10-Q 1 f10q0321_sbfinancial.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

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

For the transition period from _________________to___________________________

Commission file number 1-36785

SB FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

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

401 Clinton Street, Defiance, Ohio 43512

(Address of principal executive offices)

(Zip Code)

(419) 783-8950

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Shares, No Par Value 7,230,953 Outstanding at May 7, 2021		SBFG		The NASDAQ Stock Market, LLC (NASDAQ Capital Market)

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

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

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

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

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

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

SB FINANCIAL GROUP, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	39

Signatures		40

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SB Financial Group, Inc.

Condensed Consolidated Balance Sheets

	March 2021			December 2020
($ in thousands)	(unaudited)			(audited)
Assets
Cash and due from banks	$	206,036		$	140,690
Interest bearing time deposits		3,562			5,823
Available-for-sale securities		177,918			149,406
Loans held for sale		8,689			7,234
Loans, net of unearned income		848,176			872,723
Allowance for loan losses		(13,326	)		(12,574	)
Premises and equipment, net		23,233			23,557
Federal Reserve and Federal Home Loan Bank Stock, at cost		5,303			5,303
Foreclosed assets held for sale, net		43			23
Interest receivable		3,371			3,799
Goodwill		22,091			22,091
Cash value of life insurance		17,651			17,530
Mortgage servicing rights		10,490			7,759
Other assets		12,630			14,475

Total assets	$	1,325,867		$	1,257,839

Liabilities and shareholders’ equity

Liabilities
Deposits
Non interest bearing demand	$	273,026		$	251,649
Interest bearing demand		191,593			176,785
Savings		218,260			174,864
Money market		249,088			216,164
Time deposits		188,229			229,549
Total deposits		1,120,196			1,049,011

Short-term borrowings		24,321			20,189
Federal Home Loan Bank advances		8,000			8,000
Trust preferred securities		10,310			10,310
Interest payable		489			616
Other liabilities		18,585			26,790
Total liabilities		1,181,901			1,114,916

Commitments & Contingent Liabilities		-			-

Shareholders’ Equity
Preferred stock, no par value; authorized 200,000 shares; 2021 - 0 shares outstanding, 2020 - 0 shares outstanding		-			-
Common stock, no par value; authorized 10,000,000 shares; 2021 - 8,180,712 shares issued, 2020 - 8,180,712 shares issued		54,463			54,463
Additional paid-in capital		14,755			14,845
Retained earnings		90,883			84,578
Accumulated other comprehensive income (loss)		(457	)		2,210
Treasury stock, at cost; (2021 - 938,705 common shares, 2020 - 808,456 common shares)		(15,678	)		(13,173	)
Total shareholders’ equity		143,966			142,923
Total liabilities and shareholders’ equity	$	1,325,867		$	1,257,839

See notes to condensed consolidated financial statements (unaudited)

Note: The balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date.

SB Financial Group, Inc.

Condensed Consolidated Income Statement (unaudited)

	Three Months Ended
	March			March
($ in thousands, except per share data)	2021			2020
Interest Income
Loans
Taxable	$	9,926		$	9,795
Tax exempt		48			79
Securities
Taxable		643			692
Tax exempt		88			78
Total interest income		10,705			10,644

Interest Expense
Deposits		962			1,880
Repurchase agreements & other		11			28
Federal Home Loan Bank advance expense		56			100
Trust preferred securities expense		51			88
Total interest expense		1,080			2,096

Net Interest Income		9,625			8,548
Provision for loan losses		750			600

Net interest income after provision for loan losses		8,875			7,948

Noninterest Income
Wealth management fees		912			768
Customer service fees		758			682
Gain on sale of mortgage loans & OMSR		5,859			1,949
Mortgage loan servicing fees, net		2,378			(2,052	)
Gain on sale of non-mortgage loans		17			104
Title insurance income		521			265
Loss on sale/disposal of assets		(2	)		(46	)
Other income		479			491
Total noninterest income		10,922			2,161

Noninterest Expense
Salaries and employee benefits		6,620			5,427
Net occupancy expense		740			698
Equipment expense		732			700
Data processing fees		534			548
Professional fees		764			757
Marketing expense		135			208
Telephone and communications		154			115
Postage and delivery expense		111			115
State, local and other taxes		323			254
Employee expense		153			184
Other expenses		643			400
Total noninterest expense		10,909			9,406

Income before income tax		8,888			703

Provision for income taxes		1,807			22

Net Income	$	7,081		$	681

Net income available to common shareholders	$	7,081		$	681

Basic earnings per common share	$	0.97		$	0.09

Diluted earnings per common share	$	0.97		$	0.09

Average common shares outstanding (in thousands):
Basic:		7,317			7,749
Diluted:		7,335			7,756

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

	Three Months Ended
	March			March
($ in thousands)	2021			2020

Net income	$	7,081		$	681
Other comprehensive income (loss), net of tax:
Net unrealized holding gain (loss) on securities available-for-sale		(3,377	)		1,759
Related income tax effect		710			(369	)
Other comprehensive income (loss), net of tax		(2,667	)		1,390
Total comprehensive income	$	4,414		$	2,071

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

($ in thousands, except per share data)	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
January 1, 2021	$	-	$	54,463	$	14,845		$	84,578		$	2,210		$	(13,173	)	$	142,923
Net income									7,081									7,081
Other comprehensive loss												(2,667	)					(2,667	)
Dividends on common, $0.105 per share									(776	)								(776	)
Restricted stock vesting						(213	)								213			-
Repurchased stock															(2,718	)		(2,718	)
Stock based compensation expense						123												123
March 31, 2021	$	-	$	54,463	$	14,755		$	90,883		$	(457	)	$	(15,678	)	$	143,966

($ in thousands, except per share data)	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total
January 1, 2020	$	-	$	54,463	$	15,023		$	72,704		$	659	$	(6,755	)	$	136,094
Net income									681								681
Other comprehensive income												1,390					1,390
Dividends on common, $0.095 per share									(744	)							(744	)
Restricted stock vesting						(225	)							225			-
Stock options exercised						(253	)							441			188
Repurchased stock														(1,814	)		(1,814	)
Stock based compensation expense						110											110
March 31, 2020	$	-	$	54,463	$	14,655		$	72,641		$	2,049	$	(7,903	)	$	135,905

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Consolidated Statements of Cash Flows

($ in thousands)	Three Months Ended March 31,
	2021			2020
Operating Activities
Net Income	$	7,081		$	681
Items not requiring (providing) cash
Depreciation and amortization		489			477
Provision for loan losses		750			600
Expense of share-based compensation plan		123			110
Amortization of premiums and discounts on securities		280			70
Amortization of intangible assets		17			2
Amortization of originated mortgage servicing rights		1,187			597
Impairment (recovery) of mortgage servicing rights		(2,706	)		2,212
Proceeds from sale of loans held for sale		136,708			84,476
Originations of loans held for sale		(133,500	)		(87,259	)
Gain from sale of loans		(5,876	)		(2,053	)
Loss on sales of assets		2			46
Changes in
Interest receivable		428			166
Other assets		2,467			(7,089	)
Interest payable & other liabilities		(8,332	)		2,317
Net cash used in operating activities		(882	)		(4,647	)

Investing Activities
Purchases of available-for-sale securities		(44,143	)		(45,065	)
Proceeds from maturities of interest bearing time deposits		2,261			-
Proceeds from maturities of available-for-sale securities		11,975			39,975
Net change in loans		24,524			(5,656	)
Purchase of premises, equipment		(165	)		(691	)
Purchase of bank owned life insurance		(50	)		-
Proceeds from sale of foreclosed assets		3			175
Net cash used in investing activities		(5,595	)		(11,262	)

Financing Activities
Net increase in demand deposits, money market, interest checking & savings accounts		112,505			30,248
Net decrease in time deposits		(41,320	)		(6,576	)
Net increase in short term borrowings		4,132			23,936
Net proceeds from share-based compensation plans		-			188
Stock repurchase plan		(2,718	)		(1,814	)
Dividends on common shares		(776	)		(744	)
Net cash provided by financing activities		71,823			45,238
Increase in cash and cash equivalents		65,346			29,329
Cash and cash equivalents, beginning of period		140,690			27,064
Cash and cash equivalents, end of period	$	206,036		$	56,393
Supplemental cash flow information
Interest paid	$	1,207		$	2,156
Supplemental non-cash disclosure
Transfer of loans to foreclosed assets	$	25		$	5

See notes to condensed consolidated financial statements (unaudited)

SB FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—BASIS OF PRESENTATION

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

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

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

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

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three months ended March 31, 2021, are not necessarily indicative of results for the complete year.

The condensed consolidated balance sheet of the Company as of December 31, 2020 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, 2020.

New and applicable accounting pronouncements:

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

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

Accounting Standards not yet adopted:

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

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

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

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

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

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

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

While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date. The Company implemented a process to track required data by utilizing accounting software in preparation for compliance. We anticipate being fully prepared for implementation by January 1, 2023.

Reclassifications:

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

NOTE 2—EARNINGS PER SHARE

Earnings per share (EPS) have been computed based on the weighted average number of common shares outstanding during the periods presented. There were no anti-dilutive shares in 2021 or 2020. The average number of common shares used in the computation of basic and diluted earnings per share are set forth in the tables below:

	Three Months Ended Mar. 31,
($ and outstanding shares in thousands - except per share data)	2021		2020

Distributed earnings allocated to common shares	$	776	$	744
Undistributed (in excess of) earnings allocated to common shares		6,299		(67	)

Net earnings allocated to common shares		7,075		677
Net earnings allocated to participating securities		6		4

Net Income allocated to common shares and participating securities	$	7,081	$	681

Weighted average shares outstanding for basic earnings per share		7,317		7,749
Dilutive effect of stock compensation		18		7

Weighted average shares outstanding for diluted earnings per share		7,335		7,756

Basic earnings per common share	$	0.97	$	0.09

Diluted earnings per common share	$	0.97	$	0.09

NOTE 3 – BUSINESS COMBINATION

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

In accordance with ASC 805, the Company expensed approximately $1.2 million of direct acquisition costs during the three months ended June 30, 2020, and no additional merger expense was recorded in the three months ended March 31, 2021. The $1.2 million in merger expense is split between data processing and professional fees expense. As a result of the acquisition, the Company recorded $4.3 million of goodwill and $0.7 million of intangible assets in the second quarter of 2020. The Company was able to increase both its deposit and loan base and acquire new households in a new market. It is expected that this transaction will result in business synergies and economies of scale. The acquisition was consistent with the Company’s strategy to expand its presence in Northwest Ohio and to increase profitability by introducing existing products and services to the acquired customer base. The intangible assets are related to core deposits, which are being amortized over 10 years on a straight-line basis. For tax purposes, goodwill is non-deductible but will be evaluated annually for impairment.

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

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

Fair value of assets acquired
Cash and cash equivalents	$	31,756
Interest bearing time deposits		11,542
Investment securities		1,362
Federal Home Loan Bank stock		117
Loans held for investment		16,395
Premises and equipment		446
Goodwill		4,325
Core deposit intangible		660
Other assets		192
Total assets acquired	$	66,795

Fair value of liabilities assumed

Deposits	$	51,053
Other liabilities		223
Total liabilities assumed		51,276
Total purchase price (cash)	$	15,519

Pro Forma Financial Information

The results of operations of Edon have been included in the Company’s consolidated financial statements since the acquisition date of June 5, 2020. The following schedule includes the pro forma results for the three months ended March 31, 2021 and 2020, as if the Edon acquisition had occurred as of the beginning of the reporting periods presented. The acquisition would have added less than $0.1 million in revenue and earnings to the Company for the three months ended March 31, 2020.

Summary of Operations	Three Months Ended
($ in thousands)	Mar. 2021		Mar. 2020

Net interest income	$	9,625	$	8,885
Provision for loan losses		750		600

Net interest income after provision	$	8,875	$	8,285

Non interest income		10,922		2,188
Non interest expense		10,909		9,687

Income before income taxes	$	8,888	$	786
Income tax expense*		1,807		39

Net income	$	7,081	$	747

Basic earnings per share	$	0.97	$	0.10
Diluted earnings per share	$	0.97	$	0.10

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

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, 2021 and December 31, 2020 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
($ in thousands)	Cost		Gains		Losses			Fair Value
March 31, 2021:
U.S. Treasury and Government agencies	$	9,062	$	221	$	-		$	9,283
Mortgage-backed securities		155,395		1,089		(2,286	)		154,198
State and political subdivisions		11,541		475		(24	)		11,992
Other corporate securities		2,500		-		(55	)		2,445

Totals	$	178,498	$	1,785	$	(2,365	)	$	177,918

				Gross		Gross
		Amortized		Unrealized		Unrealized
		Cost		Gains		Losses			Fair Value
December 31, 2020:
U.S. Treasury and Government agencies	$	6,541	$	323	$	-		$	6,864
Mortgage-backed securities		125,973		1,845		(57	)		127,761
State and political subdivisions		11,595		680		-			12,275
Other corporate securities		2,500		6		-			2,506

Totals	$	146,609	$	2,854	$	(57	)	$	149,406

The amortized cost and fair value of securities available for sale at March 31, 2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
($ in thousands)	Cost		Value

Within one year	$	3,943	$	3,993
Due after one year through five years		3,654		3,719
Due after five years through ten years		10,124		10,356
Due after ten years		5,382		5,652
		23,103		23,720
Mortgage-backed securities		155,395		154,198

Totals	$	178,498	$	177,918

The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $61.6 million at March 31, 2021 and $53.7 million at December 31, 2020. The fair value of securities delivered for repurchase agreements was $32.2 million at March 31, 2021 and $28.2 million at December 31, 2020.

There were no realized gains and losses from sales of available-for-sale securities for the three months ended March 31, 2021 or March 31, 2020.

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 $112.7 million at March 31, 2021, and $27.3 million at December 31, 2020, which was approximately 63 and 18 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

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, 2021 and December 31, 2020 are as follows:

	Less than 12 Months					12 Months or Longer					Total
($ in thousands) March 31, 2021	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

U.S. Treasury and Government agencies	$	-	$	-		$	-	$	-		$	-	$	-
Mortgage-backed securities		108,758		(2,283	)		689		(3	)		109,447		(2,286	)
State and political subdivisions		842		(24	)		-		-			842		(24	)
Other corporate securities		2,445		(55	)		-		-			2,445		(55	)

Totals	$	112,045	$	(2,362	)	$	689	$	(3	)	$	112,734	$	(2,365	)

		Less than 12 Months					12 Months or Longer					Total
December 31, 2020		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

U.S. Treasury and Government agencies	$	-	$	-		$	-	$	-		$	-	$	-
Mortgage-backed securities		26,582		(54	)		717		(3	)		27,299		(57	)
State and political subdivisions		-		-			-		-			-		-
Other corporate securities		-		-			-		-			-		-

Totals	$	26,582	$	(54	)	$	717	$	(3	)	$	27,299	$	(57	)

The total unrealized loss in the securities portfolio was $2.4 million as of March 31, 2021 compared to a $0.06 million unrealized loss at December 31, 2020. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost. Management has determined there is no other-than-temporary-impairment on its securities as of March 31, 2021.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

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

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

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

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

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

Categories of loans at March 31, 2021 and December 31, 2020 include:

	Total Loans						Nonaccrual Loans
($ in thousands)	March 2021			December 2020			March 2021		December 2020

Commercial & industrial	$	179,841		$	204,767		$	615	$	902
Commercial real estate - owner occupied		119,749			113,169			1,450		1,450
Commercial real estate - nonowner occupied		265,509			257,651			952		962
Agricultural		48,374			55,235			-		-
Residential real estate		177,109			182,165			2,138		2,704
Home equity line of credit (HELOC)		44,706			46,310			449		390
Consumer		13,507			14,847			31		18

Total loans	$	848,795		$	874,144		$	5,635	$	6,426

Net deferred costs (fees)	$	(619	)	$	(1,421	)

Total loans, net deferred costs (fees)	$	848,176		$	872,723

Allowance for loan losses	$	(13,326	)	$	(12,574	)

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

Commercial & Industrial and Agricultural

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

Commercial Real Estate (Owner and Nonowner Occupied)

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

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

Residential Real Estate, HELOC and Consumer

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

The following tables present the activity in the allowance for loan losses for the three months ended March 31, 2021 and March 31, 2020, and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2021 and December 31, 2020.

($ in thousands)

For the Three Months Ended March 31, 2021	Commercial & industrial			Commercial real estate		Agricultural			Residential real estate			Consumer			Total

Beginning balance	$	3,074		$	5,451	$	496		$	2,534		$	1,019		$	12,574
Charge offs		-			-		-			(21	)		(31	)		(52	)
Recoveries		-			-		-			49			5			54
Provision		(115	)		726		(23	)		46			116			750
Ending balance	$	2,959		$	6,177	$	473		$	2,608		$	1,109		$	13,326

For the Three Months Ended March 31, 2020		Commercial & industrial			Commercial real estate		Agricultural			Residential real estate			Consumer			Total

Beginning balance	$	1,883		$	3,602	$	434		$	2,203		$	633		$	8,755
Charge offs		(388	)		-		-			-			(12	)		(400	)
Recoveries		1			-		-			1			1			3
Provision (credit)		153			66		41			238			102			600
Ending balance	$	1,649		$	3,668	$	475		$	2,442		$	724		$	8,958

Loans Receivable at March 31, 2021	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance:
individually evaluated for impairment	$	-	$	174	$	-	$	90	$	3	$	267
Ending balance:
collectively evaluated for impairment	$	2,959	$	6,003	$	473	$	2,518	$	1,106	$	13,059

Totals	$	2,959	$	6,177	$	473	$	2,608	$	1,109	$	13,326

Loans:
Ending balance:
individually evaluated for impairment	$	590	$	2,325	$	-	$	2,268	$	151	$	5,334
Ending balance:
collectively evaluated for impairment	$	179,251	$	382,933	$	48,374	$	174,841	$	58,062	$	843,461

Totals	$	179,841	$	385,258	$	48,374	$	177,109	$	58,213	$	848,795

Loans Receivable at December 31, 2020	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance:
individually evaluated for impairment	$	-	$	174	$	-	$	160	$	3	$	337
Ending balance:
collectively evaluated for impairment	$	3,074	$	5,277	$	496	$	2,374	$	1,016	$	12,237

Totals	$	3,074	$	5,451	$	496	$	2,534	$	1,019	$	12,574

Loans:
Ending balance:
individually evaluated for impairment	$	849	$	2,202	$	-	$	2,746	$	162	$	5,959
Ending balance:
collectively evaluated for impairment	$	203,918	$	368,618	$	55,235	$	179,419	$	60,995	$	868,185

Totals	$	204,767	$	370,820	$	55,235	$	182,165	$	61,157	$	874,144

Credit Risk Profile

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

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

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

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

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

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

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of March 31, 2021 and December 31, 2020.

($ in thousands) March 31, 2021	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner occupied		Agricultural		Residential real estate		HELOC		Consumer		Total

Pass (1 - 4)	$	177,989	$	115,121	$	258,320	$	48,367	$	173,993	$	44,213	$	13,465	$	831,468
Special Mention (5)		1,371		3,178		3,309		-		-		-		11		7,869
Substandard (6)		147		-		2,928		7		3,087		493		31		6,693
Doubtful (7)		334		1,450		952		-		29		-		-		2,765
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	179,841	$	119,749	$	265,509	$	48,374	$	177,109	$	44,706	$	13,507	$	848,795

December 31, 2020	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner occupied		Agricultural		Residential real estate		HELOC		Consumer		Total

Pass (1 - 4)	$	202,543	$	108,726	$	250,405	$	55,227	$	178,575	$	45,866	$	14,807	$	856,149
Special Mention (5)		1,485		2,993		3,338		-		-		-		14		7,830
Substandard (6)		151		-		3,026		8		3,560		444		26		7,215
Doubtful (7)		588		1,450		882		-		30		-		-		2,950
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	204,767	$	113,169	$	257,651	$	55,235	$	182,165	$	46,310	$	14,847	$	874,144

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

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2021 and December 31, 2020.

($ in thousands)	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
March 31, 2021	Past Due		Past Due		90 Days Past Due		Due		Current		Receivable

Commercial & industrial	$	154	$	-	$	334	$	488	$	179,353	$	179,841
Commercial real estate - owner occupied		-		-		1,450		1,450		118,299		119,749
Commercial real estate - nonowner occupied		213		-		698		911		264,598		265,509
Agricultural		7		-		-		7		48,367		48,374
Residential real estate		254		279		1,128		1,661		175,448		177,109
HELOC		133		66		219		418		44,288		44,706
Consumer		5		12		46		63		13,444		13,507
Total Loans	$	766	$	357	$	3,875	$	4,998	$	843,797	$	848,795

	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
December 31, 2020	Past Due		Past Due		90 Days Past Due		Due		Current		Receivable

Commercial & industrial	$	380	$	-	$	618	$	998	$	203,769	$	204,767
Commercial real estate - owner occupied		-		-		1,450		1,450		111,719		113,169
Commercial real estate - nonowner occupied		-		141		699		840		256,811		257,651
Agricultural		8		-		-		8		55,227		55,235
Residential real estate		12		1,393		1,212		2,617		179,548		182,165
HELOC		190		74		198		462		45,848		46,310
Consumer		123		42		20		185		14,662		14,847
Total Loans	$	713	$	1,650	$	4,197	$	6,560	$	867,584	$	874,144

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

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

The following tables present impaired loan information as of and for the three months ended March 31, 2021 and 2020, and for the twelve months ended December 31, 2020:

($ in thousands)
Three Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
March 31, 2021	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	590	$	1,386	$	-	$	1,598	$	12
Commercial real estate - owner occupied		1,450		1,450		-		1,450		-
Commercial real estate - nonowner occupied		296		425		-		534		7
Agricultural		-		-		-		-		-
Residential real estate		1,549		1,693		-		1,843		7
HELOC		84		84				86		1
Consumer		5		5		-		7		-
With a specific allowance recorded:
Commercial & industrial		-		-		-		-		-
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		579		579		174		579		-
Agricultural		-		-		-		-		-
Residential real estate		642		642		90		647		6
HELOC		62		62		3		75		1
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	590	$	1,386	$	-	$	1,598	$	12
Commercial real estate - owner occupied	$	1,450	$	1,450	$	-	$	1,450	$	-
Commercial real estate - nonowner occupied	$	875	$	1,004	$	174	$	1,113	$	7
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,191	$	2,335	$	90	$	2,490	$	13
HELOC	$	146	$	146	$	3	$	161	$	2
Consumer	$	5	$	5	$	-	$	7	$	-

($ in thousands)
Twelve Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
December 31, 2020	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	849	$	1,645	$	-	$	1,878	$	50
Commercial real estate - owner occupied		1,441		1,441		-		1,573		11
Commercial real estate - nonowner occupied		182		182		-		258		14
Agricultural		-		-		-		-		-
Residential real estate		1,017		1,084		-		1,243		64
HELOC		89		89				98		4
Consumer		7		7		-		12		1
With a specific allowance recorded:
Commercial & industrial		-		-		-		-		-
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		579		579		174		579		3
Agricultural		-		-		-		-		-
Residential real estate		1,729		1,774		160		1,785		14
HELOC		66		66		3		83		6
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	849	$	1,645	$	-	$	1,878	$	50
Commercial real estate - owner occupied	$	1,441	$	1,441	$	-	$	1,573	$	11
Commercial real estate - nonowner occupied	$	761	$	761	$	174	$	837	$	17
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,746	$	2,858	$	160	$	3,028	$	78
HELOC	$	155	$	155	$	3	$	181	$	10
Consumer	$	7	$	7	$	-	$	12	$	1

	Three Months Ended
March 31, 2020	Average Recorded		Interest Income
($ in thousands)	Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	1,922	$	15
Commercial real estate - owner occupied		1,362		-
Commercial real estate - nonowner occupied		473		3
Agricultural		-		-
Residential real estate		2,663		2
HELOC		15		-
Consumer		15		-
With a specific allowance recorded:
Commercial & industrial		249		-
Commercial real estate - owner occupied		-		-
Commercial real estate - nonowner occupied		-		-
Agricultural		-		-
Residential real estate		652		5
HELOC		-		-
Consumer		-		-
Totals:
Commercial & industrial	$	2,171	$	15
Commercial real estate - owner occupied	$	1,362	$	-
Commercial real estate - nonowner occupied	$	473	$	3
Agricultural	$	-	$	-
Residential real estate	$	3,315	$	7
HELOC	$	15	$

SEC Form 10-Q filed by SB Financial Group, Inc.