SB FINANCIAL GROUP, INC. 10-Q

Item 1. Financial Statements SB Financial Group, Inc. Condensed Consolidated Balance Sheets ($ in thousands) September 2021 December 2020 (unaudited) (audited) Assets Cash and due from banks $ 138,015 $ 140,690 Interest bearing time deposits 2,651 5,823 Available-for-sale securities 248,815 149,406 Loans held for sale 10,335 7,234 Loans, net of unearned income 846,548 872,723 Allowance for loan losses ( 13,812 ) ( 12,574 ) Premises and equipment, net 23,874 23,557 Federal Reserve and Federal Home Loan Bank Stock, at cost 5,303 5,303 Foreclosed assets held for sale, net 1,601 23 Interest receivable 2,954 3,799 Goodwill 22,091 22,091 Cash value of life insurance 17,795 17,530 Mortgage servicing rights 11,194 7,759 Other assets 12,361 14,475 Total assets $ 1,329,725 $ 1,257,839 Liabilities and shareholders’ equity Liabilities Deposits Non interest bearing demand $ 258,857 $ 251,649 Interest bearing demand 189,130 176,785 Savings 246,414 174,864 Money market 258,741 216,164 Time deposits 158,518 229,549 Total deposits 1,111,660 1,049,011 Short-term borrowings 20,771 20,189 Federal Home Loan Bank advances 5,500 8,000 Trust preferred securities 10,310 10,310 Subordinated debt net of issuance costs 19,534 - Interest payable 576 616 Other liabilities 17,082 26,790 Total liabilities 1,185,433 1,114,916 Commitments & Contingent Liabilities - - Shareholders’ Equity Preferred stock, no par value; authorized 200,000 shares; 2021 - 0 shares outstanding, 2020 - 0 shares outstanding - - Common stock, no par value; authorized 10,000,000 shares; 2021 - 8,180,712 shares issued, 2020 - 8,180,712 shares issued 54,463 54,463 Additional paid-in capital 14,875 14,845 Retained earnings 97,183 84,578 Accumulated other comprehensive income (loss) ( 699 ) 2,210 Treasury stock, at cost; (2021 - 1,206,790 common shares, 2020 - 808,456 common shares) ( 21,530 ) ( 13,173 ) Total shareholders’ equity 144,292 142,923 Total liabilities and shareholders’ equity $ 1,329,725 $ 1,257,839 See notes to condensed consolidated financial statements (unaudited) Note: The balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date. 1 SB Financial Group, Inc. Condensed Consolidated Income Statement (unaudited) ($ in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, Interest Income 2021 2020 2021 2020 Loans Taxable $ 9,948 $ 10,179 $ 29,070 $ 29,919 Tax exempt 52 47 147 185 Securities Taxable 939 494 2,417 1,696 Tax exempt 94 87 267 246 Total interest income 11,033 10,807 31,901 32,046 Interest Expense Deposits 709 1,423 2,489 4,852 Repurchase agreements & other 12 12 35 60 Federal Home Loan Bank advance expense 40 59 147 251 Trust preferred securities expense 49 54 150 204 Subordinated debt expense 199 - 274 - Total interest expense 1,009 1,548 3,095 5,367 Net Interest Income 10,024 9,259 28,806 26,679 Provision for loan losses 300 1,800 1,050 3,700 Net interest income after provision for loan losses 9,724 7,459 27,756 22,979 Noninterest Income Wealth management fees 959 839 2,826 2,382 Customer service fees 812 730 2,390 2,079 Gain on sale of mortgage loans & OMSR 3,947 8,085 14,061 18,153 Mortgage loan servicing fees, net 155 ( 169 ) 2,316 ( 4,101 ) Gain on sale of non-mortgage loans 52 119 114 330 Title insurance income 508 517 1,561 1,391 Gain (loss) on sale/disposal of assets 1 ( 52 ) 1 ( 178 ) Other income 215 349 839 1,138 Total noninterest income 6,649 10,418 24,108 21,194 Noninterest Expense Salaries and employee benefits 6,689 6,995 20,190 18,841 Net occupancy expense 714 736 2,202 2,109 Equipment expense 872 888 2,382 2,368 Data processing fees 671 586 1,858 2,422 Professional fees 817 695 2,155 2,676 Marketing expense 201 137 556 486 Telephone and communications 140 142 433 379 Postage and delivery expense 100 96 308 307 State, local and other taxes 286 331 887 847 Employee expense 186 155 500 432 Other expenses 580 574 1,770 1,536 Total noninterest expense 11,256 11,335 33,241 32,403 Income before income tax 5,117 6,542 18,623 11,770 Provision for income taxes 1,014 1,292 3,678 2,184 Net Income $ 4,103 $ 5,250 $ 14,945 $ 9,586 Net income available to common shareholders $ 4,103 $ 5,250 $ 14,945 $ 9,586 Basic earnings per common share $ 0.59 $ 0.69 $ 2.09 $ 1.25 Diluted earnings per common share $ 0.58 $ 0.69 $ 2.08 $ 1.25 Average common shares outstanding (in thousands): Basic: 6,966 7,607 7,142 7,700 Diluted: 7,017 7,607 7,167 7,700 See notes to condensed consolidated financial statements (unaudited) 2 SB Financial Group, Inc. Condensed Consolidated Statements of Comprehensive Income (unaudited) Three Months Ended Nine Months Ended September September September September ($ in thousands) 2021 2020 2021 2020 Net income $ 4,103 $ 5,250 $ 14,945 $ 9,586 Other comprehensive income (loss), net of tax: Net unrealized holding gain (loss) on securities available-for-sale ( 1,517 ) ( 125 ) ( 3,682 ) 1,977 Related income tax effect 319 26 773 ( 415 ) Other comprehensive income (loss), net of tax ( 1,198 ) ( 99 ) ( 2,909 ) 1,562 Total comprehensive income $ 2,905 $ 5,151 $ 12,036 $ 11,148 See notes to condensed consolidated financial statements (unaudited) 3 SB Financial Group, Inc. Condensed Consolidated Statements of Shareholders’ Equity (unaudited) ($ in thousands, except per share data) Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total January 1, 2021 $ - $ 54,463 $ 14,845 $ 84,578 $ 2,210 $ ( 13,173 ) $ 142,923 Net income 7,081 7,081 Other comprehensive loss ( 2,667 ) ( 2,667 ) Dividends on common, $ 0.105 per share ( 776 ) ( 776 ) Restricted stock vesting ( 213 ) 213 - Repurchased stock ( 142,094 shares) ( 2,718 ) ( 2,718 ) Stock based compensation expense 123 123 Balance, March 31, 2021 $ - $ 54,463 $ 14,755 $ 90,883 $ ( 457 ) $ ( 15,678 ) $ 143,966 Net income 3,761 3,761 Other comprehensive income 956 956 Dividends on common, $ 0.11 per share ( 793 ) ( 793 ) Repurchased stock ( 215,097 shares) ( 4,024 ) ( 4,024 ) Stock based compensation expense 151 151 Balance, June 30, 2021 $ - $ 54,463 $ 14,906 $ 93,851 $ 499 $ ( 19,702 ) $ 144,017 Net income 4,103 4,103 Other comprehensive (loss) ( 1,198 ) ( 1,198 ) Dividends on common, $ 0.11 per share ( 771 ) ( 771 ) Restricted stock vesting ( 131 ) 131 - Repurchased stock ( 106,911 shares) ( 1,959 ) ( 1,959 ) Stock based compensation expense 100 100 Balance, September 30, 2021 $ - $ 54,463 $ 14,875 $ 97,183 $ ( 699 ) $ ( 21,530 ) $ 144,292 ($ in thousands, except per share data) Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Treasury Stock Total January 1, 2020 $ - $ 54,463 $ 15,023 $ 72,704 $ 659 $ ( 6,755 ) $ 136,094 Net income 681 681 Other comprehensive income 1,390 1,390 Dividends on common, $ 0.095 per share ( 744 ) ( 744 ) Restricted stock vesting ( 225 ) 225 - Stock options exercised ( 253 ) 441 188 Repurchased stock ( 98,609 shares) ( 1,814 ) ( 1,814 ) Stock based compensation expense 110 110 Balance, March 31, 2020 $ - $ 54,463 $ 14,655 $ 72,641 $ 2,049 $ ( 7,903 ) $ 135,905 Net income 3,655 3,655 Other comprehensive income 271 271 Dividends on common, $ 0.10 per share ( 770 ) ( 770 ) Repurchased stock ( 90,762 shares) ( 1,305 ) ( 1,305 ) Stock based compensation expense 125 125 Balance, June 30, 2020 $ - $ 54,463 $ 14,780 $ 75,526 $ 2,320 $ ( 9,208 ) $ 137,881 Net income 5,250 5,250 Other comprehensive loss ( 99 ) ( 99 ) Dividends on common, $ 0.10 per share ( 764 ) ( 764 ) Restricted stock vesting ( 82 ) 82 - Repurchased stock ( 73,517 shares) ( 1,005 ) ( 1,005 ) Stock based compensation expense 84 84 Balance, September 30, 2020 $ - $ 54,463 $ 14,782 $ 80,012 $ 2,221 $ ( 10,131 ) $ 141,347 See notes to condensed consolidated financial statements (unaudited) 4 SB Financial Group, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) ($ in thousands) Nine Months Ended September 30, 2021 2020 Operating Activities Net Income $ 14,945 $ 9,586 Items not requiring (providing) cash Depreciation and amortization 1,562 1,440 Provision for loan losses 1,050 3,700 Expense of share-based compensation plan 374 319 Amortization of premiums and discounts on securities 860 415 Amortization of intangible assets 53 28 Amortization of originated mortgage servicing rights 3,078 3,479 Impairment (recovery) of mortgage servicing rights ( 2,855 ) 2,974 Proceeds from sale of loans held for sale 378,855 455,305 Originations of loans held for sale ( 371,452 ) ( 447,575 ) Gain from sale of loans ( 14,175 ) ( 18,483 ) Loss on sales of assets 1 177 Changes in Interest receivable 845 ( 1,053 ) Other assets 2,924 ( 5,570 ) Interest payable & other liabilities ( 10,055 ) 627 Net cash provided by operating activities 6,010 5,369 Investing Activities Purchases of available-for-sale securities ( 138,525 ) ( 98,020 ) Proceeds from maturities of interest bearing time deposits 3,172 2,586 Proceeds from maturities of available-for-sale securities 34,574 71,578 Net change in loans 24,676 ( 44,814 ) Purchase of premises, equipment ( 1,879 ) ( 1,586 ) Purchase of bank owned life insurance ( 50 ) - Purchase of Federal Reserve and Federal Home Loan Bank Stock - ( 538 ) Proceeds from sale of foreclosed assets 123 445 Acquisition, net of cash acquired - 16,263 Net cash used in investing activities ( 77,909 ) ( 54,086 ) Financing Activities Net increase in demand deposits, money market, interest checking & savings accounts 133,680 139,626 Net decrease in time deposits ( 71,031 ) ( 16,883 ) Net increase in short term borrowings 582 7,765 Repayment of Federal Home Loan Bank advances ( 2,500 ) ( 8,000 ) Net proceeds from subordinated debt 19,534 - Net proceeds from share-based compensation plans - 188 Stock repurchase plan ( 8,701 ) ( 4,124 ) Dividends on common shares ( 2,340 ) ( 2,278 ) Net cash provided by financing activities 69,224 116,294 Increase (Decrease) in cash and cash equivalents ( 2,675 ) 67,577 Cash and cash equivalents, beginning of period 140,690 27,064 Cash and cash equivalents, end of period $ 138,015 $ 94,641 Supplemental cash flow information Interest paid $ 3,135 $ 5,612 Income taxes paid $ 3,760 $ 2,715 Supplemental non-cash disclosure Transfer of loans to foreclosed assets $ 1,687 $ 207 In conjunction with the Edon acquisition, liabilities assumed were: Fair value of assets acquired $ - $ 66,795 Cash paid in acquisition - ( 15,519 ) Liabilities assumed $ - $ 51,276 See notes to condensed consolidated financial statements (unaudited) 5 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, including The State Bank and Trust Company (“State Bank”), SBFG Title, LLC (“Title”), SB Captive, Inc. (“Captive”), RFCBC, Inc. (“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. 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 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 3. The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, SBT Title, SB 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. Those adjustments consist only of normal recurring adjustments. Results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of results for the complete year. The 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. 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, 2020. New and applicable accounting pronouncements: ASU No. 2020-01: Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323 and Topic 815 This guidance was issued in January 2020 to clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective beginning after December 15, 2020. The impact of this new guidance did not have a material impact on the Company’s consolidated financial statements. 6 Accounting Standards not yet adopted: ASU No. 2020-04: Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) This guidance provides temporary options to ease the potential burden in accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective as of March 12, 2020 through December 31, 2022. 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 on the Company’s consolidated financial statements. ASU No. 2016-13: Financial Instruments – Credit Losses (Topic 326) This ASU, which is commonly known as “CECL,” replaces the current GAAP incurred impairment methodology regarding credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities. In 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 standard. 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 delays the effective date of ASU No. 2016-13 to the Company’s 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 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 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. 7 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 2021 or 2020. Participating securities in the table reflect dividends on unvested restricted shares. 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 Sep. 30, ($ and outstanding shares in thousands - except per share data) 2021 2020 Distributed earnings allocated to common shares $ 771 $ 764 Undistributed (in excess of) earnings allocated to common shares 3,327 4,482 Net earnings allocated to common shares 4,098 5,246 Net earnings allocated to participating securities 5 4 Net Income allocated to common shares and participating securities $ 4,103 $ 5,250 Weighted average shares outstanding for basic earnings per share 6,966 7,607 Dilutive effect of stock compensation 51 - Weighted average shares outstanding for diluted earnings per share 7,017 7,607 Basic earnings per common share $ 0.59 $ 0.69 Diluted earnings per common share $ 0.58 $ 0.69 Nine Months Ended Sep. 30, ($ and outstanding shares in thousands - except per share data) 2021 2020 Distributed earnings allocated to common shares $ 2,340 $ 2,278 Undistributed earnings allocated to common shares 12,589 7,296 Net earnings allocated to common shares 14,929 9,574 Net earnings allocated to participating securities 16 12 Net Income allocated to common shares and participating securities $ 14,945 $ 9,586 Weighted average shares outstanding for basic earnings per share 7,142 7,700 Dilutive effect of stock compensation 25 - Weighted average shares outstanding for diluted earnings per share 7,167 7,700 Basic earnings per common share $ 2.09 $ 1.25 Diluted earnings per common share $ 2.08 $ 1.25 8 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”). 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 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 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. It is expected that this transaction will result in business synergies and economies of scale. 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 Edon transaction based on assumptions that are subject to change as management continues to evaluate relevant information as it becomes available. The table includes any updates to assumptions determined within one year of the completion of the transaction. 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 was $ 0.4 million. Fair value of assets acquired Cash and cash equivalents $ 31,756 Interest bearing time deposits 11,542 Investment securities 1,362 Federal Home Loan Bank stock 117 Loans held for investment 16,395 Premises and equipment 446 Goodwill 4,325 Core deposit intangible 660 Other assets 192 Total assets acquired $ 66,795 Fair value of liabilities assumed Deposits $ 51,053 Other liabilities 223 Total liabilities assumed 51,276 Total purchase price (cash) $ 15,519 9 Pro Forma Financial Information The 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 nine months ended September 30, 2021 and 2020, as if the Edon acquisition had occurred as of the beginning of the reporting periods presented. The acquisition would have increased revenue by approximately $ 0.5 million and reduced net income by $ 0.4 million for the nine months ended September 30, 2020. Summary of Operations ($ in thousands) Nine Months Ended SB Financial Consolidated Sep. 2021 Sep. 2020 Net interest income $ 28,806 $ 27,178 Provision for loan losses 1,050 3,700 Net interest income after provision $ 27,756 $ 23,478 Non interest income 24,108 21,237 Non interest expense 33,241 33,474 Income before income taxes $ 18,623 $ 11,241 Income tax expense 3,678 2,073 Net income $ 14,945 $ 9,168 Basic earnings per share $ 2.09 $ 1.19 Diluted earnings per share $ 2.08 $ 1.19 * Income tax expense for Edon calculated using a 21 % statutory rate Note 4 – AVAILABLE FOR SALE Securities The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at September 30, 2021 and December 31, 2020 were as follows: Gross Gross Amortized Unrealized Unrealized ($ in thousands) Cost Gains Losses Fair Value September 30, 2021 U.S. Treasury and Government agencies $ 11,502 $ 213 $ - $ 11,715 Mortgage-backed securities 216,539 965 ( 2,522 ) 214,982 State and political subdivisions 13,409 513 ( 24 ) 13,898 Other corporate securities 8,250 3 ( 33 ) 8,220 Totals $ 249,700 $ 1,694 $ ( 2,579 ) $ 248,815 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value December 31, 2020 U.S. Treasury and Government agencies $ 6,541 $ 323 $ - $ 6,864 Mortgage-backed securities 125,973 1,845 ( 57 ) 127,761 State and political subdivisions 11,595 680 - 12,275 Other corporate securities 2,500 6 - 2,506 Totals $ 146,609 $ 2,854 $ ( 57 ) $ 149,406 10 The amortized cost and fair value of securities available for sale at September 30, 2021, 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 Fair ($ in thousands) Cost Value Within one year $ 3,416 $ 3,172 Due after one year through five years 3,074 3,391 Due after five years through ten years 18,607 18,979 Due after ten years 8,064 8,291 33,161 33,833 Mortgage-backed securities 216,539 214,982 Totals $ 249,700 $ 248,815 The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $ 62.1 million at September 30, 2021 and $ 53.7 million at December 31, 2020. The fair value of securities delivered for repurchase agreements was $ 25.2 million at September 30, 2021 and $ 28.2 million at December 31, 2020. There were no realized gains and losses from sales of available-for-sale securities for the three and nine months ended September 30, 2021 or September 30, 2020. 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 $ 178.6 million at September 30, 2021, and $ 27.3 million at December 31, 2020, which was approximately 72 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. 11 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, 2021 and December 31, 2020 are as follows: ($ in thousands) Less than 12 Months 12 Months or Longer Total September 30, 2021 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ - $ - $ - $ - $ - $ - Mortgage-backed securities 162,287 ( 2,277 ) 9,661 ( 245 ) 171,948 ( 2,522 ) State and political subdivisions 2,668 ( 24 ) - - 2,668 ( 24 ) Other corporate securities 3,967 ( 33 ) - - 3,967 ( 33 ) Totals $ 168,922 $ ( 2,334 ) $ 9,661 $ ( 245 ) $ 178,583 $ ( 2,579 ) Less than 12 Months 12 Months or Longer Total December 31, 2020 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ - $ - $ - $ - $ - $ - Mortgage-backed securities 26,582 ( 54 ) 717 ( 3 ) 27,299 ( 57 ) State and political subdivisions - - - - - - Other corporate securities - - - - - - Totals $ 26,582 $ ( 54 ) $ 717 $ ( 3 ) $ 27,299 $ ( 57 ) The total unrealized loss in the securities portfolio was $ 2.6 million as of September 30, 2021 compared to a $ 0.06 million unrealized loss at December 31, 2020. 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 September 30, 2021. NOTE 5 – 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. Generally, all loan classes are placed on nonaccrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available. 12 The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers 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 when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. When 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, 2021 and December 31, 2020 include: Total Loans Nonaccrual Loans ($ in thousands) September 2021 December 2020 September 2021 December 2020 Commercial & industrial $ 138,377 $ 204,767 $ 144 $ 902 Commercial real estate - owner occupied 118,311 113,169 88 1,450 Commercial real estate - nonowner occupied 269,409 257,651 478 962 Agricultural 57,318 55,235 - - Residential real estate 207,675 182,165 2,056 2,704 Home equity line of credit (HELOC) 41,506 46,310 413 390 Consumer 14,154 14,847 9 18 Total loans $ 846,750 $ 874,144 $ 3,188 $ 6,426 Net deferred costs (fees) $ ( 202 ) $ ( 1,421 ) Total loans, net deferred costs (fees) $ 846,548 $ 872,723 Allowance for loan losses $ ( 13,812 ) $ ( 12,574 ) 13 The risk characteristics of each loan portfolio segment are as follows: Commercial & Industrial and Agricultural Commercial & industrial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial Real Estate (Owner and Nonowner Occupied) Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Residential Real Estate, HELOC and Consumer Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers. 14 The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2021, December 31, 2020 and September 30, 2020. ($ in thousands) For the Three Months Ended September 30, 2021 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Beginning balance $ 1,718 $ 6,672 $ 494 $ 3,425 $ 997 $ 13,306 Charge offs - - - - ( 24 ) ( 24 ) Recoveries 227 - - - 3 230 Provision 6 81 88 98 27 300 Ending balance $ 1,951 $ 6,753 $ 582 $ 3,523 $ 1,003 $ 13,812 For the Nine Months Ended September 30, 2021 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Beginning balance $ 3,074 $ 5,451 $ 496 $ 2,534 $ 1,019 $ 12,574 Charge offs - - - ( 43 ) ( 59 ) ( 102 ) Recoveries 227 - - 49 14 290 Provision ( 1,350 ) 1,302 86 983 29 1,050 Ending balance $ 1,951 $ 6,753 $ 582 $ 3,523 $ 1,003 $ 13,812 For the Three Months Ended September 30, 2020 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Beginning balance $ 2,844 $ 3,604 $ 504 $ 2,278 $ 783 $ 10,013 Charge offs - - - - ( 32 ) ( 32 ) Recoveries 10 - - 1 1 12 Provision 342 911 46 258 243 1,800 Ending balance $ 3,196 $ 4,515 $ 550 $ 2,537 $ 995 $ 11,793 For the Nine Months Ended September 30, 2020 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Beginning balance $ 1,883 $ 3,602 $ 434 $ 2,203 $ 633 $ 8,755 Charge offs ( 582 ) - - ( 37 ) ( 67 ) ( 686 ) Recoveries 15 - - 3 6 24 Provision 1,880 913 116 368 423 3,700 Ending balance $ 3,196 $ 4,515 $ 550 $ 2,537 $ 995 $ 11,793 15 Loans Receivable at September 30, 2021 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance: Ending balance: individually evaluated for impairment $ - $ 10 $ - $ 79 $ 4 $ 93 Ending balance: collectively evaluated for impairment $ 1,951 $ 6,743 $ 582 $ 3,444 $ 999 $ 13,719 Totals $ 1,951 $ 6,753 $ 582 $ 3,523 $ 1,003 $ 13,812 Loans: Ending balance: individually evaluated for impairment $ 119 $ 363 $ - $ 2,046 $ 149 $ 2,677 Ending balance: collectively evaluated for impairment $ 138,258 $ 387,357 $ 57,318 $ 205,629 $ 55,511 $ 844,073 Totals $ 138,377 $ 387,720 $ 57,318 $ 207,675 $ 55,660 $ 846,750 Loans Receivable at December 31, 2020 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance: Ending balance: individually evaluated for impairment $ - $ 174 $ - $ 160 $ 3 $ 337 Ending balance: collectively evaluated for impairment $ 3,074 $ 5,277 $ 496 $ 2,374 $ 1,016 $ 12,237 Totals $ 3,074 $ 5,451 $ 496 $ 2,534 $ 1,019 $ 12,574 Loans: Ending balance: individually evaluated for impairment $ 849 $ 2,202 $ - $ 2,746 $ 162 $ 5,959 Ending balance: collectively evaluated for impairment $ 203,918 $ 368,618 $ 55,235 $ 179,419 $ 60,995 $ 868,185 Totals $ 204,767 $ 370,820 $ 55,235 $ 182,165 $ 61,157 $ 874,144 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 $ 100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings: Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination. 16 Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy. Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable. Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not 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, 2021 and December 31, 2020. ($ in thousands) September 30, 2021 Commercial & industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total Pass (1 - 4) $ 137,396 $ 115,159 $ 263,416 $ 57,318 $ 204,899 $ 41,094 $ 14,138 $ 833,420 Special Mention (5) 685 3,064 2,639 - - - 7 6,395 Substandard (6) 191 - 2,876 - 2,749 412 9 6,237 Doubtful (7) 105 88 478 - 27 - - 698 Loss (8) - - - - - - - - Total Loans $ 138,377 $ 118,311 $ 269,409 $ 57,318 $ 207,675 $ 41,506 $ 14,154 $ 846,750 December 31, 2020 Commercial & industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total Pass (1 - 4) $ 202,543 $ 108,726 $ 250,405 $ 55,227 $ 178,575 $ 45,866 $ 14,807 $ 856,149 Special Mention (5) 1,485 2,993 3,338 - - - 14 7,830 Substandard (6) 151 - 3,026 8 3,560 444 26 7,215 Doubtful (7) 588 1,450 882 - 30 - - 2,950 Loss (8) - - - - - - - - Total Loans $ 204,767 $ 113,169 $ 257,651 $ 55,235 $ 182,165 $ 46,310 $ 14,847 $ 874,144 The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. 17 The following tables present the Company’s loan portfolio aging analysis as of September 30, 2021 and December 31, 2020. ($ in thousands) 30-59 Days 60-89 Days Greater Than 90 Days Total Past Total Loans September 30, 2021 Past Due Past Due Past Due Due Current Receivable Commercial & industrial $ 58 $ 23 $ 96 $ 177 $ 138,200 $ 138,377 Commercial real estate - owner occupied - - 88 88 118,223 118,311 Commercial real estate - nonowner occupied 77 37 209 323 269,086 269,409 Agricultural - - - - 57,318 57,318 Residential real estate 377 168 1,184 1,729 205,946 207,675 HELOC 256 108 179 543 40,963 41,506 Consumer 7 50 45 102 14,052 14,154 Total Loans $ 775 $ 386 $ 1,801 $ 2,962 $ 843,788 $ 846,750 30-59 Days 60-89 Days Greater Than 90 Days Total Past Total Loans December 31, 2020 Past Due Past Due Past Due Due Current Receivable Commercial & industrial $ 380 $ - $ 618 $ 998 $ 203,769 $ 204,767 Commercial real estate - owner occupied - - 1,450 1,450 111,719 113,169 Commercial real estate - nonowner occupied - 141 699 840 256,811 257,651 Agricultural 8 - - 8 55,227 55,235 Residential real estate 12 1,393 1,212 2,617 179,548 182,165 HELOC 190 74 198 462 45,848 46,310 Consumer 123 42 20 185 14,662 14,847 Total Loans $ 713 $ 1,650 $ 4,197 $ 6,560 $ 867,584 $ 874,144 All loans past due 90 days are systematically placed on nonaccrual status. A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable 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. 18 The following tables present impaired loan information as of and for the three and nine months ended September 30, 2021 and 2020, and for the twelve months ended December 31, 2020: ($ in thousands) Nine Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income September 30, 2021 Investment Balance Allowance Investment Recognized With no related allowance recorded: Commercial & industrial $ 119 $ 204 $ - $ 217 $ 2 Commercial real estate - owner occupied 88 88 - 88 - Commercial real estate - nonowner occupied 232 232 - 359 22 Agricultural - - - - - Residential real estate 1,449 1,516 - 1,705 49 HELOC 6 6 9 - Consumer 3 3 - 4 - With a specific allowance recorded: Commercial & industrial - - - - - Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied 173 173 10 173 - Agricultural - - - - - Residential real estate 737 737 83 770 20 HELOC - - - - - Consumer - - - - - Totals: Commercial & industrial $ 119 $ 204 $ - $ 217 $ 2 Commercial real estate - owner occupied $ 88 $ 88 $ - $ 88 $ - Commercial real estate - nonowner occupied $ 405 $ 405 $ 10 $ 532 $ 22 Agricultural $ - $ - $ - $ - $ - Residential real estate $ 2,186 $ 2,253 $ 83 $ 2,475 $ 69 HELOC $ 6 $ 6 $ - $ 9 $ - Consumer $ 3 $ 3 $ - $ 4 $ - Three Months Ended Average Recorded Interest Income September 30, 2021 Investment Recognized ($ in thousands) With no related allowance recorded: Commercial & industrial $ 216 $ 1 Commercial real estate - owner occupied 88 - Commercial real estate - nonowner occupied 356 7 Agricultural - - Residential real estate 1,689 18 HELOC 7 - Consumer 3 - With a specific allowance recorded: Commercial & industrial - - Commercial real estate - owner occupied - - Commercial real estate - nonowner occupied 173 - Agricultural - - Residential real estate 762 7 HELOC - - Consumer - - Totals: Commercial & industrial $ 216 $ 1 Commercial real estate - owner occupied $ 88 $ - Commercial real estate - nonowner occupied $ 529 $ 7 Agricultural $ - $ - Residential real estate $ 2,451 $ 25 HELOC $ 7 $ - Consumer $ 3 $ - 19 ($ in thousands) Twelve Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income December 31, 2020 Investment Balance Allowance Investment Recognized With no related allowance recorded: Commercial & industrial $ 849 $ 1,645 $ - $ 1,878 $ 50 Commercial real estate - owner occupied 1,441 1,441 - 1,573 11 Commercial real estate - nonowner occupied 182 182 - 258 14 Agricultural - - - - - Residential real estate 1,017 1,084 - 1,243 64 HELOC 89 89 98 4 Consumer 7 7 - 12 1 With a specific allowance recorded: Commercial & industrial - - - - - Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied 579 579 174 579 3 Agricultural - - - - - Residential real estate 1,729 1,774 160 1,785 14 HELOC 66 66 3 83 6 Consumer - - - - - Totals: Commercial & industrial $ 849 $ 1,645 $ - $ 1,878 $ 50 Commercial real estate - owner occupied $ 1,441 $ 1,441 $ - $ 1,573 $ 11 Commercial real estate - nonowner occupied $ 761 $ 761 $ 174 $ 837 $ 17 Agricultural $ - $ - $ - $ - $ - Residential real estate $ 2,746 $ 2,858 $ 160 $ 3,028 $ 78 HELOC $ 155 $ 155 $ 3 $ 181 $ 10 Consumer $ 7 $ 7 $ - $ 12 $ 1 Nine Months Ended Three Months Ended September 30, 2020 Average Recorded Interest Income Average Recorded Interest Income ($ in thousands) Investment Recognized Investment Recognized With no related allowance recorded: Commercial & industrial $ 1,886 $ 34 $ 1,860 $ 10 Commercial real estate - owner occupied 1,362 - 1,362 - Commercial real estate - nonowner occupied 1,051 14 1,051 6 Agricultural - - - - Residential real estate 1,634 70 1,619 20 HELOC 64 3 60 1 Consumer 13 1 11 - With a specific allowance recorded: Commercial & industrial 249 - 249 - Commercial real estate - owner occupied - - - - Commercial real estate - nonowner occupied - - - - Agricultural - - - - Residential real estate 2,056 10 2,051 10 HELOC 84 4 82 1 Consumer - - - - Totals: Commercial & industrial $ 2,135 $ 34 $ 2,109 $ 10 Commercial real estate - owner occupied $ 1,362 $ - $ 1,362 $ - Commercial real estate - nonowner occupied $ 1,051 $ 14 $ 1,051 $ 6 Agricultural $ - $ - $ - $ - Residential real estate $ 3,690 $ 80 $ 3,670 $ 30 HELOC $ 148 $ 7 $ 142 $ 2 Consumer $ 13 $ 1 $ 11 $ - Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status. Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis. 20 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. 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 following: (1) Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven. (2) Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven. (3) Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs. ● Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type. The Company had no new TDR activity in the three months ended September 30, 2021. The following table represents new TDR activity for the nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, the Company had no new TDR activity. 21 ($ in thousands) Number of Loans Pre-Modification Recorded Balance Post Modification Recorded Balance HELOC 2 $ 42 $ 42 Total modifications 2 $ 42 $ 42 Interest Only Term Combination Total Modification HELOC $ - $ - $ 42 $ 42 Total modifications $ - $ - $ 42 $ 42 There were no TDRs modified during the past twelve months that have subsequently defaulted. On 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 to be a TDR. As of September 30, 2021, the Company had no loans on COIVD-related deferral. As of September 30, 2021, the Company had $ 1.6 million in commercial real estate in Foreclosed Assets Held For Sale. Foreclosed assets held for sale at December 31, 2020, was $. 02 million. NOTE 6 – ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER The Company acquired loans in the acquisition of Edon effective June 5, 2020. None of the acquired loans had evidence of deterioration of credit quality since origination, and it was probable, at acquisition, that all contractually required payments would be collected. The following table presents the carrying amount of the acquired loans included in the consolidated balance sheet as of September 30, 2021: ($ in thousands) September 30, 2021 Commercial & industrial $ 1,068 Commercial real estate - owner occupied - Commercial real estate - nonowner occupied 362 Agricultural 7,579 Residential real estate 2,487 HELOC - Consumer 41 Total loans $ 11,537 Accretable yield, or income expected to be collected as of September 30, 2021 was $ 0.3 million. 22 NOTE 7 – 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 September 30, 2021 and $ 1.3 billion at December 31, 2020. Contractually specified servicing fees of $ 0.9 million and $ 2.5 million were included in mortgage loan servicing fees in the consolidated income statement for the three months and nine months ended September 30, 2021, respectively. Servicing fees of $ 0.8 million and $ 2.4 million were included for the three and nine months ended September 30, 2020, respectively. The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2021 2020 2021 2020 Balance at beginning of period $ 10,678 $ 8,168 $ 7,759 $ 11,017 Mortgage servicing rights capitalized during the period 1,211 1,349 3,658 3,971 Mortgage servicing rights amortization during the period ( 943 ) ( 1,308 ) ( 3,078 ) ( 3,479 ) Net change in valuation allowance 248 326 2,855 ( 2,974 ) Balance at end of period $ 11,194 $ 8,535 $ 11,194 $ 8,535 Valuation allowance: Balance at beginning of period $ 2,285 $ 4,606 $ 4,892 $ 1,306 Increase (decrease) ( 248 ) ( 326 ) ( 2,855 ) 2,974 Balance at end of period $ 2,037 $ 4,280 $ 2,037 $ 4,280 NOTE 8 – GOODWILL A summary of the activity in goodwill is presented below: Nine Months Ended September 30, ($ in thousands) 2021 2020 Beginning balance $ 22,091 $ 17,792 Acquired goodwill - 4,325 Measurement period adjustments - ( 26 ) Ending balance $ 22,091 $ 22,091 Goodwill 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. As of September 30, 2021 and December 31, 2020 the carrying amount of goodwill was $ 22.1 million. There have been no changes in the carrying amount of the goodwill for the three and nine months ended September 30, 2021 Goodwill is assessed for impairment annually as of December 31, or more frequently if events occur 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 than 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. Goodwill was assessed for impairment using a qualitative test performed as of September 30, 2021.. The results of the test indicated no goodwill impairment existed as of that date. 23 NOTE 9 – 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. 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 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, 2021 and December 31, 2020. September 30, 2021 December 31, 2020 ($ in thousands) Notional Fair Notional Fair Amount Value Amount Value Asset Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 89,557 $ 4,910 $ 87,687 $ 7,962 IRLCs - - 46,130 278 Forward contracts 50,500 285 - - Total contracts $ 140,057 $ 5,195 $ 133,817 $ 8,240 Liability Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 89,557 $ ( 4,910 ) $ 87,687 $ ( 7,962 ) Forward contracts - - 50,000 ( 265 ) IRLCs 43,734 ( 119 ) - - Total contracts $ 133,291 $ ( 5,029 ) $ 137,687 $ ( 8,227 ) 24 The fair value of interest rate swaps were estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the nine months ended September 30, 2021 and 2020. Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) Statement of income classification 2021 2020 2021 2020 Interest rate swap contracts Other income $ - $ 54 $ 133 $ 282 IRLCs Gain on sale of mortgage loans & OMSR ( 239 ) ( 102 ) ( 397 ) 235 Forward contracts Gain on sale of mortgage loans & OMSR 393 195 550 ( 165 ) The following table shows the offsetting of financial assets and derivative assets at September 30, 2021 and December 31, 2020. Gross amounts Gross amounts offset in the Net amounts of assets presented in the Gross amounts not offset in the consolidated balance sheet ($ in thousands) of recognized assets consolidated balance sheet consolidated balance sheet Financial instruments Cash collateral received Net amount September 30, 2021 Interest rate swaps $ 4,910 $ - $ 4,910 $ - $ - $ 4,910 December 31, 2020 Interest rate swaps $ 7,962 $ - $ 7,962 $ - $ - $ 7,962 The following table shows the offsetting of financial liabilities and derivative liabilities at September 30, 2021 and December 31, 2020. Gross amounts Gross amounts offset in the Net amounts of liabilities presented in the Gross amounts not offset in the consolidated balance sheet ($ in thousands) of recognized liabilities consolidated balance sheet consolidated balance sheet Financial instruments Cash collateral pledged Net amount September 30, 2021 Interest rate swaps $ 4,910 $ - $ 4,910 $ - $ 6,896 $ ( 1,986 ) December 31, 2020 Interest rate swaps $ 7,962 $ - $ 7,962 $ - $ 8,896 $ ( 934 ) NOTE 10 – SHORT-TERM BORROWINGS ($ in thousands) September 30, 2021 December 31, 2020 Securities sold under repurchase agreements $ 20,771 $ 20,189 Totals $ 20,771 $ 20,189 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 (“FHLB”). These securities have various maturity dates from 2022 through 2051. As of September 30, 2021, these repurchase agreements were secured by securities totaling $ 25.2 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, 2021, there was no collateral pledged or borrowings drawn at the Discount Window. At September 30, 2021 and December 31, 2020, the Company had $ 41.0 million in federal funds lines, of which none was drawn. 25 NOTE 11 – FEDERAL HOME LOAN BANK ADVANCES The Company’s FHLB advances were secured by $ 155.4 million in mortgage loans at September 30, 2021. Advances, at interest rates from 2.88 to 2.93 percent, are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at September 30, 2021 were: ($ in thousands) Debt 2022 $ 3,000 2023 2,500 Total $ 5,500 NOTE 12 – TRUST PREFERRED SECURITIES On September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is based upon the 3-month LIBOR plus 1.80%, currently at 1.92%, 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, 2021 and December 31, 2020 was $ 10.3 million, with a maturity date of September 15, 2035 . NOTE 13 – SUBORDINATED DEBT On May 27, 2021, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreements”) with qualified institutional buyers and accredited investors (collectively, the “Purchasers”) pursuant to which the Company issued and sold $ 20.0 million in aggregate principal amount of its 3.65 % Fixed to Floating Rate Subordinated Notes due 2031 (the “Notes”). The Notes were sold by the Company in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended. The Notes mature on June 1, 2031 and bear interest at a fixed rate of 3.65% through May 31, 2026. From June 1, 2026 to the maturity date or earlier redemption of the Notes, the interest rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month Secured Overnight Financing Rate (“SOFR”) provided by the Federal Reserve Bank of New York plus 296 basis points. The Company may redeem the Notes at any time after May 31, 2026, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $ 0.5 million, which are being amortized over the life of the Notes. NOTE 14 – 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. 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 liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies 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 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. 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 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. 26 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 (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 fell at September 30, 2021 and December 31, 2020. ($ in thousands) Fair value at September 30, 2021 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 11,715 $ - $ 11,715 $ - Mortgage-backed securities 214,982 - 214,982 - State and political subdivisions 13,898 - 13,898 - Other corporate securities 8,220 - 8,220 - Interest rate contracts - assets 4,910 - 4,910 - Interest rate contracts - liabilities ( 4,910 ) - ( 4,910 ) - Forward contracts 285 285 - - IRLCs ( 119 ) - - ( 119 ) ($ in thousands) Fair value at December 31, 2020 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 6,864 $ - $ 6,864 $ - Mortgage-backed securities 127,761 - 127,761 - State and political subdivisions 12,275 - 12,275 - Other corporate securities 2,506 - 2,506 - Interest rate contracts - assets 7,962 - 7,962 - Interest rate contracts - liabilities ( 7,962 ) - ( 7,962 ) - Forward contracts ( 265 ) ( 265 ) - - IRLCs 278 - - 278 Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2021 and 2020. for the Three Months Ended September 30, for the Nine Months Ended September 30, ($ in thousands) 2021 2020 2021 2020 Interest Rate Lock Commitments Balance at beginning of period $ 120 $ 392 $ 278 $ 55 Total realized gains (losses) Change in fair value ( 239 ) ( 102 ) ( 397 ) 235 Balance at end of period $ ( 119 ) $ 290 $ ( 119 ) $ 290 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 consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. 27 Collateral-dependent Impaired Loans, Net of ALLL Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The estimated fair value of collateral-dependent impaired loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining 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, 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 rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees; miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis. ($ in thousands) Fair value at September 30, 2021 (Level 1) (Level 2) (Level 3) Impaired loans $ 794 $ - $ - $ 794 Mortgage servicing rights 11,194 - - 11,194 ($ in thousands) Fair value at December 31, 2020 (Level 1) (Level 2) (Level 3) Impaired loans $ 3,544 $ - $ - $ 3,544 Mortgage servicing rights 7,759 - - 7,759 Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs 28 Unobservable (Level 3) Inputs The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. ($ in thousands) Fair value at September 30, 2021 Valuation technique Unobservable inputs Range (weighted-average) Collateral-dependent impaired loans $ 794 Market comparable properties Comparability adjustments (%) 0 - 12% (8 )% Mortgage servicing rights 11,194 Discounted cash flow Discount Rate 8.65 % Constant prepayment rate 12.01 % P&I earnings credit 0.08 % T&I earnings credit 0.13 % Inflation for cost of servicing 1.50 % IRLCs ( 119 ) Discounted cash flow Loan closing rates 49% - 99 % ($ in thousands) Fair value at December 31, 2020 Valuation technique Unobservable inputs Range (weighted-average) Collateral-dependent impaired loans $ 3,544 Market comparable properties Comparability adjustments (%) 0 - 43% (22 )% Mortgage servicing rights 7,759 Discounted cash flow Discount Rate 8.28 % Constant prepayment rate 20.87 % P&I earnings credit 0.14 % T&I earnings credit 0.24 % Inflation for cost of servicing 1.50 % IRLCs 278 Discounted cash flow Loan closing rates 49% - 100 % There were no changes in the inputs or methodologies used to determine fair value at September 30, 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. Loans The estimated fair value of loans as of September 30, 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. 29 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, 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, 2021 and December 31, 2020 and are not considered significant to this presentation. Trust Preferred Securities The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate. Subordinated Debt The fair value for subordinated debt is estimated by discounting the cash flows using a discount rate equal to the rate currently offered on similar borrowings. 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. 30 ($ in thousands) Carrying Fair Fair value measurements using September 30, 2021 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 138,015 $ 138,015 $ 138,015 $ - $ - Interest bearing time deposits 2,651 2,651 - 2,651 - Loans held for sale 10,335 10,515 - 10,515 - Loans, net of allowance for loan losses 832,736 834,605 - - 834,605 Federal Reserve and FHLB Bank stock, at cost 5,303 5,303 - 5,303 - Interest receivable 2,954 2,954 - 2,954 - Financial liabilities Deposits $ 1,111,660 $ 1,112,208 $ 953,142 $ 159,066 $ - Short-term borrowings 20,771 20,771 - 20,771 - FHLB advances 5,500 5,649 - 5,649 - Trust preferred securities 10,310 9,136 - 9,136 - Subordinated debt, net of issuance costs 19,534 21,281 - 21,281 - Interest payable 576 576 - 576 - ($ in thousands) Carrying Fair Fair value measurements using December 31, 2020 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 140,690 $ 140,690 $ 140,690 $ - $ - Interest bearing time deposits 5,823 5,823 - 5,823 - Loans held for sale 7,234 7,508 - 7,508 - Loans, net of allowance for loan losses 860,149 853,294 - - 853,294 Federal Reserve and FHLB Bank stock, at cost 5,303 5,303 - 5,303 - Interest receivable 3,799 3,799 - 3,799 - Financial liabilities Deposits $ 1,049,011 $ 1,050,558 $ 819,462 $ 231,096 $ - Short-term borrowings 20,189 20,189 - 20,189 - FHLB advances 8,000 8,257 - 8,257 - Trust preferred securities 10,310 8,394 - 8,394 - Interest payable 616 616 - 616 - NOTE 15 – SHARE BASED COMPENSATION In April 2017, the Company’s shareholders approved a new share-based incentive compensation plan, the SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which replaced the Company’s 2008 Stock Incentive Plan. 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 89,833 shares had been granted under the plan as of September 30, 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. 31 As of September 30, 2021, there were no stock options outstanding, and no unrecognized compensation cost related to stock option awards. No stock options were granted in the nine months of 2021. 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 restricted stock awards were approved and issued in February 2021. The compensation cost charged against income for the LTI Plan was $ 0.4 million, with a total income tax benefit recognized in the income statement of $ 0.08 million. As of September 30, 2021, there was $ 0.65 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. The table below is a summary of restricted stock activity under the Company’s 2017 Plan for the nine months ended September 30, 2021. Shares Weighted- Average Value per Share Nonvested, January 1, 2021 34,778 $ 18.52 Granted 35,854 18.29 Vested ( 23,179 ) 18.39 Forfeited ( 1,480 ) 17.90 Nonvested, September 30, 2021 45,973 $ 18.43 NOTE 16 – GENERAL LITIGATION The Company is subject to claims and lawsuits 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, 2021, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Company. 32