What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 446 added, 399 removed, 58 unchanged (94% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statement Regarding Forward-Looking Information

Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations,

contains certain forward-looking statements 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.

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 items;

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

including those relating to products or services;

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking

This Quarterly Report on Form 10-Q, including

Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements

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 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.

(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.

8 unchanged sentences

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

changes in economic conditions in the market areas in which the

Company and its subsidiaries operate;

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 contracts;

the transition away from LIBOR as a reference rate for financial

operating risks;

1 unchanged sentence

changes in tax laws;

fluctuations in interest

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

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;

changes in the

competitive environment;

losses of significant customers;

1 unchanged sentence

and the loss of key personnel.

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, 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.

of SB Financial

Financial Group, Inc.

(“SB Financial” 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.

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 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.

operates as a loan subsidiary in servicing and working out problem loans.

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.

Title, LLC (“Title”) is an Ohio corporation that was formed in March 2019.

SBFG Title engages in the sale of title insurance

Captive, Inc.

(“Captive”) is a Nevada corporation that was formed in March 2019.

SB Captive pools insurance risk among like

sized banking institutions.

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

refer to SB Financial and its consolidated subsidiaries.

Accounting Policies

1 to the Consolidated Financial Statements 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.

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, 2020, as supplemented by the risk factors included

under the heading “Item 1A.

Risk Factors” of Part II of the Company’s Quarterly Report on Form 10-Q for the quarter

ended June 30, 2021.

Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof.

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

SB Financial Group, Inc.

(“SB Financial”

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

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 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 (“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.

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.

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.

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.

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

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.

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.

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 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

and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill

and other intangibles, at fair value as required.

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, 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

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 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.

Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020

Net income for the second quarter of 2021 was $3.8 million compared to net income of $3.7 million for the second quarter

of 2020, an increase of 2.9 percent.

Earnings per diluted share (EPS) of $0.52 were up 10.6 percent from EPS of $0.47 for the second

quarter of 2020.

Net income for the second quarter of 2021 was negatively impacted by the Company’s temporary impairment of $0.1

million on its mortgage servicing rights.

The 2020 second quarter was impacted by temporary impairment of mortgage servicing rights of

$1.1 million and merger costs of $1.2 million.

Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020, provided additional PPP funding of $284.5 billion

and the establishment of PPP Second Draw Loans under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Relief

Act”.) The Company continued its participation in the CARES Act pandemic response through the origination of loans under the PPP

lending initiative.

In the second phase of the initiative under the Relief Act, the Company originated $26.2 million in PPP loans during

the quarter ended June 30, 2021.

Total PPP loans outstanding at June 30, 2021 was $34.8 million, with $6.4 million remaining from Phase

I and $28.4 million remaining from Phase II.

for Loan Losses:

The second quarter provision for loan losses was zero, compared to $1.3 million for the year-ago quarter as

the Company recognized that risk in the portfolio has stabilized.

The total reserve level of $13.3 million is up nearly 33 percent from

the prior year and given that level zero provision for the quarter was appropriate.

Net charge-offs for the quarter were $0.02 million

compared to net charge-offs of $0.2 million for the year-ago quarter.

Total delinquent loans ended the quarter at $3.5 million, or 0.41

percent of total loans, which is down $1.9 million from the prior year.

Asset Quality Review – For the Period Ended

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,

2021 compared to Three Months Ended September 30, 2020

for the third quarter of 2021 was $4.1 million compared to net income of $5.3 million for the third quarter of 2020, a decrease of 21.8

Earnings per diluted share (EPS) of $0.58 were down 15.9 percent from EPS of $0.69 for the third quarter of 2020.

for the third quarter of 2021 was positively impacted by the recapture of the Company’s temporary mortgage servicing rights impairment

of $0.25 million.

The 2020 third quarter was also positively impacted by mortgage servicing rights recapture of $0.33 million.

The Consolidated Appropriations Act,

2021, which was signed into law on December 27, 2020, provided additional PPP funding of $284.5 billion and the establishment of PPP Second

Draw Loans under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Relief Act”.) The Company

continued its participation in the CARES Act pandemic response through the PPP lending initiative.

During the quarter ended September

30, 2021, the Company processed forgiveness (loans paid by off by the SBA) of $24.6 million.

PPP loans outstanding at September 30, 2021

totaled $10.2 million, with $0.4 million remaining from Phase I and $9.8 million remaining from Phase II.

Provision for Loan Losses:

quarter provision for loan losses was $0.3 million, compared to $1.8 million for the year-ago quarter.

The total reserve level of $13.8

million is up over 17 percent from the prior year.

The Company had recoveries of $0.2 million for the quarter compared to net charge-offs

of $0.02 million for the year-ago quarter.

Total delinquent loans ended the quarter at $3.0 million, or 0.35 percent of total loans, which

is down $3.0 million from the prior year.

Quality Review – For the Period Ended

in thousands)

Net charge-offs – QTD/YTD

Net chargeoffs (recoveries) – QTD/YTD

($206)/($188 )

Nonaccruing loans

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Allowance for loan losses/Nonperforming loans

Total revenue, consisting of net interest income and noninterest income, was $15.7 million for the second quarter of

2021, a decrease of $1.8 million, or 10.3 percent, from the $17.5 million generated during the second quarter of 2020.

interest income was $9.2 million, which is up $0.3 million from the prior year second quarter’s $8.9 million.

The Company’s

earning assets increased $177.7 million, coupled with a 70 basis point decrease in the yield on earning assets.

The net interest margin

(FTE) for the second quarter of 2021 was 2.94 percent compared to 3.32 percent for the second quarter of 2020.

Funding costs for interest

bearing liabilities for the second quarter of 2021 were 0.44 percent compared to 0.89 percent for the prior year second quarter.

income was $6.5 million for the second quarter of 2021, which was down $2.1 million from the prior year second quarter’s $8.6 million.

In addition to the mortgage revenue detailed below, wealth management revenue was $1.0 million.

Impairment to our mortgage servicing

rights decreased noninterest income by $0.1 million in the quarter.

Our title agency contributed revenue of $0.5 million in the second

quarter of 2021, down $0.1 million from the prior year.

Noninterest income as a percentage of average assets for the second quarter of

2021 was 1.97 percent compared to 2.95 percent for the prior year second quarter.

Bank originated $164.9 million of mortgage loans for the second quarter of 2021, of which $119.1 million was sold with the remainder

of loans held for investment.

This compares to $223.7 million originated for the second quarter of 2020, of which $204.6 million was

sold with the remainder of loans held for investment.

These second quarter 2021 originations and subsequent sales resulted in $4.3 million

of gains, down $3.9 million from the gains for the second quarter of 2020.

Net mortgage banking revenue was $4.0 million for the second

quarter of 2021 compared to $6.2 million for the second quarter of 2020.

The 2021 second quarter included a $0.1 million impairment to

our mortgage servicing rights compared to a $1.1 million valuation impairment for the second quarter of 2020.

Noninterest Expense:

Noninterest expense for the second quarter of 2021 was $11.1 million, which was down $0.6 million compared

to $11.7 million in the prior-year second quarter.

The second quarter of 2021 included lower commission and incentives on mortgage sales

and title volume.

The second quarter of 2020 included $1.2 million in one-time merger related expenses.

Income taxes for the second quarter of 2021 were $0.9 million (effective rate of 18.6 percent) compared to $0.9 million

(effective rate of 19.2 percent) for the second quarter of 2020.

Months Ended June 30, 2021 compared to Six Months Ended June 30, 2020

Net income for the first six months of 2021 was $10.8 million compared to net income of $4.3 million for the first

six months of 2020, an increase of 150 percent.

Earnings per diluted share (EPS) for the period of $1.49 were up 166 percent from EPS

of $0.56 for the prior year six-month period.

for Loan Losses :

The provision for loan losses for the first six months of 2021 was $0.8 million compared to $1.9 million

for the prior year first six months.

Net charge offs for the period were $0.02 million compared to net charge offs of $0.6 million for

the prior year six-month period.

Total revenue, consisting of net interest income and noninterest income, was $36.2 million for the first six

months of 2021, an increase of $8.0 million, or 28.5 percent, from the $28.2 million generated during the 2020 first six months.

interest income was $18.8 million, which is up $1.4 million from net interest income of $17.4 million for the prior year first six months.

The Company’s earning assets increased $199.2 million, and had a 73 basis point decrease in the yield on earning assets for the

first six months of 2021.

The net interest margin (FTE) for the first six months of 2021 was 3.07 percent compared to 3.40 percent for

the first six months of 2020.

Funding costs for interest bearing liabilities for the first six months of 2021 were 0.47 percent compared

to 1.00 percent for the prior year first six months.

income was $17.5 million for the first six months of 2021, which is up $6.7 million from noninterest income of $10.8 million for the

prior year first six months.

In addition to the mortgage revenue detailed below, gains from the sale of non-mortgage loans was $0.1 million,

compared to $0.2 million for the same period in 2020.

For the first six months, the Company had a mortgage servicing rights recapture

of $2.6 million compared to mortgage servicing rights impairment in the first six months of 2020 of $3.3 million.

Bank originated $320.7 million of mortgage loans during the first six months of 2021, of which $255.8 million of loans were sold with

the remainder of loans held for investment.

These levels were down 1 and 12 percent, respectively, as compared to the prior year first

Noninterest Expense:

Noninterest expense for the first six months of 2021 was $22.0 million, which is up $0.9 million compared

to $21.1 million in the prior year first six months.

Consolidated Revenue:

Total revenue,

consisting of net interest income and noninterest income, was $16.7 million for the third quarter of 2021, a decrease of $3.0 million,

or 15.3 percent, from the $19.7 million generated during the third quarter of 2020.

Net interest income (“NII”) was $10.0

million for the third quarter of 2021, which was up $0.8 million from the prior year third quarter’s $9.3 million.

Included in NII

was $1.1 million in fees and interest from PPP loans compared to $0.6 million for the prior year quarter.

The Company’s earning

assets increased $163.3 million, coupled with a 44 basis point decrease in the yield on earning assets.

The net interest margin (FTE)

for the third quarter of 2021 was 3.21 percent compared to 3.41 percent for the third quarter of 2020.

Funding costs for interest bearing

liabilities for the third quarter of 2021 were 0.44 percent compared to 0.75 percent for the prior year third quarter.

Noninterest income was $6.6 million for the third

quarter of 2021, which was down $3.8 million from the prior year third quarter’s $10.4 million.

In addition to the mortgage revenue

detailed below, wealth management revenue was $1.0 million.

Recapture of mortgage servicing rights impairment increased noninterest income

by $0.25 million in the quarter.

Our title agency contributed revenue of $0.5 million in the third quarter of 2021.

Noninterest income

as a percentage of average assets for the third quarter of 2021 was 1.99 percent compared to 3.42 percent for the prior year third quarter.

State Bank originated $153.1 million of mortgage

loans for the third quarter of 2021, of which $123.1 million of loans were sold with the remainder of loans held for investment.

compares to $200.2 million originated for the third quarter of 2020, of which $166.2 million of loans were sold with the remainder of

loans held for investment.

These third quarter 2021 originations and subsequent sales resulted in $3.9 million of gains, down $4.1 million

from the gains for the third quarter of 2020.

Net mortgage banking revenue was $4.1 million for the third quarter of 2021 compared to

$7.9 million for the third quarter of 2020.

The 2021 third quarter included a $0.25 million recapture of mortgage servicing rights compared

to a $0.33 million recapture for the third quarter of 2020.

Consolidated Noninterest Expense:

Noninterest expense for the third quarter of 2021 was $11.3 million, which was even compared to the $11.3 million in the prior-year third

The third quarter of 2021 included lower commission and incentives on mortgage sales and title volume, which was offset by higher

data processing and professional fee expense due to expanded implementation of technology solutions.

Income Taxes:

for the third quarter of 2021 were $1.0 million (effective rate of 19.8 percent) compared to $1.3 million (effective rate of 19.8 percent)

for the third quarter of 2020.

Nine Months Ended September 30,

2021 compared to Nine Months Ended September 30, 2020

income for the nine months ended September 30, 2021 was $14.9 million compared to net income of $9.6 million for the first nine months

of 2020, an increase of $5.4 million or 56 percent.

EPS for the period of $2.08 were up 66 percent from EPS of $1.25 for the prior year

nine-month period.

Provision for Loan Losses :

The provision for loan losses for the nine months ended September 30, 2021 was $1.1 million compared to $3.7 million for the prior year

The Company had recoveries of $0.2 million for the first nine months of 2021 compared to net charge offs of $0.7 million

for the prior year nine-month period.

Consolidated Revenue :

revenue, consisting of net interest income and noninterest income, was $52.9 million for the first nine months of 2021, an increase of

$5.0 million, or 10.4 percent, from the $47.9 million generated during the prior year nine-month period.

Net interest income was $28.8 million, which is

up $2.1 million or 8.0 percent from net interest income of $26.7 million for the prior year nine months.

The Company’s earning assets

increased $188.4 million, and had a 64 basis point decrease in the yield on earning assets for the nine months of 2021.

The net interest

margin (FTE) for the first nine months of 2021 was 3.12 percent compared to 3.41 percent for the nine months of 2020.

Funding costs for

interest bearing liabilities for the nine months of 2021 were 0.46 percent compared to 0.91 percent for the prior year nine months.

Noninterest income was $24.1 million for the nine

months ended September 30, 2021, which is up $2.9 million or 13.7 percent from noninterest income of $21.2 million for the prior year

In addition to the mortgage revenue detailed below, gains from the sale of non-mortgage loans was $0.1 million, compared

to $0.3 million for the same period in 2020.

For the nine months ended September 30, 2021, the Company had mortgage servicing rights recapture

of $2.9 million compared to mortgage servicing rights impairment in the nine months of 2020 of $3.0 million.

State Bank originated $473.8 million of mortgage

loans during the first nine months of 2021, of which $378.9 million of loans were sold with the remainder of loans held for investment.

These levels compare to $525.2 million of loans originated and $455.3 million of loans sold for the prior nine month period, or declines

of 9.8 and 16.8 percent, respectively.

Consolidated Noninterest Expense:

Noninterest expense for the nine months ended September 30, 2021 was $33.2 million, which is up $0.8 million or 2.6 percent compared to

the $32.4 million from the prior year nine month period.

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

in staffing and benefit costs and expenses for SBFG Title, which offset the $1.2 million in Edon merger expenses from the prior year.

Income taxes for the first six months of 2021 were $2.7 million (effective rate of 19.7 percent) compared to $0.9 million

(effective rate of 17.1 percent) for the first six months of 2020.

in Financial Condition

assets at June 30, 2021 were $1,312.5 million, an increase of $54.7 million or 4.3 percent since December 2020 year end.

net of unearned income, were $850.5 million as of June 30, 2021, down $22.2 million or 2.5 percent, from year-end.

Total PPP loan balances

added $34.8 million to our total loans at June 30, 2021.

deposits at June 30, 2021 were $1,091.0 million, an increase of $42.0 million or 4.0 percent since 2020 year end.

Borrowed funds (consisting

of FHLB advances, REPOs, Trust Preferreds and subordinated debt) totaled $60.4 million at June 30, 2021.

This is up from year-end when

borrowed funds totaled $47.1 million due to an increase in REPOs and the subordinated debt.

The subordinated debt issuance of $20 million

during the quarter will be used for general corporate purposes.

Total equity for the Company of $144.0 million now stands at 11.0 percent

of total assets compared to the December 31, 2020 level of $142.9 million and 11.4 percent of total assets.

allowance for loan loss of $13.3 million is up $0.8 million from the December 2020 year end level.

of June 30, 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

June 30, 2021 that management believes have changed State Bank’s capital classification.

Bank’s actual capital levels and ratios as of June 30, 2021 and December 31, 2020 are presented in the following table.

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

in staffing, benefit costs and higher investments in technology.

The prior year period included $1.2 million in one-time expenses related

to the Edon acquisition.

Income Taxes:

for the nine months ended September 30, 2021 were $3.7 million (effective rate of 19.8 percent) compared to $2.2 million (effective rate

of 18.6 percent) for the nine months ended September 30, 2020.

Changes in Financial Condition

Total assets at September 30, 2021 were $1.33

billion, an increase of $71.9 million or 5.7 percent since December 31, 2020.

Total loans, net of unearned income, were $846.5 million

as of September 30, 2021, down $26.2 million or 3.0 percent, from year-end.

PPP loan balances of $10.2 million were included in our total

loans at September 30, 2021.

Total deposits at September 30, 2021 were $1.11

billion, an increase of $62.6 million or 6.0 percent since 2020 year end.

Borrowed funds (consisting of FHLB advances, REPOs, Trust Preferred

Securities and subordinated debt) totaled $56.1 million at September 30, 2021.

This is up from year-end 2020 when borrowed funds totaled

$47.1 million due to an increase in REPOs and the subordinated debt.

Total equity for the Company of $144.3 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 $13.8 million is

up $1.2 million from the December 2020 year end level.

Capital Resources

As of September 30, 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, 2021 that management

believes have changed State Bank’s capital classification.

State Bank’s actual capital levels

and ratios as of September 30, 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:

Be Well Capitalized Under

Capital Adequacy

Corrective Action

in thousands)

As of June 30, 2021

As of September 30, 2021

Tier I Capital to average assets

7 unchanged sentences

Total Risk-based capital to risk-weighted assets

regulatory capital requirements commonly referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected

in the June 30, 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.

relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide

for operating expenses.

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.

These assets are commonly referred to as liquid

Liquid assets were $378.4 million at June 30, 2021, compared to $303.2 million at December 31, 2020.

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.

Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $643.4 million

at June 30, 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

At June 30, 2021, all eligible commercial real estate, first mortgage residential and multi-family mortgage loans were pledged

under an FHLB blanket lien.

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 six months

ended June 30, 2021 and 2020 follows.

Company experienced positive cash flows from operating activities for the six months ended June 30, 2021 and negative cash flows for

the six months ended June 30, 2020.

Net cash provided by operating activities was $2.0 million for the six months ended June 30, 2021

and net cash used by operating activities was $.3 million for the six months ended June 30, 2020.

Highlights for the current year include

$255.8 million in proceeds from the sale of loans, which is down $33.3 million from the prior year.

Originations of loans held for sale

was a use of cash of $249.5 million, which is down from the prior year by $38.4 million.

For the six months ended June 30, 2021, there

was a gain on sale of loans of $10.2 million, and depreciation and amortization of $1.0 million.

Company experienced negative cash flows from investing activities for the six months ended June 30, 2021 and June 30, 2020.

flows used in investing activities was $43.4 million for the six months ended June 30, 2021 and $43.8 million for the six months ended

June 30, 2020.

Highlights for the current year include purchases of available-for-sale securities of $88.4 million.

These cash payments

were offset by $23.3 million in proceeds from maturities and sales of securities, which is down $38.5 million from the prior year six

-month period.

The Company experienced a $20.6 million decrease in loans, which is down $81.1 million from the prior year six -month

Company experienced positive cash flows from financing activities for the six months ended June 30, 2021 and June 30, 2020.

flow provided by financing activities was $55.6 million for the six months ended June 30, 2021 and $102.8 million for the six months

ended June 30, 2020.

Highlights for the current period include a $98.9.5 million increase in transaction deposits for the six months

ended June 30, 2021, which is down $10.9 million from the prior year.

Certificates of deposit decreased by $56.9 million in the current

year compared to $10.5 million for the prior year.

The issuance of subordinated debt during the quarter provided for $19.5 million in

proceeds net of debt issuance costs.

uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over

the estimated remaining life of all balance sheet positions.

The EVE analysis calculates the net present value of the Company’s

assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points.

The likelihood of a significant

decrease in rates as of June 30, 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 June 30, 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 June 30, 2021 and December 31, 2020.

New regulatory capital requirements

commonly referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the September 30, 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

ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses.

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.

These assets are commonly referred to as liquid assets.

Liquid assets were $399.8

million at September 30, 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 $652.8 million at September 30, 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 September 30, 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, 2021 and 2020 follows.

The Company experienced positive cash flows from

operating activities for the nine months ended September 30, 2021 and September 30, 2020.

Net cash provided by operating activities was

$6.0 million for the nine months ended September 30, 2021 and $5.4 million for the nine months ended September 30, 2020.

Highlights for

the current year include $378.9 million in proceeds from the sale of loans, which is down $76.4 million from the prior year.

of loans held for sale was a use of cash of $371.5 million, which is down from the prior year by $76.1 million.

For the nine months ended

September 30, 2021, there was a gain on sale of loans of $14.2 million, and depreciation and amortization of $1.6 million.

The Company experienced negative cash flows from

investing activities for the nine months ended September 30, 2021 and September 30, 2020.

Net cash used in investing activities was $77.9

million for the nine months ended September 30, 2021 and $54.1 million for the nine months ended September 30, 2020.

Highlights for the

current year include purchases of available-for-sale securities of $138.5 million.

These cash payments were offset by $34.6 million in

proceeds from maturities and sales of securities, which is down $37.0 million from the prior year nine-month period.

The Company experienced

a $24.7 million decrease in loans, which is down $69.5 million from the prior year nine-month period.

The Company experienced positive cash flows from

financing activities for the nine months ended September 30, 2021 and September 30, 2020.

Net cash provided by financing activities was

$69.2 million for the nine months ended September 30, 2021 and $116.3 million for the nine months ended September 30, 2020.

for the current period include a $133.7 million increase in transaction deposits for the nine months ended September 30, 2021, which is

down $6.0 million from the prior year.

Certificates of deposit decreased by $71.0 million in the current year compared to $16.9 million

for the prior year nine-month period.

The issuance of subordinated debt during the quarter provided for $19.5 million in proceeds net

of debt issuance costs.

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 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 September 30, 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 September 30, 2021 and only the minus 100 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 September 30, 2021 and December 31, 2020.

Economic Value of Equity

June 30, 2021

September 30, 2021

($ in thousands)

14 unchanged sentences

-100 basis points

Off-Balance-Sheet

Borrowing Arrangements:

additional off-balance-sheet liquidity 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.

Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount

of $643.4 million were pledged to meet FHLB collateralization requirements as of June 30, 2021.

Based on the current collateralization

requirements of the FHLB, the Company had approximately $100.1 million of additional borrowing capacity at June 30, 2021.

also had $132.7 million in unpledged securities available to pledge for additional borrowings.

Company’s contractual obligations as of June 30, 2021 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 $5.5 million, Trust

Preferred Securities of $10.3 million, and Subordinated debt, net of issuance costs, of $19.5 million.

Total time deposits at June 30,

2021 were $172.7 million, of which $69.6 million mature beyond one year.

addition, as of June 30, 2021, the Company had commitments to sell mortgage loans totaling $52.1 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.

If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of

Cincinnati and other financial institutions are available.

LIABILITY MANAGEMENT

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.

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

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.

rate risk is the exposure of a banking institution’s financial condition to adverse movements in interest rates.

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.

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).

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

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.

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.

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.

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

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.

As market conditions warrant, the Company may implement various interest rate risk management

strategies, including the use of derivative financial instruments.

Off-Balance-Sheet Borrowing Arrangements:

Significant additional off-balance-sheet liquidity

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.

The Company’s commercial

real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $652.8 million were

pledged to meet FHLB collateralization requirements as of September 30, 2021.

Based on the current collateralization requirements of the

FHLB, the Company had approximately $105.2 million of additional borrowing capacity at September 30, 2021.

The Company also had $161.0

million in unpledged securities available to pledge for additional borrowings.

The Company’s contractual obligations as

of September 30, 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 $5.5 million, Trust Preferred Securities of $10.3 million,

and Subordinated debt, net of issuance costs, of $19.5 million.

Total time deposits at September 30, 2021 were $158.5 million, of which

$62.8 million mature beyond one year.

In addition, as of September 30, 2021, the Company

had commitments to sell mortgage loans totaling $52.0 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).

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 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;

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

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, 2020.

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, 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 2. Management’s Discussion and Analysis