What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-07 compared with 2025-05-08 · 415 added, 313 removed, 108 unchanged (87% of the section changed)

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

Statement Regarding Forward-Looking Information

Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations,

contains certain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance.

Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance.

of forward-looking statements include:

(a) projections of income or expense, earnings per share, the payment or non-payment of dividends,

capital structure and other financial items;

(b) statements of plans and objectives of the Company or our management or Board of Directors,

including those relating to products or services;

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking

This Quarterly Report on Form 10-Q, including

Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements,

, which are not historical fact, that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,

as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, which are provided to assist in the understanding of anticipated future financial performance, provide current

expectations or forecasts of future events and are not guarantees of future performance.

Examples of forward-looking statements include:

(a) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial

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

(d) statements regarding future customer

attraction or retention;

and (e) statements of assumptions underlying such statements.

Words such as “anticipates”, “believes”,

“plans”, “intends”, “expects”, “projects”, “estimates”, “should”,

“may”, “would be”, “will allow”, “will likely result”, “will continue”, “will

remain”, or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying

those statements.

(d) statements regarding future customer attraction or retention;

statements of assumptions underlying such statements.

Words such as “anticipates”, “believes”, “plans”,

“intends”, “expects”, “projects”, “estimates”, “should”, “may”,

“would be”, “will allow”, “will likely result”, “will continue”, “will remain”,

or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying those

Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties.

79 unchanged sentences

profitability, and viability as a going concern;

impact on our businesses, as well as on the risks described above, of various domestic or

international widespread natural or other disasters (including severe weather events), pandemics,

cybersecurity attacks, system failures, civil unrest, military or terrorist activities or

international conflicts;

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

2 unchanged sentences

year ended December 31, 2024.

reliance should not be placed on the forward-looking statements, which speak only as of the date hereof.

Except as may be required by

law, the Company undertakes no obligation to update any forward-looking statement to reflect unanticipated events or circumstances after

the date on which the statement is made.

of SB Financial

Financial Group, Inc.

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

Governors of the Federal Reserve System (“Federal Reserve Board”).

SB Financial’s wholly owned subsidiary, The State

Bank and Trust Company (“State Bank”), is an Ohio-chartered bank engaged in commercial banking.

Statutory Trust II (“RST II”) was established in August 2005.

In September 2005, RST II completed a pooled private offering

of 10,000 Trust Preferred Securities with a liquidation amount of $1,000 per security.

The proceeds of the offering were loaned to SB

Financial in exchange for junior subordinated debentures of SB Financial with terms substantially similar to the Trust Preferred Securities.

The sole assets of RST II are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and

unconditional guarantee by SB Financial of the obligations of RST II.

Bank Insurance, LLC (“SBI”) is an Ohio corporation and a wholly owned subsidiary of State Bank incorporated in June 2010.

SBI is an insurance company that engages in the sale of insurance products to retail and commercial customers of State Bank.

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

SBFG Title engages in the sale of title insurance

Captive, Inc.

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

SB Captive pools insurance risk among

like sized banking institutions.

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

refer to SB Financial and its consolidated subsidiaries.

Accounting Policies

1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December

31, 2024, describes the significant accounting policies used in the development and presentation of the Company’s financial statements.

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States

and conform to general practices within the banking industry.

The preparation of financial statements in conformity with generally accepted

accounting principles requires management to make estimates and assumptions.

The Company’s financial position and results of operations

can be affected by these estimates and assumptions and are integral to the understanding of reported results.

Undue reliance should

not be placed on the forward-looking statements, which speak only as of the date hereof.

Except as may be required by law, the Company

undertakes no obligation to update any forward-looking statement to reflect unanticipated events or circumstances after the date on which

the statement is made.

Overview of SB Financial

SB Financial Group, Inc.

(“SB Financial”)

is an Ohio corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System (“Federal

Reserve Board”).

SB Financial’s wholly owned subsidiary, The State Bank and Trust Company (“State Bank”), is

an Ohio-chartered bank engaged in commercial banking.

Rurban Statutory Trust II (“RST II”)

was established in August 2005.

In September 2005, RST II completed a pooled private offering of 10,000 Trust Preferred Securities with

a liquidation amount of $1,000 per security.

The proceeds of the offering were loaned to SB Financial in exchange for junior subordinated

debentures of SB Financial with terms substantially similar to the Trust Preferred Securities.

The sole assets of RST II are the junior

subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by SB Financial

of the obligations of RST II.

State Bank Insurance, LLC (“SBI”)

is an Ohio corporation and a wholly owned subsidiary of State Bank incorporated in June 2010.

SBI is an insurance company that engages

in the sale of insurance products to retail and commercial customers of State Bank.

SBFG Title, LLC (“SBFG Title”) is

an Ohio corporation that was formed in March 2019.

SBFG Title engages in the sale of title insurance services.

SB Captive, Inc.

(“SB Captive”) is

a Nevada corporation that was formed in March 2019.

SB Captive pools insurance risk among like sized banking institutions.

Unless the context indicates otherwise, all references

herein to “we”, “us”, “our”, or the “Company” refer to SB Financial and its consolidated

subsidiaries.

Critical Accounting Policies

are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results,

and they require management to make estimates that are difficult, subjective, and/or complex.

for Credit Losses – The Company believes the determination of the allowance for credit losses involves a higher degree of judgment

and complexity than its other significant accounting policies.

The allowance for credit losses is calculated with the objective of maintaining

a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance

sheet credit exposure.

Management’s determination of the adequacy of the allowance for credit losses is based on periodic evaluations

of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions,

and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the

financial assets.

However, this evaluation has subjective components requiring material estimates, including expected default probabilities,

the expected loss given default (“LGD”), the amounts and timing of expected future cash flows on individually evaluated loans,

and estimated losses based on historical loss experience and forecasted economic conditions.

All of these factors may be susceptible

to significant change.

To the extent that actual results differ from management estimates, additional provisions for credit losses may

be required that would adversely impact earnings in future periods.

and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill

and other intangibles, at fair value as required.

Note 1 to the consolidated financial statements

included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, describes the significant accounting

policies used in the development and presentation of the Company’s financial statements.

The accounting and reporting policies

of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices

within the banking industry.

The preparation of financial statements in conformity with generally accepted accounting principles requires

management to make estimates and assumptions.

The Company’s financial position and results of operations can be affected by these

estimates and assumptions and are integral to the understanding of reported results.

Critical accounting policies are those policies

that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require

management to make estimates that are difficult, subjective, and/or complex.

Allowance for Credit Losses – The

Company believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other

significant accounting policies.

The allowance for credit losses is calculated with the objective of maintaining a reserve level believed

by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure.

determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical

credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts

that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

However, this evaluation

has subjective components requiring material estimates, including expected default probabilities, the expected loss given default (“LGD”),

the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience

and forecasted economic conditions.

All of these factors may be susceptible to significant change.

To the extent that actual results

differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future

Goodwill and Other Intangibles - The

Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value

Goodwill is subject, at a minimum, to annual tests for impairment.

Other intangible

assets are amortized over their estimated useful lives using straight-line or accelerated methods and are subject to impairment if events

or circumstances indicate a possible inability to realize the carrying amount.

The initial goodwill and other intangibles recorded and

subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform

in the future.

Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue

growth trends, specific industry conditions and changes in competition.

A decrease in earnings resulting from these or other factors

could lead to an impairment of goodwill that could adversely impact earnings in future periods.

Months Ended March 31, 2025, compared to Three Months Ended March 31, 2024

Net income for the first quarter of 2025 was $2.2 million compared to net income of $2.4 million for the first quarter

of 2024, a decrease of 8.9 percent.

Diluted earnings per share (“DEPS”) of $0.33 for the first quarter of 2025 were slightly

lower compared to the DEPS of $0.35 for the first quarter of 2024.

Net income for the first quarter of 2025 was positively impacted by

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

Total interest income

continues to improve and was up 13.5 percent compared to the prior year first quarter.

Mortgage loan volume was down slightly compared

to the prior year first quarter;

however, sales of originated loans were up 7.3 percent when compared to the first quarter of 2024.

in the 2025 first quarter results were $0.7 million of merger related expenses and a little more than two months of activity from the

Marblehead acquisition.

for Credit Losses:

The first quarter provision for credit losses was $387,000 as compared to a zero provision for the prior year

first quarter.

The Company had net charge-offs of $84,000 for the first quarter of 2025 compared to net charge-offs of $57,000 for the

year-ago quarter.

The provision expense included $13,000 for unfunded commitments, $224,000 due to the Marblehead acquisition and $150,000

of growth-related provision.

Total delinquent loans (consisting of nonaccrual loans and loans greater than 30 days past due) ended the

quarter at $5.9 million, or 0.54 percent of total loans.

Asset Quality Review – For the Period

Other intangible assets are amortized over their estimated

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

inability to realize the carrying amount.

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

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

Events and factors

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

conditions and changes in competition.

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

that could adversely impact earnings in future periods.

Three Months Ended June 30, 2025, compared

to Three Months Ended June 30, 2024

Net income for the

second quarter of 2025 was $3.9 million compared to net income of $3.1 million for the second quarter of 2024, an increase of $0.7 million

or 23.7 percent.

Diluted earnings per share (“DEPS”) of $0.60 for the second quarter of 2025 were higher compared to the

DEPS of $0.47 for the second quarter of 2024.

Net income for the second quarter of 2025 was positively impacted by higher interest income

on loans, which was partially offset by higher interest expense on deposits and wholesale borrowings.

Total interest income continues

to improve and was up $2.8 million, or 18.0 percent, compared to the prior year second quarter.

Mortgage loan volume was up 30.3 percent

compared to the prior year second quarter, with sales of originated loans up 33.1 percent when compared to the second quarter of 2024.

Provision for Credit Losses:

second quarter provision for credit losses was $597,000 as compared to a zero provision for the prior year second quarter.

had net charge-offs of $46,000 for the second quarter of 2025 compared to net recoveries of $16,000 for the year-ago quarter.

The provision

expense included $297,000 for unfunded commitments, and $300,000 of growth-related provision.

Total delinquent loans ended the quarter

at $5.6 million, or 0.51 percent of total loans.

Asset Quality Review – For the

($ in thousands)

Net charge-offs (recoveries) – QTD

Net charge-offs (recoveries) – QTD/YTD

Nonaccruing loans

4 unchanged sentences

Allowance for credit losses/Nonperforming loans

Operating revenue, consisting of net interest income (“NII”) and noninterest income, was $15.4 million for

the first quarter of 2025, an increase of $2.3 million, or 17.2 percent, from the $13.1 million generated during the first quarter of

for the first quarter of 2025 was $11.3 million, which was up $2.1 million from the prior year first quarter’s $9.2 million.

the first quarter of 2025 to the prior year first quarter, the Company’s earning assets increased $115.6 million, and the average

yield on earning assets increased by 24 basis points.

The net interest margin for the first quarter of 2025 was 3.40 percent compared

to 2.99 percent for the first quarter of 2024.

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

liabilities for the first quarter of 2025 were 2.32 percent compared to 2.55 percent for the prior year first quarter.

noninterest income was $4.1 million for the first quarter of 2025, which increased slightly compared to $4.0 million for the prior year

first quarter.

In addition to the mortgage revenue detailed below, wealth management revenue was flat compared to the prior year.

of mortgage servicing rights increased noninterest income by $0.01 million in the quarter, compared to a recapture of $0.18 million in

the prior year first quarter.

SBFG Title contributed revenue of $0.4 million in the first quarter of 2025, up $0.13 million from the

Noninterest income as a percentage of average assets for the first quarter of 2025 was 1.14 percent compared to 1.19 percent

for the prior year first quarter.

Bank originated $39.8 million of mortgage loans during the first quarter of 2025 and sold $39.3 million, with $3.8 million of loans held

for investment.

This compares to $42.9 million originated for the first quarter of 2024, of which $36.6 million were sold with the remainder

of loans held for investment.

These first quarter 2025 originations and subsequent sales resulted in $0.9 million of gains, up $0.01

million from the gains for the first quarter of 2024.

Net mortgage banking revenue was $1.46 million for the first quarter of 2025 compared

to $1.54 million for the first quarter of 2024.

Noninterest Expense:

Total noninterest expense for the first quarter of 2025 was $12.4 million, which was up $2.1 million compared

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

The quarter included over $0.7 million in one-time merger-related expenses.

to the prior year, the 2025 first quarter included operating expenses for approximately 75 days of activity of Marblehead.

Income taxes for the first quarter of 2025 were $0.43 million (16.7 percent) compared to $0.48 million (16.9 percent)

for the first quarter of 2024.

in Financial Condition

assets at March 31, 2025, were $1.5 billion, up $121.5 million, or 8.8 percent, since December 31, 2024.

Total loans, net of unearned

income, were $1.09 billion as of March 31, 2025, up $41.5 million, or 4.0 percent, from year-end.

Total deposits at March 31, 2025, were

$1.27 billion, an increase of $118.6 million, or 10.3 percent, since 2024 year end.

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

$76.1 million at March 31, 2025.

Consolidated Revenue:

revenue, consisting of net interest income (“NII”) and noninterest income, was $17.2 million for the second quarter of 2025,

an increase of $3.1 million, or 22.3 percent, from the $14.0 million generated during the second quarter of 2024.

NII for the second quarter of 2025 was $12.1

million, which was up $2.5 million from the prior year second quarter’s $9.7 million.

Comparing the second quarter of 2025 to the

prior year second quarter, the Company’s earning assets increased $152.5 million, and the average yield on earning assets increased

by 24 basis points.

The net interest margin for the second quarter of 2025 was 3.48 percent compared to 3.12 percent for the second quarter

Funding costs (interest paid to consumers and other entities) for deposits and other interest-bearing liabilities for the second

quarter of 2025 were 2.33 percent compared to 2.48 percent for the prior year second quarter.

Total noninterest income was $5.0 million for

the second quarter of 2025, which increased compared to $4.4 million for the prior year second quarter.

Mortgage revenue increase during

the second quarter of 2025, as detailed below, while wealth management revenue was flat compared to the prior year.

Recapture of mortgage

servicing rights increased noninterest income by $0.16 million in the quarter, compared to a recapture of $0.04 million in the prior

year second quarter.

SBFG Title contributed revenue of $0.6 million in the second quarter of 2025, up $0.18 million from the prior year.

Noninterest income as a percentage of average assets for the second quarter of 2025 was 1.35 percent compared to 1.31 percent for the

prior year second quarter.

State Bank originated $97.9 million of mortgage

loans during the second quarter of 2025 and sold $74.3 million, with $23.6 million of loans held for investment.

This compares to $75.1

million originated for the second quarter of 2024, of which $55.8 million were sold with the remainder of loans held for investment.

These second quarter 2025 originations and subsequent sales resulted in $1.6 million of gains, up $0.3 million from the gains for the

second quarter of 2024.

Net mortgage banking revenue was $2.16 million for the second quarter of 2025 compared to $1.84 million for the

second quarter of 2024.

Consolidated Noninterest Expense:

Total noninterest expense for the second quarter of 2025 was $11.9 million, which was up $1.2 million compared to $10.7 million in the

prior-year second quarter.

The quarter included higher expenses related to increased mortgage activity.

Compared to the prior year, the

2025 second quarter included operating expenses for the entire quarter’s activity of Marblehead.

Income Taxes:

Income taxes for

the second quarter of 2025 were $0.88 million (18.5 percent) compared to $0.26 million (7.7 percent) for the second quarter of 2024.

Six Months Ended June 30, 2025, compared

to Six Months Ended June 30, 2024

Net income for the

first six months of 2025 was $6.0 million compared to net income of $5.5 million for the first six months of 2024, an increase of $0.5

million, or 9.7 percent.

Diluted earnings per share (“DEPS”) of $0.93 for the first six months of 2025 were 13.4 percent

higher compared to DEPS of $0.82 for the first six months of 2024.

Net income for the first six months of 2025 was positively impacted

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

interest income continues to improve and was up $4.9 million or 15.8 percent compared to the prior year first six months.

Mortgage loan

volume was up $19.7 million, or 16.7 percent compared to the prior year first six months, with sales of originated loans up $21.1 million,

or 22.9 percent when compared to the first six months of 2024.

Included in the 2025 six months results were $0.7 million of merger related

expenses and a little more than five months of activity from the Marblehead acquisition.

Provision for Credit Losses:

provision for credit losses for the first six months of 2025 was $984,000 as compared to a zero provision for the prior year first six

The Company had net charge-offs of $130,000 for the first six months of 2025 compared to net charge-offs of $41,000 for the year-ago

first six months.

The provision expense for the first six months of 2025 included $310,000 for unfunded commitments, $224,000 due to

the Marblehead acquisition and $450,000 of growth-related provision.

Consolidated Revenue:

revenue, consisting of net interest income (“NII”) and noninterest income, was $32.6 million for the first six months of

2025, an increase of $5.4 million, or 19.8 percent, from the $27.2 million generated during the first six months of 2024.

NII for the first six months of 2025 was $23.4

million, which was up $4.6 million from NII of $18.8 million for the prior year first six months.

Comparing the first six months of 2025

to the prior year first six months, the Company’s earning assets increased $133.7 million, and the average yield on earning assets

increased by 25 basis points.

The net interest margin for the first six months of 2025 was 3.43 percent compared to 3.05 percent for

the first six months of 2024.

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

for the first six months of 2025 were 2.30 percent compared to 2.52 percent for the prior year first six months.

Total non-interest income was $9.2 million for

the first six months of 2025, which increased by $0.8 million compared to $8.3 million for the prior year first six months.

revenue increased for the first six months of 2025, as detailed below, wealth management revenue was flat compared to the prior year.

Recapture of mortgage servicing rights increased noninterest income by $0.17 million in the first six months, compared to a recapture

of $0.22 million in the prior year first six months.

SBFG Title contributed revenue of $0.98 million in the first six months of 2025,

up $0.31 million from the prior year.

Noninterest income as a percentage of average assets was 1.25 percent for both the six months ended

June 30, 2025, and 2024.

State Bank originated $137.7 million of mortgage

loans during the first six months of 2025 and sold $113.6 million, with $24.1 million of loans held for investment.

This compares to

$118.0 million originated for the first six months of 2024, of which $92.5 million were sold with the remainder of loans held for investment.

These first six months 2025 originations and subsequent sales resulted in $2.4 million of gains, up $0.36 million from the gains for

the first six months of 2024.

Net mortgage banking revenue was $3.62 million for the first six months of 2025 compared to $3.39 million

for the first six months of 2024.

Consolidated Noninterest Expense:

Total noninterest expense for the first six months of 2025 was $24.3 million, which was up $3.3 million compared to $21.0 million in

the prior-year first six months.

The 2025 first six months included over $0.7 million in one-time merger-related expenses.

the prior year, the 2025 first six months included operating expenses for approximately five and one half months of activity for Marblehead.

Income Taxes:

Income taxes for

the first six months of 2025 were $1.31 million (17.9 percent) compared to $0.74 million (11.9 percent) for the first six months of 2024.

Changes in Financial Condition

Total assets at June 30, 2025, were $1.5 billion,

up $106.8 million, or 7.7 percent, since December 31, 2024.

Total loans, net of unearned income, were $1.09 billion as of June 30, 2025,

up $48.0 million, or 4.6 percent, from year-end.

Total deposits at June 30, 2025, were $1.25 billion, an increase of $97.2 million, or

8.4 percent, since 2024 year-end.

Borrowed funds (consisting of FHLB advances,

repurchase (“REPO”) agreements, trust preferred securities and subordinated debt) totaled $80.7 million at June 30, 2025.

This is up slightly from year-end 2024 when borrowed funds totaled $75.6 million.

Total shareholders’

equity for the Company of $131.5 million now stands at 8.8 percent of total assets compared to the December 31, 2024, level of $127.5

million or 9.2 percent of total assets.

Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total equity

would increase to $158.4 million or 10.6 percent of total assets.

allowance for credit losses of $15.4 million is up $0.3 million from the December 2024 year-end level due to $0.09 million of net charge-offs,

$0.23 million due to the Marblehead acquisition, and $0.15 million of growth-related provision expense.

The Company has had stable asset

quality through the first three months of 2025, with the non-performing asset ratio at 41 basis points and coverage on non-performing

loans at 254 percent.

of March 31, 2025, based on the computations for the FFIEC 041 Consolidated Reports of Condition and Income filed by State Bank with

the Federal Reserve Board, State Bank was classified as “well capitalized” under the regulatory framework for prompt corrective

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

conditions or events since March 31, 2025, that management believes have changed State Bank’s capital classification.

Bank’s actual capital levels and ratios as of March 31, 2025, and December 31, 2024, are presented in the following table.

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

To Be Well Capitalized Under Prompt

Total shareholders’ equity for the Company of

$133.6 million now stands at 9.0 percent of total assets compared to the December 31, 2024, level of $127.5 million, or 9.2 percent of

total assets.

Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss, total equity would increase to $159.1 million,

or 10.7 percent of total assets.

The allowance for credit losses of $15.6 million

is up $0.55 million from the December 2024 year-end level due to $0.13 million of net charge-offs, $0.23 million due to the Marblehead

acquisition, and $0.30 million of growth-related provision expense.

The Company has had stable asset quality through the first six months

of 2025, with the non-performing asset ratio at 41 basis points and coverage on non-performing loans at 266 percent.

Capital Resources

As of June 30, 2025, based on the computations

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

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

To be categorized as well capitalized,

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

There are no conditions or events since June 30, 2025, that

management believes have changed State Bank’s capital classification.

State Bank’s actual capital levels and

ratios as of June 30, 2025, and December 31, 2024, are presented in the following table.

Capital levels are presented for State Bank

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

For Capital Adequacy

Corrective Action

To Be Well Capitalized

Under Prompt Corrective

Action Procedures

($ in thousands)

As of March 31, 2025

As of June 30, 2025

Tier I Capital to average assets

7 unchanged sentences

Total Risk-based capital to risk-weighted assets

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

the capital table above.

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

as such, unrealized gains and losses from available-for-sale securities will continue to be excluded from State Bank’s regulatory

relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide

for operating expenses.

Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits

in other financial institutions, securities available-for-sale and loans held for sale.

These assets are commonly referred to as liquid

Liquid assets totaled $310.7 million at March 31, 2025, compared to $235.9 million at December 31, 2024.

risk arises from the possibility that the Company may not be able to meet the Company’s financial obligations and operating cash

needs or may become overly reliant upon external funding sources.

In order to manage this risk, the Board of Directors of the Company

has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring

liquidity and quantifies minimum liquidity requirements.

This policy designates the Asset/Liability Committee (“ALCO”) as

the body responsible for meeting these objectives.

The ALCO reviews liquidity regularly and evaluates significant changes in strategies

that affect balance sheet or cash flow positions.

Liquidity is centrally managed on a daily basis by the Company’s Chief Financial

Officer and Asset Liability Manager.

Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $890.3 million

at March 31, 2025, and $852.6 million at December 31, 2024, which can and has been used to collateralize borrowings, is an additional

source of liquidity.

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

its liquidity needs.

At March 31, 2025, all eligible commercial real estate, first mortgage residential, agricultural and multi-family

mortgage loans were pledged under an FHLB blanket lien.

cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication

of the ability of the Company to maintain an adequate level of liquidity.

A discussion of the cash flow statements for the three months

ended March 31, 2025, and March 31, 2024 follows.

Company experienced positive cash flows from operating activities for the three months ended March 31, 2025, and March 31, 2024.

cash provided by operating activities was $6.7 million for the three months ended March 31, 2025, and $0.3 million for the three months

ended March 31, 2024.

Highlights for the current year include $39.3 million in proceeds from the sale of loans, which is up from $36.6

million in the prior year.

Originations of loans held for sale was a use of cash of $36.3 million, which is down from $38.4 million in

the prior year .

For the three months ended March 31, 2025, there was a gain on sale of loans of $0.9 million, and depreciation and amortization

on premises and equipment of $0.5 million.

Company experienced positive cash flows from investing activities for the three months ended March 31, 2025, and March 31, 2024.

cash provided by investing activities was $9.2 million for the three months ended March 31, 2025, and $11.7 million for the three months

ended March 31, 2024.

Highlights for the current year include an increase of $23.0 million in loans, which is up $31.6 million from the

prior year three-month period, and $3.0 million paid for the Marblehead acquisition, net of cash acquired.

These cash payments were offset

by $6.1 million in proceeds from maturing securities, and $30.1 million in proceeds from the sale of securities which were acquired from

Company experienced positive cash flows from financing activities for the three months ended March 31, 2025, and negative cash flows

from financing activities for the three months ended March 31, 2024.

Net cash provided by financing activities was $63.3 million for

the three months ended March 31, 2025, and net cash used in financing activities was $8.4 million for the three months ended March 31,

Highlights for the current period include a $45.5 million increase in transaction deposits and a $20.1 million increase in time

deposits for the three months ended March 31, 2025.

This reflects a $0.6 million increase in transaction deposits from the prior year

three-month period and a $22.8 million increase in time deposits.

Net repayments of Federal Home Loan Bank advances for the three months

ended March 31, 2025, were $1.0 million, compared to $48.6 million for the prior year three-month period.

Off-Balance-Sheet

Borrowing Arrangements:

additional off-balance-sheet liquidity is available in the form of FHLB advances and unused federal funds lines from correspondent banks.

Management expects the risk of changes in off-balance-sheet arrangements to be immaterial to earnings.

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

of $890.3 million were pledged to meet FHLB collateralization requirements as of March 31, 2025.

Based on the current collateralization

requirements of the FHLB, the Company had approximately $145.4 million of additional borrowing capacity at March 31, 2025.

also had $64.5 million in unpledged securities available to pledge for additional borrowings.

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

In addition, as of March

31, 2025, the Company had commitments to sell mortgage loans totaling $23.3 million.

The Company believes that it has adequate resources

to fund commitments as they arise and that it can adjust the rate on savings and time deposits to retain deposits in changing interest

rate environments.

If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other

financial institutions are available.

Liability Management

liability management involves developing, executing and monitoring strategies to maintain appropriate liquidity, maximize net interest

income and minimize the impact that significant fluctuations in market interest rates would have on current and future earnings.

business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans,

mortgage-backed securities, and securities available for sale) which are primarily funded by interest-bearing liabilities (deposits and

With the exception of specific loans which are originated and held for sale, all of the financial instruments of the Company

are for other than trading purposes.

All of the Company’s transactions are denominated in U.S.

dollars with no specific foreign

exchange exposure.

In addition, the Company has limited exposure to commodity prices related to agricultural loans.

The impact of changes

in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant.

The Company’s financial instruments

have varying levels of sensitivity to changes in market interest rates resulting in market risk.

Interest rate risk is the Company’s

primary market risk exposure;

to a lesser extent, liquidity risk also impacts market risk exposure.

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

this risk can be an important source of profitability and shareholder value;

however, excessive levels of interest rate risk could pose

a significant threat to the Company’s earnings and capital base.

Accordingly, effective risk management that maintains interest

rate risks at prudent levels is essential to the Company’s safety and soundness.

a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process

used to control interest rate risk and the organization’s quantitative level of exposure.

When assessing the interest rate risk

management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls

are in place to maintain interest rate risks at prudent levels of consistency and continuity.

Evaluating the quantitative level of interest

rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated

financial condition, including capital adequacy, earnings, liquidity and asset quality (when appropriate).

Federal Reserve Board together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation adopted

a Joint Agency Policy Statement on Interest Rate Risk effective June 26, 1996.

The policy statement provides guidance to examiners and

bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest

rate risk management at supervised institutions.

The policy statement also outlines fundamental elements of sound management that have

been identified in prior Federal Reserve Board guidance and discusses the importance of these elements in the context of managing interest

Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive

risk management process that effectively identifies, measures and controls interest rate risk.

institutions derive their income primarily from the excess of interest collected over interest paid.

The rates of interest an institution

earns on its assets and owes on its liabilities generally are established contractually for a period of time.

Since market interest rates

change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes.

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

If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s

interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates.

an institution’s profits could decrease on existing assets because the institution will either have lower net interest income or

possibly, net interest expense.

Similar risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive

assets are funded by longer-term, fixed-rate liabilities in a declining rate environment.

are several ways an institution can manage interest rate risk including:

1) matching repricing periods for new assets and liabilities,

for example, by shortening or lengthening terms of new loans, investments, or liabilities;

2) selling existing assets or repaying certain

and 3) hedging existing assets, liabilities, or anticipated transactions.

An institution might also invest in more complex

financial instruments intended to hedge or otherwise change interest rate risk.

Interest rate swaps, futures contracts, options on futures

contracts, and other such derivative financial instruments can be used for this purpose.

Because these instruments are sensitive to interest

rate changes, they require management’s expertise to be effective.

The Company does not currently utilize any derivative financial

instruments to manage interest rate risk.

As market conditions warrant, the Company may implement various interest rate risk management

strategies, including the use of derivative financial instruments.

Regulatory capital requirements commonly referred

to as “Basel III” were fully phased in as of January 1, 2019, and are reflected in the capital table above.

Management opted

out of the accumulated other comprehensive income treatment under the new requirements and, as such, unrealized gains and losses from

available-for-sale securities will continue to be excluded from State Bank’s regulatory capital.

Liquidity relates primarily to the Company’s

ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses.

Assets used to

satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions,

securities available-for-sale and loans held for sale.

These assets are commonly referred to as liquid assets.

Liquid assets totaled

$289.8 million at June 30, 2025, compared to $235.9 million at December 31, 2024.

Liquidity risk arises from the possibility that

the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant upon

external funding sources.

In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy that

identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity

requirements.

This policy designates the Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives.

The ALCO reviews liquidity regularly and evaluates significant changes in strategies that affect balance sheet or cash flow positions.

Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Asset Liability Manager.

The Company’s commercial real estate, first

mortgage residential, agricultural and multi-family mortgage portfolio of $896.7 million at June 30, 2025, and $852.6 million at December

31, 2024, which can and has been used to collateralize borrowings, is an additional source of liquidity.

Management believes the Company’s

current liquidity level, without these borrowings, is sufficient to meet its liquidity needs.

At June 30, 2025, all eligible commercial

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

The cash flow statements for the periods presented

provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain

an adequate level of liquidity.

A discussion of the cash flow statements for the six months ended June 30, 2025, and June 30, 2024, follows.

The Company experienced positive cash flows from

operating activities for the six months ended June 30, 2025, and negative cash flows from operating activities for the six months ended

June 30, 2024.

Net cash provided by operating activities was $3.1 million for the six months ended June 30, 2025, and net cash used was

$0.1 million for the six months ended June 30, 2024.

Highlights for the current year include $113.6 million in proceeds from the sale

of loans, which is up $21.1 million from the prior year.

Originations of loans held for sale was a use of cash of $118.3 million, which

is up $21.6 million from the prior year.

For the six months ended June 30, 2025, there was a gain on sale of loans of $2.5 million,

and depreciation and amortization on premises and equipment of $1.1 million.

The Company experienced positive cash flows from

investing activities for the six months ended June 30, 2025, and June 30, 2024.

Net cash provided by investing activities was $7.2 million

for the six months ended June 30, 2025, and $3.7 million for the six months ended June 30, 2024.

Highlights for the current year include

an increase of $29.7 million in loans, which is up $24.5 million from the prior year six-month period, and $3.0 million paid for the

Marblehead acquisition, net of cash acquired.

These cash payments were offset by $11.5 million in proceeds from maturing securities,

and $30.1 million in proceeds from the sale of securities which were acquired from Marblehead.

The Company experienced positive cash flows from

financing activities for the six months ended June 30, 2025, and negative cash flows from financing activities for the six months ended

June 30, 2024.

Net cash provided by financing activities was $43.2 million for the six months ended June 30, 2025, and net cash used

in financing activities was $4.6 million for the six months ended June 30, 2024.

Highlights for the current period include a $32.2 million

increase in transaction deposits and a $11.9 million increase in time deposits for the six months ended June 30, 2025.

This reflects

a $9.7 million decrease in transaction deposits from the prior year six-month period and a $8.9 million increase in time deposits.

repayments of Federal Home Loan Bank advances for the six months ended June 30, 2025, were $1.0 million, compared to $48.6 million for

the prior year six-month period.

Off-Balance-Sheet Borrowing Arrangements:

Significant additional off-balance-sheet liquidity

is available in the form of FHLB advances and unused federal funds lines from correspondent banks.

Management expects the risk of changes

in off-balance-sheet arrangements to be immaterial to earnings.

The Company’s commercial

real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $896.7 million were

pledged to meet FHLB collateralization requirements as of June 30, 2025.

Based on the current collateralization requirements of the FHLB,

the Company had approximately $157.0 million of additional borrowing capacity at June 30, 2025.

The Company also had $57.8 million in

unpledged securities available to pledge for additional borrowings.

The Company has contractual obligations consisting

of long-term debt obligations and operating lease obligations.

In addition, as of June 30, 2025, the Company had commitments to sell

mortgage loans totaling $19.5 million.

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

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

If the Company requires

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

Asset Liability Management

Asset liability management involves developing,

executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the impact that significant

fluctuations in market interest rates would have on current and future earnings.

The business of the Company and the composition of its

balance sheet consist of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available

for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings).

With the exception of specific loans

which are originated and held for sale, all of the financial instruments of the Company are for other than trading purposes.

Company’s transactions are denominated in U.S.

dollars with no specific foreign exchange exposure.

In addition, the Company has

limited exposure to commodity prices related to agricultural loans.

The impact of changes in foreign exchange rates and commodity prices

on interest rates are assumed to be insignificant.

The Company’s financial instruments have varying levels of sensitivity to changes

in market interest rates resulting in market risk.

Interest rate risk is the Company’s primary market risk exposure;

extent, liquidity risk also impacts market risk exposure.

Interest rate risk is the exposure of

a banking institution’s financial condition to adverse movements in interest rates.

Accepting this risk can be an important source

of profitability and shareholder value;

however, excessive levels of interest rate risk could pose a significant threat to the Company’s

earnings and capital base.

Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to

the Company’s safety and soundness.

Evaluating a financial institution’s

exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate

risk and the organization’s quantitative level of exposure.

When assessing the interest rate risk management process, the Company

seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain

interest rate risks at prudent levels of consistency and continuity.

Evaluating the quantitative level of interest rate risk exposure

requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition,

including capital adequacy, earnings, liquidity and asset quality (when appropriate).

The Federal Reserve Board together with

the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation adopted a Joint Agency Policy Statement on

Interest Rate Risk effective June 26, 1996.

The policy statement provides guidance to examiners and bankers on sound practices for managing

interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions.

The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve Board

guidance and discusses the importance of these elements in the context of managing interest rate risk.

Specifically, the guidance emphasizes

the need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies,

measures and controls interest rate risk.

Financial institutions derive their income

primarily from the excess of interest collected over interest paid.

The rates of interest an institution earns on its assets and owes

on its liabilities generally are established contractually for a period of time.

Since market interest rates change over time, an institution

is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes.

For example, assume that an institution’s

assets carry intermediate or long-term fixed rates and that those assets are funded with short-term liabilities.

If market interest rates

rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities

may not be sufficiently offset if assets continue to earn at the long-term fixed rates.

Accordingly, an institution’s profits could

decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense.

risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive assets are funded by longer-term, fixed-rate

liabilities in a declining rate environment.

There are several ways an institution

can manage interest rate risk including:

1) matching repricing periods for new assets and liabilities, for example, by shortening or

lengthening terms of new loans, investments, or liabilities;

2) selling existing assets or repaying certain liabilities;

and 3) hedging

existing assets, liabilities, or anticipated transactions.

An institution might also invest in more complex financial instruments intended

to hedge or otherwise change interest rate risk.

Interest rate swaps, futures contracts, options on futures contracts, and other such

derivative financial instruments can be used for this purpose.

Because these instruments are sensitive to interest rate changes, they

require management’s expertise to be effective.

The Company does not currently utilize any derivative financial instruments to

manage interest rate risk.

As market conditions warrant, the Company may implement various interest rate risk management strategies,

including the use of derivative financial instruments.

Quantitative and Qualitative Disclosures About Market Risk

believes there has been no material change in the Company’s market risk from the information contained in the Company’s Annual

Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2024.

Management believes there has been no material

change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with

the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2024.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis