UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from _________________to___________________________
Commission
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(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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
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SB FINANCIAL GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | 1 | |
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 34 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 42 |
| Item 4. | Controls and Procedures | 42 |
| PART II – OTHER INFORMATION | 43 | |
| 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 | 43 |
| Item 4. | Mine Safety Disclosures | 43 |
| Item 5. | Other Information | 43 |
| Item 6. | Exhibits | 44 |
| Signatures | 45 | |
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SB Financial Group, Inc.
Condensed
Consolidated Balance Sheets
| ($ in thousands) | March 2025 (unaudited) | December 2024 | ||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest bearing time deposits | ||||||||
| Available-for-sale securities | ||||||||
| Loans held for sale | ||||||||
| Loans, net of unearned income | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Premises and equipment, net | ||||||||
| Federal Reserve and Federal Home Loan Bank Stock, at cost | ||||||||
| Foreclosed assets and other assets held for sale, net | ||||||||
| Interest receivable | ||||||||
| Goodwill | ||||||||
| Cash value of life insurance | ||||||||
| Mortgage servicing rights | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders’ equity | ||||||||
| Liabilities | ||||||||
| Deposits | ||||||||
| Non interest bearing demand | $ | $ | ||||||
| Interest bearing demand | ||||||||
| Savings | ||||||||
| Money market | ||||||||
| Time deposits | ||||||||
| Total deposits | ||||||||
| Repurchase agreements | ||||||||
| Federal Home Loan Bank advances | ||||||||
| Trust preferred securities | ||||||||
| Subordinated debt net of issuance costs | ||||||||
| Interest payable | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments & Contingent Liabilities | ||||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, par value; authorized | ||||||||
| Common stock, par value;2025 - | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost;(2025 - | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See notes to condensed consolidated financial statements (unaudited)
1
SB Financial Group, Inc.
Condensed Consolidated Statements of Income (unaudited)
| ($ in thousands, except per share data) | Three Months Ended March 31, | |||||||
| 2025 | 2024 | |||||||
| Interest Income | ||||||||
| Loans | ||||||||
| Taxable | $ | $ | ||||||
| Tax exempt | ||||||||
| Securities | ||||||||
| Taxable | ||||||||
| Tax exempt | ||||||||
| Other interest income | ||||||||
| Total interest income | ||||||||
| Interest Expense | ||||||||
| Deposits | ||||||||
| Repurchase agreements & other | ||||||||
| Federal Home Loan Bank advance expense | ||||||||
| Trust preferred securities expense | ||||||||
| Subordinated debt expense | ||||||||
| Total interest expense | ||||||||
| Net Interest Income | ||||||||
| Provision for credit losses - loans | ( | ) | ||||||
| Provision for unfunded commitments | ||||||||
| Total provision for credit losses | ||||||||
| Net interest income after provision for credit losses | ||||||||
| Noninterest Income | ||||||||
| Wealth management fees | ||||||||
| Customer service fees | ||||||||
| Gain on sale of mortgage loans & OMSR | ||||||||
| Mortgage loan servicing fees, net | ||||||||
| Gain on sale of non-mortgage loans | ||||||||
| Title insurance income | ||||||||
| Other income | ||||||||
| Total noninterest income | ||||||||
| Noninterest Expense | ||||||||
| Salaries and employee benefits | ||||||||
| Net occupancy expense | ||||||||
| Equipment expense | ||||||||
| Data processing fees | ||||||||
| Professional fees | ||||||||
| Marketing expense | ||||||||
| Telephone and communications | ||||||||
| Postage and delivery expense | ||||||||
| State, local and other taxes | ||||||||
| Employee expense | ||||||||
| Other expense | ||||||||
| Total noninterest expense | ||||||||
| Income before income tax | ||||||||
| Provision for income taxes | ||||||||
| Net Income | $ | $ | ||||||
| Basic earnings per common share | $ | $ | ||||||
| Diluted earnings per common share | $ | $ | ||||||
| Average common shares outstanding (in thousands): | ||||||||
| Basic: | ||||||||
| Diluted: | ||||||||
See notes to condensed consolidated financial statements (unaudited)
2
SB Financial Group, Inc.
Condensed Consolidated Statements of Comprehensive Income (unaudited)
| Three Months Ended March 31, | ||||||||
| ($ in thousands) | 2025 | 2024 | ||||||
| Net income | $ | $ | ||||||
| Other comprehensive income (loss) | ||||||||
| Available for sale investment securities: | ||||||||
| Gross unrealized holding gains (losses) arising in the period | ( | ) | ||||||
| Related tax (expense) benefit | ( | ) | ||||||
| Net effect on other comprehensive income (loss) | ( | ) | ||||||
| Total comprehensive income | $ | $ | ||||||
See notes to condensed consolidated financial statements (unaudited)
3
SB Financial Group, Inc.
Condensed Consolidated Statements of Shareholders’ Equity (unaudited)
| Common | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury | ||||||||||||||||||||
| ($ in thousands, except per share data) | Stock | Capital | Earnings | Loss | Stock | Total | ||||||||||||||||||
| Balance, January 1, 2025 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| Cash dividends on common, $ | ( | ) | ( | ) | ||||||||||||||||||||
| Restricted stock vesting | ( | ) | ||||||||||||||||||||||
| Repurchased stock ( | ( | ) | ( | ) | ||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||
| Balance, March 31, 2025 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Common | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury | ||||||||||||||||||||
| ($ in thousands, except per share data) | Stock | Capital | Earnings | Loss | Stock | Total | ||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends on common, $ | ( | ) | ( | ) | ||||||||||||||||||||
| Restricted stock vesting | ( | ) | ||||||||||||||||||||||
| Repurchased stock ( | ( | ) | ( | ) | ||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See notes to condensed consolidated financial statements (unaudited)
4
SB Financial Group, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
| ($ in thousands) | Three Months Ended March 31, | |||||||
| 2025 | 2024 | |||||||
| Operating Activities | ||||||||
| Net Income | $ | $ | ||||||
| Items not requiring (providing) cash | ||||||||
| Depreciation and amortization | ||||||||
| Provision for credit losses | ||||||||
| Expense of share-based compensation plan | ||||||||
| Amortization of premiums and discounts on securities | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of originated mortgage servicing rights | ||||||||
| Recovery of mortgage servicing rights | ( | ) | ( | ) | ||||
| Proceeds from sale of loans held for sale | ||||||||
| Originations of loans held for sale | ( | ) | ( | ) | ||||
| Gain from sale of loans | ( | ) | ( | ) | ||||
| Changes in | ||||||||
| Interest receivable | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Interest payable & other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Investing Activities | ||||||||
| Purchases of available-for-sale securities | ( | ) | ||||||
| Proceeds from maturities of interest bearing time deposits | ( | ) | ||||||
| Proceeds from maturities of available-for-sale securities | ||||||||
| Proceeds from sales of available-for-sale securities | ||||||||
| Net change in loans | ( | ) | ||||||
| Purchase of premises, equipment | ( | ) | ( | ) | ||||
| Purchase of bank owned life insurance | ( | ) | ||||||
| Purchase of Federal Reserve and Federal Home Loan Bank Stock | ( | ) | ||||||
| Proceeds from sale of Federal Home Loan Bank Stock | ||||||||
| Proceeds from sale of foreclosed assets | ||||||||
| Acquisition, net of cash acquired (paid) | ( | ) | ||||||
| Net cash provided by investing activities | ||||||||
| Financing Activities | ||||||||
| Net increase in demand deposits, money market, interest checking & savings accounts | ||||||||
| Net (decrease) increase in time deposits | ( | ) | ||||||
| Net increase (decrease) in securities sold under agreements to repurchase | ( | ) | ||||||
| Proceeds from Federal Home Loan Bank advances | ||||||||
| Repayment of Federal Home Loan Bank advances | ( | ) | ( | ) | ||||
| Stock repurchase plan | ( | ) | ( | ) | ||||
| Cash dividends on common shares | ( | ) | ( | ) | ||||
| Net cash provided (used in) by financing activities | ( | ) | ||||||
| Increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Supplemental non-cash disclosure | ||||||||
| Transfer of loans to foreclosed assets | $ | $ | ||||||
| In conjunction with the Marblehead acquisition, liabilities assumed were: | ||||||||
| Fair value of assets acquired | $ | $ | ||||||
| Cash paid in acquisition | ( | ) | ||||||
| Liabilities assumed | $ | $ | ||||||
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 (“SBFG”), is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, including The State Bank and Trust Company (“State Bank”), SBFG Title, LLC (“SBFG Title”), and SB Captive, Inc. (“SB Captive”). State Bank owns all of the outstanding stock of State Bank Insurance, LLC (“SBI”). In December 2024, SBFG completed the dissolution of four of its inactive subsidiaries – RFCBC, Inc., Rurbanc Data Services, Inc., Rurban Mortgage Company and SBFG Mortgage, LLC.
The consolidated financial statements include the accounts of SBFG, State Bank, SBFG Title, SB Captive and SBI (collectively, the “Company”). 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 (“GAAP”) 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 GAAP 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-months ended March 31, 2025, are not necessarily indicative of results for the complete year.
The condensed consolidated balance sheet of the Company as of December 31, 2024, 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, 2024.
Adoption of New Accounting Standards:
Accounting Standards Update (“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 was initially effective as of March 12, 2020, through December 31, 2022. However, a deferral of the implementation of the Reference Rate Reform was issued in December of 2022, which extended the implementation through December 31, 2024. The Company has implemented a replacement for the reference rate and has determined that the changes did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2023-07: Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures
This ASU expands operating segment disclosures and requires all segment disclosures to be reported in both annual and interim periods. The new standard requires disclosure of the following: significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) for reportable segments; the title and position of the CODM as well as how the CODM uses the reported measure(s) of profit and loss to assess segment performance; and “other segment items” by reportable segment and a description of its composition. The Company adopted the standard on January 1, 2024, and its adoption did not have a material effect on our financial statements.
6
Accounting Standards not yet adopted:
ASU No. 2023-09: Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the Financial Accounting Standards Bord (“FASB”) issued ASU 2023-09: Income Taxes (Topic 740) Improvements to Income Tax Disclosures. The amendments in this ASU address investor requests for more transparency about income tax information through improvements to income tax disclosures, primarily related to effective tax rate reconciliation and information related to income taxes paid, among certain other amendments to improve the effectiveness of such disclosures. The amendments in this ASU are effective for annual periods beginning after December 15, 2024, and are to be applied on a prospective basis. Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
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. The average number of common shares used in the computation of basic and diluted earnings per share are set forth in the table
below. There were no anti-dilutive shares in 2025 or 2024.
| Three Months Ended March 31, | ||||||||
| ($ and outstanding shares in thousands - except per share data) | 2025 | 2024 | ||||||
| Distributed earnings allocated to common shares | $ | $ | ||||||
| Undistributed earnings allocated to common shares | ||||||||
| Net earnings allocated to common shares | ||||||||
| Net earnings allocated to participating securities | ||||||||
| Net Income allocated to common shares and participating securities | $ | $ | ||||||
| Weighted average shares outstanding for basic earnings per share | ||||||||
| Dilutive effect of stock compensation | ||||||||
| Weighted average shares outstanding for diluted earnings per share | ||||||||
| Basic earnings per common share | $ | $ | ||||||
| Diluted earnings per common share | $ | $ | ||||||
NOTE 3 – BUSINESS COMBINATION
Effective
January 17, 2025, the Company acquired all of the outstanding common shares of Marblehead Bancorp and its subsidiary The Marblehead Bank
of Marblehead, Ohio (collectively, “Marblehead”). Marblehead was headquartered in Marblehead, Ohio and had two retail offices.
At closing, Marblehead Bancorp was merged with and into SBFG, with SBFG surviving, and immediately thereafter, The Marblehead Bank was
merged with and into State Bank, with State Bank surviving. Under the terms of the merger agreement, shareholders of Marblehead received
fixed consideration of $
In
accordance with ASC 805, the Company expensed approximately $
7
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 as relevant information 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.
| ($ in thousands) | January 17, 2025 | |||
| Fair value of assets acquired | ||||
| Cash and cash equivalents | $ | |||
| Investment securities | ||||
| Federal Reserve and Federal Home Loan Bank stock | ||||
| Loans held for investment | ||||
| Premises and equipment | ||||
| Goodwill | ||||
| Core deposit intangible | ||||
| Other assets | ||||
| Total assets acquired | $ | |||
| Fair value of liabilities assumed | ||||
| Deposits | $ | |||
| Other liabilities | ||||
| Total liabilities assumed | ||||
| Total purchase price (cash) | $ | |||
Pro Forma Financial Information
The
results of operations of Marblehead have been included in the Company’s consolidated financial statements since the acquisition
date of January 17, 2025. The following schedule includes the pro forma results for the three months ended March 31, 2025, and 2024,
as if the Marblehead acquisition had occurred as of the beginning of the reporting periods presented.
8
| Three Months Ended | ||||||||
| Summary of Operations ($ in thousands) | Mar. 2025 | Mar. 2024 | ||||||
| Net interest income | $ | $ | ||||||
| Provision for loan losses | ||||||||
| Net interest income after provision | $ | $ | ||||||
| Non interest income | ||||||||
| Non interest expense | ||||||||
| Income before income taxes | $ | $ | ||||||
| Income tax expense* | ||||||||
| Net income to common shareholders | $ | $ | ||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnngs per share | $ | $ | ||||||
| * |
Note 4 – AVAILABLE-FOR-SALE Securities
The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at March 31, 2025, and December 31, 2024, were as follows:
| Gross | Gross | |||||||||||||||
| ($ in thousands) | Amortized | Unrealized | Unrealized | |||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| March 31, 2025 | ||||||||||||||||
| U.S. Treasury and Government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| State and political subdivisions | ( | ) | ||||||||||||||
| Other corporate securities | ( | ) | ||||||||||||||
| Totals | $ | $ | $ | ( | ) | $ | ||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| December 31, 2024 | ||||||||||||||||
| U.S. Treasury and Government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| State and political subdivisions | ( | ) | ||||||||||||||
| Other corporate securities | ( | ) | ||||||||||||||
| Totals | $ | $ | $ | ( | ) | $ | ||||||||||
The amortized cost and fair value of securities available-for-sale at March 31, 2025, 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.
9
| Amortized | Fair | |||||||
| ($ in thousands) | Cost | Value | ||||||
| Within one year | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Mortgage-backed securities | ||||||||
| Totals | $ | $ | ||||||
The fair value of securities pledged as collateral,
to secure public deposits and for other purposes, was $
There were no realized gains or losses from sales of available-for-sale securities for the three months ended March 31, 2025, or March 31, 2024.
Certain investments in debt securities are reported
in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments was $
Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2025, and December 31, 2024, are as follows:
| ($ in thousands) | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||
| March 31, 2025 | Number of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||
| U.S. Treasury and Government agencies | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ||||||||||||||||||||||||
| State and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Other corporate securities | ( | ) | ( | ) | ||||||||||||||||||||||||
| Totals | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
| December 31, 2024 | Number of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||
| U.S. Treasury and Government agencies | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||
| Mortgage-backed securities | $ | ( | ) | ( | ) | |||||||||||||||||||||||
| State and political subdivisions | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Other corporate securities | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Totals | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
10
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. Management reviews these securities on a quarterly basis and evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, management determines whether a decline in fair value resulted from a credit loss or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, a provision is recorded to the allowance for credit losses (the “ACL”).
Changes in the ACL are recorded as provision for (or reversal of) credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. At March 31, 2025, and December 31, 2024, no ACL on available-for-sale securities was recorded.
Management has made the accounting policy election
to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Accrued interest receivable
on available-for-sale debt securities totaled $
NOTE 5 – LOANS AND ALLOWANCE FOR CREDIT 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 credit 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.
The following table summarizes the composition of the loan portfolio:
| Total Loans | ||||||||
| ($ in thousands) | March 31, 2025 | December 31, 2024 | ||||||
| Commercial & industrial | $ | $ | ||||||
| Commercial real estate - owner occupied | ||||||||
| Commercial real estate - nonowner occupied | ||||||||
| Agricultural | ||||||||
| Residential real estate | ||||||||
| Home equity line of credit (HELOC) | ||||||||
| Consumer | ||||||||
| Total loans | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Loans, net | $ | $ | ||||||
11
The totals shown above are net of accretable
discounts on acquired loans and deferred loan fees and costs, which totaled $
The risk characteristics of each loan portfolio segment are as follows:
Commercial & Industrial and Agricultural
Commercial & industrial loans and agricultural loans are primarily underwritten 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 versus non-owner-occupied commercial real estate loans.
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally underwritten based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Residential Real Estate, 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.
Allowance for Credit Losses (ACL)
The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
12
Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
Accrued interest receivable related to loans totaled
$
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments:
| ● | Commercial & Industrial - Commercial & industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial & industrial loans and lease financing agreements is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease. |
| ● | Commercial Real Estate - Owner Occupied - Owner occupied commercial real estate loans consist of loans to purchase, construct, or refinance owner occupied nonresidential properties. This includes office buildings and other commercial facilities. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation as the commercial real estate collateral may be more adversely affected by conditions in the real estate markets or in the general economy. |
| ● | Commercial Real Estate – Nonowner Occupied - Nonowner occupied commercial real estate loans consist of loans to purchase, construct, or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as multifamily properties. The primary risk associated with nonowner occupied commercial real estate loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation as the commercial real estate collateral may be more adversely affected by conditions in the real estate markets or in the general economy. |
| ● | Agricultural - Agricultural loans consist of loans or lines of credit to finance farmland, equipment, and general business needs or other assets. The primary risk associated with agricultural loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan. |
| ● | Residential Real Estate – Residential real estate mortgage loans consist of loans to purchase, construct, or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. |
| ● | Home Equity Line of Credit (HELOCs) - Home equity loans consist of HELOCs and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior liens as a substantial decline in value could render the junior lien position effectively unsecured. |
13
| ● | Consumer - Consumer loans consist of loans to finance unsecured home improvements, personal assets, such as automobiles or recreational vehicles, and revolving lines of credit that can be secured or unsecured. 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. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. |
The Company utilizes a Discounted Cash Flow (“DCF”) method to estimate the quantitative portion of the ACL for all loan pools evaluated on a collective pooled basis, with the exception of the credit card and consumer loan portfolios, which were estimated using the Remaining Life Method. For each segment, a Loss Driver Analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized the Company’s own Federal Financial Institutions Examination Council’s (“FFIEC”) Call Report data, as well as peer institution data.
In creating the DCF model, the Company has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. The Company’s own loan-level loss data from January 2016 through March 31, 2025, contained within the model was supplemented with peer data in most loan pools as there was not sufficient loan-level detail from prior cycles reflecting similar economic conditions as the forecasted loss drivers to result in a sound calculation.
Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers. The Company utilizes data from Federal Reserve Economic Data (“FRED”) to provide economic forecasts under various scenarios, which are applied to loan pools to reflect credit risk in the current economic environment.
Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. When possible, the Company utilizes its own PDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own PDs, the LDA is utilized to determine PDs based on the forecasted economic factors. When possible, the Company utilizes its own LGDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own LGDs, the LGD is derived using a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the reversion period and long-term historical average. The Company utilizes its own prepayment and curtailment rates in the ACL estimate. In pools where observations are not sufficient, the Company utilizes the model’s most relevant benchmark rate.
Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. A number of factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising interest rates, external factors and other considerations. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above. During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods.
Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate.
14
The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments. Any allowance for off-balance sheet credit exposures is reported in Other liabilities on the Company’s consolidated balance sheet and is increased or decreased through a provision for credit loss expense on the Company’s consolidated statement of income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded.
While the Company’s policies and procedures used to estimate the ACL, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions, which may materially impact asset quality and the adequacy of the ACL and thus the resulting provision for credit losses.
During the first quarter of 2025, the Company
completed the acquisition of Marblehead, in Marblehead, Ohio. The Company performed an analysis of the acquired non-PCD loan portfolio
as part of the acquisition process and recorded a provision for credit losses of $
| ($ in thousands) For the three months ended March 31, 2025 | Balance, beginning of period | Chargeoffs | Recoveries | Provision for Credit Losses | Balance, end of period | |||||||||||||||
| Commercial & industrial | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||||||
| Agricultural | ( | ) | ||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| HELOC | ( | ) | ||||||||||||||||||
| Consumer | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
| ($ in thousands) For the three months ended March 31, 2024 | Balance, beginning of period | Chargeoffs | Recoveries | Provision for Credit Losses | Balance, end of period | |||||||||||||||
| Commercial & industrial | $ | $ | ( | ) | $ | | $ | | $ | |||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||||||
| Commercial real estate - nonowner occupied | ( | ) | ||||||||||||||||||
| Agricultural | ||||||||||||||||||||
| Residential real estate | ( | ) | ||||||||||||||||||
| HELOC | ||||||||||||||||||||
| Consumer | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||
| ($ in thousands) For the twelve months ended December 31, 2024 | Balance, beginning of period | Chargeoffs | Recoveries | Provision for Credit Losses | Balance, end of period | |||||||||||||||
| Commercial & industrial | $ | $ | ( | ) | $ | | $ | | $ | |||||||||||
| Commercial real estate - owner occupied | ( | ) | ||||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||||||
| Agricultural | ||||||||||||||||||||
| Residential real estate | ( | ) | ( | ) | ||||||||||||||||
| HELOC | ||||||||||||||||||||
| Consumer | ( | ) | ( | ) | ||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||
15
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the ACL.
The following table presents an analysis of collateral-dependent loans of the Company as of March 31, 2025, and December 31, 2024.
| ($ in thousands) | Collateral Type | Allocated | ||||||||||||||
| March 31, 2025 | Real Estate | Other | Total | Allowance | ||||||||||||
| Commercial & industrial | $ | $ | | $ | $ | | ||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||
| Agricultural | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| HELOC | ||||||||||||||||
| Consumer | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| ($ in thousands) | Collateral Type | Allocated | ||||||||||||||
| December 31, 2024 | Real Estate | Other | Total | Allowance | ||||||||||||
| Commercial & industrial | $ | $ | | $ | $ | | ||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||
| Agricultural | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| HELOC | ||||||||||||||||
| Consumer | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Under the current expected credit loss (“CECL”) model, for collateral dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of collateral. The ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
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 $
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): Loans 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 loan or in the Company’s credit position at some future date. Special mention loans 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 as 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 as Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
The Company evaluates the loan risk grading system
definitions and allowance for credit loss methodology on an ongoing basis.
17
| ($ in thousands) | Term Loans by Year of Origination | Revolving | Revolving Loans Converted | |||||||||||||||||||||||||||||||||
| March 31, 2025 | 2025 | 2024 | 2023 | 2022 | 2021 | Prior | Loans | to Term | Total | |||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Home equity line of credit (HELOC) | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total Loans | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
18
The following table presents loan balances by credit quality indicators and gross chargeoffs by loan category and year of origination as of December 31, 2024.
| ($ in thousands) | Term Loans by Year of Origination | Revolving | Revolving Loans Converted | |||||||||||||||||||||||||||||||||
| December 31, 2024 | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Loans | to Term | Total | |||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Home equity line of credit (HELOC) | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total Loans | ||||||||||||||||||||||||||||||||||||
| Pass (1 - 4) | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention (5) | ||||||||||||||||||||||||||||||||||||
| Substandard (6) | ||||||||||||||||||||||||||||||||||||
| Doubtful (7) | ||||||||||||||||||||||||||||||||||||
| Loss (8) | ||||||||||||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross chargeoffs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
19
The following tables present the Company’s loan portfolio aging analysis as of March 31, 2025, and December 31, 2024.
| ($ in thousands) | 30-59 Days | 60-89 Days | Greater Than 90 Days | Total Past | ||||||||||||||||||||
| March 31, 2025 | Past Due | Past Due | Past Due | Due | Current | Total Loans | ||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| HELOC | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 30-59 Days | 60-89 Days | Greater Than 90 Days | Total Past | |||||||||||||||||||||
| December 31, 2024 | Past Due | Past Due | Past Due | Due | Current | Total Loans | ||||||||||||||||||
| Commercial & industrial | $ | | $ | | $ | | $ | $ | $ | |||||||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| HELOC | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
All loans past due 90 days are systematically placed on nonaccrual status.
When a loan is moved 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 nonaccrual loans may be realized
once all contractual principal amounts are received. It is at the discretion of management to determine when a loan is placed back on
accrual status once a borrower establishes a history of six consecutive timely principal and interest payments.
20
| March 31, 2025 | ||||||||||||
| ($ in thousands) | Nonaccrual loans with no allowance | Nonaccrual loans with an allowance | Total nonaccrual loans | |||||||||
| Commercial & industrial | $ | $ | $ | |||||||||
| Commercial real estate - owner occupied | ||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||
| Agricultural | ||||||||||||
| Residential real estate | ||||||||||||
| Home equity line of credit (HELOC) | ||||||||||||
| Consumer | ||||||||||||
| Total loans | $ | $ | $ | |||||||||
| December 31, 2024 | ||||||||||||
| ($ in thousands) | Nonaccrual loans with no allowance | Nonaccrual loans with an allowance | Total nonaccrual loans | |||||||||
| Commercial & industrial | $ | $ | $ | |||||||||
| Commercial real estate - owner occupied | ||||||||||||
| Commercial real estate - nonowner occupied | ||||||||||||
| Agricultural | ||||||||||||
| Residential real estate | ||||||||||||
| Home equity line of credit (HELOC) | ||||||||||||
| Consumer | ||||||||||||
| Total loans | $ | $ | $ | |||||||||
Modifications made to Borrowers Experiencing Financial Difficulty
In the normal course of business, the Company may execute loan modifications with borrowers. These modifications are analyzed to determine whether the modification is considered concessionary, long term and made to a borrower experiencing financial difficulty. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the borrowers short-term cash relief to allow them to improve their financial condition. If a loan modification is determined to be made to a borrower experiencing financial difficulty, the loan is considered collateral dependent and evaluated as part of the ACL as described above in the Allowance for Credit Losses section of this note. For the three months ended March 31, 2025, and March 31, 2024, the Company did not modify any loans made to borrowers experiencing financial difficulty.
The Company had no commitments to lend to borrowers experiencing financial difficulty for which the Company had modified an existing loan as of March 31, 2025, and March 31, 2024. The Company monitors loan payments on an ongoing basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and its ability to generate positive cash flows during the loan term. For the three months ended March 31, 2025, and March 31, 2024, the Company had no loan modifications made to borrowers experiencing financial difficulty for which there was a payment default within the 12 months following the modification date.
Unfunded Loan Commitments
The Company maintains an allowance for off-balance
sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby
and commercial letters of credit when there is a contractual obligation to extend credit and when the extension of credit is not unconditionally
cancellable (i.e. the commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as
a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on
a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be
funded over its estimated life, which are the same loss rates that are used in computing the ACL for loans. The allowance for credit losses
for unfunded loan commitments of $
21
The following table presents the balance and activity in the ACL for unfunded loan commitments for the three months ended March 31, 2025, and March 31, 2024.
| Three Months Ended March 31, | ||||||||
| ($ in thousands) | 2025 | 2024 | ||||||
| Balance, beginning of period | $ | $ | ||||||
| Adjustment for acquired loans | ||||||||
| Provision for unfunded commitments | ||||||||
| Balance, end of period | $ | $ | ||||||
NOTE 6 – GOODWILL
| Three Months Ended March 31, | ||||||||
| ($ in thousands) | 2025 | 2024 | ||||||
| Beginning balance | $ | $ | ||||||
| Acquired goodwill | ||||||||
| Ending balance | $ | $ | ||||||
Goodwill is not amortized, but is evaluated for
impairment annually as of December 31, or more frequently if events occur or circumstances change that indicate an impairment may exist.
As of March 31, 2025, and December 31, 2024, the carrying amount of goodwill was $
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 than 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 March 31,2025. 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 March 31, 2025, impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.
NOTE 7 – MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included
in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $
22
The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance:
| Three Months Ended March 31, | ||||||||
| ($ in thousands) | 2025 | 2024 | ||||||
| Balance at beginning of period | $ | $ | ||||||
| Mortgage servicing rights capitalized during the period | ||||||||
| Mortgage servicing rights amortization during the period | ( | ) | ( | ) | ||||
| Net change in valuation allowance | ||||||||
| Balance at end of period | $ | $ | ||||||
| Valuation allowance: | ||||||||
| Balance at beginning of period | $ | $ | ||||||
| Increase (decrease) | ( | ) | ( | ) | ||||
| Balance at end of period | $ | $ | ||||||
| Fair value, beginning of period | $ | $ | ||||||
| Fair value, end of period | $ | $ | ||||||
NOTE 8 – 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 included in Other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and included in 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 March 31, 2025, and December 31, 2024.
23
| March 31, 2025 | December 31, 2024 | |||||||||||||||
| ($ in thousands) | Notional | Fair | Notional | Fair | ||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| Asset Derivatives | ||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||
| Interest rate swaps associated with loans | $ | $ | $ | $ | ||||||||||||
| Forward contracts | ||||||||||||||||
| Total contracts | $ | $ | $ | $ | ||||||||||||
| Liability Derivatives | ||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||
| Interest rate swaps associated with loans | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| IRLCs | ( | ) | ( | ) | ||||||||||||
| Total contracts | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
The fair value of interest rate swaps was 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 or forward contract and the balance sheet date.
The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the three months ended March 31, 2025, and 2024.
| Three Months Ended March 31, | ||||||||||
| ($ in thousands) | Statement of income classification | 2025 | 2024 | |||||||
| Interest rate swap contracts | $ | $ | ||||||||
| IRLCs | ||||||||||
| Forward contracts | ( | ) | ||||||||
24
The following table shows the offsetting of financial assets and derivative assets at March 31, 2025, and at December 31, 2024.
| Gross amounts | Net amounts of assets | Gross amounts not offset in the consolidated balance sheet | ||||||||||||||||||||||
| ($ in thousands) | Gross amounts of recognized assets | offset in the consolidated balance sheet | presented in the consolidated balance sheet | Financial instruments | Cash collateral received | Net amount | ||||||||||||||||||
| March 31, 2025 | ||||||||||||||||||||||||
| Interest rate swaps | $ | | $ | | $ | $ | $ | $ | | |||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following table shows the offsetting of financial liabilities and derivative liabilities at March 31, 2025, and at December 31, 2024.
| Gross amounts | Net amounts of liabilities | Gross amounts not offset in the consolidated balance sheet | ||||||||||||||||||||||
| ($ in thousands) | Gross amounts of recognized liabilities | offset in the consolidated balance sheet | presented in the consolidated balance sheet | Financial instruments | Cash collateral pledged | Net amount | ||||||||||||||||||
| March 31, 2025 | ||||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NOTE 9 – DEPOSITS
Major classification of deposits at March 31, 2025, and at December 31, 2024, were as follows:
| ($ in thousands) | March 31, 2025 | December 31, 2024 | ||||||
| Non interest bearing demand | $ | $ | ||||||
| Interest bearing demand | ||||||||
| Savings | ||||||||
| Money market | ||||||||
| Time deposits $250,000 or less | ||||||||
| Time deposits greater than $250,000 | ||||||||
| Total Deposits | $ | $ | ||||||
Included in time deposits at March 31, 2025, and
at December 31, 2024, were $
NOTE 10 – SHORT-TERM BORROWINGS
| ($ in thousands) | March 31, 2025 | December 31, 2024 | ||||||
| Securities sold under repurchase agreements | $ | $ | ||||||
The Company has retail repurchase (“REPO”)
agreements to facilitate cash management transactions with commercial customers. These obligations are secured by agency and mortgage-backed
securities and such collateral is held by the Federal Home Loan Bank (“FHLB”). These securities have various maturity dates
from 2025 through 2051. As of March 31, 2025, these REPO agreements were secured by securities with a fair value totaling $
The Company has borrowing capabilities at the Federal Reserve Discount Window (“Discount Window”) by pledging either securities or loans as collateral. As of March 31, 2025, there were no borrowings drawn or securities pledged at the Discount Window.
At both March 31, 2025, and December 31, 2024,
the Company had $
25
NOTE 11 – FEDERAL HOME LOAN BANK (FHLB) ADVANCES
The Company’s FHLB advances were secured
by $
| ($ in thousands) | Debt | |||
| 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| Total | $ | |||
NOTE 12 – TRUST PREFERRED SECURITIES
On September 15, 2005, RST II, a wholly owned
subsidiary of the Company, closed a pooled private offering of
NOTE 13 – SUBORDINATED DEBT
On May 27, 2021, the Company entered into Subordinated
Note Purchase Agreements with qualified institutional buyers and accredited investors pursuant to which the Company issued and sold $
The Notes mature on
NOTE 14 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
| Level 1 | Quoted prices in active markets for identical assets or liabilities |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities |
26
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying consolidated balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy.
Available-for-Sale Securities
The fair values of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include obligations of the U.S. Treasury and government agencies, mortgage-backed securities, obligations of political and state subdivisions, and other corporate securities. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.
Interest Rate Contracts
The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties (Level 2).
Forward contracts
The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1).
Interest Rate Lock Commitments (IRLCs)
The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected “pull-through” rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).
The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at March 31, 2025, and at December 31, 2024.
27
| ($ in thousands) | Fair value at March 31, 2025 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| U.S. Treasury and Government Agencies | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| State and political subdivisions | ||||||||||||||||
| Other corporate securities | ||||||||||||||||
| Interest rate contracts - assets | ||||||||||||||||
| Interest rate contracts - liabilities | ( | ) | ( | ) | ||||||||||||
| Forward contracts | ||||||||||||||||
| IRLCs | ( | ) | ( | ) | ||||||||||||
| ($ in thousands) | Fair value at December 31, 2024 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| U.S. Treasury and Government Agencies | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| State and political subdivisions | ||||||||||||||||
| Other corporate securities | ||||||||||||||||
| Interest rate contracts - assets | ||||||||||||||||
| Interest rate contracts - liabilities | ( | ) | ( | ) | ||||||||||||
| Forward contracts | ||||||||||||||||
| IRLCs | ( | ) | ( | ) | ||||||||||||
Level 1 - quoted prices in active markets for identical assets
Level 2 - significant other observable inputs
Level 3 - significant unobservable inputs
The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs for the three months ended March 31, 2025, and 2024.
| for the Three Months Ended March 31, | ||||||||
| ($ in thousands) | 2025 | 2024 | ||||||
| Interest rate lock commitments | ||||||||
| Balance at beginning of period | $ | ( | ) | $ | ||||
| Total realized gains (losses) | ||||||||
| Change in fair value | ||||||||
| Balance at end of period | $ | ( | ) | $ | ||||
The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
28
Collateral-dependent Individually evaluated Loans, Net of ACL
The estimated fair value of collateral-dependent individually evaluated loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent individually evaluated loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining an independent appraisal of the collateral, which is reviewed for accuracy and consistency by management. Appraisers are selected from an approved list which is maintained by management. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All individually evaluated loans held by the Company were collateral dependent at March 31, 2025, and at December 31, 2024.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active,
open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the
servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio
has been valued using all relevant positive and negative cash flows including servicing fees; miscellaneous income and float; marginal
costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace.
Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
| ($ in thousands) | Fair value at March 31, 2025 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Collateral-dependent Individually evaluated loans | $ | $ | $ | $ | ||||||||||||
| Mortgage servicing rights | ||||||||||||||||
| ($ in thousands) | Fair value at December 31, 2024 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Collateral-dependent impaired loans | $ | $ | $ | $ | ||||||||||||
| Mortgage servicing rights |
Level 1 - quoted prices in active markets for identical assets
Level 2 - significant other observable inputs
Level 3 - significant unobservable inputs
29
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
| Fair value at | ||||||||||
| ($ in thousands) | March 31, 2025 | Valuation technique | Unobservable inputs | Range (weighted- average) | ||||||
| Collateral-dependent individually evaluated loans | $ | |||||||||
| Mortgage servicing rights | ||||||||||
| IRLCs | ( | ) | ||||||||
| Fair value at | ||||||||||
| ($ in thousands) | December 31, 2024 | Valuation technique | Unobservable inputs | Range (weighted- average) | ||||||
| Collateral-dependent impaired loans | $ | |||||||||
| Mortgage servicing rights | ||||||||||
| IRLCs | ( | ) | ||||||||
There were no changes in the inputs or methodologies used to determine fair value at March 31, 2025, as compared to December 31, 2024.
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.
Cash and Due From Banks, Interest Bearing Time Deposits, Federal Reserve and Federal Home Loan Bank Stock, and Accrued Interest Receivable and Payable
The carrying amount approximates the fair value.
Loans Held for Sale
The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.
Loans
The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The “exit price” is determined based on discounted estimated future cash flows using rates that incorporate discounts for credit, liquidity, and marketability factors.
30
Deposits, Short-Term Borrowings, and FHLB Advances
Deposits include demand deposits, savings accounts, and certain money market deposits. Short-term borrowings include federal funds borrowed and REPO agreements. The carrying amount of these instruments approximates the fair value. The estimated fair value for fixed-maturity time deposits and FHLB advances are based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at March 31, 2025, and at December 31, 2024.
Loan Commitments
The fair value of loan commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at March 31, 2025, and at December 31, 2024, and are not considered significant to this presentation.
Trust Preferred Securities
The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate.
Subordinated Debt
The fair value for subordinated debt is estimated by discounting the cash flows using a discount rate equal to the rate currently offered on similar borrowings.
The following table presents estimated fair values
of the Company’s other financial instruments carried at other than fair value. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not
intend to sell these financial instruments,
31
| ($ in thousands) | Carrying | Fair | Fair value measurements using | |||||||||||||||||
| March 31, 2025 | amount | value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
| Financial assets | ||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing time deposits | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans, net of allowance for credit losses | ||||||||||||||||||||
| Federal Reserve and FHLB Bank stock, at cost | ||||||||||||||||||||
| Interest receivable | ||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| FHLB advances | ||||||||||||||||||||
| Trust preferred securities | ||||||||||||||||||||
| Subordinated debt, net of issuance costs | ||||||||||||||||||||
| Interest payable | ||||||||||||||||||||
| ($ in thousands) | Carrying | Fair | Fair value measurements using | |||||||||||||||||
| December 31, 2024 | amount | value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
| Financial assets | ||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing time deposits | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans, net of allowance for credit losses | ||||||||||||||||||||
| Federal Reserve and FHLB Bank stock, at cost | ||||||||||||||||||||
| Interest receivable | ||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| FHLB advances | ||||||||||||||||||||
| Trust preferred securities | ||||||||||||||||||||
| Subordinated debt, net of issuance costs | ||||||||||||||||||||
| Interest payable | ||||||||||||||||||||
NOTE 15 – SHARE BASED COMPENSATION
In April 2017, the Company’s shareholders
approved a new share-based incentive compensation plan, the SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”),
which replaced the Company’s 2008 Stock Incentive Plan. The 2017 Plan permits the Company to grant or award incentive stock options,
nonqualified stock options, stock appreciation rights (“SARs”), restricted stock, and restricted stock units to employees
and non-employee directors and advisory board members of the Company and its subsidiaries. A total of
The 2017 Plan is intended to advance the interests of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards. The 2017 Plan permits equity-based awards to be used to attract, motivate, reward and retain highly competent individuals upon whose judgment, initiative, leadership and efforts are key to the success of the Company by encouraging those individuals to become shareholders of the Company.
Stock option awards are granted with an exercise
price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on
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On February 5, 2013, the Company adopted a Long
Term Incentive Plan (the “LTI Plan”), which provides for awards of restricted stock in the Company to certain key executives.
These restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives. The
compensation cost charged against income for awards under the LTI Plan for the three months ended March 31, 2025 and March 31, 2024 was
$
As of March 31, 2025, there was $
The table below is a summary of restricted stock activity under the Company’s 2017 Plan for the three months ended March 31, 2025.
| Shares | Weighted- Average Value per Share | |||||||
| Nonvested, January 1, 2025 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested, March 31, 2025 | $ | |||||||
NOTE 16 – OPERATING SEGMENTS
The Company provides a range of community banking services, including commercial and consumer lending, personal and business banking, treasury management and merchant services, personal wealth management and brokerage services, and other financial services primarily to individuals, businesses, and municipalities. All of the Company’s business activities are dependent and assessed based on the manner in which it supports the other activities of the Company.
The chief operating decision maker (“CODM”)
of the Company is the Chief Executive Officer, who along with others in the Company’s executive management, evaluates performance
and allocates resources based upon analysis of the Company as
The CODM is provided with the Company’s
consolidated statements of financial condition and operations and evaluates the Company’s operating results based on consolidated
net interest income, non-interest income, non-interest expense, and net income, which can be seen on the consolidated statement of operations.
These results are used to benchmark the Company against its competitors. Other significant non-cash items assessed by the CODM are depreciation,
amortization and provision for credit losses consistent with the reporting on the consolidated statements of cash flows. Expenditures
for long-lived assets are also evaluated and are consistent with the reporting on the consolidated statements of cashflows. Strategic
plans and budget to actual monitoring are evaluated as
NOTE 17 – GENERAL LITIGATION
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Additionally, the Company is subject to periodic examinations by various regulatory agencies. It is the opinion of management that the disposition or ultimate resolution of any such claims, lawsuits and examinations pending at March 31, 2025, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Company.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. 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 management or Board of Directors, including those relating to products or services; (c) statements of future economic performance; (d) statements regarding future customer attraction or retention; and (e) statements of assumptions underlying such statements. Words such as “anticipates”, “believes”, “plans”, “intends”, “expects”, “projects”, “estimates”, “should”, “may”, “would be”, “will allow”, “will likely result”, “will continue”, “will remain”, or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying those statements. Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation:
| ● | current and future economic and financial market conditions, either nationally or in the states in which we do business, including 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, any of which may result in adverse impacts on 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; |
| ● | recent and future bank failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational ramification for the banking industry as a whole, any of which could adversely affect the Company’s business, earnings and financial condition; |
| ● | instability in global economic conditions and geopolitical matters (including the ongoing military conflicts in Ukraine and the Middle East), and volatility in financial markets, which could have a material adverse effect on our results of operations and financial condition; |
| ● | changes in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate sensitivity; |
| ● | the volatility of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; |
| ● | factors that can impact the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of construction projects that we finance; |
| ● | changes in customers’, suppliers’, and other counterparties’ performance and creditworthiness may be different than anticipated due to inflationary pressures and/or other economic and financial market conditions; |
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| ● | operational risks, reputational risks, legal and compliance risks, and other risks related to potential fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, or failures, disruptions or breaches in security of our systems, including those resulting from computer viruses or cyber-attacks; |
| ● | our ability to secure sensitive or confidential client information against unauthorized disclosure or access through computer systems and telecommunication networks, including those of our third-party vendors and other service providers, which may prove inadequate; |
| ● | a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks; |
| ● | competitive pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to recruit and retain qualified management and banking personnel; |
| ● | unexpected losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future; |
| ● | risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past and possible future acquisitions; |
| ● | uncertainty regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry; |
| ● | changes in federal, state and/or local tax laws may adversely affect our reported financial condition or results of operations; |
| ● | changes in accounting standards, policies and practices may adversely affect our reported financial condition or results of operations; |
| ● | litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries; |
| ● | continued availability of earnings and dividends from State Bank and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable legal and regulatory requirements; |
| ● | our ability to adapt to or comply with regulatory requirements and increasing scrutiny and evolving expectations from customers, regulators, investors and other stakeholders with respect to the Company’s environmental, social and governance (ESG) practices, which could affect our reputation and business and operating results; |
| ● | our ability to anticipate and successfully keep pace with technological changes affecting the financial services industry; |
| ● | an unexpected inability to obtain needed liquidity which could adversely affect our business, profitability, and viability as a going concern; and |
| ● | other risks identified from time to time in the Company’s other filings with the Securities and Exchange Commission, including the risks identified under the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024. |
Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement to reflect unanticipated events or circumstances after the date on which the statement is made.
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Overview of SB Financial
SB Financial Group, Inc. (“SB Financial”) is an Ohio corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). SB Financial’s wholly owned subsidiary, The State Bank and Trust Company (“State Bank”), is an Ohio-chartered bank engaged in commercial banking.
Rurban Statutory Trust II (“RST II”) was established in August 2005. In September 2005, RST II completed a pooled private offering of 10,000 Trust Preferred Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to SB Financial in exchange for junior subordinated debentures of SB Financial with terms substantially similar to the Trust Preferred Securities. The sole assets of RST II are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by SB Financial of the obligations of RST II.
State Bank Insurance, LLC (“SBI”) is an Ohio corporation and a wholly owned subsidiary of State Bank incorporated in June 2010. SBI is an insurance company that engages in the sale of insurance products to retail and commercial customers of State Bank.
SBFG Title, LLC (“SBFG Title”) is an Ohio corporation that was formed in March 2019. SBFG Title engages in the sale of title insurance services.
SB Captive, Inc. (“SB Captive”) is a Nevada corporation that was formed in March 2019. SB Captive pools insurance risk among like sized banking institutions.
Unless the context indicates otherwise, all references herein to “we”, “us”, “our”, or the “Company” refer to SB Financial and its consolidated subsidiaries.
Critical Accounting Policies
Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, describes the significant accounting policies used in the development and presentation of the Company’s financial statements. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, and/or complex.
Allowance for Credit Losses – The Company believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management’s determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default (“LGD”), the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods.
Goodwill and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line or accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. A decrease in earnings resulting from these or other factors could lead to an impairment of goodwill that could adversely impact earnings in future periods.
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Three Months Ended March 31, 2025, compared to Three Months Ended March 31, 2024
Net Income: Net income for the first quarter of 2025 was $2.2 million compared to net income of $2.4 million for the first quarter of 2024, a decrease of 8.9 percent. Diluted earnings per share (“DEPS”) of $0.33 for the first quarter of 2025 were slightly lower compared to the DEPS of $0.35 for the first quarter of 2024. Net income for the first quarter of 2025 was positively impacted by higher interest income on loans, which was offset by higher interest expense on deposits and wholesale borrowings. Total interest income continues to improve and was up 13.5 percent compared to the prior year first quarter. Mortgage loan volume was down slightly compared to the prior year first quarter; however, sales of originated loans were up 7.3 percent when compared to the first quarter of 2024. Included in the 2025 first quarter results were $0.7 million of merger related expenses and a little more than two months of activity from the Marblehead acquisition.
Provision for Credit Losses: The first quarter provision for credit losses was $387,000 as compared to a zero provision for the prior year first quarter. The Company had net charge-offs of $84,000 for the first quarter of 2025 compared to net charge-offs of $57,000 for the year-ago quarter. The provision expense included $13,000 for unfunded commitments, $224,000 due to the Marblehead acquisition and $150,000 of growth-related provision. Total delinquent loans (consisting of nonaccrual loans and loans greater than 30 days past due) ended the quarter at $5.9 million, or 0.54 percent of total loans.
| Asset Quality Review – For the Period
Ended ($ in thousands) | March 31, 2025 | March 31, 2024 | ||||||
| Net charge-offs (recoveries) – QTD | $ | 84 | $ | 57 | ||||
| Nonaccruing loans | 6,051 | 2,434 | ||||||
| OREO / Other Assets Owned (OAO) | 73 | 510 | ||||||
| Nonperforming assets | 6,124 | 2,944 | ||||||
| Nonperforming assets/Total assets | 0.41 | % | 0.22 | % | ||||
| Allowance for credit losses/Total loans | 1.41 | % | 1.58 | % | ||||
| Allowance for credit losses/Nonperforming loans | 254.4 | % | 642.7 | % | ||||
Consolidated Revenue: Operating revenue, consisting of net interest income (“NII”) and noninterest income, was $15.4 million for the first quarter of 2025, an increase of $2.3 million, or 17.2 percent, from the $13.1 million generated during the first quarter of 2024.
NII for the first quarter of 2025 was $11.3 million, which was up $2.1 million from the prior year first quarter’s $9.2 million. Comparing the first quarter of 2025 to the prior year first quarter, the Company’s earning assets increased $115.6 million, and the average yield on earning assets increased by 24 basis points. The net interest margin for the first quarter of 2025 was 3.40 percent compared to 2.99 percent for the first quarter of 2024. Funding costs (interest paid to consumers and other entities) for deposits and other interest-bearing liabilities for the first quarter of 2025 were 2.32 percent compared to 2.55 percent for the prior year first quarter.
Total noninterest income was $4.1 million for the first quarter of 2025, which increased slightly compared to $4.0 million for the prior year first quarter. In addition to the mortgage revenue detailed below, wealth management revenue was flat compared to the prior year. Recapture of mortgage servicing rights increased noninterest income by $0.01 million in the quarter, compared to a recapture of $0.18 million in the prior year first quarter. SBFG Title contributed revenue of $0.4 million in the first quarter of 2025, up $0.13 million from the prior year. Noninterest income as a percentage of average assets for the first quarter of 2025 was 1.14 percent compared to 1.19 percent for the prior year first quarter.
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State Bank originated $39.8 million of mortgage loans during the first quarter of 2025 and sold $39.3 million, with $3.8 million of loans held for investment. This compares to $42.9 million originated for the first quarter of 2024, of which $36.6 million were sold with the remainder of loans held for investment. These first quarter 2025 originations and subsequent sales resulted in $0.9 million of gains, up $0.01 million from the gains for the first quarter of 2024. Net mortgage banking revenue was $1.46 million for the first quarter of 2025 compared to $1.54 million for the first quarter of 2024.
Consolidated Noninterest Expense: Total noninterest expense for the first quarter of 2025 was $12.4 million, which was up $2.1 million compared to $10.3 million in the prior-year first quarter. The quarter included over $0.7 million in one-time merger-related expenses. Compared to the prior year, the 2025 first quarter included operating expenses for approximately 75 days of activity of Marblehead.
Income Taxes: Income taxes for the first quarter of 2025 were $0.43 million (16.7 percent) compared to $0.48 million (16.9 percent) for the first quarter of 2024.
Changes in Financial Condition
Total assets at March 31, 2025, were $1.5 billion, up $121.5 million, or 8.8 percent, since December 31, 2024. Total loans, net of unearned income, were $1.09 billion as of March 31, 2025, up $41.5 million, or 4.0 percent, from year-end. Total deposits at March 31, 2025, were $1.27 billion, an increase of $118.6 million, or 10.3 percent, since 2024 year end.
Borrowed funds (consisting of FHLB advances, repurchase (“REPO”) agreements, trust preferred securities and subordinated debt) totaled $76.1 million at March 31, 2025. This is up slightly from year-end 2024 when borrowed funds totaled $75.6 million. Total shareholders’ equity for the Company of $131.5 million now stands at 8.8 percent of total assets compared to the December 31, 2024, level of $127.5 million or 9.2 percent of total assets. Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total equity would increase to $158.4 million or 10.6 percent of total assets.
The allowance for credit losses of $15.4 million is up $0.3 million from the December 2024 year-end level due to $0.09 million of net charge-offs, $0.23 million due to the Marblehead acquisition, and $0.15 million of growth-related provision expense. The Company has had stable asset quality through the first three months of 2025, with the non-performing asset ratio at 41 basis points and coverage on non-performing loans at 254 percent.
Capital Resources
As of March 31, 2025, based on the computations for the FFIEC 041 Consolidated Reports of Condition and Income filed by State Bank with the Federal Reserve Board, State Bank was classified as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since March 31, 2025, that management believes have changed State Bank’s capital classification.
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State Bank’s actual capital levels and ratios as of March 31, 2025, and December 31, 2024, are presented in the following table. Capital levels are presented for State Bank only as the Company is exempt from quarterly reporting on capital levels at the holding company level:
| To Be Well Capitalized Under Prompt | ||||||||||||||||||||||||
| For Capital Adequacy | Corrective Action | |||||||||||||||||||||||
| Actual | Purposes | Procedures | ||||||||||||||||||||||
| ($ in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| As of March 31, 2025 | ||||||||||||||||||||||||
| Tier I Capital to average assets | $ | 148,641 | 10.06 | % | $ | 59,093 | 4.0 | % | $ | 73,866 | 5.0 | % | ||||||||||||
| Tier I Common equity capital to risk-weighted assets | 148,641 | 12.35 | % | 54,171 | 4.5 | % | 78,247 | 6.5 | % | |||||||||||||||
| Tier I Capital to risk-weighted assets | 148,641 | 12.35 | % | 72,228 | 6.0 | % | 96,304 | 8.0 | % | |||||||||||||||
| Total Risk-based capital to risk-weighted assets | 163,709 | 13.60 | % | 96,304 | 8.0 | % | 120,380 | 10.0 | % | |||||||||||||||
| As of December 31, 2024 | ||||||||||||||||||||||||
| Tier I Capital to average assets | $ | 156,122 | 11.09 | % | $ | 56,290 | 4.0 | % | $ | 70,363 | 5.0 | % | ||||||||||||
| Tier I Common equity capital to risk-weighted assets | 156,122 | 13.43 | % | 52,297 | 4.5 | % | 75,541 | 6.5 | % | |||||||||||||||
| Tier I Capital to risk-weighted assets | 156,122 | 13.43 | % | 69,730 | 6.0 | % | 92,973 | 8.0 | % | |||||||||||||||
| Total Risk-based capital to risk-weighted assets | 170,672 | 14.69 | % | 92,973 | 8.0 | % | 116,216 | 10.0 | % | |||||||||||||||
Regulatory capital requirements commonly referred to as “Basel III” were fully phased in as of January 1, 2019, and are reflected in the capital table above. Management opted out of the accumulated other comprehensive income treatment under the new requirements and, as such, unrealized gains and losses from available-for-sale securities will continue to be excluded from State Bank’s regulatory capital.
Liquidity
Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions, securities available-for-sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets totaled $310.7 million at March 31, 2025, compared to $235.9 million at December 31, 2024.
Liquidity risk arises from the possibility that the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates the Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO reviews liquidity regularly and evaluates significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Asset Liability Manager.
The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $890.3 million at March 31, 2025, and $852.6 million at December 31, 2024, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs. At March 31, 2025, all eligible commercial real estate, first mortgage residential, agricultural and multi-family mortgage loans were pledged under an FHLB blanket lien.
The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for the three months ended March 31, 2025, and March 31, 2024 follows.
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The Company experienced positive cash flows from operating activities for the three months ended March 31, 2025, and March 31, 2024. Net cash provided by operating activities was $6.7 million for the three months ended March 31, 2025, and $0.3 million for the three months ended March 31, 2024. Highlights for the current year include $39.3 million in proceeds from the sale of loans, which is up from $36.6 million in the prior year. Originations of loans held for sale was a use of cash of $36.3 million, which is down from $38.4 million in the prior year . For the three months ended March 31, 2025, there was a gain on sale of loans of $0.9 million, and depreciation and amortization on premises and equipment of $0.5 million.
The Company experienced positive cash flows from investing activities for the three months ended March 31, 2025, and March 31, 2024. Net cash provided by investing activities was $9.2 million for the three months ended March 31, 2025, and $11.7 million for the three months ended March 31, 2024. Highlights for the current year include an increase of $23.0 million in loans, which is up $31.6 million from the prior year three-month period, and $3.0 million paid for the Marblehead acquisition, net of cash acquired. These cash payments were offset by $6.1 million in proceeds from maturing securities, and $30.1 million in proceeds from the sale of securities which were acquired from Marblehead.
The Company experienced positive cash flows from financing activities for the three months ended March 31, 2025, and negative cash flows from financing activities for the three months ended March 31, 2024. Net cash provided by financing activities was $63.3 million for the three months ended March 31, 2025, and net cash used in financing activities was $8.4 million for the three months ended March 31, 2024. Highlights for the current period include a $45.5 million increase in transaction deposits and a $20.1 million increase in time deposits for the three months ended March 31, 2025. This reflects a $0.6 million increase in transaction deposits from the prior year three-month period and a $22.8 million increase in time deposits. Net repayments of Federal Home Loan Bank advances for the three months ended March 31, 2025, were $1.0 million, compared to $48.6 million for the prior year three-month period.
Off-Balance-Sheet Borrowing Arrangements:
Significant additional off-balance-sheet liquidity is available in the form of FHLB advances and unused federal funds lines from correspondent banks. Management expects the risk of changes in off-balance-sheet arrangements to be immaterial to earnings.
The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $890.3 million were pledged to meet FHLB collateralization requirements as of March 31, 2025. Based on the current collateralization requirements of the FHLB, the Company had approximately $145.4 million of additional borrowing capacity at March 31, 2025. The Company also had $64.5 million in unpledged securities available to pledge for additional borrowings.
The Company has contractual obligations consisting of long-term debt obligations and operating lease obligations. In addition, as of March 31, 2025, the Company had commitments to sell mortgage loans totaling $23.3 million. The Company believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings and time deposits to retain deposits in changing interest rate environments. If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.
Asset Liability Management
Asset liability management involves developing, executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the impact that significant fluctuations in market interest rates would have on current and future earnings. The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings). With the exception of specific loans which are originated and held for sale, all of the financial instruments of the Company are for other than trading purposes. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Company has limited exposure to commodity prices related to agricultural loans. The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant. The Company’s financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Company’s primary market risk exposure; to a lesser extent, liquidity risk also impacts market risk exposure.
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Interest rate risk is the exposure of a banking institution’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Company’s safety and soundness.
Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization’s quantitative level of exposure. When assessing the interest rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and asset quality (when appropriate).
The Federal Reserve Board together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation adopted a Joint Agency Policy Statement on Interest Rate Risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve Board guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies, measures and controls interest rate risk.
Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution’s assets carry intermediate or long-term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment.
There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening or lengthening terms of new loans, investments, or liabilities; 2) selling existing assets or repaying certain liabilities; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contracts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management’s expertise to be effective. The Company does not currently utilize any derivative financial instruments to manage interest rate risk. As market conditions warrant, the Company may implement various interest rate risk management strategies, including the use of derivative financial instruments.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management believes there has been no material change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer (the principal executive officer) and the Executive Vice President and Chief Financial Officer (the principal financial officer) of the Company, the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and the Company’s Executive Vice President and Chief Financial Officer have concluded that:
| ● | information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; |
| ● | information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and |
| ● | the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. |
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of our business, the Company and its subsidiaries are parties to various legal actions which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors is included in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | Not Applicable |
| (b) | Not Applicable |
| (c) | Repurchases of Common Shares |
On December 18, 2024, the Company announced a share repurchase program authorizing the repurchase of up to 500,000 common shares of the Company through December 31, 2026. The table below sets forth information regarding common shares repurchased by the Company during the quarter ended March 31, 2025.
| (a) | (b) | (c) | (d) | |||||||||||||
| Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
| 01/01/25 - 01/31/25 | 26,446 | $ | 20.69 | 26,446 | 456,094 | |||||||||||
| 02/01/25 - 02/28/25 | - | - | - | 456,094 | ||||||||||||
| 03/01/25 - 03/31/25 | - | - | - | 456,094 | ||||||||||||
| Total | 26,446 | $ | 20.69 | 26,446 | 456,094 | |||||||||||
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
| (a) | None |
| (b) | None |
| (c) | During the quarter ended March 31, 2025, no director or officer (as defined in Rule 16a-1 under the Exchange Act) |
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Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| SB FINANCIAL GROUP, INC. | ||||
| Date: | May 8, 2025 | By: | /s/ Mark A. Klein | |
| Mark A. Klein | ||||
| Chairman, President & CEO | ||||
| By: | /s/ Anthony V. Cosentino | |
| Anthony V. Cosentino | ||
| Executive Vice President & | ||
| Chief Financial Officer |
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