What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 233 added, 224 removed, 283 unchanged (62% of the section changed)

22 unchanged sentences

include, without limitation:

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;

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;

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;

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;

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

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

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

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

which could negatively impact our income and expenses and the value of various financial contracts;

● 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 the recent conflicts involving Israel and Hamas), 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, which could negatively impact our income and expenses and the value of various financial contracts;

● changes in customers’, suppliers’,

11 unchanged sentences

in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks;

● competitive

pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes

to third-party relationships and our ability to recruit and retain qualified management and banking personnel;

losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future;

inherent in pursuing strategic growth initiatives, including integration and other risks involved in past and possible future acquisitions;

● uncertainty

regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the

Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations

concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting

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

fiduciary standards, securities and other aspects of the financial services industry;

effect of changes in federal, state and/or local tax laws may adversely affect our reported financial condition or results of operations;

effect of changes in accounting standards, policies and practices may adversely affect our reported financial condition or results of

and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims

and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries;

availability of earnings and dividends from State Bank and excess capital sufficient for us to service our debt and pay dividends to

our shareholders in compliance with applicable legal and regulatory requirements;

ability to 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;

ability to anticipate and successfully keep pace with technological changes affecting the financial services industry;

risks identified from time to time in the Company’s other filings with the Securities and Exchange Commission, including the risks

identified under the heading “Item 1A.

Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the

fiscal year ended December 31, 2022, as supplemented by “Item IA.

Risk Factors” of Part II of the Company’s Quarterly

Report on Form 10-Q for the fiscal quarter ended March 31, 2023, and by “Item 1A.

Risk Factors” of Part II of this Quarterly

Report on Form 10-Q.

● competitive pressures and factors among financial

services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and

our ability to recruit and retain qualified management and banking personnel;

● unexpected losses of services of our key management personnel, or the inability

to recruit and retain qualified personnel in the future;

● risks inherent in pursuing strategic growth initiatives,

including integration and other risks involved in past and possible future acquisitions;

● uncertainty regarding the nature, timing, cost

and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of

the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance

premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental

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

securities and other aspects of the financial services industry;

● changes in federal, state and/or local tax laws

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

● changes in accounting standards, policies and

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

● litigation and regulatory compliance exposure,

including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable

resolution of regulatory and other governmental examinations or inquiries;

● continued availability of earnings and dividends

from State Bank and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable

legal and regulatory requirements;

● our ability to 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

pace with technological changes affecting the financial services industry;

● and unexpected inability to obtain needed liquidity

which could adversely affect our business, profitability, and viability as a going concern;

● other risks identified from time to time in the

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

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

Risk Factors” of Part II of the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended

March 31, 2023, and June 30, 2023.

Undue reliance should

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that could adversely impact earnings for future periods.

Three Months Ended June 30, 2023

compared to Three Months Ended June 30, 2022

for the second quarter of 2023 was $3.1 million compared to net income of $2.8 million for the second quarter of 2022, an increase of

Diluted earnings per share (“DEPS”) of $0.44 were up 10.0 percent from DEPS of $0.40 for the second quarter of

Net income for the second quarter of 2023 was positively impacted by higher loan income, which was offset by significantly higher

interest expense cost on deposits and wholesale borrowings.

Mortgage loan volume was down over 31 percent compared to the prior year second

quarter, but originations were up when compared to the first quarter of 2023.

Three Months Ended September 30,

2023 compared to Three Months Ended September 30, 2022

for the third quarter of 2023 was $2.7 million compared to net income of $3.3 million for the third quarter of 2022, a decrease of 19.6

Diluted earnings per share (“DEPS”) of $0.39 were down 17.0 percent from DEPS of $0.47 for the third quarter of 2022.

Net income for the third quarter of 2023 was positively impacted by higher loan income, which was offset by significantly higher interest

expense cost on deposits and wholesale borrowings.

Mortgage loan volume was down 10.7 percent compared to the prior year third quarter,

but sales of originated loans were up 38.1 percent when compared to the third quarter of 2022.

Provision for Credit Losses:

second quarter provision for credit losses was $0.15 million as compared to no ($0) provision for the prior year quarter.

Net charge-offs

for the quarter were $22,000 compared to net charge-offs of $3,000 for the year-ago quarter.

Total delinquent loans ended the quarter

at $2.4 million, or 0.24 percent of total loans, which is down $0.6 million compared to the prior year.

The Company adopted ASC 326 on

January 1, 2023, which increased the allowance for credit losses (“ACL”) by $1.4 million.

third quarter provision for credit losses was a credit of $6 thousand driven by a reduction in the balance of unfunded commitments as

compared to no ($0) provision for the prior year quarter.

Net charge-offs for the quarter were $5,000 compared to net recoveries of $23,000

for the year-ago quarter.

Total delinquent loans ended the quarter at $3.3 million, or 0.33 percent of total loans.

The Company adopted

ASC 326 on January 1, 2023, which increased the allowance for credit losses (“ACL”) by $1.4 million.

Quality Review – For the Period Ended

in thousands)

September 30,

Net charge-offs – QTD/YTD

Nonaccruing loans

OREO / Other Assets Owned

OREO / Other Assets Owned (OAO)

Nonperforming assets

Nonperforming assets/Total

Allowance for credit losses/Total

Allowance for credit losses/Nonperforming

Nonperforming assets/Total assets

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 $14.2 million for the second quarter of 2023, a decrease of $0.1 million,

or 0.5 percent, from the $14.3 million generated during the second quarter of 2022.

consisting of net interest income and noninterest income, was $13.7 million for the third quarter of 2023, a decrease of $0.8 million,

or 5.3 percent, from the $14.5 million generated during the third quarter of 2022.

Net interest income (“NII”) for the

second quarter of 2023 was $9.8 million, which was up $0.2 million from the prior year second quarter’s $9.6 million.

the second quarter of 2023 to the prior year second quarter, the Company’s earning assets increased $32.7 million, and the average

third quarter of 2023 was $9.5 million, which was down $0.9 million from the prior year third quarter’s $10.4 million.

the third quarter of 2023 to the prior year third quarter, the Company’s earning assets increased $29.2 million, and the average

yield on earning assets increased by 89 basis points.

The net interest margin for the second quarter of 2023 was 3.15 percent compared

to 3.16 percent for the second quarter of 2022.

The net interest margin for the third quarter of 2023 was 3.08 percent compared

to 3.45 percent for the third quarter of 2022.

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

for the second quarter of 2023 were 1.90 percent compared to 0.39 percent for the prior year second quarter.

for the third quarter of 2023 were 2.18 percent compared to 0.58 percent for the prior year second quarter.

The increase in funding costs

has been driven by the rapid increase in the Federal Funds borrowing rate and the increased competition among banks for funding sources.

Noninterest income was $4.4 million for the second

quarter of 2023, which was down $0.3 million from the prior year second quarter’s $4.7 million.

In addition to the mortgage revenue

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

Impairment of our mortgage servicing rights

decreased noninterest income by $0.02 million in the quarter, compared to a recapture of $0.2 million in the prior year second quarter.

Our title agency contributed revenue of $0.5 million in the second quarter of 2023, down $0.2 million from the prior year.

income as a percentage of average assets for the second quarter of 2023 was 1.30 percent compared to 1.43 percent for the prior year first

Noninterest income was $4.2 million for the third

quarter of 2023, which was up $0.1 million, or 3.0 percent from the prior year third quarter’s $4.0 million.

In addition to the

mortgage revenue detailed below, wealth management revenue was $0.8 million for the third quarter of 2023.

Impairment of our mortgage

servicing rights decreased noninterest income by $0.1 million in the quarter, compared to a recapture of $0.1 million in the prior year

third quarter.

Our title agency contributed revenue of $0.4 million in the third quarter of 2023, down $0.05 million from the prior year.

Noninterest income as a percentage of average assets for the third quarter of 2023 was 1.24 percent compared to 1.24 percent for the prior

year third quarter.

State Bank originated $61.2 million of mortgage

loans during the second quarter of 2023, of which $47.9 million was sold with the remainder of loans held for investment.

loans during the third quarter of 2023, of which $54.1 million were sold with the remainder of loans held for investment.

This compares

to $95.4 million originated for the second quarter of 2022, of which $49.9 million was sold with the remainder of loans held for investment.

These second quarter 2023 originations and subsequent sales resulted in $1.1 million of gains, down $0.1 million from the gains for the

second quarter of 2022.

Net mortgage banking revenue was $1.6 million for the second quarter of 2023 compared to $1.8 million for the

second quarter of 2022.

The economic headwinds of higher interest rates and limited housing supply in our markets has kept overall production

down below historical levels.

to $68.6 million originated for the third quarter of 2022, of which $39.2 million were sold with the remainder of loans held for investment.

These third quarter 2023 originations and subsequent sales resulted in $1.2 million of gains, up $0.3 million from the gains for the third

quarter of 2022.

Net mortgage banking revenue was $1.6 million for the third quarter of 2023 compared to $1.4 million for the third quarter

The economic headwinds of higher interest rates and limited housing supply in our markets has kept overall production down below

historical levels.

Consolidated Noninterest Expense:

Noninterest expense for the second quarter of 2023 was $10.3 million, which was down $0.5 million compared to $10.8 million in the prior-year

second quarter.

Noninterest expense for the third quarter of 2023 was $10.5 million, which was up $0.1 million compared to $10.4 million in the prior-year

third quarter.

Overall head count is down from the prior year quarter by 6.0 percent as we continue to right size the mortgage business

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to the lower total origination volume.

We had several non-recurring items in the quarter that elevated other operating expense including

a check fraud and a contingent liability from a portfolio review.

Income Taxes:

for the second quarter of 2023 were $0.6 million (effective rate of 17.0 percent) compared to $0.6 million (effective rate of 18.2 percent)

for the second quarter of 2022.

Six Months Ended June 30, 2023

compared to Six Months Ended June 30, 2022

for the first six months of 2023 was $5.5 million compared to net income of $5.6 million for the prior six months of 2022, a decrease

of 2.2 percent.

Diluted earnings per share (“DEPS”) of $0.79 were equal to the DEPS of $0.79 for the first six months of 2022.

Net income for the first six months of 2023 was positively impacted by the Company’s recapture of temporary impairment of $0.04

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

servicing rights of $1.13 million.

Mortgage loan volume was down over 40 percent during the first six months of 2023, and a lower percentage

of originated volume was sold on the secondary market, as compared to the same period in 2022.

Sales volume has been impacted by a lower

percentage of saleable originated product produced for the first six months of 2023.

Funding costs for the first six months of 2023 are up nearly 400 percent as compared to the prior year first

for the third quarter of 2023 were $0.5 million (effective rate of 16.7 percent) compared to $0.7 million (effective rate of 18.2 percent)

for the third quarter of 2022.

Nine Months Ended September 30,

2023 compared to Nine Months Ended September 30, 2022

for the first nine months of 2023 was $8.2 million compared to net income of $9.0 million for the prior year nine months, a decrease of

DEPS of $1.18 were down from the DEPS of $1.27 for the first nine months of 2022.

Net income for the first nine months of

2023 was negatively impacted by the Company’s temporary impairment of mortgage servicing rights of $0.04 million, while net income

for the 2022 first nine months was positively impacted by a recapture of mortgage servicing rights of $1.19 million.

Mortgage loan volume

was down over 32 percent during the first nine months of 2023, and sold loans on those originations were down $33.4 million or 21 percent

compared to the prior year nine-month period.

Funding costs for the first nine months of 2023 are up over 400 percent as compared to the

prior year first nine months.

Provision for Credit Losses:

first six months of 2023 provision for credit losses was $0.4 million as compared to no ($0) provision for the prior year first six months.

Net charge-offs for the current year were $83,000 compared to net charge-offs of $4,000 for the year-ago first six months.

first nine months of 2023 provision for credit losses was $0.4 million as compared to no ($0) provision for the prior year first nine

Net charge-offs for the current year were $88,000 compared to net recoveries of $19,000 for the year-ago first nine months.

Consolidated Revenue:

Total revenue,

consisting of net interest income and noninterest income, was $28.2 million for the first six months of 2023, a decrease of $0.4 million,

or 1.3 percent, from the $28.5 million generated during the first six months of 2022.

consisting of net interest income and noninterest income, was $41.9 million for the first nine months of 2023, a decrease of $1.1 million,

or 2.6 percent, from the $43.0 million generated during the first nine months of 2022.

Net interest income (“NII”) for the

first six months of 2023 was $20.2 million, which was up $2.1 million from the prior year first six months $18.1 million.

first nine months of 2023 was $29.7 million, which was up $1.2 million from the prior year first nine months $28.5 million.

The net interest

margin for the first six months of 2023 was 3.24 percent compared to 2.91 percent for the first six months of 2022 as the yield on earnings

assets increased at a larger pace than funding costs.

margin for the first nine months of 2023 was 3.18 percent compared to 3.08 percent for the first nine months of 2022 as the yield on earnings

assets increased at a slower pace than funding costs.

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

liabilities for the first six months of 2023 were 1.69 percent compared to 0.38 percent for the prior year first six months.

liabilities for the first nine months of 2023 were 1.85 percent compared to 0.45 percent for the prior year first nine months.

Noninterest income was $12.2 million for the first

six months of 2023, which was down $2.4 million from the prior year first six months $10.5 million.

nine months of 2023, which was down $2.3 million from the prior year first nine months $14.5 million.

In addition to the mortgage revenue

detailed below, recapture of our mortgage servicing rights impairment increased noninterest income in the prior year first six months

by over $1.2 million compared to the 2023 first six months.

Our title agency contributed revenue of $0.8 million in the first six months

of 2023, down $0.5 million from the prior year first six months level of $1.3 million.

detailed below, recapture of our mortgage servicing rights impairment increased noninterest income in the prior year first nine months

by over $1.1 million compared to the 2023 first nine months.

Our title agency contributed revenue of $1.3 million in the first nine months

of 2023, down $0.5 million from the prior year first nine months level of $1.8 million.

State Bank originated $176.0 million of mortgage

loans during the first six months of 2023, of which $73.7 million was sold with the remainder of loans held for investment.

loans during the first nine months of 2023, of which $127.8 million was sold with the remainder of loans held for investment.

This compares

to $192.8 million originated for the first six months of 2022, of which $122.1 million was sold with the remainder of loans held for investment.

These 2023 year-to-date originations and subsequent sales resulted in $1.7 million of gains, down $1.2 million from the $2.9 million in

gains for the first six months of 2022.

Net mortgage banking revenue was $2.8 million for the first six months of 2023 compared to $4.7

million for the first six months of 2022.

to $261.4 million originated for the first nine months of 2022, of which $161.2 million was sold with the remainder of loans held for

These 2023 year-to-date originations and subsequent sales resulted in $2.9 million of gains, down $0.9 million from the $3.7

million in gains for the first nine months of 2022.

Net mortgage banking revenue was $4.4 million for the first nine months of 2023 compared

to $6.1 million for the first nine months of 2022.

Consolidated Noninterest Expense:

Noninterest expense for the first six months of 2023 was $21.1 million, which was down $0.6 million compared to $21.7 million in the prior-year

first six months.

Commission and benefit expense is down compared to the prior year due to lower staffing levels and compressed volume

in Residential Mortgage and SBA.

Noninterest expense for the first nine months of 2023 was $31.6 million, which was down $0.5 million compared to $32.0 million in the

prior-year first nine months.

Commission and benefit expense continues to be lower compared to the prior year due to lower staffing levels

and compressed volume in Residential Mortgage and SBA.

Income Taxes:

taxes for the first six months of 2023 were $1.1 million (effective rate of 17.2 percent) compared to $1.2 million (effective rate of

18.0 percent) for the first six months of 2022.

taxes for the first nine months of 2023 were $1.7 million (effective rate of 17.0 percent) compared to $2.0 million (effective rate of

18.1 percent) for the first nine months of 2022.

Changes in Financial Condition

Total assets at June 30, 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 $984.8 million as of June

30, 2023, up $22.7 million, or 2.4 percent, from year-end.

Total deposits at June 30, 2023 were $1.07 billion,

a decrease of $15.5 million, or 1.4 percent, since 2022 year end.

The Company had approximately $160.0 million and $220.1 million of uninsured

deposits as of June 30, 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.

Total assets at September 30, 2023 were $1.33

billion, a decrease of $9.2 million, or 0.7 percent, since December 31, 2022.

Total loans, net of unearned income, were $989.0 million

as of September 30, 2023, up $26.9 million, or 2.8 percent, from year-end.

Total deposits at September 30, 2023 were $1.09

billion, a decrease of $1.3 million, or 0.1 percent, since 2022 year end.

The Company had approximately $180.2 million and $220.1 million

of uninsured deposits as of September 30, 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 $132.3 million at June 30, 2023.

from year-end 2022 when borrowed funds totaled $104.8 million due to higher levels of FHLB advances due to the decline in deposits noted

Total equity for the Company of $117.7 million now stands at 8.8 percent of total assets compared to the December 31, 2022, level

of $118.4 million and 8.9 percent of total assets.

Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total

equity would increase to $150.6 million or 11.2% of total assets.

(“REPO”) agreements, trust preferred securities and subordinated debt) totaled $106.0 million at September 30, 2023.

is up from year-end 2022 when borrowed funds totaled $104.8 million due to slightly higher levels of REPOS.

Total equity for the Company

of $112.3 million now stands at 8.5 percent of total assets compared to the December 31, 2022, level of $118.4 million and 8.9 percent

of total assets.

Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total equity would increase to $151.9

million or 11.5% of total assets.

The allowance for credit losses of $15.8 million

is up $2.0 million from the December 2022 year-end level due to adding $1.4 million for the adoption of CECL $0.6 million for the first

six months of provision net of charge-offs.

The Company has had improving asset quality through the first six months of 2023 with the

non-performing asset ratio at 26 basis points and coverage on non-performing loans at 543 percent.

Other liabilities are down $6.5 million from December

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

is up $2.0 million from the December 2022 year-end level due to adding $1.4 million for the adoption of CECL, and $0.4 million for the

first nine months of provision net of charge-offs.

The Company has had stable to slightly improving asset quality through the first nine

months of 2023 with the non-performing asset ratio at 30 basis points and coverage on non-performing loans at 474 percent.

Capital Resources

As of June 30, 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 June 30, 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.

As of September 30, 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 September

30, 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 June 30, 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:

and ratios as of September 30, 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

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($ in thousands)

As of June 30, 2023

As of September 30, 2023

Tier I Capital to average assets

8 unchanged sentences

Regulatory capital requirements commonly

referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the June 30, 2023 capital table

referred to as “Basel III” were fully phased in as of January 1, 2019 and are reflected in the September 30, 2023 capital

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

7 unchanged sentences

Liquid assets totaled $236.2

million at June 30, 2023, compared to $270.8 million at December 31, 2022.

million at September 30, 2023, compared to $270.8 million at December 31, 2022.

Liquidity risk arises from the possibility

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The Company’s commercial real

estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $797.0 million at June 30, 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 June 30, 2023, all

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

estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $803.0 million at September 30, 2023 and $730.9

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

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

30, 2023, all eligible commercial real estate, first mortgage residential and multi-family mortgage loans were pledged under an FHLB blanket

The cash flow statements for the periods

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to maintain an adequate level of liquidity.

A discussion of the cash flow statements for the six months ended June 30, 2023 and 2022 follows.

A discussion of the cash flow statements for the nine months ended September 30, 2023 and

2022 follows.

The Company experienced positive cash

flows from operating activities for the nine months ended September 30, 2023 and September 30, 2022.

Net cash provided by operating activities

was $7.2 million for the nine months ended September 30, 2023 and $12.8 million for the nine months ended September 30, 2022.

for the current year include $127.8 million in proceeds from the sale of loans, which is down $37.5 million from the prior year.

of loans held for sale was a use of cash of $127.2 million, which is down from the prior year by $31.1 million.

For the nine months ended

September 30, 2023, there was a gain on sale of loans of $3.1 million, and depreciation and amortization on premises and equipment of

$1.7 million.

The Company experienced negative cash

flows from operating activities for the six months ended June 30, 2023 and positive cash flows for the six months ended June 30, 2022.

Net cash used by operating activities was $0.9 million for the six months ended June 30, 2023 and net cash provided by operating activities

was $3.7 million for the six months ended June 30, 2022.

Highlights for the current year include $73.7 million in proceeds from the sale

of loans, which is down $51.3 million from the prior year.

Originations of loans held for sale was a use of cash of $76.3 million, which

is down from the prior year by $43.6 million.

For the six months ended June 30, 2023, there was a gain on sale of loans of $1.9 million,

and depreciation and amortization on premises and equipment of $1.1 million.

flows from investing activities for the nine months ended September 30, 2023 and September 30, 2022.

Net cash used in investing activities

was $10.3 million for the nine months ended September 30, 2023 and $133.0 million for the nine months ended September 30, 2022.

for the current year include an increase of $27.1 million in loans, which is down $75.6 million from the prior year nine-month period.

These cash payments were offset by $17.0 million in proceeds from maturities and sales of securities, which is down $12.9 million from

the prior year nine-month period.

The Company experienced negative cash

flows from investing activities for the six months ended June 30, 2023 and June 30, 2022.

Net cash used in investing activities was $14.0

million for the six months ended June 30, 2023 and $111.3 million for the six months ended June 30, 2022.

Highlights for the current year

include an increase of $22.9 million in loans, which is down $50.2 million from the prior year six-month period.

These cash payments were

offset by $10.3 million in proceeds from maturities and sales of securities, which is down $11.1 million from the prior year six-month

The Company experienced positive cash

flows from financing activities for the six months ended June 30, 2023 and negative cash flows from financing activities for the six months

ended June 30, 2022.

Net cash provided by financing activities was $8.1 million for the six months ended June 30, 2023 and net cash used

in financing activities was $12.3 million for the six months ended June 30, 2022.

Highlights for the current period include a $64.3 million

decrease in transaction deposits and a $48.8 million increase in time deposits for the six months ended June 30, 2023.

This compares to

the prior year six-month period where transaction deposits decreased by $27.0 million and time deposits decreased by $14.2 million.

proceeds of Federal Home Loan Bank advances for the six months ended June 30, 2023 were $21.3 million, compared to $19.5 million for the

prior year six-month period.

flows from financing activities for the nine months ended September 30, 2023 and September 30, 2022.

Net cash used by financing activities

was $5.6 million for the nine months ended September 30, 2023 and $1.4 million for the nine months ended September 30, 2022.

for the current period include a $54.2 million decrease in transaction deposits and a $52.9 million increase in time deposits for the

nine months ended September 30, 2023.

This compares to the prior year nine-month period where transaction deposits decreased by $45.9

million and time deposits increased by $18.7 million.

Net repayments of Federal Home Loan Bank advances for the nine months ended September

30, 2023 were $0.5 million, compared to net proceeds of $29.5 million for the prior year nine-month period.

Off-Balance-Sheet Borrowing Arrangements:

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commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $803.0 million

were pledged to meet FHLB collateralization requirements as of June 30, 2023.

Based on the current collateralization requirements of the

FHLB, the Company had approximately $91.5 million of additional borrowing capacity at June 30, 2023.

The Company also had $150.1 million

in unpledged securities available to pledge for additional borrowings.

were pledged to meet FHLB collateralization requirements as of September 30, 2023.

Based on the current collateralization requirements

of the FHLB, the Company had approximately $100.5 million of additional borrowing capacity at September 30, 2023.

The Company also had

$110.5 million in unpledged securities available to pledge for additional borrowings.

The Company has contractual obligations consisting

of long-term debt obligations and operating lease obligations.

In addition, as of June 30, 2023, the Company had commitments to sell mortgage

loans totaling $11.8 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.

In addition, as of September 30, 2023, 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 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

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financial instruments.

Quantitative and Qualitative

Disclosures about Market Risk

Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis