SB FINANCIAL GROUP, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Information This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. Examples of forward-looking statements include: (a) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial items; (b) statements of plans and objectives of the Company or our management or Board of Directors, including those relating to products or services; (c) statements of future economic performance; (d) statements regarding future customer attraction or retention; and (e) statements of assumptions underlying such statements. Words such as “anticipates”, “believes”, “plans”, “intends”, “expects”, “projects”, “estimates”, “should”, “may”, “would be”, “will allow”, “will likely result”, “will continue”, “will remain”, or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying those statements. Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation: ● current and future economic and financial market conditions, either nationally or in the states in which we do business, including conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the failure of the federal government to raise the federal debt ceiling and/or possible future U.S. government shutdowns over budget disagreements, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, and other factors beyond our control, any of which may result in adverse impacts on our deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans made by us; ● recent and future bank failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational ramification for the banking industry as a whole, any of which could adversely affect the Company’s business, earnings and financial condition; ● instability in global economic conditions and geopolitical matters (including the ongoing 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; ● changes in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate sensitivity; ● the volatility of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; ● factors that can impact the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of construction projects that we finance; ● 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; 33 ● competitive pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to recruit and retain qualified management and banking personnel; ● unexpected losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future; ● risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past and possible future acquisitions; ● uncertainty regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry; ● changes in federal, state and/or local tax laws may adversely affect our reported financial condition or results of operations; ● changes in accounting standards, policies and practices may adversely affect our reported financial condition or results of operations; ● litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries; ● continued availability of earnings and dividends from State Bank and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable legal and regulatory requirements; ● our ability to adapt to or comply with regulatory requirements and increasing scrutiny and evolving expectations from customers, regulators, investors and other stakeholders with respect to the Company’s environmental, social and governance (ESG) practices, which could affect our reputation and business and operating results; ● our ability to anticipate and successfully keep pace with technological changes affecting the financial services industry; ● an unexpected inability to obtain needed liquidity which could adversely affect our business, profitability, and viability as a going concern; and ● 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 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 not be placed on the forward-looking statements, which speak only as of the date hereof. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement to reflect unanticipated events or circumstances after the date on which the statement is made. Overview of SB Financial SB Financial Group, Inc. (“SB Financial”) is an Ohio corporation and a financial holding company registered with the Federal Reserve Board. SB Financial’s wholly owned subsidiary, The State Bank and Trust Company (“State Bank”), is an Ohio-chartered bank engaged in commercial banking. Rurban Statutory Trust II (“RST II”) was established in August 2005. In September 2005, RST II completed a pooled private offering of 10,000 Trust Preferred Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to SB Financial in exchange for junior subordinated debentures of SB Financial with terms substantially similar to the Trust Preferred Securities. The sole assets of RST II are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by SB Financial of the obligations of RST II. 34 RFCBC, Inc. (“RFCBC”) is an Ohio corporation and wholly owned subsidiary of SB Financial that was incorporated in August 2004. RFCBC operates as a loan subsidiary in servicing and working out problem loans. State Bank Insurance, LLC (“SBI”) is an Ohio corporation and a wholly owned subsidiary of State Bank incorporated in June of 2010. SBI is an insurance company that engages in the sale of insurance products to retail and commercial customers of State Bank. SBFG Title, LLC (“SBFG Title”) is an Ohio corporation that was formed in March 2019. SBFG Title engages in the sale of title insurance services. SB Captive, Inc. (“SB Captive”) is a Nevada corporation that was formed in March 2019. SB Captive pools insurance risk among like sized banking institutions. Unless the context indicates otherwise, all references herein to “we”, “us”, “our”, or the “Company” refer to SB Financial and its consolidated subsidiaries. Critical Accounting Policies Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, describes the significant accounting policies used in the development and presentation of the Company’s financial statements. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, and/or complex. Allowance for Credit Losses – The Company believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management’s determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default (“LGD”), the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods. Goodwill and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. 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 in future periods. 35 Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023 Net Income: Net income 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 percent. 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: The 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 $1.4 million. Asset Quality Review – For the Period Ended ($ in thousands) March 31, 2024 March 31, 2023 Net charge-offs – QTD/YTD $ 57 $ 61 Nonaccruing loans 2,434 3,396 OREO / Other Assets Owned (OAO) 510 650 Nonperforming assets 2,944 4,046 Nonperforming assets/Total assets 0.22 % 0.30 % Allowance for credit losses/Total loans 1.58 % 1.58 % Allowance for credit losses/Nonperforming loans 642.7 % 454.7 % Consolidated Revenue: Total revenue, 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 first quarter of 2024 was $9.2 million, which was down $1.1 million from the prior year first quarter’s $10.3 million. Comparing 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 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. 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 $4.0 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 $0.9 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. Noninterest 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 quarter. State Bank originated $42.9 million of mortgage 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 $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 $1.45 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 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 line. Commission expense for both mortgage and Small Business Administration (“SBA”) is down compared to the prior year due to the lower total origination volume. Income Taxes: Income taxes 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. 36 Changes in Financial Condition 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 $77.9 million at March 31, 2024. This is down 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. The allowance for credit losses of $15.6 million 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 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 $2.0 million. The Company elected to not phase in the impact of CECL as the reduction in capital did not have a material impact to tangible and regulatory capital levels. State Bank’s actual capital levels and ratios as of March 31, 2024, and December 31, 2023, are presented in the following table. Capital levels are presented for State Bank only as the Company is exempt from quarterly reporting on capital levels at the holding company level: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Procedures ($ in thousands) Amount Ratio Amount Ratio Amount Ratio As of March 31, 2024 Tier I Capital to average assets $ 150,922 11.17 % $ 54,028 4.0 % $ 67,535 5.0 % Tier I Common equity capital to risk-weighted assets 150,922 13.84 % 49,066 4.5 % 70,873 6.5 % Tier I Capital to risk-weighted assets 150,922 13.84 % 65,421 6.0 % 87,228 8.0 % Total Risk-based capital to risk-weighted assets 164,586 15.09 % 87,228 8.0 % 109,035 10.0 % 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 % Regulatory capital requirements commonly referred to as “Basel III” were fully phased in as of January 1, 2019, and are reflected in the March 31, 2024, capital table above. Management opted out of the accumulated other comprehensive income treatment under the new requirements and, as such, unrealized gains and losses from available-for-sale securities will continue to be excluded from State Bank’s regulatory capital. 37 Liquidity Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions, securities available-for-sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets totaled $247.0 million at March 31, 2024, compared to $246.7 million at December 31, 2023. Liquidity risk arises from the possibility that the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates the Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO reviews liquidity regularly and evaluates significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Asset Liability Manager. The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $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 lien. The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for the three months ended March 31, 2024, and 2023 follows. The Company experienced positive cash 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 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. 38 Off-Balance-Sheet Borrowing Arrangements: Significant additional off-balance-sheet liquidity is available in the form of FHLB advances and unused federal funds lines from correspondent banks. Management expects the risk of changes in off-balance-sheet arrangements to be immaterial to earnings. The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $806.4 million 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 million in unpledged securities available to pledge for additional borrowings. The Company has contractual obligations consisting of long-term debt obligations and operating lease obligations. In addition, as of 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. Asset Liability Management Asset liability management involves developing, executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the impact that significant fluctuations in market interest rates would have on current and future earnings. The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings). With the exception of specific loans which are originated and held for sale, all of the financial instruments of the Company are for other than trading purposes. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Company has limited exposure to commodity prices related to agricultural loans. The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant. The Company’s financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Company’s primary market risk exposure; to a lesser extent, liquidity risk also impacts market risk exposure. Interest rate risk is the exposure of a banking institution’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Company’s safety and soundness. Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization’s quantitative level of exposure. When assessing the interest rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and asset quality (when appropriate). The Federal Reserve Board together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation adopted a Joint Agency Policy Statement on Interest Rate Risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve Board guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies, measures and controls interest rate risk. 39 Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution’s assets carry intermediate or long-term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment. There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening or lengthening terms of new loans, investments, or liabilities; 2) selling existing assets or repaying certain liabilities; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contracts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management’s expertise to be effective. The Company does not currently utilize any derivative financial instruments to manage interest rate risk. As market conditions warrant, the Company may implement various interest rate risk management strategies, including the use of derivative financial instruments. Item 3. Quantitative and Qualitative Disclosures About Market Risk Management believes there has been no material change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2023.