SB FINANCIAL GROUP, INC. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to_____________ Commission file number 1-36785 SB FINANCIAL GROUP, INC. (Exact name of registrant as specified in its charter) Ohio 34-1395608 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 401 Clinton Street , Defiance , Ohio 43512 (Address of principal executive offices) (Zip Code) (419) 783-8950 (Registrant’s telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Shares, No Par Value 7,163,935 Outstanding at May 6, 2022 SBFG The NASDAQ Stock Market, LLC (NASDAQ Capital Market) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large Accelerate Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☒ Smaller Reporting Company ☒ Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ SB FINANCIAL GROUP, INC. FORM 10-Q TABLE OF CONTENTS PART I – FINANCIAL INFORMATION Item 1. Financial Statements 1 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39 Item 4. Controls and Procedures 39 PART II – OTHER INFORMATION Item 1. Legal Proceedings 40 Item 1A. Risk Factors 40 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40 Item 3. Defaults Upon Senior Securities 40 Item 4. Mine Safety Disclosures 40 Item 5. Other Information 40 Item 6. Exhibits 41 Signatures 42 i PART I – FINANCIAL INFORMATION Item 1. Financial Statements SB Financial Group, Inc. Condensed Consolidated Balance Sheets ($ in thousands) March 2022 December 2021 (unaudited) (audited) Assets Cash and due from banks $ 130,003 $ 149,511 Interest bearing time deposits 1,894 2,643 Available-for-sale securities 265,311 263,259 Loans held for sale 4,737 7,472 Loans, net of unearned income 850,671 822,714 Allowance for loan losses ( 13,804 ) ( 13,805 ) Premises and equipment, net 23,039 23,212 Federal Reserve and Federal Home Loan Bank Stock, at cost 5,303 5,303 Foreclosed assets and other assets held for sale, net 527 2,104 Interest receivable 2,815 2,920 Goodwill 23,239 23,191 Cash value of life insurance 17,932 17,867 Mortgage servicing rights 13,135 12,034 Other assets 10,328 12,429 Total assets $ 1,335,130 $ 1,330,854 Liabilities and shareholders’ equity Liabilities Deposits Non interest bearing demand $ 252,273 $ 247,044 Interest bearing demand 211,152 195,464 Savings 236,394 237,571 Money market 289,699 276,462 Time deposits 148,553 156,504 Total deposits 1,138,071 1,113,045 Repurchase agreements 19,035 15,320 Federal Home Loan Bank advances 5,500 5,500 Trust preferred securities 10,310 10,310 Subordinated debt net of issuance costs 19,558 19,546 Interest payable 536 299 Other liabilities 9,483 21,905 Total liabilities 1,202,493 1,185,925 Commitments & Contingent Liabilities Shareholders’ Equity Preferred stock, no par value; authorized 200,000 shares; 2022 - 0 shares outstanding, 2021 - 0 shares outstanding - - Common stock, no par value; authorized 10,500,000 shares; 2022 - 8,525,375 shares issued, 2021 - 8,180,712 shares issued 61,319 54,463 Additional paid-in capital 14,872 14,944 Retained earnings 94,833 99,716 Accumulated other comprehensive loss ( 13,659 ) ( 1,845 ) Treasury stock, at cost; (2022 - 1,414,624 common shares, 2021 - 1,296,382 common shares) ( 24,728 ) ( 22,349 ) Total shareholders’ equity 132,637 144,929 Total liabilities and shareholders’ equity $ 1,335,130 $ 1,330,854 See notes to condensed consolidated financial statements (unaudited) Note: The balance sheet at December 31, 2021 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 March March 2022 2021 Interest Income Loans Taxable $ 8,052 $ 9,926 Tax exempt 61 48 Securities Taxable 1,235 643 Tax exempt 47 88 Total interest income 9,395 10,705 Interest Expense Deposits 618 962 Repurchase agreements & other 13 11 Federal Home Loan Bank advance expense 39 56 Trust preferred securities expense 53 51 Subordinated debt expense 195 - Total interest expense 918 1,080 Net Interest Income 8,477 9,625 Provision for loan losses - 750 Net interest income after provision for loan losses 8,477 8,875 Noninterest Income Wealth management fees 955 912 Customer service fees 794 758 Gain on sale of mortgage loans & OMSR 1,676 5,859 Mortgage loan servicing fees, net 1,204 2,378 Gain on sale of non-mortgage loans 169 17 Title insurance income 602 521 Other income 402 477 Total noninterest income 5,802 10,922 Noninterest Expense Salaries and employee benefits 6,189 6,620 Net occupancy expense 742 740 Equipment expense 854 732 Data processing fees 576 534 Professional fees 950 764 Marketing expense 231 135 Telephone and communications 111 154 Postage and delivery expense 116 111 State, local and other taxes 278 323 Employee expense 136 153 Other expense 676 643 Total noninterest expense 10,859 10,909 Income before income tax 3,420 8,888 Provision for income taxes 607 1,807 Net Income $ 2,813 $ 7,081 Basic earnings per common share $ 0.40 $ 0.97 Diluted earnings per common share $ 0.40 $ 0.97 See notes to condensed consolidated financial statements (unaudited) 2 SB Financial Group, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended March March ($ in thousands) 2022 2021 Net income $ 2,813 $ 7,081 Other comprehensive loss Available for sale investment securities: Gross unrealized holding loss arising in the period ( 14,953 ) ( 3,377 ) Related tax benefit 3,139 710 Net effect on other comprehensive loss ( 11,814 ) ( 2,667 ) Total comprehensive income (loss) $ ( 9,001 ) $ 4,414 See notes to condensed consolidated financial statements (unaudited) 3 SB Financial Group, Inc. Condensed Consolidated Statements of Shareholders’ Equity (unaudited) Common Additional Paid-in Retained Accumulated Other Comprehensive Treasury ($ in thousands, except per share data) Stock Capital Earnings Loss Stock Total January 1, 2022 $ 54,463 $ 14,944 $ 99,716 $ ( 1,845 ) $ ( 22,349 ) $ 144,929 Net income 2,813 2,813 Other comprehensive loss ( 11,814 ) ( 11,814 ) Stock dividends on common - 344,663 shares 6,856 ( 6,864 ) ( 8 ) Cash dividends on common, $ 0.115 per share ( 832 ) ( 832 ) Restricted stock vesting ( 230 ) 230 - Repurchased stock - 130,848 shares ( 2,609 ) ( 2,609 ) Stock based compensation expense 158 158 March 31, 2022 $ 61,319 $ 14,872 $ 94,833 $ ( 13,659 ) $ ( 24,728 ) $ 132,637 Common Additional Paid-in Retained Accumulated Other Comprehensive Treasury ($ in thousands, except per share data) Stock Capital Earnings Loss 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 ) Cash dividends on common, $ 0.105 per share ( 776 ) ( 776 ) Restricted stock vesting ( 213 ) 213 - Repurchased stock - 111,266 shares ( 2,718 ) ( 2,718 ) Stock based compensation expense 123 123 March 31, 2021 $ 54,463 $ 14,755 $ 90,883 $ ( 457 ) $ ( 15,678 ) $ 143,966 See notes to condensed consolidated financial statements (unaudited) 4 SB Financial Group, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) ($ in thousands) Three Months Ended March 31, 2022 2021 Operating Activities Net Income $ 2,813 $ 7,081 Items not requiring (providing) cash Depreciation and amortization 548 489 Provision for loan losses - 750 Expense of share-based compensation plan 158 123 Amortization of premiums and discounts on securities 336 280 Amortization of intangible assets 17 17 Amortization of originated mortgage servicing rights 547 1,187 Impairment (recovery) of mortgage servicing rights ( 890 ) ( 2,706 ) Proceeds from sale of loans held for sale 73,897 136,708 Originations of loans held for sale ( 70,077 ) ( 133,500 ) Gain from sale of loans ( 1,856 ) ( 5,876 ) Changes in Interest receivable 105 428 Other assets ( 373 ) 2,467 Interest payable & other liabilities ( 6,690 ) ( 8,332 ) Net cash used in operating activities ( 1,465 ) ( 882 ) Investing Activities Purchases of available-for-sale securities ( 30,635 ) ( 44,143 ) Proceeds from maturities of interest bearing time deposits 749 2,261 Proceeds from maturities of available-for-sale securities 13,294 11,975 Net change in loans ( 27,958 ) 24,524 Purchase of premises, equipment ( 417 ) ( 165 ) Purchase of bank owned life insurance - ( 50 ) Proceeds from sale of foreclosed assets 1,632 3 Net cash used in investing activities ( 43,335 ) ( 5,595 ) Financing Activities Net increase in demand deposits, money market, interest checking & savings accounts 32,977 112,505 Net decrease in time deposits ( 7,951 ) ( 41,320 ) Net increase in securities sold under agreements to repurchase 3,715 4,132 Stock repurchase plan ( 2,609 ) ( 2,718 ) Dividends on common shares ( 840 ) ( 776 ) Net cash provided by financing activities 25,292 71,823 Increase (decrease) in cash and cash equivalents ( 19,508 ) 65,346 Cash and cash equivalents, beginning of period 149,511 140,690 Cash and cash equivalents, end of period $ 130,003 $ 206,036 Supplemental cash flow information Interest paid $ 681 $ 1,207 Supplemental non-cash disclosure Transfer of loans to foreclosed assets $ - $ 25 Stock dividends declared and paid $ 6,856 $ - 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 (“SBFG Title”), SB Captive, Inc. (“SB 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. In addition, State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance, LLC (“SBI”). The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, SBFG 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 months ended March 31, 2022, are not necessarily indicative of results for the complete year. The condensed consolidated balance sheet of the Company as of December 31, 2021 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, 2021. 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 for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The impact of this new guidance did not have a material impact on the Company’s consolidated financial statements. 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. 6 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 has the potential 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. The new accounting guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019. However, the FASB has deferred the effective date for this ASU for smaller reporting companies, such as the Company, to annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2022. The Company will continue to estimate the impact of adopting ASU 2016-13 throughout 2022. We expect the final adoption of the standard will not have a material impact on the Company’s consolidated financial statements. We expect to be fully prepared for implementation by January 1, 2023. 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 2022 or 2021. 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 March 31, ($ and outstanding shares in thousands - except per share data) 2022 2021 Distributed earnings allocated to common shares $ 835 $ 776 Undistributed earnings allocated to common shares 1,972 6,299 Net earnings allocated to common shares 2,807 7,075 Net earnings allocated to participating securities 6 6 Net Income allocated to common shares and participating securities $ 2,813 $ 7,081 Weighted average shares outstanding for basic earnings per share 7,035 7,317 Dilutive effect of stock compensation 65 18 Weighted average shares outstanding for diluted earnings per share 7,100 7,335 Basic earnings per common share $ 0.40 $ 0.97 Diluted earnings per common share $ 0.40 $ 0.97 On January 10, 2022, the Company announced that its board of directors had declared a 5 percent common stock dividend payable on February 4, 2022, to shareholders of record as of January 21, 2022. Holders of the Company’s common shares as of the record date received one additional common share for every twenty common shares held on the record date. No fractional shares were issued, and shareholders received cash for such fractional interests based on the closing price of the Company’s common shares on the record date of $ 19.89 . 7 Had the 5 percent common stock dividend been included in the Company’s 2021 financial statements, common shares outstanding would have increased by approximately 345,000 and diluted earnings per share, assuming the shares were outstanding for the quarter ended March 31, 2021, would have decreased by $ 0.05 per share. On January 25, 2022, the Company filed a Certificate of Amendment with the Ohio Secretary of State to amend Article FIRST of its Amended Articles of Incorporation to increase the authorized number of common shares, without par value, of the Company from 10,000,000 to 10,500,000 . The addition of these authorized shares did not have a material impact on the Company’s consolidated financial statements. Note 3 – AVAILABLE FOR SALE Securities The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at March 31, 2022 and December 31, 2021 were as follows: ($ in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value March 31, 2022 U.S. Treasury and Government agencies $ 8,746 $ 13 $ ( 351 ) $ 8,408 Mortgage-backed securities 243,092 14 ( 16,170 ) 226,936 State and political subdivisions 13,563 184 ( 577 ) 13,170 Other corporate securities 17,200 - ( 403 ) 16,797 Totals $ 282,601 $ 211 $ ( 17,501 ) $ 265,311 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2021 U.S. Treasury and Government agencies $ 8,986 $ 135 $ ( 16 ) $ 9,105 Mortgage-backed securities 231,057 614 ( 3,537 ) 228,134 State and political subdivisions 12,352 536 ( 9 ) 12,879 Other corporate securities 13,200 2 ( 61 ) 13,141 Totals $ 265,595 $ 1,287 $ ( 3,623 ) $ 263,259 8 The amortized cost and fair value of securities available for sale at March 31, 2022, 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 $ 749 $ 747 Due after one year through five years 3,299 3,266 Due after five years through ten years 25,188 24,606 Due after ten years 10,273 9,756 39,509 38,375 Mortgage-backed securities 243,092 226,936 Totals $ 282,601 $ 265,311 The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $ 65.4 million at March 31, 2022 and $ 54.2 million at December 31, 2021. The fair value of securities delivered for repurchase agreements was $ 25.3 million at March 31, 2022 and $ 23.6 million at December 31, 2021. There were no realized gains or losses from sales of available-for-sale securities for the three months ended March 31, 2022 or March 31, 2021. 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 $ 252.6 million at March 31, 2022, and $ 214.2 million at December 31, 2021, which consisted of 124 securities, or approximately 95 percent, and 64 securities, or approximately 81 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. 9 Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2022 and December 31, 2021, are as follows: ($ in thousands) Less than 12 Months 12 Months or Longer Total March 31, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ 6,787 $ ( 350 ) $ 249 $ ( 1 ) $ 7,036 $ ( 351 ) Mortgage-backed securities 147,270 ( 8,870 ) 77,798 ( 7,300 ) 225,068 ( 16,170 ) State and political subdivisions 7,556 ( 577 ) - - 7,556 ( 577 ) Other corporate securities 12,947 ( 403 ) - - 12,947 ( 403 ) Totals $ 174,560 $ ( 10,200 ) $ 78,047 $ ( 7,301 ) $ 252,607 $ ( 17,501 ) Less than 12 Months 12 Months or Longer Total December 31, 2021 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ 3,397 $ ( 16 ) $ - $ - $ 3,397 $ ( 16 ) Mortgage-backed securities 183,727 ( 2,856 ) 18,566 ( 681 ) 202,293 ( 3,537 ) State and political subdivisions 1,673 ( 9 ) - - 1,673 ( 9 ) Other corporate securities 6,889 ( 61 ) - - 6,889 ( 61 ) Totals $ 195,686 $ ( 2,942 ) $ 18,566 $ ( 681 ) $ 214,252 $ ( 3,623 ) The total unrealized loss in the securities portfolio was $ 17.5 million as of March 31, 2022 compared to a $ 3.6 million unrealized loss at December 31, 2021. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost. Management has determined there is no other-than-temporary-impairment on its securities as of March 31, 2022. NOTE 4 – 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. 10 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 March 31, 2022 and December 31, 2021 include: Total Loans Nonaccrual Loans ($ in thousands) March 2022 December 2021 March 2022 December 2021 Commercial & industrial $ 124,599 $ 122,250 $ 142 $ 143 Commercial real estate - owner occupied 125,304 118,891 88 88 Commercial real estate - nonowner occupied 274,643 262,277 456 466 Agricultural 55,660 57,403 - - Residential real estate 214,183 206,424 3,199 2,484 Home equity line of credit (HELOC) 41,222 41,682 399 464 Consumer 14,741 13,474 9 7 Total loans $ 850,352 $ 822,401 $ 4,293 $ 3,652 Net deferred costs (fees) $ 319 $ 313 Total loans, net deferred costs (fees) $ 850,671 $ 822,714 Allowance for loan losses $ ( 13,804 ) $ ( 13,805 ) 11 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 versus non-owner-occupied commercial real estate 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. 12 The following tables present the activity in the allowance for loan losses for the three-month periods ended March 31, 2022 and March 31, 2021, and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2022 and December 31, 2021. ($ in thousands) For the Three Months Ended March 31, 2022 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Beginning balance $ 1,890 $ 6,781 $ 599 $ 3,515 $ 1,020 $ 13,805 Charge offs - - - - ( 9 ) ( 9 ) Recoveries - - - - 8 8 Provision 2 102 ( 52 ) ( 13 ) ( 39 ) - Ending balance $ 1,892 $ 6,883 $ 547 $ 3,502 $ 980 $ 13,804 For the Three Months Ended March 31, 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 - - - ( 21 ) ( 31 ) ( 52 ) Recoveries - - - 49 5 54 Provision ( 115 ) 726 ( 23 ) 46 116 750 Ending balance $ 2,959 $ 6,177 $ 473 $ 2,608 $ 1,109 $ 13,326 Loans Receivable at March 31, 2022 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance: Ending balance: individually evaluated for impairment $ - $ 10 $ - $ 172 $ 4 $ 186 Ending balance: collectively evaluated for impairment $ 1,892 $ 6,873 $ 547 $ 3,330 $ 976 $ 13,618 Totals $ 1,892 $ 6,883 $ 547 $ 3,502 $ 980 $ 13,804 Loans: Ending balance: individually evaluated for impairment $ 118 $ 346 $ - $ 2,974 $ 141 $ 3,579 Ending balance: collectively evaluated for impairment $ 124,481 $ 399,601 $ 55,660 $ 211,209 $ 55,822 $ 846,773 Totals $ 124,599 $ 399,947 $ 55,660 $ 214,183 $ 55,963 $ 850,352 13 Loans Receivable at December 31, 2021 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance: Ending balance: individually evaluated for impairment $ - $ 10 $ - $ 120 $ 3 $ 133 Ending balance: collectively evaluated for impairment $ 1,890 $ 6,771 $ 599 $ 3,395 $ 1,017 $ 13,672 Totals $ 1,890 $ 6,781 $ 599 $ 3,515 $ 1,020 $ 13,805 Loans: Ending balance: individually evaluated for impairment $ 118 $ 354 $ - $ 2,307 $ 135 $ 2,914 Ending balance: collectively evaluated for impairment $ 122,132 $ 380,814 $ 57,403 $ 204,117 $ 55,021 $ 819,487 Totals $ 122,250 $ 381,168 $ 57,403 $ 206,424 $ 55,156 $ 822,401 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. 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. 14 The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of March 31, 2022 and December 31, 2021. ($ in thousands) March 31, 2022 Commercial & industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total Pass (1 - 4) $ 123,668 $ 117,826 $ 265,749 $ 55,660 $ 210,649 $ 40,823 $ 14,732 $ 829,107 Special Mention (5) 627 7,390 5,617 - - - - 13,634 Substandard (6) 186 - 2,821 - 3,507 399 9 6,922 Doubtful (7) 118 88 456 - 27 - - 689 Loss (8) - - - - - - - - Total Loans $ 124,599 $ 125,304 $ 274,643 $ 55,660 $ 214,183 $ 41,222 $ 14,741 $ 850,352 December 31, 2021 Commercial & industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total Pass (1 - 4) $ 121,285 $ 111,232 $ 253,269 $ 57,403 $ 203,295 $ 41,218 $ 13,467 $ 801,169 Special Mention (5) 659 7,571 5,694 - - - - 13,924 Substandard (6) 188 - 2,848 - 3,102 464 7 6,609 Doubtful (7) 118 88 466 - 27 - - 699 Loss (8) - - - - - - - - Total Loans $ 122,250 $ 118,891 $ 262,277 $ 57,403 $ 206,424 $ 41,682 $ 13,474 $ 822,401 The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. The following tables present the Company’s loan portfolio aging analysis as of March 31, 2022 and December 31, 2021. ($ in thousands) 30-59 Days 60-89 Days Greater Than Total Past Total Loans March 31, 2022 Past Due Past Due 90 Days Past Due Due Current Receivable Commercial & industrial $ 1,620 $ - $ 142 $ 1,762 $ 122,837 $ 124,599 Commercial real estate - owner occupied - - 88 88 125,216 125,304 Commercial real estate - nonowner occupied 116 443 245 804 273,839 274,643 Agricultural - - - - 55,660 55,660 Residential real estate 216 65 1,652 1,933 212,250 214,183 HELOC 194 - 235 429 40,793 41,222 Consumer 14 13 6 33 14,708 14,741 Total Loans $ 2,160 $ 521 $ 2,368 $ 5,049 $ 845,303 $ 850,352 30-59 Days 60-89 Days Greater Than Total Past Total Loans December 31, 2021 Past Due Past Due 90 Days Past Due Due Current Receivable Commercial & industrial $ 166 $ 25 $ 118 $ 309 $ 121,941 $ 122,250 Commercial real estate - owner occupied - - 88 88 118,803 118,891 Commercial real estate - nonowner occupied 221 233 246 700 261,577 262,277 Agricultural - - - - 57,403 57,403 Residential real estate 265 716 1,344 2,325 204,099 206,424 HELOC 53 80 248 381 41,301 41,682 Consumer 20 14 7 41 13,433 13,474 Total Loans $ 725 $ 1,068 $ 2,051 $ 3,844 $ 818,557 $ 822,401 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. 15 The following tables present impaired loan information as of and for the three months ended March 31, 2022 and 2021, and for the twelve months ended December 31, 2021: ($ in thousands) Three Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income March 31, 2022 Investment Balance Allowance Investment Recognized With no related allowance recorded: Commercial & industrial $ 118 $ 203 $ - $ 216 $ - Commercial real estate - owner occupied 88 88 - 88 - Commercial real estate - nonowner occupied 215 215 - 351 5 Agricultural - - - - - Residential real estate 1,709 1,775 - 1,935 18 HELOC 21 21 23 - Consumer - - - - - With a specific allowance recorded: Commercial & industrial - - - - - Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied 43 173 10 173 - Agricultural - - - - - Residential real estate 1,265 1,265 172 1,280 1 HELOC 120 120 4 130 1 Consumer - - - - - Totals: Commercial & industrial $ 118 $ 203 $ - $ 216 $ - Commercial real estate - owner occupied $ 88 $ 88 $ - $ 88 $ - Commercial real estate - nonowner occupied $ 258 $ 388 $ 10 $ 524 $ 5 Agricultural $ - $ - $ - $ - $ - Residential real estate $ 2,974 $ 3,040 $ 172 $ 3,215 $ 19 HELOC $ 141 $ 141 $ 4 $ 153 $ 1 Consumer $ - $ - $ - $ - $ - ($ in thousands) Twelve Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income December 31, 2021 Investment Balance Allowance Investment Recognized With no related allowance recorded: Commercial & industrial $ 118 $ 204 $ - $ 217 $ 2 Commercial real estate - owner occupied 88 88 - 88 - Commercial real estate - nonowner occupied 223 223 - 357 28 Agricultural - - - - - Residential real estate 1,391 1,458 - 1,663 60 HELOC 33 33 41 2 Consumer - - - - - With a specific allowance recorded: Commercial & industrial - - - - - Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied 43 173 10 173 - Agricultural - - - - - Residential real estate 916 916 120 933 20 HELOC 102 102 3 124 5 Consumer - - - - - Totals: Commercial & industrial $ 118 $ 204 $ - $ 217 $ 2 Commercial real estate - owner occupied $ 88 $ 88 $ - $ 88 $ - Commercial real estate - nonowner occupied $ 266 $ 396 $ 10 $ 530 $ 28 Agricultural $ - $ - $ - $ - $ - Residential real estate $ 2,307 $ 2,374 $ 120 $ 2,596 $ 80 HELOC $ 135 $ 135 $ 3 $ 165 $ 7 Consumer $ - $ - $ - $ - $ - 16 Three Months Ended March 31, 2021 Average Recorded Interest Income ($ in thousands) Investment Recognized With no related allowance recorded: Commercial & industrial $ 1,598 $ 12 Commercial real estate - owner occupied 1,450 - Commercial real estate - nonowner occupied 534 7 Agricultural - - Residential real estate 1,843 7 HELOC 86 1 Consumer 7 - With a specific allowance recorded: Commercial & industrial - - Commercial real estate - owner occupied - - Commercial real estate - nonowner occupied 579 - Agricultural - - Residential real estate 647 6 HELOC 75 1 Consumer - - Totals: Commercial & industrial $ 1,598 $ 12 Commercial real estate - owner occupied $ 1,450 $ - Commercial real estate - nonowner occupied $ 1,113 $ 7 Agricultural $ - $ - Residential real estate $ 2,490 $ 13 HELOC $ 161 $ 2 Consumer $ 7 $ - 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. 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 cla ssified 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. 17 (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 March 31, 2022, and March 31, 2021, respectively. There were no TDRs modified during the past twelve months that have subsequently defaulted. On March 22, 2020, a statement was issued by the Company’s bank regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encouraged financial institutions to work prudently with borrowers unable to meet the contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”) further provided that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2021 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. As of March 31, 2022, all loans previously modified under Section 4013 of the CARES Act had returned to normal payment terms. NOTE 5 – GOODWILL A summary of the activity in goodwill is presented below: Three Months Ended March 31, ($ in thousands) 2022 2021 Beginning balance $ 23,191 $ 22,091 Measurement period adjustments 48 - Ending balance $ 23,239 $ 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 March 31, 2022 and December 31, 2021 the carrying amount of goodwill was $ 23.2 million. 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. 18 Goodwill was assessed for impairment using a qualitative test performed as of December 31, 2021. The results of the test indicated no goodwill impairment existed as of that date. NOTE 6 – 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 $ 1.38 billion at March 31, 2022 and $ 1.36 billion at December 31, 2021. Contractually specified servicing fees of $ 0.9 million and $ 0.8 million were included in mortgage loan servicing fees in the consolidated income statement for the three months ended March 31, 2022 and 2021, respectively. The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance: Three Months Ended March 31, ($ in thousands) 2022 2021 Balance at beginning of period $ 12,034 $ 7,759 Mortgage servicing rights capitalized during the period 758 1,212 Mortgage servicing rights amortization during the period ( 547 ) ( 1,187 ) Net change in valuation allowance 890 2,706 Balance at end of period $ 13,135 $ 10,490 Valuation allowance: Balance at beginning of period $ 1,456 $ 4,892 Increase (decrease) ( 890 ) ( 2,706 ) Balance at end of period $ 566 $ 2,186 Fair value, beginning of period $ 12,629 $ 7,759 Fair value, end of period $ 14,433 $ 11,160 NOTE 7 – 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. 19 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 March 31, 2022 and December 31, 2021. March 31, 2022 December 31, 2021 Notional Fair Notional Fair ($ in thousands) Amount Value Amount Value Asset Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 75,640 $ 482 $ 84,733 $ 3,655 IRLCs - - 21,391 22 Forward contracts 17,750 281 - - Total contracts $ 93,390 $ 763 $ 106,124 $ 3,677 Liability Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 75,640 $ ( 482 ) $ 84,733 $ ( 3,655 ) Forward contracts - - 25,000 ( 32 ) IRLCs 13,285 ( 155 ) - - Total contracts $ 88,925 $ ( 637 ) $ 109,733 $ ( 3,687 ) 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. 20 The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the three months ended March 31, 2022 and 2021. Amount of gain (loss) ($ in thousands) Statement of income classification 2022 2021 Interest rate swap contracts Other income $ - $ 133 IRLCs Gain on sale of mortgage loans & OMSR ( 177 ) ( 692 ) Forward contracts Gain on sale of mortgage loans & OMSR 313 762 The following table shows the offsetting of financial assets and derivative assets at March 31, 2022 and December 31, 2021. 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 March 31, 2022 Interest rate swaps $ 1,211 $ 729 $ 482 $ - $ - $ 482 December 31, 2021 Interest rate swaps $ 3,746 $ 91 $ 3,655 $ - $ - $ 3,655 The following table shows the offsetting of financial liabilities and derivative liabilities at March 31, 2022 and December 31, 2021. 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 March 31, 2022 Interest rate swaps $ 1,211 $ 729 $ 482 $ - $ 6,897 $ ( 6,415 ) December 31, 2021 Interest rate swaps $ 3,746 $ 91 $ 3,655 $ - $ 6,906 $ ( 3,251 ) NOTE 8 – DEPOSITS Major classification of deposits at March 31, 2022 and at December 31, 2021 were as follows: ($ in thousands) March 31, 2022 December 31, 2021 Non interest bearing demand $ 252,273 $ 247,044 Interest bearing demand 211,152 195,464 Savings 236,394 237,571 Money market 289,699 276,462 Time deposits less than $ 250,000 136,722 142,736 Time deposits $ 250,000 or greater 11,831 13,768 Total Deposits $ 1,138,071 $ 1,113,045 Included in time deposits at March 31, 2022 and December 31, 2021 were $ 52.5 million and $ 55.6 million, respectively, of deposits which were obtained through the Certificate of Deposit Account Registry Service (CDARS). 21 NOTE 9 – SHORT-TERM BORROWINGS ($ in thousands) March 31, 2022 December 31, 2021 Securities sold under repurchase agreements $ 19,035 $ 15,320 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 2061. As of March 31, 2022, these repurchase agreements were secured by securities totaling $ 25.3 million. The repurchase agreements mature within one month. The Company has borrowing capabilities at the Federal Reserve Discount Window (“Discount Window”) by pledging either securities or loans as collateral. As of March 31, 2022, there was no collateral pledged or borrowings drawn at the Discount Window. At March 31, 2022 and December 31, 2021, the Company had $ 41.0 million in federal funds lines, of which none were drawn. NOTE 10 – FEDERAL HOME LOAN BANK ADVANCES The Company’s FHLB advances were secured by $ 163.7 million in mortgage loans at March 31, 2022. 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 March 31, 2022 were: ($ in thousands) Debt 2022 $ 3,000 2023 2,500 Total $ 5,500 NOTE 11 – 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 percent and are included in interest expense in the consolidated financial statements. The issuers of these securities have not yet determined the replacement rate index for LIBOR. These securities may be included in Tier 1 capital and may be prepaid at any time without penalty (with certain limitations applicable) under current regulatory guidelines and interpretations. The balance of the Capital Securities as of March 31, 2022 and December 31, 2021 was $ 10.3 million, with a maturity date of September 15, 2035 . 22 NOTE 12 – 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 13 – DISCLOSURES ABOUT 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. 23 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. 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). 24 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 March 31, 2022 and December 31, 2021. ($ in thousands) Fair value at March 31, 2022 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 8,408 $ - $ 8,408 $ - Mortgage-backed securities 226,936 - 226,936 - State and political subdivisions 13,170 - 13,170 - Other corporate securities 16,797 - 16,797 - Interest rate contracts - assets 482 - 482 - Interest rate contracts - liabilities ( 482 ) - ( 482 ) - Forward contracts 281 281 - - IRLCs ( 155 ) - - ( 155 ) ($ in thousands) Fair value at December 31, 2021 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 9,105 $ - $ 9,105 $ - Mortgage-backed securities 228,134 - 228,134 - State and political subdivisions 12,879 - 12,879 - Other corporate securities 13,141 - 13,141 - Interest rate contracts - assets 3,655 - 3,655 - Interest rate contracts - liabilities ( 3,655 ) - ( 3,655 ) - Forward contracts ( 32 ) ( 32 ) - - IRLCs 22 - - 22 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 months ended March 31, 2022 and 2021. Three Months Ended March 31, ($ in thousands) 2022 2021 Interest Rate Lock Commitments Balance at beginning of period $ 22 $ 278 Total realized gains (losses) Change in fair value ( 177 ) ( 692 ) Balance at end of period $ ( 155 ) $ ( 414 ) 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. 25 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 March 31, 2022 and December 31, 2021. 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 March 31, 2022 (Level 1) (Level 2) (Level 3) Impaired loans $ 819 $ - $ - $ 819 Mortgage servicing rights 2,527 - - 2,527 ($ in thousands) Fair value at December 31, 2021 (Level 1) (Level 2) (Level 3) Impaired loans $ 464 $ - $ - $ 464 Mortgage servicing rights 3,301 - - 3,301 Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs 26 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 March 31, 2022 Valuation technique Unobservable inputs Range (weighted- average) Collateral-dependent impaired loans $ 819 Market comparable properties Comparability adjustments (%) 11.5 - 18.2% (14 %) Mortgage servicing rights 2,527 Discounted cash flow Discount Rate 9.77 % Constant prepayment rate 7.57 % P&I earnings credit 0.46 % T&I earnings credit 1.90 % Inflation for cost of servicing 1.50 % IRLCs ( 155 ) Discounted cash flow Loan closing rates 43% - 99 % ($ in thousands) Fair value at December 31, 2021 Valuation technique Unobservable inputs Range (weighted- average) Collateral-dependent impaired loans $ 464 Market comparable properties Comparability adjustments (%) 6.4 - 18% (13 %) Mortgage servicing rights 3,301 Discounted cash flow Discount Rate 8.65 % Constant prepayment rate 10.94 % P&I earnings credit 0.10 % T&I earnings credit 1.25 % Inflation for cost of servicing 1.50 % IRLCs 22 Discounted cash flow Loan closing rates 49% - 99 % There were no changes in the inputs or methodologies used to determine fair value at March 31, 2022 as compared to December 31, 2021. 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 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. 27 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 March 31, 2022 and December 31, 2021. 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 March 31, 2022 and December 31, 2021 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. ($ in thousands) Carrying Fair Fair value measurements using March 31, 2022 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 130,003 $ 130,003 $ 130,003 $ - $ - Interest bearing time deposits 1,894 1,894 - 1,894 - Loans held for sale 4,737 4,700 - 4,700 - Loans, net of allowance for loan losses 836,866 839,070 - - 839,070 Federal Reserve and FHLB Bank stock, at cost 5,303 5,303 - 5,303 - Interest receivable 2,815 2,815 - 2,815 - Mortgage servicing rights 13,135 14,433 - - 14,433 Financial liabilities Deposits $ 1,138,071 $ 1,136,257 $ 989,518 $ 146,739 $ - Short-term borrowings 19,035 19,035 - 19,035 - FHLB advances 5,500 5,536 - 5,536 - Trust preferred securities 10,310 9,669 - 9,669 - Subordinated debt, net of issuance costs 19,558 21,218 - 21,218 - Interest payable 536 536 - 536 - ($ in thousands) Carrying Fair Fair value measurements using December 31, 2021 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 149,511 $ 149,511 $ 149,511 $ - $ - Interest bearing time deposits 2,643 2,643 - 2,643 - Loans held for sale 7,472 7,561 - 7,561 - Loans, net of allowance for loan losses 808,909 813,766 - - 813,766 Federal Reserve and FHLB Bank stock, at cost 5,303 5,303 - 5,303 - Interest receivable 2,920 2,920 - 2,920 - Mortgage servicing rights 12,034 12,629 - - 12,629 Financial liabilities Deposits $ 1,113,045 $ 1,112,710 $ 956,541 $ 156,169 $ - Short-term borrowings 15,320 15,320 - 15,320 - FHLB advances 5,500 5,596 - 5,596 - Trust preferred securities 10,310 9,067 - 9,067 - Subordinated debt, net of issuance costs 19,546 20,581 - 20,581 - Interest payable 299 299 - 299 - 28 NOTE 14 – 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 (“SARs”), 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 122,198 shares had been granted under the plan as of March 31, 2022. The 2017 Plan is intended to advance the interests of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards. The 2017 Plan permits equity-based awards to be used to attract, motivate, reward and retain highly competent individuals upon whose judgment, initiative, leadership and efforts are key to the success of the Company by encouraging those individuals to become shareholders of the Company. Stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on 5 years of continuous service and have 10 -year contractual terms. The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. As of March 31, 2022, there were no stock options outstanding, and no unrecognized compensation cost related to stock option awards. No stock options were granted in the first three months of 2022. 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 2021, the Company met certain performance targets under the LTI Plan and restricted stock awards were approved and issued in February 2022. The compensation cost charged against income for awards under the LTI Plan for the three months ended March 31, 2022 and March 31, 2021, was $ 0.2 million and $ 0.1 million, respectively, with a total income tax benefit recognized in the income statement of $ 0.03 million and $ 0.03 million, respectively. As of March 31, 2022, there was $ 1.1 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 three months ended March 31, 2022. Shares Weighted- Average Value per Share Nonvested, January 1, 2022 40,922 $ 18.43 Granted 38,340 20.00 Vested ( 25,939 ) 19.03 Forfeited ( 924 ) 18.78 Nonvested, March 31, 2022 52,399 $ 19.27 NOTE 15 – 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 March 31, 2022, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Company. 29 Item 2. Management’s Discussion and Anal ysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Information 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 items; (b) statements of plans and objectives of the Company or our management or Board of Directors, including those relating to products or services; (c) statements of future economic performance; (d) statements regarding future customer attraction or retention; and (e) statements of assumptions underlying such statements. Words such as “anticipates”, “believes”, “plans”, “intends”, “expects”, “projects”, “estimates”, “should”, “may”, “would be”, “will allow”, “will likely result”, “will continue”, “will remain”, or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying those statements. Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation: ● the ever-changing effects of the novel coronavirus (COVID-19) pandemic – the duration, extent and severity of which are impossible to predict, including the possibility of further resurgence of the spread of COVID-19 and variants thereof -- on national, regional and local economies, supply chains, labor markets and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic, including public health actions directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs and other restrictions on travel and commercial, social or other activities), the development, availability and effectiveness of vaccines, and the implementation of fiscal stimulus packages; ● current and future economic and financial market conditions, either nationally or in the states in which we do business, including the effects of inflation, U.S. fiscal debt, budget and tax matters, geopolitical matters (including the conflict in Ukraine), and any slowdown in global economic growth, in addition to the continuing impact of the COVID-19 pandemic on our customers’ operations and financial condition, any of which may result in adverse impacts on our deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans; ● changes in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate sensitivity; ● the volatility of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; ● factors that can impact the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of construction projects that we finance; ● the transition away from LIBOR as a reference rate for financial contracts, which could negatively impact our income and expenses and the value of various financial contracts; ● changes in customers’, suppliers’, and other counterparties’ performance and creditworthiness may be different than anticipated due to the continuing impact of and the various responses to the COVID-19 pandemic; ● operational risks, reputational risks, legal and compliance risks, and other risks related to potential fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, or failures, disruptions or breaches in security of our systems, including those resulting from computer viruses or cyber-attacks; 30 ● our ability to secure sensitive or confidential client information against unauthorized disclose or access through computer systems and telecommunication networks, including those of our third-party vendors and other service providers, which may prove inadequate; ● a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks; ● competitive pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to recruit and retain qualified management and banking personnel; ● unexpected losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future; ● risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past and possible future acquisitions; ● uncertainty regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, as well as the reforms provided for in the Coronavirus Aid, Relief and Economic Security (CARES) Act and the follow-up legislation in the Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021; ● the effect of changes in federal, state and/or local tax laws may adversely affect our reported financial condition or results of operations; ● the effect of changes in accounting policies and practices may adversely affect our reported financial condition or results of operations; ● litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries; ● continued availability of earnings and dividends from State Bank and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable legal and regulatory requirements; ● our ability to anticipate and successfully keep pace with technological changes affecting the financial services industry; and ● other risks identified from time to time in the Company’s other 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, 2021. 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 w hich the statement is made. Overview of SB Financial SB Financial Group, Inc. (“SB Financial”) 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. 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. 31 RFCBC, Inc. (“RFCBC”) is an Ohio corporation and wholly-owned subsidiary of SB Financial that was incorporated in August 2004. RFCBC operates as a loan subsidiary in servicing and working out problem loans. State Bank Insurance, LLC (“SBI”) is an Ohio corporation and a wholly-owned subsidiary of State Bank incorporated in June of 2010. SBI is an insurance company that engages in the sale of insurance products to retail and commercial customers of State Bank. SBFG Title, LLC (“SBFG Title”) is an Ohio corporation that was formed in March 2019. SBFG Title engages in the sale of title insurance services. SB Captive, Inc. (“SB 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 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, 2021 describes the significant accounting policies used in the development and presentation of the Company’s financial statements. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, and/or complex. Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. 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. 32 Goodwill and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line or accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. A decrease in earnings resulting from these or other factors could lead to an impairment of goodwill that could adversely impact earnings for future periods. Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021 Net Income: Net income for the first quarter of 2022 was $2.8 million compared to net income of $7.1 million for the first quarter of 2021, a decrease of 60.3 percent. Earnings per diluted share (EPS) of $0.40 were down 58.8 percent from EPS of $0.97 for the first quarter of 2021. Net income for the first quarters of 2022 and 2021 were both positively impacted by the recapture of the Company’s temporary mortgage servicing rights impairment in the amounts of $0.9 million and $2.7 million, respectively. Net income for the first quarter of 2022 was negatively impacted by the significant decline in mortgage loan volume and loan sales during the first quarter of 2022, as compared to the first quarter of 2021, as rising rates reduced refinance activity and compressed inventories of available housing constrained new purchase volume. Mortgage loan volume was down over 37 percent from the prior year and a lower percentage of originated volume was sold on the secondary market. Loan growth was positive in the quarter and remaining balances on the Paycheck Protection Program (“PPP”) initiative were down to $0.8 million at March 31, 2022. Provision for Loan Losses: The first quarter provision for loan losses was $0.0 million, compared to $0.75 million for the year-ago quarter. The total reserve level of $13.8 million is up 3.6 percent from the prior year. The Company had net charge-offs of $.01 million for the quarter compared to net recoveries of $0.02 million for the year-ago quarter. Total delinquent loans ended the quarter at $5.1 million, or 0.59 percent of total loans, which increased $0.1 million from the prior year. Asset Quality Review – For the Period Ended ($ in thousands) March 31, 2022 March 31, 2021 Net charge-offs (recoveries) $ 1 $ (2 ) Nonaccruing loans 4,293 5,635 Accruing Trouble Debt Restructures 762 794 Nonaccruing and restructured loans 5,055 6,429 OREO / OAO 527 43 Nonperforming assets 5,582 6,472 Nonperforming assets/Total assets 0.42 % 0.49 % Allowance for loan losses/Total loans 1.62 % 1.57 % Allowance for loan losses/Nonperforming loans 273.1 % 207.3 % 33 Consolidated Revenue: Total revenue, consisting of net interest income and noninterest income, was $14.3 million for the first quarter of 2022, a decrease of $6.3 million, or 30.5 percent, from the $20.5 million generated during the first quarter of 2021. Net interest income (“NII”) was $8.5 million for the first quarter of 2022, which was down $1.1 million from the prior year first quarter’s $9.6 million. Included in NII was $0.1 million in fees and interest from PPP loans compared to $0.8 million for the prior year quarter. The Company’s earning assets increased $66.9 million, coupled with a 60 basis point decrease in the yield on earning assets. The net interest margin (FTE) for the first quarter of 2022 was 2.68 percent compared to 3.21 percent for the first quarter of 2021. Funding costs (interest paid to consumers and other entities) for interest bearing liabilities for the first quarter of 2022 were 0.39 percent compared to 0.50 percent for the prior year first quarter. Noninterest income was $5.8 million for the first quarter of 2022, which was down $5.1 million from the prior year first quarter’s $10.9 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 $0.9 million in the quarter, compared to an increase of $2.7 million in the prior year. During the quarter, we sold $1.6 million in Small Business Administration (“SBA”) loans, with gains on sale of $0.17 million. Our title agency contributed revenue of $0.6 million in the first quarter of 2022. Noninterest income as a percentage of average assets for the first quarter of 2022 was 1.72 percent compared to 3.41 percent for the prior year first quarter. State Bank originated $97.4 million of mortgage loans for the first quarter of 2022, which resulted in $72.2 million in loan proceeds, with the remainder of loans held for investment. This compares to $155.8 million originated for the first quarter of 2021, of which $136.7 million of loans were sold with the remainder of loans held for investment. The Company is experiencing stronger competition for new purchase volume due to the compressed inventory levels of homes available for sale. In addition, the rise in rates has reduced the economic advantage for clients to refinance existing mortgage loans. These first quarter 2022 originations and subsequent sales resulted in $1.7 million of gains, compared to $5.9 million of gains for the first quarter of 2021. Net mortgage banking revenue was $2.9 million for the first quarter of 2022 compared to $8.2 million for the first quarter of 2021. The 2022 first quarter included a $0.9 million recapture of mortgage servicing rights compared to a $2.7 million recapture for the first quarter of 2021. Consolidated Noninterest Expense: Noninterest expense for the first quarter of 2022 was $10.9 million, which was down slightly compared to the $10.9 million in the prior-year first quarter. The first quarter of 2022 included lower incentives on mortgage activity and higher unfilled salaried positions throughout the Company, which was offset by higher data processing and professional fee expense due to expanded implementation of technology solutions. Income Taxes: Income taxes for the first quarter of 2022 were $0.6 million (effective rate of 17.7 percent) compared to $1.8 million (effective rate of 20.3 percent) for the first quarter of 2021. In addition to the impact of the lower pretax income, this quarter was impacted by having additional earning assets that are tax free in nature. Changes in Financial Condition Total assets at March 31, 2022 were $1.34 billion, an increase of $4.3 million, or 0.3 percent, since December 31, 2021. Total loans, net of unearned income, were $850.7 million as of March 31, 2022, up $28.0 million, or 3.4 percent, from year-end. PPP loan balances of $0.8 million and $2.0 million were included in our total loans at March 31, 2022 and December 31, 2021, respectively. Total deposits at March 31, 2022 were $1.14 billion, an increase of $25.0 million or 2.2 percent since 2021 year end. Borrowed funds (consisting of FHLB advances, retail repurchase agreements, trust preferred securities and subordinated debt) totaled $54.4 million at March 31, 2022. This is up from year-end 2021 when borrowed funds totaled $50.7 million due to an increase in REPOs. Total equity for the Company of $132.6 million now stands at 9.9 percent of total assets compared to the December 31, 2021 level of $144.9 million and 10.9 percent of total assets. The reduction was due to an $11.8 million increase in the unrealized loss on the Company’s investment portfolio. The allowance for loan loss of $13.8 million is flat from the December 2021 year end level. 34 Capital Resources As of March 31, 2022, based on the computations for the FFIEC 041 Consolidated Reports of Condition and Income filed by State Bank with the Federal Reserve Board, State Bank was classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since March 31, 2022 that management believes have changed State Bank’s capital classification. State Bank’s actual capital levels and ratios as of March 31, 2022 and December 31, 2021 are presented in the following table. Capital levels are presented for State Bank only as the Company is exempt from quarterly reporting on capital levels at the holding company level: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Procedures ($ in thousands) Amount Ratio Amount Ratio Amount Ratio As of March 31, 2022 Tier I Capital to average assets $ 136,243 10.35 % $ 52,651 4.0 % $ 65,814 5.0 % Tier I Common equity capital to risk-weighted assets 136,243 13.71 % 44,716 4.5 % 64,590 6.5 % Tier I Capital to risk-weighted assets 136,243 13.71 % 59,621 6.0 % 79,495 8.0 % Total Risk-based capital to risk-weighted assets 148,681 14.96 % 79,495 8.0 % 99,369 10.0 % As of December 31, 2021 Tier I Capital to average assets $ 133,202 10.18 % $ 52,324 4.0 % $ 65,405 5.0 % Tier I Common equity capital to risk-weighted assets 133,202 13.94 % 42,986 4.5 % 62,090 6.5 % Tier I Capital to risk-weighted assets 133,202 13.94 % 57,314 6.0 % 76,419 8.0 % Total Risk-based capital to risk-weighted assets 145,165 15.20 % 76,419 8.0 % 95,523 10.0 % New regulatory capital requirements commonly referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the March 31, 2022 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 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 totaled $401.9 million at March 31, 2022, compared to $422.9 million at December 31, 2021. 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 $669.8 million at March 31, 2022 and $645.1 million at December 31, 2021, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs. At March 31, 2022, all eligible commercial real estate, first mortgage residential and multi-family mortgage loans were pledged under an FHLB blanket lien. 35 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 three months ended March 31, 2022 and 2021 follows. The Company experienced negative cash flows from operating activities for the three months ended March 31, 2022 and March 31, 2021. Net cash used by operating activities was $1.5 million for the three months ended March 31, 2022 and $0.9 million for the three months ended March 31, 2021. Highlights for the current year include $73.9 million in proceeds from the sale of loans, which is down $62.8 million from the prior year. Originations of loans held for sale was a use of cash of $70.1 million, which is down from the prior year by $63.4 million. For the three months ended March 31, 2022, there was a gain on sale of loans of $1.9 million, and depreciation and amortization of $0.6 million. The Company experienced negative cash flows from investing activities for the three months ended March 31, 2022 and March 31, 2021. Net cash used in investing activities was $43.3 million for the three months ended March 31, 2022 and $5.6 million for the three months ended March 31, 2021. Highlights for the current year include purchases of available-for-sale securities of $30.6 million. These cash payments were offset by $13.3 million in proceeds from maturities and sales of securities, which is up $1.3 million from the prior year three-month period. The Company experienced a $28.0 million increase in loans, which is up $52.5 million from the prior year three-month period. The Company experienced positive cash flows from financing activities for the three months ended March 31, 2022 and March 31, 2021. Net cash provided by financing activities was $25.3 million for the three months ended March 31, 2022 and $71.8 million for the three months ended March 31, 2021. Highlights for the current period include a $33.0 million increase in transaction deposits for the three months ended March 31, 2022, which is down $79.5 million from the prior year. Certificates of deposit decreased by $8.0 million in the current year compared to $41.3 million for the prior year three-month period. ALCO uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The likelihood of a significant decrease in rates as of March 31, 2022 and December 31, 2021 was considered unlikely given the current interest rate environment and therefore, only the minus 100 basis point rate change was included in this analysis. The results are reflected in the following tables for March 31, 2022 and December 31, 2021. 36 Economic Value of Equity March 31, 2022 ($ in thousands) Change in rates $ Amount $ Change % Change +400 basis points $ 287,682 $ 24,404 9.27 % +300 basis points 284,476 21,198 8.05 % +200 basis points 278,814 15,536 5.90 % +100 basis points 272,118 8,840 3.36 % Base Case 263,278 - - -100 basis points 249,230 (14,048 ) -5.34 % Economic Value of Equity December 31, 2021 ($ in thousands) Change in rates $ Amount $ Change % Change +400 basis points $ 278,254 $ 35,684 14.71 % +300 basis points 273,190 30,620 12.62 % +200 basis points 265,711 23,142 9.54 % +100 basis points 256,110 13,540 5.58 % Base Case 242,570 - - -100 basis points 217,281 (25,289 ) -10.43 % 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 $669.8 million were pledged to meet FHLB collateralization requirements as of March 31, 2022. Based on the current collateralization requirements of the FHLB, the Company had approximately $108.9 million of additional borrowing capacity at March 31, 2022. The Company also had $173.6 million in unpledged securities available to pledge for additional borrowings. The Company’s contractual obligations as of March 31, 2022 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 of $20.0 million, or $19.5 million, net of issuance costs. Total time deposits at March 31, 2022 were $148.6 million, of which $62.5 million mature beyond one year. In addition, as of March 31, 2022, the Company had commitments to sell mortgage loans totaling $16.2 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. 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. 37 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 Board 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. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment. There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening or lengthening terms of new loans, investments, or liabilities; 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. As market conditions warrant, the Company may implement various interest rate risk management strategies, including the use of derivative financial instruments. 38 Item 3. Quantitative and Qualitative Disclosures about Market Risk Management believes there has been no material change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2021. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures With the participation of the President and Chief Executive Officer (the principal executive officer) and the Executive Vice President and Chief Financial Officer (the principal financial officer) of the Company, the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Re port on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and the Company’s Executive Vice President and Chief Financial Officer have concluded that: ● information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; ● information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and ● the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 39 PART II – OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of our business, the Company and its subsidiaries are parties to various legal actions which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Item 1A. Risk Factors There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors is included in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Not Applicable (b) Not Applicable (c) Repurchases of Common Shares On May 25, 2021, the Company announced that its board of directors had approved a new share repurchase program authorizing the repurchase of up to 750,000 common shares of the Company through May 31, 2022. The table below sets forth information regarding common shares repurchased by the Company during the quarter ended March 31, 2022. (c) (d) Period (a) Total Number of Shares Purchased (b) Weighted Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs 01/01/22 - 01/31/22 38,864 $ 19.85 38,864 456,775 02/01/22 - 02/28/22 62,651 19.60 62,651 394,124 03/01/22 - 03/31/22 29,333 19.27 29,333 364,791 Total 130,848 $ 19.60 130,848 364,791 Item 3. Defaults Upon Senior Securities Not applicable Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information Not applicable 40 Item 6. Exhibits Exhibits 31.1 – Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) 31.2 – Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) 32.1 – Section 1350 Certification (Principal Executive Officer) 32.2 – Section 1350 Certification (Principal Financial Officer) 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SB FINANCIAL GROUP, INC. Date: May 6, 2022 By: /s/ Mark A. Klein Mark A. Klein Chairman, President & CEO By: /s/ Anthony V. Cosentino Anthony V. Cosentino Executive Vice President & Chief Financial Officer 42