Note: The balance sheet at December 31, 2021 has been derived
from the audited consolidated financial statements at that date.
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”), SBFG Title, LLC (“SBFG Title”), SB Captive,
Inc. (“SB Captive”), 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. In addition,
State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance,
LLC (“SBI”).
The consolidated financial statements include
the accounts of the Company, State Bank, RFCBC, RDSI, RMC, SBFG Title, SB 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 (“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 and six months ended June 30, 2022, are not necessarily indicative of results
for the complete year.
The condensed consolidated balance sheet of the
Company as of December 31, 2021 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, 2021.
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 fiscal
years beginning after December 15, 2020, and interim periods within those fiscal years. The impact of this new guidance 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 on the Company’s
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 has the potential
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.
The new accounting guidance is effective
for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019. However, the
FASB has deferred the effective date for this ASU for smaller reporting companies, such as the Company, to annual reporting periods and
interim reporting periods within those annual periods, beginning after December 15, 2022.
The Company will continue to estimate
the impact of adopting ASU 2016-13 throughout 2022. We expect to be fully prepared for implementation by January 1, 2023.
ASU No. 2022-02: Financial Instruments
– Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures
The amendments to ASU 2016-13 (Financial
Instruments – Credit Losses) update the prior guidance on Troubled Debt Restructurings (“TDR”) by eliminating the TDR
recognition and measurement guidance and, instead, require that an entity evaluate whether the modification represents a new loan or a
continuation of an existing loan. In addition, entities are required to disclose current-period gross writeoffs by year of origination
for financing receivables and net investment in leases.
The new accounting guidance is effective
for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019. However, the
FASB has deferred the effective date for this ASU for smaller reporting companies, such as the Company, to annual reporting periods and
interim reporting periods within those annual periods, beginning after December 15, 2022.
The Company will continue to estimate
the impact of adopting the amendments throughout 2022. We expect to be fully prepared for implementation by January 1, 2023.
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 tables below. There were no anti-dilutive
shares in 2022 or 2021. Participating securities in the tables reflect dividends on nonvested restricted shares.
| |
Three Months Ended
June 30, | |
($ and outstanding shares in thousands - except per share data) | |
2022 | | |
2021 | |
| |
| | |
| |
Distributed earnings allocated to common shares | |
$ | 858 | | |
$ | 793 | |
Undistributed earnings allocated to common shares | |
| 1,968 | | |
| 2,962 | |
| |
| | | |
| | |
Net earnings allocated to common shares | |
| 2,826 | | |
| 3,755 | |
Net earnings allocated to participating securities | |
| 8 | | |
| 6 | |
| |
| | | |
| | |
Net Income allocated to common shares and participating securities | |
$ | 2,834 | | |
$ | 3,761 | |
| |
| | | |
| | |
Weighted average shares outstanding for basic earnings per share | |
| 7,075 | | |
| 7,148 | |
Dilutive effect of stock compensation | |
| 74 | | |
| 52 | |
| |
| | | |
| | |
Weighted average shares outstanding for diluted earnings per share | |
| 7,149 | | |
| 7,200 | |
| |
| | | |
| | |
Basic earnings per common share | |
$ | 0.40 | | |
$ | 0.53 | |
| |
| | | |
| | |
Diluted earnings per common share | |
$ | 0.40 | | |
$ | 0.52 | |
| |
Six Months Ended
June 30, | |
($ and outstanding shares in thousands - except per share data) | |
2022 | | |
2021 | |
| |
| | |
| |
Distributed earnings allocated to common shares | |
$ | 1,694 | | |
$ | 1,569 | |
Undistributed earnings allocated to common shares | |
| 3,939 | | |
| 9,262 | |
| |
| | | |
| | |
Net earnings allocated to common shares | |
| 5,633 | | |
| 10,831 | |
Net earnings allocated to participating securities | |
| 14 | | |
| 11 | |
| |
| | | |
| | |
Net Income allocated to common shares and participating securities | |
$ | 5,647 | | |
$ | 10,842 | |
| |
| | | |
| | |
Weighted average shares outstanding for basic earnings per share | |
| 7,055 | | |
| 7,232 | |
Dilutive effect of stock compensation | |
| 61 | | |
| 24 | |
| |
| | | |
| | |
Weighted average shares outstanding for diluted earnings per share | |
| 7,116 | | |
| 7,256 | |
| |
| | | |
| | |
Basic earnings per common share | |
$ | 0.80 | | |
$ | 1.50 | |
| |
| | | |
| | |
Diluted earnings per common share | |
$ | 0.79 | | |
$ | 1.49 | |
On January 10, 2022, the Company announced that
its board of directors had declared a 5 percent common stock dividend payable on February 4, 2022, to shareholders of record as of January
21, 2022. Holders of the Company’s common shares as of the record date received one additional common share for every twenty common
shares held on the record date. No fractional shares were issued, and shareholders received cash for such fractional interests based on
the closing price of the Company’s common shares on the record date of $19.89.
Had the 5 percent common stock dividend been included in the Company’s
2021 financial statements, common shares outstanding would have increased by approximately 345,000 and diluted earnings per share, assuming
the shares were outstanding for the three and six months ended June 30, 2021, would have decreased by $0.03 and $0.07 per share, respectively.
In connection with the 5 percent common stock
dividend, the Company filed a Certificate of Amendment with the Ohio Secretary of State on January 25, 2022 to amend Article FIRST of
its Amended Articles of Incorporation to proportionately increase the authorized number of common shares, without par value, of the Company
from 10,000,000 to 10,500,000. The addition of these authorized shares did not have a material impact on the Company’s consolidated
financial statements.
Note 3 – AVAILABLE
FOR SALE Securities
The amortized cost and appropriate fair values,
together with gross unrealized gains and losses, of securities at June 30, 2022 and December 31, 2021 were as follows:
| |
| | |
Gross | | |
Gross | | |
| |
($ in thousands) | |
Amortized | | |
Unrealized | | |
Unrealized | | |
| |
| |
Cost | | |
Gains | | |
Losses | | |
Fair Value | |
June 30, 2022 | |
| | |
| | |
| | |
| |
U.S. Treasury and Government agencies | |
$ | 9,056 | | |
$ | 1 | | |
$ | (585 | ) | |
$ | 8,472 | |
Mortgage-backed securities | |
| 254,483 | | |
| 7 | | |
| (25,573 | ) | |
| 228,917 | |
State and political subdivisions | |
| 13,538 | | |
| 24 | | |
| (1,345 | ) | |
| 12,217 | |
Other corporate securities | |
| 17,200 | | |
| - | | |
| (644 | ) | |
| 16,556 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 294,277 | | |
$ | 32 | | |
$ | (28,147 | ) | |
$ | 266,162 | |
| |
| | |
Gross | | |
Gross | | |
| |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
| |
| |
Cost | | |
Gains | | |
Losses | | |
Fair Value | |
December 31, 2021 | |
| | |
| | |
| | |
| |
U.S. Treasury and Government agencies | |
$ | 8,986 | | |
$ | 135 | | |
$ | (16 | ) | |
$ | 9,105 | |
Mortgage-backed securities | |
| 231,057 | | |
| 614 | | |
| (3,537 | ) | |
| 228,134 | |
State and political subdivisions | |
| 12,352 | | |
| 536 | | |
| (9 | ) | |
| 12,879 | |
Other corporate securities | |
| 13,200 | | |
| 2 | | |
| (61 | ) | |
| 13,141 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 265,595 | | |
$ | 1,287 | | |
$ | (3,623 | ) | |
$ | 263,259 | |
The amortized cost and fair value of securities available
for sale at June 30, 2022, 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 | |
$ | 1,256 | | |
$ | 1,263 | |
Due after one year through five years | |
| 3,089 | | |
| 3,037 | |
Due after five years through ten years | |
| 26,189 | | |
| 25,005 | |
Due after ten years | |
| 9,260 | | |
| 7,940 | |
| |
| 39,794 | | |
| 37,245 | |
Mortgage-backed securities | |
| 254,483 | | |
| 228,917 | |
| |
| | | |
| | |
Totals | |
$ | 294,277 | | |
$ | 266,162 | |
The fair value of securities pledged as collateral,
to secure public deposits and for other purposes, was $60.3 million at June 30, 2022 and $54.2 million at December 31, 2021. The fair
value of securities delivered for repurchase agreements was $27.5 million at June 30, 2022 and $23.6 million at December 31, 2021.
There were no realized gains or losses from sales
of available-for-sale securities for the six months ended June 30, 2022 or June 30, 2021.
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 $257.1
million at June 30, 2022, and $214.2 million at December 31, 2021, which consisted of 139 securities, or approximately 97 percent, and
64 securities, or approximately 81 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates.
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information
obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment
of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized
in net income in the period the other-than-temporary impairment is identified.
Securities with unrealized losses, aggregated
by investment class and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2022
and December 31, 2021, are as follows:
| |
Less than 12 Months | | |
12 Months or Longer | | |
Total | |
June 30, 2022
($ in thousands) | |
Fair Value | | |
Unrealized
Losses | | |
Fair Value | | |
Unrealized
Losses | | |
Fair Value | | |
Unrealized
Losses | |
| |
| | |
| | |
| | |
| | |
| | |
| |
U.S. Treasury and Government agencies | |
$ | 7,858 | | |
$ | (584 | ) | |
$ | 250 | | |
$ | (1 | ) | |
$ | 8,108 | | |
$ | (585 | ) |
Mortgage-backed securities | |
| 156,242 | | |
| (14,928 | ) | |
| 72,095 | | |
| (10,645 | ) | |
| 228,337 | | |
| (25,573 | ) |
State and political subdivisions | |
| 9,409 | | |
| (1,345 | ) | |
| - | | |
| - | | |
| 9,409 | | |
| (1,345 | ) |
Other corporate securities | |
| 11,206 | | |
| (644 | ) | |
| - | | |
| - | | |
| 11,206 | | |
| (644 | ) |
Totals | |
$ | 184,715 | | |
$ | (17,501 | ) | |
$ | 72,345 | | |
$ | (10,646 | ) | |
$ | 257,060 | | |
$ | (28,147 | ) |
| |
Less than 12 Months | | |
12 Months or Longer | | |
Total | |
December 31, 2021 | |
Fair Value | | |
Unrealized
Losses | | |
Fair Value | | |
Unrealized
Losses | | |
Fair Value | | |
Unrealized
Losses | |
| |
| | |
| | |
| | |
| | |
| | |
| |
U.S. Treasury and Government agencies | |
$ | 3,397 | | |
$ | (16 | ) | |
$ | - | | |
$ | - | | |
$ | 3,397 | | |
$ | (16 | ) |
Mortgage-backed securities | |
| 183,727 | | |
| (2,856 | ) | |
| 18,566 | | |
| (681 | ) | |
| 202,293 | | |
| (3,537 | ) |
State and political subdivisions | |
| 1,673 | | |
| (9 | ) | |
| - | | |
| - | | |
| 1,673 | | |
| (9 | ) |
Other corporate securities | |
| 6,889 | | |
| (61 | ) | |
| - | | |
| - | | |
| 6,889 | | |
| (61 | ) |
Totals | |
$ | 195,686 | | |
$ | (2,942 | ) | |
$ | 18,566 | | |
$ | (681 | ) | |
$ | 214,252 | | |
$ | (3,623 | ) |
The total unrealized loss in the securities portfolio
was $28.1 million as of June 30, 2022 compared to a $3.6 million unrealized loss at December 31, 2021. 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 June 30, 2022.
NOTE 4 – 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 June 30, 2022 and December 31, 2021 include:
| |
Total Loans | | |
Nonaccrual Loans | |
($ in thousands) | |
June 2022 | | |
December 2021 | | |
June 2022 | | |
December 2021 | |
| |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 127,434 | | |
$ | 122,250 | | |
$ | 140 | | |
$ | 143 | |
Commercial real estate - owner occupied | |
| 129,496 | | |
| 118,891 | | |
| 88 | | |
| 88 | |
Commercial real estate - nonowner occupied | |
| 274,583 | | |
| 262,277 | | |
| 271 | | |
| 466 | |
Agricultural | |
| 60,490 | | |
| 57,403 | | |
| - | | |
| - | |
Residential real estate | |
| 241,776 | | |
| 206,424 | | |
| 3,176 | | |
| 2,484 | |
Home equity line of credit (HELOC) | |
| 44,142 | | |
| 41,682 | | |
| 291 | | |
| 464 | |
Consumer | |
| 17,303 | | |
| 13,474 | | |
| 32 | | |
| 7 | |
Total loans | |
$ | 895,224 | | |
$ | 822,401 | | |
$ | 3,998 | | |
$ | 3,652 | |
| |
| | | |
| | | |
| | | |
| | |
Net deferred costs (fees) | |
$ | 387 | | |
$ | 313 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total loans, net deferred costs (fees) | |
$ | 895,611 | | |
$ | 822,714 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses | |
$ | (13,801 | ) | |
$ | (13,805 | ) | |
| | | |
| | |
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 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 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 and six months ended June 30, 2022 and June 30, 2021, and the recorded investment in loans based
on portfolio segment and impairment method as of June 30, 2022 and December 31, 2021.
($ in thousands) | |
| | |
| | |
| | |
| | |
| | |
| |
For the Three Months Ended June 30, 2022 | |
Commercial &
industrial | | |
Commercial
real estate | | |
Agricultural | | |
Residential
real estate | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Beginning balance | |
$ | 1,892 | | |
$ | 6,883 | | |
$ | 547 | | |
$ | 3,502 | | |
$ | 980 | | |
$ | 13,804 | |
Charge offs | |
| - | | |
| - | | |
| - | | |
| - | | |
| (9 | ) | |
| (9 | ) |
Recoveries | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6 | | |
| 6 | |
Provision | |
| (64 | ) | |
| (212 | ) | |
| 13 | | |
| 249 | | |
| 14 | | |
| - | |
Ending balance | |
$ | 1,828 | | |
$ | 6,671 | | |
$ | 560 | | |
$ | 3,751 | | |
$ | 991 | | |
$ | 13,801 | |
For the Six Months Ended June 30, 2022 | |
Commercial &
industrial | | |
Commercial
real estate | | |
Agricultural | | |
Residential
real estate | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Beginning balance | |
$ | 1,890 | | |
$ | 6,781 | | |
$ | 599 | | |
$ | 3,515 | | |
$ | 1,020 | | |
$ | 13,805 | |
Charge offs | |
| - | | |
| - | | |
| - | | |
| - | | |
| (18 | ) | |
| (18 | ) |
Recoveries | |
| - | | |
| - | | |
| - | | |
| - | | |
| 14 | | |
| 14 | |
Provision | |
| (62 | ) | |
| (110 | ) | |
| (39 | ) | |
| 236 | | |
| (25 | ) | |
| - | |
Ending balance | |
$ | 1,828 | | |
$ | 6,671 | | |
$ | 560 | | |
$ | 3,751 | | |
$ | 991 | | |
$ | 13,801 | |
For the Three Months Ended June 30, 2021 | |
Commercial &
industrial | | |
Commercial
real estate | | |
Agricultural | | |
Residential
real estate | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Beginning balance | |
$ | 2,959 | | |
$ | 6,177 | | |
$ | 473 | | |
$ | 2,608 | | |
$ | 1,109 | | |
$ | 13,326 | |
Charge offs | |
| - | | |
| - | | |
| - | | |
| (22 | ) | |
| (4 | ) | |
| (26 | ) |
Recoveries | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6 | | |
| 6 | |
Provision | |
| (1,241 | ) | |
| 495 | | |
| 21 | | |
| 839 | | |
| (114 | ) | |
| - | |
Ending balance | |
$ | 1,718 | | |
$ | 6,672 | | |
$ | 494 | | |
$ | 3,425 | | |
$ | 997 | | |
$ | 13,306 | |
For the Six Months Ended June 30, 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 | |
| - | | |
| - | | |
| - | | |
| (43 | ) | |
| (35 | ) | |
| (78 | ) |
Recoveries | |
| - | | |
| - | | |
| - | | |
| 49 | | |
| 11 | | |
| 60 | |
Provision | |
| (1,356 | ) | |
| 1,221 | | |
| (2 | ) | |
| 885 | | |
| 2 | | |
| 750 | |
Ending balance | |
$ | 1,718 | | |
$ | 6,672 | | |
$ | 494 | | |
$ | 3,425 | | |
$ | 997 | | |
$ | 13,306 | |
Loans Receivable at June 30, 2022 | |
Commercial &
industrial | | |
Commercial
real estate | | |
Agricultural | | |
Residential
real estate | | |
Consumer | | |
Total | |
Allowance: | |
| | |
| | |
| | |
| | |
| | |
| |
Ending balance: | |
| | |
| | |
| | |
| | |
| | |
| |
individually evaluated for impairment | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 167 | | |
$ | 4 | | |
$ | 171 | |
Ending balance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
collectively evaluated for impairment | |
$ | 1,828 | | |
$ | 6,671 | | |
$ | 560 | | |
$ | 3,584 | | |
$ | 987 | | |
$ | 13,630 | |
Totals | |
$ | 1,828 | | |
$ | 6,671 | | |
$ | 560 | | |
$ | 3,751 | | |
$ | 991 | | |
$ | 13,801 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: | |
| | |
| | |
| | |
| | |
| | |
| |
Ending balance: | |
| | |
| | |
| | |
| | |
| | |
| |
individually evaluated for impairment | |
$ | 117 | | |
$ | 295 | | |
$ | - | | |
$ | 2,997 | | |
$ | 131 | | |
$ | 3,540 | |
Ending balance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
collectively evaluated for impairment | |
$ | 127,317 | | |
$ | 403,784 | | |
$ | 60,490 | | |
$ | 238,779 | | |
$ | 61,314 | | |
$ | 891,684 | |
Totals | |
$ | 127,434 | | |
$ | 404,079 | | |
$ | 60,490 | | |
$ | 241,776 | | |
$ | 61,445 | | |
$ | 895,224 | |
Loans Receivable at December 31, 2021 | |
Commercial &
industrial | | |
Commercial
real estate | | |
Agricultural | | |
Residential
real estate | | |
Consumer | | |
Total | |
Allowance: | |
| | |
| | |
| | |
| | |
| | |
| |
Ending balance: | |
| | |
| | |
| | |
| | |
| | |
| |
individually evaluated for impairment | |
$ | - | | |
$ | 10 | | |
$ | - | | |
$ | 120 | | |
$ | 3 | | |
$ | 133 | |
Ending balance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
collectively evaluated for impairment | |
$ | 1,890 | | |
$ | 6,771 | | |
$ | 599 | | |
$ | 3,395 | | |
$ | 1,017 | | |
$ | 13,672 | |
Totals | |
$ | 1,890 | | |
$ | 6,781 | | |
$ | 599 | | |
$ | 3,515 | | |
$ | 1,020 | | |
$ | 13,805 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
individually evaluated for impairment | |
$ | 118 | | |
$ | 354 | | |
$ | - | | |
$ | 2,307 | | |
$ | 135 | | |
$ | 2,914 | |
Ending balance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
collectively evaluated for impairment | |
$ | 122,132 | | |
$ | 380,814 | | |
$ | 57,403 | | |
$ | 204,117 | | |
$ | 55,021 | | |
$ | 819,487 | |
Totals | |
$ | 122,250 | | |
$ | 381,168 | | |
$ | 57,403 | | |
$ | 206,424 | | |
$ | 55,156 | | |
$ | 822,401 | |
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 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 following tables present the credit risk profile
of the Company’s loan portfolio based on rating category as of June 30, 2022 and December 31, 2021.
($ in thousands)
June 30, 2022 | |
Commercial &
industrial | | |
Commercial
real estate -
owner occupied | | |
Commercial
real estate -
nonowner
occupied | | |
Agricultural | | |
Residential
real estate | | |
HELOC | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Pass (1 - 4) | |
$ | 126,532 | | |
$ | 126,444 | | |
$ | 269,015 | | |
$ | 60,490 | | |
$ | 238,272 | | |
$ | 43,851 | | |
$ | 17,272 | | |
$ | 881,876 | |
Special Mention (5) | |
| 600 | | |
| 2,964 | | |
| 5,292 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 8,856 | |
Substandard (6) | |
| 161 | | |
| - | | |
| 5 | | |
| - | | |
| 3,479 | | |
| 291 | | |
| 31 | | |
| 3,967 | |
Doubtful (7) | |
| 141 | | |
| 88 | | |
| 271 | | |
| - | | |
| 25 | | |
| - | | |
| - | | |
| 525 | |
Loss (8) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Loans | |
$ | 127,434 | | |
$ | 129,496 | | |
$ | 274,583 | | |
$ | 60,490 | | |
$ | 241,776 | | |
$ | 44,142 | | |
$ | 17,303 | | |
$ | 895,224 | |
December 31, 2021 | |
Commercial &
industrial | | |
Commercial
real estate -
owner occupied | | |
Commercial
real estate -
nonowner
occupied | | |
Agricultural | | |
Residential
real estate | | |
HELOC | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Pass (1 - 4) | |
$ | 121,285 | | |
$ | 111,232 | | |
$ | 253,269 | | |
$ | 57,403 | | |
$ | 203,295 | | |
$ | 41,218 | | |
$ | 13,467 | | |
$ | 801,169 | |
Special Mention (5) | |
| 659 | | |
| 7,571 | | |
| 5,694 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 13,924 | |
Substandard (6) | |
| 188 | | |
| - | | |
| 2,848 | | |
| - | | |
| 3,102 | | |
| 464 | | |
| 7 | | |
| 6,609 | |
Doubtful (7) | |
| 118 | | |
| 88 | | |
| 466 | | |
| - | | |
| 27 | | |
| - | | |
| - | | |
| 699 | |
Loss (8) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Loans | |
$ | 122,250 | | |
$ | 118,891 | | |
$ | 262,277 | | |
$ | 57,403 | | |
$ | 206,424 | | |
$ | 41,682 | | |
$ | 13,474 | | |
$ | 822,401 | |
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 June 30, 2022 and December 31, 2021.
($ in thousands) | |
30-59 Days | | |
60-89 Days | | |
Greater Than
90 Days | | |
Total Past | | |
| | |
Total Loans | |
June 30, 2022 | |
Past Due | | |
Past Due | | |
Past Due | | |
Due | | |
Current | | |
Receivable | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 156 | | |
$ | - | | |
$ | 140 | | |
$ | 296 | | |
$ | 127,138 | | |
$ | 127,434 | |
Commercial real estate - owner occupied | |
| 48 | | |
| - | | |
| 88 | | |
| 136 | | |
| 129,360 | | |
| 129,496 | |
Commercial real estate - nonowner occupied | |
| 255 | | |
| - | | |
| 71 | | |
| 326 | | |
| 274,257 | | |
| 274,583 | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| 60,490 | | |
| 60,490 | |
Residential real estate | |
| 23 | | |
| 374 | | |
| 1,361 | | |
| 1,758 | | |
| 240,018 | | |
| 241,776 | |
HELOC | |
| 118 | | |
| 94 | | |
| 134 | | |
| 346 | | |
| 43,796 | | |
| 44,142 | |
Consumer | |
| 18 | | |
| 19 | | |
| 22 | | |
| 59 | | |
| 17,244 | | |
| 17,303 | |
Total Loans | |
$ | 618 | | |
$ | 487 | | |
$ | 1,816 | | |
$ | 2,921 | | |
$ | 892,303 | | |
$ | 895,224 | |
| |
30-59 Days | | |
60-89 Days | | |
Greater Than
90 Days | | |
Total Past | | |
| | |
Total Loans | |
December 31, 2021 | |
Past Due | | |
Past Due | | |
Past Due | | |
Due | | |
Current | | |
Receivable | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 166 | | |
$ | 25 | | |
$ | 118 | | |
$ | 309 | | |
$ | 121,941 | | |
$ | 122,250 | |
Commercial real estate - owner occupied | |
| - | | |
| - | | |
| 88 | | |
| 88 | | |
| 118,803 | | |
| 118,891 | |
Commercial real estate - nonowner occupied | |
| 221 | | |
| 233 | | |
| 246 | | |
| 700 | | |
| 261,577 | | |
| 262,277 | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| 57,403 | | |
| 57,403 | |
Residential real estate | |
| 265 | | |
| 716 | | |
| 1,344 | | |
| 2,325 | | |
| 204,099 | | |
| 206,424 | |
HELOC | |
| 53 | | |
| 80 | | |
| 248 | | |
| 381 | | |
| 41,301 | | |
| 41,682 | |
Consumer | |
| 20 | | |
| 14 | | |
| 7 | | |
| 41 | | |
| 13,433 | | |
| 13,474 | |
Total Loans | |
$ | 725 | | |
$ | 1,068 | | |
$ | 2,051 | | |
$ | 3,844 | | |
$ | 818,557 | | |
$ | 822,401 | |
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 and six months ended June 30, 2022 and 2021, and for the twelve months ended December 31, 2021:
($ in thousands) | |
Recorded | | |
Unpaid
Principal | | |
Related | | |
Average
Recorded | | |
Interest
Income | |
Six Months Ended June 30, 2022 | |
Investment | | |
Balance | | |
Allowance | | |
Investment | | |
Recognized | |
| |
| | |
| | |
| | |
| | |
| |
With no related allowance recorded: | |
| | |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 117 | | |
$ | 202 | | |
$ | - | | |
$ | 216 | | |
$ | 1 | |
Commercial real estate - owner occupied | |
| 88 | | |
| 88 | | |
| - | | |
| 88 | | |
| - | |
Commercial real estate - nonowner occupied | |
| 207 | | |
| 207 | | |
| - | | |
| 350 | | |
| 11 | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 1,750 | | |
| 1,816 | | |
| - | | |
| 2,011 | | |
| 35 | |
HELOC | |
| 19 | | |
| 19 | | |
| | | |
| 23 | | |
| 1 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
With a specific allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - nonowner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 1,247 | | |
| 1,247 | | |
| 167 | | |
| 1,279 | | |
| 1 | |
HELOC | |
| 112 | | |
| 112 | | |
| 4 | | |
| 125 | | |
| 1 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Totals: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
$ | 117 | | |
$ | 202 | | |
$ | - | | |
$ | 216 | | |
$ | 1 | |
Commercial real estate - owner occupied | |
$ | 88 | | |
$ | 88 | | |
$ | - | | |
$ | 88 | | |
$ | - | |
Commercial real estate - nonowner occupied | |
$ | 207 | | |
$ | 207 | | |
$ | - | | |
$ | 350 | | |
$ | 11 | |
Agricultural | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Residential real estate | |
$ | 2,997 | | |
$ | 3,063 | | |
$ | 167 | | |
$ | 3,290 | | |
$ | 36 | |
HELOC | |
$ | 131 | | |
$ | 131 | | |
$ | 4 | | |
$ | 148 | | |
$ | 2 | |
Consumer | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
($ in thousands) | |
Average
Recorded | | |
Interest
Income | |
Three Months Ended June 30, 2022 | |
Investment | | |
Recognized | |
| |
| | |
| |
With no related allowance recorded: | |
| | |
| |
Commercial & industrial | |
$ | 216 | | |
$ | 1 | |
Commercial real estate - owner occupied | |
| 88 | | |
| - | |
Commercial real estate - nonowner occupied | |
| 348 | | |
| 6 | |
Agricultural | |
| - | | |
| - | |
Residential real estate | |
| 2,002 | | |
| 16 | |
HELOC | |
| 21 | | |
| - | |
Consumer | |
| - | | |
| - | |
With a specific allowance recorded: | |
| | | |
| | |
Commercial & industrial | |
| - | | |
| - | |
Commercial real estate - owner occupied | |
| - | | |
| - | |
Commercial real estate - nonowner occupied | |
| - | | |
| - | |
Agricultural | |
| - | | |
| - | |
Residential real estate | |
| 1,278 | | |
| 15 | |
HELOC | |
| 123 | | |
| 1 | |
Consumer | |
| - | | |
| - | |
Totals: | |
| | | |
| | |
Commercial & industrial | |
$ | 216 | | |
$ | 1 | |
Commercial real estate - owner occupied | |
$ | 88 | | |
$ | - | |
Commercial real estate - nonowner occupied | |
$ | 348 | | |
$ | 6 | |
Agricultural | |
$ | - | | |
$ | - | |
Residential real estate | |
$ | 3,280 | | |
$ | 31 | |
HELOC | |
$ | 144 | | |
$ | 1 | |
Consumer | |
$ | - | | |
$ | - | |
($ in thousands) | |
Recorded | | |
Unpaid
Principal | | |
Related | | |
Average
Recorded | | |
Interest
Income | |
Twelve Months Ended December 31, 2021 | |
Investment | | |
Balance | | |
Allowance | | |
Investment | | |
Recognized | |
| |
| | |
| | |
| | |
| | |
| |
With no related allowance recorded: | |
| | |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 118 | | |
$ | 204 | | |
$ | - | | |
$ | 217 | | |
$ | 2 | |
Commercial real estate - owner occupied | |
| 88 | | |
| 88 | | |
| - | | |
| 88 | | |
| - | |
Commercial real estate - nonowner occupied | |
| 223 | | |
| 223 | | |
| - | | |
| 357 | | |
| 28 | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 1,391 | | |
| 1,458 | | |
| - | | |
| 1,663 | | |
| 60 | |
HELOC | |
| 33 | | |
| 33 | | |
| | | |
| 41 | | |
| 2 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
With a specific allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - nonowner occupied | |
| 43 | | |
| 173 | | |
| 10 | | |
| 173 | | |
| - | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 916 | | |
| 916 | | |
| 120 | | |
| 933 | | |
| 20 | |
HELOC | |
| 102 | | |
| 102 | | |
| 3 | | |
| 124 | | |
| 5 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Totals: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
$ | 118 | | |
$ | 204 | | |
$ | - | | |
$ | 217 | | |
$ | 2 | |
Commercial real estate - owner occupied | |
$ | 88 | | |
$ | 88 | | |
$ | - | | |
$ | 88 | | |
$ | - | |
Commercial real estate - nonowner occupied | |
$ | 266 | | |
$ | 396 | | |
$ | 10 | | |
$ | 530 | | |
$ | 28 | |
Agricultural | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Residential real estate | |
$ | 2,307 | | |
$ | 2,374 | | |
$ | 120 | | |
$ | 2,596 | | |
$ | 80 | |
HELOC | |
$ | 135 | | |
$ | 135 | | |
$ | 3 | | |
$ | 165 | | |
$ | 7 | |
Consumer | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
Six Months Ended | | |
Three Months Ended | |
($ in thousands) | |
Average
Recorded | | |
Interest
Income | | |
Average
Recorded | | |
Interest
Income | |
June 30, 2021 | |
Investment | | |
Recognized | | |
Investment | | |
Recognized | |
| |
| | |
| | |
| | |
| |
With no related allowance recorded: | |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 855 | | |
$ | 22 | | |
$ | 849 | | |
$ | 11 | |
Commercial real estate - owner occupied | |
| 88 | | |
| - | | |
| 88 | | |
| - | |
Commercial real estate - nonowner occupied | |
| 532 | | |
| 15 | | |
| 531 | | |
| 8 | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 1,453 | | |
| 26 | | |
| 1,447 | | |
| 13 | |
HELOC | |
| 46 | | |
| 1 | | |
| 44 | | |
| - | |
Consumer | |
| 6 | | |
| - | | |
| 5 | | |
| - | |
With a specific allowance recorded: | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - owner occupied | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - nonowner occupied | |
| 579 | | |
| - | | |
| 579 | | |
| - | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 645 | | |
| 9 | | |
| 644 | | |
| 4 | |
HELOC | |
| 129 | | |
| 3 | | |
| 127 | | |
| 1 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | |
Totals: | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
$ | 855 | | |
$ | 22 | | |
$ | 849 | | |
$ | 11 | |
Commercial real estate - owner occupied | |
$ | 88 | | |
$ | - | | |
$ | 88 | | |
$ | - | |
Commercial real estate - nonowner occupied | |
$ | 1,111 | | |
$ | 15 | | |
$ | 1,110 | | |
$ | 8 | |
Agricultural | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Residential real estate | |
$ | 2,098 | | |
$ | 35 | | |
$ | 2,091 | | |
$ | 17 | |
HELOC | |
$ | 175 | | |
$ | 4 | | |
$ | 171 | | |
$ | 1 | |
Consumer | |
$ | 6 | | |
$ | - | | |
$ | 5 | | |
$ | - | |
Impaired loans less than $100,000 are
included in groups of homogenous loans. These loans are evaluated based on delinquency status.
Interest income recognized on a cash
basis does not materially differ from interest income recognized on an accrual basis.
Troubled Debt Restructured (TDR) Loans
TDRs are modified loans where a concession
was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are
not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.
TDR Concession Types
The Company’s standards relating
to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations.
Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific
circumstances at a point in time. All loan modifications, including those classified as TDRs,
are reviewed and approved by management. The types of concessions provided to borrowers include:
| ● | Interest
rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining
original life of the loan. The Company also may grant interest rate concessions for a limited
timeframe on a case by case basis. |
| ● | Amortization
or maturity date change: A change in the amortization or maturity date beyond what the collateral
supports, including a concession that does any of the following: |
| (1) | Lengthens
the amortization period of the amortized principal beyond market terms. This concession reduces
the minimum monthly payment and increases the amount of the balloon payment at the end of
the term of the loan. Principal is generally not forgiven. |
| (2) | Reduces
the amount of loan principal to be amortized. This concession also reduces the minimum monthly
payment and increases the amount of the balloon payment at the end of the term of the loan.
Principal is generally not forgiven. |
| (3) | Extends
the maturity date or dates of the debt beyond what the collateral supports. This concession
generally applies to loans without a balloon payment at the end of the term of the loan.
In addition, there may be instances where renewing loans potentially require non-market terms
and would then be reclassified as TDRs. |
| ● | Other:
A concession that is not categorized as one of the concessions described above. These concessions
include, but are not limited to: principal forgiveness, collateral concessions, covenant
concessions, and reduction of accrued interest. Principal forgiveness may result from any
TDR modification of any concession type. |
The
Company had no new TDR activity in the three and six months ended June 30, 2022, and June 30, 2021, respectively. The Company had one
TDR, a residential loan with a recorded balance of $62,000,that during the past twelve months defaulted on its modified contractual agreement.
On
March 22, 2020, a statement was issued by the Company’s bank regulators and titled the “Interagency Statement on Loan Modifications
and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”)
that encouraged financial institutions to work prudently with borrowers unable to meet the contractual payment obligations due
to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended
(the “CARES Act”) further provided that a qualified loan modification is exempt by law from classification as a troubled
debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2021 or the date that
is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C.
1601 et seq.) terminates. As of June 30, 2022, all loans previously modified under Section 4013 of the CARES Act had returned to normal
payment terms.
NOTE 5 – GOODWILL
A summary of the activity in goodwill is presented
below:
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
($ in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Beginning balance | |
$ | 23,239 | | |
$ | 22,091 | | |
$ | 23,191 | | |
$ | 22,091 | |
Measurement period adjustments | |
| - | | |
| - | | |
| 48 | | |
| - | |
Ending balance | |
$ | 23,239 | | |
$ | 22,091 | | |
$ | 23,239 | | |
$ | 22,091 | |
Goodwill is not amortized but is evaluated for
impairment annually, and on an interim basis if events or circumstances change that indicate an impairment may exist.
As of June 30, 2022 and December 31, 2021, the
carrying amount of goodwill was $23.2 million. Goodwill is assessed for impairment annually as of December 31, or more frequently if events
occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment
can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less 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 qualitative
test performed as of December 31, 2021. The results of the test indicated no goodwill impairment existed as of that date.
NOTE 6 – 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 $1.37
billion at June 30, 2022 and $1.36 billion at December 31, 2021. Contractually specified servicing fees of $0.9 million and $1.7 million
were included in mortgage loan servicing fees in the consolidated income statement for the three months and six months ended June 30,
2022, respectively. Servicing fees of $0.8 million and $1.7 million were included for the three and six months ended June 30, 2021, respectively.
The following table summarizes mortgage servicing
rights capitalized and related amortization, along with activity in the related valuation allowance:
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
($ in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Balance at beginning of period | |
$ | 13,135 | | |
$ | 10,490 | | |
$ | 12,034 | | |
$ | 7,759 | |
Mortgage servicing rights capitalized during the period | |
| 530 | | |
| 1,235 | | |
| 1,288 | | |
| 2,447 | |
Mortgage servicing rights amortization during the period | |
| (496 | ) | |
| (948 | ) | |
| (1,043 | ) | |
| (2,135 | ) |
Net change in valuation allowance | |
| 239 | | |
| (99 | ) | |
| 1,129 | | |
| 2,607 | |
Balance at end of period | |
$ | 13,408 | | |
$ | 10,678 | | |
$ | 13,408 | | |
$ | 10,678 | |
| |
| | | |
| | | |
| | | |
| | |
Valuation allowance: | |
| | | |
| | | |
| | | |
| | |
Balance at beginning of period | |
$ | 566 | | |
$ | 2,186 | | |
$ | 1,456 | | |
$ | 4,892 | |
Increase (decrease) | |
| (239 | ) | |
| 99 | | |
| (1,129 | ) | |
| (2,607 | ) |
Balance at end of period | |
$ | 327 | | |
$ | 2,285 | | |
$ | 327 | | |
$ | 2,285 | |
| |
| | | |
| | | |
| | | |
| | |
Fair value, beginning of period | |
$ | 14,433 | | |
$ | 11,160 | | |
$ | 12,629 | | |
$ | 7,759 | |
Fair value, end of period | |
$ | 15,135 | | |
$ | 11,067 | | |
$ | 15,135 | | |
$ | 11,067 | |
NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising
from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational
risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity
and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative
financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business
activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest
rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s
known or expected cash payments principally related to certain variable-rate assets.
Non-designated Hedges
The Company does not use derivatives for trading
or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain
customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.
Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such
that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program
do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are
recognized directly in earnings.
Additionally, the Company enters into forward
contracts for the future delivery of mortgage loans to third-party investors and enters into Interest Rate Lock Commitments (“IRLCs”)
with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts that are entered
into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The
IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected
in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are
reported in accrued income and other assets in the consolidated balance sheets, while derivative instruments with a negative fair value
are reported in accrued expenses and other liabilities in the consolidated balance sheets.
The table below presents the notional amount and
fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of June 30, 2022 and December 31, 2021.
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
Notional | | |
Fair | | |
Notional | | |
Fair | |
($ in thousands) | |
Amount | | |
Value | | |
Amount | | |
Value | |
| |
| | | |
| | | |
| | | |
| | |
Asset Derivatives | |
| | | |
| | | |
| | | |
| | |
Derivatives not designated as hedging instruments | |
| | | |
| | | |
| | | |
| | |
Interest rate swaps associated with loans | |
$ | 69,348 | | |
$ | 2,918 | | |
$ | 84,733 | | |
$ | 3,655 | |
IRLCs | |
| 12,120 | | |
| 54 | | |
| 21,391 | | |
| 22 | |
Forward contracts | |
| - | | |
| - | | |
| - | | |
| - | |
Total contracts | |
$ | 81,468 | | |
$ | 2,972 | | |
$ | 106,124 | | |
$ | 3,677 | |
| |
| | | |
| | | |
| | | |
| | |
Liability Derivatives | |
| | | |
| | | |
| | | |
| | |
Derivatives not designated as hedging instruments | |
| | | |
| | | |
| | | |
| | |
Interest rate swaps associated with loans | |
$ | 69,348 | | |
$ | (2,918 | ) | |
$ | 84,733 | | |
$ | (3,655 | ) |
Forward contracts | |
| 15,000 | | |
| (44 | ) | |
| 25,000 | | |
| (32 | ) |
IRLCs | |
| - | | |
| - | | |
| - | | |
| - | |
Total contracts | |
$ | 84,348 | | |
$ | (2,962 | ) | |
$ | 109,733 | | |
$ | (3,687 | ) |
The fair value of interest rate swaps were estimated
using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs
and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the
balance sheet date.
The following table presents the amounts included
in the consolidated statements of income for non-hedging derivative financial instruments for the three and six months ended June 30,
2022 and 2021.
| |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
($ in thousands) | |
Statement of income classification | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Interest rate swap contracts | |
Other income | |
$ | 3 | | |
$ | - | | |
$ | 3 | | |
$ | 133 | |
IRLCs | |
Gain on sale of mortgage loans & OMSR | |
| 209 | | |
| 534 | | |
| 32 | | |
| (158 | ) |
Forward contracts | |
Gain on sale of mortgage loans & OMSR | |
| (325 | ) | |
| (605 | ) | |
| (12 | ) | |
| 157 | |
The following table shows the offsetting of financial assets and derivative
assets at June 30, 2022 and December 31, 2021.
|
|
Gross |
|
|
Gross
amounts |
|
|
Net
amounts
of assets
presented |
|
|
Gross
amounts not offset in the consolidated balance sheet |
|
|
|
|
($ in thousands) |
|
amounts
of
recognized assets |
|
|
offset
in the consolidated balance sheet |
|
|
in
the
consolidated balance sheet |
|
|
Financial
instruments |
|
|
Cash
collateral received |
|
|
Net
amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps |
|
$ |
2,918 |
|
|
$ |
- |
|
|
$ |
2,918 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps |
|
$ |
3,746 |
|
|
$ |
91 |
|
|
$ |
3,655 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,655 |
|
The following table shows the offsetting of financial liabilities and
derivative liabilities at June 30, 2022 and December 31, 2021.
|
|
Gross |
|
|
Gross
amounts |
|
|
Net amounts of liabilities
presented |
|
|
Gross amounts not offset in the consolidated balance sheet |
|
|
|
|
($ in thousands) |
|
amounts of recognized liabilities |
|
|
offset in the consolidated balance sheet |
|
|
in the
consolidated balance sheet |
|
|
Financial instruments |
|
|
Cash collateral pledged |
|
|
Net amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
2,918 |
|
|
$ |
- |
|
|
$ |
2,918 |
|
|
$ |
- |
|
|
$ |
5,001 |
|
|
$ |
(2,083 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
3,746 |
|
|
$ |
91 |
|
|
$ |
3,655 |
|
|
$ |
- |
|
|
$ |
6,906 |
|
|
$ |
(3,251 |
) |
NOTE 8 – DEPOSITS
Major classification of deposits at June 30, 2022
and at December 31, 2021 were as follows:
($ in thousands) | |
June 30,
2022 | | |
December 31,
2021 | |
Non interest bearing demand | |
$ | 239,676 | | |
$ | 247,044 | |
Interest bearing demand | |
| 198,286 | | |
| 195,464 | |
Savings | |
| 215,285 | | |
| 237,571 | |
Money market | |
| 276,274 | | |
| 276,462 | |
Time deposits less than $250,000 | |
| 128,241 | | |
| 142,736 | |
Time deposits $250,000 or greater | |
| 14,017 | | |
| 13,768 | |
Total Deposits | |
$ | 1,071,779 | | |
$ | 1,113,045 | |
Included in time deposits at June 30, 2022 and
December 31, 2021 were $45.0 million and $55.6 million, respectively, of deposits which were obtained through the Certificate of Deposit
Account Registry Service (CDARS).
NOTE 9 – SHORT-TERM BORROWINGS
($ in thousands) | |
June 30,
2022 | | |
December 31,
2021 | |
| |
| | |
| |
Fed funds borrowed | |
$ | 5,000 | | |
$ | - | |
Securities sold under repurchase agreements | |
| 25,772 | | |
| 15,320 | |
| |
$ | 30,772 | | |
$ | 15,320 | |
The Company has retail repurchase agreements (“REPO”)
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 2024
through 2061. As of June 30, 2022, these REPO agreements were secured by securities totaling $27.5 million. The REPO agreements mature
within one month.
The Company has borrowing capabilities at the
Federal Reserve Discount Window (“Discount Window”) by pledging either securities or loans as collateral. As of June 30, 2022,
there was no collateral pledged or borrowings drawn at the Discount Window.
At June 30, 2022 and December 31, 2021, the Company
had $41.0 million in federal funds lines, of which $5.0 million was drawn.
NOTE 10 – FEDERAL HOME LOAN BANK ADVANCES
The Company’s FHLB advances were secured
by $174.2 million in mortgage loans at June 30, 2022. All advances at June 30, 2022 had a 90 day maturity and a variable interest rate.
Aggregate annual maturities of FHLB advances at June 30, 2022 were:
($ in thousands) | |
Debt | |
| |
| |
2022 | |
$ | 25,000 | |
Total | |
$ | 25,000 | |
NOTE 11 – TRUST PREFERRED SECURITIES
On September 15, 2005, RST II, a wholly-owned
subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security.
The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital
Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is based upon the 3-month LIBOR plus
1.80 percent and are included in interest expense in the consolidated financial statements. The issuers of these securities have not yet
determined the replacement rate index for LIBOR. These securities may be included in Tier 1 capital and may be prepaid at any time without
penalty (with certain limitations applicable) under current regulatory guidelines and interpretations. The balance of the Capital Securities
as of June 30, 2022 and December 31, 2021 was $10.3 million, with a maturity date of September 15, 2035.
NOTE 12 – SUBORDINATED DEBT
On May 27, 2021, the Company entered into Subordinated
Note Purchase Agreements (collectively, the "Purchase Agreements'') with qualified institutional buyers and accredited investors
(collectively, the "Purchasers") pursuant to which the Company issued and sold $20.0 million in aggregate principal amount of
its 3.65% Fixed to Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes were sold by the Company in a private
placement exempt from the registration requirements under the Securities Act of 1933, as amended.
The Notes mature on June 1, 2031 and bear interest
at a fixed rate of 3.65% through May 31, 2026. From June 1, 2026 to the maturity date or earlier redemption of the Notes, the interest
rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month Secured Overnight Financing Rate ("SOFR")
provided by the Federal Reserve Bank of New York plus 296 basis points. The Company may redeem the Notes at any time after May 31, 2026,
and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior
regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately
$0.5 million, which are being amortized over the life of the Notes.
NOTE 13 – 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 |
| 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 |
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 1 securities include money market mutual funds. Level 1 inputs include quoted
prices in an active market. Level 2 securities include U.S. treasury and government agencies, mortgage-backed securities, and obligations
of political and state subdivisions. 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.
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 table presents 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 June 30, 2022 and December 31, 2021.
($ in thousands) | |
Fair value at June 30,
2022 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| |
U.S. Treasury and Government Agencies | |
$ | 8,472 | | |
$ | - | | |
$ | 8,472 | | |
$ | - | |
Mortgage-backed securities | |
| 228,917 | | |
| - | | |
| 228,917 | | |
| - | |
State and political subdivisions | |
| 12,217 | | |
| - | | |
| 12,217 | | |
| - | |
Other corporate securities | |
| 16,556 | | |
| - | | |
| 16,556 | | |
| - | |
Interest rate contracts - assets | |
| 2,918 | | |
| - | | |
| 2,918 | | |
| - | |
Interest rate contracts - liabilities | |
| (2,918 | ) | |
| - | | |
| (2,918 | ) | |
| - | |
Forward contracts | |
| (44 | ) | |
| (44 | ) | |
| - | | |
| - | |
IRLCs | |
| 54 | | |
| - | | |
| - | | |
| 54 | |
($ in thousands) | |
Fair value at
December 31,
2021 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| |
U.S. Treasury and Government Agencies | |
$ | 9,105 | | |
$ | - | | |
$ | 9,105 | | |
$ | - | |
Mortgage-backed securities | |
| 228,134 | | |
| - | | |
| 228,134 | | |
| - | |
State and political subdivisions | |
| 12,879 | | |
| - | | |
| 12,879 | | |
| - | |
Other corporate securities | |
| 13,141 | | |
| - | | |
| 13,141 | | |
| - | |
Interest rate contracts - assets | |
| 3,655 | | |
| - | | |
| 3,655 | | |
| - | |
Interest rate contracts - liabilities | |
| (3,655 | ) | |
| - | | |
| (3,655 | ) | |
| - | |
Forward contracts | |
| (32 | ) | |
| (32 | ) | |
| - | | |
| - | |
IRLCs | |
| 22 | | |
| - | | |
| - | | |
| 22 | |
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 and six months ended June 30, 2022 and 2021.
| |
for the Three Months Ended June 30, | | |
for the Six Months Ended June 30, | |
($ in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Interest Rate Lock Commitments | |
| | |
| | |
| | |
| |
Balance at beginning of period | |
$ | (155 | ) | |
$ | (414 | ) | |
$ | 22 | | |
$ | 278 | |
Change in fair value | |
| 209 | | |
| 534 | | |
| 32 | | |
| (158 | ) |
Balance at end of period | |
$ | 54 | | |
$ | 120 | | |
$ | 54 | | |
$ | 120 | |
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.
Collateral-dependent Impaired Loans, Net of
ALLL
Loans for which it is probable the Company will
not collect all principal and interest due according to contractual terms are measured for impairment. The estimated fair value of collateral-dependent
impaired loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent impaired 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 Credit Administration. These appraisers are selected from the list of approved appraisers
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 impaired loans held by the Company were collateral dependent at June 30, 2022 and December 31, 2021.
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. These mortgage servicing
rights are tested for impairment on a quarterly basis.
($ in thousands) | |
Fair value at June 30,
2022 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| |
Impaired loans | |
$ | 1,096 | | |
$ | - | | |
$ | - | | |
$ | 1,096 | |
Mortgage servicing rights | |
| 2,854 | | |
| - | | |
| - | | |
| 2,854 | |
($ in thousands) | |
Fair value at December 31,
2021 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| |
Impaired loans | |
$ | 464 | | |
$ | - | | |
$ | - | | |
$ | 464 | |
Mortgage servicing rights | |
| 3,301 | | |
| - | | |
| - | | |
| 3,301 | |
Level 1 |
- quoted prices in active markets for identical assets |
Level 2 |
- significant other observable inputs |
Level 3 |
- significant unobservable inputs |
Unobservable (Level 3) Inputs
The following table presents quantitative information
about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
($ in thousands) | |
Fair value at
June 30,
2022 | | |
Valuation
technique | |
Unobservable inputs | |
Range (weighted-average) | |
| |
| | |
| |
| |
| |
Collateral-dependent impaired loans | |
$ | 1,096 | | |
Market comparable properties | |
Comparability adjustments (%) | |
| 11.5 - 18.2% (14 | %) |
| |
| | | |
| |
| |
| | |
Mortgage servicing rights | |
| 2,854 | | |
Discounted cash flow | |
Discount Rate | |
| 10.89 | % |
| |
| | | |
| |
Constant prepayment rate | |
| 7.01 | % |
| |
| | | |
| |
P&I earnings credit | |
| 1.67 | % |
| |
| | | |
| |
T&I earnings credit | |
| 3.01 | % |
| |
| | | |
| |
Inflation for cost of servicing | |
| 1.50 | % |
| |
| | | |
| |
| |
| | |
IRLCs | |
| 54 | | |
Discounted cash flow | |
Loan closing rates | |
| 37% - 99 | % |
($ in thousands) | |
Fair value at
December 31,
2021 | | |
Valuation
technique | |
Unobservable inputs | |
Range (weighted-average) | |
| |
| | |
| |
| |
| |
Collateral-dependent impaired loans | |
$ | 464 | | |
Market comparable properties | |
Comparability adjustments (%) | |
| 6.4 - 18% (13 | %) |
| |
| | | |
| |
| |
| | |
Mortgage servicing rights | |
| 3,301 | | |
Discounted cash flow | |
Discount Rate | |
| 8.65 | % |
| |
| | | |
| |
Constant prepayment rate | |
| 10.94 | % |
| |
| | | |
| |
P&I earnings credit | |
| 0.10 | % |
| |
| | | |
| |
T&I earnings credit | |
| 1.25 | % |
| |
| | | |
| |
Inflation for cost of servicing | |
| 1.50 | % |
| |
| | | |
| |
| |
| | |
IRLCs | |
| 22 | | |
Discounted cash flow | |
Loan closing rates | |
| 49% - 99 | % |
There were no changes in the inputs or methodologies
used to determine fair value at June 30, 2022 as compared to December 31, 2021.
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, 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 fair value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity,
and marketability factors.
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 June 30, 2022 and December 31, 2021.
Loan Commitments
The fair value of 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 June 30, 2022 and December 31, 2021 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, the Company does not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the aggregate.
($ in thousands) | |
Carrying | | |
Fair | | |
Fair value measurements using | |
June 30, 2022 | |
amount | | |
value | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| | |
| |
Financial assets | |
| | |
| | |
| | |
| | |
| |
Cash and due from banks | |
$ | 29,567 | | |
$ | 29,567 | | |
$ | 29,567 | | |
$ | - | | |
$ | - | |
Interest bearing time deposits | |
| 1,691 | | |
| 1,691 | | |
| - | | |
| 1,691 | | |
| - | |
Loans held for sale | |
| 4,242 | | |
| 4,295 | | |
| - | | |
| 4,295 | | |
| - | |
Loans, net of allowance for loan losses | |
| 881,810 | | |
| 880,089 | | |
| - | | |
| - | | |
| 880,089 | |
Federal Reserve and FHLB Bank stock, at cost | |
| 5,303 | | |
| 5,303 | | |
| - | | |
| 5,303 | | |
| - | |
Interest receivable | |
| 3,256 | | |
| 3,256 | | |
| - | | |
| 3,256 | | |
| - | |
Mortgage servicing rights | |
| 13,408 | | |
| 15,135 | | |
| - | | |
| - | | |
| 15,135 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 1,071,779 | | |
$ | 1,068,773 | | |
$ | 929,521 | | |
$ | 139,252 | | |
$ | - | |
Short-term borrowings | |
| 30,772 | | |
| 30,772 | | |
| - | | |
| 30,772 | | |
| - | |
FHLB advances | |
| 25,000 | | |
| 24,972 | | |
| - | | |
| 24,972 | | |
| - | |
Trust preferred securities | |
| 10,310 | | |
| 9,353 | | |
| - | | |
| 9,353 | | |
| - | |
Subordinated debt, net of issuance costs | |
| 19,570 | | |
| 20,544 | | |
| - | | |
| 20,544 | | |
| - | |
Interest payable | |
| 307 | | |
| 307 | | |
| - | | |
| 307 | | |
| - | |
($ in thousands) | |
Carrying | | |
Fair | | |
Fair value measurements using | |
December 31, 2021 | |
amount | | |
value | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| | |
| |
Financial assets | |
| | |
| | |
| | |
| | |
| |
Cash and due from banks | |
$ | 149,511 | | |
$ | 149,511 | | |
$ | 149,511 | | |
$ | - | | |
$ | - | |
Interest bearing time deposits | |
| 2,643 | | |
| 2,643 | | |
| - | | |
| 2,643 | | |
| - | |
Loans held for sale | |
| 7,472 | | |
| 7,561 | | |
| - | | |
| 7,561 | | |
| - | |
Loans, net of allowance for loan losses | |
| 808,909 | | |
| 813,766 | | |
| - | | |
| - | | |
| 813,766 | |
Federal Reserve and FHLB Bank stock, at cost | |
| 5,303 | | |
| 5,303 | | |
| - | | |
| 5,303 | | |
| - | |
Interest receivable | |
| 2,920 | | |
| 2,920 | | |
| - | | |
| 2,920 | | |
| - | |
Mortgage servicing rights | |
| 12,034 | | |
| 12,629 | | |
| - | | |
| - | | |
| 12,629 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 1,113,045 | | |
$ | 1,112,710 | | |
$ | 956,541 | | |
$ | 156,169 | | |
$ | - | |
Short-term borrowings | |
| 15,320 | | |
| 15,320 | | |
| - | | |
| 15,320 | | |
| - | |
FHLB advances | |
| 5,500 | | |
| 5,596 | | |
| - | | |
| 5,596 | | |
| - | |
Trust preferred securities | |
| 10,310 | | |
| 9,067 | | |
| - | | |
| 9,067 | | |
| - | |
Subordinated debt, net of issuance costs | |
| 19,546 | | |
| 20,581 | | |
| - | | |
| 20,581 | | |
| - | |
Interest payable | |
| 299 | | |
| 299 | | |
| - | | |
| 299 | | |
| - | |
NOTE 14 – 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 directors of the Company and its subsidiaries. A total of 500,000 common shares of the Company are available for grants or awards
under the 2017 Plan, of which 121,823 shares had been granted under the plan as of June 30, 2022.
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 5 years of continuous
service and have 10-year contractual terms. The fair value of each option award is estimated on the date of grant using the Black-Scholes
valuation model. As of June 30, 2022, there were no stock options outstanding, and no unrecognized compensation cost related to stock
option awards. No stock options were granted in the first six months of 2022.
On February 5, 2013, the Company adopted a Long Term Incentive (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 and six months ended June 30, 2022, was $0.2 million and $0.4 million, respectively, and for the three
and six months ended June 30, 2021, was $0.1 million and $0.2 million, respectively.
As of June 30, 2022, there was $0.9 million of
total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards
under the 2017 Plan which were granted in accordance with the LTI plan. That cost is expected to be recognized over a weighted-average
period of 2.6 years.
The table below is a summary of restricted stock
activity under the Company’s 2017 Plan for the six months ended June 30, 2022.
| |
Shares | | |
Weighted- Average
Value per
Share | |
Nonvested, January 1, 2022 | |
| 40,922 | | |
$ | 18.43 | |
Granted | |
| 38,340 | | |
| 20.00 | |
Vested | |
| (25,939 | ) | |
| 19.03 | |
Forfeited | |
| (1,299 | ) | |
| 18.49 | |
Nonvested, June 30, 2022 | |
| 52,024 | | |
$ | 19.28 | |
NOTE 15 – 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 June 30, 2022, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow
of the Company.