SB FINANCIAL GROUP, INC. 10-K

Item 8. Financial Statements and Supplementary Data. Our Consolidated Financial Statements and notes thereto and other supplementary data follow. Index to Consolidated Financial Statements Page Consolidated Balance Sheets as of December 31, 2022 and 2021 F-2 Consolidated Statements of Income for the Years ended December 31, 2022 and 2021 F-3 Consolidated Statements of Comprehensive Income (Loss) for the Years ended December 31, 2022 and 2021 F-4 Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-7 Report of Independent Registered Public Accounting Firm (FORVIS, LLP) (PCAOB ID: 686 ) F-40 F- 1 SB Financial Group, Inc. Consolidated Balance Sheets at December 31, ($ in thousands) 2022 2021 Assets Cash and due from banks $ 27,817 $ 149,511 Interest bearing time deposits 2,131 2,643 Available-for-sale securities 238,780 263,259 Loans held for sale 2,073 7,472 Loans, net of unearned income 962,075 822,714 Allowance for loan losses ( 13,818 ) ( 13,805 ) Premises and equipment, net 22,829 23,212 Federal Reserve and Federal Home Loan Bank Stock, at cost 6,326 5,303 Foreclosed assets and other assets held for sale, net 777 2,104 Interest receivable 4,091 2,920 Goodwill 23,239 23,191 Cash value of life insurance 28,870 17,867 Mortgage servicing rights 13,503 12,034 Other assets 16,940 12,429 Total assets $ 1,335,633 $ 1,330,854 Liabilities and shareholders’ equity Liabilities Deposits Non interest bearing demand $ 256,799 $ 247,044 Interest bearing demand 191,719 195,464 Savings 191,272 237,571 Money market 255,995 276,462 Time deposits 190,880 156,504 Total deposits 1,086,665 1,113,045 Repurchase agreements 14,923 15,320 Federal Home Loan Bank advances 60,000 5,500 Trust preferred securities 10,310 10,310 Subordinated debt net of issuance costs 19,594 19,546 Interest payable 769 299 Other liabilities 24,944 21,905 Total liabilities 1,217,205 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; 2022 - 10,500,000 shares authorized, 8,525,375 shares issued; 2021 - 10,000,000 shares authorized, 8,180,712 shares issued 61,319 54,463 Additional paid-in capital 15,087 14,944 Retained earnings 101,966 99,716 Accumulated other comprehensive loss ( 32,120 ) ( 1,845 ) Treasury stock, at cost; (2022 - 1,589,913 common shares; 2021 - 1,296,382 common shares) ( 27,824 ) ( 22,349 ) Total shareholders’ equity 118,428 144,929 Total liabilities and shareholders’ equity $ 1,335,633 $ 1,330,854 See Notes to Consolidated Financial Statements F- 2 SB Financial Group, Inc. Consolidated Statements of Income Years Ended December 31, ($ in thousands, except per share data) 2022 2021 Interest Income Loans Taxable $ 38,238 $ 37,959 Tax exempt 335 206 Securities Taxable 5,798 3,386 Tax exempt 198 353 Total interest income 44,569 41,904 Interest Expense Deposits 3,477 3,129 Repurchase agreements & other 39 42 Federal Home Loan Bank advance expense 515 188 Trust preferred securities expense 361 199 Subordinated debt expense 778 462 Total interest expense 5,170 4,020 Net Interest Income 39,399 37,884 Provision for loan losses - 1,050 Net interest income after provision for loan losses 39,399 36,834 Noninterest Income Wealth management fees 3,728 3,814 Customer service fees 3,378 3,217 Gain on sale of mortgage loans & OMSR 4,298 17,255 Mortgage loan servicing fees, net 2,964 2,940 Gain on sale of non-mortgage loans 566 158 Title insurance income 2,229 2,089 Other income 1,068 1,224 Total noninterest income 18,231 30,697 Noninterest Expense Salaries and employee benefits 24,142 26,838 Net occupancy expense 2,993 3,048 Equipment expense 3,616 3,281 Data processing fees 2,510 2,579 Professional fees 3,214 3,027 Marketing expense 911 784 Telephone and communications 474 581 Postage and delivery expense 422 414 State, local and other taxes 1,082 1,175 Employee expense 613 663 Other expense 2,337 2,418 Total noninterest expense 42,314 44,808 Income before income tax 15,316 22,723 Provision for income taxes 2,795 4,446 Net Income $ 12,521 $ 18,277 Basic earnings per common share $ 1.79 $ 2.58 Diluted earnings per common share $ 1.77 $ 2.56 See Notes to Consolidated Financial Statements F- 3 SB Financial Group, Inc. Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, ($ in thousands) 2022 2021 Net income $ 12,521 $ 18,277 Other comprehensive (loss) Available for sale investment securities: Gross unrealized holding (loss) arising in the period ( 38,323 ) ( 5,133 ) Related tax benefit 8,048 1,078 Net effect on other comprehensive (loss) ( 30,275 ) ( 4,055 ) Total comprehensive income (loss) $ ( 17,754 ) $ 14,222 See Notes to Consolidated Financial Statements F- 4 SB Financial Group, Inc. Consolidated Statements of Shareholders’ Equity Years Ended December 31, Accumulated Other ($ in thousands, except per share data) Common Stock Additional Paid-in Capital Retained Earnings Comprehensive Income (Loss) Treasury Stock Total January 1, 2022 $ 54,463 $ 14,944 $ 99,716 $ ( 1,845 ) $ ( 22,349 ) $ 144,929 Net income 12,521 12,521 Other comprehensive loss ( 30,275 ) ( 30,275 ) Stock dividends on common ( 344,663 shares) 6,856 ( 6,864 ) ( 8 ) Dividends on common, $ 0.48 per share ( 3,407 ) ( 3,407 ) Restricted stock vesting ( 425 ) 425 - Repurchased stock ( 317,356 shares) ( 5,900 ) ( 5,900 ) Stock based compensation expense 568 568 December 31, 2022 $ 61,319 $ 15,087 $ 101,966 $ ( 32,120 ) $ ( 27,824 ) $ 118,428 Accumulated Other ($ in thousands, except per share data) Common Stock Additional Paid-in Capital Retained Earnings Comprehensive Income (Loss) Treasury Stock Total January 1, 2021 $ 54,463 $ 14,845 $ 84,578 $ 2,210 $ ( 13,173 ) $ 142,923 Net income 18,277 18,277 Other comprehensive loss ( 4,055 ) ( 4,055 ) Dividends on common, $ 0.44 per share ( 3,139 ) ( 3,139 ) Restricted stock vesting ( 344 ) 344 - Repurchased stock ( 507,721 shares) ( 9,520 ) ( 9,520 ) Stock based compensation expense 443 443 December 31, 2021 $ 54,463 $ 14,944 $ 99,716 $ ( 1,845 ) $ ( 22,349 ) $ 144,929 See Notes to Consolidated Financial Statements F- 5 SB Financial Group, Inc. Consolidated Statements of Cash Flows Investing Activities Years Ended December 31, ($ in thousands) 2022 2021 Operating Activities Net Income $ 12,521 $ 18,277 Items not requiring (providing) cash Depreciation and amortization 2,196 2,262 Provision for loan losses - 1,050 Expense of share-based compensation plan 568 443 Amortization of premiums and discounts on securities 897 1,236 Amortization of intangible assets 69 71 Amortization of originated mortgage servicing rights 1,749 3,885 Impairment (recovery) of mortgage servicing rights ( 1,279 ) ( 3,436 ) Deferred income taxes 2,709 2,302 Proceeds from sale of loans held for sale 189,515 490,557 Originations of loans held for sale ( 181,192 ) ( 478,119 ) Gain from sale of loans ( 4,864 ) ( 17,413 ) Changes in Interest receivable ( 1,171 ) 879 Other assets ( 2,014 ) 2,006 Interest payable & other liabilities 5,865 ( 6,743 ) Net cash provided by operating activities 25,569 17,257 Investing Activities Purchases of available-for-sale securities ( 50,618 ) ( 170,694 ) Proceeds from maturities of interest bearing time deposits 512 3,180 Proceeds from maturities of available-for-sale securities 35,878 50,471 Net change in loans ( 139,670 ) 48,503 Purchase of premises, equipment ( 1,896 ) ( 2,427 ) Purchase of bank owned life insurance ( 10,500 ) ( 50 ) Purchase of Federal Reserve and Federal Home Loan Bank Stock ( 1,023 ) - Proceeds from sale of foreclosed assets 1,646 129 Acquisition, net of cash acquired (paid) - ( 1,100 ) Net cash used in investing activities ( 165,671 ) ( 71,988 ) Financing Activities Net increase (decrease) in demand deposits, money market, interest checking & savings accounts ( 60,756 ) 137,079 Net increase (decrease) in time deposits 34,376 ( 73,045 ) Net decrease in securities sold under agreements to repurchase ( 397 ) ( 4,869 ) Proceeds from Federal Home Loan Bank advances 232,000 - Repayment of Federal Home Loan Bank advances ( 177,500 ) ( 2,500 ) Stock repurchase plan ( 5,900 ) ( 9,520 ) Dividends on common shares ( 3,415 ) ( 3,139 ) Net cash provided by financing activities 18,408 63,552 Increase in cash and cash equivalents ( 121,694 ) 8,821 Cash and cash equivalents, beginning of year 149,511 140,690 Cash and cash equivalents, end of year $ 27,817 $ 149,511 Supplemental cash flow information Interest paid $ 4,700 $ 4,337 Income taxes paid $ - $ 4,230 Supplemental non-cash disclosure Recognition of right-of-use lease assets $ - $ 318 Transfer of loans to foreclosed assets $ 322 $ 1,687 Stock dividends declared and paid $ 6,856 $ - See Notes to Consolidated Financial Statements F- 6 SB Financial Group, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2022 and 2021 Note 1: Organization and Summary of Significant Accounting Policies Organization and Nature of Operations SB Financial Group, Inc. (the “Company”) is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), SBFG Title, LLC dba Peak Title Agency (“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”). State Bank owns all the outstanding stock of Rurban Mortgage Company (“RMC”) and State Bank Insurance, LLC (“SBI”). The Company is primarily engaged in providing a full range of banking and wealth management services to individual and corporate customers primarily located in Ohio, Indiana, and Michigan. The Company is subject to competition from other financial institutions in its market areas. The Company is regulated by certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company, State Bank, SBFG Title, SB Captive, RFCBC, RDSI, RMC, RST II, and SBI. All significant intercompany accounts and transactions were eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, loan servicing rights, and fair value of financial instruments. Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2022 and 2021, cash equivalents consisted primarily of interest-bearing and noninterest bearing demand deposit balances held by correspondent banks. At December 31, 2022, the Company’s correspondent cash accounts exceeded federally insured limits by $ 1.6 million. Additionally, the Company had approximately $ 9.8 million of cash held by the FRB and the FHLB, which is not federally insured. Securities Available-for-sale securities, which include any debt security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. For debt securities with fair value below carrying value when the Company does not intend to sell the debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, the Company recognizes the credit component of an other-than-temporary impairment of the debt security in earnings and the remaining portion in other comprehensive income. F- 7 Mortgage Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income. The Company utilizes third-party hedges to minimize the impact of interest rate risk fluctuations, and their impact is realized through noninterest income. Loans 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, loans are placed on nonaccrual status not later than 90 days past due. Past due status is based on the contractual terms of the loan. 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. Allowance for Loan Losses 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. 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 non-classified 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 on the historical loss or risk rating data. A loan is considered impaired when, based on current information and events, it is probable that the Company 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 a loan moves 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. F- 8 Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. Premises and Equipment Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method for buildings and equipment over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line method over the terms of the respective leases. Long-lived Asset Impairment The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset’s cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long- lived asset exceeds its fair value. Federal Reserve Bank and Federal Home Loan Bank Stock FRB and FHLB stock are required investments for institutions that are members of the FRB and FHLB systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment. Foreclosed Assets and Other Assets Held for Sale Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less cost to sell. Revenue and expenses from operations related to foreclosed assets and changes in the valuation allowance are included in net income or expense from foreclosed assets. Goodwill Goodwill is tested for impairment annually. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Core Deposits and Other Intangibles Intangible assets are being amortized on a straight-line basis over weighted-average periods ranging from one to eight years . Such assets are periodically evaluated as to the recoverability of their carrying value. Purchased software is being amortized using the straight-line method over periods ranging from one to three years . Derivatives 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 are entered into in order to 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 the 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 the derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. F- 9 For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation. Mortgage Servicing Rights Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance, (Accounting Standards Codification “ASC” 806-50), servicing rights from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost of service, the discount rate, the custodial earning rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income. Each class of separately recognized servicing assets subsequently measured using the amortization method is evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with “Mortgage loan servicing fees, net” in the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Share-Based Employee Compensation Plan At December 31, 2022 and 2021, the Company had a share-based employee compensation plan (see Note 18 to the Consolidated Financial Statements). Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before the maturity or the ability to unilaterally cause the holder to return specific assets. Income Taxes The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. F- 10 The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term “upon examination” also includes resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. With a few exceptions, the Company is no longer subject to U.S. Federal, State and Local examinations by tax authorities for the years before 2019. As of December 31, 2022, the Company had no uncertain income tax positions. Treasury Shares Treasury stock is stated at cost. Cost is determined by the weighted-average cost method. Earnings Per Share Earnings per common share is computed using the two-class method. Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflect additional potential common shares that may be issued by the Company related solely to outstanding stock options or awards which are determined using the treasury stock method. Treasury stock shares are not deemed outstanding for earnings per share calculations. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available- for-sale securities. AOCI consists solely of the cumulative unrealized gains and losses on available-for-sale securities net of income tax. Subordinated Debt At December 31, 2022, the Company had subordinated debt obligations of $ 20.0 million related to its 3.65 % Fixed to Floating Rate Subordinated Notes due 2031, which were issued and sold by the Company on May 27, 2021. The Subordinated Notes were issued in order to provide additional funds for various corporate obligations of the Company, including share buybacks, acquisition costs and organic asset growth (see Note 13 to the Consolidated Financial Statements). Revenue Recognition The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered through State Bank. F- 11 Interest income is the largest source of revenue for the Company and is primarily recognized on an accrual basis. Noninterest income is earned through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking and title insurance. 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. 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. 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. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. However, on October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses , for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, which was codified in the final ASU issued by the FASB on November 15, 2019. As a result, because the Company qualified as a smaller reporting company, based on its most recent determination under applicable rules of the Securities and Exchange Commission, as of November 15, 2019, the Company is not subject to ASU 2016-13 until its annual and interim periods beginning January 1, 2023. The Company established a committee and engaged an outside consultant to assist in the transition to the new standard. Specific loan level history was incorporated into the model and the Company is comfortable with the assumptions related to each loan product type. The Company expects to recognize a one-time cumulative effect adjustment (increase) to the allowance for credit losses between $ 1.0 million and $ 2.0 million upon adoption as of January 1, 2023. In addition, the Company expects to establish a related reserve for unfunded commitments of between $ 1.0 million and $ 2.0 million as of January 1, 2023. F- 12 ASU No. 2022-02: Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures This guidance was issued in March 2022 to enhance the disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulties. The amendments in this update require that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The guidance is effective beginning after December 15, 2022. The impact of this new guidance should not have a material impact on the Company’s consolidated financial statements. 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. However, a deferral of the implementation of the Reference Rate Reform was issued in December of 2022, which extends the implementation to December 31, 2024. 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 to the consolidated financial statements. Note 2: Earnings Per Share Earnings per common share (“EPS”) is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common shares. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share plus the dilutive effect of stock compensation using the treasury stock method. EPS for the years ended December 31, 2022 and 2021 is computed as follows: Twelve Months Ended December 31, ($ and outstanding shares in thousands - except per share data) 2022 2021 Net Income $ 12,521 $ 18,277 Less net income allocated to participating securities 27 21 Net income allocated to common shares $ 12,494 $ 18,256 Weighted average shares outstanding for basic earnings per share 7,005 7,083 Average participating securities 37 47 Weighted average shares outstanding for diluted earnings per share 7,042 7,130 Basic earnings per common share $ 1.79 $ 2.58 Diluted earnings per common share $ 1.77 $ 2.56 There were no anti-dilutive shares in 2022 or 2021. 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 $ 19.89 of the Company’s common shares on the record date. F- 13 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 entire year would have decreased by $ 0.11 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 available-for-sale securities are as follows: Gross Gross ($ in thousands) Amortized Unrealized Unrealized Cost Gains Losses Fair Value December 31, 2022: U.S. Treasury and Government agencies $ 7,636 $ - $ ( 872 ) $ 6,764 Mortgage-backed securities 241,741 4 ( 35,910 ) 205,835 State and political subdivisions 12,862 10 ( 1,769 ) 11,103 Other corporate securities 17,200 - ( 2,122 ) 15,078 Totals $ 279,439 $ 14 $ ( 40,673 ) $ 238,780 Gross Gross Amortized Unrealized Unrealized Cost Gains 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 The amortized cost and fair value of securities available-for-sale at December 31, 2022, by contractual maturity, are shown below. Expected maturities 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 $ 1,092 $ 1,080 Due after one year through five years 1,882 1,814 Due after five years through ten years 25,490 22,470 Due after ten years 9,234 7,581 37,698 32,945 Mortgage-backed securities 241,741 205,835 Totals $ 279,439 $ 238,780 F- 14 The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $ 53.9 million at December 31, 2022, and $ 54.2 million at December 31, 2021. Securities delivered for repurchase agreements (not included above) were $ 17.8 million at December 31, 2022 and $ 23.6 million at December 31, 2021. There were no realized gains or losses on available-for-sale securities in 2022 and 2021. Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. There were 144 securities and 65 securities reported with amounts less than their historical value at December 31, 2022 and 2021, respectively. Total fair value of these investments were $ 235.5 million and $ 214.2 million at December 31, 2022 and 2021, respectively, which was approximately 99 percent and 81 percent, respectively, of the Company’s available-for-sale investment portfolio. 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. The following tables present securities with unrealized losses at December 31, 2022 and 2021: ($ in thousands) Less than 12 Months 12 Months or Longer Total December 31, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ 3,788 $ ( 452 ) $ 2,974 $ ( 420 ) $ 6,762 $ ( 872 ) Mortgage-backed securities 52,351 ( 5,234 ) 153,055 ( 30,676 ) 205,406 ( 35,910 ) State and political subdivisions 7,461 ( 1,370 ) 1,268 ( 399 ) 8,729 ( 1,769 ) Other corporate securities 12,015 ( 1,736 ) 2,564 ( 386 ) 14,579 ( 2,122 ) Totals $ 75,615 $ ( 8,792 ) $ 159,861 $ ( 31,881 ) $ 235,476 $ ( 40,673 ) 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 unrealized loss on the securities portfolio increased by $ 37.1 million as of December 31, 2022, from the prior year. Management reviews these securities on a quarterly basis and has determined that no impairment exists. 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. When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other- than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income (loss). F- 15 Note 4: Loans and Allowance for Loan Losses The following tables present the categories of loans at December 31, 2022 and 2021: Total Loans Nonaccrual Loans ($ in thousands) December 2022 December 2021 December 2022 December 2021 Commercial & industrial $ 128,090 $ 122,250 $ 114 $ 143 Commercial real estate - owner occupied 110,848 118,891 - 88 Commercial real estate - nonowner occupied 301,787 262,277 210 466 Agricultural 64,388 57,403 - - Residential real estate 291,512 206,424 3,020 2,484 Home equity line of credit (HELOC) 45,061 41,682 310 464 Consumer 19,944 13,474 28 7 Total loans $ 961,630 $ 822,401 $ 3,682 $ 3,652 Net deferred costs (fees) $ 445 $ 313 Total loans, net deferred costs (fees) $ 962,075 $ 822,714 Allowance for loan losses $ ( 13,818 ) $ ( 13,805 ) The Company makes commercial, agri-business, consumer and residential loans to customers throughout its defined market area. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Listed below is a summary of loan commitments, unused lines of credit and standby letters of credit as of December 31, 2022 and 2021. ($ in thousands) 2022 2021 Loan commitments and unused lines of credit $ 221,668 $ 219,618 Standby letters of credit 1,336 2,060 Totals $ 223,004 $ 221,678 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. F- 16 Commercial Real Estate (Owner and Nonowner Occupied) Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Residential Real Estate, Home Equity Line of Credit (“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. The following tables present the balance of the allowance for loan and lease losses (“ALLL”) and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2022 and 2021: ($ in thousands) For the Twelve Months Ended December 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 - - - - ( 34 ) ( 34 ) Recoveries - - - - 47 47 Provision ( 227 ) ( 501 ) 12 923 ( 207 ) - Ending balance $ 1,663 $ 6,280 $ 611 $ 4,438 $ 826 $ 13,818 December 31, 2022 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance: Ending balance: individually evaluated for impairment $ - $ - $ - $ 138 $ 2 $ 140 Ending balance: collectively evaluated for impairment $ 1,663 $ 6,280 $ 611 $ 4,300 $ 824 $ 13,678 Totals $ 1,663 $ 6,280 $ 611 $ 4,438 $ 826 $ 13,818 Loans: Ending balance: individually evaluated for impairment $ 204 $ 347 $ - $ 2,863 $ 114 $ 3,528 Ending balance: collectively evaluated for impairment $ 127,886 $ 412,288 $ 64,388 $ 288,649 $ 64,891 $ 958,102 Totals $ 128,090 $ 412,635 $ 64,388 $ 291,512 $ 65,005 $ 961,630 F- 17 ($ in thousands) For the Twelve Months Ended December 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 - - - ( 43 ) ( 93 ) ( 136 ) Recoveries 227 - - 49 41 317 Provision (credit) ( 1,411 ) 1,330 103 975 53 1,050 Ending balance $ 1,890 $ 6,781 $ 599 $ 3,515 $ 1,020 $ 13,805 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 (loan grades) 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 (grade 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 (grade 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 jeopardized 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 (grade 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 (grade 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 feasible. Loans will be classified as 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. F- 18 The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of December 31, 2022 and 2021: ($ in thousands) December 31, 2022 Commercial & industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total Pass (1 - 4) $ 127,424 $ 107,918 $ 296,518 $ 64,388 $ 288,172 $ 44,751 $ 19,915 $ 949,086 Special Mention (5) 394 2,930 4,899 - - - - 8,223 Substandard (6) 158 - 160 - 3,316 310 29 3,973 Doubtful (7) 114 - 210 - 24 - - 348 Loss (8) Total Loans $ 128,090 $ 110,848 $ 301,787 $ 64,388 $ 291,512 $ 45,061 $ 19,944 $ 961,630 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 Company uses a five-year average of historical losses for the general component of the allowance for loan loss calculation. No significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the periods presented. The following tables present the Company’s loan portfolio aging analysis as of December 31, 2022 and 2021: ($ in thousands) 30-59 Days 60-89 Days Greater Than 90 Days Total Past Total Loans December 31, 2022 Past Due Past Due Past Due Due Current Receivable Commercial & industrial $ 23 $ 108 $ 114 $ 245 $ 127,845 $ 128,090 Commercial real estate - owner occupied - - - - 110,848 110,848 Commercial real estate - nonowner occupied 114 - 32 146 301,641 301,787 Agricultural - - - - 64,388 64,388 Residential real estate 98 411 1,287 1,796 289,716 291,512 HELOC 98 24 138 260 44,801 45,061 Consumer 61 26 22 109 19,835 19,944 Total Loans $ 394 $ 569 $ 1,593 $ 2,556 $ 959,074 $ 961,630 30-59 Days 60-89 Days Greater Than 90 Days Total Past Total Loans December 31, 2021 Past Due Past Due 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 F- 19 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 that the Company 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 a Troubled Debt Restructure (“TDR”) 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. The following tables present impaired loan activity for the twelve months ended December 31, 2022 and 2021: ($ in thousands) Twelve Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income December 31, 2022 Investment Balance Allowance Investment Recognized With no related allowance recorded: Commercial & industrial $ 204 $ 627 $ - $ 650 $ 34 Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied 347 825 - 1,350 94 Agricultural - - - - - Residential real estate 1,491 1,558 - 1,793 65 HELOC 68 68 85 4 Consumer - - - - - With a specific allowance recorded: Commercial & industrial - - - - - Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied - - - - - Agricultural - - - - - Residential real estate 1,372 1,372 138 1,424 43 HELOC 46 46 2 51 2 Consumer - - - - - Totals: Commercial & industrial $ 204 $ 627 $ - $ 650 $ 34 Commercial real estate - owner occupied $ - $ - $ - $ - $ - Commercial real estate - nonowner occupied $ 347 $ 825 $ - $ 1,350 $ 94 Agricultural $ - $ - $ - $ - $ - Residential real estate $ 2,863 $ 2,930 $ 138 $ 3,217 $ 108 HELOC $ 114 $ 114 $ 2 $ 136 $ 6 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 $ - $ - $ - $ - $ - F- 20 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 Loans (TDRs) TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs. TDR Concession Types The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. 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 debt. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis. ● Amortization or maturity date change beyond what the collateral supports, including a change that does any of the following: (1) Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven. (2) Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven. (3) Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non- market terms and would then be reclassified as TDRs. ● Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type. There were no new TDRs during the period ended December 31, 2022. The following table represents new TDR activity for the twelve months ended December 31, 2021. F- 21 ($ in thousands) Number of Loans Pre- Modification Recorded Balance Post Modification Recorded Balance 2 $ 42 $ 42 Total modifications 2 $ 42 $ 42 Interest Only Term Combination Total Modification HELOC $ - $ - $ 42 $ 42 Total modifications $ - $ - $ 42 $ 42 There were no TDRs modified during the past twelve months that have subsequently defaulted. The Company was an active participant in the PPP initiative as detailed in the discussion of financial results for 2021. The Company originated approximately 1,100 loans with a total balance of $ 111.4 million. As of December 31, 2022, only one PPP loan remained outstanding. Fees for PPP loan originations totaled $ 4.9 million, of which $ 0.1 million and $ 3.4 million were taken into income during 2022 and 2021, respectively. Related Party Loans Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers are presented in the following table at December 31: ($ in thousands) 2022 2021 Balance at beginning of period $ 521 $ 1,164 Effect of change in compostioin of directors and executive officers 112 - New Term Loans - - Repayment of term loans ( 53 ) ( 46 ) Changes in balances of revolving lines of credit ( 59 ) ( 597 ) Balance at end of period $ 521 $ 521 Note 5: Premises and Equipment Major classifications of premises and equipment stated at cost were as follows at December 31: ($ in thousands) 2022 2021 Land $ 3,563 $ 3,549 Buildings and improvements 27,699 27,475 Equipment 14,315 13,398 Construction in process 879 655 46,456 45,077 Less accumulated depreciation ( 23,627 ) ( 21,865 ) Net premises and equipment $ 22,829 $ 23,212 F- 22 Note 6: Goodwill and Intangibles On December 31, 2021, the Company purchased an Ohio based title agency resulting in approximately $ 1.1 million in goodwill. The balance of goodwill as of December 31, 2022 and December 31, 2021 was $ 23.2 million and $ 23.2 million, respectively. Twelve Months Ended December 31, 2022 Twelve Months Ended December 31, 2021 ($ in thousands) Carrying Amount Carrying Amount Beginning balance $ 23,191 $ 22,091 Acquired goodwill - 1,100 Measurement period adjustments 48 - Ending balance $ 23,239 $ 23,191 Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Goodwill is tested on the last day of the last quarter of each calendar year. At December 31, 2022, the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Carrying basis and accumulated amortization of intangible assets were as follows at December 31: 2022 2021 Gross Carrying Accumulated Gross Carrying Accumulated ($ in thousands) Amount Amortization Amount Amortization Core deposits intangible $ 660 $ ( 170 ) $ 660 $ ( 104 ) Customer relationship intangible 200 ( 176 ) 200 ( 173 ) Banking intangibles $ 860 $ ( 346 ) $ 860 $ ( 277 ) Amortization expense for intangibles for the years ended December 31, 2022 and 2021 was $ 0.07 million and $ 0.07 million, respectively. Estimated amortization expense for each of the following five years is immaterial. Note 7: Mortgage Banking and 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 $ 1.4 billion and $ 1.4 billion at December 31, 2022 and 2021, respectively. Contractually specified servicing fees of approximately $ 3.2 million and $ 3.1 million were included in mortgage loan servicing fees in the consolidated income statement for the years ended December 31, 2022 and 2021, respectively. F- 23 The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance at December 31: ($ in thousands) 2022 2021 Carrying amount, beginning of year $ 12,034 $ 7,759 Mortgage servicing rights capitalized during the year 1,939 4,724 Mortgage servicing rights amortization during the year ( 1,749 ) ( 3,885 ) Net change in valuation allowance 1,279 3,436 Carrying amount, end of year $ 13,503 $ 12,034 Valuation allowance: Beginning of year $ 1,456 $ 4,892 Increase (reduction) ( 1,279 ) ( 3,436 ) End of year $ 177 $ 1,456 Fair value, beginning of period $ 12,629 $ 7,759 Fair value, end of period $ 15,754 $ 12,629 Note 8: Derivative Financial Instruments 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. 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 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. F- 24 The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized at December 31: 2022 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 $ 66,477 $ 5,538 $ 84,733 $ 3,655 IRLCs - - 21,391 22 Forward contracts 5,500 26 - - Total contracts $ 71,977 $ 5,564 $ 106,124 $ 3,677 Liability Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 66,477 $ ( 5,538 ) $ 84,733 $ ( 3,655 ) Forward contracts - - 25,000 ( 32 ) IRLCs 3,268 ( 20 ) - - Total contracts $ 69,745 $ ( 5,558 ) $ 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. The following table presents the amounts included in the consolidated statements of income for non- hedging derivative financial instruments for the twelve months ended December 31, 2022 and 2021. Amount of gain (loss) Statement of income classification 2022 2021 ($ in thousands) Interest rate swap contracts Other income $ 19 $ 242 IRLCs Gain on sale of mortgage loans & OMSR ( 42 ) ( 256 ) Forward contracts Gain on sale of mortgage loans & OMSR 57 233 The following table shows the offsetting of financial assets and derivative assets at December 31, 2022 and 2021. Gross amounts of Gross amounts offset in the consolidated Net amounts of assets presented in the consolidated Gross amounts not offset in the consolidated balance sheet ($ in thousands) recognized assets balance sheet balance sheet Financial instruments Cash collateral received Net amount December 31, 2022 Interest rate swaps $ 5,540 $ 2 $ 5,538 $ - $ 4,480 $ 1,058 December 31, 2021 Interest rate swaps $ 3,746 $ 91 $ 3,655 $ - $ - $ 3,655 F- 25 The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2022 and 2021. Gross amounts of Gross amounts offset in the consolidated Net amounts of liabilities presented in the consolidated Gross amounts not offset in the consolidated balance sheet ($ in thousands) recognized liabilities balance sheet balance sheet Financial instruments Cash collateral pledged Net amount December 31, 2022 Interest rate swaps $ 5,540 $ 2 $ 5,538 $ - $ - $ 5,538 December 31, 2021 Interest rate swaps $ 3,746 $ 91 $ 3,655 $ - $ 6,906 $ ( 3,251 ) Note 9: Interest-Bearing Deposits Interest-bearing time deposits in denominations of $ 250,000 or more totaled $ 23.4 million on December 31, 2022 and $ 13.8 million on December 31, 2021. Certificates of deposit obtained from brokers totaled $ 7.0 million as of December 31, 2022. There were no certificates of deposits from brokers as of December 31, 2021. At December 31, 2022, the scheduled maturities of time deposits were as follows: ($ in thousands) 2023 $ 123,829 2024 23,877 2025 37,276 2026 3,438 2027 2,278 Thereafter 182 Total $ 190,880 Included in time deposits at December 31, 2022 and 2021 were $ 58.0 million and $ 55.6 million, respectively, of deposits which were obtained through the Certificate of Deposit Account Registry Service (“CDARS”). This service allows deposit customers to maintain fully insured balances in excess of the $ 250,000 FDIC limit without the inconvenience of having multi-banking relationships. Under the reciprocal program that the Company is currently participating in, customers agree to allow their deposits to be placed with other participating banks in the CDARS program in insurable amounts under $ 250,000 . In exchange, other banks in the program agree to place their deposits with the Company also in insurable amounts under $ 250,000 . Deposits of directors and their associates, including deposits of companies for which directors are principal owners and executive officers were $ 7.0 million and $ 3.9 million at December 31, 2022 and 2021, respectively. Note 10: Short-Term Borrowings ($ in thousands) 2022 2021 Securities Sold Under Repurchase Agreements $ 14,923 $ 15,320 F- 26 The Company has retail repurchase agreements to facilitate cash management transactions with commercial customers. These obligations were secured by agency securities of $ 5.4 million and $ 8.4 million for 2022 and 2021, respectively, and mortgage-backed securities of $ 12.4 million and $ 15.2 million for 2022 and 2021, respectively. The collateral is held at the FHLB and has maturities from 2025 through 2061 . At December 31, 2022, these repurchase agreements totaled $ 14.9 million. The maximum amount of outstanding agreements at any month end during 2022 and 2021 totaled $ 30.9 million and $ 34.2 million, respectively, and the monthly average of such agreements totaled $ 20.3 million and $ 22.8 million during 2022 and 2021, respectively. 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 December 31, 2022, there was no collateral pledged or borrowings drawn at the Discount Window. At December 31, 2022 and 2021, the Company had $ 56.0 million and $ 41.0 million in federal funds lines, of which none were drawn. Note 11: Federal Home Loan Bank Advances The FHLB advances were secured by $ 206.0 million in mortgage loans at December 31, 2022. Advances consisted of fixed and variable interest rates from 3.32 to 4.53 percent. Fixed rate advances are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at December 31, 2022, were: ($ in thousands) Debt 2023 60,000 Total $ 60,000 Note 12: Trust Preferred Securities On September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is currently 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 proposed Secured Overnight Financing Rate (“SOFR”) as a replacement rate for the LIBOR-based interest rate and will amend the documents governing the securities prior to LIBOR cessation. 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 December 31, 2022 and 2021 was $ 10.3 million, with a maturity date of September 15, 2035 . Note 13: Subordinated Debt On May 27, 2021, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreements’’) with qualified institutional buyers and accredited investors (collectively, the “Purchasers”) pursuant to which the Company issued and sold $ 20.0 million in aggregate principal amount of its 3.65 % Fixed to Floating Rate Subordinated Notes due 2031 (the “Notes”). The Notes were sold by the Company in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended. The Notes mature on June 1, 2031 and bear interest at a fixed rate of 3.65% through May 31, 2026. From June 1, 2026 to the maturity date or earlier redemption of the Notes, the interest rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month Secured Overnight Financing Rate (“SOFR”) provided by the Federal Reserve Bank of New York plus 296 basis points. The Company may redeem the Notes at any time after May 31, 2026, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $ 0.5 million, which are being amortized over the life of the Notes. F- 27 Note 14: Income Taxes The provision for income taxes includes these components: For The Year Ended December 31, ($ in thousands) 2022 2021 Taxes currently payable $ 86 $ 2,144 Deferred provision 2,709 2,302 Income tax expense $ 2,795 $ 4,446 A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below: For The Year Ended December 31, ($ in thousands) 2022 2021 Computed at the statutory rate (21%) $ 3,216 $ 4,772 Increase (decrease) resulting from Tax exempt interest ( 111 ) ( 85 ) BOLI income ( 106 ) ( 60 ) Sec. 831(b) election ( 199 ) ( 183 ) Other ( 5 ) 2 Actual tax expense $ 2,795 $ 4,446 The tax effects of temporary differences related to deferred taxes shown on the balance sheets are: For The Year Ended December 31, ($ in thousands) 2022 2021 Deferred tax assets Allowance for loan losses $ 2,902 $ 2,899 Unrealized losses on available-for-sale securities 8,538 491 Capitalized research and development costs 117 - Accrued bonus 142 281 Net operating loss 5,410 - Other 854 703 17,963 4,374 Deferred tax liabilities Depreciation ( 1,117 ) ( 1,242 ) Mortgage servicing rights ( 2,836 ) ( 2,546 ) Purchase accounting adjustments ( 1,598 ) ( 1,619 ) Prepaids ( 527 ) ( 477 ) Net deferred loan costs ( 93 ) ( 66 ) Section 475 MTM ( 8,538 ) ( 491 ) FHLB stock dividends ( 271 ) ( 288 ) ( 14,980 ) ( 6,729 ) Net deferred tax asset (liability) $ 2,983 $ ( 2,355 ) F- 28 Note 15: Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) represents reclassifications out of unrealized gains and losses on available-for-sale securities net of income tax. There were no reclassifications for the years ending December 31, 2022 and 2021. Note 16: Regulatory Matters As of December 31, 2022, based on its call report computations, 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 December 31, 2022 that management believes have changed State Bank’s capital classification. State Bank’s actual capital amounts and ratios are presented in the following table. Capital levels are presented for State Bank only as the Company is exempt from quarterly reporting 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 December 31, 2022 Tier I Capital to average assets $ 146,678 11.06 % $ 53,069 4.0 % $ 66,336 5.0 % Tier I Common equity capital to risk-weighted assets 146,678 13.42 % 49,200 4.5 % 71,067 6.5 % Tier I Capital to risk-weighted assets 146,678 13.42 % 65,600 6.0 % 87,466 8.0 % Total Risk-based capital to risk-weighted assets 160,346 14.67 % 87,466 8.0 % 109,333 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 % The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was 2.50 percent at December 31, 2022 and the Company still would have met the minimum capital requirements when the capital buffer is considered. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of December 31, 2022, State Bank met all capital adequacy requirements to which they are subject. Note 17: Employee Benefits The Company has a share-based incentive compensation plan that permits the grant of stock options, restricted stock and other share-based awards to employees, directors and advisory board members of the Company and its subsidiaries. In addition, the Company has instituted a long-term incentive program, with the objective of rewarding senior management with restricted shares of the Company (see Note 18 to the Consolidated Financial Statements). F- 29 The Company has a retirement savings 401(k) plan covering substantially all employees. The Company provides a safe harbor matching contribution equal to 100 % of an employees’ salary deferral amounts up to 4 % of the employees’ eligible compensation. Employees are immediately vested in their voluntary contributions and in any Company safe harbor matching contributions. Any discretionary contribution made by the Company is fully vested after three years of credited service. Employer contributions charged to expense for 2022 and 2021 were $ 0.7 million and $ 0.7 million, respectively. Also, the Company has Supplemental Executive Retirement Plan (“SERP”) Agreements with certain active and retired officers. The agreements provide monthly payments for up to 15 years that equal 15 percent to 25 percent of average compensation prior to retirement or death. The charges to expense for the current agreements were $ 0.2 million and $ 0.3 million for 2022 and 2021, respectively. Additional life insurance is provided to certain officers through bank-owned life insurance (“BOLI”) policies. By way of a separate split-dollar agreement, each policy’s interests are divided between the Company and the insured’s beneficiary. The Company owns the policy’s cash value and a portion of the policy net death benefit, over and above the cash value assigned to the insured’s beneficiary. In May 2022, an additional $ 10.5 million in BOLI policies were purchased. The cash surrender value of all life insurance policies totaled $ 28.9 million and $ 17.9 million at December 31, 2022 and 2021, respectively. The Company has a noncontributory employee stock ownership plan (“ESOP”) covering substantially all employees of the Company and its subsidiaries. Voluntary contributions are made by the Company to the plan. Each eligible employee is vested based upon years of service, including prior years of service. The Company’s contributions to the account of each employee become fully vested after three years of service. Benefit expense for the value of the stock purchased is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. Allocated shares in the ESOP at December 31, 2022 and 2021, were 370,876 and 380,450 , respectively. Dividends on allocated shares in the ESOP are recorded as dividends and charged to retained earnings. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. ESOP expense for the years ended December 31, 2022 and 2021 was $ 0.0 million and $ 0.5 million, respectively. Note 18: Share-Based Compensation Plan In April 2017, the 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. This plan permits the grant or award of incentive stock options, nonqualified stock options, stock appreciation rights (“SAR’s”), restricted stock, and restricted stock units (“RSU’s”) for up to 500,000 common shares of the Company. 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 permit 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. Option awards are granted with an exercise price equal to the market price of the Company’s common shares at the date of grant and those option awards vest based on five 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. There were no options granted in 2022 or 2021. There were no stock options outstanding, and no compensation expense charged against income with respect to option awards under the Plan, as of December 31, 2022 or 2021. F- 30 As of December 31, 2022, there was no unrecognized compensation cost related to incentive option share- based compensation arrangements granted under the 2017 Plan. Pursuant to the Long Term Incentive (“LTI”) Plan, the Company awards restricted common shares of the Company to certain key executives under the 2017 Plan. These restricted stock awards vest over a four - year period and are intended to assist the Company in retention of key executives. During 2022 and 2021, the Company met certain performance targets and restricted stock awards were approved by the Board. The compensation cost charged against income for the LTI Plan was $ 0.6 million and $ 0.4 million for 2022 and 2021, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $ 0.1 million and $ 0.1 million for 2022 and 2021, respectively. A summary of restricted stock activity under the Company’s LTI Plan as of December 31, 2022 and changes during the year ended is presented below: Shares Weighted- Average Value per Share Nonvested, January 1, 2022 40,922 $ 18.43 Granted 40,340 19.84 Vested ( 26,044 ) 19.03 Forfeited ( 2,299 ) 17.94 Nonvested, December 31, 2022 52,919 $ 19.23 As of December 31, 2022, there was $ 0.7 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 1.82 years. Note 19: Disclosures About Fair Value of Assets and Liabilities Pursuant to ASC 820, fair value is defined as 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 three level hierarchy exists in ASC 820 for fair value measurements based upon the inputs to the valuation of an asset or liability: 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, inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Available-for-sale securities The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. government agencies, mortgage-backed securities, obligations of political and state subdivisions, and corporate securities. 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. F- 31 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 The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). The following table presents the fair value measurements of securities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2022 and 2021: ($ in thousands) Fair value at December 31, 2022 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 6,764 $ - $ 6,764 $ - Mortgage-backed securities 205,835 - 205,835 - State and political subdivisions 11,103 - 11,103 - Other corporate securities 15,078 - 15,078 - Interest rate contracts - assets 5,538 - 5,538 - Interest rate contracts - liabilities ( 5,538 ) - ( 5,538 ) - Forward contracts 26 26 - - IRLCs ( 20 ) - - ( 20 ) ($ 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 F- 32 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 years ended December 31, 2022 and 2021. for the Twelve Months Ended December 31, ($ in thousands) 2022 2021 Interest Rate Lock Commitments Balance at beginning of period $ 22 $ 278 Total realized gains (losses) Change in fair value ( 42 ) ( 256 ) Balance at end of period $ ( 20 ) $ 22 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 balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. 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 independent appraisals of the collateral from a list of preapproved appraisers, which are reviewed for accuracy and consistency by the Company. 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 December 31, 2022 and 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. The following table presents the fair value measurements of assets measured at fair value on a non- recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2022 and 2021: ($ in thousands) Fair value at December 31, 2022 (Level 1) (Level 2) (Level 3) Impaired loans $ 1,028 $ - $ - $ 1,028 Mortgage servicing rights 1,448 - - 1,448 ($ 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 F- 33 Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2022 and 2021: Fair value at ($ in thousands) December 31, 2022 Valuation technique Unobservable inputs Range (weighted- average) Collateral-dependent impaired loans $ 1,028 Market comparable properties Comparability adjustments (%) 8 - 21% (12 %) Mortgage servicing rights 1,448 Discounted cash flow Discount Rate 11.39 % Constant prepayment rate 7.52 % P&I earnings credit 4.35 % T&I earnings credit 4.58 % Inflation for cost of servicing 3.50 % IRLCs ( 20 ) Discounted cash flow Loan closing rates 41% - 99 % Fair value at ($ in thousands) 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 % The mortgage servicing rights portfolio is measured for fair value by an independent third party. The valuation of the portfolio hinges on a number of quantitative factors. These factors include, but are not limited to, a discount rate applied to the cash flows, and an assumption of future principal prepayments. The prepayment assumptions are based upon the historical performance of the Company’s portfolio as well as market metrics. The servicing rights have had a decrease in prepayments and the 3.42 percent decrease in the constant prepayment rate reflects the change in market rates. In addition, the earnings credit rate decreased and the discount rate increased. The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value. Cash and Due From Banks, Interest Bearing Time Deposits, Federal Reserve and Federal Home Loan Bank Stock and Interest Receivable and Payable Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns. 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. F- 34 Deposits, Repurchase Agreements & FHLB Advances 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 the Company could pay on similar instruments with similar terms and maturities at December 31, 2022 and 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 December 31, 2022 and 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 an appropriate discount rate. The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain 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 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 December 31, 2022 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 27,817 $ 27,817 $ 27,817 $ - $ - Interest bearing time deposits 2,131 2,131 - 2,131 - Loans held for sale 2,073 2,100 - 2,100 - Loans, net of allowance for loan losses 948,257 945,699 - - 945,699 Federal Reserve and FHLB Bank stock, at cost 6,326 6,326 - 6,326 - Interest receivable 4,091 4,091 - 4,091 - Financial liabilities Deposits $ 1,086,665 $ 1,090,718 $ 895,785 $ 194,933 $ - Short-term borrowings 14,923 14,923 - 14,923 - FHLB advances 60,000 59,886 - 59,886 - Trust preferred securities 10,310 9,674 - 9,674 - Subordinated debt, net of issuance costs 19,594 18,959 - 18,959 - Interest payable 769 769 - 769 - F- 35 ($ 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 - 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 - Note 20: Parent Company Financial Information Presented below is condensed financial information of the parent company only: Condensed Balance Sheets ($ in thousands) 2022 2021 Assets Cash & cash equivalents $ 4,655 $ 14,406 Investment in banking subsidiaries 135,923 152,761 Investment in nonbanking subsidiaries 6,587 6,770 Other assets 2,076 2,259 Total assets $ 149,241 $ 176,196 Liabilities Trust preferred securities $ 10,000 $ 10,000 Sub debt net of issuance cost 19,594 19,546 Borrowings from nonbanking subsidiaries 310 310 Other liabilities & accrued interest payable 909 1,411 Total liabilities 30,813 31,267 Stockholders’ equity 118,428 144,929 Total liabilities and stockholders’ equity $ 149,241 $ 176,196 F- 36 Condensed Statements of Income ($ in thousands) 2022 2021 Dividends from subsidiaries: Banking subsidiaries $ - $ 5,000 Nonbanking subsidiaries 750 500 Total income 750 5,500 Expenses Interest expense 1,139 661 Other expense 1,747 1,478 Total expenses 2,886 2,139 Income before income tax ( 2,136 ) 3,361 Income tax benefit ( 613 ) ( 450 ) Income (loss) before equity in undistributed income of subsidiaries ( 1,523 ) 3,811 Equity in undistributed income of subsidiaries Banking subsidiaries 13,426 13,573 Nonbanking subsidiaries 618 893 Total 14,044 14,466 Net income $ 12,521 $ 18,277 Condensed Statements of Comprehensive Income (Loss) ($ in thousands) 2022 2021 Net income $ 12,521 $ 18,277 Other comprehensive income (loss): Available-for-sale investment securities: Gross unrealized holding gain (loss) arising in the period ( 38,322 ) ( 5,133 ) Related tax (expense) benefit 8,047 1,078 Net effect on other comprehensive income (loss) ( 30,275 ) ( 4,055 ) Total comprehensive income (loss) $ ( 17,754 ) $ 14,222 F- 37 Condensed Statements of Cash Flows ($ in thousands) 2022 2021 Operating activities Net income $ 12,521 $ 18,277 Items not requiring (providing) cash Equity in undistributed net income of subsidiaries ( 14,044 ) ( 14,466 ) Stock compensation expense 568 443 Other assets 973 1,811 Other liabilities ( 502 ) 376 Net cash provided by (used in) operating activities ( 484 ) 6,441 Investing activities Capital contributed to nonbanking subsidiary - ( 1,100 ) Net cash used in investing activities - ( 1,100 ) Financing activities Dividends on common shares ( 3,407 ) ( 3,139 ) Stock dividends on common shares ( 8 ) - Repurchase of common shares ( 5,900 ) ( 9,520 ) Proceeds from sub-debt net of issuance cost - 19,546 Other financing activities 48 - Net cash provided by (used in) financing activities ( 9,267 ) 6,887 Net change in cash and cash equivalents ( 9,751 ) 12,228 Cash and cash equivalents at beginning of year 14,406 2,178 Cash and cash equivalents at end of year $ 4,655 $ 14,406 F- 38 Note 21: Quarterly Financial Information (unaudited) Quarterly Financial Information (unaudited) Years ended December 31, ($ in thousands, except per share data) 2022 December September June March Interest income $ 12,936 $ 11,764 $ 10,474 $ 9,395 Interest expense 2,037 1,334 881 918 Net interest income 10,899 10,430 9,593 8,477 Provision for loan losses - - - - Noninterest income 3,713 4,043 4,673 5,802 Noninterest expense 10,268 10,385 10,802 10,859 Income tax expense 812 746 630 607 Net income $ 3,532 $ 3,342 $ 2,834 $ 2,813 Basic earnings per common share $ 0.51 $ 0.48 $ 0.40 $ 0.40 Diluted earnings per common share $ 0.50 $ 0.47 $ 0.40 $ 0.40 Dividends per share $ 0.125 $ 0.120 $ 0.120 $ 0.115 2021 December September June March Interest income $ 10,003 $ 11,033 $ 10,163 $ 10,705 Interest expense 925 1,009 1,006 1,080 Net interest income 9,078 10,024 9,157 9,625 Provision for loan losses - 300 - 750 Noninterest income 6,589 6,649 6,537 10,922 Noninterest expense 11,567 11,256 11,076 10,909 Income tax expense 768 1,014 857 1,807 Net income $ 3,332 $ 4,103 $ 3,761 $ 7,081 Basic earnings per common share $ 0.49 $ 0.59 $ 0.53 $ 0.97 Diluted earnings per common share $ 0.49 $ 0.58 $ 0.52 $ 0.97 Dividends per share $ 0.115 $ 0.110 $ 0.110 $ 0.105 F- 39 Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit Committee SB Financial Group, Inc. Defiance, Ohio Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of SB Financial Group, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. F- 40 Allowances for Loan Losses Description of the Matter As described in Note 4 to the financial statements, the Company’s consolidated allowance for loan and lease losses (ALLL) was $13.8 million at December 31, 2022. The Company also describes in Note 1 of the financial statements the accounting policy around this estimate. The ALLL is an estimate of losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses. The estimate consists of several key elements, which include: specific reserves for impaired loans, general reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogenous loans and leases, among others. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change. We identified the valuation of the ALLL as a critical audit matter. Auditing the ALLL involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific reserves associated with impaired loans and assessing the appropriateness of loan grades. How We Addressed the Matter in Our Audit Our audit procedures related to the estimated allowance for loan losses included: ● Testing the design of internal controls, including those related to technology, over the ALLL including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of a loss rate, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans and management’s review controls over the ALLL balance. ● Testing clerical/computational accuracy of the formulas within the ALLL model. ● Testing of completeness and accuracy of the information and reports utilized in the ALLL, including reports used in management review controls over the ALLL. ● Computing an independent calculation of an acceptable range and comparing it to the Company’s estimate. ● Evaluating the qualitative adjustment to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions. ● Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal loan grading professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans. Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years. /s/ FORVIS, LLP (Formerly, BKD, LLP) We have served as the Company’s auditor since 2002. 2022. Indianapolis , Indiana March 7, 2023 F- 41 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . Not Applicable.