SB FINANCIAL GROUP, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. SB Financial Group, Inc. (“SB Financial”), is a financial holding company registered with the Federal Reserve Board and subject to regulation under the Bank Holding Company Act of 1956, as amended. Through its direct and indirect subsidiaries, including The State Bank and Trust Company (“State Bank”), SB Financial is engaged in commercial and retail banking, wealth management and private client financial services. The following discussion provides a review of the consolidated financial condition and results of operations of SB Financial and its subsidiaries (collectively, the “Company”). This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes as of and for the years ended December 31, 2024, and 2023 included in this Annual Report on Form 10-K. Strategic Discussion The focus and strategic goal of the Company is to grow into and remain a top decile (>90 th percentile) independent financial services company. The Company intends to achieve and maintain that goal by executing our five key initiatives. Increase profitability through ongoing diversification of revenue streams: For the twelve months ended December 31, 2024, the Company generated $17.0 million in noninterest income, or 29.9 percent of total operating revenue, from fee-based products. These revenue sources include fees generated from saleable residential mortgage loans, retail deposit products, wealth management services, saleable business-based loans (small business and farm service) and title agency revenue. For the twelve months ended December 31, 2023, the Company generated $17.7 million in noninterest income, or 31.1 percent of total operating revenue from fee-based products. Strengthen our penetration in all markets served: Over our 122-year history of continuous operation in Northwest Ohio, we have established a significant presence in our traditional markets in Defiance, Fulton, Paulding and Williams counties in Ohio. In our newer markets of Bowling Green, Columbus, Findlay, Toledo (Ohio) and Ft. Wayne (Indiana), our current market penetration is minimal, but we believe our potential for growth is significant. Over the past few years, we have expanded and committed additional resources to our presence in the Findlay and Edgerton markets in particular; however, we continue to seek to expand the presence and penetration in all of our markets. On January 17, 2025, we established our presence in Ottawa County with the acquisition of The Marblehead Bank located in Marblehead, Ohio. Expand product utilization by new and existing customers: As of December 31, 2024, we operated in 14 counties in Northwest Ohio, Central Ohio and Northeast Indiana with 23 full-service offices, 23 ATM’s and seven loan production offices. Combined in the 14 counties of operation, we command 0.94 percent of the deposit market share, which has steadily grown. In our traditional markets of Northwest Ohio, the deposit market share is 4.40 percent. Deliver gains in operational excellence: Our management team believes that becoming and remaining a high-performance financial services company will depend upon seamlessly and consistently delivering operational excellence, as demonstrated by the Company’s leadership in the origination and servicing of residential mortgage loans. As of December 31, 2024, the Company serviced 8,750 residential mortgage loans with an aggregate principal balance of $1.43 billion. As of December 31, 2023, the Company serviced 8,549 loans with an aggregate principal balance of $1.37 billion. 31 Sustain asset quality: As of December 31, 2024, the Company’s asset quality metrics remained strong. Specifically, total nonperforming assets were $5.5 million, or 0.40 percent of total assets. Total delinquent loans at December 31, 2024 were 0.63 percent of total loans. As of December 31, 2023, the Company had total nonperforming assets of $3.3 million, or 0.25 percent of total assets. Total delinquent loans at December 31, 2023 were 0.15 percent of total loans. The successful execution of these five strategies has enabled the Company to improve financial performance across a broad series of metrics. These metrics over the last five years are outlined in the following table. Specifically, the Company has increased total assets by $121.7 million, or 9.7 percent. The growth has been on both sides of the balance sheet over the five-year period, with loans growing $174.0 million or 19.9 percent and deposits growing $103.6 million or 9.9 percent. During the prior five-year period, the Company has raised capital through the issuance of debt securities to the market, which has improved capital significantly and expanded liquidity for potential strategic expansion. Strategic expansion has also occurred during the period with the acquisition of a small community bank (The Edon State Bank of Edon, Ohio) in 2020, the opening of three branch offices and the acquisition of two full-service title agencies. As detailed in Note 23, we closed on an acquisition of another small community bank in Marblehead, Ohio on January 17, 2025. Financial Highlights Year Ended December 31, ($ in thousands, except per share data) Earnings 2024 2023 2022 2021 2020 Interest income $ 64,349 $ 58,152 $ 44,569 $ 41,904 $ 42,635 Interest expense 24,427 18,879 5,170 4,020 6,705 Net interest income 39,922 39,273 39,399 37,884 35,930 Provision for loan losses 124 315 - 1,050 4,500 Noninterest income 17,017 17,721 18,231 30,697 30,096 Noninterest expense 42,959 41,962 42,314 44,808 43,087 Provision for income taxes 2,386 2,622 2,795 4,446 3,495 Net income 11,470 12,095 12,521 18,277 14,944 Net income available to common shareholders 11,470 12,095 12,521 18,277 14,944 Per Common Share Data Basic earnings $ 1.72 $ 1.77 $ 1.79 $ 2.58 $ 1.96 Diluted earnings 1.72 1.75 1.77 2.56 1.96 Cash dividends declared 0.56 0.52 0.48 0.44 0.40 Total equity per share 19.64 18.50 17.08 21.05 19.39 Average Balances Average total assets $ 1,361,274 $ 1,334,644 $ 1,318,781 $ 1,322,253 $ 1,161,396 Average equity 124,742 118,315 126,963 144,223 139,197 Ratios Return on average total assets 0.84 % 0.91 % 0.95 % 1.38 % 1.29 % Return on average equity 9.19 10.22 9.86 12.67 10.74 Cash dividend payout ratio 1 32.87 29.62 27.25 17.18 20.54 Average equity to average assets 9.16 8.86 9.63 10.91 11.99 Period End Totals Total assets $ 1,379,517 $ 1,343,249 $ 1,335,633 $ 1,330,854 $ 1,257,839 Available-for-sale securities 201,587 219,708 238,780 263,259 149,406 Loans held for sale 6,770 2,525 2,073 7,472 7,234 Total loans & leases 1,046,735 1,000,212 962,075 822,714 872,723 Allowance for credit losses 15,096 15,786 13,818 13,805 12,574 Total deposits 1,152,605 1,070,205 1,086,665 1,113,045 1,049,011 Advances from FHLB 35,000 83,600 60,000 5,500 8,000 Trust preferred securities 10,310 10,310 10,310 10,310 10,310 Subordinated debt, net 19,690 19,642 19,594 19,546 - Total equity 127,508 124,342 118,428 144,929 142,923 1 Cash dividends on common shares divided by net income available to common. 32 Critical Accounting Policies and Estimates The accounting and reporting policies of the Company are in accordance with generally accepted accounting principles in the United States and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the Notes to the Company’s Consolidated Financial Statements for the years ended December 31, 2024 and 2023. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective or complex. Allowance for Credit Losses: The Company believes the determination of the ACL involves a higher degree of judgment and complexity than its other significant accounting policies. The ACL is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management’s determination of the adequacy of the ACL is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods. Goodwill and Other Intangibles: The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. An effective tax rate of 21% is used to determine after-tax components of other comprehensive income (loss) included in the statements of shareholders’ equity. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Changes in Financial Condition Total assets at December 31, 2024, were $1.38 billion, compared to $1.34 billion at December 31, 2023. Loans (excluding loans held for sale) were $1.05 billion at December 31, 2024, compared to $1.00 billion at December 31, 2023. Total deposits were $1.15 billion at December 31, 2024, compared to $1.07 billion at December 31, 2023. The Company continued to allocate the reductions in our bond portfolio, from scheduled amortization, into higher yielding loan balances. 33 The following are the condensed average balance sheets of the Company for the years ending December 31 and includes the interest earned or paid, and the average interest rate, on each asset and liability: 2024 2023 2022 ($ in thousands) Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Taxable securities/cash $ 247,026 $ 6,844 2.77 % $ 254,133 $ 6,092 2.40 % $ 330,549 $ 5,798 1.75 % Non-taxable securities 6,393 146 2.28 % 7,181 170 2.37 % 8,106 198 2.44 % Loans, net 1 1,014,375 57,359 5.65 % 985,217 51,890 5.27 % 888,116 38,573 4.34 % Total earning assets 1,267,794 64,349 5.08 % 1,246,531 58,152 4.67 % 1,226,771 44,569 3.63 % Cash and due from banks 4,388 4,035 7,296 Allowance for credit losses (15,536 ) (15,478 ) (13,808 ) Premises and equipment 20,929 22,990 24,137 Other assets 83,699 76,566 74,385 Total assets $ 1,361,274 $ 1,334,644 $ 1,318,781 Liabilities Savings and interest-bearing demand deposits $ 643,710 $ 11,073 1.72 % $ 619,906 $ 7,599 1.23 % $ 693,271 $ 2,258 0.33 % Time deposits 259,818 9,962 3.83 % 236,665 7,109 3.00 % 159,401 1,219 0.76 % Repurchase agreements & other 14,336 154 1.07 % 15,765 74 0.47 % 20,481 39 0.19 % Advances from FHLB 39,092 1,721 4.40 % 55,044 2,603 4.73 % 16,420 515 3.14 % Trust preferred securities 10,310 739 7.17 % 10,310 716 6.94 % 10,310 361 3.50 % Subordianted debt 19,655 778 3.96 % 19,616 778 3.97 % 19,570 778 3.98 % Total interest-bearing liabilities 986,921 24,427 2.48 % 957,306 18,879 1.97 % 919,453 5,170 0.56 % Demand deposits 227,445 237,976 252,899 Other liabilities 22,156 21,047 19,466 Total liabilities 1,236,522 1,216,329 1,191,818 Shareholders’ equity 124,742 118,315 126,963 Total liabilities and shareholders’ equity $ 1,361,264 $ 1,334,644 $ 1,318,781 Net interest income (tax equivalent basis) $ 39,922 $ 39,273 $ 39,399 Net interest income as a percent of average interest-earning assets - GAAP measure 3.15 % 3.15 % 3.21 % Net interest income as a percent of average interest-earning assets - Non-GAAP measure 2 3.16 % 3.16 % 3.22 % -- Computed on a fully tax equivalent basis (FTE) 1 Nonaccruing loans and loans held for sale are included in the average balances. 2 Interest on tax exempt securities and loans is computed on a tax equivalent basis using a 21 percent statutory tax rate, and added to the net interest income. The tax equivalent adjustment was $0.14, $0.14 and $0.11 million in 2024, 2023 and 2022, respectively. 34 The following tables set forth the effect of volume and rate changes on interest income and expense for the periods indicated. For purposes of these tables, changes in interest due to volume and rate were determined as follows: ● Volume variance - change in volume multiplied by the previous year’s rate. ● Rate variance - change in rate multiplied by the previous year’s volume. ● Rate/volume variance - change in volume multiplied by the change in rate. This variance allocates the volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each. Total Variance Variance Attributable To ($ in thousands) 2024/2023 Volume Rate Interest income Taxable securities $ 752 $ (170 ) $ 922 Non-taxable securities 1 (24 ) (19 ) (5 ) Loans, net of unearned income and deferred fees 1 5,469 1,536 3,933 Total interest income 6,197 1,346 4,851 Interest expense Savings and interest-bearing demand deposits 3,474 292 3,182 Time deposits 2,853 695 2,158 Repurchase agreements & other 80 (7 ) 87 Advances from FHLB (882 ) (754 ) (128 ) Trust preferred securities 23 - 23 Subordinated debt - - - Total interest expense 5,548 226 5,322 Net interest income $ 649 $ 1,119 $ (470 ) 1 Interest on non-taxable securities and loans has been adjusted to fully tax equivalent 35 The maturity distribution and weighted-average interest rates of debt securities available-for-sale at December 31, 2024, are set forth in the table below. The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount: Maturing Weighted Weighted Weighted Weighted Weighted Within Average 1-5 Average 5-10 Average After Average Average ($ in thousands) 1 Year Yield Years Yield Years Yield 10 Years Yield Total Yield Available-for-sale: U.S. Treasury and Government agencies $ 2,138 4.08 % $ 817 3.39 % $ 4,434 1.46 % - $ 7,389 1.84 % Mortgage-backed securities 756 2.95 % 16,536 1.38 % 8,645 1.97 % 143,683 1.90 % 169,620 1.86 % State and political subdivisions - 276 2.61 % 3,446 3.75 % 5,685 2.35 % 9,407 2.83 % Other corporate securities - - 15,171 3.69 % - 15,171 3.69 % Total securities by maturity $ 2,894 3.78 % $ 17,629 1.49 % $ 31,696 2.92 % $ 149,368 1.92 % $ 201,587 2.04 % ($ in thousands) Years Ended December 31, Total loans 2024 2023 % Change Commercial business & agriculture $ 189,298 $ 191,932 -1.4 % Commercial real estate 479,573 424,041 13.1 % Residential real estate 308,378 318,123 -3.1 % Consumer & other 69,340 65,673 5.6 % Total loans 1,046,589 999,769 4.7 % Net deferred costs (fees) 146 443 -67.0 % Total loans, net deferred costs (fees) 1,046,735 1,000,212 4.7 % Loans held for sale $ 6,770 $ 2,525 168.1 % Total deposits 2024 2023 % Change Noninterest bearing demand $ 232,155 $ 228,713 1.5 % Interest-bearing demand 201,085 166,413 20.8 % Savings & money market 460,148 419,570 9.7 % Time deposits 259,217 255,509 1.5 % Total deposits 1,152,605 1,070,205 7.7 % Total shareholders’ equity $ 127,508 $ 124,342 2.5 % Loans held for investment (“HFI”) increased $46.5 million, or 4.7 percent, to $1.05 billion at December 31, 2024, which was due to an increase in commercial real estate lending during 2024. The Company allowed the residential real estate to amortize and minimal new production on the balance sheet was generated. Concentrations of Credit Risk : The Company makes commercial, real estate and installment loans to customers located mainly in the Tri-State region of Ohio, Indiana and Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and, in the case of agricultural loans, crops and farm equipment and the loans are expected to be repaid from cash flow from operations of businesses. As of December 31, 2024, commercial business and agricultural loans made up approximately 18.0 percent of the HFI loan portfolio while commercial real estate loans accounted for approximately 43.9 percent of the HFI loan portfolio. As of December 31, 2024, residential first mortgage loans, which are secured by first mortgages on residential real estate, made up approximately 30.0 percent of the HFI portfolio, while consumer loans to individuals, which are primarily secured by consumer assets, made up approximately 6.5 percent of the HFI loan portfolio. 36 Maturities and Sensitivities of Loans to Changes in Interest Rates: The following table shows the maturity distribution of loans outstanding as of December 31, 2024. The amounts have been categorized between loans with a fixed or floating interest rate (floating rate loans have an adjustable interest rate that changes based on a rate index). Maturities and Sensitivities of Loans to Changes in Interest Rates As of December 31, 2024 ($ in thousands) Within one year After one, but within five years After five, but within fifteen years After fifteen years Total Loans with fixed interest rates: Commercial & industrial $ 1,063 $ 31,732 $ 17,717 $ 17 $ 50,529 Commercial real estate - owner occupied 2,962 6,044 6,889 - 15,895 Commercial real estate - nonowner occupied 4,012 32,770 8,217 216 45,215 Agricultural 775 4,979 7,014 1,525 14,293 Residential real estate 1,300 929 12,550 29,277 44,056 HELOC - - - - - Consumer 4,026 7,177 907 - 12,110 Total $ 14,138 $ 83,631 $ 53,294 $ 31,035 $ 182,098 Loans with floating interest rates: Commercial & industrial $ 23,696 $ 16,178 $ 32,533 $ 1,828 $ 74,235 Commercial real estate - owner occupied 5,768 10,013 48,570 54,185 118,536 Commercial real estate - nonowner occupied 1,016 65,696 97,472 135,743 299,927 Agricultural 505 3,954 20,444 25,484 50,387 Residential real estate 363 436 10,198 253,325 264,322 HELOC 18 367 40,791 12,635 53,811 Consumer 1,981 1,438 - - 3,419 Total $ 33,347 $ 98,082 $ 250,008 $ 483,200 $ 864,637 Total loans: Commercial & industrial $ 24,759 $ 47,910 $ 50,250 $ 1,845 $ 124,764 Commercial real estate - owner occupied 8,730 16,057 55,459 54,185 134,431 Commercial real estate - nonowner occupied 5,028 98,466 105,689 135,959 345,142 Agricultural 1,280 8,933 27,458 27,009 64,680 Residential real estate 1,663 1,365 22,748 282,602 308,378 HELOC 18 367 40,791 12,635 53,811 Consumer 6,007 8,615 907 - 15,529 Total loans $ 47,485 $ 181,713 $ 303,302 $ 514,235 $ 1,046,735 Total deposits increased $82.4 million, or 7.7 percent, to $1.15 billion at December 31, 2024. The State of Ohio Homebuyer Plus program impacted transactional deposit growth during 2024, as the Company added approximately $50 million in lower cost deposits from this program. The average amount of deposits and weighted-average rates paid are summarized as follows for the years ended December 31: 2024 2023 2022 Average Average Average Average Average Average ($ in thousands) Amount Rate Amount Rate Amount Rate Savings and interest bearing demand deposits $ 643,710 1.72 % $ 619,906 1.23 % $ 693,271 0.33 % Time deposits 259,818 3.83 % 236,665 3.00 % 159,401 0.76 % Non interest bearing demand deposits 227,445 - 237,976 - 252,899 - Totals $ 1,130,973 1.86 % $ 1,094,547 1.35 % $ 1,105,571 0.31 % 37 Time deposits that exceeded the FDIC insurance limit of $250,000 are summarized as follows: ($ in thousands) 2024 2023 Three months or less $ 4,912 $ 6,637 Over three months through six months 7,249 1,599 Over six months and through twelve months 6,533 5,209 Over twelve months 4,750 8,935 Total $ 23,444 $ 22,380 Shareholders’ equity at December 31, 2024, was $127.5 million, or 9.2 percent of total assets compared to $124.3 million or 9.3 percent of total assets at December 31, 2023. Retained earnings increased during the year due to earnings of $11.5 million less dividends paid to common shareholders of $3.8 million and repurchases of Company common shares of $4.7 million. The fair market value of the bond portfolio declined slightly during 2024 due to the valuation adjustment on the portfolio, which resulted in accumulated other comprehensive loss (“AOCI”) rising to $30.2 million from $29.8 million. The Company continued to repurchase its own common shares during the year under the Company’s publicly announced share repurchase programs. Specifically, the Company repurchased 253,817 shares during 2024 at an average price of $18.43 per share. On December 18, 2024, the Company’s Board of Directors approved a share repurchase program authorizing the repurchase of 500,000 shares through December 31, 2026. As of December 31, 2024, the Company had repurchased a total of 17,460 shares, and 482,540 shares remained available for purchase, under this program. The December 18, 2024, share repurchase program replaced the Company’s prior repurchase program announced on December 21, 2022, under which an aggregate of 500,000 common shares of the Company were repurchased through December 2024. Asset Quality Years Ended December 31, ($ in thousands) 2024 2023 % Change Nonaccruing loans $ 5,516 $ 2,818 95.7 % Foreclosed assets and other assets held for sale, net - 511 N/M Nonperforming assets 5,516 3,329 65.7 % Net charge-offs/(recoveries) 250 92 171.7 % Provision for credit losses 124 315 -60.6 % Allowance for credit losses 15,096 15,786 -4.4 % Nonaccruing loans/total loans 0.53 % 0.28 % 87.0 % Allowance/nonaccruing loans 273.7 % 560.2 % -51.1 % Nonperforming assets/total assets 0.40 % 0.25 % 61.3 % Net charge offs/average loans 0.01 % 0.01 % 0.0 % Allowance/loans 1.44 % 1.58 % -8.6 % Allowance/nonperforming loans 273.68 % 560.18 % -51.1 % Nonperforming assets totaled $5.5 million, or 0.40 percent of total assets at December 31, 2024, an increase of $2.2 million, or 65.7 percent from 2023. The Company had total net charge-offs on loans of $250,000 in 2024, as compared to net charge-offs of $92,000 in 2023. The Company’s ACL at December 31, 2024, now covers nonperforming loans at 274 percent, down from 560 percent at December 31, 2023. 38 The following schedule presents an analysis of the ACL, average loan data and related ratios at December 31 for the years indicated: ($ in thousands) Provision for Credit Losses Net (Chargeoffs) Recoveries Average Loans Ratio of annualized net (chargeoffs) recoveries to average loans December 31, 2024 Commercial & industrial $ 891 $ (228 ) $ 123,238 -0.19 % Commercial real estate - owner occupied (146 ) - 131,168 0.00 % Commercial real estate - nonowner occupied 3 - 311,855 0.00 % Agricultural 444 - 63,580 0.00 % Residential real estate (1,603 ) (3 ) 314,066 0.00 % HELOC 10 - 50,240 0.00 % Consumer (39 ) (19 ) 13,204 -0.14 % Total $ (440 ) $ (250 ) $ 1,007,351 -0.02 % December 31, 2023 Commercial & industrial $ 110 $ - $ 124,435 0.00 % Commercial real estate - owner occupied 202 - 118,583 0.00 % Commercial real estate - nonowner occupied 119 - 301,072 0.00 % Agricultural 23 - 59,720 0.00 % Residential real estate 190 (52 ) 313,034 -0.02 % HELOC 39 - 46,576 0.00 % Consumer 5 (40 ) 15,470 -0.26 % Total $ 688 $ (92 ) $ 978,890 -0.01 % December 31, 2022 Commercial & industrial $ (227 ) $ - $ 126,496 0.00 % Commercial real estate - owner occupied (868 ) - 122,031 0.00 % Commercial real estate - nonowner occupied 367 - 276,805 0.00 % Agricultural 12 - 58,745 0.00 % Residential real estate 923 - 239,162 0.00 % HELOC (45 ) 13 43,210 0.03 % Consumer (162 ) - 14,039 0.00 % Total $ - $ 13 $ 880,488 0.00 % The ACL balance and the provision for credit losses are determined by management based upon periodic reviews of the loan portfolio. In addition, management considers the level of charge offs on loans, as well as the fluctuations of charge offs and recoveries on loans, in the factors which caused these changes. Estimating the risk of loss and the amount of loss is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which are subject to change over time. The Company has substantially increased its reserve level over the last several years. Specifically, the Company’s ACL balance has increased from $8.8 million at December 31, 2019 to $15.1 million at December 31, 2024, which reflects an increase of $6.3 million, or 72 percent. This increase was the result of $6.8 million in provision expense during the period and $1.0 million in net charge-offs over the five-year period. The reserve increased during 2023 due to the one-time CECL adjustment of $1.4 million taken in January of 2023 upon the Company’s adoption of the CECL methodology. 39 The following schedule provides a breakdown of the ACL allocated by type of loan and related ratios at December 31 for the years indicated: Allowance Amount Percentage of Loans In Each Category to Total Loans Allowance Amount Percentage of Loans In Each Category to Total Loans Allowance Amount Percentage of Loans In Each Category to Total Loans ($ in thousands) 2024 2023 2022 Commercial & industrial $ 2,666 17.7 % $ 2,003 12.7 % $ 1,663 12.0 % Commercial real estate - owner occupied 1,806 12.0 % 1,952 12.4 % 1,696 12.3 % Commercial real estate - nonowner occupied 5,721 37.9 % 5,718 36.2 % 4,584 33.2 % Agricultural 884 5.9 % 440 2.8 % 611 4.4 % Residential real estate 3,330 22.1 % 4,936 31.3 % 4,438 32.1 % HELOC 520 3.4 % 510 3.2 % 547 4.0 % Consumer 169 1.1 % 227 1.4 % 279 2.0 % $ 15,096 100.0 % $ 15,786 100.0 % $ 13,818 100.0 % Regulatory capital reporting is required for State Bank only, as the Company is currently exempt from quarterly regulatory capital level measurement pursuant to the Small Bank Holding Company Policy Statement. As of December 31, 2024, State Bank met all regulatory capital levels required to be considered well-capitalized (see Note 16 to the Consolidated Financial Statements). On May 27, 2021, the Company issued and sold $20.0 million in aggregate principal amount of its 3.65% Fixed to Floating Rate Subordinated Notes due 2031 in a private placement exempt from the registration requirements under the Securities Act. The Subordinated Notes 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 Subordinated 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 Subordinated Notes have a maturity of 10 years. Earnings Summary – 2024 vs. 2023 Net income for 2024 was $11.5 million, or $1.72 per diluted share, compared with net income of $12.1 million, or $1.75 per diluted share, for 2023. State Bank reported net income for 2024 of $13.0 million, which was down slightly from the $13.3 million of net income in 2023. SBFG Title reported net income for 2024 of $0.36 million, which was up from net income of $0.24 million for 2023. Positive results for 2024 included loan growth of $46.5 million, with deposits higher by $82.4 million. Deposit growth was boosted by the Company’s participation in the State of Ohio’s Homebuyer Plus program. For the full year of 2024, residential real estate loan production was $261.3 million, with $4.6 million of revenue from gains on sale. The level of mortgage origination was up from the $215.5 million in 2023. The Company’s loans serviced for others ended the year at $1.427 billion, up slightly from $1.367 billion at December 31, 2023. Operating revenue was steady at $57.0 million as increased mortgage volume offset the sale of Visa B shares that occurred in 2023 of $1.4 million. SBFG Title revenue also remained level at $1.64 million. 40 Operating expense increased by $1.0 million, or 2.4 percent, from $42.0 million in 2023 to $43.0 million in 2024, due to higher incentive and commission levels, which were partially offset by moving higher medical costs to the Captive. Results of Operations Years Ended December 31, ($ in thousands, except per share data) 2024 2023 % Change Total assets $ 1,379,517 $ 1,343,249 2.7 % Total investments 201,588 219,708 -8.2 % Loans held for sale 6,770 2,525 168.1 % Loans, net of unearned income 1,046,735 1,000,212 4.7 % Allowance for credit losses 15,096 15,786 -4.4 % Total deposits 1,152,605 1,070,205 7.7 % Total operating revenue 1 $ 56,939 $ 56,994 -0.1 % Net interest income 39,922 39,273 1.7 % Loan loss provision 124 315 -60.6 % Noninterest income 17,017 17,721 -4.0 % Noninterest expense 42,959 41,962 2.4 % Net income 11,470 12,095 -5.2 % Diluted earnings per share 1.72 1.75 -1.7 % 1 Operating revenue equals net interest income plus noninterest income. Net interest income was $39.9 million for 2024 and increased slightly from net interest income of $39.3 million for 2023. Average earning assets increased slightly to $1.27 billion in 2024, compared to $1.25 billion in 2023, primarily due to the increase in our loan portfolio, partially offset by lower cash and securities. The consolidated 2024 full year net interest margin on a fully-taxable equivalent (“FTE”) basis was 3.16 percent compared to 3.16 percent for the full year of 2023. Provision for credit losses was taken in 2024 in the amount of $0.12 million compared to $0.32 million taken during 2023. For 2024, net charge-offs totaled $0.25 million or 0.02 percent of average loans, compared to net charge-offs of $0.01 million or 0.01 percent of average loans, for 2023. Noninterest Income Years Ended December 31, ($ in thousands) 2024 2023 % Change Wealth management fees $ 3,511 $ 3,532 -0.6 % Customer service fees 3,467 3,403 1.9 % Gains on sale of residential loans & OMSR’s 4,564 3,609 26.5 % Mortgage loan servicing fees, net 2,183 2,101 -3.9 % Gain on sale of non-mortgage loans 146 429 -66.0 % Title insurance income 1,635 1,635 0.0 % Other 1,511 3,012 -49.8 % Total noninterest income $ 17,017 $ 17,721 -4.0 % 41 Total noninterest income was $17.0 million for 2024 compared to $17.7 million for 2023, representing a decrease of $0.7 million, or 4.0 percent, year-over-year. Gains on sale of residential mortgage loans was up from 2023 by $0.96 million, or 26.5 percent. The Company sold $216.0 million of originated mortgages into the secondary market in 2024, which due to being higher than the amortization on the serviced portfolio, increased the size of our serviced loan portfolio to $1.428 billion at December 31, 2024 from $1.367 billion at December 31, 2023. Sales of non-mortgage loans (small business and farm credits) in 2024 was just $0.7 million. The Company saw its wealth management assets under management increase by $45.9 million to $547.7 million at December 31, 2024, with total wealth management fees of $3.5 million. Noninterest Expense Years Ended December 31, ($ in thousands) 2024 2023 % Change Salaries & employee benefits $ 23,603 $ 22,777 3.6 % Net occupancy expense 2,884 3,096 -6.8 % Equipment expense 4,333 4,078 6.3 % Data processing fees 3,075 2,659 15.6 % Professional fees 2,927 3,024 -3.2 % Marketing expense 821 782 5.0 % Telephone and communications 525 501 4.8 % Postage and delivery expense 447 432 3.5 % State, local and other taxes 907 949 -4.4 % Employee expense 733 631 16.2 % Other expense 2,704 3,033 -10.8 % Total noninterest expense $ 42,959 $ 41,962 2.4 % Total noninterest expense was $43.0 million for 2024 compared to $42.0 million for 2023, representing a $1.0 million, or 2.4 percent, increase year-over-year. Total full-time equivalent employees ended 2024 at 252, which was up 1 from year end 2023. Earnings Summary – 2023 vs. 2022 Net income for 2023 was $12.1 million, or $1.75 per diluted share, compared with net income of $12.5 million, or $1.77 per diluted share, for 2022. State Bank reported net income for 2023 of $13.3 million, which was down slightly from the $13.4 million of net income in 2022. SBFG Title reported net income for 2023 of $0.24 million, which was down from net income of $0.39 million for 2022. Positive results for 2023 included loan growth of $38.1 million, while deposits were slightly lower by $16.5 million. The Company completed the final forgiveness in January of 2023 from the nearly 1,200 PPP loans processed during 2020 and 2021. The mortgage banking business line was impacted by the rapidly rising rates, which contributed to the reduction in both balance growth and gains on sale. For the full year of 2023, residential real estate loan production was $215.5 million, with $3.6 million of revenue from gains on sale. The level of mortgage origination was down from the $313.0 million in 2022. The Company’s loans serviced for others ended the year at $1.367 billion, up slightly from $1.352 billion at December 31, 2022. Operating revenue decreased just slightly by $0.6 million, or 1.1 percent, from $57.6 million in 2022 to $57.0 million in 2023 due to decreased originated mortgage servicing rights (“OMSR”) recapture, significantly lower mortgage gain revenue offset by a $1.4 million gain on the sale of equity securities. SBFG Title revenue decreased by $0.6 million to $1.6 million for 2023. Operating expense decreased by $0.35 million, or 0.8 percent, from $42.3 million in 2022 to $42.0 million in 2023, due to lower incentive and commission levels, which were partially offset by higher medical costs and increased spending on technology. Goodwill, Intangibles and Capital Purchases The Company completed its most recent annual goodwill impairment review as of December 31, 2024. Due to declines in the Company’s share price, a quantitative evaluation of goodwill was completed as of September 30, 2024, which revealed that impairment was not warranted. No events have occurred since that assessment, which would warrant impairment. At December 31, 2024, the Company concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The Company’s goodwill is further discussed in Note 6 to the Consolidated Financial Statements. Management plans to continue from time to time to purchase additional premises and equipment and improve current facilities to meet the current and future needs of the Company’s customers. These purchases will include buildings, leasehold improvements, furniture and equipment. Management expects that cash on hand and cash generated from current operations will fund these capital expenditures and purchases. 42 Liquidity Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Sources used to satisfy these needs consist of cash and due from banks, interest-bearing deposits in other financial institutions, securities available-for-sale, loans held for sale and borrowings from various sources. These assets, excluding the borrowings, are commonly referred to as liquid assets. Liquid assets were $235.9 million at December 31, 2024, which included pledged available-for-sale securities of $132.8 million, compared to liquid assets of $246.7 million at December 31, 2023. The Company does not have material cash requirements for capital expenditures over the next year. Any cash needs for capital requirements would be funded by cash existing at the Company. The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $852.6 million at December 31, 2024, can and is readily used to collateralize borrowings, which is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its current and anticipated liquidity needs. At December 31, 2024, all eligible commercial real estate, residential first, multi-family mortgage and agricultural loans were pledged under a FHLB blanket lien. Significant additional off balance-sheet liquidity is available in the form of FHLB advances, unused federal funds lines from correspondent banks and the national certificate of deposit market. Management expects the risk of changes in off-balance-sheet arrangements to be immaterial to earnings. Based on the current collateralization requirements of the FHLB, approximately $142.5 million of additional borrowing capacity existed at December 31, 2024. At December 31, 2024 and 2023, the Company had $41.0 million in federal funds lines available. The Company also had $66.8 million in unpledged securities at December 31, 2024 available for additional borrowings. The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2024 and 2023 follows: The Company experienced positive cash flows from operating activities in 2024 and 2023. Net cash from operating activities was $9.5 million and $14.0 million for the years ended December 31, 2024 and 2023, respectively. Significant operating items for 2024 included gain on sale of loans of $4.7 million and net income of $11.5 million. Cash provided by the sale of loans held for sale were $216.0 million. Cash used in the origination of loans held for sale were $217.8 million. The Company experienced negative cash flows from investing activities in 2024 and 2023. Net cash used in investing activities was $28.9 million and $17.4 million for the years ended December 31, 2024 and 2023, respectively. A net increase in loans of $46.8 million was the primary change in 2024. The primary change for 2023 was a net increase in loans of $38.7 million. The Company had proceeds from repayments, maturities, sales and calls of securities of $18.8 million and $22.2 million in 2024 and 2023, respectively. The Company experienced positive cash flows from financing activities in 2024 and negative cash flows in 2023. Net cash provided by financing activities was $22.5 million and net cash used in financing activities was $1.5 million for the years ended December 31, 2024 and 2023, respectively. The increase in deposits of $82.4 million attributed to the positive cash flows in 2024 and the decrease in deposits of $16.5 million attributed to the negative cash flows in 2023. 43 The Company uses an Economic Value of Equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The results of this analysis are reflected in the following table, which reflects the Company’s neutral balance sheet that directionally is trending to a liability sensitive position: Economic Value of Equity December 31, 2024 ($ in thousands) Change in rates $ Amount $ Change % Change +400 basis points $ 258,979 $ 10,652 4.29 % +300 basis points 258,247 9,920 3.99 % +200 basis points 253,713 5,386 2.17 % +100 basis points 250,545 2,218 0.89 % Base Case 248,327 - - -100 basis points 240,798 (7,529 ) -3.03 % -200 basis points 229,540 (18,787 ) -7.57 % -300 basis points 213,379 (34,948 ) -14.07 % -400 basis points 190,188 (58,139 ) -23.41 % Economic Value of Equity December 31, 2023 ($ in thousands) Change in rates $ Amount $ Change % Change +400 basis points $ 206,660 $ (9,716 ) -4.49 % +300 basis points 211,240 (5,136 ) -2.37 % +200 basis points 211,639 (4,737 ) -2.19 % +100 basis points 213,900 (2,476 ) -1.14 % Base Case 216,376 - - -100 basis points 213,526 (2,850 ) -1.32 % -200 basis points 206,761 (9,616 ) -4.44 % -300 basis points 195,925 (20,452 ) -9.45 % -400 basis points 196,802 (19,574 ) -9.05 %