What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-05 · 252 added, 230 removed, 274 unchanged (64% of the section changed)

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking

This Quarterly Report on Form 10-Q, including

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

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

Forward-looking statements provide current

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

Examples of forward-looking statements include:

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

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

Anal ysis of Financial Condition and Results of Operations

Statement Regarding Forward-Looking Information

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

contains certain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance.

Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance.

of forward-looking statements include:

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

capital structure and other financial items;

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

including those relating to products or services;

(d) statements regarding future customer attraction or retention;

statements of assumptions underlying such statements.

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

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

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

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

(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.

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Risks and uncertainties that could cause actual results to differ materially

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

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

including stimulus packages and programs;

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

Small Business Administration’s

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

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

and its subsidiaries operate;

changes in policies by regulatory agencies;

the transition away from LIBOR as a reference rate for financial

operating risks;

changes in accounting standards and policies;

changes in tax laws;

fluctuations in interest rates;

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

increases in FDIC insurance premiums;

changes in the

competitive environment;

losses of significant customers;

geopolitical events;

and the loss of key personnel.

Additional detailed information

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

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

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

Risk Factors” of Part

I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as supplemented by the risk factors included

under the heading “Item 1A.

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

ended June 30, 2021.

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

as may be required by law, the Company undertakes no obligation to update any forward-looking statement to reflect unanticipated events

or circumstances after the date on which the statement is made.

include, without limitation:

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;

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;

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;

volatility of mortgage banking income, whether due to interest rates, demand, the fair value

of mortgage loans, or other 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;

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;

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;

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;

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;

losses of services of our key management personnel, or the inability to recruit and retain

qualified personnel in the future;

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;

effect of changes in federal, state and/or local tax laws may adversely affect our reported

financial condition or results of operations;

effect of changes in accounting policies and practices may adversely affect our reported

financial condition or results of operations;

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;

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;

ability to anticipate and successfully keep pace with technological changes affecting the

financial services industry;

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.

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

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(“SB Financial”)

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

SB Financial’s

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

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”)

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

SBFG Title, LLC (“Title”) is an Ohio

corporation that was formed in March 2019.

SBFG Title, LLC (“SBFG Title”) is

an Ohio corporation that was formed in March 2019.

SBFG Title engages in the sale of title insurance services.

SB Captive, Inc.

(“Captive”) is a

Nevada corporation that was formed in March 2019.

(“SB Captive”) is

a Nevada corporation that was formed in March 2019.

SB Captive pools insurance risk among like sized banking institutions.

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that could adversely impact earnings for future periods.

Three Months Ended September 30,

2021 compared to Three Months Ended September 30, 2020

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

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

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

of $0.25 million.

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

The Consolidated Appropriations Act,

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

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

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

During the quarter ended September

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

PPP loans outstanding at September 30, 2021

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

Three Months Ended March 31, 2022 compared

to Three Months Ended March 31, 2021

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.

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:

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The total reserve level of $13.8

million is up over 17 percent from the prior year.

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

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

is down $3.0 million from the prior year.

Quality Review – For the Period Ended

increased $0.1 million from the prior year.

Asset Quality Review – For the Period Ended

($ in thousands)

Net chargeoffs (recoveries) – QTD/YTD

($206)/($188 )

Net charge-offs (recoveries)

Nonaccruing loans

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Total revenue,

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

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

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

Included in NII

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

million for the first quarter of 2022, which was down $1.1 million from the prior year first quarter’s $9.6 million.

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

Funding costs for interest bearing

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

Noninterest income was $6.6 million for the third

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

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

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Recapture of mortgage servicing rights impairment increased noninterest income

by $0.25 million in the quarter.

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

Noninterest income

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

State Bank originated $153.1 million of mortgage

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

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

loans held for investment.

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

from the gains for the third quarter of 2020.

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

$7.9 million for the third quarter of 2020.

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

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

Consolidated Noninterest Expense:

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

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

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

Income Taxes:

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

for the third quarter of 2020.

Nine Months Ended September 30,

2021 compared to Nine Months Ended September 30, 2020

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

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

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

nine-month period.

Provision for Loan Losses :

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

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

for the prior year nine-month period.

Consolidated Revenue :

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

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

Net interest income was $28.8 million, which is

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

The Company’s earning assets

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

The net interest

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

Funding costs for

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

Noninterest income was $24.1 million for the nine

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

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

to $0.3 million for the same period in 2020.

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

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

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

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

of 9.8 and 16.8 percent, respectively.

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

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

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

in staffing, benefit costs and higher investments in technology.

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

to the Edon acquisition.

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:

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

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

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 September 30, 2021 were $1.33

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

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

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

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

loans at September 30, 2021.

Total deposits at September 30, 2021 were $1.11

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

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

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

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

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

Total equity for the Company of $144.3 million now stands at 10.9

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

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

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

flat from the December 2021 year end level.

Capital Resources

As of September 30, 2021, based on the

computations for the FFIEC 041 Consolidated Reports of Condition and Income filed by State Bank with the Federal Reserve, State Bank was

classified as well capitalized under the regulatory framework for prompt corrective action.

To be categorized as well capitalized, State

Bank must maintain capital ratios as set forth in the table below.

There are no conditions or events since September 30, 2021 that management

believes have changed State Bank’s capital classification.

State Bank’s actual capital levels

and ratios as of September 30, 2021 and December 31, 2020 are presented in the following table.

Capital levels are presented for State

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

Be Well Capitalized Under

Capital Adequacy

Corrective Action

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:

For Capital Adequacy

To Be Well Capitalized

Under Prompt Corrective

($ in thousands)

As of September 30, 2021

As of March 31, 2022

Tier I Capital to average assets

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Total Risk-based capital to risk-weighted assets

New regulatory capital requirements

commonly referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the September 30, 2021

capital table above.

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

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

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 relates primarily to the Company’s

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These assets are commonly referred to as liquid assets.

Liquid assets were $399.8

million at September 30, 2021, compared to $303.2 million at December 31, 2020.

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

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The Company’s commercial real estate, first

mortgage residential, agricultural and multi-family mortgage portfolio of $652.8 million at September 30, 2021 and $608.4 million at December

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.

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current liquidity level, without these borrowings, is sufficient to meet its liquidity needs.

At September 30, 2021, all eligible commercial

At March 31, 2022, all eligible commercial

real estate, first mortgage residential and multi-family mortgage loans were pledged under an FHLB blanket lien.

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an adequate level of liquidity.

A discussion of the cash flow statements for the nine months ended September 30, 2021 and 2020 follows.

The Company experienced positive cash flows from

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

Net cash provided by operating activities was

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

Highlights for

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

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

For the nine months ended

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

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

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

Net cash used in investing activities was $77.9

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

Highlights for the

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

These cash payments were offset by $34.6 million in

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

The Company experienced

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

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 nine months ended September 30, 2021 and September 30, 2020.

financing activities for the three months ended March 31, 2022 and March 31, 2021.

Net cash provided by financing activities was $25.3

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

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

down $6.0 million from the prior year.

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

for the prior year nine-month period.

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

of debt issuance costs.

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”)

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from -400 basis points to +400 basis points.

The likelihood of a significant decrease in rates as of September 30, 2021 and December 31,

2020 was considered unlikely given the current interest rate environment and therefore, only the minus 100 basis point rate change was

included in this analysis as of September 30, 2021 and only the minus 100 basis point rate change was included in this analysis as of

December 31, 2020.

The results of this analysis are reflected in the following tables for September 30, 2021 and December 31, 2020.

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.

Economic Value of Equity

September 30, 2021

March 31, 2022

($ in thousands)

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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 September 30, 2021.

Based on the current collateralization requirements of the

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

The Company also had $161.0

million in unpledged securities available to pledge for additional borrowings.

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 September 30, 2021 were comprised of long-term debt obligations, other debt obligations, operating lease obligations and other long-term

of March 31, 2022 were comprised of long-term debt obligations, other debt obligations, operating lease obligations and other long-term

Long-term debt obligations were comprised of FHLB advances of $5.5 million, trust preferred securities of $10.3 million,

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

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

$62.8 million mature beyond one year.

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

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.

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rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions.

The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance

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.

38 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis