What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-09 · 216 added, 262 removed, 254 unchanged (65% of the section changed)

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking

Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q, including

18 unchanged sentences

include, without limitation:

● current and future economic

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

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

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

government shutdowns over budget disagreements, slowing

gross domestic product, tariffs, a U.S.

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

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

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

loans made by us;

● recent and future bank

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

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

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

● instability in global economic

conditions and geopolitical matters (including the ongoing conflict in Ukraine and the recent conflicts involving Israel and Hamas), and

volatility in financial markets, which could have a material adverse effect on our results of operations and financial condition;

● changes in interest rates

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

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

● the impacts and duration of the continuing recovery

from the COVID-19 pandemic and its impacts on national, regional and local economies, supply chains, labor markets and on our customers,

counterparties, employees and third-party service providers;

● the volatility of mortgage

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

● factors that can impact

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

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

● the transition away from LIBOR as a reference

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

● changes in customers’, suppliers’,

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

pressures and other economic and financial market conditions;

● operational risks, reputational

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

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

viruses or cyber-attacks;

● our ability to secure sensitive

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

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

● a failure in or breach of our operational or

security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions

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

● competitive pressures and factors among financial

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

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

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

to recruit and retain qualified personnel in the future;

● risks inherent in pursuing strategic growth initiatives,

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

● uncertainty regarding the nature, timing, cost

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

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

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

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

securities and other aspects of the financial services industry;

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

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

● changes in accounting standards, policies and

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

● litigation and regulatory compliance exposure,

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

resolution of regulatory and other governmental examinations or inquiries;

● continued availability of earnings and dividends

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

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

which we do business, including conditions such as inflation, recession, unemployment, changes

in interest rates, fiscal and monetary policy, an increasing federal government budget deficit,

the failure of the federal government to raise the federal debt ceiling and/or possible future

government shutdowns over budget disagreements, slowing gross domestic product, tariffs,

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

other factors beyond our control, any of which may result in adverse impacts on our deposit

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

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

securing loans made by us;

and future bank failures may reduce customer confidence, affect sources of funding and liquidity,

increase regulatory requirements and costs, adversely affect financial markets and/or have

a negative reputational ramification for the banking industry as a whole, any of which could

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

● instability

in global economic conditions and geopolitical matters (including the ongoing military conflicts

in Ukraine and the Middle East), and volatility in financial markets, which could have a

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

in interest rates resulting from national and local economic conditions and the policies

of regulatory authorities, including monetary policies of the Board of Governors of the Federal

Reserve System, which may adversely affect interest rates, interest margins, loan demand

and interest rate sensitivity;

volatility of mortgage banking income, whether due to interest rates, demand, the fair value

of mortgage loans, or other factors;

that can impact the performance of our loan portfolio, including changes in real estate values

and liquidity in our primary market areas, the financial health of our borrowers and the

success of construction projects that we finance;

in customers’, suppliers’, and other counterparties’ performance and creditworthiness

may be different than anticipated due to the continuing inflationary pressures and other

economic and financial market conditions;

● operational

risks, reputational risks, legal and compliance risks, and other risks related to potential

fraud or theft by employees or outsiders, unauthorized transactions by employees or operational

errors, or failures, disruptions or breaches in security of our systems, including those

resulting from computer viruses or cyber-attacks;

ability to secure sensitive or confidential client information against unauthorized disclose

or access through computer systems and telecommunication networks, including those of our

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

failure in or breach of our operational or security systems or infrastructure, or those of

our third-party vendors and other service providers, resulting in failures or disruptions

in customer account management, general ledger, deposit, loan, or other systems, including

as a result of cyber-attacks;

● competitive

pressures and factors among financial services organizations could increase significantly,

including product and pricing pressures, changes to third-party relationships and our ability

to recruit and retain qualified management and banking personnel;

losses of services of our key management personnel, or the inability to recruit and retain

qualified personnel in the future;

inherent in pursuing strategic growth initiatives, including integration and other risks

involved in past and possible future acquisitions;

● uncertainty

regarding the nature, timing, cost and effect of legislative or regulatory changes in the

banking industry or otherwise affecting the Company, including major reform of the regulatory

oversight structure of the financial services industry and changes in laws and regulations

concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection,

rent regulation and housing, financial accounting and reporting, environmental protection,

insurance, bank products and services, bank and bank holding company capital and liquidity

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

in federal, state and/or local tax laws may adversely affect our reported financial condition

or results of operations;

in accounting standards, policies and practices may adversely affect our reported financial

condition or results of operations;

and regulatory compliance exposure, including the costs and effects of any adverse developments

in legal proceedings or other claims and the costs and effects of unfavorable resolution

of regulatory and other governmental examinations or inquiries;

availability of earnings and dividends from State Bank and excess capital sufficient for

us to service our debt and pay dividends to our shareholders in compliance with applicable

legal and regulatory requirements;

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

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

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

● our ability to anticipate and successfully keep

pace with technological changes affecting the financial services industry;

● and unexpected inability to obtain needed liquidity

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

● other risks identified from time to time in the

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

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

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

March 31, 2023, and June 30, 2023.

ability to adapt to or comply with regulatory requirements and increasing scrutiny and evolving

expectations from customers, regulators, investors and other stakeholders with respect to

the Company’s environmental, social and governance (ESG) practices, which could affect

our reputation and business and operating results;

ability to anticipate and successfully keep pace with technological changes affecting the

financial services industry;

unexpected inability to obtain needed liquidity which could adversely affect our business,

profitability, and viability as a going concern;

risks identified from time to time in the Company’s other filings with the Securities

and Exchange Commission, including the risks identified under the heading “Item 1A.

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

year ended December 31, 2023.

Undue reliance should

69 unchanged sentences

Other intangible assets are amortized over their estimated

useful lives using straight-line or accelerated methods, and are subject to impairment if events or circumstances indicate a possible

inability to realize the carrying amount.

The initial goodwill and other intangibles recorded and subsequent impairment analysis requires

management to make subjective judgments concerning estimates of how the acquired asset will perform in the future.

Events and factors

that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry

conditions and changes in competition.

A decrease in earnings resulting from these or other factors could lead to an impairment of goodwill

that could adversely impact earnings for future periods.

Three Months Ended September 30,

2023 compared to Three Months Ended September 30, 2022

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

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

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

expense cost on deposits and wholesale borrowings.

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

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

useful lives using straight-line or accelerated methods and are subject to impairment if events or circumstances indicate a possible inability

to realize the carrying amount.

The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management

to make subjective judgments concerning estimates of how the acquired asset will perform in the future.

Events and factors that may significantly

affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes

in competition.

A decrease in earnings resulting from these or other factors could lead to an impairment of goodwill that could adversely

impact earnings in future periods.

Three Months Ended March 31, 2024

compared to Three Months Ended March 31, 2023

for the first quarter of 2024 was $2.4 million compared to net income of $2.5 million for the first quarter of 2023, a decrease of 3.3

Diluted earnings per share (“DEPS”) of $0.35 for the first quarter of 2024 were level to the DEPS of $0.35 for the

first quarter of 2023.

Net income for the first quarter of 2024 was positively impacted by higher loan income, which was offset by significantly

higher interest expense cost on deposits and wholesale borrowings.

Mortgage loan volume was down 13.1 percent compared to the prior year

first quarter, but sales of originated loans were up 41.9 percent when compared to the first quarter of 2023.

Provision for Credit Losses:

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

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

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

for the year-ago quarter.

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

first quarter provision for credit losses was zero as compared to $250,000 provision for the prior year quarter.

Net charge-offs for the

quarter were $57,000 compared to net charge-offs of $61,000 for the year-ago quarter.

Total delinquent loans (consisting of nonaccruing

loans and loans greater than 30 days past due) ended the quarter at $2.7 million, or 0.27 percent of total loans.

The Company adopted

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

Quality Review – For the Period Ended

Asset Quality Review

– For the Period Ended

($ in thousands)

September 30,

Net charge-offs – QTD/YTD

7 unchanged sentences

Total revenue,

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

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

consisting of net interest income and noninterest income, was $13.1 million for the first quarter of 2024, a decrease of $0.9 million,

or 6.1 percent, from the $14.0 million generated during the first quarter of 2023.

Net interest income (“NII”) for the

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

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

first quarter of 2024 was $9.2 million, which was down $1.1 million from the prior year first quarter’s $10.3 million.

the first quarter of 2024 to the prior year first quarter, the Company’s earning assets decreased $1.3 million, and the average

yield on earning assets increased by 48 basis points.

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

to 3.45 percent for the third quarter of 2022.

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

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

The increase in funding costs

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

Noninterest income was $4.2 million for the third

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

The net interest margin for the first quarter of 2024 was 2.99 percent compared

to 3.37 percent for the first quarter of 2023.

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

bearing liabilities for the first quarter of 2024 were 2.55 percent compared to 1.46 percent for the prior year first quarter.

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

funding sources.

Noninterest income was $4.0 million for the first

quarter of 2024, which was up $0.3 million, or 7.8 percent, from the prior year first quarter’s $3.7 million.

In addition to the

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

Impairment of our mortgage

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

third quarter.

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

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

year third quarter.

mortgage revenue detailed below, wealth management revenue was $0.9 million for the first quarter of 2024.

Recapture of mortgage servicing

rights increased noninterest income by $0.2 million in the quarter, compared to a recapture of $0.1 million in the prior year first quarter.

Our title agency contributed revenue of $0.3 million in the first quarter of 2024, down $0.1 million from the prior year.

income as a percentage of average assets for the first quarter of 2024 was 1.19 percent compared to 1.10 percent for the prior year first

State Bank originated $42.9 million of mortgage

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

loans during the first quarter of 2024, of which $36.6 million were sold with the remainder of loans held for investment.

This compares

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

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

to $49.4 million originated for the first quarter of 2023, of which $25.8 million were sold with the remainder of loans held for investment.

These first quarter 2024 originations and subsequent sales resulted in $0.8 million of gains, up $0.2 million from the gains for the first

quarter of 2023.

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

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

historical levels.

Net mortgage banking revenue was $1.45 million for the first quarter of 2024 compared to $1.21 million for the first

quarter of 2023.

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

down below historical levels.

Consolidated Noninterest Expense:

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

third quarter.

Noninterest expense for the first quarter of 2024 was $10.3 million, which was down $0.5 million compared to $10.8 million in the prior-year

first quarter.

Overall head count is down from the prior year quarter by 3.9 percent as we continue to right size the mortgage business

1 unchanged sentence

to the lower total origination volume.

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

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

Income Taxes:

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

for the third quarter of 2022.

Nine Months Ended September 30,

2023 compared to Nine Months Ended September 30, 2022

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

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

Net income for the first nine months of

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

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

Mortgage loan volume

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

compared to the prior year nine-month period.

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

prior year first nine months.

Provision for Credit Losses:

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

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

Consolidated Revenue:

Total revenue,

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

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

Net interest income (“NII”) for the

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

The net interest

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

assets increased at a slower pace than funding costs.

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

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

Noninterest income was $12.2 million for the first

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

In addition to the mortgage revenue

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

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

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

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

State Bank originated $176.0 million of mortgage

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

This compares

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

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

million in gains for the first nine months of 2022.

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

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

Consolidated Noninterest Expense:

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

prior-year first nine months.

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

and compressed volume in Residential Mortgage and SBA.

Income Taxes:

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

18.1 percent) for the first nine months of 2022.

for the first quarter of 2024 were $0.5 million (effective rate of 16.9 percent) compared to $0.5 million (effective rate of 17.4 percent)

for the first quarter of 2023.

Changes in Financial Condition

Total assets at September 30, 2023 were $1.33

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

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

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

Total deposits at September 30, 2023 were $1.09

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

The Company had approximately $180.2 million and $220.1 million

of uninsured deposits as of September 30, 2023 and December 31, 2022, respectively.

Uninsured deposit amounts are estimated based on the

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

Total assets at March 31, 2024, were $1.34 billion,

and were largely unchanged since December 31, 2023.

Total loans, net of unearned income, were $991.6 million as of March 31, 2024, down

$8.7 million, or 0.7 percent, from year-end.

Total deposits at March 31, 2024, were $1.11 billion,

an increase of $42.1 million, or 3.9 percent, since 2023 year end.

The Company had approximately $242.6 million and $229.5 million of

uninsured deposits as of March 31, 2024, and December 31, 2023, respectively.

Uninsured deposit amounts are estimated based on the portions

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

Borrowed funds (consisting of FHLB advances, repurchase

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

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

Total equity for the Company

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

(“REPO”) agreements, trust preferred securities and subordinated debt) totaled $77.9 million at March 31, 2024.

from year-end 2023 when borrowed funds totaled $126.9 million due to the paydown of FHLB advances.

Total equity for the Company of $123.7

million now stands at 9.3 percent of total assets compared to the December 31, 2023, level of $124.3 million or 9.3 percent of total assets.

Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total equity would increase to $155.3 million or 11.6%

of total assets.

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

million or 11.5% of total assets.

The allowance for credit losses of $15.6 million

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

first nine months of provision net of charge-offs.

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

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

is down $0.1 million from the December 2023 year-end level due to $0.06 million of net charge-offs and negative provision of $.09 million

for the quarter.

The Company has had stable to slightly improving asset quality through the first three months of 2024, with the non-performing

asset ratio at 22 basis points and coverage on non-performing loans at 643 percent.

Capital Resources

As of September 30, 2023, based on the

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

Bank was classified as “well capitalized” under the regulatory framework for prompt corrective action.

To be categorized as

well capitalized, State Bank must maintain capital ratios as set forth in the table below.

There are no conditions or events since September

30, 2023 that management believes have changed State Bank’s capital classification.

The Company adopted CECL on January 1, 2023,

which reduced capital levels by $2.0 million.

The Company elected to not phase in the impact of CECL as the reduction in capital did not

have a material impact to tangible and regulatory capital levels.

As of March 31, 2024, based on the computations

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

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

To be categorized as well capitalized,

State Bank must maintain capital ratios as set forth in the table below.

There are no conditions or events since March 31, 2024, that

management believes have changed State Bank’s capital classification.

The Company adopted CECL on January 1, 2023, which reduced

capital levels by $2.0 million.

The Company elected to not phase in the impact of CECL as the reduction in capital did not have a material

impact to tangible and regulatory capital levels.

State Bank’s actual capital levels

and ratios as of September 30, 2023 and December 31, 2022 are presented in the following table.

Capital levels are presented for State

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

Capitalized Under

For Capital Adequacy

Prompt Corrective

and ratios as of March 31, 2024, and December 31, 2023, are presented in the following table.

Capital levels are presented for State Bank

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

Adequacy Purposes

To Be Well Capitalized

Under Prompt Corrective

Action Procedures

($ in thousands)

As of September 30, 2023

As of March 31, 2024

Tier I Capital to average assets

8 unchanged sentences

Regulatory capital requirements commonly

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

referred to as “Basel III” were fully phased in as of January 1, 2019, and are reflected in the March 31, 2024, capital table

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

7 unchanged sentences

Liquid assets totaled $247.0

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

million at March 31, 2024, compared to $246.7 million at December 31, 2023.

Liquidity risk arises from the possibility

8 unchanged sentences

The Company’s commercial real

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

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

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

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

estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $806.4 million at March 31, 2024, and $807.8 million

at December 31, 2023, which can and has been used to collateralize borrowings, is an additional source of liquidity.

Management believes

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

At March 31, 2024, all

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

The cash flow statements for the periods

1 unchanged sentence

to maintain an adequate level of liquidity.

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

2022 follows.

A discussion of the cash flow statements for the three months ended March 31, 2024, and 2023

The Company experienced positive cash

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

Net cash provided by operating activities

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

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

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

For the nine months ended

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

$1.7 million.

The Company experienced negative cash

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

Net cash used in investing activities

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

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

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

the prior year nine-month period.

flows from operating activities for the three months ended March 31, 2024, and negative cash flows from operating activities for the three

months ended March 31, 2023.

Net cash provided by operating activities was $.3 million for the three months ended March 31, 2024, and

net cash used from operating activities was $4.1 million for the three months ended March 31, 2023.

Highlights for the current year include

$36.6 million in proceeds from the sale of loans, which is up from $25.8 million from the prior year.

Originations of loans held for sale

was a use of cash of $38.4 million, which is up from the prior year of $29.0 million.

For the three months ended March 31, 2024, there

was a gain on sale of loans of $.8 million, and depreciation and amortization on premises and equipment of $.6 million.

The Company experienced positive cash

flows from investing activities for the three months ended March 31, 2024, and negative cash flows from investing activities for the three

months ended March 31, 2023.

Net cash provided by investing activities was $11.7 million for the three months ended March 31, 2024, and

net cash used in investing activities was $9.4 million for the three months ended March 31, 2023.

Highlights for the current year include

an increase of $8.6 million in loans, which is up $22.9 million from the prior year three-month period.

These cash payments were offset

by $4.2 million in proceeds from maturities and sales of securities, which is down from $4.9 million from the prior year three-month period.

The Company experienced negative cash

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

Net cash used by financing activities

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

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

nine months ended September 30, 2023.

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

million and time deposits increased by $18.7 million.

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

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

flows from financing activities for the three months ended March 31, 2024, and positive cash flows from financing activities for the three

months ended March 31, 2023.

Net cash used by financing activities was $8.4 million for the three months ended March 31, 2024, and net

cash provided by financing activities was $7.3 million for the three months ended March 31, 2023.

Highlights for the current period include

a $44.9 million increase in transaction deposits and a $2.7 million decrease in time deposits for the three months ended March 31, 2024.

This compares to the prior year three-month period where transaction deposits decreased by $19.9 million and time deposits increased by

$43.4 million.

Net repayments of Federal Home Loan Bank advances for the three months ended March 31, 2024, were $48.6 million, compared

to $15.5 million for the prior year three-month period.

Off-Balance-Sheet Borrowing Arrangements:

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commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $806.4 million

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

Based on the current collateralization requirements

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

were pledged to meet FHLB collateralization requirements as of March 31, 2024.

Based on the current collateralization requirements of

the FHLB, the Company had approximately $139.0 million of additional borrowing capacity at March 31, 2024.

The Company also had $100.5

2 unchanged sentences

of long-term debt obligations and operating lease obligations.

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

In addition, as of March 31, 2024, the Company had commitments to sell

mortgage loans totaling $19.3 million.

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

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

If the Company requires funds

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

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

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

If the Company requires

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

Asset Liability Management

82 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis