,094 
Total liabilities and shareholders’ equity  $1,218,241   $1,038,577 

 

See notes to condensed consolidated financial statements (unaudited)

 

Note: The balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date.

 

1

 

 

SB Financial Group, Inc.

Condensed Consolidated Income Statement (unaudited)

 

   Three Months Ended   Nine Months Ended 
($ in thousands, except per share data)  September 30,   September 30, 
   2020   2019   2020   2019 
Interest Income                
Loans                
Taxable  $10,179   $10,607   $29,919   $30,216 
Tax exempt   47    82    185    217 
Securities                    
Taxable   494    776    1,696    2,489 
Tax exempt   87    81    246    273 
Total interest income   10,807    11,546    32,046    33,195 
                     
Interest Expense                    
Deposits   1,423    2,258    4,852    6,268 
Repurchase agreements & other   12    22    60    65 
Federal Home Loan Bank advance expense   59    101    251    301 
Trust preferred securities expense   54    107    204    331 
Total interest expense   1,548    2,488    5,367    6,965 
                     
Net Interest Income   9,259    9,058    26,679    26,230 
Provision for loan losses   1,800    300    3,700    500 
                     
Net interest income after provision for loan losses   7,459    8,758    22,979    25,730 
                     
Noninterest Income                    
Wealth management fees   839    775    2,382    2,292 
Customer service fees   730    729    2,079    2,049 
Gain on sale of mortgage loans & OMSR   8,085    2,495    18,153    5,365 
Mortgage loan servicing fees, net   (169)   8    (4,101)   (731)
Gain on sale of non-mortgage loans   119    462    330    1,005 
Title insurance income   517    400    1,391    727 
Net gain on sale of securities   -    -    -    206 
Loss on sale/disposal of assets   (52)   1    (178)   (6)
Other income   349    496    1,138    1,150 
Total noninterest income   10,418    5,366    21,194    12,057 
                     
Noninterest Expense                    
Salaries and employee benefits   6,995    5,715    18,841    15,922 
Net occupancy expense   736    656    2,109    1,928 
Equipment expense   888    688    2,368    2,064 
Data processing fees   586    499    2,422    1,430 
Professional fees   695    571    2,676    1,837 
Marketing expense   137    239    486    724 
Telephone and communications   142    118    379    345 
Postage and delivery expense   96    89    307    254 
State, local and other taxes   331    243    847    745 
Employee expense   155    199    432    588 
Other expenses   574    483    1,536    1,397 
Total noninterest expense   11,335    9,500    32,403    27,234 
                     
Income before income tax   6,542    4,624    11,770    10,553 
                     
Provision for income taxes   1,292    862    2,184    1,938 
                     
Net income  $5,250   $3,762   $9,586   $8,615 
                     
Preferred share dividends  $-   $233   $-   $720 
                     
Net income available to common shareholders  $5,250   $3,529   $9,586   $7,895 
                     
Basic earnings per common share  $0.69   $0.55   $1.25   $1.22 
                     
Diluted earnings per common share  $0.69   $0.48   $1.25   $1.08 
                     
Average common shares outstanding (in thousands):                    
Basic:   7,607    6,397    7,700    6,459 
Diluted:   7,607    7,876    7,700    7,955 

 

See notes to condensed consolidated financial statements (unaudited)

 

2

 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended   Nine Months Ended 
   September   September   September   September 
($ in thousands)  2020   2019   2020   2019 
Net income  $5,250   $3,762   $9,586   $8,615 
Other comprehensive income (loss):                    
Available for sale investment securities:                    
Unrealized holding gain (loss) arising in the period   (125)   125    1,977    2,045 
Related tax expense (benefit)   26    (26)   (415)   (429)
Less: Reclassification for gain realized in income   -    -    -    (206)
Related tax expense   -    -    -    42 
Net effect on other comprehensive income   (99)   99    1,562    1,452 
Total comprehensive income  $5,151   $3,861   $11,148   $10,067 

 

See notes to condensed consolidated financial statements (unaudited)

 

3

 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

 

   Preferred   Common   Additional
Paid-in
   Retained   Accumulated
Other
Comprehensive
   Treasury     
($ in thousands, except per share data)  Stock   Stock   Capital   Earnings   Income (Loss)   Stock   Total 
Balance, January 1, 2020  $-   $54,463   $15,023   $72,704   $659   $(6,755)  $136,094 
Net income                  681              681 
Other comprehensive income                       1,390         1,390 
Dividends on common, $0.095 per share                  (744)             (744)
Restricted stock vesting             (225)             225    - 
Stock options exercised             (253)             441    188 
Repurchased stock                            (1,814)   (1,814)
Stock based compensation expense             110                   110 
Balance, March 31, 2020  $-   $54,463   $14,655   $72,641   $2,049   $(7,903)  $135,905 
Net income                  3,655              3,655 
Other comprehensive income                       271         271 
Dividends on common, $0.10 per share                  (770)             (770)
Repurchased stock                            (1,305)   (1,305)
Stock based compensation expense             125                   125 
Balance, June 30, 2020  $-   $54,463   $14,780   $75,526   $2,320   $(9,208)  $137,881 
Net income                  5,250              5,250 
Other comprehensive loss                       (99)        (99)
Dividends on common, $0.10 per share                  (764)             (764)
Restricted stock vesting             (82)             82    - 
Repurchased stock                            (1,005)   (1,005)
Stock based compensation expense             84                   84 
Balance, September 30, 2020  $-   $54,463   $14,782   $80,012   $2,221   $(10,131)  $141,347 
                                    
Balance, January 1, 2019  $13,979   $40,485   $15,226   $64,012   $(552)  $(2,715)  $130,435 
Net income                  2,226              2,226 
Other comprehensive income                       676         676 
Conversion of preferred to common   (1)   1                        - 
Stock reissue for purchase of Peak Title             22              117    139 
Dividends on common, $0.085 per share                  (556)             (556)
Dividends on preferred, $0.1625 per share                  (244)             (244)
Restricted stock vesting             (208)             208    - 
Stock options exercised             (10)             21    11 
Repurchased stock                            (1,294)   (1,294)
Stock based compensation expense             113                   113 
Balance, March 31, 2019  $13,978   $40,486   $15,143   $65,438   $124   $(3,663)  $131,506 
Net income                  2,627              2,627 
Other comprehensive income                       677         677 
Dividends on common, $0.900 per share                  (586)             (586)
Dividends on preferred, $0.1625 per share                  (243)             (243)
Stock options exercised             (24)             43    19 
Repurchased stock                            (203)   (203)
Stock based compensation expense             140                   140 
Balance, June 30, 2019  $13,978   $40,486   $15,259   $67,236   $801   $(3,823)  $133,937 
Net income                  3,762              3,762 
Other comprehensive income                       99         99 
Common stock issuance   (737)   737                        - 
Dividends on common, $0.900 per share                  (581)             (581)
Dividends on preferred, $0.1625 per share                  (233)             (233)
Restricted stock vesting             (113)             113    - 
Stock options exercised             (20)             36    16 
Repurchased stock                            (2,847)   (2,847)
Stock based compensation expense             93                   93 
Balance, September 30, 2019  $13,241   $41,223   $15,219   $70,184   $900   $(6,521)  $134,246 

 

See notes to condensed consolidated financial statements (unaudited)

 

4

 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

   Nine Months Ended
September 30,
 
($ in thousands)  2020   2019 
Operating Activities        
Net Income  $9,586   $8,615 
Items not requiring (providing) cash          
Depreciation and amortization   1,440    1,386 
Provision for loan losses   3,700    500 
Expense of share-based compensation plan   319    346 
Amortization of premiums and discounts on securities   415    213 
Amortization of intangible assets   28    6 
Amortization of originated mortgage servicing rights   3,479    1,415 
Impairment of mortgage servicing rights   2,974    1,398 
Proceeds from sale of loans held for sale   455,305    244,716 
Originations of loans held for sale   (447,575)   (249,061)
Gain from sale of loans   (18,483)   (6,370)
Loss (gain) on sales of assets   177    5 
Net change in foreclosed assets   -    6 
Net gains on sales of securities   -    (206)
Changes in          
Interest receivable   (1,053)   (354)
Other assets   (5,570)   (5,598)
Interest payable & other liabilities   627    6,636 
           
Net cash provided by operating activities   5,369    3,653 
           
Investing Activities          
Purchases of available-for-sale securities   (98,020)   (8,840)
Proceeds from maturities of interest bearing time deposits   2,586    - 
Proceeds from maturities of available-for-sale securities   71,578    17,237 
Proceeds from sales of available-for-sale securities   -    7,375 
Net change in loans   (44,814)   (51,171)
Purchase of premises, equipment   (1,586)   (2,047)
Proceeds from sales of premises, equipment   -    8 
Purchase of bank owned life insurance   -    (50)
Purchase of Federal Reserve and Federal Home Loan Bank Stock   (538)   (525)
Proceeds from sale of foreclosed assets   445    146 
Net cash and cash equivalents (paid) received in acquisition   16,263    (2,600)
           
Net cash used in investing activities   (54,086)   (40,467)
           
Financing Activities          
Net increase in demand deposits, money market, interest checking & savings accounts   139,626    18,725 
Net increase (decrease) in certificates of deposit   (16,883)   26,677 
Net increase (decrease) in short term borrowings   7,765    (525)
Proceeds from Federal Home Loan Bank advances   -    8,000 
Repayment of Federal Home Loan Bank advances   (8,000)   (8,000)
Net proceeds from share-based compensation plans   188    46 
Stock repurchase plan   (4,124)   (4,344)
Issuance of common shares   -    139 
Dividends on common shares   (2,278)   (1,723)
Dividends on preferred shares   -    (720)
           
Net cash provided by financing activities   116,294    38,275 
           
Increase in cash and cash equivalents   67,577    1,461 
           
Cash and cash equivalents, beginning of period   27,064    48,363 
           
Cash and cash equivalents, end of period  $94,641   $49,824 
           
Supplemental cash flow information          
Interest paid  $5,612   $6,483 
Income taxes paid  $2,715   $4,230 
Fair value of assets acquired - premises and equipment (Peak Title)  $-   $1,161 
           
Supplemental non-cash disclosure          
Initial recognition of right-of-use lease assets  $-   $293 
Transfer of loans to foreclosed assets  $207   $517 
           
In conjunction with the Edon acquisition, liabilities assumed were:          
Fair value of assets acquired  $66,795   $- 
Cash paid in acquisition   (15,519)  $- 
Liabilities assumed  $51,276   $- 

 

See notes to condensed consolidated financial statements (unaudited)

 

5

 

 

SB FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1—BASIS OF PRESENTATION

 

SB Financial Group, Inc., an Ohio corporation (the “Company”), is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”). RDSI is presently inactive and has had no material operations or employees since January 1, 2018. In addition, State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance, LLC (“SBI”).

 

In June 2020, the Company acquired Edon Bancorp (“Edon”) and its subsidiary, The Edon State Bank Company of Edon, Ohio. This acquisition was completed effective June 5, 2020, and the acquisition resulted in an increase in goodwill, which is detailed in Note 8. The business combination summary is detailed in Note 3.

 

In March 2019, the Company formed SBFG Title, LLC (“Title”) and purchased all of the assets and real estate of an Ohio based title agency. The purchase was completed effective March 15, 2019, and the purchase resulted in an increase in goodwill, which is detailed in Note 8.

 

In March 2019, the Company formed SB Captive, Inc. (“Captive”), which is a captive insurance company based in Nevada. The Captive allows the Company to share insurance risk among a pool of similar sized banks.

 

The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, Title, Captive and SBI. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of results for the complete year.

 

The condensed consolidated balance sheet of the Company as of December 31, 2019 has been derived from the audited consolidated balance sheet of the Company as of that date.

 

For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

New and applicable accounting pronouncements:

 

ASU No. 2017-04: Intangibles – Goodwill and Other (Topic 350)

 

This ASU simplifies the test for goodwill impairment. Specifically, these amendments eliminate Step 2 from the goodwill impairment test, and also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Company has decided to adopt this ASU immediately, and management does not believe the changes will have a material effect on the Company’s accounting and disclosures.

 

ASU No. 2018-13: Fair Value Measurement - Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)

 

The updated guidance improves the disclosure requirements for fair value measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted- average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. The impact of this new guidance did not have a material impact on the Company’s consolidated financial statements.

 

6

 

 

Accounting Standards not yet adopted:

 

ASU No. 2020-04: Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)

 

This guidance provides temporary options to ease the potential burden in accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective as of March 12, 2020 through December 31, 2022. The Company anticipates being fully prepared to implement a replacement for the reference rate and has determined that any change will not have a material impact to the consolidated financial statements.

 

ASU No. 2020-01: Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323 and Topic 815

 

This guidance was issued in January 2020 to clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective beginning after December 15, 2020. The Company is currently assessing the impact on its accounting and disclosures.

 

ASU No. 2016-13: Financial Instruments – Credit Losses (Topic 326)

 

This ASU, which is commonly known as “CECL,” replaces the current GAAP incurred impairment methodology regarding credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP.

 

The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities.

 

In December 2018, the OCC, the Federal Reserve Board, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

 

On November 15, 2019, the FASB delayed the effective date for certain small public companies and other private companies. As the Company is currently a smaller reporting company, the amendment will delay the effective date of ASU No. 2016-13 to the fiscal year beginning January 1, 2023.

 

While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date. The Company implemented a process to track required data by utilizing accounting software in preparation for compliance. We anticipate being fully prepared for implementation by December 15, 2022.

 

Reclassifications:

 

Certain reclassifications have been made to prior period financial statements to conform to the current financial statement presentation. These reclassifications had no effect on net income.

 

7

 

 

NOTE 2—EARNINGS PER SHARE

 

Earnings per share (EPS) have been computed based on the weighted average number of common shares outstanding during the periods presented. There were no anti-dilutive shares in 2020 or 2019. The average number of common shares used in the computation of basic and diluted earnings per share are set forth in the tables below:

 

   Three Months Ended
Sep. 30,
 
($ and outstanding shares in thousands - except per share data)  2020   2019 
         
Distributed earnings allocated to common shares  $764   $581 
Undistributed (in excess of) earnings allocated to common shares   4,482    2,944 
           
Net earnings allocated to common shares   5,246    3,525 
Net earnings allocated to participating securities   4    4 
Dividends on convertible preferred shares   -    233 
           
Net Income allocated to common shares and participating securities  $5,250   $3,762 
           
Weighted average shares outstanding for basic earnings per share   7,607    6,397 
Dilutive effect of stock compensation   -    34 
Dilutive effect of convertible shares   -    1,445 
           
Weighted average shares outstanding for diluted earnings per share   7,607    7,876 
           
Basic earnings per common share  $0.69   $0.55 
           
Diluted earnings per common share  $0.69   $0.48 

 

   Nine Months Ended
Sep. 30,
 
($ and outstanding shares in thousands - except per share data)  2020   2019 
         
Distributed earnings allocated to common shares  $2,278   $1,723 
Undistributed earnings allocated to common shares   7,296    6,159 
           
Net earnings allocated to common shares   9,574    7,882 
Net earnings allocated to participating securities   12    13 
Dividends on convertible preferred shares   -    720 
           
Net Income allocated to common shares and participating securities  $9,586   $8,615 
           
Weighted average shares outstanding for basic earnings per share   7,700    6,459 
Dilutive effect of stock compensation   -    36 
Dilutive effect of preferred convertible shares   -    1,460 
           
Weighted average shares outstanding for diluted earnings per share   7,700    7,955 
           
Basic earnings per common share  $1.25   $1.22 
           
Diluted earnings per common share  $1.25   $1.08 

 

8

 

 

NOTE 3 – BUSINESS COMBINATION

 

Effective June 5, 2020, the Company acquired Edon Bancorp and its subsidiary, The Edon State Bank Company of Edon, Ohio. Edon Bancorp was headquartered in Edon, Ohio and had one retail banking office. The Edon State Bank was merged with and into State Bank, with State Bank surviving. Under the terms of the merger agreement, shareholders of Edon received fixed consideration of $103.50 in cash for each share of Edon common stock for total consideration of $15.5 million. The Company accounted for the transaction under the acquisition method of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.

 

In accordance with ASC 805, the Company expensed approximately $1.2 million of direct acquisition costs during the three months ended June 30, 2020, and no additional merger expense was recorded in the three months ended September 30, 2020. The $1.2 million in merger expense is split between data processing and professional fees expense. As a result of the acquisition, the Company recorded $4.3 million of goodwill and $0.7 million of intangible assets in the second quarter of 2020. The Company was able to increase both its deposit and loan base and acquire new households in a new market. It is expected that this transaction will result in business synergies and economies of scale. The acquisition was consistent with the Company’s strategy to expand its presence in Northwest Ohio and to increase profitability by introducing existing products and services to the acquired customer base. The intangible assets are related to core deposits, which are being amortized over 10 years on a straight-line basis. For tax purposes, goodwill is non-deductible but will be evaluated annually for impairment.

 

The following table summarizes the fair value of the total consideration transferred as part of the acquisition as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction based on assumptions that are subject to change as management continues to evaluate relevant information as it becomes available. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, relevant information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be recorded in the reporting period in which the adjustment amounts are determined. Potential adjustments, if any, will be related to assets that may have changes to valuation amounts that were not readily determinable at acquisition date.

 

The contractual principal of loans at the acquisition date was $16.3 million and the estimate of the contractual cash flows not expected to be collected is $0.4 million.

 

Fair value of assets acquired    
     
Cash and cash equivalents  $31,756 
Interest bearing time deposits   11,542 
Investment securities   1,362 
Federal Home Loan Bank stock   117 
Loans held for investment   16,395 
Premises and equipment   446 
Goodwill   4,325 
Core deposit intangible   660 
Other assets   192 
Total assets acquired  $66,795 
      
Fair value of liabilities assumed     
      
Deposits  $51,053 
Other liabilities   223 
Total liabilities assumed   51,276 
Total purchase price (cash)  $15,519 

 

9

 

 

Pro Forma Financial Information

 

The results of operations of Edon Bancorp have been included in the Company’s consolidated financial statements since the acquisition date of June 5, 2020. The following schedule includes the pro forma results for the three and nine months ended September 30, 2020 and 2019, as if the Edon acquisition had occurred as of the beginning of the reporting periods presented. The acquisition added less than $0.1 million in revenue and earnings to the Company for the three months and nine months ended September 30, 2020.

 

   Three Months Ended 
Summary of Operations ($ in thousands)  Sep. 2020   Sep. 2019 
         
Net interest income  $9,259   $9,424 
Provision for loan losses   1,800    306 
           
Net interest income after provision  $7,459   $9,118 
           
Non interest income   10,418    5,394 
Non interest expense   11,335    9,776 
           
Income before income taxes  $6,542   $4,736 
Income tax expense*   1,292    886 
           
Net income  $5,250   $3,850 
Preferred share dividends   -    233 
           
Net income to common shareholders  $5,250   $3,617 
           
Basic earnings per share  $0.69   $0.57 
Diluted earnngs per share  $0.69   $0.49 

 

*Income tax expense for Edon calculated using a 21% statuatory rate

 

   Nine Months Ended 
Summary of Operations ($ in thousands)  Sep. 2020   Sep. 2019 
         
Net interest income  $27,178   $27,340 
Provision for loan losses   3,700    506 
           
Net interest income after provision  $23,478   $26,834 
           
Non interest income   21,238    12,145 
Non interest expense   33,474    28,043 
           
Income before income taxes  $11,242   $10,936 
Income tax expense*   2,073    2,018 
           
Net income  $9,169   $8,918 
Preferred share dividends   -    487 
           
Net income to common shareholders  $9,169   $8,431 
           
Basic earnings per share  $1.19   $1.31 
Diluted earnngs per share  $1.19   $1.12 

 

*Income tax expense for Edon calculated using a 21% statuatory rate

 

10

 

 

Note 4 – AVAILABLE FOR SALE Securities

 

The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at September 30, 2020 and December 31, 2019 were as follows:

 

       Gross   Gross     
($ in thousands)  Amortized   Unrealized   Unrealized     
September 30, 2020  Cost   Gains   Losses   Fair Value 
                 
U.S. Treasury and Government agencies  $6,555   $312   $-   $6,867 
Mortgage-backed securities   107,356    1,898    (61)   109,193 
State and political subdivisions   11,093    663    (1)   11,755 
Other corporate securities   2,500    -    -    2,500 
                     
Totals  $127,504   $2,873   $(62)  $130,315 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized     
December 31, 2019  Cost   Gains   Losses   Fair Value 
                 
U.S. Treasury and Government agencies  $12,023   $181   $(2)  $12,202 
Mortgage-backed securities   77,892    492    (202)   78,182 
State and political subdivisions   10,199    366    (1)   10,564 
Other corporate securities   -    -    -    - 
                     
Totals  $100,114   $1,039   $(205)  $100,948 

 

The amortized cost and fair value of securities available for sale at September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized     
($ in thousands)  Cost   Fair Value 
         
Within one year  $757   $763 
Due after one year through five years   6,433    6,603 
Due after five years through ten years   6,995    7,282 
Due after ten years   5,963    6,474 
    20,148    21,122 
           
Mortgage-backed securities   107,356    109,193 
           
Totals  $127,504   $130,315 

 

The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $45.1 million at September 30, 2020 and $34.8 million at December 31, 2019. The fair value of securities delivered for repurchase agreements was $24.9 million at September 30, 2020 and $19.5 million at December 31, 2019.

 

There were no realized gains and losses from sales of available-for-sale securities for the nine months ended September 30, 2020, and $0.2 million in realized gains for the nine months ended September 30, 2019.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments was $23.3 million at September 30, 2020, and $38.8 million at December 31, 2019, which was approximately 18 and 38 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

11

 

 

Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2020 and December 31, 2019 are as follows:

 

   Less than 12 Months   12 Months or Longer   Total 
($ in thousands)
September 30, 2020
  Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
                         
U.S. Treasury and Government agencies  $-   $-   $-   $-   $-   $- 
Mortgage-backed securities   22,474    (57)   750    (4)   23,224    (61)
State and political subdivisions   96    (1)   -    -    96    (1)
Other corporate securities   -    -    -    -    -    - 
                               
Totals  $22,570   $(58)  $750   $(4)  $23,320   $(62)

 

   Less than 12 Months   12 Months or Longer   Total 
December 31, 2019  Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
                         
U.S. Treasury and Government agencies  $872   $(1)  $2,598   $(1)  $3,470   $(2)
Mortgage-backed securities   30,692    (157)   4,264    (45)   34,956    (202)
State and political subdivisions   339    (1)   -    -    339    (1)
Other corporate securities   -    -    -    -    -    - 
                               
Totals  $31,903   $(159)  $6,862   $(46)  $38,765   $(205)

  

The total unrealized loss in the securities portfolio was $0.06 million as of September 30, 2020 compared to a $0.2 million unrealized loss at December 31, 2019. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost. Management has determined there is no other-than-temporary-impairment on its securities as of September 30, 2020.

 

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, all loan classes are placed on nonaccrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

12

 

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

A loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

When State Bank moves a loan to nonaccrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.

 

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, State Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

13

 

 

Categories of loans at September 30, 2020 and December 31, 2019 include:

 

   Total Loans   Nonaccrual Loans 
($ in thousands)  September 2020   December 2019   September 2020   December 2019 
                 
Commercial & industrial  $218,833   $151,047   $1,140   $1,772 
Commercial real estate - owner occupied   107,128    98,488    1,450    1,362 
Commercial real estate - nonowner occupied   264,651    268,294    1,025    464 
Agricultural   57,437    50,994    -    - 
Residential real estate   178,485    193,159    2,481    1,635 
Home equity line of credit (HELOC)   47,003    48,070    296    249 
Consumer   14,421    14,738    17    18 
Total loans  $887,958   $824,790   $6,409   $5,500 
                     
Net deferred costs (fees)  $(2,108)  $720           
                     
Total loans, net deferred costs (fees)  $885,850   $825,510           
                     
Allowance for loan losses  $(11,793)  $(8,755)          

  

The risk characteristics of each loan portfolio segment are as follows:

 

Commercial & Industrial and Agricultural

 

Commercial & industrial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial Real Estate (Owner and Nonowner Occupied)

 

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

 

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

  

14

 

  

Residential Real Estate, HELOC and Consumer

 

Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers.

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended September 30, 2020 and September 30, 2019, and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2020, December 31, 2019 and September 30, 2019.

  

($ in thousands)                        
For the Three Months Ended
September 30, 2020
  Commercial & industrial   Commercial real estate   Agricultural   Residential real estate   Consumer   Total 
                         
Beginning balance  $2,844   $3,604   $504   $2,278   $783   $10,013 
Charge offs   -    -    -    -    (32)   (32)
Recoveries   10    -    -    1    1    12 
Provision   342    911    46    258    243    1,800 
Ending balance  $3,196   $4,515   $550   $2,537   $995   $11,793 
                               
For the Nine Months Ended
September 30, 2020
  Commercial & industrial   Commercial real estate   Agricultural   Residential real estate   Consumer   Total 
                               
Beginning balance  $1,883   $3,602   $434   $2,203   $633   $8,755 
Charge offs   (582)   -    -    (37)   (67)   (686)
Recoveries   15    -    -    3    6    24 
Provision   1,880    913    116    368    423    3,700 
Ending balance  $3,196   $4,515   $550   $2,537   $995   $11,793 
                               
For the Three Months Ended
September 30, 2019
  Commercial & industrial   Commercial real estate   Agricultural   Residential real estate   Consumer   Total 
                               
Beginning balance  $1,378   $3,448   $509   $2,287   $684   $8,306 
Charge offs   (95)   -    -    (23)   (10)   (128)
Recoveries   7    -    -    1    6    14 
Provision (credit)   103    72    (16)   128    13    300 
Ending balance  $1,393   $3,520   $493   $2,393   $693   $8,492 
                               
For the Nine Months Ended
September 30, 2019
  Commercial & industrial   Commercial real estate   Agricultural   Residential real estate   Consumer   Total 
                               
Beginning balance  $1,435   $2,923   $482   $2,567   $760   $8,167 
Charge offs   (143)   -    -    (23)   (42)   (208)
Recoveries   8    -    -    2    23    33 
Provision (credit)   93    597    11    (153)   (48)   500 
Ending balance  $1,393   $3,520   $493   $2,393   $693   $8,492 

 

15

 

 

Loans Receivable at
September 30, 2020
  Commercial & industrial   Commercial real estate   Agricultural   Residential real estate   Consumer   Total 
Allowance:                        
Ending balance:                        
individually evaluated for impairment  $1   $-   $-   $167   $3   $171 
Ending balance:                              
collectively evaluated for impairment  $3,195   $4,515   $550   $2,370   $992   $11,622 
                               
Totals  $3,196   $4,515   $550   $2,537   $995   $11,793 
                               
Loans:                              
Ending balance:                              
individually evaluated for impairment  $1,117   $2,341   $-   $3,239   $136   $6,833 
Ending balance:                              
collectively evaluated for impairment  $217,716   $369,438   $57,437   $175,246   $61,288   $881,125 
                               
Totals  $218,833   $371,779   $57,437   $178,485   $61,424   $887,958 
                               
Loans Receivable at
December 31, 2019
  Commercial & industrial   Commercial real estate   Agricultural   Residential real estate   Consumer   Total 
Allowance:                              
Ending balance:                              
individually evaluated for impairment  $511   $147   $-   $68   $-   $726 
Ending balance:                              
collectively evaluated for impairment  $1,372   $3,455   $434   $2,135   $633   $8,029 
                               
Totals  $1,883   $3,602   $434   $2,203   $633   $8,755 
                               
Loans:                              
Ending balance:                              
individually evaluated for impairment  $1,722   $1,558   $-   $2,274   $31   $5,585 
Ending balance:                              
collectively evaluated for impairment  $149,325   $365,224   $50,994   $190,885   $62,777   $819,205 
                               
Totals  $151,047   $366,782   $50,994   $193,159   $62,808   $824,790 

  

16

 

 

Credit Risk Profile

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination.

 

Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

 

Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

 

Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not warranted. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of September 30, 2020 and December 31, 2019.

 

($ in thousands)
September 30, 2020
  Commercial & industrial   Commercial real
estate - owner
occupied
   Commercial real
estate - nonowner
occupied
   Agricultural   Residential
real estate
   HELOC   Consumer   Total 
                                 
Pass (1 - 4)  $216,293   $105,400   $261,953   $57,427   $174,776   $46,646   $14,394   $876,889 
Special Mention (5)   776    -    286    -    -    -    -    1,062 
Substandard (6)   1,009    278    1,387    10    3,678    357    27    6,746 
Doubtful (7)   755    1,450    1,025    -    31    -    -    3,261 
Loss (8)   -    -    -    -    -    -    -    - 
Total Loans  $218,833   $107,128   $264,651   $57,437   $178,485   $47,003   $14,421   $887,958 

 

December 31, 2019  Commercial & industrial   Commercial real
estate - owner
occupied
   Commercial real
estate - nonowner
occupied
   Agricultural   Residential
real estate
   HELOC   Consumer   Total 
                                 
Pass (1 - 4)  $147,667   $96,836   $265,839   $50,994   $190,438   $47,787   $14,706   $814,267 
Special Mention (5)   597    -    543    -    -    -    -    1,140 
Substandard (6)   1,444    290    1,663    -    2,689    283    32    6,401 
Doubtful (7)   1,339    1,362    249    -    32    -    -    2,982 
Loss (8)   -    -    -    -    -    -    -    - 
Total Loans  $151,047   $98,488   $268,294   $50,994   $193,159   $48,070   $14,738   $824,790 

 

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis.

 

17

 

 

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2020 and December 31, 2019.

 

        Greater Than          Total 

($ in thousands)

September 30, 2020

  30-59 Days Past Due   60-89 Days Past Due   90 Days Past Due   Total Past Due   Current   Loans Receivable 
                         
Commercial & industrial  $73   $31   $780   $884   $217,949   $218,833 
Commercial real estate - owner occupied   -    -    1,450    1,450    105,678    107,128 
Commercial real estate - nonowner occupied   42    197    834    1,073    263,578    264,651 
Agricultural   -    10    -    10    57,427    57,437 
Residential real estate   -    755    1,371    2,126    176,359    178,485 
HELOC   127    90    125    342    46,661    47,003 
Consumer   29    21    9    59    14,362    14,421 
Total Loans  $271   $1,104   $4,569   $5,944   $882,014   $887,958 

 

         Greater Than          Total 
December 31, 2019  30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days Past
Due
   Total Past Due   Current   Loans Receivable 
                         
Commercial & industrial  $64   $-   $312   $376   $150,671   $151,047 
Commercial real estate - owner occupied   -    -    -    -    98,488    98,488 
Commercial real estate - nonowner occupied   -    -    215    215    268,079    268,294 
Agricultural   13    -    -    13    50,981    50,994 
Residential real estate   309    415    644    1,368    191,791    193,159 
HELOC   166    91    56    313    47,757    48,070 
Consumer   65    93    14    172    14,566    14,738 
Total Loans  $617   $599   $1,241   $2,457   $822,333   $824,790 

  

All loans past due 90 days are systematically placed on nonaccrual status.

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

18

 

 

The following tables present impaired loan information as of and for the nine months ended September 30, 2020 and 2019, and for the twelve months ended December 31, 2019:

 

($ in thousands)

Nine Months Ended

  Recorded     Unpaid Principal     Related     Average Recorded     Interest Income  
September 30, 2020   Investment     Balance     Allowance     Investment     Recognized  
With no related allowance recorded:                              
Commercial & industrial   $ 925     $ 1,721     $ -     $ 1,886     $ 34  
Commercial real estate - owner occupied     1,362       1,362       -       1,362       -  
Commercial real estate - nonowner occupied     979       979       -       1,051       14  
Agricultural     -       -       -       -       -  
Residential real estate     1,228       1,294       -       1,634       70  
HELOC     57       57               64       3  
Consumer     9       9       -       13       1  
With a specific allowance recorded:                                        
Commercial & industrial     192       249       1       249       -  
Commercial real estate - owner occupied     -       -       -       -       -  
Commercial real estate - nonowner occupied     -       -       -       -       -  
Agricultural     -       -       -       -       -  
Residential real estate     2,011       2,048       167       2,056       10  
HELOC     70       70       3       84       4  
Consumer     -       -       -       -       -  
Totals:                                        
Commercial & industrial   $ 1,117     $ 1,970     $ 1     $ 2,135     $ 34  
Commercial real estate - owner occupied   $ 1,362     $ 1,362     $ -     $ 1,362     $ -  
Commercial real estate - nonowner occupied   $ 979     $ 979     $ -     $ 1,051     $ 14  
Agricultural   $ -     $ -     $ -     $ -     $ -  
Residential real estate   $ 3,239     $ 3,342     $ 167     $ 3,690     $ 80  
HELOC   $ 127     $ 127     $ 3     $ 148     $ 7  
Consumer   $ 9     $ 9     $ -     $ 13     $ 1  

 

Three Months Ended
September 30, 2020
  Average Recorded   Interest Income 
($ in thousands)  Investment   Recognized 
With no related allowance recorded:        
Commercial & industrial  $1,860   $10 
Commercial real estate - owner occupied   1,362    - 
Commercial real estate - nonowner occupied   1,051    6 
Agricultural   -    - 
Residential real estate   1,619    20 
HELOC   60    1 
Consumer   11    - 
With a specific allowance recorded:          
Commercial & industrial   249    - 
Commercial real estate - owner occupied   -    - 
Commercial real estate - nonowner occupied   -    - 
Agricultural   -    - 
Residential real estate   2,051    10 
HELOC   82    1 
Consumer   -    - 
Totals:          
Commercial & industrial  $2,109   $10 
Commercial real estate - owner occupied  $1,362   $- 
Commercial real estate - nonowner occupied  $1,051   $6 
Agricultural  $-   $- 
Residential real estate  $3,670   $30 
HELOC  $142   $2 
Consumer  $11   $- 

 

19

 

 

($ in thousands)

Twelve Months Ended

  Recorded   Unpaid Principal   Related   Average Recorded   Interest Income 
December 31, 2019  Investment   Balance   Allowance   Investment   Recognized 
With no related allowance recorded:                    
Commercial & industrial  $722   $1,092   $-   $1,377   $114 
Commercial real estate - owner occupied   -    -    -    -    - 
Commercial real estate - nonowner occupied   196    197    -    259    21 
Agricultural   -    -    -    -    - 
Residential real estate   1,621    1,687    -    2,001    106 
HELOC   16    16         18    1 
Consumer   15    15    -    19    1 
With a specific allowance recorded:                         
Commercial & industrial   1,000    1,000    511    823    49 
Commercial real estate - owner occupied   1,362    1,362    147    1,362    38 
Commercial real estate - nonowner occupied   -    -    -    -    - 
Agricultural   -    -    -    -    - 
Residential real estate   653    653    68    666    31 
HELOC   -    -    -    -    - 
Consumer   -    -    -    -    - 
Totals:                         
Commercial & industrial  $1,722   $2,092   $511   $2,200   $163 
Commercial real estate - owner occupied  $1,362   $1,362   $147   $1,362   $38 
Commercial real estate - nonowner occupied  $196   $197   $-   $259   $21 
Agricultural  $-   $-   $-   $-   $- 
Residential real estate  $2,274   $2,340   $68   $2,667   $137 
HELOC  $16   $16   $-   $18   $1 
Consumer  $15   $15   $-   $19   $1 

 

   Nine Months Ended   Three Months Ended 
September 30, 2019  Average Recorded   Interest Income   Average Recorded   Interest Income 
($ in thousands)  Investment   Recognized   Investment   Recognized 
With no related allowance recorded:                
Commercial & industrial  $1,432   $76   $1,202   $22 
Commercial real estate - owner occupied   -    -    -    - 
Commercial real estate - nonowner occupied   259    15    259    5 
Agricultural   -    -    -    - 
Residential real estate   1,808    74    1,793    24 
HELOC   19    1    17    - 
Consumer   20    1    18    - 
With a specific allowance recorded:                    
Commercial & industrial   -    -    -    - 
Commercial real estate - owner occupied   -    -    -    - 
Commercial real estate - nonowner occupied   -    -    -    - 
Agricultural   -    -    -    - 
Residential real estate   538    19    533    6 
HELOC   -    -    -    - 
Consumer   -    -    -    - 
Totals:                    
Commercial & industrial  $1,432   $76   $1,202   $22 
Commercial real estate - owner occupied  $-   $-   $-   $- 
Commercial real estate - nonowner occupied  $259   $15   $259   $5 
Agricultural  $-   $-   $-   $- 
Residential real estate  $2,346   $93   $2,326   $30 
HELOC  $19   $1   $17   $- 
Consumer  $20   $1   $18   $- 

  

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

 

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

 

20

 

 

Troubled Debt Restructured (TDR) Loans

 

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

 

TDR Concession Types

 

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved by management. The types of concessions provided to borrowers include:

 

·Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the loan. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.

 

·Amortization or maturity date change: A change in the amortization or maturity date beyond what the collateral supports, including a concession that does any of the following:

 

(1)Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(2)Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(3)Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

 

·Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

 

During the nine months ended September 30, 2020, the Company had no new TDR activity.

 

21

 

 

The following table represents new TDR activity for the nine months ended September 30, 2019:

 

($ in thousands)  Number of Loans   Pre-Modification
Recorded Balance
   Post Modification
Recorded Balance
 
             
Commercial & industrial   3   $763   $763 
                
Total modifications   3   $763   $763 

 

   Interest           Total 
   Only   Term   Combination   Modification 
                 
Commercial & industrial  $150   $613   $          -   $763 
                     
Total modifications  $150   $613   $-   $763 

  

There were no TDR’s modified during the past twelve months that have subsequently defaulted.

 

On March 27, 2020, President Trump signed the CARES Act, which extends the duration of loan forbearance (deferral) agreements beyond the current three-month period before a loan is considered to be a troubled debt restructure. As of September 30, 2020, the Company had approved 26 loan deferral requests for clients with a total dollar amount of $38.4 million, which do not constitute TDR’s as a result of the CARES act.

 

NOTE 6 – ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

 

The Company acquired loans in the acquisition of The Edon State Bank Company of Edon, Ohio, effective June 5, 2020. None of the acquired loans had evidence of deterioration of credit quality since origination, and it was probable, at acquisition, that all contractually required payments would be collected.

 

The following table presents the carrying amount of the acquired loans included in the balance sheet as of September 30, 2020:

  

($ in thousands)  September 30,
2020
 
Commercial & industrial  $1,716 
Commercial real estate - owner occupied   - 
Commercial real estate - nonowner occupied   518 
Agricultural   9,968 
Residential real estate   3,277 
Home equity line of credit (HELOC)   - 
Consumer   181 
Total loans  $15,660 

  

Accretable yield, or income expected to be collected as of September 30, 2020 is $0.4 million.

 

22

 

 

NOTE 7 – MORTGAGE SERVICING RIGHTS

 

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $1.3 billion at September 30, 2020 and $1.2 billion at December 31, 2019. Contractually specified servicing fees of approximately $2.4 million and $2.1 million were included in mortgage loan servicing fees in the consolidated income statement for the nine months ended September 30, 2020 and 2019, respectively.

 

The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance:

 

($ in thousands)  2020   2019 
         
Carrying amount, January 1  $11,017   $11,365 
Mortgage servicing rights capitalized during the year   3,971    1,895 
Mortgage servicing rights amortization during the year   (3,479)   (1,415)
Net change in valuation allowance   (2,974)   (1,398)
Carrying amount, September 30  $8,535   $10,447 
           
Valuation allowance:          
January 1  $1,306   $212 
Increase   2,974    1,398 
September 30  $4,280   $1,610 

 

NOTE 8 – GOODWILL

 

Goodwill is recorded on the acquisition date of an entity. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. The acquisition of The Edon State Bank Company of Edon, Ohio, on June 5, 2020, and the purchase of an Ohio- based title agency through a newly-formed, wholly-owned subsidiary, SBFG Title, LLC, on March 15, 2019 resulted in approximately $4.3 million and $1.4 million, respectively, in goodwill.

 

A summary of the activity in goodwill is presented below:

 

   Nine Months Ended 
   September 30,
2020
   September 30,
2019
 
($ in thousands)  Carrying Amount   Carrying Amount 
         
Beginning balance  $17,792   $16,353 
Acquired goodwill   4,325    1,439 
Measurement period adjustments   (26)   - 
           
Ending balance  $22,091   $17,792 

 

Goodwill is not amortized but is evaluated for impairment annually as of December 31, or more frequently if events or circumstances that indicate an impairment may exist.. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less that its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment.

 

Goodwill was assessed for impairment using a quantitative test performed as of September 30, 2020. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date. No events or circumstances since the September 30, 2020 impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

 

23

 

 

NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS

 

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable-rate assets.

 

Non-designated Hedges

 

The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

 

Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into Interest Rate Lock Commitments (“IRLCs”) with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets.

 

The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of September 30, 2020 and December 31, 2019.

 

   September 30,
2020
   December 31,
2019
 
   Notional   Fair   Notional   Fair 
($ in thousands)  Amount   Value   Amount   Value 
Asset Derivatives                
Derivatives not designated as hedging instruments                
Interest rate swaps associated with loans  $88,509   $9,169   $82,826   $2,846 
IRLCs   62,795    290    16,347    55 
Total contracts  $151,304   $9,459   $99,173   $2,901 
                     
Liability Derivatives                    
Derivatives not designated as hedging instruments                    
Interest rate swaps associated with loans  $88,509   $(9,169)  $82,826   $(2,846)
Forward contracts   71,500    (197)   22,000    (32)
Total contracts  $160,009   $(9,366)  $104,826   $(2,878)

 

The fair value of interest rate swaps were estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date.

 

24

 

 

The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the nine months ended September 30, 2020 and 2019.

 

      Amount of gain (loss) 
($ in thousands)  Statement of income classification  2020   2019 
Interest rate swap contracts  Other income  $282   $394 
Interest rate swap contracts  Other expense   -    - 
IRLCs  Gain on sale of mortgage loans & OMSR   235    (215)
Forward contracts  Gain on sale of mortgage loans & OMSR   (165)   199 

 

The following table shows the offsetting of financial assets and derivative assets at September 30, 2020 and December 31, 2019.

 

   Gross   Gross amounts offset in the   Net amounts of assets presented in the   Gross amounts not offset in the consolidated balance sheet     
($ in thousands)  amounts of
recognized assets
   consolidated
balance
sheet
   consolidated
balance
sheet
   Financial instruments   Cash
collateral received
   Net amount 
September 30, 2020                        
Interest rate swaps  $9,169   $            -   $9,169   $           -   $           -   $9,169 
                               
December 31, 2019                         &nb