What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 275 added, 225 removed, 301 unchanged (62% of the section changed)

Management’s Discussion and

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;

Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking

This Quarterly Report on Form 10-Q, including

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

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

Forward-looking statements provide current

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

Examples of forward-looking statements include:

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

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

(d) statements regarding future customer

attraction or retention;

and (e) statements of assumptions underlying such statements.

Words such as “anticipates”, “believes”,

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

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

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

those statements.

(d) statements regarding future customer attraction or retention;

statements of assumptions underlying such statements.

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

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

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

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

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

3 unchanged sentences

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,

● 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;

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

● 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;

● 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

● 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;

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.

● our ability to anticipate and successfully keep

pace with technological changes affecting the financial services industry;

● 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

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 which

the statement is made.

Overview of SB Financial

93 unchanged sentences

that could adversely impact earnings for future periods.

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.

Three Months Ended June 30, 2022 compared

to Three Months Ended June 30, 2021

Net income for the second

quarter of 2022 was $2.8 million compared to net income of $3.8 million for the second quarter of 2021, a decrease of 24.6 percent.

earnings per share (“DEPS”) of $0.40 were down 23.1 percent from DEPS of $0.52 for the second quarter of 2021.

for the second quarter of 2022 was positively impacted by the Company’s recapture of temporary impairment of $0.24 million on its

mortgage servicing rights.

The 2021 second quarter was negatively impacted by temporary impairment of mortgage servicing rights of $0.1

Net income for the second quarter of 2022 was negatively impacted by the significant decline in mortgage loan volume and loan

sales, as compared to the same period in 2021, as rising rates reduced refinance activity and compressed inventories of available housing

constrained new purchase volume.

Mortgage loan volume was down nearly 42 percent during the second quarter of 2022, and a lower percentage

of originated volume was sold on the secondary market, as compared to the same period in 2021.

In addition, Paycheck Protection Program

(“PPP”) related revenue compared to the prior year was down by $2.05 million.

Provision for Loan Losses:

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.

quarter provision for loan losses was zero for both the current and prior year quarters.

The total reserve level of $13.8 million is up

nearly 4 percent from the prior year.

Given that level of reserve (1.54 percent), zero provision for the quarter was appropriate.

charge-offs for the quarter were $3,000 compared to net charge-offs of $20,000 for the year-ago quarter.

Total delinquent loans ended

the quarter at $2.9 million, or 0.32 percent of total loans, which is down $0.6 million from the prior year.

Asset Quality Review – For the Period Ended

($ in thousands)

Net charge-offs (recoveries)

Net charge-offs – QTD/YTD

Nonaccruing loans

Accruing Trouble Debt Restructures

Accruing Troubled Debt Restructures

Nonaccruing and restructured loans

OREO / Other Assets Owned (OAO)

Nonperforming assets

4 unchanged sentences

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.

consisting of net interest income and noninterest income, was $14.3 million for the second quarter of 2022, a decrease of $1.4 million,

or 9.1 percent, from the $15.7 million generated during the second quarter of 2021.

Net interest income (“NII”) was $9.6

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 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.

million, which is up $0.4 million from the prior year second quarter’s $9.2 million.

The Company’s earning assets decreased

$35.1 million, but the average yield on earning assets increased by 20 basis points.

The net interest margin, for the second quarter of

2022 was 3.16 percent compared to 2.93 percent for the second quarter of 2021.

Funding costs (interest paid to consumers and other entities)

for interest bearing liabilities for the second quarter of 2022 were 0.39 percent compared to 0.44 percent for the prior year second quarter.

PPP fees and interest increased the 2021 net interest margin by 12 basis points.

Noninterest income was $4.7 million for the second

quarter of 2022, which was down $1.9 million from the prior year second quarter’s $6.5 million.

In addition to the mortgage revenue

detailed below, wealth management revenue was $0.9 million.

Recapture of our mortgage servicing rights impairment increased noninterest

income by $0.2 million in the quarter.

Our title agency contributed revenue of $0.7 million in the second quarter of 2022, up $0.2 million

from the prior year.

Noninterest income as a percentage of average assets for the second quarter of 2022 was 1.43 percent compared to

1.97 percent for the prior year second quarter.

State Bank originated $95.4 million of mortgage

loans for the second quarter of 2022, of which $49.9 million was sold with the remainder of loans held for investment.

This compares to

$164.9 million originated for the second quarter of 2021, of which $119.1 million was sold with the remainder of loans held for investment.

These second quarter 2022 originations and subsequent sales resulted in $1.2 million of gains, down $3.1 million from the gains for the

second quarter of 2021.

Net mortgage banking revenue was $1.8 million for the second quarter of 2022 compared to $4.0 million for the

second quarter of 2021.

The 2022 second quarter included a $0.2 million recapture of our mortgage servicing rights impairment compared

to a $0.1 million valuation impairment for the second quarter of 2021.

As detailed above, mortgage loan originations have decreased significantly

in 2022 as rising rates have reduced refinance activity and compressed inventories of available housing have constrained new purchase

Consolidated Noninterest Expense:

Noninterest expense for the second quarter of 2022 was $10.8 million, which was down $0.3 million compared to $11.1 million in the prior-year

second quarter.

The second quarter of 2022 included lower commission and incentives on mortgage sales, offset by higher equipment expense

due to several technology related improvements.

Income Taxes:

Income taxes for the

second quarter of 2022 were $0.6 million (effective rate of 18.2 percent) compared to $0.9 million (effective rate of 18.6 percent) for

the second quarter of 2021.

Six Months Ended June 30, 2022 compared

to Six Months Ended June 30, 2021

Net income for the first

six months of 2022 was $5.6 million compared to net income of $10.8 million for the first six months of 2021, a decrease of 47.9 percent.

DEPS of $0.79 were down 47.0 percent from DEPS of $1.49 for the first six months of 2021.

Net income for both periods were positively

impacted by the recapture of the Company’s temporary mortgage servicing rights impairment in the amounts of $1.1 million and $2.6

million for the first six months of 2022 and 2021, respectively.

Net income for the first six months of 2022 was negatively impacted by

the significant decline in mortgage loan volume and loan sales, as compared to the same period in 2021, as rising rates reduced refinance

activity and compressed inventories of available housing constrained new purchase volume.

Mortgage loan volume was down nearly 40 percent

from the prior year and a lower percentage of originated volume was sold on the secondary market.

Loan growth since December 31, 2021 was $72.9

million with remaining balances on PPP loans down to $0.6 million at June 30, 2022.

Provision for Loan Losses:

for loan losses for the first six months of 2022 was $0.0 million, compared to $0.75 million for the year-ago period.

The Company had

net charge-offs of $4,000 for the first six months of 2022 compared to net charge-offs of $18,000 for the year-ago period.

Consolidated Revenue:

Total revenue,

consisting of net interest income and noninterest income, was $28.5 million for the first six months of 2022, a decrease of $7.7 million,

or 21.2 percent, from the $36.2 million generated during the first six months of 2021.

Net interest income was $18.1 million for the

first six months of 2022, which was down $0.7 million from $18.8 million for the prior year first six months.

Included in NII for the

first six months of 2022 was $0.1 million in fees and interest from PPP loans compared to $2.2 million for the prior year first six months.

The Company’s earning assets increased $15.7 million, but the yield on average earning assets decreased 20 basis points.

interest margin for the first six months of 2022 was 2.91 percent compared to 3.06 percent for the first six months of 2021.

Funding costs

for interest bearing liabilities for the first six months of 2022 were 0.38 percent compared to 0.47 percent for the prior year similar

Noninterest income was $10.5 million for the first

quarter of 2022, which was down $5.1 million from the prior year first quarter’s $10.9 million.

six months of 2022, which was down $7.0 million from $17.5 million for the prior year first six months.

In addition to the mortgage revenue

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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.

by $1.1 million in the period, compared to an increase of $2.6 million in the prior year.

During the first six months, we sold $2.7 million

in Small Business Administration (“SBA”) loans, with gains on sale of $0.3 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.

$1.3 million in the first six months of 2022.

Noninterest income as a percentage of average assets for the first six months of 2022 was

1.58 percent compared to 2.67 percent for the prior year first six months.

State Bank originated $192.8 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

loans for the first six months of 2022, which resulted in $122.1 million in loan proceeds, with the remainder of loans held for investment.

This compares to $320.7 million originated for the first six months of 2021, of which $255.8 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.

These originations and subsequent sales resulted in $2.9 million of gains, compared to $10.1 million of

gains for the first six months of 2021.

Net mortgage banking revenue was $4.7 million for the first six months of 2022 compared to $12.3

million for the first six months 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

Noninterest expense for the first six months of 2022 was $21.7 million, which was down slightly compared to the $22.0 million in the prior-year

first six months.

The first half 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.

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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.

first six months of 2022 were $1.2 million (effective rate of 18.0 percent) compared to $2.7 million (effective rate of 19.7 percent)

for the first six months of 2021.

In addition to the impact of the lower pretax income, the first six months of 2022 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

Total assets at June 30, 2022 were $1.29 billion,

a decrease of $36.9 million, or 2.8 percent, since December 31, 2021.

Total loans, net of unearned income, were $895.6 million as of June

30, 2022, up $73.0 million, or 8.9 percent, from year-end.

PPP loan balances of $0.6 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.

loans at June 30, 2022 and December 31, 2021, respectively.

Total deposits at June 30, 2022 were $1.07 billion,

a decrease of $41.3 million or 3.77 percent since 2021 year end.

Borrowed funds (consisting of FHLB advances, federal funds borrowed,

REPO agreements, trust preferred securities and subordinated debt) totaled $85.7 million at June 30, 2022.

This is up from year-end 2021

when borrowed funds totaled $50.7 million due to an increase in REPO agreements, federal funds borrowed, and FHLB advances.

for the Company of $124.6 million now stands at 9.6 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 a $20.4 million increase in the unrealized loss on the Company’s investment

The allowance for loan loss of $13.8 million is

flat from the December 2021 year end level.

The Company's loan growth was offset

by continued improvement of overall asset quality metrics, including reductions in non-performing assets and delinquencies.

Other liabilities are down $10.2 million from

December 31, 2021 due to escrow balances held for our serviced mortgage customers at December 31 that were paid in the first quarter of

2022, and a reclassification of deferred taxes resulting from a change in unrealized losses in the securities portfolio.

Capital Resources

As of March 31, 2022, based on the computations

As of June 30, 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

2 unchanged sentences

maintain capital ratios as set forth in the table below.

There are no conditions or events since March 31, 2022 that management believes

There are no conditions or events since June 30, 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.

as of June 30, 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

For Capital Adequacy

Under Prompt Corrective

Action Procedures

($ in thousands)

As of March 31, 2022

As of June 30, 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 March 31, 2022 capital table above.

Regulatory capital requirements commonly referred

to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the June 30, 2022 capital table above.

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

7 unchanged sentences

Liquid assets totaled $301.7

million at March 31, 2022, compared to $422.9 million at December 31, 2021.

million at June 30, 2022, compared to $422.9 million at December 31, 2021.

Liquidity risk arises from the possibility that

8 unchanged sentences

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

mortgage residential, agricultural and multi-family mortgage portfolio of $706.5 million at June 30, 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 March 31, 2022, all eligible commercial

At June 30, 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 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.

A discussion of the cash flow statements for the six months ended June 30, 2022 and 2021 follows.

The Company experienced positive cash flows from

operating activities for the six months ended June 30, 2022 and June 30, 2021.

Net cash provided by operating activities was $3.7 million

for the six months ended June 30, 2022 and $2.0 million for the six months ended June 30, 2021.

Highlights for the current year include

$125.1 million in proceeds from the sale of loans, which is down $130.7 million from the prior year.

Originations of loans held for sale

was a use of cash of $119.9 million, which is down from the prior year by $129.6 million.

For the six months ended June 30, 2022, there

was a gain on sale of loans of $3.2 million, and depreciation and amortization of $1.1 million.

The Company experienced negative cash flows from

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

investing activities for the six months ended June 30, 2022 and June 30, 2021.

Net cash used in investing activities was $111.3 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.

for the six months ended June 30, 2022 and $43.4 million for the six months ended June 30, 2021.

Highlights for the current year include

purchases of available-for-sale securities of $50.6 million.

These cash payments were offset by $21.4 million in proceeds from maturities

and sales of securities, which is down $1.9 million from the prior year six-month period.

The Company experienced a $73.1 million increase

in loans, which is up $93.7 million from the prior year six-month period.

The Company experienced negative cash flows from

financing activities for the six months ended June 30, 2022 and positive cash flows for the six months ended June 30, 2021.

Net cash used

by financing activities was $12.3 million for the six months ended June 30, 2022 and net cash provided by financing activities was $55.6

million for the six months ended June 30, 2021.

Highlights for the current period include a $27.0 million decrease in transaction deposits

for the six months ended June 30, 2022, which is down $125.9 million from the prior year.

Certificates of deposit decreased by $14.2 million

in the current year compared to $56.9 million for the prior year six-month period.

Proceeds from Federal Home Loan Bank advances for the

six months ended June 30, 2022 were $25.0 million, an increase of $25.0 million from the prior year six-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 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.

The likelihood of a significant decrease in rates as of June 30, 2022 and December 31, 2021

was considered unlikely given the current interest rate environment and therefore, only the minus 100 and 200 basis point rate change

was included in this analysis.

The results are reflected in the following tables for June 30, 2022 and December 31, 2021.

Economic Value of Equity

March 31, 2022

June 30, 2022

($ in thousands)

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-100 basis points

-200 basis points

Economic Value of Equity

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real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $706.5 million were

pledged to meet FHLB collateralization requirements as of March 31, 2022.

pledged to meet FHLB collateralization requirements as of June 30, 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 had approximately $96.6 million of additional borrowing capacity at June 30, 2022.

The Company also had $176.9 million in

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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

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

of June 30, 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 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 June 30, 2022 were $142.3 million, of which $82.2 million mature

beyond one year.

In addition, as of June 30, 2022, the Company

had commitments to sell mortgage loans totaling $15.5 million.

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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