SB FINANCIAL GROUP, INC. 10-K

Item 8. Financial Statements and Supplementary Data. Our Consolidated Financial Statements and Notes thereto and other supplementary data follow. Index to Consolidated Financial Statements Page Consolidated Balance Sheets as of December 31, 2023 and 2022 F-2 Consolidated Statements of Income for the Years ended December 31, 2023 and 2022 F-3 Consolidated Statements of Comprehensive Income (Loss) for the Years ended December 31, 2023 and 2022 F-4 Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-7 Report of Independent Registered Public Accounting Firm (FORVIS, LLP) (PCAOB ID: 686 ) F-45 F- 1 SB Financial Group, Inc. Consolidated Balance Sheets at December 31, ($ in thousands) 2023 2022 Assets Cash and due from banks $ 22,965 $ 27,817 Interest bearing time deposits 1,535 2,131 Available-for-sale securities 219,708 238,780 Loans held for sale 2,525 2,073 Loans, net of unearned income 1,000,212 962,075 Allowance for credit losses ( 15,786 ) ( 13,818 ) Premises and equipment, net 21,378 22,829 Federal Reserve and Federal Home Loan Bank Stock, at cost 7,279 6,326 Foreclosed assets and other assets held for sale, net 511 777 Interest receivable 4,657 4,091 Goodwill 23,239 23,239 Cash value of life insurance 29,121 28,870 Mortgage servicing rights 13,906 13,503 Other assets 11,999 16,940 Total assets $ 1,343,249 $ 1,335,633 Liabilities and shareholders’ equity Liabilities Deposits Non interest bearing demand $ 228,713 $ 256,799 Interest bearing demand 166,413 191,719 Savings 216,965 191,272 Money market 202,605 255,995 Time deposits 255,509 190,880 Total deposits 1,070,205 1,086,665 Repurchase agreements 13,387 14,923 Federal Home Loan Bank advances 83,600 60,000 Trust preferred securities 10,310 10,310 Subordinated debt net of issuance costs 19,642 19,594 Interest payable 2,443 769 Other liabilities 19,320 24,944 Total liabilities 1,218,907 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 15,124 15,087 Retained earnings 108,486 101,966 Accumulated other comprehensive loss ( 29,831 ) ( 32,120 ) Treasury stock, at cost; (2023 - 1,756,733 common shares; 2022 - 1,589,913 common shares) ( 30,756 ) ( 27,824 ) Total shareholders’ equity 124,342 118,428 Total liabilities and shareholders’ equity $ 1,343,249 $ 1,335,633 See Notes to Consolidated Financial Statements F- 2 SB Financial Group, Inc. Consolidated Statements of Income Years Ended December 31, ($ in thousands, except per share data) 2023 2022 Interest Income Loans Taxable $ 51,407 $ 38,238 Tax exempt 483 335 Securities Taxable 5,245 5,174 Tax exempt 170 198 Other interest income 847 624 Total interest income 58,152 44,569 Interest Expense Deposits 14,708 3,477 Repurchase agreements & other 74 39 Federal Home Loan Bank advance expense 2,603 515 Trust preferred securities expense 716 361 Subordinated debt expense 778 778 Total interest expense 18,879 5,170 Net Interest Income 39,273 39,399 Provision for credit losses - loans 688 - Provision for unfunded commitments ( 373 ) - Total provision for credit losses 315 - Net interest income after provision for loan losses 38,958 39,399 Noninterest Income Wealth management fees 3,532 3,728 Customer service fees 3,403 3,378 Gain on sale of mortgage loans & OMSR 3,609 4,298 Mortgage loan servicing fees, net 2,101 2,964 Gain on sale of non-mortgage loans 429 566 Title insurance income 1,635 2,229 Net gain on sale of securities 1,453 - Other income 1,559 1,068 Total noninterest income 17,721 18,231 Noninterest Expense Salaries and employee benefits 22,777 24,142 Net occupancy expense 3,096 2,993 Equipment expense 4,078 3,616 Data processing fees 2,659 2,510 Professional fees 3,024 3,214 Marketing expense 782 911 Telephone and communications 501 474 Postage and delivery expense 432 422 State, local and other taxes 949 1,082 Employee expense 631 613 Other expense 3,033 2,337 Total noninterest expense 41,962 42,314 Income before income tax 14,717 15,316 Provision for income taxes 2,622 2,795 Net Income $ 12,095 $ 12,521 Basic earnings per common share $ 1.77 $ 1.79 Diluted earnings per common share $ 1.75 $ 1.77 See Notes to Consolidated Financial Statements F- 3 SB Financial Group, Inc. Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, ($ in thousands) 2023 2022 Net income $ 12,095 $ 12,521 Other comprehensive income (loss) Available for sale investment securities: Gross unrealized holding gain (loss) arising in the period 2,897 ( 38,323 ) Related tax benefit ( 608 ) 8,048 Net effect on other comprehensive income (loss) 2,289 ( 30,275 ) Total comprehensive income (loss) $ 14,384 $ ( 17,754 ) See Notes to Consolidated Financial Statements F- 4 SB Financial Group, Inc. Consolidated Statements of Shareholders’ Equity Years Ended December 31, Common Additional Paid-in Retained Accumulated Other Comprehensive Treasury ($ in thousands, except per share data) Stock Capital Earnings Income (Loss) Stock Total January 1, 2023 $ 61,319 $ 15,087 $ 101,966 $ ( 32,120 ) $ ( 27,824 ) $ 118,428 Net income 12,095 12,095 Other comprehensive income 2,289 2,289 CECL initial adjustment ( 1,991 ) ( 1,991 ) Dividends on common, $ 0.52 per share ( 3,584 ) ( 3,584 ) Restricted stock vesting ( 539 ) 539 - Repurchased stock ( 244,325 shares) ( 3,471 ) ( 3,471 ) Stock based compensation expense 576 576 December 31, 2023 $ 61,319 $ 15,124 $ 108,486 $ ( 29,831 ) $ ( 30,756 ) $ 124,342 Common Additional Paid-in Retained Accumulated Other Comprehensive Treasury ($ in thousands, except per share data) Stock Capital Earnings Income (Loss) Stock Total January 1, 2022 $ 54,463 $ 14,944 $ 99,716 $ ( 1,845 ) $ ( 22,349 ) $ 144,929 Net income 12,521 12,521 Other comprehensive loss ( 30,275 ) ( 30,275 ) Stock dividends on common ( 344,663 shares) 6,856 ( 6,864 ) ( 8 ) Dividends on common, $ 0.48 per share ( 3,407 ) ( 3,407 ) Restricted stock vesting ( 425 ) 425 - Repurchased stock ( 317,356 shares) ( 5,900 ) ( 5,900 ) Stock based compensation expense 568 568 December 31, 2022 $ 61,319 $ 15,087 $ 101,966 $ ( 32,120 ) $ ( 27,824 ) $ 118,428 See Notes to Consolidated Financial Statements F- 5 SB Financial Group, Inc. Consolidated Statements of Cash Flows Years Ended December 31, ($ in thousands) 2023 2022 Operating Activities Net Income $ 12,095 $ 12,521 Items not requiring (providing) cash Depreciation and amortization 2,235 2,196 Provision for credit losses 315 - Expense of share-based compensation plan 576 568 Amortization of premiums and discounts on securities 522 897 Amortization of intangible assets 90 69 Amortization of originated mortgage servicing rights 1,242 1,749 Impairment (recovery) of mortgage servicing rights 50 ( 1,279 ) Deferred income taxes 1,878 2,709 Proceeds from sale of loans held for sale 161,183 189,515 Originations of loans held for sale ( 159,292 ) ( 181,192 ) Gain from sale of loans ( 4,038 ) ( 4,864 ) Net gains on sales of securities ( 1,453 ) - Changes in Interest receivable ( 566 ) ( 1,171 ) Other assets 3,876 ( 2,014 ) Interest payable & other liabilities ( 4,724 ) 5,865 Net cash provided by operating activities 13,989 25,569 Investing Activities Purchases of available-for-sale securities ( 723 ) ( 50,618 ) Proceeds from maturities of interest bearing time deposits 596 512 Proceeds from maturities of available-for-sale securities 22,170 35,878 Net change in loans ( 38,736 ) ( 139,670 ) Purchase of premises, equipment ( 958 ) ( 1,896 ) Proceeds from bank owned life insurance 398 - Purchase of bank owned life insurance - ( 10,500 ) Purchase of Federal Reserve and Federal Home Loan Bank Stock ( 953 ) ( 1,023 ) Proceeds from sale of foreclosed assets 816 1,646 Net cash used in investing activities ( 17,390 ) ( 165,671 ) Financing Activities Net decrease in demand deposits, money market, interest checking & savings accounts ( 81,089 ) ( 60,756 ) Net increase in time deposits 64,629 34,376 Net decrease in securities sold under agreements to repurchase ( 1,536 ) ( 397 ) Proceeds from Federal Home Loan Bank advances 810,500 232,000 Repayment of Federal Home Loan Bank advances ( 786,900 ) ( 177,500 ) Stock repurchase plan ( 3,471 ) ( 5,900 ) Dividends on common shares ( 3,584 ) ( 3,415 ) Net cash provided by (used in) financing activities ( 1,451 ) 18,408 Increase in cash and cash equivalents ( 4,852 ) ( 121,694 ) Cash and cash equivalents, beginning of year 27,817 149,511 Cash and cash equivalents, end of year $ 22,965 $ 27,817 Supplemental cash flow information Interest paid $ 17,205 $ 4,700 Supplemental non-cash disclosure Transfer of loans to foreclosed assets $ 507 $ 322 Stock dividends declared and paid $ - $ 6,856 See Notes to Consolidated Financial Statements F- 6 SB Financial Group, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2023 and 2022 Note 1: Organization and Summary of Significant Accounting Policies Organization and Nature of Operations SB Financial Group, Inc. (“SB Financial”) is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), SBFG Title, LLC dba Peak Title Agency (“SBFG Title”), SB Captive, Inc. (“SB Captive”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), Rurban Statutory Trust II (“RST II”), and SBFG Mortgage, LLC. State Bank owns all the outstanding stock of Rurban Mortgage Company (“RMC”) and State Bank Insurance, LLC (“SBI”). The “Company” refers to SB Financial and its consolidated subsidiaries collectively, except where the context indicates the reference relates solely to the registrant, SB Financial. The Company is primarily engaged in providing a full range of banking and wealth management services to individual and corporate customers primarily located in Ohio, Indiana, and Michigan. The Company is subject to competition from other financial institutions in its market areas. The Company is regulated by certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company, State Bank, SBFG Title, SB Captive, RFCBC, RDSI, RMC, RST II, SBFG Mortgage, LLC, and SBI. All significant intercompany accounts and transactions were eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the ACL, loan servicing rights, and fair value of financial instruments. Significant Accounting Policies Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2023 and 2022, cash equivalents consisted primarily of interest-bearing and noninterest bearing demand deposit balances held by correspondent banks. At December 31, 2023, the Company’s correspondent cash accounts exceeded federally insured limits by $ .4 million. Additionally, the Company had approximately $ 5.9 million of cash held by the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank (“FHLB”), which is not federally insured. Securities Available-for-sale securities, which include any debt security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income. F- 7 Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. The Company has made a policy election to exclude accrued interest from the amortized cost basis of securities and report accrued interest separately in other assets on the consolidated balance sheets. A security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on nonaccrual is reversed against interest income. There was no accrued interest related to securities reversed against interest income for the years ended December 31, 2023 or 2022. Allowance for Credit Losses – Available-for-Sale Securities For available-for-sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income as a provision for credit losses. For available-for-sale securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL are recorded as provision for (or reversal of) credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. At December 31, 2023, no ACL on available-for-sale securities was recorded. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Accrued interest receivable on available-for-sale debt securities totaled $ 0.7 million at December 31, 2023. Should the decline in fair value be the result of credit losses or other factors, the security would be moved into a nonaccrual status and all accrued interest be reversed. Mortgage Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income. The Company utilizes third-party hedges to minimize the impact of interest rate risk fluctuations, and their impact is realized through noninterest income. Loans Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge offs, the ACL, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on nonaccrual status not later than 90 days past due. Past due status is based on the contractual terms of the loan. All interest accrued, but not collected for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. F- 8 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. 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. ● Home Equity Line of Credit (HELOCs) - Home equity loans consist of HELOCs 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. F- 9 ● 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 utilizes 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 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 sound calculation. Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, 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 credit 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. 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. 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. F- 10 While the Company’s policies and procedures used to estimate the ACL, 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. Premises and Equipment Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method for buildings and equipment over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line method over the terms of the respective leases. Long-lived Asset Impairment The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset’s cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) Stock FRB and FHLB stock are required investments for institutions that are members of the FRB and FHLB systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment. Foreclosed Assets and Other Assets Held for Sale Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less cost to sell. Revenue and expenses from operations related to foreclosed assets and changes in the valuation allowance are included in net income or expense from foreclosed assets. Goodwill Goodwill is tested for impairment annually or upon a triggering event. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Core Deposits and Other Intangibles Intangible assets are being amortized on a straight-line basis over weighted-average periods ranging from one to eight years . Such assets are periodically evaluated as to the recoverability of their carrying value. Purchased software is being amortized using the straight-line method over periods ranging from one to three years . Derivatives The Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into interest rate lock commitments (“IRLCs”) with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. F- 11 The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with the changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while the derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation. Mortgage Servicing Rights Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (Accounting Standards Codification “ASC” 806-50), servicing rights from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost of service, the discount rate, the custodial earning rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income. Each class of separately recognized servicing assets subsequently measured using the amortization method is evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with “Mortgage loan servicing fees, net” in the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Share-Based Employee Compensation Plan At December 31, 2023 and 2022, the Company had a share-based employee compensation plan (see Note 18 to the Consolidated Financial Statements). Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before the maturity or the ability to unilaterally cause the holder to return specific assets. F- 12 Income Taxes The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term “upon examination” also includes resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. With a few exceptions, the Company is no longer subject to U.S. Federal, State and Local examinations by tax authorities for the years before 2020. As of December 31, 2023, the Company had no uncertain income tax positions. Treasury Shares Treasury stock is stated at cost. Cost is determined by the weighted-average cost method. Earnings Per Share Earnings per share (“EPS”) is computed using the two-class method. Basic EPS represent income available to common shareholders divided by the weighted-average number of common shares outstanding during each period. Diluted EPS reflect additional potential common shares that may be issued by the Company related solely to outstanding stock options or awards which are determined using the treasury stock method. Treasury stock shares are not deemed outstanding for EPS calculations. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities. AOCI consists solely of the cumulative unrealized gains and losses on available-for-sale securities net of income tax. Subordinated Debt At December 31, 2023, the Company had subordinated debt obligations of $ 20.0 million related to its 3.65 % Fixed to Floating Rate Subordinated Notes due 2031, which were issued and sold by the Company on May 27, 2021. The Subordinated Notes were issued in order to provide additional funds for various corporate obligations of the Company, including share buybacks, acquisition costs and organic asset growth (see Note 13 to the Consolidated Financial Statements). F- 13 Revenue Recognition The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered through State Bank. Interest income is the largest source of revenue for the Company and is primarily recognized on an accrual basis. Noninterest income is earned through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking and title insurance. Adoption of New Accounting Standards: 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 that are noncancellable), 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. 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 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 deferred tax being recorded as part of the deferred tax asset in the Company’s consolidated balance sheet. F- 14 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 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). 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. 2023-02: Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (ASU 2023-02). This ASU permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization if certain conditions are met. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The Company adopted the standard using a modified retrospective transition approach to the amendments related to our low income housing tax credit (“LIHTC”) investments that are eligible to apply proportional amortization. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition. Accounting Standards not yet adopted: ASU No. 2023-09: Income Taxes (Topic 740): Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this update address investor requests for more transparency about income tax information through improvements to income tax disclosures, primarily related to effective tax rate reconciliation and information related to income taxes paid, among certain other amendments to improve the effectiveness of such disclosures. The amendments of this ASU are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. Adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements. F- 15 Note 2: Earnings Per Share EPS is computed using the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common shares. Diluted EPS is computed using the weighted-average number of shares determined for the basic EPS plus the dilutive effect of stock compensation using the treasury stock method. EPS for the years ended December 31, 2023 and 2022 is computed as follows: Twelve Months Ended December 31, ($ and outstanding shares in thousands - except per share data) 2023 2022 Distributed earnings allocated to common shares $ 3,584 $ 3,412 Undistributed earnings allocated to common shares 8,482 9,082 Net earnings allocated to common shares 12,066 12,494 Net earnings allocated to participating securities 29 27 Net Income allocated to common shares and participating securities $ 12,095 $ 12,521 Weighted average shares outstanding for basic earnings per share 6,829 7,005 Dilutive effect of stock compensation 88 73 Weighted average shares outstanding for diluted earnings per share 6,917 7,078 Basic earnings per common share $ 1.77 $ 1.79 Diluted earnings per common share $ 1.75 $ 1.77 There were no anti-dilutive shares in 2023 or 2022. On January 10, 2022, the Company announced that its board of directors had declared a 5 percent common stock dividend payable on February 4, 2022, to shareholders of record as of January 21, 2022. Holders of the Company’s common shares as of the record date received one additional common share for every twenty common shares held on the record date. No fractional shares were issued, and shareholders received cash for such fractional interests based on the closing price of $ 19.89 of the Company’s common shares on the record date. F- 16 Note 3: Available-for-Sale Securities The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of available-for-sale securities are as follows: Gross Gross Amortized Unrealized Unrealized ($ in thousands) Cost Gains Losses Fair Value December 31, 2023 U.S. Treasury and Government agencies $ 7,339 $ 1 $ ( 823 ) $ 6,517 Mortgage-backed securities 221,717 3 ( 32,853 ) 188,867 State and political subdivisions 11,212 8 ( 1,322 ) 9,898 Other corporate securities 17,200 - ( 2,774 ) 14,426 Totals $ 257,468 $ 12 $ ( 37,772 ) $ 219,708 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 December 31, 2023, by contractual maturity, are shown below. Expected maturities differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair ($ in thousands) Cost Value Within one year $ 809 $ 800 Due after one year through five years 1,903 1,839 Due after five years through ten years 24,483 20,824 Due after ten years 8,556 7,378 35,751 30,841 Mortgage-backed securities 221,717 188,867 Totals $ 257,468 $ 219,708 The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $ 89.7 million at December 31, 2023, and $ 53.9 million at December 31, 2022. Securities delivered for repurchase agreements (not included above) were $ 19.7 million at December 31, 2023 and $ 17.8 million at December 31, 2022. During the 4th quarter of 2023, the Company sold all of the equity shares it owned in Visa Class “B” shares. As a result of this sale, the Company no longer owns any Visa Class B shares. The carrying value of the Visa Class B shares on the Company’s balance sheet was nominal as the Company had a historical cost basis of $ 0.01 per share. After transaction costs, the Company realized a pre-tax gain on the sale of $ 1.45 million. F- 17 Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. There were 139 securities and 144 securities reported with amounts less than their historical value at December 31, 2023 and 2022, respectively. Total fair value of these investments was $ 217.0 million and $ 235.5 million at December 31, 2023 and 2022, respectively, which was approximately 99 percent and 99 percent, respectively, of the Company’s available-for-sale investment portfolio. The following tables present securities with unrealized losses at December 31, 2023 and 2022: ($ in thousands) Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2023 U.S. Treasury and Government agencies $ - $ - $ 6,022 $ ( 823 ) $ 6,022 $ ( 823 ) Mortgage-backed securities - - 188,508 ( 32,853 ) 188,508 ( 32,853 ) State and political subdivisions - - 8,541 ( 1,322 ) 8,541 ( 1,322 ) Other corporate securities - - 13,926 ( 2,774 ) 13,926 ( 2,774 ) Totals $ - $ - $ 216,997 $ ( 37,772 ) $ 216,997 $ ( 37,772 ) Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2022 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 ) 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. Management reviews these securities on a quarterly basis and evaluates if any security has a fair value less than its amortized cost. 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. F- 18 Note 4: Loans and Allowance for Credit Losses The following tables present the categories of loans at December 31, 2023 and 2022: Total Loans ($ in thousands) 2023 2022 Commercial & industrial $ 126,716 $ 128,393 Commercial real estate - owner occupied 126,717 110,929 Commercial real estate - nonowner occupied 297,323 301,880 Agricultural 65,659 64,505 Residential real estate 318,123 291,368 Home equity line of credit (HELOC) 47,845 45,056 Consumer 17,829 19,944 Total loans 1,000,212 962,075 Allowance for credit losses ( 15,786 ) ( 13,818 ) Loans, net $ 984,426 $ 948,257 The Company makes commercial, agri-business, consumer and residential loans to customers throughout its defined market area. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Listed below is a summary of loan commitments, unused lines of credit, and standby letters of credit as of December 31, 2023 and 2022. ($ in thousands) 2023 2022 Loan commitments and unused lines of credit $ 201,605 $ 221,668 Standby letters of credit 1,184 1,336 Totals $ 202,789 $ 223,004 The risk characteristics of each loan portfolio segment are as follows: Commercial & Industrial and Agricultural Commercial & industrial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. F- 19 Commercial Real Estate (Owner and Nonowner Occupied) Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Residential Real Estate, Home Equity Line of Credit (“HELOC”) and Consumer Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers. 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. F- 20 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 table summarizes the activity related to the ACL for the twelve months ended December 31, 2023 under the CECL methodology. ($ in thousands) For the twelve months ended December 31, 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 $ - $ - $ 110 $ 2,003 Commercial real estate - owner occupied 1,696 54 - - 202 1,952 Commercial real estate - nonowner occupied 4,584 1,015 - - 119 5,718 Agricultural 611 ( 194 ) - - 23 440 Residential real estate 4,438 360 ( 53 ) 1 190 4,936 HELOC 547 ( 76 ) - - 39 510 Consumer 279 ( 17 ) ( 65 ) 25 5 227 Total $ 13,818 $ 1,372 $ ( 118 ) $ 26 $ 688 $ 15,786 Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the ACL under the incurred loss methodology. The following table contains disclosures related to the ACL for the year ended December 31, 2022 under this methodology. ($ in thousands) For the twelve months ended December 31, 2022 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, 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 The following table presents gross chargeoffs for the year ended December 31, 2023 by loan category and origination year. ($ in thousands) Term Loans by Year of Origination Revolving December 31, 2023 2023 2022 2021 2020 2019 Prior Loans Total Commercial & industrial $ - $ - $ - $ - $ - $ - $ - $ - Commercial real estate - owner occupied - - - - - - - - Commercial real estate - nonowner occupied - - - - - - - - Agricultural - - - - - - - - Residential real estate - - 32 21 - - - 53 Home equity line of credit (HELOC) - - - - - - - - Consumer - 12 8 11 - - 34 65 $ - $ 12 $ 40 $ 32 $ - $ - $ 34 $ 118 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. F- 21 The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2023. ($ in thousands) Collateral Type Allocated December 31, 2023 Real Estate Other Total Allowance Commercial & industrial $ 604 $ - $ 604 $ 97 Commercial real estate - owner occupied - - - - Commercial real estate - nonowner occupied 284 - 284 40 Agricultural - - - - Residential real estate 1,023 - 1,023 18 HELOC - - - - Consumer - - - - Total $ 1,911 $ - $ 1,911 $ 155 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 table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology under the incurred loss methodology as of December 31, 2022. December 31, 2022 Commercial & industrial Commercial real estate Agricultural Residential real estate Consumer Total Allowance for loan 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 F- 22 Credit Risk Profile The Company categorizes loans into risk categories (loan grades) based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $ 100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings: Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination. Special Mention (grade 5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy. Substandard (grade 6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardized the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful (grade 7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable. Loss (grade 8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not feasible. Loans will be classified as loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. F- 23 The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis. The following table presents loan balances by credit quality indicators by year of origination as of December 31, 2023. ($ in thousands) Term Loans by Year of Origination Revolving Revolving Loans Converted December 31, 2023 2023 2022 2021 2020 2019 Prior Loans to Term Total Commercial & industrial Pass (1 - 4) $ 17,239 $ 18,076 $ 19,143 $ 10,573 $ 7,449 $ 5,965 $ 45,831 $ 444 $ 124,720 Special Mention (5) - 731 - 64 - 140 201 - 1,136 Substandard (6) - 41 - - 25 137 - 80 283 Doubtful (7) 195 - 226 - 1 100 50 5 577 Loss (8) - - - - - - - - - Total $ 17,434 $ 18,848 $ 19,369 $ 10,637 $ 7,475 $ 6,342 $ 46,082 $ 529 $ 126,716 Commercial real estate - owner occupied Pass (1 - 4) $ 29,253 $ 21,427 $ 26,808 $ 12,931 $ 12,881 $ 20,409 $ 112 $ 173 $ 123,994 Special Mention (5) - - - 2,338 358 - - - 2,696 Substandard (6) - - - - - - - - - Doubtful (7) - - 26 - 1 - - - 27 Loss (8) - - - - - - - - - Total $ 29,253 $ 21,427 $ 26,834 $ 15,269 $ 13,240 $ 20,409 $ 112 $ 173 $ 126,717 Commercial real estate - nonowner occupied Pass (1 - 4) $ 52,915 $ 67,285 $ 47,658 $ 46,364 $ 30,561 $ 47,895 $ 2,377 $ - $ 295,055 Special Mention (5) - - - - 838 1,134 - - 1,972 Substandard (6) - - - - - 154 18 - 172 Doubtful (7) - - - - - 124 - - 124 Loss (8) - - - - - - - - - Total $ 52,915 $ 67,285 $ 47,658 $ 46,364 $ 31,399 $ 49,307 $ 2,395 $ - $ 297,323 Agricultural Pass (1 - 4) $ 9,496 $ 16,131 $ 12,940 $ 3,029 $ 1,859 $ 9,801 $ 12,403 $ - $ 65,659 Special Mention (5) - - - - - - - - - Substandard (6) - - - - - - - - - Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 9,496 $ 16,131 $ 12,940 $ 3,029 $ 1,859 $ 9,801 $ 12,403 $ - $ 65,659 Residential real estate Pass (1 - 4) $ 53,013 $ 110,531 $ 85,075 $ 31,558 $ 10,425 $ 22,564 $ 1,816 $ 1,300 $ 316,282 Special Mention (5) - - - - - - - - - Substandard (6) - - 361 54 485 920 - - 1,820 Doubtful (7) - - - - - 21 - - 21 Loss (8) - - - - - - - - - Total $ 53,013 $ 110,531 $ 85,436 $ 31,612 $ 10,910 $ 23,505 $ 1,816 $ 1,300 $ 318,123 Home equity line of credit (HELOC) Pass (1 - 4) $ - $ - $ 46 $ 18 $ 85 $ 94 $ 40,932 $ 6,492 $ 47,667 Special Mention (5) - - - - - 59 20 99 178 Substandard (6) - - - - - - - - - Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ - $ - $ 46 $ 18 $ 85 $ 153 $ 40,952 $ 6,591 $ 47,845 Consumer Pass (1 - 4) $ 3,296 $ 5,142 $ 1,429 $ 740 $ 221 $ 128 $ 6,863 $ - $ 17,819 Special Mention (5) - - - 1 - - - - 1 Substandard (6) - 9 - - - - - - 9 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 3,296 $ 5,151 $ 1,429 $ 741 $ 221 $ 128 $ 6,863 $ - $ 17,829 Total Loans Pass (1 - 4) $ 165,212 $ 238,592 $ 193,099 $ 105,213 $ 63,481 $ 106,856 $ 110,334 $ 8,409 $ 991,196 Special Mention (5) - 731 - 2,403 1,196 1,333 221 99 5,983 Substandard (6) - 50 361 54 510 1,211 18 80 2,284 Doubtful (7) 195 - 252 - 2 245 50 5 749 Loss (8) - - - - - - - - - Total Loans $ 165,407 $ 239,373 $ 193,712 $ 107,670 $ 65,189 $ 109,645 $ 110,623 $ 8,593 $ 1,000,212 F- 24 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 December 31, 2023 and 2022: ($ in thousands) 30-59 Days 60-89 Days Greater Than 90 Days Total Past December 31, 2023 Past Due Past Due Past Due Due Current Total Loans Commercial & industrial $ 26 $ - $ 658 $ 684 $ 126,032 $ 126,716 Commercial real estate - owner occupied - - - - 126,717 126,717 Commercial real estate - nonowner occupied - - 29 29 297,294 297,323 Agricultural - - - - 65,659 65,659 Residential real estate - 222 395 617 317,506 318,123 HELOC - 8 67 75 47,770 47,845 Consumer 88 33 1 122 17,707 17,829 Total Loans $ 114 $ 263 $ 1,150 $ 1,527 $ 998,685 $ 1,000,212 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. F- 25 The categories of nonaccrual loans as of December 31, 2023 and December 31, 2022 are presented in the following table. 2023 2022 ($ in thousands) Nonaccrual loans with no allowance Nonaccrual loans with an allowance Total nonaccrual loans Total nonaccrual loans Commercial & industrial $ 651 $ 97 $ 748 $ 114 Commercial real estate - owner occupied 26 - 26 - Commercial real estate - nonowner occupied 141 - 141 210 Agricultural - - - - Residential real estate 1,694 18 1,712 3,020 Home equity line of credit (HELOC) 180 - 180 310 Consumer 11 - 11 28 Total loans $ 2,703 $ 115 $ 2,818 $ 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. F- 26 The following table presents impaired loan activity for the twelve months ended December 31, 2022: ($ in thousands) Recorded Unpaid Principal Related Average Recorded Interest Income Twelve Months Ended 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 $ - $ - $ - $ - $ - 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 provide the borrowers with 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 twelve months ended December 31, 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 December 31, 2023. Prior to the adoption of ASU 2022-02, the Company reported Troubled Debt Restructured loans (“TDRs”). TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. There were no new TDRs during the period ended December 31, 2022. F- 27 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 twelve-month period ended December 31, 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 ACL for unfunded loan commitments 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 twelve months ended December 31, 2023 and 2022. ($ in thousands) 2023 2022 Balance, beginning of period $ - $ - Adjustment for adoption of ASU 2016-13 1,149 - Provision for unfunded commitments ( 373 ) - Balance, end of period $ 776 $ - Related Party Loans Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers are presented in the following table at December 31: ($ in thousands) 2023 2022 Balance at beginning of period $ 521 $ 521 Effect of change in compostioin of directors and executive officers - 112 New Term Loans - - Repayment of term loans ( 144 ) ( 53 ) Changes in balances of revolving lines of credit 58 ( 59 ) Balance at end of period $ 435 $ 521 F- 28 Note 5: Premises and Equipment Major classifications of premises and equipment stated at cost were as follows at December 31: ($ in thousands) 2023 2022 Land $ 3,563 $ 3,563 Buildings and improvements 27,663 27,699 Equipment 15,842 14,315 Construction in process 167 879 47,235 46,456 Less accumulated depreciation ( 25,857 ) ( 23,627 ) Net premises and equipment $ 21,378 $ 22,829 Note 6: Goodwill and Intangibles The balance of goodwill was $ 23.2 million for the twelve months ended December 31, 2023 and December 31, 2022. 2023 2022 ($ in thousands) Carrying Amount Carrying Amount Beginning balance $ 23,239 $ 23,191 Measurement period adjustments - 48 Ending balance $ 23,239 $ 23,239 Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Goodwill is tested on the last day of the last quarter of each calendar year. The Company performed a quantitative analysis of goodwill as of September 30, 2023, and determined that no impairment was required. At December 31, 2023, the Company determined that no events had occurred to change the assessment from the quantitative analysis and it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Carrying basis and accumulated amortization of intangible assets were as follows at December 31: 2023 2022 Gross Carrying Accumulated Gross Carrying Accumulated ($ in thousands) Amount Amortization Amount Amortization Core deposits intangible $ 660 $ ( 236 ) $ 660 $ ( 170 ) Customer relationship intangible 200 ( 200 ) 200 ( 176 ) Banking intangibles $ 860 $ ( 436 ) $ 860 $ ( 346 ) Amortization expense for intangibles for the years ended December 31, 2023 and 2022 was $ 0.09 million and $ 0.07 million, respectively. Estimated amortization expense for each of the following five years is immaterial. F- 29 Note 7: Mortgage Banking and Servicing Rights Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $ 1.4 billion at both December 31, 2023 and 2022. Contractually specified servicing fees of approximately $ 3.4 million and $ 3.2 million were included in mortgage loan servicing fees in the consolidated income statement for the years ended December 31, 2023 and 2022, respectively. The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance at December 31: ($ in thousands) 2023 2022 Carrying amount, beginning of year $ 13,503 $ 12,034 Mortgage servicing rights capitalized during the year 1,695 1,939 Mortgage servicing rights amortization during the year ( 1,242 ) ( 1,749 ) Net change in valuation allowance ( 50 ) 1,279 Carrying amount, end of year $ 13,906 $ 13,503 Valuation allowance: Beginning of year $ 177 $ 1,456 Increase (reduction) 50 ( 1,279 ) End of year $ 227 $ 177 Fair value, beginning of period $ 15,754 $ 12,629 Fair value, end of period $ 17,125 $ 15,754 Note 8: Derivative Financial Instruments The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable-rate assets. The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. F- 30 The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized at December 31: 2023 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 $ 68,381 $ 3,638 $ 66,477 $ 5,538 IRLCs 7,466 45 - - Forward contracts - - 5,500 26 Total contracts $ 75,847 $ 3,683 $ 71,977 $ 5,564 Liability Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 68,381 $ ( 3,638 ) $ 66,477 $ ( 5,538 ) IRLCs - - 3,268 ( 20 ) Forward contracts 10,750 ( 37 ) - - Total contracts $ 79,131 $ ( 3,675 ) $ 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 and the balance sheet date. The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the twelve months ended December 31, 2023 and 2022. Amount of gain (loss) ($ in thousands) Statement of income classification 2023 2022 Interest rate swap contracts Other income $ 132 $ 19 IRLCs Gain on sale of mortgage loans & OMSR 65 ( 42 ) Forward contracts Gain on sale of mortgage loans & OMSR ( 63 ) 57 The following table shows the offsetting of financial assets and derivative assets at December 31, 2023 and 2022. Gross amounts of Gross amounts offset in the Net amounts of assets presented in the Gross amounts not offset in the consolidated balance sheet ($ in thousands) recognized assets consolidated balance sheet consolidated balance sheet Financial instruments Cash collateral received Net amount December 31, 2023 Interest rate swaps $ 3,957 $ 319 $ 3,638 $ - $ 2,900 $ 738 December 31, 2022 Interest rate swaps $ 5,540 $ 2 $ 5,538 $ - $ 4,480 $ 1,058 F- 31 The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2023 and 2022. Gross amounts of Gross amounts offset in the Net amounts of liabilities presented in the Gross amounts not offset in the consolidated balance sheet ($ in thousands) recognized liabilities consolidated balance sheet consolidated balance sheet Financial instruments Cash collateral pledged Net amount December 31, 2023 Interest rate swaps $ 3,957 $ 319 $ 3,638 $ - $ - $ 3,638 December 31, 2022 Interest rate swaps $ 5,540 $ 2 $ 5,538 $ - $ - $ 5,538 Note 9: Interest-Bearing Deposits Interest-bearing time deposits in denominations of $ 250,000 or more totaled $ 54.1 million on December 31, 2023 and $ 23.4 million on December 31, 2022. There were no certificates of deposits from brokers as of December 31, 2023 and $ 7.0 million as of December 31, 2022. At December 31, 2023, the scheduled maturities of time deposits were as follows: ($ in thousands) 2024 $ 197,374 2025 41,190 2026 14,459 2027 1,958 2028 528 Thereafter - Total $ 255,509 Included in time deposits at December 31, 2023 and 2022 were $ 56.5 million and $ 58.0 million, respectively, of deposits which were obtained through the Certificate of Deposit Account Registry Service (“CDARS”). This service allows deposit customers to maintain fully insured balances in excess of the $ 250,000 FDIC limit without the inconvenience of having multi-banking relationships. Under the reciprocal program that the Company is currently participating in, customers agree to allow their deposits to be placed with other participating banks in the CDARS program in insurable amounts under $ 250,000 . In exchange, other banks in the program agree to place their deposits with the Company also in insurable amounts under $ 250,000 . Deposits of directors and their associates, including deposits of companies for which directors are principal owners and executive officers, totaled $ 5.2 million and $ 7.0 million at December 31, 2023 and 2022, respectively. Note 10: Short-Term Borrowings ($ in thousands) 2023 2022 Securities Sold Under Repurchase Agreements $ 13,387 $ 14,923 The Company has retail repurchase agreements to facilitate cash management transactions with commercial customers. These obligations were secured by agency securities of $ 4.5 million and $ 5.4 million as of December 31, 2023 and 2022, respectively, and mortgage-backed securities of $ 15.2 million and $ 12.4 million for 2023 and 2022, respectively. The collateral is held at the FHLB and has maturities from 2025 through 2051. At December 31, 2023, these repurchase agreements totaled $ 13.4 million. The maximum amount of outstanding agreements at any month end during 2023 and 2022 totaled $ 24.6 million and $ 30.9 million, respectively, and the monthly average of such agreements totaled $ 15.8 million and $ 20.3 million during 2023 and 2022, respectively. The repurchase agreements mature within one month. F- 32 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 December 31, 2023, there was $ 20.1 million of collateral pledged, but no borrowings drawn at either borrowing facilities. At December 31, 2023 and 2022, the Company had $ 41.0 million in federal funds lines, of which none were drawn. Note 11: Federal Home Loan Bank (FHLB) Advances The FHLB advances were secured by $ 272.1 million in mortgage loans at December 31, 2023. Advances consisted of fixed and variable interest rates from 3.75 to 5.47 percent. Fixed rate advances are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at December 31, 2023, were: ($ in thousands) Debt 2024 61,100 2026 5,000 2028 17,500 Total $ 83,600 Note 12: Trust Preferred Securities On September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $ 1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is currently based upon the 3-month CME Group Benchmark Administration (“CME”) Term Secured Overnight Financing Rate (“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 December 31, 2023 and 2022 was $ 10.3 million, with a maturity date of September 15, 2035 . Note 13: Subordinated Debt On May 27, 2021, the Company entered into Subordinated Note Purchase Agreements with qualified institutional buyers and accredited investors 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 14: Income Taxes The provision for income taxes includes these components: For The Year Ended December 31, ($ in thousands) 2023 2022 Taxes currently payable $ 744 $ 86 Deferred provision 1,878 2,709 Income tax expense $ 2,622 $ 2,795 F- 33 A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below: For The Year Ended December 31, ($ in thousands) 2023 2022 Computed at the statutory rate ( 21 %) $ 3,091 $ 3,216 Increase (decrease) resulting from Tax exempt interest ( 117 ) ( 111 ) BOLI income ( 187 ) ( 106 ) Sec. 831(b) election ( 198 ) ( 199 ) Other 33 ( 5 ) Actual tax expense $ 2,622 $ 2,795 The tax effects of temporary differences related to deferred taxes shown on the balance sheets are: For The Year Ended December 31, ($ in thousands) 2023 2022 Deferred tax assets Allowance for credit losses $ 3,315 $ 2,902 Unrealized losses on available-for-sale securities 7,929 8,538 Capitalized research and development costs 90 117 Accrued bonus 124 142 Net operating loss 2,758 5,410 Other 819 854 15,035 17,963 Deferred tax liabilities Depreciation ( 983 ) ( 1,117 ) Mortgage servicing rights ( 2,920 ) ( 2,836 ) Purchase accounting adjustments ( 1,488 ) ( 1,598 ) Prepaids ( 475 ) ( 527 ) Net deferred loan costs ( 93 ) ( 93 ) Section 475 MTM ( 7,929 ) ( 8,538 ) FHLB stock dividends ( 122 ) ( 271 ) ( 14,010 ) ( 14,980 ) Net deferred tax asset $ 1,025 $ 2,983 As of December 31, 2023 the Company had $ 13.1 million in net operating losses. No valuation allowance is recorded as these are expected to be fully utilized and have no expiration. Note 15: Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) represents reclassifications out of unrealized gains and losses on available-for-sale securities net of income tax. There were no reclassifications for the years ending December 31, 2023 and 2022. Note 16: Regulatory Matters As of December 31, 2023, based on its call report computations, State Bank was classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since December 31, 2023 that management believes have changed State Bank’s capital classification. F- 34 State Bank’s actual capital amounts and ratios are presented in the following table. Capital levels are presented for State Bank only as the Company is exempt from quarterly reporting at the holding company level: For Capital Adequacy To Be Well Capitalized Under Prompt Corrective Actual Purposes Action Procedures ($ in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2023 Tier I Capital to average assets $ 148,049 10.93 % $ 54,185 4.0 % $ 67,732 5.0 % Tier I Common equity capital to risk-weighted assets $ 148,049 13.42 % $ 49,640 4.5 % $ 71,702 6.5 % Tier I Capital to risk-weighted assets $ 148,049 13.42 % $ 66,186 6.0 % $ 88,249 8.0 % Total Risk-based capital to risk-weighted assets $ 161,872 14.67 % $ 88,249 8.0 % $ 110,311 10.0 % As of December 31, 2022 Tier I Capital to average assets $ 146,678 11.06 % $ 53,069 4.0 % $ 66,336 5.0 % Tier I Common equity capital to risk-weighted assets $ 146,678 13.42 % $ 49,200 4.5 % $ 71,067 6.5 % Tier I Capital to risk-weighted assets $ 146,678 13.42 % $ 65,600 6.0 % $ 87,466 8.0 % Total Risk-based capital to risk-weighted assets $ 160,346 14.67 % $ 87,466 8.0 % $ 109,333 10.0 % The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was 2.50 percent at December 31, 2023 and the Company still would have met the minimum capital requirements when the capital buffer is considered. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes that State Bank met all capital adequacy requirements to which State Bank was subject as of December 31, 2023. Note 17: Employee Benefits The Company has a share-based incentive compensation plan that permits the grant of stock options, restricted stock and other share-based awards to employees, directors and advisory board members of the Company and its subsidiaries. In addition, the Company has instituted a long-term incentive program, with the objective of rewarding senior management through grants of restricted common shares of the Company (see Note 18 to the Consolidated Financial Statements). The Company has a retirement savings 401(k) plan covering substantially all employees. The Company provides a safe harbor matching contribution equal to 100 % of an employees’ salary deferral amounts up to 4 % of the employees’ eligible compensation. Employees are immediately vested in their voluntary contributions and in any Company safe harbor matching contributions. Any discretionary contribution made by the Company is fully vested after three years of credited service. Employer contributions charged to expense for 2023 and 2022 were $ 0.6 million and $ 0.7 million, respectively. Also, the Company has Supplemental Executive Retirement Plan (“SERP”) Agreements with certain active and retired officers. The agreements provide monthly payments for up to 15 years that equal 15 percent to 25 percent of average compensation prior to retirement or death. The charges to expense for the current agreements were $ 0.2 million and $ 0.2 million for 2023 and 2022, respectively. F- 35 Additional life insurance is provided to certain officers through bank-owned life insurance (“BOLI”) policies. By way of a separate split-dollar agreement, each policy’s interests are divided between the Company and the insured’s beneficiary. The Company owns the policy’s cash value and a portion of the policy net death benefit, over and above the cash value assigned to the insured’s beneficiary. In May 2022, an additional $ 10.5 million in BOLI policies were purchased. The cash surrender value of all life insurance policies totaled $ 29.1 million and $ 28.9 million at December 31, 2023 and 2022, respectively. The Company has a noncontributory employee stock ownership plan (“ESOP”) covering substantially all employees of the Company and its subsidiaries. Voluntary contributions are made by the Company to the plan. Each eligible employee is vested based upon years of service, including prior years of service. The Company’s contributions to the account of each employee become fully vested after three years of service. Benefit expense for the value of the stock purchased is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. Allocated shares in the ESOP at December 31, 2023 and 2022, were 328,187 and 370,876 , respectively. Dividends on allocated shares in the ESOP are recorded as dividends and charged to retained earnings. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. ESOP expense for the years ended December 31, 2023 and 2022 was $ 0.1 million and $ 0.0 million, respectively. Note 18: Share-Based Compensation Plan In April 2017, the shareholders approved a new share-based incentive compensation plan, the SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”). This plan permits the grant or award of incentive stock options, nonqualified stock options, stock appreciation rights (“SAR’s”), restricted stock, and restricted stock units (“RSU’s”) for up to 500,000 common shares of the Company. The 2017 Plan is intended to advance the interests of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards. The 2017 Plan 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. Option awards are granted with an exercise price equal to the market price of the Company’s common shares at the date of grant and those option awards vest based on five years of continuous service and have 10 -year contractual terms. The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. There were no options granted in 2023 or 2022. There were no stock options outstanding, and no compensation expense charged against income with respect to option awards under the Plan, as of December 31, 2023 or 2022. As of December 31, 2023, there was no unrecognized compensation cost related to incentive option share-based compensation arrangements granted under the 2017 Plan. Pursuant to the Long Term Incentive (“LTI”) Plan, the Company awards restricted common shares of the Company to certain key executives under the 2017 Plan. These restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives. During 2023 and 2022, the Company met certain performance targets and restricted stock awards were approved by the Board. The compensation cost charged against income for the LTI Plan was $ 0.6 million and $ 0.6 million for 2023 and 2022, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $ 0.1 million and $ 0.1 million for 2023 and 2022, respectively. F- 36 A summary of restricted stock activity under the Company’s LTI Plan as of December 31, 2023 and changes during the year ended is presented below: 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, December 31, 2023 48,966 $ 18.49 As of December 31, 2023, there was $ 0.6 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards under the 2017 Plan which were granted in accordance with the LTI Plan. That cost is expected to be recognized over a weighted-average period of 1.62 years. Note 19: Disclosures About Fair Value of Assets and Liabilities Pursuant to ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy exists in ASC 820 for fair value measurements based upon the inputs to the valuation of an asset or liability: Level 1: Quoted prices in active markets for identical assets or liabilities Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Available-for-sale securities The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include obligations of U.S. government agencies, mortgage-backed securities, obligations of political and state subdivisions, and corporate securities. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means. 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. F- 37 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 table presents the fair value measurements of securities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2023 and 2022: ($ in thousands) Fair value at December 31, 2023 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 6,517 $ - $ 6,517 $ - Mortgage-backed securities 188,867 - 188,867 - State and political subdivisions 9,898 - 9,898 - Other corporate securities 14,426 - 14,426 - Interest rate contracts - assets 3,638 - 3,638 - Interest rate contracts - liabilities ( 3,638 ) - ( 3,638 ) - Forward contracts ( 37 ) ( 37 ) - - IRLCs 45 - - 45 ($ 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 The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs for the years ended December 31, 2023 and 2022. for the Twelve Months Ended December 31, ($ in thousands) 2023 2022 Interest rate lock commitments Balance at beginning of period $ ( 20 ) $ 22 Change in fair value 65 ( 42 ) Balance at end of period $ 45 $ ( 20 ) F- 38 The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Collateral-dependent Individually Evaluated Loans, Net of ACL Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for collateral dependency. The estimated fair value of collateral-dependent loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining independent appraisals of the collateral from a list of preapproved appraisers, which are reviewed for accuracy and consistency by the Company. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All individually evaluated loans held by the Company were collateral dependent at December 31, 2023 and 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. The following table presents the fair value measurements of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2023 and 2022: ($ in thousands) Fair value at December 31, 2023 (Level 1) (Level 2) (Level 3) Collateral-dependent Individually evaluated loans $ 864 $ - $ - $ 864 Mortgage servicing rights 1,896 - - 1,896 ($ 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 F- 39 Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2023 and 2022: ($ in thousands) Fair value at December 31, 2023 Valuation technique Unobservable inputs Range (weighted- average) Collateral-dependent individually evaluated loans $ 864 Market comparable properties Comparability adjustments (%) 2 - 100% (25 %) Mortgage servicing rights 1,896 Discounted cash flow Discount rate 11.01 % Constant prepayment rate 7.16 % P&I earnings credit 5.33 % T&I earnings credit 5.13 % Inflation for cost of servicing 3.50 % IRLCs 45 Discounted cash flow Loan closing rates 27 % - 91 % ($ in thousands) Fair value at December 31, 2022 Valuation technique Unobservable inputs Range (weighted- average) Collateral-dependent impaired loans $ 1,028 Market comparable properties Comparability adjustments (%) 8 - 21% (12 %) Mortgage servicing rights 1,448 Discounted cash flow Discount rate 11.39 % Constant prepayment rate 7.52 % P&I earnings credit 4.35 % T&I earnings credit 4.58 % Inflation for cost of servicing 3.50 % IRLCs ( 20 ) Discounted cash flow Loan closing rates 41 % - 99 % The mortgage servicing rights portfolio is measured for fair value by an independent third party. The valuation of the portfolio hinges on a number of quantitative factors. These factors include, but are not limited to, a discount rate applied to the cash flows, and an assumption of future principal prepayments. The prepayment assumptions are based upon the historical performance of the Company’s portfolio as well as market metrics. The servicing rights have had a decrease in prepayments and the 3.42 percent decrease in the constant prepayment rate reflects the change in market rates. In addition, the earnings credit rate decreased and the discount rate increased. The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value. Cash and Due From Banks, Interest Bearing Time Deposits, FRB and FHLB Stock and Interest Receivable and Payable Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns. Loans Held for Sale The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk. F- 40 Loans The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors. Deposits, Repurchase Agreements & FHLB Advances Deposits include demand deposits, savings accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate the Company could pay on similar instruments with similar terms and maturities at December 31, 2023 and 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 December 31, 2023 and 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 an appropriate discount rate. The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate. ($ in thousands) Carrying Fair Fair value measurements using December 31,2023 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 22,965 $ 22,965 $ 22,965 $ - $ - Interest bearing time deposits 1,535 1,535 - 1,535 - Loans held for sale 2,525 2,565 - 2,565 - Loans, net of allowance for credit losses 984,426 964,216 - - 964,216 Federal Reserve and FHLB Bank stock, at cost 7,279 7,279 - 7,279 - Interest receivable 4,657 4,657 - 4,657 - Financial liabilities Deposits $ 1,070,205 $ 1,078,028 $ 814,696 $ 263,332 $ - Short-term borrowings 13,387 13,387 - 13,387 - FHLB advances 83,600 83,368 - 83,368 - Trust preferred securities 10,310 9,759 - 9,759 - Subordinated debt, net of issuance costs 19,642 19,435 - 19,435 - Interest payable 2,443 2,443 - 2,443 - F- 41 ($ 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 20: Parent Company Financial Information Presented below is condensed financial information of the parent company only: Condensed Balance Sheets ($ in thousands) 2023 2022 Assets Cash & cash equivalents $ 6,468 $ 4,655 Investment in banking subsidiaries 139,502 135,923 Investment in nonbanking subsidiaries 6,279 6,587 Other assets 2,726 2,076 Total assets $ 154,975 $ 149,241 Liabilities Trust preferred securities $ 10,000 $ 10,000 Sub debt net of issuance cost 19,642 19,594 Borrowings from nonbanking subsidiaries 310 310 Other liabilities & accrued interest payable 681 909 Total liabilities 30,633 30,813 Shareholders’ equity 124,342 118,428 Total liabilities and shareholders’ equity $ 154,975 $ 149,241 F- 42 Condensed Statements of Income ($ in thousands) 2023 2022 Dividends from subsidiaries: Banking subsidiaries $ 10,000 $ - Nonbanking subsidiaries 700 750 Total income 10,700 750 Expenses Interest expense 1,494 1,139 Other expense 1,616 1,747 Total expenses 3,110 2,886 Income before income tax 7,590 ( 2,136 ) Income tax benefit ( 652 ) ( 613 ) Income (loss) before equity in undistributed income of subsidiaries 8,242 ( 1,523 ) Equity in undistributed income of subsidiaries Banking subsidiaries 3,290 13,426 Nonbanking subsidiaries 563 618 Total 3,853 14,044 Net income $ 12,095 $ 12,521 Condensed Statements of Comprehensive Income (Loss) ($ in thousands) 2023 2022 Net income $ 12,095 $ 12,521 Other comprehensive income (loss): Available-for-sale investment securities: Gross unrealized holding gain (loss) arising in the period 2,897 ( 38,323 ) Related tax (expense) benefit ( 608 ) 8,048 Net effect on other comprehensive income (loss) 2,289 ( 30,275 ) Total comprehensive income (loss) $ 14,384 $ ( 17,754 ) F- 43 Condensed Statements of Cash Flows ($ in thousands) 2023 2022 Operating activities Net income $ 12,095 $ 12,521 Items not requiring (providing) cash Equity in undistributed net income of subsidiaries ( 3,853 ) ( 14,044 ) Stock compensation expense 576 568 Other assets 230 973 Other liabilities ( 228 ) ( 502 ) Net cash provided by (used in) operating activities 8,820 ( 484 ) Financing activities Dividends on common shares ( 3,584 ) ( 3,407 ) Stock dividends on common shares - ( 8 ) Repurchase of common shares ( 3,471 ) ( 5,900 ) Other financing activities 48 48 Net cash used in financing activities ( 7,007 ) ( 9,267 ) Net change in cash and cash equivalents 1,813 ( 9,751 ) Cash and cash equivalents at beginning of year 4,655 14,406 Cash and cash equivalents at end of year $ 6,468 $ 4,655 Note 21: Quarterly Financial Information (unaudited) Quarterly Financial Information (unaudited) Years ended December 31, ($ in thousands, except per share data) 2023 December September June March Interest income $ 15,126 $ 14,796 $ 14,406 $ 13,824 Interest expense 5,542 5,260 4,577 3,500 Net interest income 9,584 9,536 9,829 10,324 Provision for loan losses ( 74 ) ( 6 ) 145 250 Noninterest income 5,531 4,163 4,361 3,666 Noninterest expense 10,369 10,481 10,339 10,773 Income tax expense 937 537 631 517 Net income $ 3,883 $ 2,687 $ 3,075 $ 2,450 Basic earnings per common share $ 0.58 $ 0.39 $ 0.45 $ 0.35 Diluted earnings per common share $ 0.56 $ 0.39 $ 0.45 $ 0.35 Dividends per share $ 0.135 $ 0.130 $ 0.130 $ 0.125 2022 December September June March Interest income $ 12,936 $ 11,764 $ 10,474 $ 9,395 Interest expense 2,037 1,334 881 918 Net interest income 10,899 10,430 9,593 8,477 Provision for loan losses - - - - Noninterest income 3,713 4,043 4,673 5,802 Noninterest expense 10,268 10,385 10,802 10,859 Income tax expense 812 746 630 607 Net income $ 3,532 $ 3,342 $ 2,834 $ 2,813 Basic earnings per common share $ 0.51 $ 0.48 $ 0.40 $ 0.40 Diluted earnings per common share $ 0.50 $ 0.47 $ 0.40 $ 0.40 Dividends per share $ 0.125 $ 0.120 $ 0.120 $ 0.115 F- 44 Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit Committee SB Financial Group, Inc. Defiance, Ohio Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of SB Financial Group, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years ended December 31, 2023 and 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Accounting Standards Topic 326: Financial Instruments – Credit Losses . The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. F- 45 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowances for Credit Losses As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Topic 326: Financial Instruments – Credit Losses . The Company’s loan portfolio totaled $1.0 billion as of December 31, 2023, and the associated allowance for credit losses (“ACL”) on loans was $15.8 million. As discussed in Notes 1 and 4 to the consolidated financial statements, the Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist using relevant available information, from internal and external sources, relating to past events, current conditions, reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. 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. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. We have identified the ACL, and more specifically the qualitative adjustments applied in the ACL, as a critical audit matter. The principal consideration for our determination is the high degree of judgment and subjectivity in auditing the assumptions utilized by management in calculating the qualitative reserve component. This required a high degree of judgement due to the nature and extent of audit evidence and effort required to address this matter. The primary procedures we performed related to this critical audit matter included: ● Obtained an understanding of the Company’s process and internal controls for establishing the ACL, including the selection, application and related adjustments of the qualitative factor components of the ACL. ● Evaluated the relevancy and reliability of the underlying data used to derive the qualitative factors, including comparison to internal, external and/or peer data to ensure movement in a directionally consistent manner. ● Assessed the appropriateness and reasonableness of the qualitative factor adjustments, including evaluating management’s judgments as to which factors and relevant assessed risks impacted the qualitative adjustments for each loan pool. ● Evaluated the reasonableness of the assumptions utilized by management in calculating the qualitative reserve component. ● Tested the accuracy of the mathematical application of the qualitative factors to adjust the historical loss experience. /s/ FORVIS, LLP We have served as the Company’s auditor since 2002. Indianapolis, Indiana March 8, 2024 F- 46 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . Not Applicable.