Notes
to Consolidated Financial Statements
Years Ended December 31, 2022 and 2021
Note
1: Organization and Summary of Significant Accounting Policies
Organization
and Nature of Operations
SB
Financial Group, Inc. (the “Company”) is a financial holding company whose principal activity is the ownership and management
of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), SBFG Title, LLC dba Peak Title Agency
(“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”). State Bank owns all the outstanding
stock of Rurban Mortgage Company (“RMC”) and State Bank Insurance, LLC (“SBI”). The Company is primarily engaged
in providing a full range of banking and wealth management services to individual and corporate customers primarily located in Ohio,
Indiana, and Michigan. The Company is subject to competition from other financial institutions in its market areas. The Company is regulated
by certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of the Company, State Bank, SBFG Title, SB Captive, RFCBC, RDSI, RMC, RST II,
and SBI. All significant intercompany accounts and transactions were eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses, loan servicing rights, and fair value of financial instruments.
Cash
Equivalents
The
Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2022
and 2021, cash equivalents consisted primarily of interest-bearing and noninterest bearing demand deposit balances held by correspondent
banks.
At
December 31, 2022, the Company’s correspondent cash accounts exceeded federally insured limits by
$1.6
million. Additionally, the Company had approximately $9.8 million of cash held by the FRB and the FHLB, which is not federally insured.
Securities
Available-for-sale
securities, which include any debt security for which the Company has no immediate plan to sell but which may be sold in the future,
are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.
Amortization
of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net
security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.
For
debt securities with fair value below carrying value when the Company does not intend to sell the debt security, and it is more likely
than not the Company will not have to sell the security before recovery of its cost basis, the Company recognizes the credit component
of an other-than-temporary impairment of the debt security in earnings and the remaining portion in other comprehensive income.
Mortgage
Loans Held for Sale
Mortgage
loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded
in noninterest income. The Company utilizes third-party hedges to minimize the impact of interest rate risk fluctuations, and their impact
is realized through noninterest income.
Loans
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, loans are placed on nonaccrual status not later than 90 days past due. Past due status
is based on the contractual terms of the loan. 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.
Allowance
for Loan Losses
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 non-classified 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 on the historical loss or risk rating data.
A
loan is considered impaired when, based on current information and events, it is probable that the Company 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
a loan moves 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, individual consumer and residential
loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to
financial difficulties of the borrower.
Premises
and Equipment
Depreciable
assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method for buildings
and equipment over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line
method over the terms of the respective leases.
Long-lived
Asset Impairment
The
Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying
amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected
to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset’s cost is
adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long- lived asset exceeds
its fair value.
Federal
Reserve Bank and Federal Home Loan Bank Stock
FRB
and FHLB stock are required investments for institutions that are members of the FRB and FHLB systems. The required investment in the
common stock is based on a predetermined formula, carried at cost and evaluated for impairment.
Foreclosed
Assets and Other Assets Held for Sale
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the
date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and
the assets are carried at the lower of the carrying amount or the fair value less cost to sell. Revenue and expenses from operations
related to foreclosed assets and changes in the valuation allowance are included in net income or expense from foreclosed assets.
Goodwill
Goodwill
is tested for impairment annually. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated
and goodwill is written down to its implied fair value.
Core
Deposits and Other Intangibles
Intangible
assets are being amortized on a straight-line basis over weighted-average periods ranging from one to eight years. Such assets are periodically
evaluated as to the recoverability of their carrying value. Purchased software is being amortized using the straight-line method over
periods ranging from one to three years.
Derivatives
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 are entered into in order to 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 the 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 the derivative instruments with a negative fair
value are reported in accrued expenses and other liabilities in the consolidated balance sheets.
For
exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer
quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require
significant management judgment or estimation.
Mortgage
Servicing Rights
Mortgage
servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing
assets and liabilities accounting guidance, (Accounting Standards Codification “ASC” 806-50), servicing rights from the sale
or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently
measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in
proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value
at each reporting date.
Fair
value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation
model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the cost of service, the discount rate, the custodial earning
rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter
as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right
and may result in a reduction to noninterest income.
Each
class of separately recognized servicing assets subsequently measured using the amortization method is evaluated and measured for impairment.
Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and
investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less
than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement
of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with “Mortgage loan servicing
fees, net” in the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.
Servicing
fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal
or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan
servicing fee income.
Share-Based
Employee Compensation Plan
At
December 31, 2022 and 2021, the Company had a share-based employee compensation plan (see Note 18 to the Consolidated Financial Statements).
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is
deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor
and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain
it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them before the maturity or the ability to unilaterally cause
the holder to return specific assets.
Income
Taxes
The
Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740). The income tax accounting guidance results
in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the
current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.
The
Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset
or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes
in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred
tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence
available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain
tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or
sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term “upon examination”
also includes resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition
threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of
being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether
or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available
at the reporting date and is subject to management’s judgment.
The
Company recognizes interest and penalties on income taxes as a component of income tax expense.
The
Company files consolidated income tax returns with its subsidiaries. With a few exceptions, the Company is no longer subject to U.S.
Federal, State and Local examinations by tax authorities for the years before 2019. As of December 31, 2022, the Company had no uncertain
income tax positions.
Treasury
Shares
Treasury
stock is stated at cost. Cost is determined by the weighted-average cost method.
Earnings
Per Share
Earnings
per common share is computed using the two-class method. Basic earnings per share represent income available to common shareholders divided
by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflect additional potential
common shares that may be issued by the Company related solely to outstanding stock options or awards which are determined using the
treasury stock method. Treasury stock shares are not deemed outstanding for earnings per share calculations.
Comprehensive
Income (Loss)
Comprehensive
income (loss) consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes
unrealized appreciation (depreciation) on available- for-sale securities. AOCI consists solely of the cumulative unrealized gains and
losses on available-for-sale securities net of income tax.
Subordinated
Debt
At
December 31, 2022, the Company had subordinated debt obligations of $20.0 million related to its 3.65% Fixed to Floating Rate Subordinated
Notes due 2031, which were issued and sold by the Company on May 27, 2021. The Subordinated Notes were issued in order to provide additional
funds for various corporate obligations of the Company, including share buybacks, acquisition costs and organic asset growth (see Note
13 to the Consolidated Financial Statements).
Revenue
Recognition
The
Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or services are provided and collectability
is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities.
The Company also earns noninterest income from various banking and financial services offered through State Bank.
Interest
income is the largest source of revenue for the Company and is primarily recognized on an accrual basis.
Noninterest
income is earned through a variety of financial and transaction services provided to corporate and consumer clients such as trust and
wealth advisory, deposit account, debit card, mortgage banking and title insurance.
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. 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. 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.
ASU
2016-13 is effective for annual and interim periods beginning after December 15, 2019. However, on October 16, 2019, the FASB voted to
defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years
beginning after December 15, 2022, and interim periods within those fiscal years, which was codified in the final ASU issued by the FASB
on November 15, 2019. As a result, because the Company qualified as a smaller reporting company, based on its most recent determination
under applicable rules of the Securities and Exchange Commission, as of November 15, 2019, the Company is not subject to ASU 2016-13
until its annual and interim periods beginning January 1, 2023.
The
Company established a committee and engaged an outside consultant to assist in the transition to the new standard. Specific loan level
history was incorporated into the model and the Company is comfortable with the assumptions related to each loan product type. The Company
expects to recognize a one-time cumulative effect adjustment (increase) to the allowance for credit losses between $1.0 million and $2.0
million upon adoption as of January 1, 2023. In addition, the Company expects to establish a related reserve for unfunded commitments
of between $1.0 million and $2.0 million as of January 1, 2023.
ASU
No. 2022-02: Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures
This
guidance was issued in March 2022 to enhance the disclosure requirements for certain loan refinancing and restructurings by creditors
when a borrower is experiencing financial difficulties. The amendments in this update require that an entity evaluate whether the modification
represents a new loan or a continuation of an existing loan. The guidance is effective beginning after December 15, 2022. The impact
of this new guidance should not have a material impact on the Company’s consolidated financial statements.
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.
However, a deferral of the implementation of the Reference Rate Reform was issued in December of 2022, which extends the implementation
to December 31, 2024. 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.
Note
2: Earnings Per Share
Earnings
per common share (“EPS”) is computed using the two-class method. Basic earnings per common share is computed by dividing
net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period,
excluding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock
awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the
same rate as holders of common shares. Diluted earnings per common share is computed using the weighted-average number of shares determined
for the basic earnings per common share plus the dilutive effect of stock compensation using the treasury stock method. EPS for the years
ended December 31, 2022 and 2021 is computed as follows:
| |
Twelve Months Ended
December 31, | |
($ and outstanding shares in thousands - except per share data) | |
2022 | | |
2021 | |
| |
| | |
| |
Net Income | |
$ | 12,521 | | |
$ | 18,277 | |
Less net income allocated to participating securities | |
| 27 | | |
| 21 | |
| |
| | | |
| | |
Net income allocated to common shares | |
$ | 12,494 | | |
$ | 18,256 | |
| |
| | | |
| | |
Weighted average shares outstanding for basic earnings per share | |
| 7,005 | | |
| 7,083 | |
Average participating securities | |
| 37 | | |
| 47 | |
| |
| | | |
| | |
Weighted average shares outstanding for diluted earnings per share | |
| 7,042 | | |
| 7,130 | |
| |
| | | |
| | |
Basic earnings per common share | |
$ | 1.79 | | |
$ | 2.58 | |
| |
| | | |
| | |
Diluted earnings per common share | |
$ | 1.77 | | |
$ | 2.56 | |
There
were no anti-dilutive shares in 2022 or 2021.
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 $19.89 of the Company’s common shares on the record date.
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 entire year would have
decreased by $0.11 per share.
On
January 25, 2022, the Company filed a Certificate of Amendment with the Ohio Secretary of State to amend Article FIRST of its Amended
Articles of Incorporation to increase the authorized number of common shares, without par value, of the Company from 10,000,000 to 10,500,000.The
addition of these authorized shares did not have a material impact on the Company’s consolidated financial statements.
Note
3: Available-for-Sale Securities
The
amortized cost and appropriate fair values, together with gross unrealized gains and losses, of available-for-sale securities are as
follows:
| |
| | |
Gross | | |
Gross | | |
| |
($ in thousands) | |
Amortized | | |
Unrealized | | |
Unrealized | | |
| |
| |
Cost | | |
Gains | | |
Losses | | |
Fair Value | |
December 31, 2022: | |
| | |
| | |
| | |
| |
U.S. Treasury and Government agencies | |
$ | 7,636 | | |
$ | - | | |
$ | (872 | ) | |
$ | 6,764 | |
Mortgage-backed securities | |
| 241,741 | | |
| 4 | | |
| (35,910 | ) | |
| 205,835 | |
State and political subdivisions | |
| 12,862 | | |
| 10 | | |
| (1,769 | ) | |
| 11,103 | |
Other corporate securities | |
| 17,200 | | |
| - | | |
| (2,122 | ) | |
| 15,078 | |
| |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 279,439 | | |
$ | 14 | | |
$ | (40,673 | ) | |
$ | 238,780 | |
| |
| | |
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 December 31, 2022, by contractual maturity, are shown below. Expected
maturities 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 | |
$ | 1,092 | | |
$ | 1,080 | |
Due after one year through five years | |
| 1,882 | | |
| 1,814 | |
Due after five years through ten years | |
| 25,490 | | |
| 22,470 | |
Due after ten years | |
| 9,234 | | |
| 7,581 | |
| |
| 37,698 | | |
| 32,945 | |
Mortgage-backed securities | |
| 241,741 | | |
| 205,835 | |
| |
| | | |
| | |
Totals | |
$ | 279,439 | | |
$ | 238,780 | |
The
fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $53.9 million at December 31,
2022, and $54.2 million at December 31, 2021. Securities delivered for repurchase agreements (not included above) were $17.8 million
at December 31, 2022 and $23.6 million at December 31, 2021.
There
were no realized gains or losses on available-for-sale securities in 2022 and 2021.
Certain
investments in debt securities are reported in the financial statements at an amount less than their historical cost. There were 144
securities and 65 securities reported with amounts less than their historical value at December 31, 2022 and 2021, respectively. Total
fair value of these investments were $235.5 million and $214.2 million at December 31, 2022 and 2021, respectively, which was approximately
99 percent and 81 percent, respectively, of the Company’s available-for-sale investment portfolio.
Based
on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained
from regulatory filings, management believes the declines in fair value for these securities are temporary.
Should
the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting
loss recognized in net income in the period the other-than- temporary impairment is identified.
The
following tables present securities with unrealized losses at December 31, 2022 and 2021:
($ in thousands) | |
Less than 12 Months | | |
12 Months or Longer | | |
Total | |
December 31, 2022 | |
Fair Value | | |
Unrealized
Losses | | |
Fair Value | | |
Unrealized
Losses | | |
Fair Value | | |
Unrealized
Losses | |
| |
| | |
| | |
| | |
| | |
| | |
| |
U.S. Treasury and Government agencies | |
$ | 3,788 | | |
$ | (452 | ) | |
$ | 2,974 | | |
$ | (420 | ) | |
$ | 6,762 | | |
$ | (872 | ) |
Mortgage-backed securities | |
| 52,351 | | |
| (5,234 | ) | |
| 153,055 | | |
| (30,676 | ) | |
| 205,406 | | |
| (35,910 | ) |
State and political subdivisions | |
| 7,461 | | |
| (1,370 | ) | |
| 1,268 | | |
| (399 | ) | |
| 8,729 | | |
| (1,769 | ) |
Other corporate securities | |
| 12,015 | | |
| (1,736 | ) | |
| 2,564 | | |
| (386 | ) | |
| 14,579 | | |
| (2,122 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 75,615 | | |
$ | (8,792 | ) | |
$ | 159,861 | | |
$ | (31,881 | ) | |
$ | 235,476 | | |
$ | (40,673 | ) |
| |
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
unrealized loss on the securities portfolio increased by $37.1 million as of December 31, 2022, from the prior year. Management reviews
these securities on a quarterly basis and has determined that no impairment exists. Management evaluates securities for other-than-temporary
impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. When the Company
does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery
of its cost basis, it recognizes the credit component of an other- than-temporary impairment of a debt security in earnings and the remaining
portion in other comprehensive income (loss).
Note
4: Loans and Allowance for Loan Losses
The
following tables present the categories of loans at December 31, 2022 and 2021:
| |
Total Loans | | |
Nonaccrual Loans | |
($ in thousands) | |
December 2022 | | |
December 2021 | | |
December 2022 | | |
December 2021 | |
| |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 128,090 | | |
$ | 122,250 | | |
$ | 114 | | |
$ | 143 | |
Commercial real estate - owner occupied | |
| 110,848 | | |
| 118,891 | | |
| - | | |
| 88 | |
Commercial real estate - nonowner occupied | |
| 301,787 | | |
| 262,277 | | |
| 210 | | |
| 466 | |
Agricultural | |
| 64,388 | | |
| 57,403 | | |
| - | | |
| - | |
Residential real estate | |
| 291,512 | | |
| 206,424 | | |
| 3,020 | | |
| 2,484 | |
Home equity line of credit (HELOC) | |
| 45,061 | | |
| 41,682 | | |
| 310 | | |
| 464 | |
Consumer | |
| 19,944 | | |
| 13,474 | | |
| 28 | | |
| 7 | |
| |
| | | |
| | | |
| | | |
| | |
Total loans | |
$ | 961,630 | | |
$ | 822,401 | | |
$ | 3,682 | | |
$ | 3,652 | |
| |
| | | |
| | | |
| | | |
| | |
Net deferred costs (fees) | |
$ | 445 | | |
$ | 313 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total loans, net deferred costs (fees) | |
$ | 962,075 | | |
$ | 822,714 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses | |
$ | (13,818 | ) | |
$ | (13,805 | ) | |
| | | |
| | |
The
Company makes commercial, agri-business, consumer and residential loans to customers throughout its defined market area. Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the
commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary,
is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment, commercial real estate and residential real estate.
Standby
letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and
similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans
to customers.
Listed
below is a summary of loan commitments, unused lines of credit and standby letters of credit as of December 31, 2022 and 2021.
($ in thousands) | |
2022 | | |
2021 | |
Loan commitments and unused lines of credit | |
$ | 221,668 | | |
$ | 219,618 | |
Standby letters of credit | |
| 1,336 | | |
| 2,060 | |
Totals | |
$ | 223,004 | | |
$ | 221,678 | |
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, Home Equity Line of Credit (“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 balance of the allowance for loan and lease losses (“ALLL”) and the recorded investment in loans
based on portfolio segment and impairment method as of December 31, 2022 and 2021:
($ in thousands) For the Twelve Months Ended
December 31, 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 | |
| - | | |
| - | | |
| - | | |
| - | | |
| (34 | ) | |
| (34 | ) |
Recoveries | |
| - | | |
| - | | |
| - | | |
| - | | |
| 47 | | |
| 47 | |
Provision | |
| (227 | ) | |
| (501 | ) | |
| 12 | | |
| 923 | | |
| (207 | ) | |
| - | |
Ending balance | |
$ | 1,663 | | |
$ | 6,280 | | |
$ | 611 | | |
$ | 4,438 | | |
$ | 826 | | |
$ | 13,818 | |
December 31, 2022 | |
Commercial
& industrial | | |
Commercial
real estate | | |
Agricultural | | |
Residential
real estate | | |
Consumer | | |
Total | |
Allowance: | |
| | |
| | |
| | |
| | |
| | |
| |
Ending balance: individually evaluated for
impairment | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 138 | | |
$ | 2 | | |
$ | 140 | |
Ending balance: collectively evaluated for impairment | |
$ | 1,663 | | |
$ | 6,280 | | |
$ | 611 | | |
$ | 4,300 | | |
$ | 824 | | |
$ | 13,678 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 1,663 | | |
$ | 6,280 | | |
$ | 611 | | |
$ | 4,438 | | |
$ | 826 | | |
$ | 13,818 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: individually evaluated for impairment | |
$ | 204 | | |
$ | 347 | | |
$ | - | | |
$ | 2,863 | | |
$ | 114 | | |
$ | 3,528 | |
Ending balance: collectively evaluated for impairment | |
$ | 127,886 | | |
$ | 412,288 | | |
$ | 64,388 | | |
$ | 288,649 | | |
$ | 64,891 | | |
$ | 958,102 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Totals | |
$ | 128,090 | | |
$ | 412,635 | | |
$ | 64,388 | | |
$ | 291,512 | | |
$ | 65,005 | | |
$ | 961,630 | |
($ in thousands)
For the Twelve Months Ended
December 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 | |
| - | | |
| - | | |
| - | | |
| (43 | ) | |
| (93 | ) | |
| (136 | ) |
Recoveries | |
| 227 | | |
| - | | |
| - | | |
| 49 | | |
| 41 | | |
| 317 | |
Provision (credit) | |
| (1,411 | ) | |
| 1,330 | | |
| 103 | | |
| 975 | | |
| 53 | | |
| 1,050 | |
Ending balance | |
$ | 1,890 | | |
$ | 6,781 | | |
$ | 599 | | |
$ | 3,515 | | |
$ | 1,020 | | |
$ | 13,805 | |
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 (loan grades) 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 (grade 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
(grade 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 jeopardized 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
(grade 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
(grade 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 feasible. 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 December 31, 2022
and 2021:
($ in thousands) December 31, 2022 | |
Commercial
& industrial | | |
Commercial
real estate -
owner
occupied | | |
Commercial
real estate -
nonowner
occupied | | |
Agricultural | | |
Residential real estate | | |
HELOC | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Pass (1 - 4) | |
$ | 127,424 | | |
$ | 107,918 | | |
$ | 296,518 | | |
$ | 64,388 | | |
$ | 288,172 | | |
$ | 44,751 | | |
$ | 19,915 | | |
$ | 949,086 | |
Special Mention (5) | |
| 394 | | |
| 2,930 | | |
| 4,899 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 8,223 | |
Substandard (6) | |
| 158 | | |
| - | | |
| 160 | | |
| - | | |
| 3,316 | | |
| 310 | | |
| 29 | | |
| 3,973 | |
Doubtful (7) | |
| 114 | | |
| - | | |
| 210 | | |
| - | | |
| 24 | | |
| - | | |
| - | | |
| 348 | |
Loss (8) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Loans | |
$ | 128,090 | | |
$ | 110,848 | | |
$ | 301,787 | | |
$ | 64,388 | | |
$ | 291,512 | | |
$ | 45,061 | | |
$ | 19,944 | | |
$ | 961,630 | |
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 Company uses
a five-year average of historical losses for the general component of the allowance for loan loss calculation. No significant changes
were made to the loan risk grading system definitions and allowance for loan loss methodology during the periods presented.
The
following tables present the Company’s loan portfolio aging analysis as of December 31, 2022 and 2021:
($ in thousands) | |
30-59 Days | | |
60-89 Days | | |
Greater Than 90 Days | | |
Total Past | | |
| | |
Total Loans | |
December 31, 2022 | |
Past Due | | |
Past Due | | |
Past Due | | |
Due | | |
Current | | |
Receivable | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 23 | | |
$ | 108 | | |
$ | 114 | | |
$ | 245 | | |
$ | 127,845 | | |
$ | 128,090 | |
Commercial real estate - owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| 110,848 | | |
| 110,848 | |
Commercial real estate - nonowner occupied | |
| 114 | | |
| - | | |
| 32 | | |
| 146 | | |
| 301,641 | | |
| 301,787 | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| 64,388 | | |
| 64,388 | |
Residential real estate | |
| 98 | | |
| 411 | | |
| 1,287 | | |
| 1,796 | | |
| 289,716 | | |
| 291,512 | |
HELOC | |
| 98 | | |
| 24 | | |
| 138 | | |
| 260 | | |
| 44,801 | | |
| 45,061 | |
Consumer | |
| 61 | | |
| 26 | | |
| 22 | | |
| 109 | | |
| 19,835 | | |
| 19,944 | |
Total Loans | |
$ | 394 | | |
$ | 569 | | |
$ | 1,593 | | |
$ | 2,556 | | |
$ | 959,074 | | |
$ | 961,630 | |
| |
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 that the Company 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 a Troubled Debt Restructure
(“TDR”) 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 activity for the twelve months ended December 31, 2022 and 2021:
($ in thousands) Twelve Months Ended | |
Recorded | | |
Unpaid Principal | | |
Related | | |
Average Recorded | | |
Interest Income | |
December 31, 2022 | |
Investment | | |
Balance | | |
Allowance | | |
Investment | | |
Recognized | |
With no related allowance recorded: | |
| | |
| | |
| | |
| | |
| |
Commercial & industrial | |
$ | 204 | | |
$ | 627 | | |
$ | - | | |
$ | 650 | | |
$ | 34 | |
Commercial real estate - owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - nonowner occupied | |
| 347 | | |
| 825 | | |
| - | | |
| 1,350 | | |
| 94 | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 1,491 | | |
| 1,558 | | |
| - | | |
| 1,793 | | |
| 65 | |
HELOC | |
| 68 | | |
| 68 | | |
| | | |
| 85 | | |
| 4 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
With a specific allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate - nonowner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Agricultural | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 1,372 | | |
| 1,372 | | |
| 138 | | |
| 1,424 | | |
| 43 | |
HELOC | |
| 46 | | |
| 46 | | |
| 2 | | |
| 51 | | |
| 2 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Totals: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial & industrial | |
$ | 204 | | |
$ | 627 | | |
$ | - | | |
$ | 650 | | |
$ | 34 | |
Commercial real estate - owner occupied | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Commercial real estate - nonowner occupied | |
$ | 347 | | |
$ | 825 | | |
$ | - | | |
$ | 1,350 | | |
$ | 94 | |
Agricultural | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Residential real estate | |
$ | 2,863 | | |
$ | 2,930 | | |
$ | 138 | | |
$ | 3,217 | | |
$ | 108 | |
HELOC | |
$ | 114 | | |
$ | 114 | | |
$ | 2 | | |
$ | 136 | | |
$ | 6 | |
Consumer | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
($ in thousands) Twelve Months Ended | |
Recorded | | |
Unpaid Principal | | |
Related | | |
Average Recorded | | |
Interest Income | |
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 | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
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 Loans (TDRs)
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. 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 debt. The Company
also may grant interest rate concessions for a limited timeframe on a case by case basis. |
| ● | Amortization
or maturity date change beyond what the collateral supports, including a change 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. |
There
were no new TDRs during the period ended December 31, 2022. The following table represents new TDR activity for the twelve months ended
December 31, 2021.
($ in thousands) | |
Number of
Loans | | |
Pre-
Modification
Recorded
Balance | | |
Post
Modification
Recorded
Balance | |
| |
| 2 | | |
$ | 42 | | |
$ | 42 | |
Total modifications | |
| 2 | | |
$ | 42 | | |
$ | 42 | |
| |
Interest
Only | | |
Term | | |
Combination | | |
Total
Modification | |
HELOC | |
$ | - | | |
$ | - | | |
$ | 42 | | |
$ | 42 | |
Total modifications | |
$ | - | | |
$ | - | | |
$ | 42 | | |
$ | 42 | |
There
were no TDRs modified during the past twelve months that have subsequently defaulted.
The
Company was an active participant in the PPP initiative as detailed in the discussion of financial results for 2021. The Company originated
approximately 1,100 loans with a total balance of $111.4 million. As of December 31, 2022, only one PPP loan remained outstanding. Fees
for PPP loan originations totaled $4.9 million, of which $0.1 million and $3.4 million were taken into income during 2022 and 2021, respectively.
Related
Party Loans
Loans
to directors and their related interests, including loans to companies for which directors are principal owners and executive officers
are presented in the following table at December 31:
($ in thousands) | |
2022 | | |
2021 | |
| |
| | |
| |
Balance at beginning of period | |
$ | 521 | | |
$ | 1,164 | |
Effect of change in compostioin of directors and executive officers | |
| 112 | | |
| - | |
New Term Loans | |
| - | | |
| - | |
Repayment of term loans | |
| (53 | ) | |
| (46 | ) |
Changes in balances of revolving lines of credit | |
| (59 | ) | |
| (597 | ) |
Balance at end of period | |
$ | 521 | | |
$ | 521 | |
Note
5: Premises and Equipment
Major
classifications of premises and equipment stated at cost were as follows at December 31:
($ in thousands) | |
2022 | | |
2021 | |
| |
| | |
| |
Land | |
$ | 3,563 | | |
$ | 3,549 | |
Buildings and improvements | |
| 27,699 | | |
| 27,475 | |
Equipment | |
| 14,315 | | |
| 13,398 | |
Construction in process | |
| 879 | | |
| 655 | |
| |
| 46,456 | | |
| 45,077 | |
| |
| | | |
| | |
Less accumulated depreciation | |
| (23,627 | ) | |
| (21,865 | ) |
| |
| | | |
| | |
Net premises and equipment | |
$ | 22,829 | | |
$ | 23,212 | |
Note
6: Goodwill and Intangibles
On
December 31, 2021, the Company purchased an Ohio based title agency resulting in approximately $1.1 million in goodwill. The balance
of goodwill as of December 31, 2022 and December 31, 2021 was $23.2 million and $23.2 million, respectively.
| |
Twelve Months
Ended December 31, 2022 | | |
Twelve Months
Ended December 31, 2021 | |
($ in thousands) | |
Carrying Amount | | |
Carrying Amount | |
| |
| | |
| |
Beginning balance | |
$ | 23,191 | | |
$ | 22,091 | |
Acquired goodwill | |
| - | | |
| 1,100 | |
Measurement period adjustments | |
| 48 | | |
| - | |
| |
| | | |
| | |
Ending balance | |
$ | 23,239 | | |
$ | 23,191 | |
Impairment
exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Goodwill is tested on the last day of the last
quarter of each calendar year. At December 31, 2022, the Company elected to perform a qualitative assessment to determine if it was more
likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment
indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.
Carrying
basis and accumulated amortization of intangible assets were as follows at December 31:
| |
2022 | | |
2021 | |
| |
Gross Carrying | | |
Accumulated | | |
Gross Carrying | | |
Accumulated | |
($ in thousands) | |
Amount | | |
Amortization | | |
Amount | | |
Amortization | |
Core deposits intangible | |
$ | 660 | | |
$ | (170 | ) | |
$ | 660 | | |
$ | (104 | ) |
Customer relationship intangible | |
| 200 | | |
| (176 | ) | |
| 200 | | |
| (173 | ) |
Banking intangibles | |
$ | 860 | | |
$ | (346 | ) | |
$ | 860 | | |
$ | (277 | ) |
Amortization
expense for intangibles for the years ended December 31, 2022 and 2021 was $0.07 million and $0.07 million, respectively. Estimated amortization
expense for each of the following five years is immaterial.
Note
7: Mortgage Banking and 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 $1.4 billion and $1.4 billion at December 31, 2022 and 2021, respectively. Contractually specified
servicing fees of approximately $3.2 million and $3.1 million were included in mortgage loan servicing fees in the consolidated income
statement for the years ended December 31, 2022 and 2021, respectively.
The
following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation
allowance at December 31:
($ in thousands) | |
2022 | | |
2021 | |
| |
| | |
| |
Carrying amount, beginning of year | |
$ | 12,034 | | |
$ | 7,759 | |
Mortgage servicing rights capitalized during the year | |
| 1,939 | | |
| 4,724 | |
Mortgage servicing rights amortization during the year | |
| (1,749 | ) | |
| (3,885 | ) |
Net change in valuation allowance | |
| 1,279 | | |
| 3,436 | |
Carrying amount, end of year | |
$ | 13,503 | | |
$ | 12,034 | |
| |
| | | |
| | |
Valuation allowance: | |
| | | |
| | |
Beginning of year | |
$ | 1,456 | | |
$ | 4,892 | |
Increase (reduction) | |
| (1,279 | ) | |
| (3,436 | ) |
| |
| | | |
| | |
End of year | |
$ | 177 | | |
$ | 1,456 | |
| |
| | | |
| | |
Fair value, beginning of period | |
$ | 12,629 | | |
$ | 7,759 | |
Fair value, end of period | |
$ | 15,754 | | |
$ | 12,629 | |
Note
8: Derivative Financial Instruments
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.
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 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
at December 31:
| |
2022 | | |
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 | |
$ | 66,477 | | |
$ | 5,538 | | |
$ | 84,733 | | |
$ | 3,655 | |
IRLCs | |
| - | | |
| - | | |
| 21,391 | | |
| 22 | |
Forward contracts | |
| 5,500 | | |
| 26 | | |
| - | | |
| - | |
Total contracts | |
$ | 71,977 | | |
$ | 5,564 | | |
$ | 106,124 | | |
$ | 3,677 | |
| |
| | | |
| | | |
| | | |
| | |
Liability Derivatives | |
| | | |
| | | |
| | | |
| | |
Derivatives not designated as hedging instruments | |
| | | |
| | | |
| | | |
| | |
Interest rate swaps associated with loans | |
$ | 66,477 | | |
$ | (5,538 | ) | |
$ | 84,733 | | |
$ | (3,655 | ) |
Forward contracts | |
| - | | |
| - | | |
| 25,000 | | |
| (32 | ) |
IRLCs | |
| 3,268 | | |
| (20 | ) | |
| - | | |
| - | |
Total contracts | |
$ | 69,745 | | |
$ | (5,558 | ) | |
$ | 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 twelve months ended December 31, 2022 and 2021.
| |
| |
Amount of gain (loss) | |
| |
Statement of income classification | |
2022 | | |
2021 | |
($ in thousands) | |
| |
| | | |
| | |
Interest rate swap contracts | |
Other income | |
$ | 19 | | |
$ | 242 | |
IRLCs | |
Gain on sale of mortgage loans & OMSR | |
| (42 | ) | |
| (256 | ) |
Forward contracts | |
Gain on sale of mortgage loans & OMSR | |
| 57 | | |
| 233 | |
The
following table shows the offsetting of financial assets and derivative assets at December 31, 2022 and 2021.
| |
Gross
amounts
of | | |
Gross amounts
offset in the
consolidated | | |
Net amounts of
assets
presented in
the
consolidated | | |
Gross amounts not offset in the
consolidated balance sheet | | |
| |
($ in thousands) | |
recognized
assets | | |
balance
sheet | | |
balance
sheet | | |
Financial
instruments | | |
Cash collateral
received | | |
Net amount | |
December 31, 2022 | |
| | |
| | |
| | |
| | |
| | |
| |
Interest rate swaps | |
$ | 5,540 | | |
$ | 2 | | |
$ | 5,538 | | |
$ | - | | |
$ | 4,480 | | |
$ | 1,058 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 December 31, 2022 and 2021.
| |
Gross amounts
of | | |
Gross amounts
offset in the
consolidated | | |
Net amounts of
liabilities
presented in
the
consolidated | | |
Gross amounts not offset in the
consolidated balance sheet | | |
| |
($ in thousands) | |
recognized
liabilities | | |
balance
sheet | | |
balance
sheet | | |
Financial
instruments | | |
Cash collateral
pledged | | |
Net amount | |
December 31, 2022 | |
| | |
| | |
| | |
| | |
| | |
| |
Interest rate swaps | |
$ | 5,540 | | |
$ | 2 | | |
$ | 5,538 | | |
$ | - | | |
$ | - | | |
$ | 5,538 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest rate swaps | |
$ | 3,746 | | |
$ | 91 | | |
$ | 3,655 | | |
$ | - | | |
$ | 6,906 | | |
$ | (3,251 | ) |
Note
9: Interest-Bearing Deposits
Interest-bearing
time deposits in denominations of $250,000 or more totaled $23.4 million on December 31, 2022 and $13.8 million on December 31,
2021. Certificates of deposit obtained from brokers totaled $7.0 million as of December 31, 2022. There were no certificates
of deposits from brokers as of December 31, 2021.
At
December 31, 2022, the scheduled maturities of time deposits were as follows:
($ in thousands) | |
| |
2023 | |
$ | 123,829 | |
2024 | |
| 23,877 | |
2025 | |
| 37,276 | |
2026 | |
| 3,438 | |
2027 | |
| 2,278 | |
Thereafter | |
| 182 | |
| |
| | |
Total | |
$ | 190,880 | |
Included
in time deposits at December 31, 2022 and 2021 were $58.0 million and $55.6 million, respectively, of deposits which were obtained through
the Certificate of Deposit Account Registry Service (“CDARS”). This service allows deposit customers to maintain fully insured
balances in excess of the $250,000 FDIC limit without the inconvenience of having multi-banking relationships. Under the reciprocal program
that the Company is currently participating in, customers agree to allow their deposits to be placed with other participating banks in
the CDARS program in insurable amounts under $250,000. In exchange, other banks in the program agree to place their deposits with the
Company also in insurable amounts under $250,000.
Deposits
of directors and their associates, including deposits of companies for which directors are principal owners and executive officers were
$7.0 million and $3.9 million at December 31, 2022 and 2021, respectively.
Note
10: Short-Term Borrowings
($ in thousands) | |
2022 | | |
2021 | |
| |
| | |
| |
Securities Sold Under Repurchase Agreements | |
$ | 14,923 | | |
$ | 15,320 | |
The
Company has retail repurchase agreements to facilitate cash management transactions with commercial customers. These obligations
were secured by agency securities of $5.4 million and $8.4 million for 2022 and 2021, respectively, and mortgage-backed securities
of $12.4 million and $15.2 million for 2022 and 2021, respectively. The collateral is held at the FHLB and has maturities from 2025
through 2061. At December 31, 2022, these repurchase agreements totaled $14.9 million. The maximum amount of outstanding agreements
at any month end during 2022 and 2021 totaled $30.9 million and $34.2 million, respectively, and the monthly average of such
agreements totaled $20.3 million and $22.8 million during 2022 and 2021, respectively. The repurchase 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 December 31, 2022, there was no collateral pledged or borrowings drawn at the Discount Window.
At
December 31, 2022 and 2021, the Company had $56.0 million and $41.0 million in federal funds lines, of which none were drawn.
Note
11: Federal Home Loan Bank Advances
The
FHLB advances were secured by $206.0 million in mortgage loans at December 31, 2022. Advances consisted of fixed and variable interest
rates from 3.32 to 4.53 percent. Fixed rate advances are subject to restrictions or penalties in the event of prepayment. Aggregate annual
maturities of FHLB advances at December 31, 2022, were:
($ in thousands) | |
Debt | |
2023 | |
| 60,000 | |
Total | |
$ | 60,000 | |
Note
12: 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 currently 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 proposed Secured Overnight Financing Rate (“SOFR”) as a replacement rate for
the LIBOR-based interest rate and will amend the documents governing the securities prior to LIBOR cessation. 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 December 31, 2022 and 2021 was $10.3 million, with a maturity
date of September 15, 2035.
Note
13: 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 $0.5 million, which are being
amortized over the life of the Notes.
Note
14: Income Taxes
The
provision for income taxes includes these components:
| |
For The Year Ended
December 31, | |
($ in thousands) | |
2022 | | |
2021 | |
Taxes currently payable | |
$ | 86 | | |
$ | 2,144 | |
Deferred provision | |
| 2,709 | | |
| 2,302 | |
Income tax expense | |
$ | 2,795 | | |
$ | 4,446 | |
A
reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
| |
For The Year Ended
December 31, | |
($ in thousands) | |
2022 | | |
2021 | |
Computed at the statutory rate (21%) | |
$ | 3,216 | | |
$ | 4,772 | |
Increase (decrease) resulting from | |
| | | |
| | |
Tax exempt interest | |
| (111 | ) | |
| (85 | ) |
BOLI income | |
| (106 | ) | |
| (60 | ) |
Sec. 831(b) election | |
| (199 | ) | |
| (183 | ) |
Other | |
| (5 | ) | |
| 2 | |
Actual tax expense | |
$ | 2,795 | | |
$ | 4,446 | |
The
tax effects of temporary differences related to deferred taxes shown on the balance sheets are:
| |
For The Year Ended
December 31, | |
($ in thousands) | |
2022 | | |
2021 | |
Deferred tax assets | |
| | |
| |
Allowance for loan losses | |
$ | 2,902 | | |
$ | 2,899 | |
Unrealized losses on available-for-sale securities | |
| 8,538 | | |
| 491 | |
Capitalized research and development costs | |
| 117 | | |
| - | |
Accrued bonus | |
| 142 | | |
| 281 | |
Net operating loss | |
| 5,410 | | |
| - | |
Other | |
| 854 | | |
| 703 | |
| |
| 17,963 | | |
| 4,374 | |
Deferred tax liabilities | |
| | | |
| | |
Depreciation | |
| (1,117 | ) | |
| (1,242 | ) |
Mortgage servicing rights | |
| (2,836 | ) | |
| (2,546 | ) |
Purchase accounting adjustments | |
| (1,598 | ) | |
| (1,619 | ) |
Prepaids | |
| (527 | ) | |
| (477 | ) |
Net deferred loan costs | |
| (93 | ) | |
| (66 | ) |
Section 475 MTM | |
| (8,538 | ) | |
| (491 | ) |
FHLB stock dividends | |
| (271 | ) | |
| (288 | ) |
| |
| (14,980 | ) | |
| (6,729 | ) |
Net deferred tax asset (liability) | |
$ | 2,983 | | |
$ | (2,355 | ) |
Note
15: Accumulated Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) represents reclassifications out of unrealized gains and losses on available-for-sale securities net
of income tax. There were no reclassifications for the years ending December 31, 2022 and 2021.
Note
16: Regulatory Matters
As
of December 31, 2022, based on its call report computations, State Bank was classified as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the table
below. There are no conditions or events since December 31, 2022 that management believes have changed State Bank’s capital classification.
State
Bank’s actual capital amounts and ratios are presented in the following table. Capital levels are presented for State Bank only
as the Company is exempt from quarterly reporting at the holding company level:
| |
Actual | | |
For
Capital Adequacy
Purposes | | |
To Be Well Capitalized
Under Prompt
Corrective Action
Procedures | |
($ in thousands) | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
As of December 31, 2022 | |
| | |
| | |
| | |
| | |
| | |
| |
Tier I Capital to average assets | |
$ | 146,678 | | |
| 11.06 | % | |
$ | 53,069 | | |
| 4.0 | % | |
$ | 66,336 | | |
| 5.0 | % |
Tier I Common equity capital to risk-weighted assets | |
| 146,678 | | |
| 13.42 | % | |
| 49,200 | | |
| 4.5 | % | |
| 71,067 | | |
| 6.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tier I Capital to risk-weighted assets | |
| 146,678 | | |
| 13.42 | % | |
| 65,600 | | |
| 6.0 | % | |
| 87,466 | | |
| 8.0 | % |
Total Risk-based capital to risk-weighted assets | |
| 160,346 | | |
| 14.67 | % | |
| 87,466 | | |
| 8.0 | % | |
| 109,333 | | |
| 10.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
As of December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tier I Capital to average assets | |
$ | 133,202 | | |
| 10.18 | % | |
$ | 52,324 | | |
| 4.0 | % | |
$ | 65,405 | | |
| 5.0 | % |
Tier I Common equity capital to risk-weighted assets | |
| 133,202 | | |
| 13.94 | % | |
| 42,986 | | |
| 4.5 | % | |
| 62,090 | | |
| 6.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tier I Capital to risk-weighted assets | |
| 133,202 | | |
| 13.94 | % | |
| 57,314 | | |
| 6.0 | % | |
| 76,419 | | |
| 8.0 | % |
Total Risk-based capital to risk-weighted assets | |
| 145,165 | | |
| 15.20 | % | |
| 76,419 | | |
| 8.0 | % | |
| 95,523 | | |
| 10.0 | % |
The
above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including
dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was 2.50 percent at
December 31, 2022 and the Company still would have met the minimum capital requirements when the capital buffer is considered. The net
unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of December
31, 2022, State Bank met all capital adequacy requirements to which they are subject.
Note
17: Employee Benefits
The
Company has a share-based incentive compensation plan that permits the grant of stock options, restricted stock and other share-based
awards to employees, directors and advisory board members of the Company and its subsidiaries. In addition, the Company has instituted
a long-term incentive program, with the objective of rewarding senior management with restricted shares of the Company (see Note 18 to
the Consolidated Financial Statements).
The
Company has a retirement savings 401(k) plan covering substantially all employees. The Company provides a safe harbor matching contribution
equal to 100% of an employees’ salary deferral amounts up to 4% of the employees’ eligible compensation. Employees are immediately
vested in their voluntary contributions and in any Company safe harbor matching contributions. Any discretionary contribution made by
the Company is fully vested after three years of credited service. Employer contributions charged to expense for 2022 and 2021 were $0.7
million and $0.7 million, respectively.
Also,
the Company has Supplemental Executive Retirement Plan (“SERP”) Agreements with certain active and retired officers. The
agreements provide monthly payments for up to 15 years that equal 15 percent to 25 percent of average compensation prior to retirement
or death. The charges to expense for the current agreements were $0.2 million and $0.3 million for 2022 and 2021, respectively.
Additional
life insurance is provided to certain officers through bank-owned life insurance (“BOLI”) policies. By way of a separate
split-dollar agreement, each policy’s interests are divided between the Company and the insured’s beneficiary. The
Company owns the policy’s cash value and a portion of the policy net death benefit, over and above the cash value assigned to
the insured’s beneficiary. In May 2022, an additional $10.5 million in BOLI policies were purchased. The cash surrender
value of all life insurance policies totaled $28.9 million
and $17.9 million at December 31, 2022 and 2021, respectively.
The
Company has a noncontributory employee stock ownership plan (“ESOP”) covering substantially all employees of the Company
and its subsidiaries. Voluntary contributions are made by the Company to the plan. Each eligible employee is vested based upon years
of service, including prior years of service. The Company’s contributions to the account of each employee become fully vested after
three years of service. Benefit expense for the value of the stock purchased is recorded equal to the fair market value of the stock
when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. Allocated shares in
the ESOP at December 31, 2022 and 2021, were 370,876 and 380,450, respectively.
Dividends
on allocated shares in the ESOP are recorded as dividends and charged to retained earnings. Compensation expense is recorded equal to
the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made
to the ESOP. ESOP expense for the years ended December 31, 2022 and 2021 was $0.0 million and $0.5 million, respectively.
Note
18: Share-Based Compensation Plan
In
April 2017, the 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. This plan permits the grant or award
of incentive stock options, nonqualified stock options, stock appreciation rights (“SAR’s”), restricted stock, and restricted
stock units (“RSU’s”) for up to 500,000 common shares of the Company.
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 permit 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.
Option
awards are granted with an exercise price equal to the market price of the Company’s common shares at the date of grant and those
option awards vest based on five 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. There were no options granted in 2022 or 2021. There were
no stock options outstanding, and no compensation expense charged against income with respect to option awards under the Plan, as of
December 31, 2022 or 2021.
As
of December 31, 2022, there was no unrecognized compensation cost related to incentive option share- based compensation arrangements
granted under the 2017 Plan.
Pursuant
to the Long Term Incentive (“LTI”) Plan, the Company awards restricted common shares of the Company to certain key executives
under the 2017 Plan. These restricted stock awards vest over a four- year period and are intended to assist the Company in retention
of key executives. During 2022 and 2021, the Company met certain performance targets and restricted stock awards were approved by the
Board. The compensation cost charged against income for the LTI Plan was $0.6 million and $0.4 million for 2022 and 2021, respectively.
The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.1 million and $0.1 million
for 2022 and 2021, respectively.
A
summary of restricted stock activity under the Company’s LTI Plan as of December 31, 2022 and changes during the year ended is
presented below:
| |
Shares | | |
Weighted- Average Value per Share | |
Nonvested, January 1, 2022 | |
| 40,922 | | |
$ | 18.43 | |
Granted | |
| 40,340 | | |
| 19.84 | |
Vested | |
| (26,044 | ) | |
| 19.03 | |
Forfeited | |
| (2,299 | ) | |
| 17.94 | |
Nonvested, December 31, 2022 | |
| 52,919 | | |
$ | 19.23 | |
As
of December 31, 2022, there was $0.7 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 1.82 years.
Note
19: Disclosures About Fair Value of Assets and Liabilities
Pursuant
to ASC 820, fair value is defined as 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 three level hierarchy exists in ASC 820 for fair value measurements
based upon the inputs to the valuation of an asset or liability:
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, inputs used for assets measured at fair value on a recurring basis, recognized in the
accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale
securities
The
fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. government
agencies, mortgage-backed securities, obligations of political and state subdivisions, and corporate securities. Level 2 inputs do not
include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly
observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted
intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated
by observable market data by correlation or other means.
Interest
rate contracts
The
fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts
or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when
appropriate, the creditworthiness of the counterparties.
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
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 securities measured at fair value on a recurring basis and the level within the
fair value hierarchy in which the fair value measurements fell at December 31, 2022 and 2021:
($ in thousands) | |
Fair value at
December 31,
2022 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| |
U.S. Treasury and Government Agencies | |
$ | 6,764 | | |
$ | - | | |
$ | 6,764 | | |
$ | - | |
Mortgage-backed securities | |
| 205,835 | | |
| - | | |
| 205,835 | | |
| - | |
State and political subdivisions | |
| 11,103 | | |
| - | | |
| 11,103 | | |
| - | |
Other corporate securities | |
| 15,078 | | |
| - | | |
| 15,078 | | |
| - | |
Interest rate contracts - assets | |
| 5,538 | | |
| - | | |
| 5,538 | | |
| - | |
Interest rate contracts - liabilities | |
| (5,538 | ) | |
| - | | |
| (5,538 | ) | |
| - | |
Forward contracts | |
| 26 | | |
| 26 | | |
| - | | |
| - | |
IRLCs | |
| (20 | ) | |
| - | | |
| - | | |
| (20 | ) |
($ 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 years ended December 31, 2022 and 2021.
| |
for the Twelve Months Ended
December 31, | |
($ in thousands) | |
2022 | | |
2021 | |
Interest Rate Lock Commitments | |
| | |
| |
Balance at beginning of period | |
$ | 22 | | |
$ | 278 | |
Total realized gains (losses) | |
| | | |
| | |
Change in fair value | |
| (42 | ) | |
| (256 | ) |
Balance at end of period | |
$ | (20 | ) | |
$ | 22 | |
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 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
independent appraisals of the collateral from a list of preapproved appraisers, which are reviewed for accuracy and consistency by the
Company. 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 December 31, 2022 and 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.
The
following table presents the fair value measurements of assets measured at fair value on a non- recurring basis and the level within
the fair value hierarchy in which the fair value measurements fell at December 31, 2022 and 2021:
($ in thousands) | |
Fair value at
December 31, 2022 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
Impaired loans | |
$ | 1,028 | | |
$ | - | | |
$ | - | | |
$ | 1,028 | |
Mortgage servicing rights | |
| 1,448 | | |
| - | | |
| - | | |
| 1,448 | |
($ 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 tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements
at December 31, 2022 and 2021:
| |
Fair value at | | |
| |
| |
| |
($ in thousands) | |
December 31,
2022 | | |
Valuation
technique | |
Unobservable inputs | |
Range (weighted-
average) | |
| |
| | |
| |
| |
| |
Collateral-dependent impaired loans | |
$ | 1,028 | | |
Market comparable properties | |
Comparability adjustments (%) | |
| 8 - 21% (12 | %) |
Mortgage servicing rights | |
| 1,448 | | |
Discounted cash flow | |
Discount Rate | |
| 11.39 | % |
| |
| | | |
| |
Constant prepayment rate | |
| 7.52 | % |
| |
| | | |
| |
P&I earnings credit | |
| 4.35 | % |
| |
| | | |
| |
T&I earnings credit | |
| 4.58 | % |
| |
| | | |
| |
Inflation for cost of servicing | |
| 3.50 | % |
| |
| | | |
| |
| |
| | |
IRLCs | |
| (20 | ) | |
Discounted cash flow | |
Loan closing rates | |
| 41% - 99 | % |
| |
Fair value at | | |
| |
| |
| |
($ in thousands) | |
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 | % |
The
mortgage servicing rights portfolio is measured for fair value by an independent third party. The valuation of the portfolio hinges on
a number of quantitative factors. These factors include, but are not limited to, a discount rate applied to the cash flows, and an assumption
of future principal prepayments. The prepayment assumptions are based upon the historical performance of the Company’s portfolio
as well as market metrics. The servicing rights have had a decrease in prepayments and the 3.42 percent decrease in the constant prepayment
rate reflects the change in market rates. In addition, the earnings credit rate decreased and the discount rate increased.
The
following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets
at amounts other than fair value.
Cash
and Due From Banks, Interest Bearing Time Deposits, Federal Reserve and Federal Home Loan Bank Stock and Interest Receivable and Payable
Fair
value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because
they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns.
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,
Repurchase Agreements & FHLB Advances
Deposits
include demand deposits, savings accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated
fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate the Company could pay on similar
instruments with similar terms and maturities at December 31, 2022 and 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 December 31, 2022 and 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 an appropriate discount rate.
The
following table presents estimated fair values of the Company’s financial instruments. The fair values of certain 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 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 | |
December 31, 2022 | |
amount | | |
value | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
Financial assets | |
| | |
| | |
| | |
| | |
| |
Cash and due from banks | |
$ | 27,817 | | |
$ | 27,817 | | |
$ | 27,817 | | |
$ | - | | |
$ | - | |
Interest bearing time deposits | |
| 2,131 | | |
| 2,131 | | |
| - | | |
| 2,131 | | |
| - | |
Loans held for sale | |
| 2,073 | | |
| 2,100 | | |
| - | | |
| 2,100 | | |
| - | |
Loans, net of allowance for loan losses | |
| 948,257 | | |
| 945,699 | | |
| - | | |
| - | | |
| 945,699 | |
Federal Reserve and FHLB Bank stock, at cost | |
| 6,326 | | |
| 6,326 | | |
| - | | |
| 6,326 | | |
| - | |
Interest receivable | |
| 4,091 | | |
| 4,091 | | |
| - | | |
| 4,091 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 1,086,665 | | |
$ | 1,090,718 | | |
$ | 895,785 | | |
$ | 194,933 | | |
$ | - | |
Short-term borrowings | |
| 14,923 | | |
| 14,923 | | |
| - | | |
| 14,923 | | |
| - | |
FHLB advances | |
| 60,000 | | |
| 59,886 | | |
| - | | |
| 59,886 | | |
| - | |
Trust preferred securities | |
| 10,310 | | |
| 9,674 | | |
| - | | |
| 9,674 | | |
| - | |
Subordinated debt, net of issuance costs | |
| 19,594 | | |
| 18,959 | | |
| - | | |
| 18,959 | | |
| - | |
Interest payable | |
| 769 | | |
| 769 | | |
| - | | |
| 769 | | |
| - | |
($ 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 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
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
20: Parent Company Financial Information
Presented
below is condensed financial information of the parent company only:
Condensed
Balance Sheets
($ in thousands) | |
2022 | | |
2021 | |
Assets | |
| | |
| |
Cash & cash equivalents | |
$ | 4,655 | | |
$ | 14,406 | |
Investment in banking subsidiaries | |
| 135,923 | | |
| 152,761 | |
Investment in nonbanking subsidiaries | |
| 6,587 | | |
| 6,770 | |
Other assets | |
| 2,076 | | |
| 2,259 | |
| |
| | | |
| | |
Total assets | |
$ | 149,241 | | |
$ | 176,196 | |
Liabilities | |
| | | |
| | |
Trust preferred securities | |
$ | 10,000 | | |
$ | 10,000 | |
Sub debt net of issuance cost | |
| 19,594 | | |
| 19,546 | |
Borrowings from nonbanking subsidiaries | |
| 310 | | |
| 310 | |
Other liabilities & accrued interest payable | |
| 909 | | |
| 1,411 | |
| |
| | | |
| | |
Total liabilities | |
| 30,813 | | |
| 31,267 | |
| |
| | | |
| | |
Stockholders’ equity | |
| 118,428 | | |
| 144,929 | |
| |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 149,241 | | |
$ | 176,196 | |
Condensed Statements
of Income
($ in thousands) | |
2022 | | |
2021 | |
Dividends from subsidiaries: | |
| | |
| |
Banking subsidiaries | |
$ | - | | |
$ | 5,000 | |
Nonbanking subsidiaries | |
| 750 | | |
| 500 | |
Total income | |
| 750 | | |
| 5,500 | |
Expenses | |
| | | |
| | |
Interest expense | |
| 1,139 | | |
| 661 | |
Other expense | |
| 1,747 | | |
| 1,478 | |
Total expenses | |
| 2,886 | | |
| 2,139 | |
Income before income tax | |
| (2,136 | ) | |
| 3,361 | |
Income tax benefit | |
| (613 | ) | |
| (450 | ) |
Income (loss) before equity in undistributed income of subsidiaries | |
| (1,523 | ) | |
| 3,811 | |
Equity in undistributed income of subsidiaries | |
| | | |
| | |
Banking subsidiaries | |
| 13,426 | | |
| 13,573 | |
Nonbanking subsidiaries | |
| 618 | | |
| 893 | |
Total | |
| 14,044 | | |
| 14,466 | |
Net income | |
$ | 12,521 | | |
$ | 18,277 | |
Condensed Statements
of Comprehensive Income (Loss)
($ in thousands) | |
2022 | | |
2021 | |
| |
| | |
| |
Net income | |
$ | 12,521 | | |
$ | 18,277 | |
Other comprehensive income (loss): | |
| | | |
| | |
Available-for-sale investment securities: | |
| | | |
| | |
Gross unrealized holding gain (loss) arising in the period | |
| (38,322 | ) | |
| (5,133 | ) |
Related tax (expense) benefit | |
| 8,047 | | |
| 1,078 | |
Net effect on other comprehensive income (loss) | |
| (30,275 | ) | |
| (4,055 | ) |
Total comprehensive income (loss) | |
$ | (17,754 | ) | |
$ | 14,222 | |
Condensed Statements
of Cash Flows
($ in thousands) | |
2022 | | |
2021 | |
Operating activities | |
| | |
| |
Net income | |
$ | 12,521 | | |
$ | 18,277 | |
Items not requiring (providing) cash | |
| | | |
| | |
Equity in undistributed net income of subsidiaries | |
| (14,044 | ) | |
| (14,466 | ) |
Stock compensation expense | |
| 568 | | |
| 443 | |
Other assets | |
| 973 | | |
| 1,811 | |
Other liabilities | |
| (502 | ) | |
| 376 | |
Net cash provided by (used in) operating activities | |
| (484 | ) | |
| 6,441 | |
| |
| | | |
| | |
Investing activities | |
| | | |
| | |
Capital contributed to nonbanking subsidiary | |
| - | | |
| (1,100 | ) |
Net cash used in investing activities | |
| - | | |
| (1,100 | ) |
| |
| | | |
| | |
Financing activities | |
| | | |
| | |
Dividends on common shares | |
| (3,407 | ) | |
| (3,139 | ) |
Stock dividends on common shares | |
| (8 | ) | |
| - | |
Repurchase of common shares | |
| (5,900 | ) | |
| (9,520 | ) |
Proceeds from sub-debt net of issuance cost | |
| - | | |
| 19,546 | |
Other financing activities | |
| 48 | | |
| - | |
Net cash provided by (used in) financing activities | |
| (9,267 | ) | |
| 6,887 | |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
| (9,751 | ) | |
| 12,228 | |
Cash and cash equivalents at beginning of year | |
| 14,406 | | |
| 2,178 | |
Cash and cash equivalents at end of year | |
$ | 4,655 | | |
$ | 14,406 | |
Note
21: Quarterly Financial Information (unaudited)
Quarterly
Financial Information (unaudited)
Years ended December 31,
($ in thousands, except per share data) | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
2022 | |
December | | |
September | | |
June | | |
March | |
| |
| | |
| | |
| | |
| |
Interest income | |
$ | 12,936 | | |
$ | 11,764 | | |
$ | 10,474 | | |
$ | 9,395 | |
Interest expense | |
| 2,037 | | |
| 1,334 | | |
| 881 | | |
| 918 | |
Net interest income | |
| 10,899 | | |
| 10,430 | | |
| 9,593 | | |
| 8,477 | |
Provision for loan losses | |
| - | | |
| - | | |
| - | | |
| - | |
Noninterest income | |
| 3,713 | | |
| 4,043 | | |
| 4,673 | | |
| 5,802 | |
Noninterest expense | |
| 10,268 | | |
| 10,385 | | |
| 10,802 | | |
| 10,859 | |
Income tax expense | |
| 812 | | |
| 746 | | |
| 630 | | |
| 607 | |
Net income | |
$ | 3,532 | | |
$ | 3,342 | | |
$ | 2,834 | | |
$ | 2,813 | |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings per common share | |
$ | 0.51 | | |
$ | 0.48 | | |
$ | 0.40 | | |
$ | 0.40 | |
Diluted earnings per common share | |
$ | 0.50 | | |
$ | 0.47 | | |
$ | 0.40 | | |
$ | 0.40 | |
Dividends per share | |
$ | 0.125 | | |
$ | 0.120 | | |
$ | 0.120 | | |
$ | 0.115 | |
2021 | |
December | | |
September | | |
June | | |
March | |
| |
| | |
| | |
| | |
| |
Interest income | |
$ | 10,003 | | |
$ | 11,033 | | |
$ | 10,163 | | |
$ | 10,705 | |
Interest expense | |
| 925 | | |
| 1,009 | | |
| 1,006 | | |
| 1,080 | |
Net interest income | |
| 9,078 | | |
| 10,024 | | |
| 9,157 | | |
| 9,625 | |
Provision for loan losses | |
| - | | |
| 300 | | |
| - | | |
| 750 | |
Noninterest income | |
| 6,589 | | |
| 6,649 | | |
| 6,537 | | |
| 10,922 | |
Noninterest expense | |
| 11,567 | | |
| 11,256 | | |
| 11,076 | | |
| 10,909 | |
Income tax expense | |
| 768 | | |
| 1,014 | | |
| 857 | | |
| 1,807 | |
Net income | |
$ | 3,332 | | |
$ | 4,103 | | |
$ | 3,761 | | |
$ | 7,081 | |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings per common share | |
$ | 0.49 | | |
$ | 0.59 | | |
$ | 0.53 | | |
$ | 0.97 | |
Diluted earnings per common share | |
$ | 0.49 | | |
$ | 0.58 | | |
$ | 0.52 | | |
$ | 0.97 | |
Dividends per share | |
$ | 0.115 | | |
$ | 0.110 | | |
$ | 0.110 | | |
$ | 0.105 | |