What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-04 · 262 added, 320 removed, 259 unchanged (69% of the section changed)

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materially from those expressed or implied in such statements.

Risks and uncertainties that

could cause actual results to differ materially include, without limitation:

ever-changing effects of the novel coronavirus (COVID-19) pandemic – the duration,

extent and severity of which are impossible to predict, including the possibility of further

resurgence of the spread of COVID-19 and variants thereof -- on national, regional and local

economies, supply chains, labor markets and on our customers, counterparties, employees and

third-party service providers, as well as the effects of various responses of governmental

and nongovernmental authorities to the COVID-19 pandemic, including public health actions

directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs

and other restrictions on travel and commercial, social or other activities), the development,

availability and effectiveness of vaccines, and the implementation of fiscal stimulus packages;

and future economic and financial market conditions, either nationally or in the states in

which we do business, including the effects of inflation, U.S.

fiscal debt, budget and tax

matters, geopolitical matters (including the conflict in Ukraine), and any slowdown in global

economic growth, in addition to the continuing impact of the COVID-19 pandemic on our customers’

operations and financial condition, any of which may result in adverse impacts on our deposit

levels and composition, the quality of investment securities available for purchase, demand

for loans, the ability of our borrowers to repay their loans, and the value of the collateral

securing loans;

● changes in interest rates resulting from national

and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the

Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate sensitivity;

● the volatility of mortgage banking income, whether

due to interest rates, demand, the fair value of mortgage loans, or other factors;

● factors that can impact the performance of our

loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial health of our borrowers

and the success of construction projects that we finance;

Risks and uncertainties that could cause actual results to differ materially

include, without limitation:

● current and future economic

and financial market conditions, either nationally or in the states in which we do business, including conditions such as inflation, recession,

unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the failure of the

federal government to raise the federal debt ceiling and/or possible future U.S.

government shutdowns over budget disagreements, slowing

gross domestic product, tariffs, a U.S.

withdrawal from or significant renegotiation of trade agreements, trade wars, and other factors

beyond our control, any of which may result in adverse impacts on our deposit levels and composition, the quality of investment securities

available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing

loans made by us;

● recent and future bank

failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely

affect financial markets and/or have a negative reputational ramification for the banking industry as a whole, any of which could adversely

affect the Company’s business, earnings and financial condition;

● instability in global economic

conditions and geopolitical matters (including the ongoing conflict in Ukraine), and volatility in financial markets, which could have

a material adverse effect on our results of operations and financial condition;

● changes in interest rates

resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board

of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate

● the impacts and duration of the continuing recovery from the COVID-19 pandemic

and its impacts on national, regional and local economies, supply chains, labor markets and on our customers, counterparties, employees

and third-party service providers;

● the volatility of mortgage

banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;

● factors that can impact

the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial

health of our borrowers and the success of construction projects that we finance;

● the transition away from LIBOR as a reference rate for financial contracts,

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and other counterparties’ performance and creditworthiness may be different than anticipated due to the continuing inflationary

pressures and the continuing impact of the COVID-19 pandemic;

● operational risks, reputational risks, legal

and compliance risks, and other risks related to potential fraud or theft by employees or outsiders, unauthorized transactions by employees

or operational errors, or failures, disruptions or breaches in security of our systems, including those resulting from computer viruses

or cyber-attacks;

● our ability to secure sensitive or confidential

client information against unauthorized disclose or access through computer systems and telecommunication networks, including those of

our third-party vendors and other service providers, which may prove inadequate;

pressures and other economic and financial market conditions;

● operational risks, reputational

risks, legal and compliance risks, and other risks related to potential fraud or theft by employees or outsiders, unauthorized transactions

by employees or operational errors, or failures, disruptions or breaches in security of our systems, including those resulting from computer

viruses or cyber-attacks;

● our ability to secure sensitive

or confidential client information against unauthorized disclose or access through computer systems and telecommunication networks, including

those of our third-party vendors and other service providers, which may prove inadequate;

● a failure in or breach of our operational or

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protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards,

securities and other aspects of the financial services industry, as well as the reforms provided for in the Coronavirus Aid, Relief and

Economic Security (CARES) Act and the follow-up legislation in the Consolidated Appropriations Act, 2021 and the American Rescue Plan

securities and other aspects of the financial services industry;

● the effect of changes in federal, state and/or

local tax laws may adversely affect our reported financial condition or results of operations;

● the effect of changes in accounting policies

and practices may adversely affect our reported financial condition or results of operations;

● the effect of changes in accounting standards,

policies and practices may adversely affect our reported financial condition or results of operations;

● litigation and regulatory compliance exposure,

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legal and regulatory requirements;

● our ability to adapt to or comply with regulatory requirements and increasing

scrutiny and evolving expectations from customers, regulators, investors and other stakeholders with respect to the Company’s environmental,

social and governance (ESG) practices, which could affect our reputation and business and operating results;

● our ability to anticipate and successfully keep

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Company’s other filings with the Securities and Exchange Commission, including the risks identified under the heading “Item

Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as supplemented

Risk Factors” of Part II of this Quarterly Report on Form 10-Q.

Undue reliance should

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make estimates that are difficult, subjective, and/or complex.

Allowance for Loan Losses - The allowance

for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio.

Management evaluates the adequacy

of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio composition (including

product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic

This evaluation is inherently subjective, as it requires the use of significant management estimates.

Many factors can affect

management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity

and economic and political conditions.

The allowance is increased through provisions charged to operating earnings and reduced by net

The Company determines the amount of the allowance

based on relative risk characteristics of the loan portfolio.

The allowance recorded for commercial loans is based on reviews of individual

credit relationships and an analysis of the migration of commercial loans and actual loss experience.

The allowance recorded for homogeneous

consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and

historical losses, adjusted for current trends, for each homogeneous category or group of loans.

The allowance for loan losses relating

to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the

discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s

analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within

the loan portfolio.

This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial

condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments

and the interpretation of economic trends.

Volatility of economic or customer-specific conditions affecting the identification and estimation

of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups

of loans are also factors.

The Company estimates a range of inherent losses related to the existence of these exposures.

The estimates

are based upon the Company’s evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated

impact of the current economic environment.

To the extent that actual results differ from management’s estimates, additional loan

loss provisions may be required that could adversely impact earnings for future periods.

Allowance for Credit Losses - The

Company believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other

significant accounting policies.

The allowance for credit losses is calculated with the objective of maintaining a reserve level believed

by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure.

determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical

credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts

that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

However, this evaluation

has subjective components requiring material estimates, including expected default probabilities, the expected loss given default (“LGD”),

the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience

and forecasted economic conditions.

All of these factors may be susceptible to significant change.

To the extent that actual results differ

from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods.

Goodwill and Other Intangibles - The

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that could adversely impact earnings for future periods.

Three Months Ended September 30, 2022 compared

to Three Months Ended September 30, 2021

Net income for the third

quarter of 2022 was $3.3 million compared to net income of $4.1 million for the third quarter of 2021, a decrease of 18.5 percent.

earnings per share (“DEPS”) of $0.47 were down 19.0 percent from DEPS of $0.58 for the third quarter of 2021.

Net income for

the third quarter of 2022 was positively impacted by the Company’s recapture of temporary impairment of $0.07 million on its mortgage

servicing rights, while net income for the 2021 third quarter was positively impacted by a recovery of mortgage servicing rights of $0.25

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

sales, as compared to the same period in 2021, as rising rates have nearly eliminated all refinance activity and continued compression

of available housing inventory has constrained new purchase volume.

Mortgage loan volume was down over 55 percent during the third quarter

of 2022, and a lower percentage of originated volume was sold on the secondary market, as compared to the same period in 2021.

Paycheck Protection Program (“PPP”) related revenue compared to the prior year was down by $1.13 million.

Provision for Loan Losses:

quarter provision for loan losses was zero as compared to $0.3 million for the prior year quarter.

Net recoveries for the quarter were

$23,000 compared to net recoveries of $206,000 for the year-ago quarter.

Total delinquent loans ended the quarter at $2.9 million, or

0.31 percent of total loans, which is flat to the prior year.

Three Months Ended March 31, 2023

compared to Three Months Ended March 31, 2022

for the first quarter of 2023 was $2.5 million compared to net income of $2.8 million for the first quarter of 2022, a decrease of 12.9

Diluted earnings per share (“DEPS”) of $0.35 were down 12.5 percent from DEPS of $0.40 for the first quarter of 2022.

Net income for the first quarter of 2023 was positively impacted by the Company’s recapture of temporary impairment of $0.06 million

on its mortgage servicing rights, while net income for the 2022 first quarter was positively impacted by a recapture of mortgage servicing

rights of $0.89 million.

Net income for the first quarter of 2023 was negatively impacted by the significant decline in mortgage loan

volume and loan sales, as compared to the same period in 2022, as rising rates have nearly eliminated all refinance activity and continued

compression of available housing inventory has constrained new purchase volume.

Mortgage loan volume was down over 49 percent during the

first quarter of 2023, and a lower percentage of originated volume was sold on the secondary market, as compared to the same period in

Significantly higher funding costs in 2023 have compressed net interest income from the run rate experienced in the second half

Provision for Credit Losses:

first quarter provision for credit losses was $0.25 million as compared to no ($0) provision for the prior year quarter.

Net charge-offs

for the quarter were $61,000 compared to net charge-offs of $1,000 for the year-ago quarter.

Total delinquent loans ended the quarter

at $3.6 million, or 0.37 percent of total loans, which is down $1.4 million compared to the prior year.

The Company adopted ASC 326 on

January 1, 2023, which increased the allowance for credit losses by $1.4 million.

Asset Quality Review – For the Period Ended

($ in thousands)

September 30,

Net recoveries – QTD/YTD

($206)/($188)

Net charge-offs – QTD

Nonaccruing loans

Accruing Troubled Debt Restructures

Nonaccruing and restructured loans

Modified Loans for borrowers with difficulties

Nonaccruing and modified loans

OREO / Other Assets Owned (OAO)

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Nonperforming assets/Total assets

Allowance for loan losses/Total loans

Allowance for loan losses/Nonperforming loans

Allowance for credit losses/Total loans

Allowance for credit losses/Nonperforming loans

Consolidated Revenue:

Total revenue,

consisting of net interest income and noninterest income, was $14.5 million for the third quarter of 2022, a decrease of $2.2 million,

or 13.2 percent, from the $16.7 million generated during the third quarter of 2021.

consisting of net interest income and noninterest income, was $14.0 million for the first quarter of 2023, a decrease of $0.3 million,

or 2.0 percent, from the $14.3 million generated during the first quarter of 2022.

Net interest income (“NII”) for the

third quarter of 2022 was $10.4 million, which was up $0.4 million from the prior year third quarter’s $10.0 million.

the third quarter of 2022 to the prior year third quarter, the Company’s earning assets decreased $43.8 million, but the average

yield on earning assets increased by 47 basis points.

The net interest margin, for the third quarter of 2022 was 3.46 percent compared

to 3.21 percent for the third quarter of 2021.

first quarter of 2023 was $10.3 million, which was up $1.8 million from the prior year first quarter’s $8.5 million.

Comparing the

first quarter of 2023 to the prior year first quarter, the Company’s earning assets decreased $38.2 million, but the average yield

on earning assets increased by 153 basis points.

The net interest margin for the first quarter of 2023 was 3.35 percent compared to 2.67

percent for the first quarter of 2022.

Funding costs (interest paid to consumers and other entities) for interest bearing liabilities

for the third quarter of 2022 were 0.58 percent compared to 0.44 percent for the prior year third quarter.

PPP fees and interest increased

the 2021 net interest margin by 31 basis points.

Noninterest income was $4.0 million for the third

quarter of 2022, which was down $2.6 million from the prior year third quarter’s $6.6 million.

for the first quarter of 2023 were 1.46 percent compared to 0.39 percent for the prior year first quarter.

The mix in earning assets moved

into loans compared to the prior year as that percentage of earning assets improved to 79 percent from 66 percent in the prior year.

Noninterest income was $3.7 million for the first

quarter of 2023, which was down $2.1 million from the prior year first quarter’s $5.8 million.

In addition to the mortgage revenue

detailed below, wealth management revenue was $0.9 million for the third quarter of 2022.

detailed below, wealth management revenue was $0.9 million for the first quarter of 2023.

Recapture of our mortgage servicing rights impairment

increased noninterest income by $0.06 million in the quarter.

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

of 2022, even to the prior year.

Noninterest income as a percentage of average assets for the third quarter of 2022 was 1.24 percent compared

to 1.99 percent for the prior year third quarter.

Our title agency contributed revenue of $0.4 million in the first quarter

of 2023, down $0.2 million from the prior year.

Noninterest income as a percentage of average assets for the first quarter of 2023 was

1.10 percent compared to 1.72 percent for the prior year first quarter.

State Bank originated $49.4 million of mortgage

loans for the third quarter of 2022, of which $39.2 million was sold with the remainder of loans held for investment.

This compares to

$152.6 million originated for the third quarter of 2021, of which $123.1 million was sold with the remainder of loans held for investment.

These third quarter 2022 originations and subsequent sales resulted in $0.9 million of gains, down $3.1 million from the gains for the

third quarter of 2021.

Net mortgage banking revenue was $1.4 million for the third quarter of 2022 compared to $4.1 million for the third

loans during the first quarter of 2023, of which $25.8 million was sold with the remainder of loans held for investment.

This compares

to $97.4 million originated for the first quarter of 2022, of which $72.2 million was sold with the remainder of loans held for investment.

These first quarter 2023 originations and subsequent sales resulted in $0.6 million of gains, down $1.1 million from the gains for the

first quarter of 2022.

Net mortgage banking revenue was $1.2 million for the first quarter of 2023 compared to $2.9 million for the first

quarter of 2022.

The 2022 third quarter included a $0.07 million recapture of our mortgage servicing rights impairment compared to a $0.25

million valuation recapture for the third quarter of 2021.

As detailed above, mortgage loan originations have decreased significantly

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

Consolidated Noninterest Expense:

Noninterest expense for the third quarter of 2022 was $10.4 million, which was down $0.9 million compared to $11.3 million in the prior-year

third quarter.

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

due to several technology related improvements.

Income Taxes:

Income taxes for the

third quarter of 2022 were $0.7 million (effective rate of 18.2 percent) compared to $1.0 million (effective rate of 19.8 percent) for

the third quarter of 2021.

Nine Months Ended September 30, 2022 compared

to Nine Months Ended September 30, 2021

Net income for the first

nine months of 2022 was $9.0 million compared to net income of $14.9 million for the first nine months of 2021, a decrease of 39.9 percent.

DEPS of $1.27 were down 38.9 percent from DEPS of $2.08 for the first nine months of 2021.

Net income for both periods were positively

impacted by the recapture of the Company’s temporary mortgage servicing rights impairment in the amounts of $1.2 million and $2.9

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

Net income for the first nine months of 2022 was negatively impacted

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

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

Mortgage loan volume was down nearly 45 percent

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

Loan growth since December 31, 2021 was $102.7

million with remaining balances on PPP loans down to $0.1 million at September 30, 2022.

Provision for Loan Losses:

for loan losses for the first nine months of 2022 was $0.0 million, compared to $1.05 million for the year-ago period.

The Company had

net recoveries of $19,000 for the first nine months of 2022 compared to net recoveries of $188,000 for the year-ago period.

Consolidated Revenue:

Total revenue,

consisting of net interest income and noninterest income, was $43.0 million for the first nine months of 2022, a decrease of $9.9 million,

or 18.7 percent, from the $52.9 million generated during the first nine months of 2021.

Net interest income was $28.5 million for the

first nine months of 2022, which was down $0.3 million from $28.8 million for the prior year first nine months.

Included in NII for the

first nine months of 2022 was $0.1 million in fees and interest from PPP loans compared to $3.3 million for the prior year first nine

Comparing the first nine months of 2022 to the first nine months of 2021, the Company’s earning assets decreased $4.4 million,

and the yield on average earning assets decreased 2 basis points.

The net interest margin for the first nine months of 2022 was 3.09 percent

compared to 3.12 percent for the first nine months of 2021.

Funding costs for interest bearing liabilities for the first nine months of

2022 were 0.45 percent compared to 0.46 percent for the prior year similar period.

Noninterest income was $14.5 million for the first

nine months of 2022, which was down $9.6 million from $24.1 million for the prior year first nine months.

In addition to the mortgage

revenue detailed below, wealth management revenue was $2.8 million.

During the first nine months, we sold $3.7 million in Small Business

Administration (“SBA”) loans, with gains on sale of $0.5 million.

Our title agency contributed revenue of $1.8 million in

the first nine months of 2022.

Noninterest income as a percentage of average assets for the first nine months of 2022 was 1.47 percent

compared to 2.44 percent for the prior year first nine months.

State Bank originated $261.4 million of mortgage

loans for the first nine months of 2022, which resulted in $161.2 million in loan sales, with the remainder of loans held for investment.

This compares to $473.3 million originated for the first nine months of 2021, of which $378.9 million of loans were sold with the remainder

of loans held for investment.

These originations and subsequent sales resulted in $3.7 million of gains for the first nine months of 2022,

compared to $14.1 million of gains for the first nine months of 2021.

Net mortgage banking revenue was $6.1 million for the first nine

months of 2022 compared to $16.4 million for the first nine months of 2021.

The 2023 first quarter included a recapture of our mortgage servicing rights impairment of $0.06 million compared to

a $0.89 million recapture for the first quarter of 2022.

Consolidated Noninterest Expense:

Noninterest expense for the first nine months of 2022 was $32.0 million, which was down $1.2 million compared to the $33.2 million in

the prior-year first nine months.

For the year to date in 2022, lower incentives on mortgage activity and higher unfilled salaried positions

throughout the Company, were offset by higher data processing and professional fee expense due to expanded implementation of technology

Noninterest expense for the first quarter of 2023 was $10.8 million, which was down $0.1 million compared to $10.9 million in the prior-year

first quarter.

Overall head count is down from the linked quarter by 4.9 percent as we continue to right size the mortgage business line.

Commission expense for both mortgage and SBA is down compared to the prior year due to the lower total origination volume.

Income Taxes:

Income taxes for the

first nine months of 2022 were $2.0 million (effective rate of 18.1 percent) compared to $3.7 million (effective rate of 19.8 percent)

for the first nine months of 2021.

In addition to the impact of the lower pretax income, the first nine months of 2022 was impacted by

having additional earning assets that are tax free in nature.

for the first quarter of 2023 were $0.5 million (effective rate of 17.4 percent) compared to $0.6 million (effective rate of 17.7 percent)

for the first quarter of 2022.

Changes in Financial Condition

Total assets at September 30, 2022 were $1.30

billion, a decrease of $27.5 million, or 2.1 percent, since December 31, 2021.

Total loans, net of unearned income, were $925.2 million

as of September 30, 2022, up $102.7 million, or 12.5 percent, from year-end.

PPP loan balances of $0.1 million and $2.0 million were included

in our total loans at September 30, 2022 and December 31, 2021, respectively.

Total deposits at September 30, 2022 were $1.09

billion, a decrease of $27.2 million, or 2.4 percent, since 2021 year end.

Borrowed funds (consisting of FHLB advances, federal funds

borrowed, REPO agreements, trust preferred securities and subordinated debt) totaled $84.6 million at September 30, 2022.

This is up from

year-end 2021 when borrowed funds totaled $50.7 million due to an increase in REPO agreements and FHLB advances.

Total equity for the

Company of $114.6 million now stands at 8.8 percent of total assets compared to the December 31, 2021 level of $144.9 million and 10.9

percent of total assets.

The reduction was due to a $31.6 million increase in the unrealized loss on the Company’s investment portfolio.

The allowance for loan loss of $13.8 million is

flat from the December 2021 year end level.

The Company’s loan growth was offset by continued improvement of overall asset quality metrics,

including reductions in non-performing assets and delinquencies.

Total assets at March 31, 2023 were $1.34 billion,

an increase of $5.7 million, or 0.4 percent, since December 31, 2022.

Total loans, net of unearned income, were $976.3 million as of March

31, 2023, up $14.2 million, or 1.5 percent, from year-end.

The final PPP loan that was originated by the Company was forgiven in the quarter.

Total deposits at March 31, 2023 were $1.11 billion,

an increase of $23.4 million, or 2.2 percent, since 2022 year end.

The Company had approximately $121.1 million and $154.5 million of

uninsured deposits as of March 31, 2023 and December 31, 2022, respectively.

Uninsured deposit amounts are estimated based on the portions

of customer account balances that exceed the FDIC insurance limit of $250,000.

Borrowed funds (consisting of FHLB advances, repurchase

(“REPO”) agreements, trust preferred securities and subordinated debt) totaled $90.4 million at March 31, 2023.

from year-end 2022 when borrowed funds totaled $104.8 million due to repayment of FHLB advances during the quarter ended March 31, 2023.

Total equity for the Company of $119.8 million now stands at 8.9 percent of total assets compared to the December 31, 2022 level of $118.4

million and 8.9 percent of total assets.

Improvement in the unrealized loss of available for sale securities was primarily offset by the

adjustments for the adoption of CECL.

The allowance for credit losses of $15.4 million

is up $1.6 million from the December 2022 year-end level due to adding $1.4 million for the adoption of CECL and the quarterly provision

net of charge-offs.

The Company continues to have stable asset quality with the non-performing asset ratio at 35 basis points and coverage

on non-performing loans at 382 percent.

Other liabilities are down $5.4 million from December

31, 2021 due to escrow balances held for our serviced mortgage customers at December 31 that were paid in the first quarter of 2022, and

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

31, 2022 due to escrow balances held for our serviced mortgage customers at December 31 that were paid in the first quarter of 2023.

Capital Resources

As of September 30, 2022, based on the computations

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

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

To be categorized as well capitalized, State Bank must

maintain capital ratios as set forth in the table below.

There are no conditions or events since September 30, 2022 that management believes

have changed State Bank’s capital classification.

State Bank’s actual capital levels and ratios

as of September 30, 2022 and December 31, 2021 are presented in the following table.

Capital levels are presented for State Bank only

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

For Capital Adequacy

To Be Well Capitalized Under

Prompt Corrective Action

As of March 31, 2023, based on the computations for the FFIEC 041 Consolidated

Reports of Condition and Income filed by State Bank with the Federal Reserve Board, State Bank was classified as “well capitalized”

under the regulatory framework for prompt corrective action.

To be categorized as well capitalized, State Bank must maintain capital ratios

as set forth in the table below.

There are no conditions or events since March 31, 2023 that management believes have changed State Bank’s

capital classification.

The Company adopted CECL on January 1, 2023 which reduced capital levels by $2.0 million.

The Company elected

to not phase in the impact of CECL as the reduction in capital did not have a material impact to tangible and regulatory capital levels.

State Bank’s actual capital levels

and ratios as of March 31, 2023 and December 31, 2022 are presented in the following table.

Capital levels are presented for State Bank

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

Capitalized Under

Adequacy Purposes

Prompt Corrective

Action Procedures

($ in thousands)

As of September 30, 2022

As of March 31, 2023

Tier I Capital to average assets

6 unchanged sentences

Tier I Capital to risk-weighted assets

Total Risk-based capital to risk-weighted

Regulatory capital requirements commonly referred

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

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

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

Total Risk-based capital to risk-weighted assets

Regulatory capital requirements commonly

referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the March 31, 2023 capital table

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

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

Liquidity relates primarily to the Company’s

5 unchanged sentences

Liquid assets totaled $266.2

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

Liquidity risk arises from the possibility that

the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant upon

external funding sources.

In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy that

identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity

million at March 31, 2023, compared to $270.8 million at December 31, 2022.

Liquidity risk arises from the possibility

that the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant

upon external funding sources.

In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy

that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity

requirements.

2 unchanged sentences

Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Asset Liability Manager.

The Company’s commercial real estate, first

mortgage residential, agricultural and multi-family mortgage portfolio of $730.9 million at September 30, 2022 and $645.1 million at December

31, 2021, which can and has been used to collateralize borrowings, is an additional source of liquidity.

Management believes the Company’s

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

At September 30, 2022, all eligible commercial

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

The cash flow statements for the periods presented

provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain

an adequate level of liquidity.

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

The Company experienced positive cash flows from

operating activities for the nine months ended September 30, 2022 and September 30, 2021.

Net cash provided by operating activities was

$12.8 million for the nine months ended September 30, 2022 and $6.0 million for the nine months ended September 30, 2021.

Highlights for

the current year include $165.3 million in proceeds from the sale of loans, which is down $213.6 million from the prior year.

of loans held for sale was a use of cash of $158.3 million, which is down from the prior year by $213.2 million.

For the nine months ended

September 30, 2022, there was a gain on sale of loans of $4.2 million, and depreciation and amortization of $1.6 million.

The Company experienced negative cash flows from

investing activities for the nine months ended September 30, 2022 and September 30, 2021.

The Company’s commercial real

estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $786.5 million at March 31, 2023 and $730.9 million

at December 31, 2022, which can and has been used to collateralize borrowings, is an additional source of liquidity.

Management believes

the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs.

At March 31, 2023, all

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

The cash flow statements for the periods

presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company

to maintain an adequate level of liquidity.

A discussion of the cash flow statements for the three months ended March 31, 2023 and 2022

The Company experienced negative cash

flows from operating activities for the three months ended March 31, 2023 and March 31, 2022.

Net cash used by operating activities was

$4.1 million for the three months ended March 31, 2023 and $1.5 million for the three months ended March 31, 2022.

Highlights for the

current year include $25.8 million in proceeds from the sale of loans, which is down $48.1 million from the prior year.

Originations of

loans held for sale was a use of cash of $29.0 million, which is down from the prior year by $41.1 million.

For the three months ended

March 31, 2023, there was a gain on sale of loans of $.6 million, and depreciation and amortization of $.5 million.

The Company experienced negative cash

flows from investing activities for the three months ended March 31, 2023 and March 31, 2022.

Net cash used in investing activities was

million for the nine months ended September 30, 2022 and $77.9 million for the nine months ended September 30, 2021.

$9.4 million for the three months ended March 31, 2023 and $43.3 million for the three months ended March 31, 2022.

Highlights for the

current year include purchases of available-for-sale securities of $50.6 million.

These cash payments were offset by $29.9 million in

proceeds from maturities and sales of securities, which is down $4.7 million from the prior year nine-month period.

The Company experienced

a $102.7 million increase in loans, which is up $127.4 million from the prior year nine-month period.

The Company experienced negative cash flows from

financing activities for the nine months ended September 30, 2022 and positive cash flows for the nine months ended September 30, 2021.

Net cash used by financing activities was $1.4 million for the nine months ended September 30, 2022 and net cash provided by financing

activities was $69.2 million for the nine months ended September 30, 2021.

Highlights for the current period include a $45.9 million decrease

in transaction deposits for the nine months ended September 30, 2022, which is down $179.5 million from the prior year.

Certificates of

deposit increased by $18.7 million in the current year compared to a decrease of $71.0 million for the prior year nine-month period.

proceeds from Federal Home Loan Bank advances for the nine months ended September 30, 2022 were $29.5 million, an increase of $27.0 million

from the prior year nine-month period.

ALCO uses an economic value of equity (“EVE”)

analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions.

The EVE analysis calculates the net present value of the Company’s assets and liabilities in rate shock environments that range

from -400 basis points to +400 basis points.

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

2021 was considered unlikely given the current interest rate environment and therefore, only the minus 100 and 200 basis point rate change

was included in this analysis.

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

Economic Value of Equity

September 30, 2022

current year include an increase of $14.3 million in loans, which is down $13.7 million from the prior year three-month period.

cash payments were offset by $4.9 million in proceeds from maturities and sales of securities, which is down $8.4 million from the prior

year three-month period.

The Company experienced positive cash

flows from financing activities for the three months ended March 31, 2023 and March 31, 2022.

Net cash provided by financing activities

was $7.3 million and $25.3 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

Highlights for the current

period include a $19.9 million decrease in transaction deposits and a $43.4 million increase in time deposits for the three months ended

March 31, 2023.

This compares to the prior year three-month period where transaction deposits increased by $33.0 million and time deposits

decreased by $8.0 million.

Net repayments of Federal Home Loan Bank advances for the three months ended March 31, 2023 were $15.5 million,

compared to no activity for the prior year three-month period.

ALCO uses an economic value of equity

(“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all

balance sheet positions.

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated

model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including

relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual

Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates.

Management cannot accurately predict

future interest rates or their effect on the Bank’s EVE in the future.

Certain shortcomings are inherent in the method of analysis

presented in the computation of EVE.

For example, although certain assets and liabilities may have similar maturities or periods to repricing,

they may react in differing degrees to changes in market interest rates.

Additionally, certain assets, such as adjustable-rate loans,

have an initial fixed rate period typically from one to seven years and over the remaining life of the asset changes in the interest rate

are restricted.

In addition, the proportion of adjustable-rate loans in the Bank’s portfolios could decrease in future periods due

to refinancing activity if market interest rates remain steady in the future.

Further, in the event of a change in interest rates, prepayment

and early withdrawal levels could deviate significantly from those assumed in the table.

Finally, the ability of many borrowers to service

their adjustable-rate debt may decrease in the event of an interest rate increase.

The EVE analysis calculates the net present value of the Company’s

assets and liabilities in rate shock environments that range from -400 basis points to +200 basis points.

The results are reflected in

the following tables for March 31, 2023 and December 31, 2022.

Value of Equity

March 31, 2023

($ in thousands)

15 unchanged sentences

-100 basis points

-200 basis points

-300 basis points

-400 basis points

Off-Balance-Sheet Borrowing Arrangements:

Significant additional off-balance-sheet liquidity

is available in the form of FHLB advances and unused federal funds lines from correspondent banks.

Management expects the risk of changes

in off-balance-sheet arrangements to be immaterial to earnings.

The Company’s commercial

real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $732.4 million were

pledged to meet FHLB collateralization requirements as of September 30, 2022.

Based on the current collateralization requirements of the

FHLB, the Company had approximately $92.3 million of additional borrowing capacity at September 30, 2022.

Significant additional off-balance-sheet

liquidity is available in the form of FHLB advances and unused federal funds lines from correspondent banks.

Management expects the risk

of changes in off-balance-sheet arrangements to be immaterial to earnings.

The Company’s

commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $786.5 million

were pledged to meet FHLB collateralization requirements as of March 31, 2023.

Based on the current collateralization requirements of

the FHLB, the Company had approximately $109.2 million of additional borrowing capacity at March 31, 2023.

The Company also had $152.3

million in unpledged securities available to pledge for additional borrowings.

The Company’s contractual obligations as

of September 30, 2022 were comprised of long-term debt obligations, other debt obligations, operating lease obligations and other long-term

Long-term debt obligations were comprised of trust preferred securities of $10.3 million, and subordinated debt of $20.0

million, or $19.5 million, net of issuance costs.

Total time deposits at September 30, 2022 were $175.2 million, of which $144.2 million

mature beyond one year.

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

had commitments to sell mortgage loans totaling $9.3 million.

The Company believes that it has adequate resources to fund commitments

as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments.

Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions

are available.

The Company has contractual obligations consisting

of long-term debt obligations and operating lease obligations.

In addition, as of March 31, 2023, the Company had commitments to sell

mortgage loans totaling $13.8 million.

The Company believes that it has adequate resources to fund commitments as they arise and that

it can adjust the rate on savings and time deposits to retain deposits in changing interest rate environments.

If the Company requires

funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

Asset Liability Management

78 unchanged sentences

Quantitative and Qualitative Disclosures about Market Risk

Management believes there has been no material

change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with

the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2021.

Management believes there has been no

material change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed

with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2022.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis