SB FINANCIAL GROUP, INC. 10-Q

Item 1. Financial Statements SB Financial Group, Inc. Condensed Consolidated Balance Sheets ($ in thousands) September 2024 (unaudited) December 2023 Assets Cash and due from banks $ 49,348 $ 22,965 Interest bearing time deposits 1,706 1,535 Available-for-sale securities 211,511 219,708 Loans held for sale 8,927 2,525 Loans, net of unearned income 1,029,955 1,000,212 Allowance for credit losses ( 15,278 ) ( 15,786 ) Premises and equipment, net 20,715 21,378 Federal Reserve and Federal Home Loan Bank Stock, at cost 5,223 7,279 Foreclosed assets and other assets held for sale, net - 511 Interest receivable 4,842 4,657 Goodwill 23,239 23,239 Cash value of life insurance 30,488 29,121 Mortgage servicing rights 14,357 13,906 Other assets 8,916 11,999 Total assets $ 1,393,949 $ 1,343,249 Liabilities and shareholders’ equity Liabilities Deposits Non interest bearing demand $ 222,425 $ 228,713 Interest bearing demand 202,097 166,413 Savings 241,761 216,965 Money market 228,182 202,605 Time deposits 265,068 255,509 Total deposits 1,159,533 1,070,205 Repurchase agreements 15,240 13,387 Federal Home Loan Bank advances 35,000 83,600 Trust preferred securities 10,310 10,310 Subordinated debt net of issuance costs 19,678 19,642 Interest payable 3,374 2,443 Other liabilities 17,973 19,320 Total liabilities 1,261,108 1,218,907 Commitments & Contingent Liabilities Shareholders’ Equity Preferred stock, no par value; authorized 200,000 shares; 2024 - 0 shares outstanding, 2023 - 0 shares outstanding - - Common stock, no par value; 2024 - 10,500,000 shares authorized, 8,525,375 shares issued; 2023 - 10,500,000 shares authorized, 8,525,375 shares issued 61,319 61,319 Additional paid-in capital 15,090 15,124 Retained earnings 113,515 108,486 Accumulated other comprehensive loss ( 24,870 ) ( 29,831 ) Treasury stock, at cost; (2024 - 1,847,073 common shares; 2023 - 1,756,733 common shares) ( 32,213 ) ( 30,756 ) Total shareholders’ equity 132,841 124,342 Total liabilities and shareholders’ equity $ 1,393,949 $ 1,343,249 See notes to condensed consolidated financial statements (unaudited) 1 SB Financial Group, Inc. Condensed Consolidated Statements of Income (unaudited) ($ in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest Income Loans Taxable $ 14,513 $ 13,128 $ 41,943 $ 37,969 Tax exempt 127 122 374 359 Securities Taxable 1,192 1,293 3,692 3,971 Tax exempt 37 39 111 132 Other interest income 679 214 1,382 595 Total interest income 16,548 14,796 47,502 43,026 Interest Expense Deposits 5,568 4,194 15,866 10,310 Repurchase agreements & other 43 16 113 35 Federal Home Loan Bank advance expense 369 666 1,352 1,883 Trust preferred securities expense 187 189 562 525 Subordinated debt expense 195 195 584 584 Total interest expense 6,362 5,260 18,477 13,337 Net Interest Income 10,186 9,536 29,025 29,689 Provision for credit losses - loans ( 307 ) - ( 440 ) 688 Provision for unfunded commitments 507 ( 6 ) 640 ( 299 ) Total provision for credit losses 200 ( 6 ) 200 389 Net interest income after provision for credit losses 9,986 9,542 28,825 29,300 Noninterest Income Wealth management fees 882 837 2,595 2,694 Customer service fees 870 863 2,625 2,559 Gain on sale of mortgage loans & OMSR 1,311 1,207 3,369 2,862 Mortgage loan servicing fees, net 39 438 1,367 1,540 Gain on sale of non-mortgage loans 20 10 135 252 Title insurance income 485 429 1,157 1,257 Gain on sale of assets 200 - 200 - Other income 316 379 1,012 1,026 Total noninterest income 4,123 4,163 12,460 12,190 Noninterest Expense Salaries and employee benefits 6,057 5,491 17,418 17,125 Net occupancy expense 706 764 2,182 2,350 Equipment expense 1,069 1,068 3,206 3,051 Data processing fees 758 648 2,254 1,979 Professional fees 659 623 2,032 2,098 Marketing expense 241 189 614 600 Telephone and communications 128 124 389 369 Postage and delivery expense 145 100 331 265 State, local and other taxes 208 218 683 664 Employee expense 228 141 565 485 Other expense 804 1,115 2,282 2,607 Total noninterest expense 11,003 10,481 31,956 31,593 Income before income tax 3,106 3,224 9,329 9,897 Provision for income taxes 752 537 1,494 1,685 Net Income $ 2,354 $ 2,687 $ 7,835 $ 8,212 Basic earnings per common share $ 0.35 $ 0.40 $ 1.17 $ 1.20 Diluted earnings per common share $ 0.35 $ 0.39 $ 1.17 $ 1.18 Average common shares outstanding (in thousands): Basic: 6,660 6,791 6,689 6,857 Diluted: 6,675 6,878 6,704 6,944 See notes to condensed consolidated financial statements (unaudited) 2 SB Financial Group, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2024 2023 2024 2023 Net income $ 2,354 $ 2,687 $ 7,835 $ 8,212 Other comprehensive income (loss) Available for sale investment securities: Gross unrealized holding gains (losses) arising in the period 8,773 ( 8,384 ) 6,280 ( 9,363 ) Related tax (expense) benefit ( 1,842 ) 1,761 ( 1,319 ) 1,966 Net effect on other comprehensive income (loss) 6,931 ( 6,623 ) 4,961 ( 7,397 ) Total comprehensive income (loss) $ 9,285 $ ( 3,936 ) $ 12,796 $ 815 See notes to condensed consolidated financial statements (unaudited) 3 SB Financial Group, Inc. Condensed Consolidated Statements of Shareholders’ Equity (unaudited) ($ in thousands, except per share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance, January 1, 2024 $ 61,319 $ 15,124 $ 108,486 $ ( 29,831 ) $ ( 30,756 ) $ 124,342 Net income 2,368 2,368 Other comprehensive loss ( 1,716 ) ( 1,716 ) Cash dividends on common, $ 0.135 per share ( 917 ) ( 917 ) Restricted stock vesting ( 313 ) 313 - Repurchased stock ( 30,048 shares) ( 521 ) ( 521 ) Stock based compensation expense 167 167 Balance, March 31, 2024 $ 61,319 $ 14,978 $ 109,937 $ ( 31,547 ) $ ( 30,964 ) $ 123,723 Net income 3,113 3,113 Other comprehensive loss ( 254 ) ( 254 ) Cash dividends on common, $ 0.14 per share ( 946 ) ( 946 ) Repurchased stock ( 26,791 shares) ( 374 ) ( 374 ) Stock based compensation expense 217 217 Balance, June 30, 2024 $ 61,319 $ 15,195 $ 112,104 $ ( 31,801 ) $ ( 31,338 ) $ 125,479 Net income 2,354 2,354 Other comprehensive income 6,931 6,931 Cash dividends on common, $ 0.14 per share ( 943 ) ( 943 ) Restricted stock vesting ( 254 ) 254 - Repurchased stock ( 66,513 shares) ( 1,129 ) ( 1,129 ) Stock based compensation expense 149 149 Balance, September 30, 2024 $ 61,319 $ 15,090 $ 113,515 $ ( 24,870 ) $ ( 32,213 ) $ 132,841 ($ in thousands, except per share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total January 1, 2023 $ 61,319 $ 15,087 $ 101,966 $ ( 32,120 ) $ ( 27,824 ) $ 118,428 Net income 2,450 2,450 Other comprehensive income 2,449 2,449 Adoption of ASU 2016-13 ( 1,991 ) ( 1,991 ) Cash dividends on common, $ 0.125 per share ( 877 ) ( 877 ) Restricted stock vesting ( 299 ) 299 - Repurchased stock ( 55,800 shares) ( 865 ) ( 865 ) Stock based compensation expense 165 165 March 31, 2023 $ 61,319 $ 14,953 $ 101,548 $ ( 29,671 ) $ ( 28,390 ) $ 119,759 Net income 3,075 3,075 Other comprehensive loss ( 3,223 ) ( 3,223 ) Dividends on common, $ 0.13 per share ( 898 ) ( 898 ) Repurchased stock ( 91,260 shares) ( 1,248 ) ( 1,248 ) Stock based compensation expense 201 201 Balance, June 30, 2023 $ 61,319 $ 15,154 $ 103,725 $ ( 32,894 ) $ ( 29,638 ) $ 117,666 Net income 2,687 2,687 Other comprehensive loss ( 6,623 ) ( 6,623 ) Cash dividends on common, $ 0.13 per share ( 891 ) ( 891 ) Restricted stock vesting ( 240 ) 240 - Repurchased stock ( 43,814 shares) ( 614 ) ( 614 ) Stock based compensation expense 123 123 Balance, September 30, 2023 $ 61,319 $ 15,037 $ 105,521 $ ( 39,517 ) $ ( 30,012 ) $ 112,348 See notes to condensed consolidated financial statements (unaudited) 4 SB Financial Group, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, ($ in thousands) 2024 2023 Operating Activities Net Income $ 7,835 $ 8,212 Items not requiring (providing) cash Depreciation and amortization 1,610 1,678 Provision for credit losses 200 389 Expense of share-based compensation plan 533 489 Amortization of premiums and discounts on securities 376 400 Amortization of intangible assets 50 66 Amortization of originated mortgage servicing rights 978 960 Recovery of mortgage servicing rights 246 38 Proceeds from sale of loans held for sale 153,730 127,821 Originations of loans held for sale ( 158,303 ) ( 127,228 ) Gain from sale of loans ( 3,504 ) ( 3,114 ) Gain on sales of assets ( 200 ) - Changes in Interest receivable ( 185 ) ( 366 ) Other assets ( 108 ) 1,586 Interest payable & other liabilities 237 ( 3,714 ) Net cash provided by operating activities 3,495 7,217 Investing Activities Purchases of available-for-sale securities - ( 723 ) Net increase (decrease) in interest bearing time deposits ( 171 ) 951 Proceeds from maturities of available-for-sale securities 14,099 16,972 Net change in loans ( 29,811 ) ( 27,070 ) Purchase of premises, equipment ( 947 ) ( 783 ) Proceeds from bank owned life insurance - 58 Purchase of bank owned life insurance ( 800 ) - Purchase of Federal Reserve and Federal Home Loan Bank Stock ( 432 ) ( 2,806 ) Proceeds from sale of Federal Home Loan Bank Stock 2,488 2,871 Proceeds from sale of foreclosed assets 711 188 Net cash used in investing activities ( 14,863 ) ( 10,342 ) Financing Activities Net increase (decrease) in demand deposits, money market, interest checking & savings accounts 79,769 ( 54,232 ) Net increase in time deposits 9,559 52,886 Net increase in securities sold under agreements to repurchase 1,853 1,596 Proceeds from Federal Home Loan Bank advances 133,000 627,000 Repayment of Federal Home Loan Bank advances ( 181,600 ) ( 627,500 ) Stock repurchase plan ( 2,024 ) ( 2,727 ) Cash dividends on common shares ( 2,806 ) ( 2,666 ) Net cash (used in) provided by financing activities 37,751 ( 5,643 ) Increase (decrease) in cash and cash equivalents 26,383 ( 8,768 ) Cash and cash equivalents, beginning of period 22,965 27,817 Cash and cash equivalents, end of period $ 49,348 $ 19,049 Supplemental cash flow information Interest paid $ 17,546 $ 11,890 Supplemental non-cash disclosure Transfer of loans to foreclosed assets $ - $ 36 See notes to condensed consolidated financial statements (unaudited) 5 SB FINANCIAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 – BASIS OF PRESENTATION SB Financial Group, Inc., an Ohio corporation (“SBFG”), is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, including The State Bank and Trust Company (“State Bank”), SBFG Title, LLC (“SBFG Title”), SB Captive, Inc. (“SB Captive”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”). RDSI is presently inactive and has had no material operations or employees since 2017. In addition, State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance, LLC (“SBI”). On August 14, 2024, SB Financial Group, Inc. and Marblehead Bancorp (“Marblehead”), parent company of The Marblehead Bank (“Marblehead Bank”), jointly announced entry into a definitive agreement pursuant to which Marblehead will be combined with SB Financial and Marblehead Bank will merge with and into State Bank. The merger agreement was unanimously approved by the Boards of Directors of both bank holding companies and their subsidiary banks. Under the terms of the merger agreement, shareholders of Marblehead Bancorp will receive $ 196.31 in cash in exchange for each share of Marblehead Bancorp common stock for a transaction valued in aggregate at approximately $ 5.0 million. When finalized, the merger will add two full-service branches and one limited-service branch to State Bank’s branch footprint, strengthening State Bank’s position in the Northwest Ohio region and expanding State Bank’s presence into the Marblehead, Ohio and Ottawa County, Ohio communities. The consolidated financial statements include the accounts of SBFG, State Bank, RFCBC, RDSI, RMC, SBFG Title, SB Captive and SBI (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of results for the complete year. The condensed consolidated balance sheet of the Company as of December 31, 2023, has been derived from the audited consolidated balance sheet of the Company as of that date. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Adoption of New Accounting Standards: Accounting Standards Update (“ASU”) No. 2020-04: Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) This guidance provides temporary options to ease the potential burden in accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective as of March 12, 2020 through December 31, 2022. However, a deferral of the implementation of the Reference Rate Reform was issued in December of 2022, which extends the implementation to December 31, 2024. The Company has implemented a replacement for the reference rate and has determined that the changes did not have a material impact on the Company’s consolidated financial statements. ASU No. 2016-13: Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments On January 1, 2023, the Company adopted ASU 2016-13: Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) (“ASC 326”) as amended. The new accounting guidance in this ASU replaces the incurred loss methodology with an expected loss methodology, which is referred to as the current expected credit loss (“CECL”) methodology. The CECL methodology is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity (“HTM”) debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (including loan commitments, standby letters of credit, financial guarantees, and other similar instruments that are noncancellable), and net investments in leases recognized by a lessor. The CECL methodology requires an entity to estimate credit losses over the life of an asset or off-balance sheet credit exposure. 6 In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management determines that the Company does not intend to sell and it is more likely than not, that the Company will not be required to sell the securities. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning on or after January 1, 2023, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses (“ACL”) of $ 1.4 million and an increase of $ 1.1 million to establish a reserve for unfunded commitments, with a $ 2.0 million decrease to retained earnings, and $ 0.5 million of deferred tax being recorded as part of the deferred tax asset in the Company’s consolidated balance sheet. The following table details the impact of the adoption of ASC 326: January 1, 2023 ($ in thousands) Pre-ASC 326 adoption Impact of ASC 326 adoption As reported under ASC 326 Cummulative Effect on Retained Earnings Allowance for credit loss on loans Commercial & industrial $ 1,663 $ 230 $ 1,893 $ 182 Commercial real estate - owner occupied 1,696 54 1,750 43 Commercial real estate - nonowner occupied 4,584 1,015 5,599 801 Agricultural 611 ( 194 ) 417 ( 153 ) Residential real estate 4,438 360 4,798 284 Home equity line of credit (HELOC) 547 ( 76 ) 471 ( 60 ) Consumer 279 ( 17 ) 262 ( 13 ) Total ACL on loans $ 13,818 $ 1,372 $ 15,190 $ 1,084 ACL on off-balance sheet commitments $ - $ 1,149 $ 1,149 $ 907 ASU No. 2022-02: Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures On January 1, 2023, the Company adopted ASU 2022-02: Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, which removed the existing measurement and disclosure requirements for loans considered to be Troubled Debt Restructurings (“TDRs”) and added additional disclosure requirements related to modifications provided to borrowers experiencing financial difficulty. Prior to adoption of ASU 2022-02, a change in contractual terms of a loan where a borrower was experiencing financial difficulty and received a concession not available through other sources was required to be disclosed as a TDR, whereas now a borrower that is experiencing financial difficulty and receives a modification in the form of principal forgiveness, interest rate reduction, an other-than-insignificant payment delay or a term extension in the current period needs to be disclosed. The amendment was adopted prospectively and had no impact on the Company’s consolidated financial statements aside from additional and revised financial statement disclosures (see Note 4 to the consolidated financial statements). ASU No. 2023-02: Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (ASU 2023-02) This ASU permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The Company adopted the standard on January 1, 2024. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. 7 Accounting Standards not yet adopted: ASU No. 2023-09: Income Taxes (Topic 740): Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09: Income Taxes (Topic 740) Improvements to Income Tax Disclosures. The amendments in this ASU address investor requests for more transparency about income tax information through improvements to income tax disclosures, primarily related to effective tax rate reconciliation and information related to income taxes paid, among certain other amendments to improve the effectiveness of such disclosures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2024, and are to be applied on a prospective basis. Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements. NOTE 2 – EARNINGS PER SHARE Earnings per share (“EPS”) have been computed based on the weighted average number of common shares outstanding during the periods presented. The average number of common shares used in the computation of basic and diluted earnings per share are set forth in the table below. There were no anti-dilutive shares in 2024 or 2023. Participating securities in the table reflect nonvested restricted shares that participate in dividends declared and paid by the Company on its common shares prior to vesting of the restricted shares. Three Months Ended Sep. 30, ($ and outstanding shares in thousands - except per share data) 2024 2023 Distributed earnings allocated to common shares $ 943 $ 891 Undistributed earnings allocated to common shares 1,403 1,789 Net earnings allocated to common shares 2,346 2,680 Net earnings allocated to participating securities 8 7 Net Income allocated to common shares and participating securities $ 2,354 $ 2,687 Weighted average shares outstanding for basic earnings per share 6,660 6,791 Dilutive effect of stock compensation 15 87 Weighted average shares outstanding for diluted earnings per share 6,675 6,878 Basic earnings per common share $ 0.35 $ 0.40 Diluted earnings per common share $ 0.35 $ 0.39 Nine Months Ended Sep. 30, ($ and outstanding shares in thousands - except per share data) 2024 2023 Distributed earnings allocated to common shares $ 2,805 $ 2,666 Undistributed earnings allocated to common shares 5,004 5,523 Net earnings allocated to common shares 7,809 8,189 Net earnings allocated to participating securities 26 23 Net Income allocated to common shares and participating securities $ 7,835 $ 8,212 Weighted average shares outstanding for basic earnings per share 6,689 6,857 Dilutive effect of stock compensation 15 87 Weighted average shares outstanding for diluted earnings per share 6,704 6,944 Basic earnings per common share $ 1.17 $ 1.20 Diluted earnings per common share $ 1.17 $ 1.18 8 Note 3 – AVAILABLE-FOR-SALE Securities The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at September 30, 2024, and December 31, 2023, were as follows: ($ in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2024 U.S. Treasury and Government agencies $ 6,687 $ 1 $ ( 592 ) $ 6,096 Mortgage-backed securities 207,956 6 ( 27,490 ) 180,472 State and political subdivisions 11,148 - ( 1,080 ) 10,068 Other corporate securities 17,200 - ( 2,325 ) 14,875 Totals $ 242,991 $ 7 $ ( 31,487 ) $ 211,511 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2023 U.S. Treasury and Government agencies $ 7,339 $ 1 $ ( 823 ) $ 6,517 Mortgage-backed securities 221,717 3 ( 32,853 ) 188,867 State and political subdivisions 11,212 8 ( 1,322 ) 9,898 Other corporate securities 17,200 - ( 2,774 ) 14,426 Totals $ 257,468 $ 12 $ ( 37,772 ) $ 219,708 The amortized cost and fair value of securities available-for-sale at September 30, 2024, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair ($ in thousands) Cost Value Within one year $ 950 $ 948 Due after one year through five years 1,126 1,104 Due after five years through ten years 25,396 22,376 Due after ten years 7,563 6,611 35,035 31,039 Mortgage-backed securities 207,956 180,472 Totals $ 242,991 $ 211,511 The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $ 147.4 million at September 30, 2024, and $ 89.7 million at December 31, 2023. The fair value of securities delivered for repurchase agreements was $ 18.4 million at September 30, 2024, and $ 19.7 million at December 31, 2023. There were no realized gains or losses from sales of available-for-sale securities for the three and nine months ended September 30, 2024, or September 30, 2023. Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments was $ 210.3 million at September 30, 2024, and $ 217.0 million at December 31, 2023, which consisted of 135 securities, or approximately 99 percent, and 139 securities, or approximately 99 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. 9 Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2024, and December 31, 2023, are as follows: ($ in thousands) Less than 12 Months 12 Months or Longer Total September 30, 2024 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ - $ - $ 5,599 $ ( 592 ) $ 5,599 $ ( 592 ) Mortgage-backed securities - - 180,131 ( 27,490 ) 180,131 ( 27,490 ) State and political subdivisions 933 ( 5 ) 8,731 ( 1,075 ) 9,664 ( 1,080 ) Other corporate securities 365 ( 135 ) 14,510 ( 2,190 ) 14,875 ( 2,325 ) Totals $ 1,298 $ ( 140 ) $ 208,971 $ ( 31,347 ) $ 210,269 $ ( 31,487 ) Less than 12 Months 12 Months or Longer Total December 31, 2023 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury and Government agencies $ - $ - $ 6,022 $ ( 823 ) $ 6,022 $ ( 823 ) Mortgage-backed securities - - 188,508 ( 32,853 ) 188,508 ( 32,853 ) State and political subdivisions - - 8,541 ( 1,322 ) 8,541 ( 1,322 ) Other corporate securities - - 13,926 ( 2,774 ) 13,926 ( 2,774 ) Totals $ - $ - $ 216,997 $ ( 37,772 ) $ 216,997 $ ( 37,772 ) Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Management reviews these securities on a quarterly basis and evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, management determines whether a decline in fair value resulted from a credit loss or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, a provision is recorded to the ACL. Changes in the ACL are recorded as provision for (or reversal of) credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. At September 30, 2024, and December 31, 2023, no ACL on available-for-sale securities was recorded. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Accrued interest receivable on available-for-sale debt securities totaled $ 0.6 million at September 30, 2024 and $ 0.7 million at December 31, 2023. Should the decline in fair value be the result of credit losses or other factors, the security would be moved to nonaccrual status and all accrued interest reversed. NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for credit losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, all loan classes are placed on nonaccrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 10 The following table summarizes the composition of the loan portfolio: Total Loans ($ in thousands) September 30, 2024 December 31, 2023 Commercial & industrial $ 123,821 $ 126,716 Commercial real estate - owner occupied 132,776 126,717 Commercial real estate - nonowner occupied 326,673 297,323 Agricultural 64,887 65,659 Residential real estate 314,010 318,123 Home equity line of credit (HELOC) 51,989 47,845 Consumer 15,799 17,829 Total loans 1,029,955 1,000,212 Allowance for credit losses ( 15,278 ) ( 15,786 ) Loans, net $ 1,014,677 $ 984,426 The totals shown above are net of deferred loan fees and costs, which totaled $ 0.60 million and $ 0.44 million at September 30, 2024, and December 31, 2023, respectively. The risk characteristics of each loan portfolio segment are as follows: Commercial & Industrial and Agricultural Commercial & industrial loans and agricultural loans are primarily underwritten based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial Real Estate (Owner and Nonowner Occupied) Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied versus non-owner-occupied commercial real estate loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally underwritten based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Residential Real Estate, HELOC and Consumer Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers. 11 Allowance for Credit Losses (ACL) The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. Accrued interest receivable related to loans totaled $ 3.3 million at September 30, 2024 and $ 3.2 million at December 31, 2023, and is excluded from the estimate of credit losses. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments: ● Commercial & Industrial - Commercial & industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial & industrial loans and lease financing agreements is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease. ● Commercial Real Estate - Owner Occupied - Owner occupied commercial real estate loans consist of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings and other commercial facilities. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation as the commercial real estate collateral may be more adversely affected by conditions in the real estate markets or in the general economy. ● Commercial Real Estate – Nonowner Occupied - Nonowner occupied commercial real estate loans consist of loans to purchase, construct, or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as multifamily properties. The primary risk associated with nonowner occupied commercial real estate loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation as the commercial real estate collateral may be more adversely affected by conditions in the real estate markets or in the general economy. ● Agricultural - Agricultural loans consist of loans or lines of credit to finance farmland, equipment, and general business needs or other assets. The primary risk associated with agricultural loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan. 12 ● Residential Real Estate – Residential real estate mortgage loans consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. ● Home Equity Line of Credit (HELOCs) - Home equity loans consist of HELOCs and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior liens as a substantial decline in value could render the junior lien position effectively unsecured. ● Consumer - Consumer loans consist of loans to finance unsecured home improvements, personal assets, such as automobiles or recreational vehicles, and revolving lines of credit that can be secured or unsecured. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. The Company utilizes a Discounted Cash Flow (“DCF”) method to estimate the quantitative portion of the ACL for all loan pools evaluated on a collective pooled basis, with the exception of the credit card and consumer loan portfolios, which were estimated using the Remaining Life Method. For each segment, a Loss Driver Analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized the Company’s own Federal Financial Institutions Examination Council’s (“FFIEC”) Call Report data, as well as peer institution data. In creating the DCF model, the Company has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. The Company’s own loan-level loss data from January 2016 through September 30, 2024, contained within the model was supplemented with peer data in most loan pools as there was not sufficient loan-level detail from prior cycles reflecting similar economic conditions as the forecasted loss drivers to result in a sound calculation. Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers. The Company utilizes data from Federal Reserve Economic Data (“FRED”) to provide economic forecasts under various scenarios, which are applied to loan pools to reflect credit risk in the current economic environment. Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. When possible, the Company utilizes its own PDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own PDs, the LDA is utilized to determine PDs based on the forecasted economic factors. When possible, the Company utilizes its own LGDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own LGDs, the LGD is derived using a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the reversion period and long-term historical average. The Company utilizes its own prepayment and curtailment rates in the ACL estimate. In pools where observations are not sufficient, the Company utilizes the model’s most relevant benchmark rate. 13 Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. A number of factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising interest rates, external factors and other considerations. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above. During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate. The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments. Any allowance for off-balance sheet credit exposures is reported in Other liabilities on the Company’s consolidated balance sheet and is increased or decreased through a provision for credit loss expense on the Company’s consolidated statement of income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded. While the Company’s policies and procedures used to estimate the ACL, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions, which may materially impact asset quality and the adequacy of the ACL and thus the resulting provision for credit losses. 14 As a result of the adoption of ASC 326, the Company recorded a $ 1.4 million increase to the ACL as a cumulative-effect adjustment on Jan uary 1, 2023. The following tables summarize the activity related to the ACL for the three and nine months ended September 30, 2024, and September 30, 2023, and the twelve months ended December 31, 2023. ($ in thousands) For the three months ended September 30, 2024 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 2,755 $ - $ - $ - $ ( 179 ) $ 2,576 Commercial real estate - owner occupied 1,967 - - - ( 130 ) 1,837 Commercial real estate - nonowner occupied 5,449 - - - 82 5,531 Agricultural 912 - - - ( 48 ) 864 Residential real estate 3,798 - - - ( 52 ) 3,746 HELOC 534 - - - 11 545 Consumer 197 - ( 29 ) 2 9 179 Total $ 15,612 $ - $ ( 29 ) $ 2 $ ( 307 ) $ 15,278 ($ in thousands) For the nine months ended September 30, 2024 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 2,003 $ - $ ( 42 ) $ 6 $ 609 $ 2,576 Commercial real estate - owner occupied 1,952 - - - ( 115 ) 1,837 Commercial real estate - nonowner occupied 5,718 - - - ( 187 ) 5,531 Agricultural 440 - - - 424 864 Residential real estate 4,936 - - - ( 1,190 ) 3,746 HELOC 510 - - - 35 545 Consumer 227 - ( 53 ) 21 ( 16 ) 179 Total $ 15,786 $ - $ ( 95 ) $ 27 $ ( 440 ) $ 15,278 ($ in thousands) For the three months ended September 30, 2023 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 1,957 $ - $ - $ - $ ( 37 ) $ 1,920 Commercial real estate - owner occupied 1,897 - - - 2 1,899 Commercial real estate - nonowner occupied 5,783 - - - 43 5,826 Agricultural 408 - - - 1 409 Residential real estate 4,985 - - 1 2 4,988 HELOC 523 - - - ( 8 ) 515 Consumer 242 - ( 12 ) 6 ( 3 ) 233 Total $ 15,795 $ - $ ( 12 ) $ 7 $ - $ 15,790 15 ($ in thousands) For the nine months ended September 30, 2023 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 1,663 $ 230 $ - $ - $ 27 $ 1,920 Commercial real estate - owner occupied 1,696 54 - - 149 1,899 Commercial real estate - nonowner occupied 4,584 1,015 - - 227 5,826 Agricultural 611 ( 194 ) - - ( 8 ) 409 Residential real estate 4,438 360 ( 53 ) 1 242 4,988 HELOC 547 ( 76 ) - - 44 515 Consumer 279 ( 17 ) ( 60 ) 24 7 233 Total $ 13,818 $ 1,372 $ ( 113 ) $ 25 $ 688 $ 15,790 ($ in thousands) For the twelve months ended December 31, 2023 Balance, beginning of period Impact of Adopting ASC 326 Chargeoffs Recoveries Provision for Credit Losses Balance, end of period Commercial & industrial $ 1,663 $ 230 $ - $ - $ 110 $ 2,003 Commercial real estate - owner occupied 1,696 54 - - 202 1,952 Commercial real estate - nonowner occupied 4,584 1,015 - - 119 5,718 Agricultural 611 ( 194 ) - - 23 440 Residential real estate 4,438 360 ( 53 ) 1 190 4,936 HELOC 547 ( 76 ) - - 39 510 Consumer 279 ( 17 ) ( 65 ) 25 5 227 Total $ 13,818 $ 1,372 $ ( 118 ) $ 26 $ 688 $ 15,786 Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the ACL. 16 The following table presents an analysis of collateral-dependent loans of the Company as of September 30, 2024, and December 31, 2023. ($ in thousands) Collateral Type Allocated September 30, 2024 Real Estate Other Total Allowance Commercial & industrial $ 1,559 $ 1,703 $ 3,262 $ 356 Commercial real estate - owner occupied 429 - 429 - Commercial real estate - nonowner occupied 155 - 155 - Agricultural - - - - Residential real estate 1,047 - 1,047 31 HELOC - - - - Consumer - - - - Total $ 3,190 $ 1,703 $ 4,893 $ 387 ($ in thousands) Collateral Type Allocated December 31, 2023 Real Estate Other Total Allowance Commercial & industrial $ 604 $ - $ 604 $ 97 Commercial real estate - owner occupied - - - - Commercial real estate - nonowner occupied 284 - 284 40 Agricultural - - - - Residential real estate 1,023 - 1,023 18 HELOC - - - - Consumer - - - - Total $ 1,911 $ - $ 1,911 $ 155 17 Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of collateral. The ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. Credit Risk Profile The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $ 100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings: Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination. Special Mention (5): Loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy. Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable. Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not warranted. Loans will be classified as Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 18 The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis. The following table presents loan balances by credit quality indicators and gross chargeoffs by loan category and year of origination as of September 30, 2024. ($ in thousands) Term Loans by Year of Origination Revolving Revolving Loans Converted September 30, 2024 2024 2023 2022 2021 2020 Prior Loans to Term Total Commercial & industrial Pass (1 - 4) $ 18,635 $ 13,982 $ 13,631 $ 16,528 $ 9,263 $ 10,901 $ 37,304 $ 116 $ 120,360 Special Mention (5) - - - - 137 - 25 - 162 Substandard (6) - - 868 - 43 567 1,252 88 2,818 Doubtful (7) - 153 - 226 - 48 - 54 481 Loss (8) - - - - - - - - - Total $ 18,635 $ 14,135 $ 14,499 $ 16,754 $ 9,443 $ 11,516 $ 38,581 $ 258 $ 123,821 Current period gross chargeoffs $ - $ 42 $ - $ - $ - $ - $ - $ - $ 42 Commercial real estate - owner occupied Pass (1 - 4) $ 11,323 $ 30,682 $ 20,242 $ 24,774 $ 13,829 $ 30,831 $ 492 $ 160 $ 132,333 Special Mention (5) - - - - - - - - - Substandard (6) - - - - 430 - - - 430 Doubtful (7) - - - 12 - 1 - - 13 Loss (8) - - - - - - - - - Total $ 11,323 $ 30,682 $ 20,242 $ 24,786 $ 14,259 $ 30,832 $ 492 $ 160 $ 132,776 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial real estate - nonowner occupied Pass (1 - 4) $ 62,369 $ 49,175 $ 53,536 $ 43,414 $ 42,349 $ 73,859 $ 106 $ - $ 324,808 Special Mention (5) 676 - - - - 913 - - 1,589 Substandard (6) - - 156 - - 120 - - 276 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 63,045 $ 49,175 $ 53,692 $ 43,414 $ 42,349 $ 74,892 $ 106 $ - $ 326,673 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Agricultural Pass (1 - 4) $ 6,515 $ 8,470 $ 14,852 $ 11,432 $ 2,801 $ 9,847 $ 10,970 $ - $ 64,887 Special Mention (5) - - - - - - - - - Substandard (6) - - - - - - - - - Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 6,515 $ 8,470 $ 14,852 $ 11,432 $ 2,801 $ 9,847 $ 10,970 $ - $ 64,887 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Residential real estate Pass (1 - 4) $ 22,601 $ 47,064 $ 104,223 $ 78,839 $ 29,261 $ 30,377 $ - $ - $ 312,365 Special Mention (5) - - - - - - - - - Substandard (6) - 285 - 260 51 1,049 - - 1,645 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 22,601 $ 47,349 $ 104,223 $ 79,099 $ 29,312 $ 31,426 $ - $ - $ 314,010 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Home equity line of credit (HELOC) Pass (1 - 4) $ - $ - $ - $ 62 $ 18 $ 167 $ 44,965 $ 6,521 $ 51,733 Special Mention (5) - - - - - - - - - Substandard (6) - - - - - 50 159 47 256 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ - $ - $ - $ 62 $ 18 $ 217 $ 45,124 $ 6,568 $ 51,989 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Consumer Pass (1 - 4) $ 1,690 $ 2,264 $ 3,704 $ 850 $ 388 $ 124 $ 3,461 $ 3,304 $ 15,785 Special Mention (5) - - - - - - - - - Substandard (6) - - 14 - - - - - 14 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 1,690 $ 2,264 $ 3,718 $ 850 $ 388 $ 124 $ 3,461 $ 3,304 $ 15,799 Current period gross chargeoffs $ - $ - $ - $ - $ 7 $ - $ - $ 46 $ 53 Total Loans Pass (1 - 4) $ 123,133 $ 151,637 $ 210,188 $ 175,899 $ 97,909 $ 156,106 $ 97,298 $ 10,101 $ 1,022,271 Special Mention (5) 676 - - - 137 913 25 - 1,751 Substandard (6) - 285 1,038 260 524 1,786 1,411 135 5,439 Doubtful (7) - 153 - 238 - 49 - 54 494 Loss (8) - - - - - - - - - Total Loans $ 123,809 $ 152,075 $ 211,226 $ 176,397 $ 98,570 $ 158,854 $ 98,734 $ 10,290 $ 1,029,955 Current period gross chargeoffs $ - $ 42 $ - $ - $ 7 $ - $ - $ 46 $ 95 19 The following table presents loan balances by credit quality indicators and gross chargeoffs by loan category and year of origination as of December 31, 2023. ($ in thousands) Term Loans by Year of Origination Revolving Revolving Loans Converted December 31, 2023 2023 2022 2021 2020 2019 Prior Loans to Term Total Commercial & industrial Pass (1 - 4) $ 17,239 $ 18,076 $ 19,143 $ 10,573 $ 7,449 $ 5,965 $ 45,831 $ 444 $ 124,720 Special Mention (5) - 731 - 64 - 140 201 - 1,136 Substandard (6) - 41 - - 25 137 - 80 283 Doubtful (7) 195 - 226 - 1 100 50 5 577 Loss (8) - - - - - - - - - Total $ 17,434 $ 18,848 $ 19,369 $ 10,637 $ 7,475 $ 6,342 $ 46,082 $ 529 $ 126,716 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial real estate - owner occupied Pass (1 - 4) $ 29,253 $ 21,427 $ 26,808 $ 12,931 $ 12,881 $ 20,409 $ 112 $ 173 $ 123,994 Special Mention (5) - - - 2,338 358 - - - 2,696 Substandard (6) - - - - - - - - - Doubtful (7) - - 26 - 1 - - - 27 Loss (8) - - - - - - - - - Total $ 29,253 $ 21,427 $ 26,834 $ 15,269 $ 13,240 $ 20,409 $ 112 $ 173 $ 126,717 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial real estate - nonowner occupied Pass (1 - 4) $ 52,915 $ 67,285 $ 47,658 $ 46,364 $ 30,561 $ 47,895 $ 2,377 $ - $ 295,055 Special Mention (5) - - - - 838 1,134 - - 1,972 Substandard (6) - - - - - 154 18 - 172 Doubtful (7) - - - - - 124 - - 124 Loss (8) - - - - - - - - - Total $ 52,915 $ 67,285 $ 47,658 $ 46,364 $ 31,399 $ 49,307 $ 2,395 $ - $ 297,323 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Agricultural Pass (1 - 4) $ 9,496 $ 16,131 $ 12,940 $ 3,029 $ 1,859 $ 9,801 $ 12,403 $ - $ 65,659 Special Mention (5) - - - - - - - - - Substandard (6) - - - - - - - - - Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 9,496 $ 16,131 $ 12,940 $ 3,029 $ 1,859 $ 9,801 $ 12,403 $ - $ 65,659 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Residential real estate Pass (1 - 4) $ 53,013 $ 110,531 $ 85,075 $ 31,558 $ 10,425 $ 22,564 $ 1,816 $ 1,300 $ 316,282 Special Mention (5) - - - - - - - - - Substandard (6) - - 361 54 485 920 - - 1,820 Doubtful (7) - - - - - 21 - - 21 Loss (8) - - - - - - - - - Total $ 53,013 $ 110,531 $ 85,436 $ 31,612 $ 10,910 $ 23,505 $ 1,816 $ 1,300 $ 318,123 Current period gross chargeoffs $ - $ - $ 32 $ 21 $ - $ - $ - $ - $ 53 Home equity line of credit (HELOC) Pass (1 - 4) $ - $ - $ 46 $ 18 $ 85 $ 94 $ 40,932 $ 6,492 $ 47,667 Special Mention (5) - - - - - 59 20 99 178 Substandard (6) - - - - - - - - - Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ - $ - $ 46 $ 18 $ 85 $ 153 $ 40,952 $ 6,591 $ 47,845 Current period gross chargeoffs $ - $ - $ - $ - $ - $ - $ - $ - $ - Consumer Pass (1 - 4) $ 3,296 $ 5,142 $ 1,429 $ 740 $ 221 $ 128 $ 6,863 $ - $ 17,819 Special Mention (5) - - - 1 - - - - 1 Substandard (6) - 9 - - - - - - 9 Doubtful (7) - - - - - - - - - Loss (8) - - - - - - - - - Total $ 3,296 $ 5,151 $ 1,429 $ 741 $ 221 $ 128 $ 6,863 $ - $ 17,829 Current period gross chargeoffs $ - $ 12 $ 8 $ 11 $ - $ - $ - $ 34 $ 65 Total Loans Pass (1 - 4) $ 165,212 $ 238,592 $ 193,099 $ 105,213 $ 63,481 $ 106,856 $ 110,334 $ 8,409 $ 991,196 Special Mention (5) - 731 - 2,403 1,196 1,333 221 99 5,983 Substandard (6) - 50 361 54 510 1,211 18 80 2,284 Doubtful (7) 195 - 252 - 2 245 50 5 749 Loss (8) - - - - - - - - - Total Loans $ 165,407 $ 239,373 $ 193,712 $ 107,670 $ 65,189 $ 109,645 $ 110,623 $ 8,593 $ 1,000,212 Current period gross chargeoffs $ - $ 12 $ 40 $ 32 $ - $ - $ - $ 34 $ 118 20 The following tables present the Company’s loan portfolio aging analysis as of September 30, 2024, and December 31, 2023. ($ in thousands) September 30, 2024 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Commercial & industrial $ 372 $ 400 $ 2,899 $ 3,671 $ 120,150 $ 123,821 Commercial real estate - owner occupied - - 430 430 132,346 132,776 Commercial real estate - nonowner occupied - - 371 371 326,302 326,673 Agricultural - - - - 64,887 64,887 Residential real estate 87 749 1,068 1,904 312,106 314,010 HELOC - 84 200 284 51,705 51,989 Consumer 41 10 - 51 15,748 15,799 Total Loans $ 500 $ 1,243 $ 4,968 $ 6,711 $ 1,023,244 $ 1,029,955 December 31, 2023 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Commercial & industrial $ 26 $ - $ 658 $ 684 $ 126,032 $ 126,716 Commercial real estate - owner occupied - - - - 126,717 126,717 Commercial real estate - nonowner occupied - - 29 29 297,294 297,323 Agricultural - - - - 65,659 65,659 Residential real estate - 222 395 617 317,506 318,123 HELOC - 8 67 75 47,770 47,845 Consumer 88 33 1 122 17,707 17,829 Total Loans $ 114 $ 263 $ 1,150 $ 1,527 $ 998,685 $ 1,000,212 21 All loans past due 90 days are systematically placed on nonaccrual status. When a loan is moved to nonaccrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on nonaccrual loans may be realized once all contractual principal amounts are received. It is at the discretion of management to determine when a loan is placed back on accrual status once a borrower establishes a history of six consecutive timely principal and interest payments. The categories of nonaccrual loans as of September 30, 2024, and December 31, 2023, are presented in the following table. September 30, 2024 ($ in thousands) Nonaccrual loans with no allowance Nonaccrual loans with an allowance Total nonaccrual loans Commercial & industrial $ 1,490 $ 1,409 $ 2,899 Commercial real estate - owner occupied 442 - 442 Commercial real estate - nonowner occupied 371 - 371 Agricultural - - - Residential real estate 1,311 225 1,536 Home equity line of credit (HELOC) 256 - 256 Consumer 14 - 14 Total loans $ 3,884 $ 1,634 $ 5,518 December 31, 2023 ($ in thousands) Nonaccrual loans with no allowance Nonaccrual loans with an allowance Total nonaccrual loans Commercial & industrial $ 651 $ 97 $ 748 Commercial real estate - owner occupied 26 - 26 Commercial real estate - nonowner occupied 141 - 141 Agricultural - - - Residential real estate 1,694 18 1,712 Home equity line of credit (HELOC) 180 - 180 Consumer 11 - 11 Total loans $ 2,703 $ 115 $ 2,818 Modifications made to Borrowers Experiencing Financial Difficulty In the normal course of business, the Company may execute loan modifications with borrowers. These modifications are analyzed to determine whether the modification is considered concessionary, long term and made to a borrower experiencing financial difficulty. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the borrowers short-term cash relief to allow them to improve their financial condition. If a loan modification is determined to be made to a borrower experiencing financial difficulty, the loan is considered collateral dependent and evaluated as part of the ACL as described above in the Allowance for Credit Losses section of this note. For the nine months ended September 30, 2024, the Company did not modify any loans made to borrowers experiencing financial difficulty. The Company had no commitments to lend to borrowers experiencing financial difficulty for which the Company had modified an existing loan as of September 30, 2024. The Company monitors loan payments on an ongoing basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and its ability to generate positive cash flows during the loan term. For the nine-month period ended September 30, 2024, the Company had no loan modifications made to borrowers experiencing financial difficulty for which there was a payment default within the 12 months following the modification date. 22 Unfunded Loan Commitments The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when the extension of credit is not unconditionally cancellable (i.e. the commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the ACL for loans. The allowance for credit losses for unfunded loan commitments of $ 1.4 million at September 30, 2024, is classified on the balance sheet within Other liabilities. The following table presents the balance and activity in the ACL for unfunded loan commitments for the three and nine months ended September 30, 2024, and September 30, 2023. Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2024 2023 2024 2023 Balance, beginning of period $ 909 $ 856 $ 776 $ - Adjustment for adoption of ASU 2016-13 - - - 1,149 Provision for unfunded commitments 507 ( 6 ) 640 ( 299 ) Balance, end of period $ 1,416 $ 850 $ 1,416 $ 850 NOTE 5 – GOODWILL As of September 30, 2024, and December 31, 2023, the carrying amount of goodwill was $ 23.2 million. Goodwill is not amortized, but is evaluated for impairment annually as of December 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. Goodwill was assessed for impairment using a quantitative test performed as of September 30, 2024. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date. No events or circumstances since the September 30, 2024, impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. 23 NOTE 6 – MORTGAGE SERVICING RIGHTS Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $ 1.41 billion at September 30, 2024, and $ 1.37 billion at December 31, 2023. Contractually specified servicing fees of $ 0.9 million and $ 2.6 million were included in mortgage loan servicing fees in the consolidated income statement for the three and nine months ended September 30, 2024, respectively. Servicing fees of $ 0.9 million and $ 2.5 million were included for the three and nine months ended September 30, 2023, respectively. The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2024 2023 2024 2023 Balance at beginning of period $ 14,548 $ 13,723 $ 13,906 $ 13,503 Mortgage servicing rights capitalized during the period 644 582 1,675 1,388 Mortgage servicing rights amortization during the period ( 370 ) ( 334 ) ( 978 ) ( 960 ) Net change in valuation allowance ( 465 ) ( 78 ) ( 246 ) ( 38 ) Balance at end of period $ 14,357 $ 13,893 $ 14,357 $ 13,893 Valuation allowance: Balance at beginning of period $ 8 $ 137 $ 227 $ 177 Increase (decrease) 465 78 246 38 Balance at end of period $ 473 $ 215 $ 473 $ 215 Fair value, beginning of period $ 18,807 $ 16,645 $ 17,125 $ 15,754 Fair value, end of period $ 18,160 $ 16,161 $ 18,160 $ 16,161 NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable-rate assets. Non-designated Hedges The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into Interest Rate Lock Commitments (“IRLCs”) with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and included in Other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and included in Other liabilities in the consolidated balance sheets. 24 The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of September 30, 2024, and December 31, 2023. September 30, 2024 December 31, 2023 ($ in thousands) Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 66,262 $ 2,602 $ 68,381 $ 3,638 IRLCs - - 7,466 45 Forward contracts 21,000 65 - - Total contracts $ 87,262 $ 2,667 $ 75,847 $ 3,683 Liability Derivatives Derivatives not designated as hedging instruments Interest rate swaps associated with loans $ 66,262 $ ( 2,602 ) $ 68,381 $ ( 3,638 ) IRLCs 14,137 ( 23 ) - - Forward contracts - - 10,750 ( 37 ) Total contracts $ 80,399 $ ( 2,625 ) $ 79,131 $ ( 3,675 ) The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC or forward contract and the balance sheet date. The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the three and nine months ended September 30, 2024, and 2023. Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) Statement of income classification 2024 2023 2024 2023 Interest rate swap contracts Other income $ 32 $ 68 $ 32 $ 74 IRLCs Gain on sale of mortgage loans & OMSR ( 38 ) ( 14 ) ( 68 ) ( 4 ) Forward contracts Gain on sale of mortgage loans & OMSR 25 37 102 59 The following table shows the offsetting of financial assets and derivative assets at September 30, 2024, and at December 31, 2023. Gross amounts Gross amounts offset in the Net amounts of assets presented in Gross amounts not offset in the consolidated balance sheet ($ in thousands) of recognized assets consolidated balance sheet the consolidated balance sheet Financial instruments Cash collateral received Net amount September 30, 2024 Interest rate swaps $ 2,222 $ ( 380 ) $ 2,602 $     - $ 1,990 $ 612 December 31, 2023 Interest rate swaps $ 3,957 $ 319 $ 3,638 $ - $ 2,900 $ 738 25 The following table shows the offsetting of financial liabilities and derivative liabilities at September 30, 2024, and at December 31, 2023. Gross amounts Gross amounts offset in the Net amounts of liabilities presented in Gross amounts not offset in the consolidated balance sheet ($ in thousands) of recognized liabilities consolidated balance sheet the consolidated balance sheet Financial instruments Cash collateral pledged Net amount September 30, 2024 Interest rate swaps $ 2,222 $ ( 380 ) $ 2,602 $ - $ - $ 2,602 December 31, 2023 Interest rate swaps $ 3,957 $ 319 $ 3,638 $ - $ - $ 3,638 NOTE 8 – DEPOSITS Major classification of deposits at September 30, 2024, and at December 31, 2023, were as follows: ($ in thousands) September 30, 2024 December 31, 2023 Non interest bearing demand $ 222,425 $ 228,713 Interest bearing demand 202,097 166,413 Savings 241,761 216,965 Money market 228,182 202,605 Time deposits $250,000 or less 213,565 201,379 Time deposits greater than $250,000 51,503 54,130 Total Deposits $ 1,159,533 $ 1,070,205 Included in time deposits at September 30, 2024, and at December 31, 2023, were $ 56.8 million and $ 56.5 million, respectively, of deposits which were obtained through the Certificate of Deposit Account Registry Service (CDARS). NOTE 9 – SHORT-TERM BORROWINGS ($ in thousands) September 30, 2024 December 31, 2023 Securities sold under repurchase agreements $ 15,240 $ 13,387 The Company has retail repurchase (“REPO”) agreements to facilitate cash management transactions with commercial customers. These obligations are secured by agency and mortgage-backed securities and such collateral is held by the Federal Home Loan Bank (“FHLB”). These securities have various maturity dates from 2025 through 2051. As of September 30, 2024, these REPO agreements were secured by securities with a fair value totaling $ 18.4 million. The REPO agreements mature within one month. The Company has borrowing capabilities at the Federal Reserve Discount Window (“Discount Window”) by pledging either securities or loans as collateral. As of September 30, 2024, there was $ 5.6 million pledged to the Discount Window. At both September 30, 2024, and December 31, 2023, the Company had $ 41.0 million in federal funds lines, of which none was drawn. 26 NOTE 10 – FEDERAL HOME LOAN BANK (FHLB) ADVANCES The Company’s FHLB advances were secured by $ 298.3 million in mortgage loans at September 30, 2024. Advances consisted of fixed interest rates from 3.75 to 4.61 percent. Fixed rate advances are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at September 30, 2024, were: ($ in thousands) Debt 2026 $ 12,500 2027 5,000 2028 17,500 Total $ 35,000 NOTE 11 – TRUST PREFERRED SECURITIES On September 15, 2005, RST II, a wholly owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $ 1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is currently based upon the 3-month CME Term SOFR as adjusted by the relevant spread adjustment plus 1.80 percent and are included in interest expense in the consolidated financial statements. These securities may be included in Tier 1 capital and may be prepaid at any time without penalty (with certain limitations applicable) under current regulatory guidelines and interpretations. The balance of the Capital Securities as of both September 30, 2024, and December 31, 2023, was $ 10.3 million, with a maturity date of September 15, 2035 . NOTE 12 – SUBORDINATED DEBT On May 27, 2021, the Company entered into Subordinated Note Purchase Agreements with qualified institutional buyers and accredited investors pursuant to which the Company issued and sold $ 20.0 million in aggregate principal amount of its 3.65 % Fixed to Floating Rate Subordinated Notes due 2031 (the “Notes”). The Notes were sold by the Company in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended. The Notes mature on June 1, 2031 , and bear interest at a fixed rate of 3.65 % through May 31, 2026. From June 1, 2026, to the maturity date or earlier redemption of the Notes, the interest rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month SOFR provided by the Federal Reserve Bank of New York plus 296 basis points. The Company may redeem the Notes at any time after May 31, 2026, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $ 0.5 million, which are being amortized over the life of the Notes. NOTE 13 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying consolidated balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy. Available-for-Sale Securities The fair values of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include obligations of the U.S. Treasury and government agencies, mortgage-backed securities, obligations of political and state subdivisions, and other corporate securities. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means. 27 Interest Rate Contracts The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties (Level 2). Forward contracts The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1). Interest Rate Lock Commitments (IRLCs) The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected “pull-through” rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at September 30, 2024, and at December 31, 2023. ($ in thousands) Fair value at September 30, 2024 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 6,096 $ - $ 6,096 $ - Mortgage-backed securities 180,472 - 180,472 - State and political subdivisions 10,068 - 10,068 - Other corporate securities 14,875 - 14,875 - Interest rate contracts - assets 2,602 - 2,602 - Interest rate contracts - liabilities ( 2,602 ) - ( 2,602 ) - Forward contracts 65 65 - - IRLCs ( 23 ) - - ( 23 ) ($ in thousands) Fair value at December 31, 2023 (Level 1) (Level 2) (Level 3) U.S. Treasury and Government Agencies $ 6,517 $ - $ 6,517 $ - Mortgage-backed securities 188,867 - 188,867 - State and political subdivisions 9,898 - 9,898 - Other corporate securities 14,426 - 14,426 - Interest rate contracts - assets 3,638 - 3,638 - Interest rate contracts - liabilities ( 3,638 ) - ( 3,638 ) - Forward contracts ( 37 ) ( 37 ) - - IRLCs 45 - - 45 Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs 28 The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2024, and 2023. for the Three Months Ended September 30, for the Nine Months Ended September 30, ($ in thousands) 2024 2023 2024 2023 Interest rate lock commitments Balance at beginning of period $ 15 $ ( 10 ) $ 45 $ ( 20 ) Total realized gains (losses) Change in fair value ( 38 ) ( 14 ) ( 68 ) ( 4 ) Balance at end of period $ ( 23 ) $ ( 24 ) $ ( 23 ) $ ( 24 ) The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Collateral-dependent Individually evaluated Loans, Net of ACL The estimated fair value of collateral-dependent individually evaluated loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent individually evaluated loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining an independent appraisal of the collateral, which is reviewed for accuracy and consistency by management. Appraisers are selected from an approved list which is maintained by management. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All individually evaluated loans held by the Company were collateral dependent at September 30, 2024, and at December 31, 2023. Mortgage Servicing Rights Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees; miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis. ($ in thousands) Fair value at September 30, 2024 (Level 1) (Level 2) (Level 3) Collateral-dependent Individually evaluated loans $ 2,047 $ - $ - $ 2,047 Mortgage servicing rights 3,142 - - 3,142 ($ in thousands) Fair value at December 31, 2023 (Level 1) (Level 2) (Level 3) Collateral-dependent impaired loans $ 864 $ - $ - $ 864 Mortgage servicing rights 1,896 - - 1,896 Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs 29 Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. Fair value at September 30, 2024 Valuation technique Unobservable inputs Range (weighted-average) ($ in thousands) Collateral-dependent individually evaluated loans $ 2,047 Market comparable properties Comparability adjustments (%) 1 - 100% (21%) Mortgage servicing rights 3,142 Discounted cash flow Discount rate 10.26% Constant prepayment rate 7.91% P&I earnings credit 5.03% T&I earnings credit 4.94% Inflation for cost of servicing 3.50 IRLCs ( 23 ) Discounted cash flow Loan closing rates 55% - 99 % Fair value at December 31, 2023 Valuation technique Unobservable inputs Range (weighted-average) ($ in thousands) Collateral-dependent impaired loans $ 864 Market comparable properties Comparability adjustments (%) 2 - 100% (25%) Mortgage servicing rights 1,896 Discounted cash flow Discount rate 11.01% Constant prepayment rate 7.16% P&I earnings credit 5.33% T&I earnings credit 5.13% Inflation for cost of servicing 3.50% IRLCs 45 Discounted cash flow Loan closing rates 27% - 91 % There were no changes in the inputs or methodologies used to determine fair value at September 30, 2024, as compared to December 31, 2023. The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value. Cash and Due From Banks, Interest Bearing Time Deposits, Federal Reserve and Federal Home Loan Bank Stock, and Accrued Interest Receivable and Payable The carrying amount approximates the fair value. Loans Held for Sale The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk. Loans The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The “exit price” is determined based on discounted estimated future cash flows using rates that incorporate discounts for credit, liquidity, and marketability factors. 30 Deposits, Short-Term Borrowings, and FHLB Advances Deposits include demand deposits, savings accounts, and certain money market deposits. Short-term borrowings include federal funds borrowed and REPO agreements. The carrying amount of these instruments approximates the fair value. The estimated fair value for fixed-maturity time deposits and FHLB advances are based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at September 30, 2024, and at December 31, 2023. Loan Commitments The fair value of loan commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at September 30, 2024, and at December 31, 2023, and are not considered significant to this presentation. Trust Preferred Securities The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate. Subordinated Debt The fair value for subordinated debt is estimated by discounting the cash flows using a discount rate equal to the rate currently offered on similar borrowings. The following table presents estimated fair values of the Company’s other financial instruments carried at other than fair value. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate. ($ in thousands) Carrying Fair Fair value measurements using September 30, 2024 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 49,348 $ 49,348 $ 49,348 $ - $ - Interest bearing time deposits 1,706 1,706 - 1,706 - Loans held for sale 8,927 9,033 - 9,033 - Loans, net of allowance for credit losses 1,014,677 1,013,713 - - 1,013,713 Federal Reserve and FHLB Bank stock, at cost 5,223 5,223 - 5,223 - Interest receivable 4,842 4,842 - 4,842 - Financial liabilities Deposits $ 1,159,533 $ 1,162,216 $ 894,465 $ 267,751 $ - Short-term borrowings 15,240 15,240 - 15,240 - FHLB advances 35,000 35,347 - 35,347 - Trust preferred securities 10,310 9,917 - 9,917 - Subordinated debt, net of issuance costs 19,678 19,580 - 19,580 - Interest payable 3,374 3,374 - 3,374 - ($ in thousands) Carrying Fair Fair value measurements using December 31, 2023 amount value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 22,965 $ 22,965 $ 22,965 $ - $ - Interest bearing time deposits 1,535 1,535 - 1,535 - Loans held for sale 2,525 2,565 - 2,565 - Loans, net of allowance for credit losses 984,426 964,216 - - 964,216 Federal Reserve and FHLB Bank stock, at cost 7,279 7,279 - 7,279 - Interest receivable 4,657 4,657 - 4,657 - Financial liabilities Deposits $ 1,070,205 $ 1,078,028 $ 814,696 $ 263,332 $ - Short-term borrowings 13,387 13,387 - 13,387 - FHLB advances 83,600 83,368 - 83,368 - Trust preferred securities 10,310 9,759 - 9,759 - Subordinated debt, net of issuance costs 19,642 19,435 - 19,435 - Interest payable 2,443 2,443 - 2,443 - 31 NOTE 14 – SHARE BASED COMPENSATION In April 2017, the Company’s shareholders approved a new share-based incentive compensation plan, the SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which replaced the Company’s 2008 Stock Incentive Plan. The 2017 Plan permits the Company to grant or award incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock, and restricted stock units to employees and non-employee directors and advisory board members of the Company and its subsidiaries. A total of 500,000 common shares of the Company are available for grants or awards under the 2017 Plan, of which 189,456 shares had been granted under the plan as of September 30, 2024. The 2017 Plan is intended to advance the interests of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards. The 2017 Plan permits equity-based awards to be used to attract, motivate, reward and retain highly competent individuals upon whose judgment, initiative, leadership and efforts are key to the success of the Company by encouraging those individuals to become shareholders of the Company. Stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on five years of continuous service and have 10-year contractual terms. The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. As of September 30, 2024, there were no stock options outstanding, and no unrecognized compensation cost related to stock option awards. No stock options were granted in the first nine months of 2024. On February 5, 2013, the Company adopted a Long Term Incentive Plan (the “LTI Plan”), which provides for awards of restricted stock in the Company to certain key executives. These restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives. The compensation cost charged against income for awards under the LTI Plan for the three and nine months ended September 30, 2024, was $ 0.1 million and $ 0.5 million, respectively, and for the three and nine months ended September 30, 2023, was $ 0.1 million and $ 0.5 million, respectively. As of September 30, 2024, there was $ 0.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards under the 2017 Plan which were granted in accordance with the LTI Plan. That cost is expected to be recognized over a weighted-average period of 2.4 years. The table below is a summary of restricted stock activity under the Company’s 2017 Plan for the nine months ended September 30, 2024. Shares Weighted- Average Value per Share Nonvested, January 1, 2024 48,966 $ 18.49 Granted 38,776 15.63 Vested ( 33,431 ) 17.36 Forfeited - - Nonvested, September 30, 2024 54,311 $ 17.15 NOTE 15 – GENERAL LITIGATION The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Additionally, the Company is subject to periodic examinations by various regulatory agencies. It is the opinion of management that the disposition or ultimate resolution of any such claims, lawsuits and examinations pending at September 30, 2024, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Company. 32