What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-09 · 360 added, 364 removed, 106 unchanged (87% of the section changed)

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

(b) statements of plans and objectives of the Company or our management or Board of Directors, including those relating to products

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statement Regarding Forward-Looking Information

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.

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;

(d) statements regarding future customer attraction or retention;

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

(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.

38 unchanged sentences

resulting from computer viruses or cyber-attacks;

ability to secure sensitive or confidential client information against unauthorized disclose

ability to secure sensitive or confidential client information against unauthorized disclosure

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

42 unchanged sentences

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.

(“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.

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.

of SB Financial

Financial Group, Inc.

(“SB Financial”) is an Ohio corporation and a financial holding company registered with the Board of

Governors of the Federal Reserve System (“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.

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.

(“RFCBC”) is an Ohio corporation and wholly owned subsidiary of SB Financial that was incorporated in August 2004.

operates as a loan subsidiary in servicing and working out problem loans.

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.

Title, LLC (“SBFG Title”) is an Ohio corporation that was formed in March 2019.

SBFG Title engages in the sale of title insurance

Captive, Inc.

(“SB Captive”) is a Nevada corporation that was formed in March 2019.

SB Captive pools insurance risk among

like sized banking institutions.

the context indicates otherwise, all references herein to “we”, “us”, “our”, or the “Company”

refer to SB Financial and its consolidated subsidiaries.

Accounting Policies

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

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.

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

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.

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.

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.

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:

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

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.

Months Ended June 30, 2024, compared to Three Months Ended June 30, 2023

Net income for the second quarter of 2024 was $3.1 million compared to net income of $3.1 million for the second quarter

of 2023, an increase of 1.2 percent.

Diluted earnings per share (“DEPS”) of $0.47 for the second quarter of 2024 were slightly

higher compared to the DEPS of $0.44 for the second quarter of 2023.

Net income for the second quarter of 2024 was positively impacted

by higher loan income, which was offset by higher interest expense on deposits and wholesale borrowings.

Interest income continues to

improve and was up 2.3% compared to the linked quarter.

Mortgage loan volume was up 14.9 percent compared to the prior year second quarter,

while sales of originated loans were up 16.5 percent when compared to the second quarter of 2023.

for Credit Losses:

The second quarter provision for credit losses was zero as compared to $145,000 provision for the prior year

The Company had net recoveries of $16,000 for the second quarter of 2024 compared to net charge-offs of $22,000 for the year-ago

Total delinquent loans (consisting of nonaccruing loans and loans greater than 30 days past due) ended the quarter at $5.3 million,

or 0.52 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)

Net charge-offs – QTD/YTD

Net charge-offs (recoveries) –

Nonaccruing loans

4 unchanged sentences

Allowance for credit losses/Nonperforming loans

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.

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.

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.

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 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

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:

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 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,

Total revenue, consisting of net interest income and noninterest income, was $14.0 million for the second quarter of

2024, a decrease of $0.2 million, or 1.0 percent, from the $14.2 million generated during the second quarter of 2023.

interest income (“NII”) for the second quarter of 2024 was $9.7 million, which was down $0.2 million from the prior year

second quarter’s $9.8 million.

Comparing the second quarter of 2024 to the prior year second quarter, the Company’s earning

assets decreased $2.7 million, and the average yield on earning assets increased by 41 basis points.

The net interest margin for the

second quarter of 2024 was 3.11 percent compared to 3.16 percent for the second quarter of 2023.

Funding costs (interest paid to consumers

and other entities) for deposits and other interest-bearing liabilities for the second quarter of 2024 were 2.47 percent compared to

1.90 percent for the prior year second quarter.

The increase in funding costs has been driven by the increased competition among banks

for funding sources, although interest expense did decline from the linked quarter for the first time in over two years.

income was $4.4 million for the second quarter of 2024, which was level to the prior year second quarter.

In addition to the mortgage

revenue detailed below, wealth management revenue was slightly down from the prior year.

Recapture of mortgage servicing rights increased

noninterest income by $0.04 million in the quarter, compared to an impairment of $0.02 million in the prior year second quarter.

Title contributed revenue of $0.4 million in the second quarter of 2024, down $0.05 million from the prior year.

Noninterest income as

a percentage of average assets for the second quarter of 2024 was 1.31 percent compared to 1.30 percent for the prior year second quarter.

Bank originated $75.1 million of mortgage loans during the second quarter of 2024, of which $55.8 million were sold with the remainder

of loans held for investment.

This compares to $65.4 million originated for the second quarter of 2023, of which $47.9 million were sold

with the remainder of loans held for investment.

These second quarter 2024 originations and subsequent sales resulted in $1.3 million

of gains, up $0.2 million from the gains for the second quarter of 2023.

Net mortgage banking revenue was $1.84 million for the second

quarter of 2024 compared to $1.55 million for the second 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.

Noninterest Expense:

Noninterest expense for the second quarter of 2024 was $10.7 million, which was up $0.4 million compared

to $10.3 million in the prior-year second quarter.

Commission expense for both mortgage and Small Business Administration (“SBA”)

is higher compared to the prior year due to the total origination volume.

Income taxes for the second quarter of 2024 were $0.3 million compared to $0.6 million for the second quarter of 2023.

This quarter included a recapture of a prior period over accrual and the higher impact of our captive insurance agency, SB Captive.

Months Ended June 30, 2024, compared to Six Months Ended June 30, 2023

Net income for the first six months of 2024 was $5.5 million compared to net income of $5.5 million for the first six

months of 2023, a decrease of 0.8 percent.

Diluted earnings per share (“DEPS”) of $0.82 were up 6.8 percent compared to the

DEPS of $0.79 for the first six months of 2023.

Net income for the first six months of 2024 was positively impacted by the Company’s

recapture of temporary impairment of $0.2 million on its mortgage servicing rights, while net income for the 2023 first six months was

positively impacted by a recapture of mortgage servicing rights of $0.04 million.

Mortgage loan volume was up 2.9 percent during the

first six months of 2024, with a higher percentage of originated volume sold on the secondary market, as compared to the same period

Funding costs for the first six months of 2024 were up nearly 50 percent as compared to the prior year first six months.

for Credit Losses:

The first six months of 2024 provision for credit losses was zero as compared to $0.4 million in provision

for the prior year first six months.

Net charge-offs for the current year were $41,000 compared to net charge-offs of $83,000 for the

year-ago first six months.

Total revenue, consisting of net interest income and noninterest income, was $27.2 million for the first six months

of 2024, a decrease of $1.0 million, or 3.6 percent, from the $28.2 million generated during the first six months of 2023.

for the first six months of 2024 was $18.8 million, which was down $1.3 million from the prior year first six months $20.2 million.

net interest margin for the first six months of 2024 was 3.02 percent compared to 3.24 percent for the first six months of 2023 as funding

costs increased faster than the yield on earnings assets.

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

bearing liabilities for the first six months of 2024 were 2.51 percent compared to 1.69 percent for the prior year first six months.

income was $8.3 million for the first six months of 2024, which was up $0.3 million from the prior year first six months $8.0 million.

In addition to the mortgage revenue detailed below, recapture of our mortgage servicing rights impairment increased noninterest income

in the first six months by nearly $0.2 million compared to the first six months of 2023.

Our title agency contributed revenue

of $0.7 million in the first six months of 2024, down $0.1 million from the prior year first six months level of $0.8 million.

Bank originated $118.0 million of mortgage loans during the first six months of 2024, of which $92.5 million was sold with the remainder

of loans held for investment.

This compares to $114.8 million originated for the first six months of 2023, of which $73.7 million was

sold with the remainder of loans held for investment.

These 2024 year-to-date mortgage originations and subsequent sales resulted in

$2.1 million of gains, up $0.4 million from the $1.7 million in gains for the first six months of 2023.

Net mortgage banking revenue

was $3.4 million for the first six months of 2024 compared to $2.8 million for the first six months of 2023.

Noninterest Expense:

Noninterest expense for the first six months of 2024 was $21.0 million, which was down $0.1 million compared

to $21.1 million in the prior-year first six months.

Commission and benefit expense was down compared to the prior year due to lower

staffing levels and lower medical costs.

Income taxes for the first six months of 2024 were $0.7 million (effective rate of 11.9 percent) compared to $1.1 million

(effective rate of 17.2 percent) for the first six months of 2023.

in Financial Condition

assets at June 30, 2024, were $1.34 billion, still largely unchanged since December 31, 2023.

Total loans, net of unearned income, were

$1.01 billion as of June 30, 2024, up $5.2 million, or 0.5 percent, from year-end.

Total deposits at June 30, 2024, were $1.11 billion,

an increase of $45.0 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.

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:

Adequacy Purposes

To Be Well Capitalized

Under Prompt Corrective

Action Procedures

funds (consisting of FHLB advances, repurchase (“REPO”) agreements, trust preferred securities and subordinated debt) totaled

$80.2 million at June 30, 2024.

This is down from year-end 2023 when borrowed funds totaled $126.9 million due to the paydown of FHLB

Total equity for the Company of $125.5 million now stands at 9.4 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 $157.3 million or 11.7% of total assets.

allowance for credit losses of $15.6 million is down $0.2 million from the December 2023 year-end level due to $0.04 million of net charge-offs

and zero provision for the year.

The Company has had stable to slightly weaker asset quality through the first six months of 2024, with

the non-performing asset ratio at 39 basis points and coverage on non-performing loans at 330 percent.

of June 30, 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

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

conditions or events since June 30, 2024, that management believes have changed State Bank’s capital classification.

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.

Bank’s actual capital levels and ratios as of June 30, 2024, and December 31, 2023, are presented in the following table.

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

For Capital Adequacy

To Be Well Capitalized Under

Prompt Corrective Action

($ in thousands)

As of March 31, 2024

As of June 30, 2024

Tier I Capital to average assets

7 unchanged sentences

Total Risk-based capital to risk-weighted assets

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

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.

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

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

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.

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.

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.

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.

market conditions warrant, the Company may implement various interest rate risk management strategies, including the use of derivative

financial instruments.

capital requirements commonly referred to as “Basel III” were fully phased in as of January 1, 2019, and are reflected in

the June 30, 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

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

Liquid assets totaled $240.1 million at June 30, 2024, compared to $246.7 million at December 31, 2023.

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.

Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $815.5 million

at June 30, 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 June 30, 2024, all eligible commercial real estate, first mortgage residential, agricultural and multi-family

mortgage loans were pledged under an FHLB blanket lien.

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 six months

ended June 30, 2024, and June 30, 2023 follows.

Company experienced negative cash flows from operating activities for the six months ended June 30, 2024, and June 30, 2023.

used in operating activities was $.1 million for the six months ended June 30, 2024, and $.9 million for the six months ended June 30,

Highlights for the current year include $92.5 million in proceeds from the sale of loans, which is up $18.8 million from the prior

Originations of loans held for sale was a use of cash of $96.7 million, which is up $20.4 million from the prior year .

six months ended June 30, 2024, there was a gain on sale of loans of $2.2 million, and depreciation and amortization on premises and

equipment of $1.1 million.

Company experienced positive cash flows from investing activities for the six months ended June 30, 2024, and negative cash flows from

investing activities for the six months ended June 30, 2023.

Net cash provided by investing activities was $3.7 million for the six months

ended June 30, 2024, and net cash used in investing activities was $14.0 million for the six months ended June 30, 2023.

Highlights for

the current year include an increase of $5.2 million in loans, which is down $17.7 million from the prior year six-month period.

cash payments were offset by $9.1 million in proceeds from maturities and sales of securities, which is down $1.2 million from the prior

year six-month period.

Company experienced negative cash flows from financing activities for the six months ended June 30, 2024, and positive cash flows from

financing activities for the six months ended June 30, 2023.

Net cash used by financing activities was $4.6 million for the six months

ended June 30, 2024, and net cash provided by financing activities was $8.1 million for the six months ended June 30, 2023.

for the current period include a $41.9 million increase in transaction deposits and a $3.1 million increase in time deposits for the

six months ended June 30, 2024.

This compares to the prior year six-month period where transaction deposits decreased by $64.3 million

and time deposits increased by $48.8 million.

Net repayments of Federal Home Loan Bank advances for the six months ended June 30, 2024,

were $48.6 million, compared to net proceeds of $21.3 million for the prior year six-month period.

Off-Balance-Sheet

Borrowing Arrangements:

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.

Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount

of $815.5 million were pledged to meet FHLB collateralization requirements as of June 30, 2024.

Based on the current collateralization

requirements of the FHLB, the Company had approximately $144.7 million of additional borrowing capacity at June 30, 2024.

also had $62.0 million in unpledged securities available to pledge for additional borrowings.

Company has contractual obligations consisting of long-term debt obligations and operating lease obligations.

In addition, as of June

30, 2024, the Company had commitments to sell mortgage loans totaling $18.1 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.

Liability Management

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.

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

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.

rate risk is the exposure of a banking institution’s financial condition to adverse movements in interest rates.

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.

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).

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

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.

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.

assume that an institution’s assets carry intermediate or long-term fixed rates and that those assets are funded with short-term

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.

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.

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

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.

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.

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.

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