SB Financial in Defiance, Ohio, has redeemed $10.3 million in trust-preferred securities, in an effort to lower its interest-related expenses.

The $664 million-asset bank will pay a $400,000 penalty to redeem the fixed-rate securities, which were set to mature in September of 2030.

"The early redemption of these securities is a significant step towards achieving our strategic goal of becoming a top-quartile financial services company," said Mark Klein, SB Financial's president and chief executive, in a press release Monday. "Our net interest margin will improve by replacing this high-interest regulatory capital instrument with funding that is substantially more cost-effective."

SB Financial used both cash and a term loan to finance the transaction. The bank has one remaining issuance of variable-rate trust-preferred securities, worth approximately $10.3 million, set to mature in September of 2035.

Trust-preferred securities allow banks to defer interest payments for up to five years. The combination debt and equity instrument was a popular source of capital for small banks until recently.

The securities have faced increasing scrutiny, however, following the financial crisis. Under the Dodd-Frank Act, trust-preferred securities no longer count as Tier 1 capital, although the law makes an exception for securities owned by banks with less than $15 billion in assets before May 9, 2010.

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