SB FINANCIAL GROUP, INC. 10-Q

Item 1. Financial Statements SB Financial Group, Inc. Condensed Consolidated Balance Sheets ($ in thousands) September 2023 December (unaudited) 2022 Assets Cash and due from banks $ 19,049 $ 27,817 Interest bearing time deposits 1,180 2,131 Available-for-sale securities 212,768 238,780 Loans held for sale 3,206 2,073 Loans, net of unearned income 989,021 962,075 Allowance for credit losses ( 15,790 ) ( 13,818 ) Premises and equipment, net 21,934 22,829 Federal Reserve and Federal Home Loan Bank Stock, at cost 6,261 6,326 Foreclosed assets and other assets held for sale, net 629 777 Interest receivable 4,457 4,091 Goodwill 23,239 23,239 Cash value of life insurance 29,291 28,870 Mortgage servicing rights 13,893 13,503 Other assets 17,336 16,940 Total assets $ 1,326,474 $ 1,335,633 Liabilities and shareholders’ equity Liabilities Deposits Non interest bearing demand $ 224,182 $ 256,799 Interest bearing demand 174,729 191,719 Savings 226,077 191,272 Money market 216,565 255,995 Time deposits 243,766 190,880 Total deposits 1,085,319 1,086,665 Repurchase agreements 16,519 14,923 Federal Home Loan Bank advances 59,500 60,000 Trust preferred securities 10,310 10,310 Subordinated debt net of issuance costs 19,630 19,594 Interest payable 2,216 769 Other liabilities 20,632 24,944 Total liabilities 1,214,126 1,217,205 Commitments & Contingent Liabilities Shareholders’ Equity Preferred stock, no par value; authorized 200,000 shares; 2023 - 0 shares outstanding, 2022 - 0 shares outstanding - - Common stock, no par value; 2023 - 10,500,000 shares authorized, 8,525,375 shares issued; 2022 - 10,500,000 shares authorized, 8,525,375 shares issued 61,319 61,319 Additional paid-in capital 15,037 15,087 Retained earnings 105,521 101,966 Accumulated other comprehensive loss ( 39,517 ) ( 32,120 ) Treasury stock, at cost; (2023 - 1,752,248 common shares; 2022 - 1,589,913 common shares) ( 30,012 ) ( 27,824 ) Total shareholders’ equity 112,348 118,428 Total liabilities and shareholders’ equity $ 1,326,474 $ 1,335,633 See notes to condensed consolidated financial statements (unaudited) 1 SB Financial Group, Inc. Condensed Consolidated Statements of Income (unaudited) Three Months Ended Nine Months Ended ($ in thousands, except per share data) September 30, September 30, 2023 2022 2023 2022 Interest Income Loans Taxable $ 13,128 $ 10,084 $ 37,969 $ 27,016 Tax exempt 122 92 359 226 Securities Taxable 1,293 1,363 3,971 3,809 Tax exempt 39 52 132 151 Other interest income 214 173 595 430 Total interest income 14,796 11,764 43,026 31,632 Interest Expense Deposits 4,194 852 10,310 2,037 Repurchase agreements & other 16 8 35 32 Federal Home Loan Bank advance expense 666 180 1,883 257 Trust preferred securities expense 189 99 525 223 Subordinated debt expense 195 195 584 584 Total interest expense 5,260 1,334 13,337 3,133 Net Interest Income 9,536 10,430 29,689 28,499 Provision for credit losses - loans - - 688 - Provision for unfunded commitments ( 6 ) - ( 299 ) - Total provision for credit losses ( 6 ) - 389 - Net interest income after provision for credit losses 9,542 10,430 29,300 28,499 Noninterest Income Wealth management fees 837 930 2,694 2,821 Customer service fees 863 844 2,559 2,498 Gain on sale of mortgage loans & OMSR 1,207 876 2,862 3,748 Mortgage loan servicing fees, net 438 527 1,540 2,337 Gain on sale of non-mortgage loans 10 125 252 461 Title insurance income 429 476 1,257 1,775 Other income 379 265 1,026 878 Total noninterest income 4,163 4,043 12,190 14,518 Noninterest Expense Salaries and employee benefits 5,491 5,858 17,125 18,465 Net occupancy expense 764 769 2,350 2,230 Equipment expense 1,068 918 3,051 2,599 Data processing fees 648 664 1,979 1,883 Professional fees 623 766 2,098 2,476 Marketing expense 189 200 600 653 Telephone and communications 124 134 369 350 Postage and delivery expense 100 75 265 301 State, local and other taxes 218 250 664 805 Employee expense 141 145 485 456 Other expense 1,115 605 2,607 1,828 Total noninterest expense 10,481 10,384 31,593 32,046 Income before income tax 3,224 4,088 9,897 10,971 Provision for income taxes 537 746 1,685 1,983 Net Income $ 2,687 $ 3,342 $ 8,212 $ 8,988 Basic earnings per common share $ 0.40 $ 0.48 $ 1.20 $ 1.28 Diluted earnings per common share $ 0.39 $ 0.47 $ 1.18 $ 1.27 Average common shares outstanding (in thousands): Basic: 6,791 6,968 6,857 7,026 Diluted: 6,878 7,033 6,944 7,098 See notes to condensed consolidated financial statements (unaudited) 2 SB Financial Group, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2023 2022 2023 2022 Net income $ 2,687 $ 3,342 $ 8,212 $ 8,988 Other comprehensive gain (loss) Available for sale investment securities: Gross unrealized holding loss arising in the period ( 8,384 ) ( 14,196 ) ( 9,363 ) ( 39,975 ) Related tax benefit 1,761 2,981 1,966 8,395 Net effect on other comprehensive loss ( 6,623 ) ( 11,215 ) ( 7,397 ) ( 31,580 ) Total comprehensive income (loss) $ ( 3,936 ) $ ( 7,873 ) $ 815 $ ( 22,592 ) See notes to condensed consolidated financial statements (unaudited) 3 SB Financial Group, Inc. Condensed Consolidated Statements of Shareholders’ Equity (unaudited) Common Additional Paid-in Retained Accumulated Other Comprehensive Treasury ($ in thousands, except per share data) Stock Capital Earnings Loss Stock Total Balance, January 1, 2023 $ 61,319 $ 15,087 $ 101,966 $ ( 32,120 ) $ ( 27,824 ) $ 118,428 Net income 2,450 2,450 Other comprehensive income 2,449 2,449 Adoption of ASU 2016-13 ( 1,991 ) ( 1,991 ) Cash dividends on common, $ 0.125 per share ( 877 ) ( 877 ) Restricted stock vesting ( 299 ) 299 - Repurchased stock ( 55,800 shares) ( 865 ) ( 865 ) Stock based compensation expense 165 165 Balance, March 31, 2023 $ 61,319 $ 14,953 $ 101,548 $ ( 29,671 ) $ ( 28,390 ) $ 119,759 Net income 3,075 3,075 Other comprehensive loss ( 3,223 ) ( 3,223 ) Cash dividends on common, $ 0.13 per share ( 898 ) ( 898 ) Repurchased stock ( 91,260 shares) ( 1,248 ) ( 1,248 ) Stock based compensation expense 201 201 Balance, June 30, 2023 $ 61,319 $ 15,154 $ 103,725 $ ( 32,894 ) $ ( 29,638 ) $ 117,666 Net income 2,687 2,687 Other comprehensive loss ( 6,623 ) ( 6,623 ) Cash dividends on common, $ 0.13 per share ( 891 ) ( 891 ) Restricted stock vesting ( 240 ) 240 - Repurchased stock ( 43,814 shares) ( 614 ) ( 614 ) Stock based compensation expense 123 123 Balance, September 30, 2023 $ 61,319 $ 15,037 $ 105,521 $ ( 39,517 ) $ ( 30,012 ) $ 112,348 Common Additional Paid-in Retained Accumulated Other Comprehensive Treasury ($ in thousands, except per share data) Stock Capital Earnings Loss Stock Total Balance, January 1, 2022 $ 54,463 $ 14,944 $ 99,716 $ ( 1,845 ) $ ( 22,349 ) $ 144,929 Net income 2,813 2,813 Other comprehensive loss ( 11,814 ) ( 11,814 ) Stock dividends on common - 344,663 shares 6,856 ( 6,864 ) ( 8 ) Cash dividends on common, $ 0.115 per share ( 832 ) ( 832 ) Restricted stock vesting ( 230 ) 230 - Repurchased stock ( 130,848 shares) ( 2,609 ) ( 2,609 ) Stock based compensation expense 158 158 Balance, March 31, 2022 $ 61,319 $ 14,872 $ 94,833 $ ( 13,659 ) $ ( 24,728 ) $ 132,637 Net income 2,834 2,834 Other comprehensive loss ( 8,551 ) ( 8,551 ) Cash dividends on common, $ 0.12 per share ( 858 ) ( 858 ) Repurchased stock ( 94,211 shares) ( 1,703 ) ( 1,703 ) Stock based compensation expense 197 197 Balance, June 30, 2022 $ 61,319 $ 15,069 $ 96,809 $ ( 22,210 ) $ ( 26,431 ) $ 124,556 Net income 3,342 3,342 Other comprehensive loss ( 11,215 ) ( 11,215 ) Cash dividends on common, $ 0.12 per share ( 843 ) ( 843 ) Restricted stock vesting ( 193 ) 193 - Repurchased stock ( 77,326 shares) ( 1,336 ) ( 1,336 ) Stock based compensation expense 124 124 Balance, September 30, 2022 $ 61,319 $ 15,000 $ 99,308 $ ( 33,425 ) $ ( 27,574 ) $ 114,628 See notes to condensed consolidated financial statements (unaudited) 4 SB Financial Group, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, ($ in thousands) 2023 2022 Operating Activities Net Income $ 8,212 $ 8,988 Items not requiring (providing) cash Depreciation and amortization 1,678 1,634 Provision for credit losses 389 - Expense of share-based compensation plan 489 479 Amortization of premiums and discounts on securities 400 752 Amortization of intangible assets 66 52 Amortization of originated mortgage servicing rights 960 1,439 Impairment (recovery) of mortgage servicing rights 38 ( 1,194 ) Proceeds from sale of loans held for sale 127,821 165,278 Originations of loans held for sale ( 127,228 ) ( 158,264 ) Gain from sale of loans ( 3,114 ) ( 4,206 ) Changes in Interest receivable ( 366 ) ( 636 ) Other assets 1,586 133 Interest payable & other liabilities ( 3,714 ) ( 1,638 ) Net cash provided by operating activities 7,217 12,817 Investing Activities Purchases of available-for-sale securities ( 723 ) ( 50,618 ) Proceeds from maturities of interest bearing time deposits 951 509 Proceeds from maturities of available-for-sale securities 16,972 29,917 Net change in loans ( 27,070 ) ( 102,699 ) Purchase of premises, equipment ( 783 ) ( 1,313 ) Proceeds from bank owned life insurance 58 - Purchase of bank owned life insurance - ( 10,500 ) Purchase of Federal Reserve and Federal Home Loan Bank Stock ( 2,806 ) ( 121 ) Proceeds from sale of Federal Home Loan Bank Stock 2,871 194 Proceeds from sale of foreclosed assets 188 1,642 Net cash used in investing activities ( 10,342 ) ( 132,989 ) Financing Activities Net decrease in demand deposits, money market, interest checking & savings accounts ( 54,232 ) ( 45,850 ) Net increase in time deposits 52,886 18,698 Net increase in securities sold under agreements to repurchase 1,596 4,434 Proceeds from Federal Home Loan Bank advances 627,000 90,000 Repayment of Federal Home Loan Bank advances ( 627,500 ) ( 60,500 ) Stock repurchase plan ( 2,727 ) ( 5,648 ) Cash dividends on common shares ( 2,666 ) ( 2,539 ) Net cash used in financing activities ( 5,643 ) ( 1,405 ) Decrease in cash and cash equivalents ( 8,768 ) ( 121,577 ) Cash and cash equivalents, beginning of period 27,817 149,511 Cash and cash equivalents, end of period $ 19,049 $ 27,934 Supplemental cash flow information Interest paid $ 11,890 $ 3,457 Supplemental non-cash disclosure Transfer of loans to foreclosed assets $ 36 $ 183 Stock dividends declared and paid $ - $ 6,856 See notes to condensed consolidated financial statements (unaudited) 5 SB FINANCIAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1—BASIS OF PRESENTATION SB Financial Group, Inc., an Ohio corporation (“SBFG”), is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, including The State Bank and Trust Company (“State Bank”), SBFG Title, LLC (“SBFG Title”), SB Captive, Inc. (“SB Captive”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”). RDSI is presently inactive and has had no material operations or employees since 2017. In addition, State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance, LLC (“SBI”). The consolidated financial statements include the accounts of SBFG, State Bank, RFCBC, RDSI, RMC, SBFG Title, SB Captive and SBI (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of results for the complete year. The condensed consolidated balance sheet of the Company as of December 31, 2022 has been derived from the audited consolidated balance sheet of the Company as of that date. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. New and applicable accounting pronouncements: ASU No. 2020-04: Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) This guidance provides temporary options to ease the potential burden in accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective as of March 12, 2020 through December 31, 2022. However, a deferral of the implementation of the Reference Rate Reform was issued in December of 2022, which extends the implementation to December 31, 2024. The Company has implemented a replacement for the reference rate and has determined that the changes did not have a material impact on the Company’s consolidated financial statements. ASU No. 2016-13: Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments On January 1, 2023, the Company adopted ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) (“ASC 326”) as amended. The new accounting guidance in this ASU replaces the incurred loss methodology with an expected loss methodology, which is referred to as the current expected credit loss (“CECL”) methodology. The CECL methodology is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity (“HTM”) debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments), and net investments in leases recognized by a lessor. The CECL methodology requires an entity to estimate credit losses over the life of an asset or off-balance sheet credit exposure. 6 In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management determines that the Company does not intend to sell and it is more likely than not, that the Company will not be required to sell the securities. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning on or after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses (“ACL”) of $ 1.4 million and an increase of $ 1.1 million to establish a reserve for unfunded commitments, with a $ 2.0 million decrease to retained earnings, and $ 0.5 million of income tax provision being recorded as part of the deferred tax asset in the Company’s consolidated balance sheet. The following table details the impact of the adoption of ASC 326: January 1, 2023 ($ in thousands) Pre-ASC 326 adoption Impact of ASC 326 adoption As reported under ASC 326 Cummulative Effect on Retained Earnings Allowance for credit loss on loans Commercial & industrial $ 1,663 $ 230 $ 1,893 $ 182 Commercial real estate - owner occupied 1,696 54 1,750 43 Commercial real estate - nonowner occupied 4,584 1,015 5,599 801 Agricultural 611 ( 194 ) 417 ( 153 ) Residential real estate 4,438 360 4,798 284 Home equity line of credit (HELOC) 547 ( 76 ) 471 ( 60 ) Consumer 279 ( 17 ) 262 ( 13 ) Total ACL on loans $ 13,818 $ 1,372 $ 15,190 $ 1,084 ACL on off-balance sheet commitments $ - $ 1,149 $ 1,149 $ 907 Allowance for Credit Losses - Securities Available-for-Sale For available-for-sale debt securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. Changes in the ACL under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit losses related to the available-for-sale debt securities portfolio. Accrued interest receivable on available-for-sale debt securities totaled $ 0.7 million at September 30, 2023 and was excluded from the estimate of credit losses. 7 Allowance for Credit Losses - Loans The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. Accrued interest receivable related to loans totaled $ 3.7 million at September 30, 2023 and is excluded from the estimate of credit losses. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments: ● Commercial & Industrial - Commercial & industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial & industrial loans and lease financing agreements is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease. ● Commercial Real Estate - Owner Occupied - Owner occupied commercial real estate loans consist of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings and other commercial facilities. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation as the commercial real estate collateral may be more adversely affected by conditions in the real estate markets or in the general economy. ● Commercial Real Estate – Nonowner Occupied - Nonowner occupied commercial real estate loans consist of loans to purchase, construct, or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as multifamily properties. The primary risk associated with nonowner occupied commercial real estate loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation as the commercial real estate collateral may be more adversely affected by conditions in the real estate markets or in the general economy. ● Agricultural - Agricultural loans consist of loans or lines of credit to finance farmland, equipment, and general business needs or other assets. The primary risk associated with agricultural loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan. ● Residential Real Estate – Residential real estate mortgage loans consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. 8 ● Home Equity Line of Credit (HELOCs) - Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior liens as a substantial decline in value could render the junior lien position effectively unsecured. ● Consumer - Consumer loans consist of loans to finance unsecured home improvements, personal assets, such as automobiles or recreational vehicles, and revolving lines of credit that can be secured or unsecured. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. The Company utilized a Discounted Cash Flow (“DCF”) method to estimate the quantitative portion of the ACL for all loan pools evaluated on a collective pooled basis, with the exception of the credit card portfolio, which was estimated using the Remaining Life Method. For each segment, a Loss Driver Analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized the Company’s own Federal Financial Institutions Examination Council’s (“FFIEC”) Call Report data, as well as peer institution data. In creating the DCF model, the Company has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. The Company’s own loan-level loss data from January 2016 through September 30, 2023 contained within the model is being supplemented with peer data in most loan pools as there was not sufficient loan-level detail from prior cycles reflecting similar economic conditions as the forecasted loss drivers to result in a statistically sound calculation. Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, and loss history, and forecasted loss drivers. The Company utilizes data from Federal Reserve Economic Data (“FRED”) to provide economic forecasts under various scenarios, which are applied to loan pools to reflect model risk in the current economic environment. Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. When possible, the Company utilizes its own PDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own PDs, the LDA is utilized to determine PDs based on the forecasted economic factors. In all cases, the LDA is then utilized to determine the long-term historical average which is reached over the reversion period. When possible, the Company utilizes its own LGDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own LGDs, the LGD is derived using a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the reversion period and long-term historical average. Benchmark prepayment and curtailment rates were used in the ACL estimate. 9 Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. A number of factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising interest rates, external factors and other considerations. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above. During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated adjusted for selling costs as appropriate. The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments. Any allowance for off-balance sheet credit exposures is reported in Other liabilities on the Company’s consolidated balance sheet and is increased or decreased through a provision for credit loss expense on the Company’s consolidated statement of income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded. While the Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions, which may materially impact asset quality and the adequacy of the ACL and thus the resulting provision for credit losses. ASU No. 2022-02: Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures On January 1, 2023, the Company adopted ASU 2022-02 Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, which removed the existing measurement and disclosure requirements for loans considered to be Troubled Debt Restructurings (“TDRs”) and added additional disclosure requirements related to modifications provided to borrowers experiencing financial difficulty. Prior to adoption of ASU 2022-02, a change in contractual terms of a loan where a borrower was experiencing financial difficulty and received a concession not available through other sources was required to be disclosed as a TDR, whereas now a borrower that is experiencing financial difficulty and receives a modification in the form of principal forgiveness, interest rate reduction, an other-than-insignificant payment delay or a term extension in the current period needs to be disclosed. The amendment was adopted prospectively and had no impact on the Company’s consolidated financial statements aside from additional and revised financial statement disclosures (See Note 4 to the consolidated financial statements). 10 NOTE 2 - EARNINGS PER SHARE Earnings per share (“EPS”) have been computed based on the weighted average number of common shares outstanding during the periods presented. The average number of common shares used in the computation of basic and diluted earnings per share are set forth in the tables below. There were no anti-dilutive shares in 2023 or 2022. Participating securities in the tables reflect nonvested restricted shares that participate in dividends declared and paid by the Company on its common shares prior to vesting of the restricted shares. Three Months Ended September 30, ($ and outstanding shares in thousands - except per share data) 2023 2022 Distributed earnings allocated to common shares $ 891 $ 843 Undistributed earnings allocated to common shares 1,789 2,492 Net earnings allocated to common shares 2,680 3,335 Net earnings allocated to participating securities 7 7 Net Income allocated to common shares and participating securities $ 2,687 $ 3,342 Weighted average shares outstanding for basic earnings per share 6,791 6,968 Dilutive effect of stock compensation 87 65 Weighted average shares outstanding for diluted earnings per share 6,878 7,033 Basic earnings per common share $ 0.40 $ 0.48 Diluted earnings per common share $ 0.39 $ 0.47 Nine Months Ended September 30, ($ and outstanding shares in thousands - except per share data) 2023 2022 Distributed earnings allocated to common shares $ 2,666 $ 2,539 Undistributed earnings allocated to common shares 5,523 6,428 Net earnings allocated to common shares 8,189 8,967 Net earnings allocated to participating securities 23 21 Net Income allocated to common shares and participating securities $ 8,212 $ 8,988 Weighted average shares outstanding for basic earnings per share 6,857 7,026 Dilutive effect of stock compensation 87 72 Weighted average shares outstanding for diluted earnings per share 6,944 7,098 Basic earnings per common share $ 1.20 $ 1.28 Diluted earnings per common share $ 1.18 $ 1.27 On January 10, 2022, the Company announced that its Board of Directors had declared a 5 percent common stock dividend payable on February 4, 2022, to shareholders of record as of January 21, 2022. Holders of the Company’s common shares as of the record date received one additional common share for every 20 common shares held on the record date. No fractional shares were issued, and shareholders received cash for such fractional interests based on the closing price of the Company’s common shares on the record date of $ 19.89 . In connection with the 5 percent common stock dividend, the Company filed a Certificate of Amendment with the Ohio Secretary of State on January 25, 2022 to amend Article FIRST of its Amended Articles of Incorporation to proportionately increase the authorized number of common shares, without par value, of the Company from 10,000,000 to 10,500,000 . The addition of these authorized shares did not have a material impact on the Company’s consolidated financial statements. 11 Note 3 – AVAILABLE-FOR-SALE Securities The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at September 30, 2023 and December 31, 2022 were as follows: Gross Gross Amortized Unrealized Unrealized ($ in thousands) Cost Gains Losses Fair Value September 30, 2023 U.S. Treasury and Government agencies $ 7,330 $ - $ ( 1,058 ) $ 6,272 Mortgage-backed securities 226,467 3 ( 43,779 ) 182,691 State and political subdivisions 11,793 - ( 2,214 ) 9,579 Other corporate securities 17,200 - ( 2,974 ) 14,226 Totals $ 262,790 $ 3 $ ( 50,025 ) $ 212,768 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value December 31, 2022 U.S. Treasury and Government agencies $ 7,636 $ - $ ( 872 ) $ 6,764 Mortgage-backed securities 241,741 4 ( 35,910 ) 205,835 State and political subdivisions 12,862 10 ( 1,769 ) 11,103 Other corporate securities 17,200 - ( 2,122 ) 15,078 Totals $ 279,439 $ 14 $ ( 40,673 ) $ 238,780 The amortized cost and fair value of securities available-for-sale at September 30, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized ($ in thousands) Cost Fair Value Within one year $ 638 $ 630 Due after one year through five years 2,642 2,516 Due after five years through ten years 23,852 19,825 Due after ten years 9,191 7,105 36,323 30,076 Mortgage-backed securities 226,467 182,691 Totals $ 262,790 $ 212,767 The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $ 101.5 million at September 30, 2023 and $ 53.9 million at December 31, 2022. The fair value of securities delivered for repurchase agreements was $ 21.5 million at September 30, 2023 and $ 17.8 million at December 31, 2022. There were no realized gains or losses from sales of available-for-sale securities for the three and nine months ended September 30, 2023 or September 30, 2022. 12 Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments was $ 211.7 million at September 30, 2023, and $ 235.5 million at December 31, 2022, which consisted of 148 securities, or 100 percent, and 155 securities, or approximately 99 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022, are as follows: ($ in thousands) Less than 12 Months 12 Months or Longer Total September 30, 2023 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ 482 $ ( 2 ) $ 5,789 $ ( 1,056 ) $ 6,271 $ ( 1,058 ) Mortgage-backed securities 71 ( 1 ) 182,340 ( 43,778 ) 182,411 ( 43,779 ) State and political subdivisions 1,004 ( 36 ) 8,264 ( 2,178 ) 9,268 ( 2,214 ) Other corporate securities 1,478 ( 272 ) 12,248 ( 2,702 ) 13,726 ( 2,974 ) Totals $ 3,035 $ ( 311 ) $ 208,641 $ ( 49,714 ) $ 211,676 $ ( 50,025 ) Less than 12 Months 12 Months or Longer Total December 31, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ 3,788 $ ( 452 ) $ 2,974 $ ( 420 ) $ 6,762 $ ( 872 ) Mortgage-backed securities 52,351 ( 5,234 ) 153,055 ( 30,676 ) 205,406 ( 35,910 ) State and political subdivisions 7,461 ( 1,370 ) 1,268 ( 399 ) 8,729 ( 1,769 ) Other corporate securities 12,015 ( 1,736 ) 2,564 ( 386 ) 14,579 ( 2,122 ) Totals $ 75,615 $ ( 8,792 ) $ 159,861 $ ( 31,881 ) $ 235,476 $ ( 40,673 ) The total unrealized loss in the securities portfolio was $ 50.0 million as of September 30, 2023 compared to a $ 40.7 million unrealized loss at December 31, 2022. Management evaluates if any security has a fair value less than its amortized cost on a quarterly basis. Once these securities are identified, management determines whether a decline in fair value resulted from a credit loss or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, a provision is recorded to the ACL. NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, all loan classes are placed on nonaccrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 13 The following table summarizes the composition of the loan portfolio: Total Loans ($ in thousands) September 30, 2023 December 31, 2022 Commercial & industrial $ 120,325 $ 128,393 Commercial real estate - owner occupied 124,182 110,929 Commercial real estate - nonowner occupied 297,554 301,880 Agricultural 60,928 64,505 Residential real estate 320,306 291,368 Home equity line of credit (HELOC) 47,695 45,056 Consumer 18,031 19,944 Total loans 989,021 962,075 Allowance for credit losses ( 15,790 ) ( 13,818 ) Loans, net $ 973,231 $ 948,257 The totals shown above are net of deferred loan fees and costs, which totaled $ 0.44 million and $ 0.31 million at September 30, 2023 and December 31, 2022, respectively. The risk characteristics of each loan portfolio segment are as follows: Commercial & Industrial and Agricultural Commercial & industrial and agricultural loans are primarily underwritten based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial Real Estate (Owner and Nonowner Occupied) Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied versus non-owner-occupied commercial real estate loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally underwritten based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. 14 Residential Real Estate, HELOC and Consumer Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers. Allowance for Credit Losses (ACL) The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about 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. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors. As a result of the adoption of ASC 326, the Company recorded a $ 1.4 million increase to the ACL as a cumulative-effect adjustment on January 1, 2023. The following tables summarize the activity related to the ACL for the three and nine months ended September 30, 2023 under the CECL methodology. ($ in thousands) For the three months ended September 30, 2023 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 1,957 $ - $ - $ - $ ( 37 ) $ 1,920 Commercial real estate - owner occupied 1,897 - - - 2 1,899 Commercial real estate - nonowner occupied 5,783 - - - 43 5,826 Agricultural 408 - - - 1 409 Residential real estate 4,985 - - 1 2 4,988 HELOC 523 - - - ( 8 ) 515 Consumer 242 - ( 12 ) 6 ( 3 ) 233 Total $ 15,795 $ - $ ( 12 ) $ 7 $ - $ 15,790 ($ in thousands) For the nine months ended September 30, 2023 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 1,663 $ 230 $ - $ - $ 27 $ 1,920 Commercial real estate - owner occupied 1,696 54 - - 149 1,899 Commercial real estate - nonowner occupied 4,584 1,015 - - 227 5,826 Agricultural 611 ( 194 ) - - ( 8 ) 409 Residential real estate 4,438 360 ( 53 ) 1 242 4,988 HELOC 547 ( 76 ) - - 44 515 Consumer 279 ( 17 ) ( 60 ) 24 7 233 Total $ 13,818 $ 1,372 $ ( 113 ) $ 25 $ 688 $ 15,790 15 Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables contain disclosures related to the allowance for loan losses in prior periods under this methodology. ($ in thousands) For the three months ended September 30, 2022 Balance, beginning of period Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 1,828 $ - $ - $ ( 32 ) $ 1,796 Commercial real estate - owner occupied 2,564 - - - 2,564 Commercial real estate - nonowner occupied 4,107 - - ( 21 ) 4,086 Agricultural 560 - - 12 572 Residential real estate 3,751 - - 175 3,926 HELOC 534 - - ( 26 ) 508 Consumer 457 ( 9 ) 32 ( 108 ) 372 Total $ 13,801 $ ( 9 ) $ 32 $ - $ 13,824 ($ in thousands) For the nine months ended September 30, 2022 Balance, beginning of period Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 1,890 $ - $ - $ ( 94 ) $ 1,796 Commercial real estate - owner occupied 2,564 - - - 2,564 Commercial real estate - nonowner occupied 4,217 - - ( 131 ) 4,086 Agricultural 599 - - ( 27 ) 572 Residential real estate 3,515 - - 411 3,926 HELOC 579 - - ( 71 ) 508 Consumer 441 ( 27 ) 46 ( 88 ) 372 Total $ 13,805 $ ( 27 ) $ 46 $ - $ 13,824 ($ in thousands) For the twelve months ended December 31, 2022 Balance at Beginning of Period Chargeoffs Recoveries Provision for Credit Losses Balance at End of Period Commercial & industrial $ 1,890 $ - $ - $ ( 227 ) $ 1,663 Commercial real estate - owner occupied 2,564 - - ( 868 ) 1,696 Commercial real estate - nonowner occupied 4,217 - - 367 4,584 Agricultural 599 - - 12 611 Residential real estate 3,515 - - 923 4,438 HELOC 579 ( 34 ) 47 ( 45 ) 547 Consumer 441 - - ( 162 ) 279 Total $ 13,805 $ ( 34 ) $ 47 $ - $ 13,818 Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the ACL. 16 The following table presents an analysis of collateral-dependent loans of the Company as of September 30, 2023. ($ in thousands) Collateral Type Allocated September 30, 2023 Real Estate Other Total Allowance Commercial & industrial $ 810 $ - $ 810 $ 97 Commercial real estate - owner occupied 1,865 - 1,865 - Commercial real estate - nonowner occupied 1,187 - 1,187 41 Agricultural - - - - Residential real estate 1,618 - 1,618 64 HELOC - - - - Consumer - - - - Total $ 5,480 $ - $ 5,480 $ 202 Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of collateral. The ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The following tables disaggregate the allowance for loan losses and recorded investment in loans by impairment methodology under the incurred loss methodology as of December 31, 2022 and September 30, 2022. December 31, 2022 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance for credit losses: Ending allowance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ 138 $ 2 $ 140 Collectively evaluated for impairment $ 1,663 $ 6,280 $ 611 $ 4,300 $ 824 $ 13,678 Totals $ 1,663 $ 6,280 $ 611 $ 4,438 $ 826 $ 13,818 Loans: Individually evaluated for impairment $ 204 $ 347 $ - $ 2,863 $ 114 $ 3,528 Collectively evaluated for impairment $ 128,189 $ 412,462 $ 64,505 $ 288,505 $ 64,886 $ 958,547 Totals $ 128,393 $ 412,809 $ 64,505 $ 291,368 $ 65,000 $ 962,075 17 September 30, 2022 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance for credit losses: Ending allowance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ 152 $ 2 $ 154 Collectively evaluated for impairment $ 1,796 $ 6,650 $ 572 $ 3,774 $ 878 $ 13,670 Totals $ 1,796 $ 6,650 $ 572 $ 3,926 $ 880 $ 13,824 Loans: Individually evaluated for impairment $ 92 $ 197 $ - $ 2,907 $ 122 $ 3,318 Collectively evaluated for impairment $ 128,171 $ 404,318 $ 60,409 $ 264,383 $ 64,200 $ 921,481 Totals $ 128,263 $ 404,515 $ 60,409 $ 267,290 $ 64,322 $ 924,799 Credit Risk Profile The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $ 100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings: Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination. Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy. Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable. Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not warranted. Loans will be classified as Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. The following table presents loan balances by credit quality indicators by year of origination as of September 30, 2023. 18 ($ in thousands) Term Loans by Year of Origination Revolving Revolving Loans Converted September 30, 2023 2023 2022 2021 2020 2019 Prior Loans to Term Total Commercial & industrial Pass (1 - 4) $ 11,924 $ 19,212 $ 20,492 $ 11,013 $ 7,977 $ 6,401 $ 40,814 $ 438 $ 118,271 Special Mention (5) - 750 - 85 29 169 - 30 1,063 Substandard (6) 196 41 226 - - 119 251 51 884 Doubtful (7) - - - - 1 101 - 5 107 Loss (8) - - - - - - - - - Total $ 12,120 $ 20,003 $ 20,718 $ 11,098 $ 8,007 $ 6,790 $ 41,065 $ 524 $ 120,325 Commercial real estate - owner occupied Pass (1 - 4) $ 21,954 $ 23,742 $ 27,571 $ 13,570 $ 13,310 $ 20,959 $ 111 $ 178 $ 121,395 Special Mention (5) - - - 704 188 - - - 892 Substandard (6) - - - 1,681 180 - - - 1,861 Doubtful (7) - - 33 - 1 - - - 34 Loss (8) - - - - - - - - - Total $ 21,954 $ 23,742 $ 27,604 $ 15,955 $ 13,679 $ 20,959 $ 111 $ 178 $ 124,182 Commercial real estate - nonowner occupied Pass (1 - 4) $ 39,881 $ 70,262 $ 55,799 $ 47,424 $ 31,012 $ 50,725 $ 88 $ - $ 295,191 Special Mention (5) - - - - - 999 - - 999 Substandard (6) - - - - 851 324 39 - 1,214 Doubtful (7) - - - - - 150 - - 150 Loss (8) - - - - - - - - - Total $ 39,881 $ 70,262 $ 55,799 $ 47,424 $ 31,863 $ 52,198 $ 127 $ - $ 297,554 Agricultural Pass (1 - 4) $ 7,673 $ 16,596 $ 13,157 $ 3,204 $ 1,897 $ 10,359 $ 8,042 $ - $ 60,928 Special Mention (5) - - - - - - - - - Substandard (6) - - - - - - - - - Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 7,673 $ 16,596 $ 13,157 $ 3,204 $ 1,897 $ 10,359 $ 8,042 $ - $ 60,928 Residential real estate Pass (1 - 4) $ 48,577 $ 111,229 $ 85,744 $ 32,249 $ 11,613 $ 24,027 $ 2,928 $ 1,600 $ 317,967 Special Mention (5) - - 369 55 935 958 - - 2,317 Substandard (6) - - - - - 22 - - 22 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 48,577 $ 111,229 $ 86,113 $ 32,304 $ 12,548 $ 25,007 $ 2,928 $ 1,600 $ 320,306 Home equity line of credit (HELOC) Pass (1 - 4) $ - $ - $ 191 $ 18 $ 86 $ 132 $ 40,023 $ 7,075 $ 47,525 Special Mention (5) - - - - - 62 20 73 155 Substandard (6) - - - 15 - - - - 15 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ - $ - $ 191 $ 33 $ 86 $ 194 $ 40,043 $ 7,148 $ 47,695 Consumer Pass (1 - 4) $ 5,477 $ 5,755 $ 1,605 $ 929 $ 291 $ 163 $ 3,797 $ - $ 18,017 Special Mention (5) - - 13 1 - - - - 14 Substandard (6) - - - - - - - - - Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 5,477 $ 5,755 $ 1,618 $ 930 $ 291 $ 163 $ 3,797 $ - $ 18,031 Total Loans Pass (1 - 4) $ 135,486 $ 246,796 $ 204,559 $ 108,407 $ 66,186 $ 112,766 $ 95,803 $ 9,291 $ 979,294 Special Mention (5) - 750 382 845 1,152 2,188 20 103 5,440 Substandard (6) 196 41 226 1,696 1,031 465 290 51 3,996 Doubtful (7) - - 33 - 2 251 - 5 291 Loss (8) - - - - - - - - - Total Loans $ 135,682 $ 247,587 $ 205,200 $ 110,948 $ 68,371 $ 115,670 $ 96,113 $ 9,450 $ 989,021 19 The following table presents loan balances by credit quality indicators and loan categories as of December 31, 2022. ($ in thousands) December 31, 2022 Commercial & industrial Commercial real estate - owner occupied Commercial real estate - nonowner occupied Agricultural Residential real estate HELOC Consumer Total Pass (1 - 4) $ 127,727 $ 107,999 $ 296,611 $ 64,505 $ 288,028 $ 44,746 $ 19,915 $ 949,531 Special Mention (5) 394 2,930 4,899 - - - - 8,223 Substandard (6) 158 - 160 - 3,316 310 29 3,973 Doubtful (7) 114 - 210 - 24 - - 348 Loss (8) - - - - - - - - Total Loans $ 128,393 $ 110,929 $ 301,880 $ 64,505 $ 291,368 $ 45,056 $ 19,944 $ 962,075 The following tables present the Company’s loan portfolio aging analysis as of September 30, 2023 and December 31, 2022. ($ in thousands) 30-59 Days 60-89 Days Greater Than 90 Days Total Past September 30, 2023 Past Due Past Due Past Due Due Current Total Loans Commercial & industrial $ 863 $ 196 $ 424 $ 1,483 $ 118,842 $ 120,325 Commercial real estate - owner occupied - 32 - 32 124,150 124,182 Commercial real estate - nonowner occupied - - 91 91 297,463 297,554 Agricultural - - - - 60,928 60,928 Residential real estate 5 245 1,047 1,297 319,009 320,306 HELOC 174 48 106 328 47,367 47,695 Consumer 35 12 15 62 17,969 18,031 Total Loans $ 1,077 $ 533 $ 1,683 $ 3,293 $ 985,728 $ 989,021 30-59 Days 60-89 Days Greater Than 90 Days Total Past December 31, 2022 Past Due Past Due Past Due Due Current Total Loans Commercial & industrial $ 23 $ 108 $ 114 $ 245 $ 128,148 $ 128,393 Commercial real estate - owner occupied - - - - 110,929 110,929 Commercial real estate - nonowner occupied 114 - 32 146 301,734 301,880 Agricultural - - - - 64,505 64,505 Residential real estate 98 411 1,287 1,796 289,572 291,368 HELOC 98 24 138 260 44,796 45,056 Consumer 61 26 22 109 19,835 19,944 Total Loans $ 394 $ 569 $ 1,593 $ 2,556 $ 959,519 $ 962,075 All loans past due 90 days are systematically placed on nonaccrual status. When a loan is moved to nonaccrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on nonaccrual loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments. The categories of nonaccrual loans as of September 30, 2023 and December 31, 2022 are presented in the following table. 20 September 30, 2023 December 31, 2022 ($ in thousands) Nonaccrual loans with no allowance Nonaccrual loans with an allowance Total nonaccrual loans Total nonaccrual loans Commercial & industrial $ 224 $ 492 $ 716 $ 114 Commercial real estate - owner occupied 33 - 33 - Commercial real estate - nonowner occupied 189 - 189 210 Agricultural - - - - Residential real estate 716 1,490 2,206 3,020 Home equity line of credit (HELOC) 170 - 170 310 Consumer 15 - 15 28 Total loans $ 1,347 $ 1,982 $ 3,329 $ 3,682 Impaired Loans (Prior to the Adoption of ASC 326) Prior to the adoption of ASU 2016-13, a loan was considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment was measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans were collectively evaluated for impairment. Accordingly, the Company did not separately identify individual consumer and residential loans for impairment measurements, unless such loans were the subject of a restructuring agreement due to financial difficulties of the borrower. Impaired loans less than $ 100,000 were included in groups of homogenous loans. These loans were evaluated based on delinquency status. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis. 21 The following table presents loans individually evaluated for impairment for the three and nine months ended September 30, 2022 and for the twelve months ended December 31, 2022: ($ in thousands) Twelve Months Ended Recorded Unpaid Principal Related Average Recorded Interest Income December 31, 2022 Investment Balance Allowance Investment Recognized With no related allowance recorded: Commercial & industrial $ 204 $ 627 $ - $ 650 $ 34 Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied 347 825 - 1,350 94 Agricultural - - - - - Residential real estate 1,491 1,558 - 1,793 65 HELOC 68 68 85 4 Consumer - - - - - With a specific allowance recorded: Commercial & industrial - - - - - Commercial real estate - owner occupied - - - - - Commercial real estate - nonowner occupied - - - - - Agricultural - - - - - Residential real estate 1,372 1,372 138 1,424 43 HELOC 46 46 2 51 2 Consumer - - - - - Totals: Commercial & industrial $ 204 $ 627 $ - $ 650 $ 34 Commercial real estate - owner occupied $ - $ - $ - $ - $ - Commercial real estate - nonowner occupied $ 347 $ 825 $ - $ 1,350 $ 94 Agricultural $ - $ - $ - $ - $ - Residential real estate $ 2,863 $ 2,930 $ 138 $ 3,217 $ 108 HELOC $ 114 $ 114 $ 2 $ 136 $ 6 Consumer $ - $ - $ - $ - $ - Three Months Ended Nine Months Ended September 30, 2022 Average Recorded Interest Income Average Recorded Interest Income ($ in thousands) Investment Recognized Investment Recognized With no related allowance recorded: Commercial & industrial $ 191 $ 1 $ 191 $ 2 Commercial real estate - owner occupied - - - - Commercial real estate - nonowner occupied 342 5 348 16 Agricultural - - - - Residential real estate 1,784 16 1,808 47 HELOC 82 1 90 3 Consumer - - - - With a specific allowance recorded: Commercial & industrial - - - - Commercial real estate - owner occupied - - - - Commercial real estate - nonowner occupied - - - - Agricultural - - - - Residential real estate 1,413 7 1,419 34 HELOC 49 1 54 2 Consumer - - - - Totals: Commercial & industrial $ 191 $ 1 $ 191 $ 2 Commercial real estate - owner occupied $ - $ - $ - $ - Commercial real estate - nonowner occupied $ 342 $ 5 $ 348 $ 16 Agricultural $ - $ - $ - $ - Residential real estate $ 3,197 $ 23 $ 3,227 $ 81 HELOC $ 131 $ 2 $ 144 $ 5 Consumer $ - $ - $ - $ - 22 Modifications made to Borrowers Experiencing Financial Difficulty In the normal course of business, the Company may execute loan modifications with borrowers. These modifications are analyzed to determine whether the modification is considered concessionary, long term and made to a borrower experiencing financial difficulty. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the borrower short-term cash relief to allow them to improve their financial condition. If a loan modification is determined to be made to a borrower experiencing financial difficulty, the loan is considered collateral dependent and evaluated as part of the ACL as described above in the Allowance for Credit Losses section of this note. For the nine months ended September 30, 2023, the Company did not modify any loans made to borrowers experiencing financial difficulty. The Company had no commitments to lend to borrowers experiencing financial difficulty for which the Company had modified an existing loan as of September 30, 2023. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and its ability to generate positive cash flows during the loan term. For the nine-month period ended September 30, 2023, the Company had no loan modifications made to borrowers experiencing financial difficulty for which there was a payment default within the 12 months following the modification date. Unfunded Loan Commitments The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the ACL for loans. The allowance for credit losses for unfunded loan commitments of $ 0.9 million at September 30, 2023 is classified on the balance sheet within Other liabilities. The following table presents the balance and activity in the ACL for unfunded loan commitments for the three and nine months ended September 30, 2023. Three Months Ended Nine Months Ended ($ in thousands) September 30, 2023 September 30, 2023 Balance, beginning of period $ 856 $ - Adjustment for adoption of ASU 2016-13 - 1,149 Provision for unfunded commitments ( 6 ) ( 299 ) Balance, end of period $ 850 $ 850 NOTE 5 – GOODWILL A summary of the activity in goodwill is presented below: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2023 2022 2023 2022 Beginning balance $ 23,239 $ 23,239 $ 23,239 $ 23,191 Measurement period adjustments - - - 48 Ending balance $ 23,239 $ 23,239 $ 23,239 $ 23,239 Goodwill is not amortized but is evaluated for impairment annually, and on an interim basis if events or circumstances change that indicate an impairment may exist. 23 As of September 30, 2023 and December 31, 2022, the carrying amount of goodwill was $ 23.2 million. Goodwill is assessed for impairment annually as of December 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. Goodwill was assessed for impairment using a quantitative test performed as of August 31, 2023. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date. No events or circumstances since the August 31, 2023 impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. NOTE 6 – MORTGAGE SERVICING RIGHTS Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $ 1.37 billion at September 30, 2023 and $ 1.35 billion at December 31, 2022. Contractually specified servicing fees of $ 0.9 million and $ 2.5 million were included in mortgage loan servicing fees in the consolidated income statement for the three and nine months ended September 30, 2023, respectively. Servicing fees of $ 0.9 million and $ 2.6 million were included in mortgage loan servicing fees in the consolidated income statement for the three and nine months ended September 30, 2022, respectively. The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2023 2022 2023 2022 Balance at beginning of period $ 13,723 $ 13,408 $ 13,503 $ 12,034 Mortgage servicing rights capitalized during the period 582 396 1,388 1,684 Mortgage servicing rights amortization during the period ( 334 ) ( 396 ) ( 960 ) ( 1,439 ) Net change in valuation allowance ( 78 ) 65 ( 38 ) 1,194 Balance at end of period $ 13,893 $ 13,473 $ 13,893 $ 13,473 Valuation allowance: Balance at beginning of period $ 137 $ 327 $ 177 $ 1,456 Increase (decrease) 78 ( 65 ) 38 ( 1,194 ) Balance at end of period $ 215 $ 262 $ 215 $ 262 Fair value, beginning of period $ 16,645 $ 15,135 $ 15,754 $ 12,629 Fair value, end of period $ 16,161 $ 15,460 $ 16,161 $ 15,460 NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable-rate assets. 24 Non-designated Hedges The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into Interest Rate Lock Commitments (“IRLCs”) with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of September 30, 2023 and December 31, 2022. September 30, 2023 December 31, 2022 Notional Fair Notional Fair ($ in thousands) Amount Value Amount Value Asset Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 61,854 $ 6,072 $ 66,477 $ 5,538 IRLCs - - - - Forward contracts 10,750 85 5,500 26 Total contracts $ 72,604 $ 6,157 $ 71,977 $ 5,564 Liability Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 61,854 $ ( 6,072 ) $ 66,477 $ ( 5,538 ) IRLCs 7,423 ( 24 ) 3,268 ( 20 ) Forward contracts - - - - Total contracts $ 69,277 $ ( 6,096 ) $ 69,745 $ ( 5,558 ) The fair value of interest rate swaps were estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC or forward contract and the balance sheet date. 25 The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the three and nine months ended September 30, 2023 and 2022. Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) Statement of income classification 2023 2022 2023 2022 Interest rate swap contracts Other income $ 68 $ - $ 74 $ 3 IRLCs Gain on sale of mortgage loans & OMSR ( 14 ) ( 201 ) ( 4 ) ( 169 ) Forward contracts Gain on sale of mortgage loans & OMSR 37 309 59 297 The following table shows the offsetting of financial assets and derivative assets at September 30, 2023 and December 31, 2022. Gross Gross amounts offset Net amounts of assets presented Gross amounts not offset in the consolidated balance sheet ($ in thousands) amounts of recognized assets in the consolidated balance sheet in the consolidated balance sheet Financial instruments Cash collateral received Net amount September 30, 2023 Interest rate swaps $ 6,072 $ - $ 6,072 $ - $ 3,786 $ 2,286 December 31, 2022 Interest rate swaps $ 5,540 $ 2 $ 5,538 $ - $ 4,480 $ 1,058 The following table shows the offsetting of financial liabilities and derivative liabilities at September 30, 2023 and December 31, 2022. Gross Gross amounts offset Net amounts of liabilities presented Gross amounts not offset in the consolidated balance sheet ($ in thousands) amounts of recognized liabilities in the consolidated balance sheet in the consolidated balance sheet Financial instruments Cash collateral pledged Net amount September 30, 2023 Interest rate swaps $ 6,072 $ - $ 6,072 $ - $ 100 $ 5,972 December 31, 2022 Interest rate swaps $ 5,540 $ 2 $ 5,538 $ - $ - $ 5,538 NOTE 8 – DEPOSITS Major classification of deposits at September 30, 2023 and at December 31, 2022 were as follows: ($ in thousands) September 30, 2023 December 31, 2022 Non interest bearing demand $ 224,182 $ 256,799 Interest bearing demand 174,729 191,719 Savings 226,077 191,272 Money market 216,565 255,995 Time deposits less than $250,000 193,518 160,507 Time deposits $250,000 or greater 50,248 30,373 Total Deposits $ 1,085,319 $ 1,086,665 Included in time deposits at September 30, 2023 and December 31, 2022 were $ 55.9 million and $ 58.0 million, respectively, of deposits which were obtained through the Certificate of Deposit Account Registry Service (CDARS). 26 NOTE 9 – SHORT-TERM BORROWINGS ($ in thousands) September 30, 2023 December 31, 2022 Securities sold under repurchase agreements $ 16,519 $ 14,923 The Company has retail repurchase (“REPO”) agreements to facilitate cash management transactions with commercial customers. These obligations are secured by agency and mortgage-backed securities and such collateral is held by the Federal Home Loan Bank (“FHLB”). These securities have various maturity dates from 2025 through 2061. As of September 30, 2023, these REPO agreements were secured by securities with a fair value totaling $ 21.5 million. The REPO agreements mature within one month. The Company has borrowing capabilities at the Federal Reserve Discount Window (“Discount Window”) and the Bank Term Funding Program (“BTFP”) by pledging either securities or loans as collateral. As of September 30, 2023, there was $ 9.2 million pledged to the Federal Reserve Discount Window. At September 30, 2023 and December 31, 2022, the Company had $ 41.0 million in federal funds lines, of which none was drawn. NOTE 10 – FEDERAL HOME LOAN BANK (FHLB) ADVANCES The Company’s FHLB advances were secured by $ 258.4 million in mortgage loans at September 30, 2023. Advances consisted of fixed and variable interest rates from 3.75 to 5.43 percent. Fixed rate advances are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at September 30, 2023 were: ($ in thousands) Debt 2023 $ 37,000 2026 $ 5,000 2028 17,500 Total $ 59,500 NOTE 11 – TRUST PREFERRED SECURITIES On September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $ 1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is currently based upon the 3-month CME Term SOFR as adjusted by the relevant spread adjustment plus 1.80 percent and are included in interest expense in the consolidated financial statements. These securities may be included in Tier 1 capital and may be prepaid at any time without penalty (with certain limitations applicable) under current regulatory guidelines and interpretations. The balance of the Capital Securities as of September 30, 2023 and December 31, 2022 was $ 10.3 million, with a maturity date of September 15, 2035 . 27 NOTE 12 – SUBORDINATED DEBT On May 27, 2021, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreements’’) with qualified institutional buyers and accredited investors (collectively, the “Purchasers”) pursuant to which the Company issued and sold $ 20.0 million in aggregate principal amount of its 3.65 % Fixed to Floating Rate Subordinated Notes due 2031 (the “Notes”). The Notes were sold by the Company in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended. The Notes mature on June 1, 2031 and bear interest at a fixed rate of 3.65 % through May 31, 2026. From June 1, 2026 to the maturity date or earlier redemption of the Notes, the interest rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month SOFR provided by the Federal Reserve Bank of New York plus 296 basis points. The Company may redeem the Notes at any time after May 31, 2026, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $ 0.5 million, which are being amortized over the life of the Notes. NOTE 13 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying consolidated balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy. Available-for-Sale Securities The fair values of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include obligations of the U.S. treasury and government agencies, mortgage-backed securities, obligations of political and state subdivisions, and other corporate securities. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means. Interest Rate Contracts The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties (Level 2). 28 Forward contracts The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1). Interest Rate Lock Commitments (IRLCs) The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected “pull-through” rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at September 30, 2023 and December 31, 2022. ($ in thousands) Fair value at September 30, 2023 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 6,272 $ - $ 6,272 $ - Mortgage-backed securities 182,692 - 182,692 - State and political subdivisions 9,578 - 9,578 - Other corporate securities 14,226 - 14,226 - Interest rate contracts - assets 6,072 - 6,072 - Interest rate contracts - liabilities ( 6,072 ) - ( 6,072 ) - Forward contracts 85 85 - - IRLCs ( 24 ) - - ( 24 ) ($ in thousands) Fair value at December 31, 2022 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 6,764 $ - $ 6,764 $ - Mortgage-backed securities 205,835 - 205,835 - State and political subdivisions 11,103 - 11,103 - Other corporate securities 15,078 - 15,078 - Interest rate contracts - assets 5,538 - 5,538 - Interest rate contracts - liabilities ( 5,538 ) - ( 5,538 ) - Forward contracts 26 26 - - IRLCs ( 20 ) - - ( 20 ) Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs 29 The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2023 and 2022. for the Three Months Ended September 30, for the Nine Months Ended September 30, ($ in thousands) 2023 2022 2023 2022 Interest rate lock commitments Balance at beginning of period $ ( 10 ) $ 54 $ ( 20 ) $ 22 Change in fair value ( 14 ) ( 201 ) ( 4 ) ( 169 ) Balance at end of period $ ( 24 ) $ ( 147 ) $ ( 24 ) $ ( 147 ) The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Collateral-dependent Individually evaluated Loans, Net of ACL The estimated fair value of collateral-dependent individually evaluated loans (or impaired loans prior to the adoption of ASC 326) is based on the appraised value of the collateral, less estimated cost to sell. Collateral- dependent individually evaluated loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining an independent appraisal of the collateral, which is reviewed for accuracy and consistency by management. Appraisers are selected from an approved list which is maintained by management. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All individually evaluated loans held by the Company were collateral dependent at September 30, 2023 and December 31, 2022. Mortgage Servicing Rights Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees; miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis. 30 ($ in thousands) Fair value at September 30, 2023 (Level 1) (Level 2) (Level 3) Collateral-dependent Individually evaluated loans $ 1,560 $ - $ - $ 1,560 Mortgage servicing rights 2,259 - - 2,259 ($ in thousands) Fair value at December 31, 2022 (Level 1) (Level 2) (Level 3) Collateral-dependent impaired loans $ 1,028 $ - $ - $ 1,028 Mortgage servicing rights 1,448 - - 1,448 Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. Fair value at Range ($ in thousands) September 30, 2023 Valuation technique Unobservable inputs (weighted- average) Collateral-dependent individually evaluated loans $ 1,560 Market comparable properties Comparability adjustments (%) 1 - 100% (17%) Mortgage servicing rights 2,259 Discounted cash flow Discount rate 11.76% Constant prepayment rate 8.32% P&I earnings credit 5.32% T&I earnings credit 5.23% Inflation for cost of servicing 3.50% IRLCs ( 24 ) Discounted cash flow Loan closing rates 49% - 99% Fair value at Range ($ in thousands) December 31, 2022 Valuation technique Unobservable inputs (weighted- average) Collateral-dependent impaired loans $ 1,028 Market comparable properties Comparability adjustments (%) 8 - 21% (12%) Mortgage servicing rights 1,448 Discounted cash flow Discount rate 11.39% Constant prepayment rate 7.52% P&I earnings credit 4.35% T&I earnings credit 4.58% Inflation for cost of servicing 3.50% IRLCs ( 20 ) Discounted cash flow Loan closing rates 41% - 99% There were no changes in the inputs or methodologies used to determine fair value at September 30, 2023 as compared to December 31, 2022. 31 The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value. Cash and Due From Banks, Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest Receivable and Payable The carrying amount approximates the fair value. Loans Held for Sale The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk. Loans The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The “exit price” is determined based on discounted estimated future cash flows using rates that incorporate discounts for credit, liquidity, and marketability factors. Deposits, Short-Term Borrowings, and FHLB Advances Deposits include demand deposits, savings accounts, and certain money market deposits. Short-term borrowings include federal funds borrowed and REPO agreements. The carrying amount of these instruments approximates the fair value. The estimated fair value for fixed-maturity time deposits and FHLB advances are based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at September 30, 2023 and December 31, 2022. Loan Commitments The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at September 30, 2023 and December 31, 2022 and are not considered significant to this presentation. Trust Preferred Securities The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate. Subordinated Debt The fair value for subordinated debt is estimated by discounting the cash flows using a discount rate equal to the rate currently offered on similar borrowings. 32 The following table presents estimated fair values of the Company’s other financial instruments carried at other than fair value. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate. ($ in thousands) Carrying Fair Fair value measurements using September 30, 2023 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 19,049 $ 19,049 $ 19,049 $ - $ - Interest bearing time deposits 1,180 1,180 - 1,180 - Loans held for sale 3,206 3,194 - 3,194 - Loans, net of allowance for loan losses 973,231 944,388 - - 944,388 Federal Reserve and FHLB Bank stock, at cost 6,261 6,261 - 6,261 - Interest receivable 4,457 4,457 - 4,457 - Financial liabilities Deposits $ 1,085,319 $ 1,091,105 $ 841,553 $ 249,552 $ - Short-term borrowings 16,519 16,519 - 16,519 - FHLB advances 59,500 58,624 - 58,624 - Trust preferred securities 10,310 9,343 - 9,343 - Subordinated debt, net of issuance costs 19,630 19,228 - 19,228 - Interest payable 2,216 2,216 - 2,216 - ($ in thousands) Carrying Fair Fair value measurements using December 31, 2022 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 27,817 $ 27,817 $ 27,817 $ - $ - Interest bearing time deposits 2,131 2,131 - 2,131 - Loans held for sale 2,073 2,100 - 2,100 - Loans, net of allowance for loan losses 948,257 945,699 - - 945,699 Federal Reserve and FHLB Bank stock, at cost 6,326 6,326 - 6,326 - Interest receivable 4,091 4,091 - 4,091 - Financial liabilities Deposits $ 1,086,665 $ 1,090,718 $ 895,785 $ 194,933 $ - Short-term borrowings 14,923 14,923 - 14,923 - FHLB advances 60,000 59,886 - 59,886 - Trust preferred securities 10,310 9,674 - 9,674 - Subordinated debt, net of issuance costs 19,594 18,959 - 18,959 - Interest payable 769 769 - 769 - NOTE 14 – SHARE BASED COMPENSATION In April 2017, the Company’s shareholders approved a new share-based incentive compensation plan, the SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which replaced the Company’s 2008 Stock Incentive Plan. The 2017 Plan permits the Company to grant or award incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock, and restricted stock units to employees and non-employee directors and advisory board members of the Company and its subsidiaries. A total of 500,000 common shares of the Company are available for grants or awards under the 2017 Plan, of which 145,376 shares had been granted under the plan as of September 30, 2023. The 2017 Plan is intended to advance the interests of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards. The 2017 Plan permits equity-based awards to be used to attract, motivate, reward and retain highly competent individuals upon whose judgment, initiative, leadership and efforts are key to the success of the Company by encouraging those individuals to become shareholders of the Company. 33 Stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on five years of continuous service and have 10 -year contractual terms. The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. As of September 30, 2023, there were no stock options outstanding, and no unrecognized compensation cost related to stock option awards. No stock options were granted in the first nine months of 2023. On February 5, 2013, the Company adopted a Long Term Incentive (LTI) Plan, which provides for awards of restricted stock in the Company to certain key executives. These restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives. The compensation cost charged against income for awards under the LTI Plan for the three and nine months ended September 30, 2023 was $ 0.1 million and $ 0.5 million, respectively, and for the three and nine months ended September 30, 2022 was $ 0.1 million and $ 0.5 million, respectively. As of September 30, 2023, there was $ 0.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards under the 2017 Plan which were granted in accordance with the LTI plan. That cost is expected to be recognized over a weighted-average period of 2.7 years. The table below is a summary of restricted stock activity under the Company’s 2017 Plan for the nine months ended September 30, 2023. Shares Weighted- Average Value per Share Nonvested, January 1, 2023 52,919 $ 19.23 Granted 28,664 16.53 Vested ( 31,810 ) 17.96 Forfeited ( 807 ) 18.27 Nonvested, September 30, 2023 48,966 $ 18.49 NOTE 15 – GENERAL LITIGATION The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Additionally, the Company is subject to periodic examinations by various regulatory agencies. It is the opinion of management that the disposition or ultimate resolution of any such claims, lawsuits and examinations pending at September 30, 2023, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Company. 34