What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-09 · 1088 added, 1379 removed, 586 unchanged (81% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

($ in thousands)

24 unchanged sentences

Shareholders’

Preferred stock, no par value;

authorized 200,000 shares;

2021 - 0 shares outstanding, 2020 - 0 shares outstanding

Common stock, no par value;

3 unchanged sentences

Retained earnings

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Treasury stock, at cost;

8 unchanged sentences

Three Months Ended

Nine Months Ended

($ in thousands, except per share data)

September 30,

Interest Income

15 unchanged sentences

Title insurance income

Net gain on sale of securities

Loss on sale/disposal of assets

15 unchanged sentences

Provision for income taxes

Preferred share dividends

Net income available to common shareholders

7 unchanged sentences

Three Months Ended

Nine Months Ended

($ in thousands)

Other comprehensive income (loss):

Available for sale investment securities:

Unrealized holding gain (loss) arising in the period

Related tax expense (benefit)

Reclassification for gain realized in income

Related tax expense

Net effect on other comprehensive income

Other comprehensive income (loss), net of tax:

Net unrealized holding gain (loss) on securities available-for-sale

Related income tax effect

Other comprehensive income (loss), net of tax

Total comprehensive income

3 unchanged sentences

Equity (unaudited)

Comprehensive

($ in thousands, except per

Balance, January 1, 2020

Other comprehensive income

Dividends on common, $0.095 per share

Restricted stock vesting

Stock options exercised

Repurchased stock

Stock based compensation expense

Balance, March 31, 2020

Other comprehensive income

Dividends on common, $0.10 per share

Repurchased stock

Stock based compensation expense

Balance, June 30, 2020

($ in thousands, except per share data)

Preferred Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Treasury Stock

January 1, 2021

Other comprehensive loss

3 unchanged sentences

Stock based compensation expense

Balance, September 30, 2020

Balance, January 1, 2019

Other comprehensive income

Conversion of preferred to common

Stock reissue for purchase of Peak Title

Dividends on common, $0.085 per share

Dividends on preferred, $0.1625 per share

Restricted stock vesting

Stock options exercised

Repurchased stock

Stock based compensation expense

Balance, March 31, 2019

Other comprehensive income

Dividends on common, $0.900 per share

Dividends on preferred, $0.1625 per share

Stock options exercised

Repurchased stock

Stock based compensation expense

Balance, June 30, 2019

March 31, 2021

($ in thousands, except per share data)

Preferred Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Treasury Stock

January 1, 2020

Other comprehensive income

Common stock issuance

Dividends on common, $0.095 per share

Dividends on preferred, $0.1625 per share

Restricted stock vesting

2 unchanged sentences

Stock based compensation expense

Balance, September 30, 2019

March 31, 2020

See notes to condensed consolidated financial statements

SB Financial Group, Inc.

Condensed Consolidated Statements

of Cash Flows (unaudited)

September 30,

Consolidated Statements of Cash Flows

($ in thousands)

Three Months Ended March 31,

Operating Activities

6 unchanged sentences

Amortization of originated mortgage servicing rights

Impairment of mortgage servicing rights

Impairment (recovery) of mortgage servicing rights

Proceeds from sale of loans held for sale

1 unchanged sentence

Gain from sale of loans

Loss (gain) on sales of assets

Net change in foreclosed assets

Net gains on sales of securities

Loss on sales of assets

Interest receivable

Interest payable & other liabilities

Net cash provided by operating activities

Net cash used in operating activities

Investing Activities

2 unchanged sentences

Proceeds from maturities of available-for-sale securities

Proceeds from sales of available-for-sale securities

Net change in loans

Purchase of premises, equipment

Proceeds from sales of premises, equipment

Purchase of bank owned life insurance

Purchase of Federal Reserve and Federal Home Loan Bank Stock

Proceeds from sale of foreclosed assets

Net cash and cash equivalents (paid) received in acquisition

Net cash used in investing activities

Financing Activities

Net increase in demand deposits,

money market, interest checking & savings accounts

Net increase (decrease) in certificates of deposit

Net increase (decrease) in short term borrowings

Proceeds from Federal Home Loan Bank advances

Repayment of Federal Home Loan Bank advances

Net increase in demand deposits, money market, interest checking & savings accounts

Net decrease in time deposits

Net increase in short term borrowings

Net proceeds from share-based compensation plans

Stock repurchase plan

Issuance of common shares

Dividends on common shares

Dividends on preferred shares

Net cash provided by financing activities

4 unchanged sentences

Interest paid

Income taxes paid

Fair value of assets acquired - premises and equipment (Peak Title)

Supplemental non-cash disclosure

Initial recognition of right-of-use lease assets

Transfer of loans to foreclosed assets

In conjunction with the Edon acquisition, liabilities assumed were:

Fair value of assets acquired

Cash paid in acquisition

Liabilities assumed

See notes to condensed consolidated financial statements

SB FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—BASIS OF PRESENTATION

SB Financial Group, Inc., an Ohio corporation

(the “Company”), is a financial holding company whose principal activity is the ownership and management of its wholly-owned

subsidiaries, The State Bank and Trust Company (“State Bank”), RFCBC, Inc.

(“RFCBC”), Rurbanc Data Services,

dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”).

RDSI is presently inactive

and has had no material operations or employees since January 1, 2018.

In addition, State Bank owns all of the outstanding stock

of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance, LLC (“SBI”).

In June 2020, the Company acquired Edon

Bancorp (“Edon”) and its subsidiary, The Edon State Bank Company of Edon, Ohio.

This acquisition was completed effective

June 5, 2020, and the acquisition resulted in an increase in goodwill, which is detailed in Note 8.

The business combination summary

is detailed in Note 3.

In March 2019, the Company formed SBFG

Title, LLC (“Title”) and purchased all of the assets and real estate of an Ohio based title agency.

The purchase was

completed effective March 15, 2019, and the purchase resulted in an increase in goodwill, which is detailed in Note 8.

In March 2019, the Company formed SB Captive,

FINANCIAL GROUP, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1—BASIS OF PRESENTATION

Financial Group, Inc., an Ohio corporation (the “Company”), is a financial holding company whose principal activity is the

ownership and management of its wholly-owned subsidiaries, including The State Bank and Trust Company (“State Bank”), RFCBC,

(“RFCBC”), Rurbanc Data Services, Inc.

dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II

(“RST II”).

RDSI is presently inactive and has had no material operations or employees since January 1, 2018.

State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance,

LLC (“SBI”).

June 2020, the Company acquired Edon Bancorp and its subsidiary, The Edon State Bank Company of Edon, Ohio (collectively, “Edon”),

which were merged with and into the Company and State Bank, respectively.

This acquisition was completed effective June 5, 2020, and

the acquisition resulted in an increase in goodwill, which is detailed in Note 8.

The business combination summary is detailed in Note

March 2019, the Company formed SBFG Title, LLC (“Title”) and purchased all of the assets and real estate of an Ohio based

title agency.

The purchase was completed effective March 15, 2019, and the purchase resulted in an increase in goodwill, which is detailed

March 2019, the Company formed SB Captive, Inc.

(“Captive”), which is a captive insurance company based in Nevada.

The Captive allows the Company to share insurance

risk among a pool of similar sized banks.

The consolidated financial statements

include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, Title, Captive and SBI.

All significant intercompany accounts

and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated

financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information

and with the instructions for Form 10-Q.

Accordingly, they do not include all of the information and footnotes required by generally

accepted accounting principles for complete financial statements.

The financial statements reflect all adjustments that are, in

the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company.

allows the Company to share insurance risk among a pool of similar sized banks.

consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, Title, Captive and SBI.

All significant

intercompany accounts and transactions have been eliminated in consolidation.

accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting

principles for interim financial information and with the instructions for Form 10-Q.

Accordingly, they do not include all of the information

and footnotes required by generally accepted accounting principles for complete financial statements.

The financial statements reflect

all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and

cash flows of the Company.

Those adjustments consist only of normal recurring adjustments.

Results of operations for the three and nine months ended September

30, 2020, are not necessarily indicative of results for the complete year.

The condensed consolidated balance sheet

of the Company as of December 31, 2019 has been derived from the audited consolidated balance sheet of the Company as of that

For further information, refer to the

consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended

December 31, 2019.

New and applicable accounting pronouncements:

Intangibles –

Goodwill and Other (Topic 350)

This ASU simplifies the test for

goodwill impairment.

Specifically, these amendments eliminate Step 2 from the goodwill impairment test, and also eliminate the

requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails

that qualitative test, to perform Step 2 of the goodwill impairment test.

The Company has decided to adopt this ASU immediately,

and management does not believe the changes will have a material effect on the Company’s accounting and disclosures.

Measurement - Disclosure Framework –

Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)

The updated guidance improves

the disclosure requirements for fair value measurements.

The ASU removes certain disclosures required by Topic 820 related to

transfers between Level 1 and Level 2 of the fair value hierarchy;

the policy for timing of transfers between levels;

valuation processes for Level 3 fair value measurements.

The ASU modifies certain disclosures required by Topic 820 related to

disclosure of transfers into and out of Level 3 of the fair value hierarchy;

the requirement to disclose the timing of liquidation

of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated

the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value;

and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement

as of the reporting date.

The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the

period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period

and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements.

unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted- average if the entity determines

that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable

inputs used to develop Level 3 fair value measurements.

The amendments in this update are effective for fiscal years, and interim

periods within those fiscal years beginning after December 15, 2019.

The impact of this new guidance did not have a material impact

on the Company’s consolidated financial statements.

Accounting Standards not yet adopted:

Reference Rate Reform

Results of operations for the three months

ended March 31, 2021, are not necessarily indicative of results for the complete year.

condensed consolidated balance sheet of the Company as of December 31, 2020 has been derived from the audited consolidated balance sheet

of the Company as of that date.

further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form

10-K for the year ended December 31, 2020.

and applicable accounting pronouncements:

Investments –

Equity Securities (Topic 321),

Investments –

Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) –

Clarifying the Interactions

between Topic 321, Topic 323 and Topic 815

This guidance was issued in January 2020 to clarify

that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting

under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance

with Topic 321 immediately before applying or upon discontinuing the equity method.

The amendments also clarify that when determining

the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise,

if the underlying securities would be accounted for under the equity method or fair value option.

The guidance is effective for years

beginning after December 15, 2020.

The new standard did not have a material impact on the Company’s consolidated financial statements.

Standards not yet adopted:

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.

guidance provides temporary options to ease the potential burden in accounting for reference rate reform.

It is intended to help stakeholders

during the global market-wide reference rate transition period.

The guidance is effective as of March 12, 2020 through December 31, 2022.

The Company anticipates

being fully prepared to implement a replacement for the reference rate and has determined that any change will not have a material

impact to the consolidated financial statements.

Investments –

Equity Securities (Topic 321), Investments –

Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic

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

The guidance is effective beginning after December 15, 2020.

The Company is currently assessing the impact on its accounting

and disclosures.

Instruments –

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.

Financial Instruments –

Credit Losses (Topic 326)

This ASU, which is commonly known as “CECL,”

replaces the current GAAP incurred impairment methodology regarding credit losses with a methodology that reflects expected credit

losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity,

their duration, and how the entity applies current GAAP.

The adoption of ASU 2016-13 is likely

to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss”

encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss”

encompasses allowances for losses expected to be incurred over the life of the portfolio.

Furthermore, ASU 2016-13 will necessitate

that we establish an allowance for expected credit losses on debt securities.

In December 2018, the OCC,

the Federal Reserve Board, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including

banking organizations’

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.

adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred

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.

December 2018, the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve Board, and the Federal Deposit

Insurance Corporation (“FDIC”) approved a final rule to address changes to credit loss accounting under GAAP, including banking

organizations’

implementation of CECL.

The final rule provides banking organizations the option to phase in over

a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting

On November 15, 2019, the FASB

delayed the effective date for certain small public companies and other private companies.

As the Company is currently a smaller

reporting company, the amendment will delay the effective date of ASU No.

2016-13 to the fiscal year beginning January 1, 2023.

While we are currently unable

to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced

by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions

The final rule provides banking organizations the option to phase in over a three-year period

the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

November 15, 2019, the FASB delayed the effective date for certain small public companies and other private companies.

As the Company

is currently a smaller reporting company, the amendment will delay the effective date of ASU No.

2016-13 to the Company’s fiscal

year beginning January 1, 2023.

we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly

influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions

and forecasts as of the adoption date.

The Company implemented a process to track required data by utilizing accounting software

in preparation for compliance.

We anticipate being fully prepared for implementation by December 15, 2022.

The Company implemented a process to track required data by utilizing accounting software in preparation

for compliance.

We anticipate being fully prepared for implementation by January 1, 2023.

Reclassifications:

Certain reclassifications have been made

to prior period financial statements to conform to the current financial statement presentation.

These reclassifications had no

effect on net income.

NOTE 2—EARNINGS PER SHARE

Earnings per share (EPS) have been computed

based on the weighted average number of common shares outstanding during the periods presented.

There were no anti-dilutive shares

in 2020 or 2019.

The average number of common shares used in the computation of basic and diluted earnings per share are set forth

in the tables below:

($ and outstanding shares in thousands - except

per share data)

Distributed earnings allocated to common shares

Undistributed (in excess of) earnings allocated to common shares

Net earnings allocated to common shares

Net earnings allocated to participating securities

Dividends on convertible preferred shares

Net Income allocated to common shares and participating securities

Weighted average shares outstanding for basic earnings per share

Dilutive effect of stock compensation

Dilutive effect of convertible shares

Weighted average shares outstanding for diluted earnings per share

Basic earnings per common share

Diluted earnings per common share

reclassifications have been made to prior period financial statements to conform to the current financial statement presentation.

reclassifications had no effect on net income.

2—EARNINGS PER SHARE

per share (EPS) have been computed based on the weighted average number of common shares outstanding during the periods presented.

were no anti-dilutive shares in 2021 or 2020.

The average number of common shares used in the computation of basic and diluted earnings

per share are set forth in the tables below:

Three Months Ended

($ and outstanding shares in thousands - except per share data)

Distributed earnings allocated to common shares

Undistributed earnings allocated to common shares

Undistributed (in excess of) earnings allocated to common shares

Net earnings allocated to common shares

Net earnings allocated to participating securities

Dividends on convertible preferred shares

Net Income allocated to common shares and participating securities

1 unchanged sentence

Dilutive effect of stock compensation

Dilutive effect of preferred convertible shares

Weighted average shares outstanding for diluted earnings per share

1 unchanged sentence

Diluted earnings per common share

NOTE 3 –

BUSINESS COMBINATION

Effective June 5, 2020, the Company acquired

Edon Bancorp and its subsidiary, The Edon State Bank Company of Edon, Ohio.

Edon Bancorp was headquartered in Edon, Ohio and had

one retail banking office.

The Edon State Bank was merged with and into State Bank, with State Bank surviving.

Under the terms

of the merger agreement, shareholders of Edon received fixed consideration of $103.50 in cash for each share of Edon common stock

for total consideration of $15.5 million.

The Company accounted for the transaction under the acquisition method of accounting,

which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.

In accordance with ASC 805, the Company

expensed approximately $1.2 million of direct acquisition costs during the three months ended June 30, 2020, and no additional

merger expense was recorded in the three months ended September 30, 2020.

The $1.2 million in merger expense is split between

data processing and professional fees expense.

As a result of the acquisition, the Company recorded $4.3 million of goodwill and

$0.7 million of intangible assets in the second quarter of 2020.

The Company was able to increase both its deposit and loan base

and acquire new households in a new market.

June 5, 2020, the Company acquired Edon Bancorp and its subsidiary, The Edon State Bank Company of Edon, Ohio.

Edon was headquartered

in Edon, Ohio and had one retail banking office.

At the closing of the acquisition, Edon Bancorp was merged with and into the Company,

with the Company surviving, and Edon State Bank (“Edon State Bank”) was merged with and into State Bank, with State Bank

Under the terms of the merger agreement, shareholders of Edon received fixed consideration of $103.50 in cash for each share

of Edon common stock for total consideration of $15.5 million.

The Company accounted for the transaction under the acquisition method

of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.

accordance with ASC 805, the Company expensed approximately $1.2 million of direct acquisition costs during the three months ended June

30, 2020, and no additional merger expense was recorded in the three months ended March 31, 2021.

The $1.2 million in merger expense

is split between data processing and professional fees expense.

As a result of the acquisition, the Company recorded $4.3 million of

goodwill and $0.7 million of intangible assets in the second quarter of 2020.

The Company was able to increase both its deposit and loan

base and acquire new households in a new market.

It is expected that this transaction will result in business synergies and economies

The acquisition was consistent with the Company’s strategy to expand its presence in Northwest Ohio and to increase

profitability by introducing existing products and services to the acquired customer base.

The intangible assets are related to

core deposits, which are being amortized over 10 years on a straight-line basis.

For tax purposes, goodwill is non-deductible

but will be evaluated annually for impairment.

The following table summarizes the fair

value of the total consideration transferred as part of the acquisition as well as the fair value of identifiable assets and liabilities

assumed as of the effective date of the transaction based on assumptions that are subject to change as management continues to

evaluate relevant information as it becomes available.

If, prior to the end of the one-year measurement period for finalizing

the purchase price allocation, relevant information becomes available which would indicate adjustments are required to the purchase

price allocation, such adjustments will be recorded in the reporting period in which the adjustment amounts are determined.

adjustments, if any, will be related to assets that may have changes to valuation amounts that were not readily determinable at

acquisition date.

The contractual principal of loans at

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

The acquisition was consistent with the Company’s strategy to expand its presence in Northwest Ohio and to increase profitability

by introducing existing products and services to the acquired customer base.

The intangible assets are related to core deposits, which

are being amortized over 10 years on a straight-line basis.

For tax purposes, goodwill is non-deductible but will be evaluated annually

for impairment.

following table summarizes the fair value of the total consideration transferred as part of the acquisition as well as the fair value

of identifiable assets and liabilities assumed as of the effective date of the Edon transaction based on assumptions that are subject

to change as management continues to evaluate relevant information as it becomes available.

If, prior to the end of the one-year measurement

period for finalizing the purchase price allocation, relevant information becomes available which would indicate adjustments are required

to the purchase price allocation, such adjustments will be recorded in the reporting period in which the adjustment amounts are determined.

Potential adjustments, if any, will be related to assets that may have changes to valuation amounts that were not readily determinable

at acquisition date.

contractual principal of loans at the acquisition date was $16.3 million and the estimate of the contractual cash flows not expected

to be collected is $0.4 million.

Fair value of assets acquired

11 unchanged sentences

Total purchase price (cash)

Pro Forma Financial Information

The results of operations of Edon Bancorp

have been included in the Company’s consolidated financial statements since the acquisition date of June 5, 2020.

The following

schedule includes the pro forma results for the three and nine months ended September 30, 2020 and 2019, as if the Edon acquisition

had occurred as of the beginning of the reporting periods presented.

The acquisition added less than $0.1 million in revenue and

earnings to the Company for the three months and nine months ended September 30, 2020.

Forma Financial Information

results of operations of Edon have been included in the Company’s consolidated financial statements since the acquisition date

of June 5, 2020.

The following schedule includes the pro forma results for the three months ended March 31, 2021 and 2020, as if the

Edon acquisition had occurred as of the beginning of the reporting periods presented.

The acquisition would have added less than $0.1

million in revenue and earnings to the Company for the three months ended March 31, 2020.

Summary of Operations

Three Months Ended

Summary of Operations ($ in thousands)

Net interest income

Provision for loan losses

Net interest income after provision

Non interest income

Non interest expense

Income before income taxes

Income tax expense*

Preferred share dividends

Net income to common shareholders

Basic earnings per share

Diluted earnngs per share

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

Nine Months Ended

Summary of Operations ($ in thousands)

($ in thousands)

Net interest income

5 unchanged sentences

Income tax expense*

Preferred share dividends

Net income to common shareholders

Basic earnings per share

Diluted earnngs per share

Diluted earnings per share

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

Note 4 –

FOR SALE Securities

The amortized cost and appropriate fair values,

together with gross unrealized gains and losses, of securities at September 30, 2020 and December 31, 2019 were as follows:

AVAILABLE FOR SALE Securities

amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at March 31, 2021 and December

31, 2020 were as follows:

($ in thousands)

September 30, 2020

March 31, 2021:

Treasury and Government agencies

7 unchanged sentences

Other corporate securities

The amortized cost and fair value of securities

available for sale at September 30, 2020, by contractual maturity, are shown below.

Expected maturities will differ from contractual

maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

amortized cost and fair value of securities available for sale at March 31, 2021, by contractual maturity, are shown below.

maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call

or prepayment penalties.

($ in thousands)

4 unchanged sentences

Mortgage-backed securities

The fair value of securities pledged as collateral,

to secure public deposits and for other purposes, was $45.1 million at September 30, 2020 and $34.8 million at December 31, 2019.

The fair value of securities delivered for repurchase agreements was $24.9 million at September 30, 2020 and $19.5 million at December

There were no realized gains and losses

from sales of available-for-sale securities for the nine months ended September 30, 2020, and $0.2 million in realized gains

for the nine months ended September 30, 2019.

Certain investments in debt securities are

reported in the financial statements at an amount less than their historical cost.

Total fair value of these investments was $23.3

million at September 30, 2020, and $38.8 million at December 31, 2019, which was approximately 18 and 38 percent, respectively,

of the Company’s available-for-sale investment portfolio at such dates.

Based on evaluation of available evidence, including

recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management

believes the declines in fair value for these securities are temporary.

Should the impairment of any of these securities become

other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period

the other-than-temporary impairment is identified.

Securities with unrealized losses, aggregated by investment class

and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2020 and December

31, 2019 are as follows:

Less than 12 Months

fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $61.6 million at March 31, 2021

and $53.7 million at December 31, 2020.

The fair value of securities delivered for repurchase agreements was $32.2 million at March 31,

2021 and $28.2 million at December 31, 2020.

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

Certain investments in debt securities are reported in the consolidated

financial statements at an amount less than their historical cost.

Total fair value of these investments was $112.7 million at March 31,

2021, and $27.3 million at December 31, 2020, which was approximately 63 and 18 percent, respectively, of the Company’s available-for-sale

investment portfolio at such dates.

Based on evaluation of available evidence, including recent changes in market interest rates, credit

rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities

are temporary.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be

reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized

loss position, at March 31, 2021 and December 31, 2020 are as follows:

than 12 Months

Months or Longer

in thousands)

September 30, 2020

Unrealized Losses

Treasury and Government agencies

Mortgage-backed securities

State and political subdivisions

Other corporate securities

Less than 12 Months

Treasury and Government

Mortgage-backed

and political subdivisions

corporate securities

than 12 Months

Months or Longer

Treasury and Government

Mortgage-backed

and political subdivisions

corporate securities

total unrealized loss in the securities portfolio was $2.4 million as of March 31, 2021 compared to a $0.06 million unrealized loss at

December 31, 2020.

Unrealized Losses

Treasury and Government agencies

Mortgage-backed securities

State and political subdivisions

Other corporate securities

The total unrealized loss in the securities

portfolio was $0.06 million as of September 30, 2020 compared to a $0.2 million unrealized loss at December 31, 2019.

evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market

concern warrants such evaluation.

Consideration is given to (1) the length of time and the extent to which the fair value has been

less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell

the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of

its amortized cost.

Management has determined there is no other-than-temporary-impairment on its securities as of September 30,

NOTE 5 –

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently

when economic or market concern warrants such evaluation.

Consideration is given to (1) the length of time and the extent to which the

fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company

to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery

of its amortized cost.

Management has determined there is no other-than-temporary-impairment on its securities as of March 31, 2021.

LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans that management has the intent

and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances

adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums

or discounts on purchased loans.

Interest income is reported on the interest method and includes amortization of net deferred loan

fees and costs over the loan term.

that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding

principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized

premiums or discounts on purchased loans.

Interest income is reported on the interest method and includes amortization of net deferred

loan fees and costs over the loan term.

Generally, all loan classes are placed on nonaccrual status not later than 90 days past due,

2 unchanged sentences

on nonaccrual or charged-off is reversed against interest income.

The interest on these loans is accounted for on the cash-basis

or cost-recovery method, until qualifying for return to accrual.

Loans are returned to accrual status when all the principal and

interest amounts contractually due are brought current and future payments are reasonably assured.

The allowance for loan losses is established

as losses are estimated to have occurred through a provision for loan losses charged to income.

Loan losses are charged against

the allowance when management believes the non-collectability of a loan balance is probable.

Subsequent recoveries, if any, are

credited to the allowance.

The allowance for loan losses is evaluated

on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light

of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s

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 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.

recoveries, if any, are credited to the allowance.

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.

This evaluation is inherently subjective

as it requires estimates that are susceptible to significant revision as new information becomes available.

allowance consists of allocated and general components.

The allocated component relates to loans that are classified as impaired.

For those loans that are classified

as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the

impaired loan is lower than the carrying value of that loan.

The general component covers nonclassified loans and is based on historical

charge-off experience and expected loss given default derived from the Company’s internal risk rating process.

Other adjustments

may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are

not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based

on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal

or interest when due according to the contractual terms of the loan agreement.

Factors considered by management in determining

impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

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

those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable

market price) of the impaired loan is lower than the carrying value of that loan.

The general component covers nonclassified loans and

is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process.

Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality

that are not fully reflected in the historical loss or risk rating data.

loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the

scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Factors considered by

management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and

interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration

each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s

prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on

a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows

discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral

if the loan is collateral dependent.

When State Bank moves a loan to nonaccrual

status, total unpaid interest accrued to date is reversed from income.

Subsequent payments are applied to the outstanding principal

balance with the interest portion of the payment recorded on the balance sheet as a contra-loan.

Interest received on impaired

loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive

timely principal and interest payments.

It is at the discretion of management to determine when a loan is placed back on accrual

status upon receipt of six consecutive timely payments.

Large groups of smaller balance homogenous

loans are collectively evaluated for impairment.

Accordingly, State Bank does not separately identify individual consumer and residential

loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties

of the borrower.

Categories of loans at September 30, 2020 and December 31, 2019

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

State Bank moves a loan to nonaccrual status, total unpaid interest accrued to date is reversed from income.

Subsequent payments are

applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan.

Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes

a history of six consecutive timely principal and interest payments.

It is at the discretion of management to determine when a loan is

placed back on accrual status upon receipt of six consecutive timely payments.

groups of smaller balance homogenous loans are collectively evaluated for impairment.

Accordingly, State Bank does not separately identify

individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement

due to financial difficulties of the borrower.

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

($ in thousands)

December 2020

Commercial & industrial

6 unchanged sentences

Allowance for loan losses

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

Commercial & Industrial and Agricultural

risk characteristics of each loan portfolio segment are as follows:

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

& 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

2 unchanged sentences

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.

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.

Real Estate (Owner and Nonowner Occupied)

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

Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria.

1 unchanged sentence

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.

loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate

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

loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property

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.

are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate

repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability

of long-term financing.

Residential Real Estate, HELOC and Consumer

Residential and consumer loans consist of two

segments –

Real Estate, HELOC and Consumer

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.

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

the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels.

Repayment can also be impacted by changes in property values on residential properties.

Risk is mitigated by the fact that

these loans are of smaller individual amounts and spread over a large number of borrowers.

The following tables present the activity in

the allowance for loan losses for the three and nine months ended September 30, 2020 and September 30, 2019, and the recorded investment

in loans based on portfolio segment and impairment method as of September 30, 2020, December 31, 2019 and September 30, 2019.

Risk is mitigated by the fact that these loans

are of smaller individual amounts and spread over a large number of borrowers.

following tables present the activity in the allowance for loan losses for the three months ended March 31, 2021 and March 31, 2020,

and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2021 and December 31, 2020.

in thousands)

For the Three Months Ended

September 30, 2020

Beginning balance

Ending balance

For the Nine Months Ended

March 31, 2021

Beginning balance

1 unchanged sentence

For the Three Months Ended

Beginning balance

Provision (credit)

Ending balance

For the Nine Months Ended

September 30, 2019

March 31, 2020

Beginning balance

2 unchanged sentences

Loans Receivable at

September 30, 2020

March 31, 2021

Commercial & industrial

Commercial real estate

Residential real estate

Ending balance:

evaluated for impairment

individually evaluated for impairment

Ending balance:

collectively evaluated for

collectively evaluated for impairment

Ending balance:

individually evaluated for

individually evaluated for impairment

Ending balance:

collectively evaluated for

collectively evaluated for impairment

Loans Receivable at

December 31, 2020

Commercial & industrial

Commercial real estate

Residential real estate

Ending balance:

individually evaluated for

individually evaluated for impairment

Ending balance:

collectively evaluated for

collectively evaluated for impairment

Ending balance:

individually evaluated for

individually evaluated for impairment

Ending balance:

collectively evaluated for

Credit Risk Profile

The Company categorizes loans into risk categories

based on relevant information about the ability of borrowers to service their debt such as:

current financial information, historical

payment experience, credit documentation, public information and current economic trends, among other factors.

The Company analyzes

loans individually by classifying the loans as to credit risk.

This analysis includes loans with an outstanding balance greater

than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans.

This analysis is performed on

a quarterly basis.

collectively evaluated for impairment

Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such

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.

analysis is performed on a quarterly basis.

The Company uses the following definitions for risk ratings:

Pass (grades 1 –

Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan

Special Mention (5):

(grades 1 –

Loans which management has determined to be performing as expected and in agreement with the terms established

at the time of loan origination.

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.

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

Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Ordinarily, special mention credits have characteristics which corrective management action would remedy.

Substandard (6):

are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged,

Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

1 unchanged sentence

by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful (7):

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

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.

considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement

is not warranted.

Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all

or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following tables present the credit risk

profile of the Company’s loan portfolio based on rating category as of September 30, 2020 and December 31, 2019.

Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s

financial statement is not warranted.

Loans will be classified Loss when it is neither practical nor desirable to defer writing off or

reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

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

and December 31, 2020.

($ in thousands)

September 30, 2020

estate - owner

estate - nonowner

March 31, 2021

Commercial & industrial

Commercial real estate - owner occupied

Commercial real estate - nonowner occupied

Residential real estate

Special Mention (5)

1 unchanged sentence

December 31, 2020

estate - owner

estate - nonowner

Commercial & industrial

Commercial real estate - owner occupied

Commercial real estate - nonowner occupied

Residential real estate

Special Mention (5)

Substandard (6)

The Company evaluates the loan risk grading

system definitions and allowance for loan loss methodology on an ongoing basis.

The following tables present the Company’s

loan portfolio aging analysis as of September 30, 2020 and December 31, 2019.

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

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

($ in thousands)

Days Past Due

Commercial real estate

3 unchanged sentences

Residential real estate

Days Past Due

Commercial real estate

3 unchanged sentences

Residential real estate

All loans past due 90 days are systematically placed on nonaccrual

A loan is considered impaired, in accordance

with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State

Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.

loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions

have been granted to borrowers experiencing financial difficulties.

These concessions could include a reduction in the interest

rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following tables present impaired loan information as of and

for the nine months ended September 30, 2020 and 2019, and for the twelve months ended December 31, 2019:

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

loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information

and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual

terms of the loan.

Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings

where concessions have been granted to borrowers experiencing financial difficulties.

These concessions could include a reduction in

the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

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

ended December 31, 2020:

($ in thousands)

Three Months Ended

Unpaid Principal

Average Recorded

Interest Income

March 31, 2021

With no related allowance recorded:

3 unchanged sentences

nonowner occupied

Residential real

With a specific allowance recorded:

Residential real estate

With a specific allowance

Commercial & industrial

Commercial real estate -

2 unchanged sentences

nonowner occupied

Residential real

Residential real estate

Commercial & industrial

Commercial real estate -

2 unchanged sentences

nonowner occupied

Residential real

Three Months Ended

September 30, 2020

Average Recorded

Interest Income

($ in thousands)

With no related allowance recorded:

Commercial & industrial

Commercial real estate - owner occupied

Commercial real estate - nonowner occupied

Residential real estate

With a specific allowance recorded:

Commercial & industrial

Commercial real estate - owner occupied

Commercial real estate - nonowner occupied

Residential real estate

Commercial & industrial

Commercial real estate - owner occupied

Commercial real estate - nonowner occupied

Residential real estate

($ in thousands)

18 unchanged sentences

Residential real estate

September 30, 2019

Average Recorded

Interest Income

Three Months Ended

March 31, 2020

Average Recorded

15 unchanged sentences

Residential real estate

Impaired loans less than $100,000 are included

in groups of homogenous loans.

loans less than $100,000 are included in groups of homogenous loans.

These loans are evaluated based on delinquency status.

Interest income recognized on a cash basis

does not materially differ from interest income recognized on an accrual basis.

Troubled Debt Restructured (TDR) Loans

TDRs are modified loans where a concession

was provided to a borrower experiencing financial difficulties.

Loan modifications are considered TDRs when the concessions provided

are not available to the borrower through either normal channels or other sources.

However, not all loan modifications are TDRs.

TDR Concession Types

The Company’s standards relating to loan

modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations.

Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific

circumstances at a point in time.

All loan modifications, including those classified as TDRs, are reviewed and approved by management.

income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

Debt Restructured (TDR) Loans

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.

Concession Types

Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow

analysis, and collateral valuations.

Each potential loan modification is reviewed individually and the terms of the loan are modified

to meet a borrower’s specific circumstances at a point in time.

All loan modifications, including those classified as TDRs, are

reviewed and approved by management.

The types of concessions provided to borrowers include:

Interest rate reduction:

A reduction of

the stated interest rate to a nonmarket rate for the remaining original life of the loan.

The Company also may grant interest rate

concessions for a limited timeframe on a case by case basis.

Amortization or maturity date change:

A change in the amortization or maturity date beyond what the collateral supports, including a concession that does any of the

(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.

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

(3) Extends the maturity date or dates of the debt beyond what the collateral supports.

rate reduction:

A reduction of the stated interest rate to a nonmarket rate for the remaining

original life of the loan.

The Company also may grant interest rate concessions for a limited

timeframe on a case by case basis.

● Amortization

or maturity date change:

A change in the amortization or maturity date beyond what the collateral

supports, including a concession that does any of the following:

(1) Lengthens

the amortization period of the amortized principal beyond market terms.

This concession reduces

the minimum monthly payment and increases the amount of the balloon payment at the end of

the term of the loan.

Principal is generally not forgiven.

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.

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.

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.

During the nine months

ended September 30, 2020, the Company had no new TDR activity.

The following table represents

new TDR activity for the nine months ended September 30, 2019:

($ in thousands)

Pre-Modification

Recorded Balance

Commercial & industrial

Total modifications

Commercial & industrial

Total modifications

There were no TDR’s modified during the past twelve months that

have subsequently defaulted.

On March 27, 2020, President Trump signed the

CARES Act, which extends the duration of loan forbearance (deferral) agreements beyond the current three-month period before a

loan is considered to be a troubled debt restructure.

As of September 30, 2020, the Company had approved 26 loan deferral requests

for clients with a total dollar amount of $38.4 million, which do not constitute TDR’s as a result of the CARES act.

NOTE 6 –

FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

The Company acquired loans in the acquisition

of The Edon State Bank Company of Edon, Ohio, effective June 5, 2020.

None of the acquired loans had evidence of deterioration

of credit quality since origination, and it was probable, at acquisition, that all contractually required payments would be collected.

In addition, there may be instances where renewing loans potentially require non-market terms

and would then be reclassified as TDRs.

A concession that is not categorized as one of the concessions described above.

These concessions

include, but are not limited to:

principal forgiveness, collateral concessions, covenant

concessions, and reduction of accrued interest.

Principal forgiveness may result from any

TDR modification of any concession type.

the three months ended March 31, 2021 and March 31, 2020, the Company had no new TDR activity.

were no TDRs modified during the past twelve months that have subsequently defaulted.

March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),

which extends the duration of loan forbearance (deferral) agreements beyond the current three-month period before a loan is considered

As of March 31, 2021, the Company had approved four loan deferral requests for two clients with a total dollar amount of

$4.9 million, which do not constitute TDRs as a result of the CARES Act.

ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

Company acquired loans in the acquisition of The Edon State Bank Company of Edon, Ohio, effective June 5, 2020.

None of the acquired

loans had evidence of deterioration of credit quality since origination, and it was probable, at acquisition, that all contractually

required payments would be collected.

The following table presents the carrying amount

of the acquired loans included in the balance sheet as of September 30, 2020:

of the acquired loans included in the consolidated balance sheet as of March 31, 2021:

($ in thousands)

September 30,

March 31, 2021

Commercial & industrial

2 unchanged sentences

Residential real estate

Home equity line of credit (HELOC)

Accretable yield, or income expected to be collected as of September

30, 2020 is $0.4 million.

NOTE 7 –

SERVICING RIGHTS

Mortgage loans serviced

for others are not included in the accompanying balance sheets.

The unpaid principal balance of mortgage loans serviced for others

approximated $1.3 billion at September 30, 2020 and $1.2 billion at December 31, 2019.

Contractually specified servicing fees of

approximately $2.4 million and $2.1 million were included in mortgage loan servicing fees in the consolidated income statement

for the nine months ended September 30, 2020 and 2019, respectively.

The following table summarizes

mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance:

yield, or income expected to be collected as of March 31, 2021 was $0.3 million.

MORTGAGE SERVICING RIGHTS

Mortgage loans serviced for others are not included

in the accompanying consolidated balance sheets.

The unpaid principal balance of mortgage loans serviced for others approximated $1.3

billion at March 31, 2021 and $1.3 billion at December 31, 2020.

Contractually specified servicing fees of approximately $0.8 million

and $0.8 million were included in mortgage loan servicing fees in the consolidated income statement for the three months ended March 31,

2021 and 2020, respectively.

following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation

($ in thousands)

3 unchanged sentences

Net change in valuation allowance

Carrying amount, September 30

Carrying amount, March 31

Valuation allowance:

NOTE 8 –

Goodwill is recorded

on the acquisition date of an entity.

During the measurement period, the Company may record subsequent adjustments to goodwill

for provisional amounts recorded at the acquisition date.

The acquisition of The Edon State Bank Company of Edon, Ohio, on June

5, 2020, and the purchase of an Ohio- based title agency through a newly-formed, wholly-owned subsidiary, SBFG Title, LLC, on March

15, 2019 resulted in approximately $4.3 million and $1.4 million, respectively, in goodwill.

A summary of the activity

in goodwill is presented below:

September 30,

Increase (decrease)

summary of the activity in goodwill is presented below:

Three Months Ended

March 31, 2021

March 31, 2020

($ in thousands)

Carrying Amount

Beginning balance

Acquired goodwill

Measurement period adjustments

Ending balance

Goodwill is not amortized but is

evaluated for impairment annually as of December 31, or more frequently if events or circumstances that indicate an

is not amortized but is evaluated for impairment annually, and on an interim basis if events or circumstances change that indicate an

impairment may exist.

When assessing goodwill for impairment, first, a qualitative assessment can be made to determine

whether it is more likely than not that the estimated fair value of a reporting unit is less that its estimated carrying

If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed.

Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment.

Goodwill was assessed for impairment using a quantitative test performed

as of September 30, 2020.

The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill

impairment existed as of that date.

No events or circumstances since the September 30, 2020 impairment test were noted that would

indicate it was more likely than not a goodwill impairment exists.

NOTE 9 –

When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is

more likely than not that the estimated fair value of a reporting unit is less that its estimated carrying value.

If the results of the

qualitative assessment are not conclusive, a quantitative goodwill test is performed.

Alternatively, a quantitative goodwill test can

be performed without performing a qualitative assessment.

was assessed for impairment using a quantitative test performed as of September 30, 2020 and reevaluated as of December 31, 2020.

Company again reviewed goodwill as of March, 31, 2021 and the estimated fair value of the reporting unit exceeded the net carrying value,

and therefore no goodwill impairment existed as of that date.

No events or circumstances since the December 31, 2020 impairment test

were noted that would indicate it was more likely than not a goodwill impairment exists.

DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks

arising from both its business operations and economic conditions.

The Company manages its exposures to a wide variety of business

and operational risks primarily through management of its core business activities.

The Company manages economic risks, including

interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities

and through the use of derivative financial instruments.

Management Objective of Using Derivatives

Company is exposed to certain risks arising from both its business operations and economic conditions.

The Company manages its exposures

to a wide variety of business and operational risks primarily through management of its core business activities.

The Company manages

economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets

and liabilities and through the use of derivative financial instruments.

Specifically, the Company enters into derivative financial instruments

to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash

amounts, the value of which are determined by interest rates.

The Company’s derivative financial instruments are used to

manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related

to certain variable-rate assets.

Non-designated Hedges

The Company does not use derivatives for

trading or speculative purposes.

Derivatives not designated as hedges are not speculative and result from a service the Company

provides to certain customers.

The Company executes interest rate swaps with commercial banking customers to facilitate their respective

risk management strategies.

Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company

executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.

As the interest

rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both

the customer swaps and the offsetting swaps are recognized directly in earnings.

Additionally, the Company enters into forward

contracts for the future delivery of mortgage loans to third-party investors and enters into Interest Rate Lock Commitments (“IRLCs”)

with potential borrowers to fund specific mortgage loans that will be sold into the secondary market.

The forward contracts that

are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund

The 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.

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

Non-designated

Company does not use derivatives for trading or speculative purposes.

Derivatives not designated as hedges are not speculative and result

from a service the Company provides to certain customers.

The Company executes interest rate swaps with commercial banking customers

to facilitate their respective risk management strategies.

Those interest rate swaps are simultaneously hedged by offsetting interest

rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value

of both the customer swaps and the offsetting swaps are recognized directly in earnings.

Additionally,

the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into Interest

Rate Lock Commitments (“IRLCs”) with potential borrowers to fund specific mortgage loans that will be sold into the secondary

The forward contracts that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s

commitment to fund the loans.

The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value

with changes in fair value reflected in noninterest income on the consolidated statements of income.

The fair value of derivative instruments

with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while derivative

instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets.

The table below presents the notional amount

and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of September 30, 2020 and December

September 30,

($ in thousands)

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.

table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized

as of March 31, 2021 and December 31, 2020.

March 31, 2021

December 31, 2020

Asset Derivatives

7 unchanged sentences

Total contracts

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.

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 nine months ended September

30, 2020 and 2019.

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.

following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments

for the three months ended March 31, 2021 and 2020.

Amount of gain (loss)

7 unchanged sentences

Gain on sale of mortgage loans & OMSR

The following table shows the offsetting of financial assets

and derivative assets at September 30, 2020 and December 31, 2019.

Gross amounts offset in the

Net amounts of assets presented in the

following table shows the offsetting of financial assets and derivative assets at March 31, 2021 and December 31, 2020.

Gross amounts offset

Net amounts of assets presented

Gross amounts not offset in the consolidated

1 unchanged sentence

($ in thousands)

recognized assets

amounts of recognized assets

in the consolidated balance sheet

consolidated balance sheet

Financial instruments

collateral received

September 30, 2020

Cash collateral received

March 31, 2021

Interest rate swaps

1 unchanged sentence

Interest rate swaps

The following table shows the offsetting of financial liabilities

and derivative liabilities at September 30, 2020 and December 31, 2019.

amounts offset in

Net amounts of liabilities

presented in the

Gross amounts not

offset in the consolidated balance sheet

following table shows the offsetting of financial liabilities and derivative liabilities at March 31, 2021 and December 31, 2020.

Gross amounts offset

Net amounts of liabilities presented

Gross amounts not offset in

the consolidated balance sheet

($ in thousands)

recognized liabilities

amounts of recognized liabilities

in the consolidated balance sheet

consolidated balance sheet

Financial instruments

collateral pledged

September 30, 2020

Cash collateral pledged

March 31, 2021

Interest rate swaps

1 unchanged sentence

Interest rate swaps

NOTE 10 –

SHORT-TERM BORROWINGS

($ in thousands)

September 30,

March 31, 2021

December 31, 2020

Securities Sold Under Repurchase Agreements

The Company has retail repurchase agreements

to facilitate cash management transactions with commercial customers.

These obligations are secured by agency and mortgage-backed

securities and such collateral is held by the Federal Home Loan Bank.

These securities have various maturity dates from 2022 through

As of September 30, 2020, these repurchase agreements were secured by agency securities and mortgage-backed securities with

corresponding liabilities of $10.8 million and $14.1 million, respectively.

Company has retail repurchase agreements to facilitate cash management transactions with commercial customers.

These obligations are

secured by agency and mortgage-backed securities and such collateral is held by the Federal Home Loan Bank.

These securities have various

maturity dates from 2022 through 2061.

As of March 31, 2021, these repurchase agreements were secured by securities totaling $32.2 million.

The repurchase agreements mature within one month.

The Company has borrowing capabilities

at the Federal Reserve Discount Window by pledging either securities or loans as collateral.

As of September 30, 2020, there was

no collateral pledged or borrowings drawn at the Discount Window.

The Company participated in the Paycheck

Protection Program (“PPP”) and also has the ability to borrow from the Federal Reserve’s special purpose Paycheck

Protection Program Liquidity Facility (“PPPLF”) for additional funding.

At September 30, 2020, there were no borrowings

from the PPLF.

At September 30, 2020 and December 31,

2019, the Company had $41.0 million in federal funds lines, of which none was drawn.

NOTE 11 –

FEDERAL HOME LOAN BANK

The FHLB advances were secured by $150.1

million in mortgage loans at September 30, 2020.

Advances, at interest rates from 2.77 to 2.93 percent, are subject to restrictions

or penalties in the event of prepayment.

Aggregate annual maturities of FHLB advances at September 30, 2020 were:

Company has borrowing capabilities at the Federal Reserve Discount Window by pledging either securities or loans as collateral.

March 31, 2021, there was no collateral pledged or borrowings drawn at the Discount Window.

Company participated in the Paycheck Protection Program (“PPP”) and, as a result, has the ability to borrow from the Federal

Reserve’s special purpose Paycheck Protection Program Liquidity Facility (“PPPLF”) for additional funding.

31, 2021, there were no borrowings from the PPPLF.

March 31, 2021 and December 31, 2020, the Company had $41.0 million in federal funds lines, of which none was drawn.

FEDERAL HOME LOAN BANK ADVANCES

FHLB advances were secured by $146.6 million in mortgage loans at March 31, 2021.

Advances, at interest rates from 2.77 to 2.93 percent,

are subject to restrictions or penalties in the event of prepayment.

Aggregate annual maturities of FHLB advances at March 31, 2021 were:

($ in thousands)

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

The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar

to the Capital Securities.

Distributions on the Capital Securities are payable quarterly at a variable rate that is based upon

the 3-month LIBOR plus 1.80 percent and are included in interest expense in the consolidated financial statements.

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 September 30, 2020 and December 31, 2019

September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with

a liquidation amount of $1,000 per security.

The proceeds of the offering were loaned to the Company in exchange for junior subordinated

debentures with terms similar to the Capital Securities.

Distributions on the Capital Securities are payable quarterly at a variable

rate that is based upon the 3-month LIBOR plus 1.80 percent and are included in interest expense in the consolidated financial statements.

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 March 31, 2021 and December 31,

2020 was $10.3 million, with a maturity date of September 15, 2035.

NOTE 13 –

FAIR VALUE OF ASSETS

AND LIABILITIES

Fair value is the price that would be received

to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

FAIR VALUE OF ASSETS AND LIABILITIES

value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants

at the measurement date.

A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs.

There is a hierarchy

of three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or

Level 2 Observable inputs other than Level 1 prices, such as quoted

prices for similar assets or liabilities;

quoted prices in markets that are not active;

or other inputs that are observable or

can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no

market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation

methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets,

as well as the general classifications of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities

The fair values of available-for-sale securities

are determined by various valuation methodologies.

Level 1 securities include money market mutual funds.

Level 1 inputs include

quoted prices in an active market.

There is a hierarchy of three levels of inputs that may be used to measure fair value:

prices in active markets for identical assets or liabilities

inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;

quoted prices in markets that are not

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of

the assets or liabilities

3 Unobservable

inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies

and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying consolidated balance sheets, as

well as the general classifications of such assets pursuant to the valuation hierarchy.

Available-for-Sale

fair values of available-for-sale securities are determined by various valuation methodologies.

Level 1 securities include money market

mutual funds.

Level 1 inputs include quoted prices in an active market.

Level 2 securities include U.S.

treasury and government agencies, mortgage-backed securities,

and obligations of political and state subdivisions.

Level 2 inputs do not include quoted prices for individual securities in active

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.

treasury and government agencies,

mortgage-backed securities, and obligations of political and state subdivisions.

Level 2 inputs do not include quoted prices for individual

securities in active markets;

however, they do include inputs that are either directly or indirectly observable for the individual security

being valued.

Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds,

credit risks and default rates.

Also included are inputs derived principally from or corroborated by observable market data by correlation

or other means.

Interest Rate Contracts

The fair values of interest rate contracts

are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account

underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness

of the counterparties.

Forward contracts

The fair values of forward contracts on

to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1).

Interest Rate Lock Commitments

The fair value of IRLCs are determined

using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates

(the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s

option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market

costs (Level 3).

The following table presents the fair value

measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair

value measurements fall at September 30, 2020 and December 31, 2019.

Rate Contracts

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.

fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto

Interest Rate Lock Commitments (IRLCs)

The fair value of IRLCs are determined using the

projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability

that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage

of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).

The following table presents the fair value measurements

of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements

fall at March 31, 2021 and December 31, 2020.

($ in thousands)

12 unchanged sentences

State and political subdivisions

Other corporate securities

Interest rate contracts - assets

2 unchanged sentences

Level 1 –

Quoted Prices in Active Markets

for Identical Assets

Quoted Prices in Active Markets for

Identical Assets

Level 2 –

Significant Other Observable

Significant Other Observable Inputs

Level 3 –

Significant Unobservable Inputs

The following table reconciles the beginning

and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant

unobservable (Level 3) inputs for the three months ended March 31, 2021 and 2020.

Interest Rate Lock Commitments for the Three Months Ended

($ in thousands)

Beginning balance January 1

Total realized gains (losses)

Change in fair value

Ending balance, March 31

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,

Loans for which it is probable the Company

will not collect all principal and interest due according to contractual terms are measured for impairment.

The estimated fair

value of collateral-dependent impaired loans is based on the appraised value of the collateral, less estimated cost to sell.

Collateral-dependent

impaired loans are classified within Level 3 of the fair value hierarchy.

This method requires obtaining an independent appraisal

of the collateral, which is reviewed for accuracy and consistency by Credit Administration.

These appraisers are selected from

the list of approved appraisers maintained by management.

The appraised values are reduced by applying a discount factor to the

value based on the Company’s loan review policy.

All impaired loans held by the Company were collateral dependent at September

30, 2020 and December 31, 2019.

methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated

balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Collateral-dependent Impaired Loans, Net of

Loans for which it is probable the Company will

not collect all principal and interest due according to contractual terms are measured for impairment.

The estimated fair value of collateral-dependent

impaired loans is based on the appraised value of the collateral, less estimated cost to sell.

Collateral-dependent impaired loans are

classified within Level 3 of the fair value hierarchy.

This method requires obtaining an independent appraisal of the collateral, which

is reviewed for accuracy and consistency by Credit Administration.

These appraisers are selected from the list of approved appraisers

maintained by management.

The appraised values are reduced by applying a discount factor to the value based on the Company’s loan

review policy.

All impaired loans held by the Company were collateral dependent at March 31, 2021 and December 31, 2020.

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

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;

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;

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.

and applying certain prevailing assumptions used in the marketplace.

Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

These mortgage servicing

rights are tested for impairment on a quarterly basis.

($ in thousands)

Fair values at

Impaired loans

1 unchanged sentence

($ in thousands)

Fair values at

Impaired loans

Mortgage servicing rights

Level 1 - quoted prices in active markets for identical assets

1 - quoted prices in active markets for identical assets

Level 2 - significant other observable inputs

Level 3 - significant unobservable inputs

3 - significant unobservable inputs

Unobservable (Level 3) Inputs

The following table presents quantitative

information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

The following table presents quantitative information

about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

Fair value at

1 unchanged sentence

in thousands)

Valuation technique

Unobservable inputs

7 unchanged sentences

Constant prepayment rate

Discounted cash flow

P&I earnings credit

1 unchanged sentence

Inflation for cost of servicing

Discounted cash flow

Loan closing rates

Fair Value at

1 unchanged sentence

in thousands)

Valuation technique

Unobservable inputs

7 unchanged sentences

Constant prepayment rate

Discounted cash flow

P&I earnings credit

1 unchanged sentence

Inflation for cost of servicing

There were no changes in the inputs or

methodologies used to determine fair value at September 30, 2020 as compared to December 31, 2019.

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, Federal Reserve

and Federal Home Loan Bank Stock and Accrued Interest Receivable and Payable

Discounted cash flow

Loan closing rates

There were no changes in the inputs or methodologies

used to determine fair value at March 31, 2021 as compared to December 31, 2020.

The following methods were used to estimate the

fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.

Cash and Due From Banks, Federal Reserve and

Federal Home Loan Bank Stock and Accrued Interest Receivable and Payable

The carrying amount approximates the fair value.

Loans Held for Sale

The fair value of loans held for sale is

based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating

the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.

The estimated fair value of loans as of

September 30, 2020 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, FHLB advances & Repurchase

Deposits include demand deposits, savings

accounts, and certain money market deposits.

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.

The estimated fair value of loans as of March

31, 2021 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, FHLB Advances & Repurchase Agreements

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 State Bank could pay on similar instruments with similar

terms and maturities at September 30, 2020 and December 31, 2019.

The estimated fair value for fixed-maturity time deposits,

as well as borrowings, is based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities

at March 31, 2021 and December 31, 2020.

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 September 30, 2020 and December 31, 2019 and are not considered significant to this presentation.

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 March 31, 2021 and December 31, 2020 and are not considered significant to this presentation.

Trust Preferred Securities

1 unchanged sentence

is estimated by discounting the cash flows using an appropriate discount rate.

The following table presents estimated

fair values of the Company’s other financial instruments carried at other than fair value.

The fair values of certain of

these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties.

Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between

willing parties, other than in a forced or liquidation sale.

Because no market exists for certain of these financial instruments,

and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown

below represent values at which the respective financial instruments could be sold individually or in the aggregate.

The following table presents estimated fair values

of the Company’s other financial instruments carried at other than fair value.

The fair values of certain of these instruments were

calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties.

Fair value is the

estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than

in a forced or liquidation sale.

Because no market exists for certain of these financial instruments, and because management does not

intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the

respective financial instruments could be sold individually or in the aggregate.

($ in thousands)

Fair value measurements using

September 30, 2020

March 31, 2021

Financial assets

15 unchanged sentences

Cash and due from banks

Interest bearing time deposits

Loans held for sale

3 unchanged sentences

Financial liabilities

Repurchase agreements

Short-term borrowings

FHLB advances

5 unchanged sentences

approved a new share-based incentive compensation plan, the SB Financial Group, Inc.

2017 Stock Incentive Plan (the “2017

Plan”), which replaced the Company’s 2008 Stock Incentive Plan (the “2008 Plan”

and, together with the 2017

Plan, the “Plans”).

The 2017 Plan permits the Company to grant or award incentive stock options, nonqualified stock

options, stock appreciation rights, restricted stock, and restricted stock units to employees and directors of the Company and

its subsidiaries.

A total of 500,000 common shares of the Company are available for grants or awards under the 2017 Plan, of which

56,324 shares had been granted under the plan as of September 30, 2020.

The 2008 Plan, which was approved by the

Company’s shareholders in April 2008, permitted the grant or award of incentive stock options, nonqualified stock options,

stock appreciation rights, and restricted stock for up to 250,000 common shares of the Company.

While awards granted under the

2008 Plan remain outstanding, no further awards could be granted under the 2008 Plan after April 2018.

The Plans are 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.

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.

Stock option awards are granted with an

exercise price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on

5 years of continuous service and have 10-year contractual terms.

The fair value of each option award was estimated on the date

of grant using the Black-Scholes valuation model.

No options were granted in the first nine months of 2020.

A summary of stock option activity under

the Company’s plans as of September 30, 2020 and changes during the quarter then ended, is presented below:

($ in thousands - except per share data)

Weighted- Average Exercise Price

Weighted- Average Remaining Term

Aggregate Intrinsic Value

Outstanding, December 31, 2019

Outstanding, September 30, 2020

Exercisable, September 30, 2020

All stock options included in the table

above were granted under the 2008 Plan.

These shares had an expiration date of February 17, 2020.

During the first nine months,

the 26,950 option shares exercised had a total intrinsic value of $0.3 million and the cash received from these exercised options

was $0.2 million.

The tax benefit from these transactions was immaterial.

On February 17, 2020, the remaining 1,300 unexercised

option shares expired.

As of September 30, 2020, there were no outstanding or exercisable options remaining, and no unrecognized

compensation cost related to stock option awards granted under the 2008 Plan.

On February 5, 2013, the Company adopted

a Long Term Incentive (LTI) Plan.

The Plan awards restricted stock in the Company to certain key executives under the Plans.

restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives.

2019, the Company met certain performance targets under the LTI Plan and a total of 16,442 shares of restricted stock were approved

and issued in February of 2020.

The compensation cost charged against income for the LTI Plan was $0.3 million, with a total income

tax benefit recognized in the income statement of $0.07 million.

As of September 30, 2020, there was $0.47

million of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted

stock awards under the Plans which were granted in accordance with the LTI plan.

That cost is expected to be recognized over a

weighted-average period of 2.3 years.

A summary of restricted stock activity

under the Company’s plans as of September 30, 2020 and changes during the quarter then ended, is presented below:

Average Value per Share

Nonvested, December 31, 2019

Nonvested, September 30, 2020

2017 Stock Incentive Plan (the “2017 Plan”),

which replaced the Company’s 2008 Stock Incentive Plan.

The 2017 Plan permits the Company to grant or award incentive stock options,

nonqualified stock options, stock appreciation rights, restricted stock, and restricted stock units to employees and directors of the

Company and its subsidiaries.

A total of 500,000 common shares of the Company are available for grants or awards under the 2017 Plan,

of which 89,013 shares had been granted under the plan as of March 31, 2021.

The 2017 Plan is intended to advance the interests

of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an

opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards.

The 2017 Plan permits

equity-based awards to be used to attract, motivate, reward and retain highly competent individuals upon whose judgment, initiative, leadership

and efforts are key to the success of the Company by encouraging those individuals to become shareholders of the Company.

Stock option awards are granted with an exercise

price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on 5 years of continuous

service and have 10-year contractual terms.

The fair value of each option award is estimated on the date of grant using the Black-Scholes

valuation model.

As of March 31, 2021, there were no stock options

outstanding, and no unrecognized compensation cost related to stock option awards.

No stock options were granted in the first three months

On February 5, 2013, the Company adopted a Long

Term Incentive (LTI) Plan, which provides for awards of restricted stock in the Company to certain key executives.

These restricted stock

awards vest over a four-year period and are intended to assist the Company in retention of key executives.

During 2020, the Company met

certain performance targets under the LTI Plan and a total of 33,604 shares of restricted stock were approved and issued in February 2021.

The compensation cost charged against income for the LTI Plan was $0.1 million, with a total income tax benefit recognized in the income

statement of $0.03 million.

As of March 31, 2021, there was $0.88 million

of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards

under the 2017 Plan which were granted in accordance with the LTI plan.

That cost is expected to be recognized over a weighted-average

period of 2.6 years.

A summary of restricted stock activity under the

Company’s 2017 Plan as of March 31, 2021 and changes during the quarter then ended, is presented below:

Weighted-Average

Value per Share

Nonvested, beginning of year

Nonvested, end of year

NOTE 15 –

2 unchanged sentences

that arise primarily in the ordinary course of business.

Additionally, the Company is subject to periodic examinations by various

regulatory agencies.

It is the opinion of management that the disposition or ultimate resolution of any such claims, lawsuits and

examinations pending at September 30, 2020, will not have a material adverse effect on the consolidated financial position, results

of operations and cash flow of the Company.

Management’s Discussion

and Analysis of Financial Condition and Results of Operations

Additionally, the Company is subject to periodic examinations by various regulatory

It is the opinion of management that the disposition or ultimate resolution of any such claims, lawsuits and examinations pending

at March 31, 2021, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow

of the Company.

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking

2 unchanged sentences

that are provided to assist in the understanding of anticipated future financial performance.

Forward-looking statements provide

current expectations or forecasts of future events and are not guarantees of future performance.

Examples of forward-looking statements

(a) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and

other financial items;

(b) statements of plans and objectives of the Company or our management or Board of Directors, including

those relating to products or services;

Forward-looking statements provide current

expectations or forecasts of future events and are not guarantees of future performance.

Examples of forward-looking statements include:

(a) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial

(b) statements of plans and objectives of the Company or our management or Board of Directors, including those relating to products

(d) statements regarding future customer

attraction or retention;

and (e) statements of assumptions underlying such statements.

Words such as “anticipates”,

“believes”, “plans”, “intends”, “expects”, “projects”, “estimates”,

“should”, “may”, “would be”, “will allow”, “will likely result”, “will

continue”, “will remain”, or other similar expressions are intended to identify forward-looking statements, but

are not the exclusive means of identifying those statements.

Forward-looking statements are based on management’s expectations

and are subject to a number of risks and uncertainties.

Although management believes that the expectations reflected in such forward-looking

statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Risks and uncertainties

that could cause actual results to differ materially include, without limitation, risks and uncertainties inherent in the national

and regional banking industry including impacts from the COVID-19 pandemic on local, national and global economic conditions as

well as the various governmental responses to the COVID-19 pandemic, including stimulus packages and programs;

potential litigation

or other risks related to participation in the U.S.

Small Business Administration’s (“SBA”) Paycheck Protection

Program (“PPP”);

changes in economic conditions in the market areas in which the Company and its subsidiaries operate,

changes in policies by regulatory agencies, changes in accounting standards and policies, changes in tax laws, fluctuations in

interest rates, demand for loans in the market areas in which the Company and its subsidiaries operate, increases in FDIC insurance

premiums, changes in the competitive environment, losses of significant customers, geopolitical events and the loss of key personnel.

Additional detailed information concerning a number of important factors which could cause actual results to differ materially

from the forward-looking statements contained in Management’s Discussion and Analysis of Financial Condition and Results

of Operations is available in the Company’s filings with the Securities and Exchange Commission, including the risks identified

under the heading “Item 1A.

Risk Factors”

of Part I of the Company’s Annual Report on Form 10-K for the fiscal

year ended December 31, 2019 and under the heading “Item 1A.

(d) statements regarding future customer attraction or retention;

statements of assumptions underlying such statements.

Words such as “anticipates”, “believes”, “plans”,

“intends”, “expects”, “projects”, “estimates”, “should”, “may”,

“would be”, “will allow”, “will likely result”, “will continue”, “will remain”,

or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying those

Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties.

Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ

materially from those expressed or implied in such statements.

Risks and uncertainties that could cause actual results to differ materially

include, without limitation, risks and uncertainties inherent in the national and regional banking industry including impacts from the

COVID-19 pandemic on local, national and global economic conditions as well as the various governmental responses to the COVID-19 pandemic,

including stimulus packages and programs;

potential litigation or other risks related to participation in the U.S.

Small Business Administration’s

(“SBA”) Paycheck Protection Program (“PPP”);

changes in economic conditions in the market areas in which the Company

and its subsidiaries operate;

changes in policies by regulatory agencies;

the transition away from LIBOR as a reference rate for financial

operating risks;

changes in accounting standards and policies;

changes in tax laws;

fluctuations in interest rates;

for loans in the market areas in which the Company and its subsidiaries operate;

increases in FDIC insurance premiums;

changes in the

competitive environment;

losses of significant customers;

geopolitical events;

and the loss of key personnel.

Additional detailed information

concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained

in Management’s Discussion and Analysis of Financial Condition and Results of Operations is available in the Company’s filings

with the Securities and Exchange Commission, including the risks identified under the heading “Item 1A.

Risk Factors”

of Part II of the Company’s Quarterly

Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.

Undue reliance should not be placed on the forward-looking

statements, which speak only as of the date hereof.

Except as may be required by law, the Company undertakes no obligation to update

any forward-looking statement to reflect unanticipated events or circumstances after the date on which the statement is made.

I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Undue reliance should not be placed on

the forward-looking statements, which speak only as of the date hereof.

Except as may be required by law, the Company undertakes no obligation

to update any forward-looking statement to reflect unanticipated events or circumstances after the date on which the statement is made.

Overview of SB Financial

2 unchanged sentences

or the “Company”) is an Ohio corporation and a financial holding company registered with the Federal Reserve Board.

SB Financial’s wholly-owned subsidiary, The State Bank and Trust Company (“State Bank”), is an Ohio-chartered

bank engaged in commercial banking.

SB Financial’s

wholly-owned subsidiary, The State Bank and Trust Company (“State Bank”), is an Ohio-chartered bank engaged in commercial

Rurban Statutory Trust II (“RST II”)

was established in August 2005.

In September 2005, RST II completed a pooled private offering of 10,000 Trust Preferred 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 of the Company with terms substantially similar to the Trust Preferred Securities.

The sole assets of RST

II are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee

by the Company of the obligations of RST II.

(“RFCBC”) is an

Ohio corporation and wholly-owned subsidiary of the Company that was incorporated in August 2004.

RFCBC operates as a loan subsidiary

in servicing and working out problem loans.

In September 2005, RST II completed a pooled private offering of 10,000 Trust Preferred Securities with

a liquidation amount of $1,000 per security.

The proceeds of the offering were loaned to SB Financial in exchange for junior subordinated

debentures of SB Financial with terms substantially similar to the Trust Preferred Securities.

The sole assets of RST II are the junior

subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by SB Financial

of the obligations of RST II.

(“RFCBC”) is an Ohio corporation

and wholly-owned subsidiary of SB Financial that was incorporated in August 2004.

RFCBC operates as a loan subsidiary in servicing and

working out problem loans.

State Bank Insurance, LLC (“SBI”)

is an Ohio corporation and a wholly-owned subsidiary of State Bank incorporated in June of 2010.

SBI is an insurance company that

engages in the sale of insurance products to retail and commercial customers of State Bank.

SBFG Title, LLC (“SBFG Title”)

is an Ohio corporation that was formed in March 2019.

SBI is an insurance company that engages

in the sale of insurance products to retail and commercial customers of State Bank.

SBFG Title, LLC (“SBFG Title”) is

an Ohio corporation that was formed in March 2019.

SBFG Title engages in the sale of title insurance services.

SB Captive, Inc.

(“Captive”)

is a Nevada corporation that was formed in March 2019.

(“Captive”) is a

Nevada corporation that was formed in March 2019.

SB Captive pools insurance risk among like sized banking institutions.

Unless the context indicates otherwise,

all references herein to “we”, “us”, “our”, or the “Company”

refer to SB Financial

and its consolidated subsidiaries.

Unless the context indicates otherwise, all references

herein to “we”, “us”, “our”, or the “Company”

refer to SB Financial Group, Inc.

consolidated subsidiaries.

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements

included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 describes the significant

accounting policies used in the development and presentation of the Company’s financial statements.

The accounting and reporting

policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general

practices within the banking industry.

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, and/or complex.

Allowance for Loan Losses - The

allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio.

Management evaluates

the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio

composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory

guidance and economic factors.

included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 describes the significant accounting

policies used in the development and presentation of the Company’s financial statements.

The accounting and reporting policies of

the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within

the banking industry.

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, and/or complex.

Allowance for Loan Losses - The allowance

for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio.

Management evaluates the adequacy

of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio composition (including

product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic

This evaluation is inherently subjective, as it requires the use of significant management estimates.

Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities,

rating migrations, loss severity and economic and political conditions.

The allowance is increased through provisions charged to

operating earnings and reduced by net charge-offs.

The Company determines the amount of the

allowance based on relative risk characteristics of the loan portfolio.

The allowance recorded for commercial loans is based on

reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience.

allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud

loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of

The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral

for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Many factors can affect

management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity

and economic and political conditions.

The allowance is increased through provisions charged to operating earnings and reduced by net

The Company determines the amount of the allowance

based on relative risk characteristics of the loan portfolio.

The allowance recorded for commercial loans is based on reviews of individual

credit relationships and an analysis of the migration of commercial loans and actual loss experience.

The allowance recorded for homogeneous

consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and

historical losses, adjusted for current trends, for each homogeneous category or group of loans.

The allowance for credit losses relating

to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the

discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s

analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable

within the loan portfolio.

This is due to several factors, including inherent delays in obtaining information regarding a customer’s

financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral

assessments and the interpretation of economic trends.

Volatility of economic or customer-specific conditions affecting the identification

and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances

for homogenous groups of loans are also factors.

The Company estimates a range of inherent losses related to the existence of these

The estimates are based upon the Company’s evaluation of imprecise risk associated with the commercial and consumer

allowance levels and the estimated impact of the current economic environment.

To the extent that actual results differ from management’s

estimates, additional loan loss provisions may be required that could adversely impact earnings for 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.

analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within

the loan portfolio.

This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial

condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments

and the interpretation of economic trends.

Volatility of economic or customer-specific conditions affecting the identification and estimation

of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups

of loans are also factors.

The Company estimates a range of inherent losses related to the existence of these exposures.

The estimates

are based upon the Company’s evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated

impact of the current economic environment.

To the extent that actual results differ from management’s estimates, additional loan

loss provisions may be required that could adversely impact earnings for 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

Goodwill is subject, at a minimum, to annual tests for impairment.

Other intangible assets are amortized

over their estimated useful lives using straight-line or 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.

A decrease in earnings resulting from these

or other factors could lead to an impairment of goodwill that could adversely impact earnings for future periods.

Three Months Ended September

30, 2020 compared to Three Months Ended September 30, 2019

income for the third quarter of 2020 was $5.3 million compared to net income of $3.8 million for the third quarter of 2019, an

increase of 40 percent.

Earnings per diluted share (EPS) of $0.69 were up 45 percent from EPS of $0.48 for the third quarter of

During the quarter, the Company recaptured temporary impairment of $0.3 million on its mortgage servicing rights.

The quarterly

results include a full quarter of earnings from the Edon acquisition.

The impact of the COVID-19 pandemic

has continued to constrain our ability to grow our revenue as we have reduced our outside calling efforts.

In response, we have

actively participated in the Paycheck Protection Program (“PPP”) and have disbursed nearly $83 million in PPP loans

to small business clients.

In addition, the Company has approved $38.4 million in loan deferrals to clients, with an additional

$42.3 million in deferrals for sold mortgages in connection with the impacts related to the COVID-19 pandemic.

Anticipated further

government action will impact our consolidated financial results during the remainder of 2020 although specific details cannot

be determined at this time.

Other intangible assets are amortized over their estimated

useful lives using straight-line or 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.

A decrease in earnings resulting from these or other factors could lead to an impairment of goodwill

that could adversely impact earnings for future periods.

Three Months Ended March 31, 2021 compared

to Three Months Ended March 31, 2020

Net income for the first

quarter of 2021 was $7.1 million compared to net income of $0.7 million for the first quarter of 2020, an increase of 940 percent.

per diluted share (EPS) of $0.97 were up 978 percent from EPS of $0.09 for the first quarter of 2020.

Net income for the first quarter

of 2021 was positively impacted by the Company’s recapture of temporary impairment of $2.7 million on its mortgage servicing rights.

The Company continues to participate in the CARES

Act pandemic response, mainly with its participation in the PPP lending initiative.

In the quarter, the Company processed loan forgiveness

on PPP loans of approximately $39.9 million with fees of $1.2 million.

In the second phase of the initiative, the Company originated $22.5

million in PPP loans during the quarter ended March 31, 2021.

Provision for Loan Losses:

The third quarter provision for loan losses was $1.8 million, compared to $0.3 million for the year-ago quarter as the Company

set aside additional loan loss reserves due to the unknown future impact of COVID-19 on our client base.

Net charge-offs for the

quarter were $0.02 million compared to $0.11 million for the year-ago quarter.

Total delinquent loans ended the quarter at $5.9

million, or 0.66 percent of total loans, which is up $3.9 million from the prior year.

quarter provision for loan losses was $0.8 million, compared to $0.6 million for the year-ago quarter as the Company set aside additional

loan loss reserves due to the unknown future impact of COVID-19 on our client base.

Net recoveries for the quarter were $0.02 million

compared to net charge-offs of $0.4 million for the year-ago quarter.

Total delinquent loans ended the quarter at $5.0 million, or 0.58

percent of total loans, which is down $0.4 million from the prior year.

Asset Quality Review –

For the Period Ended

($ in thousands)

Net charge-offs –

Net (recoveries)/charge-offs –

Nonaccruing loans

6 unchanged sentences

Consolidated Revenue:

revenue, consisting of net interest income and noninterest income, was $19.7 million for the third quarter of 2020, an increase

of $5.3 million, or 36 percent, from the $14.4 million generated during the third quarter of 2019.

Net interest income was $9.3 million, which

is up $0.2 million from the prior year third quarter’s $9.1 million.

The Company’s earning assets increased $163.0

million, coupled with a 102 basis point decrease in the yield on earning assets.

The net interest margin (FTE) for the third quarter

of 2020 was 3.41 percent compared to 3.93 percent for the third quarter of 2019.

The margin was impacted by the $82.1 million in

PPP loans outstanding at September 30, 2020, with a coupon rate of 1.0 percent.

The Company booked $0.4 million in deferred fees

and $0.2 million in interest income in the quarter related to these PPP loans.

Funding costs for interest bearing liabilities for

the third quarter of 2020 were 0.75 percent compared to 1.33 percent for the prior year third quarter.

Noninterest income was $10.4 million for

the third quarter of 2020, which was up $5.0 million from the prior year third quarter’s $5.4 million.

In addition to the

mortgage revenue detailed below, gains from the sale of non-mortgage loans was $0.1 million and wealth management revenue was $0.8

Recapture of prior impairment to our mortgage servicing rights increased noninterest income by $0.3 million in the quarter.

Our title agency contributed revenue of $0.5 million in the third quarter of 2020, up $0.1 million from the prior year.

income as a percentage of average assets for the third quarter of 2020 was 3.42 percent compared to 2.06 percent for the prior

year third quarter.

State Bank originated $200.2 million of

mortgage loans for the third quarter of 2020, of which $166.2 million was sold with the remainder in loans held for investment.

This compares to $157.9 million for the third quarter of 2019, of which $125.4 million was sold with the remainder in loans held

for investment.

The significant increase in volume from the prior year was the result of lower interest rates that drove higher

re-finance volume.

These third quarter 2020 originations and subsequent sales resulted in $8.1 million of gains, up $5.6 million

from the gains for the third quarter of 2019.

Net mortgage banking revenue was $7.9 million for the third quarter of 2020 compared

to $2.5 million for the third quarter of 2019.

The 2020 third quarter included a $0.3 million positive valuation recapture on our

mortgage servicing rights compared to no impairment for the third quarter of 2019, due to increased prepayment speeds and expected

higher default rates due to COVID-19 concerns.

Consolidated Noninterest Expense:

Noninterest expense for the third quarter of 2020 was $11.3 million, which was up $1.8 million compared to $9.5 million in the

prior-year third quarter.

The third quarter of 2020 included higher commission and incentives on mortgage sales of $0.3 million

and the expenses from our title agency of $0.3 million, which was up $0.11 million from the prior year.

The operational expenses

for the acquired Edon operations were also included in the quarter.

Income Taxes:

Income taxes for

the third quarter of 2020 were $1.3 million (effective rate 19.7 percent) compared to $0.9 million (effective rate 18.6 percent)

for the third quarter of 2019.

The higher tax expense was driven by higher earnings.

Nine Months Ended September 30, 2020

compared to Nine Months Ended September 30, 2019

for the first nine months of 2020 was $9.6 million compared to net income of $8.6 million for the first nine months of 2019, an

increase of $1.0 million or 11.3 percent.

Earnings per diluted share (EPS) for the period of $1.25 were up 15.3 percent from EPS

of $1.08 for the prior year nine-month period.

Provision for Loan Losses :

The provision for loan losses for the first nine months of 2020 was $3.7 million compared to $0.5 million for the prior year first

Net charge offs for the period were $0.7 million compared to net charge offs of $0.2 million for the prior year nine-month

Consolidated Revenue :

revenue, consisting of net interest income and noninterest income, was $47.9 million for the first nine months of 2020, an increase

of $9.6 million, or 25.0 percent, from the $38.3 million generated during the 2019 first nine months.

Net interest income was $26.7 million, which

is up $0.5 million from net interest income of $26.2 million for the prior year first nine months.

The Company’s earning

assets increased $139.6 million, and had a 80 basis point decrease in the yield on earning assets for the first nine months of

The net interest margin (FTE) for the first nine months of 2020 was 3.41 percent compared to 3.87 percent for the first nine

months of 2019.

Funding cost for interest bearing liabilities for the first nine months of 2020 were 0.91 percent compared to 1.27

percent for the prior year first nine months.

Noninterest income was $21.2 million for the

2020 first nine months, which is up $9.1 million from noninterest income of $12.1 million for the prior year first nine months.

In addition to the mortgage revenue detailed below, gains from the sale of non-mortgage loans was $0.3 million, compared to $1.0

million for the same period in 2019.

For the first nine months, the Company had a mortgage servicing rights impairment of $3.0

Total revenue,

consisting of net interest income and noninterest income, was $20.5 million for the first quarter of 2021, an increase of $9.8 million,

or 92 percent, from the $10.7 million generated during the first quarter of 2020.

Net interest income was $9.6 million, which is

up $1.1 million from the prior year first quarter’s $8.5 million.

The Company’s earning assets increased $217.1 million, coupled

with a 76 basis point decrease in the yield on earning assets.

The net interest margin (FTE) for the first quarter of 2021 was 3.21 percent

compared to 3.48 percent for the first quarter of 2020.

Funding costs for interest bearing liabilities for the first quarter of 2021 were

0.50 percent compared to 1.12 percent for the prior year first quarter.

Noninterest income was $10.9 million for the first

quarter of 2021, which was up $8.7 million from the prior year first quarter’s $2.2 million.

In addition to the mortgage revenue

detailed below, wealth management revenue was $0.9 million.

Recapture of prior impairment to our mortgage servicing rights increased noninterest

income by $2.7 million in the quarter.

Our title agency contributed revenue of $0.5 million in the first quarter of 2021, up $0.26 million

from the prior year.

Noninterest income as a percentage of average assets for the first quarter of 2021 was 3.41 percent compared to 0.81

percent for the prior year first quarter.

State Bank originated $155.8 million of mortgage

loans during the first nine months of 2020, of which $455.3 million of loans were sold with the remainder of loans held for investment.

These levels were up 71 percent and 90 percent, respectively, as compared to the prior year first nine months.

loans for the first quarter of 2021, of which $136.7 million was sold with the remainder in loans held for investment.

This compares to

$101.4 million originated for the first quarter of 2020, of which $84.5 million was sold with the remainder in loans held for investment.

The significant increase in volume from the prior year was the result of lower interest rates that drove higher refinance volume.

first quarter 2021 originations and subsequent sales resulted in $5.9 million of gains, up $3.9 million from the gains for the first quarter

Net mortgage banking revenue was $8.2 million for the first quarter of 2021 compared to -$0.1 million for the first quarter of

The 2021 first quarter included a $2.7 million positive valuation recapture on our mortgage servicing rights compared to a $2.2

million valuation impairment for the first quarter of 2020.

Consolidated Noninterest Expense:

Noninterest expense for the first nine months of 2020 was $32.4 million, which is up $5.2 million compared to $27.2 million in

the prior year first nine months.

The increase in noninterest expenses compared to the prior year was due to increased mortgage

commission, expenses for SBFG Title and $1.2 million in Edon merger expenses.

Noninterest expense for the first quarter of 2021 was $10.9 million, which was up $1.5 million compared to $9.4 million in the prior-year

first quarter.

The first quarter of 2021 included higher commission and incentives on mortgage sales and title volume.

The first quarter

of 2021 had higher expenses for our technology investments to improve client interaction and loan origination.

Income Taxes:

Income taxes for

the first nine months of 2020 were $2.2 million (effective rate 18.6 percent) compared to $1.9 million (effective rate 18.4 percent)

for the first nine months of 2019.

Income taxes for the

first quarter of 2021 were $1.8 million (effective rate 20.3 percent) compared to $0.02 million (effective rate 3.1 percent) for the first

quarter of 2020.

The higher tax expense was driven by higher earnings.

Changes in Financial Condition

Total assets at September 30, 2020 were $1,218.1

million, an increase of $179.5 million or 17.3 percent since December 2019 year end.

Total loans, net of unearned income, were

$885.9 million as of September 30, 2020, up $60.3 million from year-end, an increase of 7.3 percent.

Total PPP balances added $82.1

million to our total loans at September 30, 2020.

Total deposits at September 30, 2020 were $1,014.0

Total assets at March 31, 2021 were $1,325.9 million,

an increase of $68.0 million or 5.4 percent since December 2020 year end.

Total loans, net of unearned income, were $848.2 million as

of March 31, 2021, down $24.5 million or 2.83 percent, from year-end.

Total PPP balances added $54.4 million to our total loans at March

Total deposits at March 31, 2021 were $1,120.2

million, an increase of $71.2 million or 6.8 percent since 2020 year end.

Borrowed funds (consisting of FHLB advances, and REPOs)

totaled $28.7 million at September 30, 2020.

This is down from year-end when borrowed funds totaled $28.9 million due to an increase

in REPOs, offset by lower FHLB borrowings.

Total equity for the Company of $141.3 million now stands at 11.6 percent of total assets

compared to the December 31, 2019 level of $136.1 million and 13.1 percent of total assets.

The reduction in equity is due to the

acquisition of Edon partially offset by net income.

The allowance for loan loss of $11.8 million

is up $3.0 million from the December 2019 year end level.

The allowance to loan level is 1.33 percent (1.47 percent when adjusted

for PPP balances), which is considered appropriate by management given the risk profile of the portfolio.

Borrowed funds (consisting of FHLB advances, and REPOs) totaled

$32.3 million at March 31, 2021.

This is up from year-end when borrowed funds totaled $28.2 million due to an increase in REPOs.

equity for the Company of $144.0 million now stands at 10.9 percent of total assets compared to the December 31, 2020 level of $142.9

million and 11.4 percent of total assets.

The allowance for loan loss of $13.3 million is

up $0.8 million from the December 2020 year end level.

Capital Resources

As of September 30, 2020, based on the computations

As of March 31, 2021, based on the computations

for the FFIEC 041 Consolidated Reports of Condition and Income filed by State Bank with the Federal Reserve, 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 September 30, 2020 that management

believes have changed State Bank’s capital classification.

State Bank’s actual capital levels and

ratios as of September 30, 2020 and December 31, 2019 are presented in the following table.

Capital levels are presented for State

Bank only as the Company is exempt from quarterly reporting on capital levels at the holding company level:

For Capital Adequacy

To Be Well Capitalized Under

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 March 31, 2021 that management believes

have changed State Bank’s capital classification.

State Bank’s actual capital levels and ratios

as of March 31, 2021 and December 31, 2020 are presented in the following table.

Capital levels are presented for State Bank only as the

Company is exempt from quarterly reporting on capital levels at the holding company level:

Capitalized Under Prompt Corrective

in thousands)

As of September 30, 2020

As of March 31, 2021

Tier I Capital to average assets

Tier I Common equity capital to risk-weighted assets

Common equity capital to risk-weighted assets

Tier I Capital to risk-weighted assets

Total Risk-based capital to risk-weighted assets

Risk-based capital to risk-weighted assets

As of December 31, 2020

2 unchanged sentences

Tier I Capital to risk-weighted assets

Total Risk-based capital to risk-weighted assets

Risk-based capital to risk-weighted assets

Effective January 1, 2015, new regulatory capital

requirements commonly referred to as “Basel III”

were implemented and are reflected in the September 30, 2020 capital

Management opted out of the accumulated other comprehensive income treatment under the new requirements and as such

unrealized gains and losses from available-for-sale securities will continue to be excluded from State Bank’s regulatory

were implemented and are reflected in the March 31, 2021 capital table above.

Management opted out of the accumulated other comprehensive income treatment under the new requirements and as such unrealized gains and

losses from available-for-sale securities will continue to be excluded from State Bank’s regulatory capital.

Liquidity relates primarily to the Company’s

1 unchanged sentence

withdrawal requirements and provide for operating expenses.

to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions,

Assets used to

satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions,

securities available-for-sale and loans held for sale.

1 unchanged sentence

Liquid assets were $396.2

$247.9 million at September 30, 2020, compared to $135.3 million at December 31, 2019.

Liquidity risk arises from the possibility

that the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly

reliant upon external funding sources.

In order to manage this risk, the Board of Directors of the Company has established a Liquidity

Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies

minimum liquidity requirements.

This policy designates the Asset/Liability Committee (“ALCO”) as the body responsible

for meeting these objectives.

The ALCO reviews liquidity regularly and evaluates significant changes in strategies that affect

balance sheet or cash flow positions.

Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer

and Asset Liability Manager.

The Company’s commercial real estate,

first mortgage residential, agricultural and multi-family mortgage portfolio of $606.1 million at September 30, 2020 and $610.9

million at December 31, 2019, which can and has been used to collateralize borrowings, is an additional source of liquidity.

believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs.

30, 2020, all eligible commercial real estate, first mortgage residential and multi-family mortgage loans were pledged under an

FHLB blanket lien.

million at March 31, 2021, compared to $303.2 million at December 31, 2020.

Liquidity risk arises from the possibility that

the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant upon

external funding sources.

In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy that

identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity

requirements.

This policy designates the Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives.

The ALCO reviews liquidity regularly and evaluates significant changes in strategies that affect balance sheet or cash flow positions.

Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Asset Liability Manager.

The Company’s commercial real estate, first

mortgage residential, agricultural and multi-family mortgage portfolio of $610.7 million at March 31, 2021 and $608.4 million at December

31, 2020, which can and has been used to collateralize borrowings, is an additional source of liquidity.

Management believes the Company’s

current liquidity level, without these borrowings, is sufficient to meet its liquidity needs.

At March 31, 2021, all eligible commercial

real estate, first mortgage residential and multi-family mortgage loans were pledged under an FHLB blanket lien.

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 the nine months ended September 30, 2020

and 2019 follows.

The Company experienced positive cash flows

from operating activities for the nine months ended September 30, 2020 and September 30, 2019.

Net cash provided by operating activities

was $5.4 million for the nine months ended September 30, 2020 and $3.7 million for the nine months ended September 30, 2019.

for the current year include $455.3 million in proceeds from the sale of loans, which is up $210.6 million from the prior year.

Originations of loans held for sale was a use of cash of $447.6 million, which is up from the prior year by $198.5 million.

the nine months ended September 30, 2020, there was a gain on sale of loans of $18.4 million, and depreciation and amortization

of $1.4 million.

The Company experienced negative cash flows

from investing activities for the nine months ended September 30, 2020 and September 30, 2019.

Net cash flows used in investing

activities was $54.1 million for the nine months ended September 30, 2020 and $40.5 million for the nine months ended September

Highlights for the nine months ended September 30, 2020 include net cash provided from the acquisition of Edon of $16.3

Purchases of available-for-sale securities was $98.0 million, which is up $89.2 million from the prior year.

payments were offset by $71.6 million in proceeds from maturities and sales of securities, which is up $54.3 million from the prior

nine-month period.

The Company experienced a $44.8 million increase in loans, which is down $6.4 million from the prior year nine-month

The Company experienced positive cash flows

from financing activities for the nine months ended September 30, 2020 and September 30, 2019.

Net cash flow provided by financing

activities was $116.3 million for the nine months ended September 30, 2020 and $38.3 million for the nine months ended September

Highlights for the current period include a $139.6 million increase in transaction deposits for the nine months ended

September 30, 2020, which is up $120.9 million from the prior year.

Certificates of deposit decreased by $16.9 million in the current

year compared to an increase of $26.7 million for the prior year.

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 the three months ended March 31, 2021 and 2020 follows.

The Company experienced negative cash flows from

operating activities for the three months ended March 31, 2021 and March 31, 2020.

Net cash used by operating activities was $.9 million

for the three months ended March 31, 2021 and $4.6 million for the three months ended March 31, 2020.

Highlights for the current year

include $136.7 million in proceeds from the sale of loans, which is up $52.2 million from the prior year.

Originations of loans held for

sale was a use of cash of $133.5 million, which is up from the prior year by $46.2 million.

For the three months ended March 31, 2021,

there was a gain on sale of loans of $5.9 million, and depreciation and amortization of $.5 million.

The Company experienced negative cash flows from

investing activities for the three months ended March 31, 2021 and March 31, 2020.

Net cash flows used in investing activities was $5.6

million for the three months ended March 31, 2021 and $11.3 million for the three months ended March 31, 2020.

Highlights for the three

months ended March 31, 2021 include purchases of available-for-sale securities of $44.1 million.

These cash payments were offset by $12.0

million in proceeds from maturities and sales of securities, which is down $28.0 million from the prior year three-month period.

experienced a $24.5 million decrease in loans, which is down $30.2 million from the prior year three-month period.

The Company experienced positive cash flows from

financing activities for the three months ended March 31, 2021 and March 31, 2020.

Net cash flow provided by financing activities was

$71.8 million for the three months ended March 31, 2021 and $45.2 million for the three months ended March 31, 2020.

Highlights for the

current period include a $112.5 million increase in transaction deposits for the three months ended March 31, 2021, which is up $82.3

million from the prior year.

Certificates of deposit decreased by $41.3 million in the current year compared to $6.6 million for the prior

ALCO 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

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 likelihood of a significant decrease in rates as of September 30, 2020

and December 31, 2019 was considered unlikely given the current interest rate environment and therefore, only the minus 100 basis

point rate change was included in this analysis as of September 30, 2020 and only the minus 100 and minus 200 basis point rate

change was included in this analysis as of December 31, 2019.

The results of this analysis are reflected in the following tables

for September 30, 2020 and December 31, 2019.

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 likelihood of a significant decrease in rates as of March 31, 2021 and December 31, 2020

was considered unlikely given the current interest rate environment and therefore, only the minus 100 basis point rate change was included

in this analysis as of March 31, 2021 and only the minus 100 and minus 200 basis point rate change was included in this analysis as of

December 31, 2020.

The results of this analysis are reflected in the following tables for March 31, 2021 and December 31, 2020.

Economic Value of Equity

September 30, 2020

March 31, 2021

($ in thousands)

14 unchanged sentences

-100 basis points

-200 basis points

Off-Balance-Sheet Borrowing Arrangements:

1 unchanged sentence

is available in the form of FHLB advances and unused federal funds lines from correspondent banks.

Management expects the risk

of changes in off-balance-sheet arrangements to be immaterial to earnings.

Management expects the risk of changes

in off-balance-sheet arrangements to be immaterial to earnings.

The Company’s commercial

real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $606.1 million

were pledged to meet FHLB collateralization requirements as of September 30, 2020.

Based on the current collateralization requirements

of the FHLB, the Company had approximately $107.8 million of additional borrowing capacity at September 30, 2020.

The Company also

had $60.3 million in unpledged securities available to pledge for additional borrowings.

The Company’s contractual obligations

as of September 30, 2020 were comprised of long-term debt obligations, other debt obligations, operating lease obligations and

other long-term liabilities.

Long-term debt obligations were comprised of FHLB Advances of $8.0 million and Trust Preferred Securities

of $10.3 million.

Total time deposits at September 30, 2020 were $250.4 million, of which $60.5 million mature beyond one year.

In addition, as of September 30, 2020, the

Company had commitments to sell mortgage loans totaling $76.8 million.

The Company believes that it has adequate resources to fund

commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate

environments.

If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and

other financial institutions are available.

real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $610.7 million were

pledged to meet FHLB collateralization requirements as of March 31, 2021.

Based on the current collateralization requirements of the FHLB,

the Company had approximately $100.7 million of additional borrowing capacity at March 31, 2021.

The Company also had $83.5 million in

unpledged securities available to pledge for additional borrowings.

The Company’s contractual obligations as

of March 31, 2021 were comprised of long-term debt obligations, other debt obligations, operating lease obligations and other long-term

Long-term debt obligations were comprised of FHLB Advances of $8.0 million and Trust Preferred Securities of $10.3 million.

Total time deposits at March 31, 2021 were $188.2 million, of which $69.6 million mature beyond one year.

In addition, as of March 31, 2021, the Company

had commitments to sell mortgage loans totaling $59.1 million.

The Company believes that it has adequate resources to fund commitments

as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments.

Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions

are available.

ASSET LIABILITY MANAGEMENT

Asset liability management involves

developing, executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the

impact that significant fluctuations in market interest rates would have on current and future earnings.

The business of the Company

and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans, mortgage-backed securities,

and securities available for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings).

exception of specific loans which are originated and held for sale, all of the financial instruments of the Company are for other

than trading purposes.

All of the Company’s transactions are denominated in U.S.

dollars with no specific foreign exchange

In addition, the Company has limited exposure to commodity prices related to agricultural loans.

The impact of changes

in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant.

The Company’s financial

instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk.

Interest rate risk

is the Company’s primary market risk exposure;

to a lesser extent, liquidity risk also impacts market risk exposure.

Interest rate risk is the exposure of

a banking institution’s financial condition to adverse movements in interest rates.

Accepting this risk can be an important

source of profitability and shareholder value;

however, excessive levels of interest rate risk could pose a significant threat

to the Company’s earnings and capital base.

Accordingly, effective risk management that maintains interest rate risks at

prudent levels is essential to the Company’s safety and soundness.

Evaluating a financial institution’s

exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest

rate risk and the organization’s quantitative level of exposure.

When assessing the interest rate risk management process,

the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in

place to maintain interest rate risks at prudent levels of consistency and continuity.

Evaluating the quantitative level of interest

rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its

consolidated financial condition, including capital adequacy, earnings, liquidity and asset quality (when appropriate).

Asset liability management involves developing,

executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the impact that significant

fluctuations in market interest rates would have on current and future earnings.

The business of the Company and the composition of its

balance sheet consist of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available

for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings).

With the exception of specific loans which

are originated and held for sale, all of the financial instruments of the Company are for other than trading purposes.

All of the Company’s

transactions are denominated in U.S.

dollars with no specific foreign exchange exposure.

In addition, the Company has limited exposure

to commodity prices related to agricultural loans.

The impact of changes in foreign exchange rates and commodity prices on interest rates

are assumed to be insignificant.

The Company’s financial instruments have varying levels of sensitivity to changes in market interest

rates resulting in market risk.

Interest rate risk is the Company’s primary market risk exposure;

to a lesser extent, liquidity

risk also impacts market risk exposure.

Interest rate risk is the exposure of a

banking institution’s financial condition to adverse movements in interest rates.

Accepting this risk can be an important source

of profitability and shareholder value;

however, excessive levels of interest rate risk could pose a significant threat to the Company’s

earnings and capital base.

Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to

the Company’s safety and soundness.

Evaluating a financial institution’s exposure

to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the

organization’s quantitative level of exposure.

When assessing the interest rate risk management process, the Company seeks to ensure

that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risks

at prudent levels of consistency and continuity.

Evaluating the quantitative level of interest rate risk exposure requires the Company

to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital

adequacy, earnings, liquidity and asset quality (when appropriate).

The Federal Reserve Board together with

the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company adopted a Joint Agency Policy Statement

on interest rate risk effective June 26, 1996.

The policy statement provides guidance to examiners and bankers on sound practices

for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management

at supervised institutions.

The policy statement also outlines fundamental elements of sound management that have been identified

in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest rate risk.

Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive

risk management process that effectively identifies, measures and controls interest rate risk.

Financial institutions derive their

income primarily from the excess of interest collected over interest paid.

The rates of interest an institution earns on its assets

and owes on its liabilities generally are established contractually for a period of time.

Since market interest rates change over

time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes.

For example, assume

that an institution’s assets carry intermediate or long-term fixed rates and that those assets are funded with short-term

If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s

interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates.

an institution’s profits could decrease on existing assets because the institution will either have lower net interest income

or possibly, net interest expense.

Similar risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive

assets are funded by longer-term, fixed-rate liabilities in a declining rate environment.

There are several ways an institution

can manage interest rate risk including:

1) matching repricing periods for new assets and liabilities, for example, by shortening

or lengthening terms of new loans, investments, or liabilities;

the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company adopted a Joint Agency Policy Statement on interest

rate risk effective June 26, 1996.

The policy statement provides guidance to examiners and bankers on sound practices for managing interest

rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions.

The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance

and discusses the importance of these elements in the context of managing interest rate risk.

Specifically, the guidance emphasizes the

need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies,

measures and controls interest rate risk.

Financial institutions derive their income

primarily from the excess of interest collected over interest paid.

The rates of interest an institution earns on its assets and owes

on its liabilities generally are established contractually for a period of time.

Since market interest rates change over time, an institution

is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes.

For example, assume that an institution’s

assets carry intermediate or long-term fixed rates and that those assets are funded with short-term liabilities.

If market interest rates

rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities

may not be sufficiently offset if assets continue to earn at the long-term fixed rates.

Accordingly, an institution’s profits could

decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense.

risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive assets are funded by longer-term, fixed-rate

liabilities in a declining rate environment.

There are several ways an institution can

manage interest rate risk including:

1) matching repricing periods for new assets and liabilities, for example, by shortening or lengthening

terms of new loans, investments, or liabilities;

2) selling existing assets or repaying certain liabilities;

3) hedging existing assets, liabilities, or anticipated transactions.

An institution might also invest in more complex financial

instruments intended to hedge or otherwise change interest rate risk.

Interest rate swaps, futures contracts, options on futures

contracts, and other such derivative financial instruments can be used for this purpose.

Because these instruments are sensitive

to interest rate changes, they require management’s expertise to be effective.

The Company does not currently utilize any

derivative financial instruments to manage interest rate risk.

As market conditions warrant, the Company may implement various

interest rate risk management strategies, including the use of derivative financial instruments.

and 3) hedging existing assets,

liabilities, or anticipated transactions.

An institution might also invest in more complex financial instruments intended to hedge or

otherwise change interest rate risk.

Interest rate swaps, futures contracts, options on futures contracts, and other such derivative financial

instruments can be used for this purpose.

Because these instruments are sensitive to interest rate changes, they require management’s

expertise to be effective.

The Company does not currently utilize any derivative financial instruments to manage interest rate risk.

market conditions warrant, the Company may implement various interest rate risk management strategies, including the use of derivative

financial instruments.

Quantitative and Qualitative Disclosures about Market Risk

Management believes there has been no material

change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed

with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2019.

change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with

the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements