SB FINANCIAL GROUP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Cautionary Statement Regarding Forward-Looking Information



This Quarterly Report on Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains certain
forward-looking statements that are provided to assist in the understanding of
anticipated future financial performance. Forward-looking statements provide
current expectations or forecasts of future events and are not guarantees of
future performance. Examples of forward-looking statements include: (a)
projections of income or expense, earnings per share, the payment or non-payment
of dividends, capital structure and other financial items; (b) statements of
plans and objectives of the Company or our management or Board of Directors,
including those relating to products or services; (c) statements of future
economic performance; (d) statements regarding future customer attraction or
retention; and (e) statements of assumptions underlying such statements. Words
such as "anticipates", "believes", "plans", "intends", "expects", "projects",
"estimates", "should", "may", "would be", "will allow", "will likely result",
"will continue", "will remain", or other similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying those statements. Forward-looking statements are based on
management's expectations and are subject to a number of risks and
uncertainties. Although management believes that the expectations reflected in
such forward-looking statements are reasonable, actual results may differ
materially from those expressed or implied in such statements. Risks and
uncertainties that could cause actual results to differ materially include,
without limitation:



? the ever-changing impact of the novel coronavirus (COVID-19) pandemic – the

the duration, scope and severity of which are not foreseeable, including

the possibility of a further resurgence in the spread of COVID-19 and variants

of which — to national, regional and local economies, supply chains, labor

markets and on our customers, counterparties, employees and third parties

service providers and the impact of various government responses

and non-governmental authorities on the COVID-19 pandemic, including the public

Health measures to contain the COVID-19 pandemic (e.g

such as quarantines, closures and other travel and trade restrictions,

social or other activities), the development, availability and effectiveness

    of vaccines, and the implementation of fiscal stimulus packages;


? current and future economic and financial market conditions, either national

or in the countries in which we do business, including the effects of inflation,

US Tax debts, budget and tax matters, geopolitical matters (including the

conflict a Ukraine) and, in addition, a slowdown in global economic growth

to the ongoing impact of the COVID-19 pandemic on our customers’ operations

and financial condition, any of which may adversely affect ours

The amount and composition of deposits, the quality of available securities

for purchase, the demand for credit, the ability of our borrowers to repay their loans

    loans, and the value of the collateral securing loans;



  ? changes in interest rates resulting from national and local economic

Conditions and the guidelines of the regulatory authorities, including monetary ones

policy of Board of Directors of Federal Reserve Systemwhat maybe

Negatively affect interest rates, interest margins, credit demand and interest rates

    rate sensitivity;


? the volatility of mortgage bank earnings, whether due to interest rates,

    demand, the fair value of mortgage loans, or other factors;


? Factors that may affect the performance of our loan portfolio, including

Changes in property values ​​and liquidity in our main market areas, the

financial health of our borrowers and the success of construction projects

    that we finance;


? moving away from LIBOR as the reference interest rate for financial contracts,

which could adversely affect our income and expenses and the value of various

    financial contracts;


? changes in the performance of customers, suppliers and other counterparties and

Credit rating may be different than expected due to the sequel

inflationary pressures and the ongoing impact of the COVID-19 pandemic;

? Operational Risks, Reputational Risks, Legal and Compliance Risks, and Other

risks related to potential fraud or theft by employees or outsiders,

unauthorized transactions by employees or operational errors or failures,

Disruptions or security breaches of our systems, including those resulting therefrom

   from computer viruses or cyber-attacks;




                                       31



? our ability to protect sensitive or confidential customer information

unauthorized disclosure or access via computer systems and telecommunications

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



  ? a failure in or breach of our operational or security systems or
    infrastructure, or those of our third-party vendors and other service
    providers, resulting in failures or disruptions in customer account

Administrative, ledger, custodial, loan or other systems, including as a

    result of cyber-attacks;


? competitive pressures and factors between financial services companies

increase significantly, including product and pricing pressures, changes

relationships with third parties and our ability to hire and retain qualified personnel

    management and banking personnel;



  ? unexpected losses of services of our key management personnel, or the
    inability to recruit and retain qualified personnel in the future;


? Risks inherent in pursuing strategic growth initiatives, including integration

    and other risks involved in past and possible future acquisitions;


? Uncertainty about the nature, timing, cost and impact of legislation or

regulatory changes in the banking industry or other impacts on the company,

including a comprehensive reform of the regulatory oversight structure of the financial sector

service industry and changes in laws and regulations related to taxes, FDIC

Insurance premiums, pensions, bankruptcy, consumer protection, rent

Regulation and Housing, Financial Accounting and Reporting, Environment

Protection, insurance, banking products and services, bank and bank holding

Corporate capital and liquidity standards, fiduciary standards, securities and

other aspects of the financial services industry and the reforms

provided for in the Coronavirus Aid, Relief and Economic Security (CARES) Act

and the successor legislation in the Consolidated Appropriations Act, 2021 and

    the American Rescue Plan Act of 2021;


? the effects of changes in federal, state and/or local tax laws may be adverse

    affect our reported financial condition or results of operations;


? The effects of changes in accounting policies and practices can be adverse

    affect our reported financial condition or results of operations;


? Litigation and regulatory compliance risk, including costs and implications

any adverse developments in any legal proceedings or other claims and the costs

and the effects of unfavorable decisions by regulators and other government agencies

    examinations or inquiries;


? continuous availability of profits and dividends state bank and excess

Capital sufficient to service our debts and pay dividends to ours

Shareholders in accordance with applicable legal and regulatory requirements;

? our ability to anticipate and successfully keep pace with technology

changes affecting the financial services industry; and

? other risks identified from time to time in the Company’s other records

the Securities and Exchange Commissionincluding the risks listed below

the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report

   Form 10-K for the fiscal year ended December 31, 2021.




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.



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Overview of SB Financial



SB Financial Group, Inc. ("SB Financial") is an Ohio corporation and a financial
holding company registered with the Federal Reserve Board. SB Financial's
wholly-owned subsidiary, The State Bank and Trust Company ("State Bank"), is an
Ohio-chartered bank engaged in commercial banking.



Rurban Statutory Trust II ("RST II") was established in August 2005. In
September 2005, RST II completed a pooled private offering of 10,000 Trust
Preferred Securities with a liquidation amount of $1,000 per security. The
proceeds of the offering were loaned to SB Financial in exchange for junior
subordinated debentures of SB Financial with terms substantially similar to the
Trust Preferred Securities. The sole assets of RST II are the junior
subordinated debentures, and the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by SB Financial of the obligations
of RST II.


RFCBC, Inc. (“RFCBC”) is a Ohio Public company and wholly owned subsidiary of SB Finance that was incorporated Aug 2004. RFCBC acts as a loan subsidiary in the management and processing of problem loans.

State Bank Insurance, LLC (“SBI”) is a Ohio Corporation and a wholly owned subsidiary of state bank established in June 2010. SBI is an insurance company engaged in the sale of insurance products to personal and business customers state bank.

SBFG Title, LLC (“SBFG Title”) is a Ohio company that was formed March 2019. SBFG Title deals in the sale of property insurance services.

SB Captive, Inc. (“SB Captive”) is a Nevada company that was formed March 2019. SB Captive pools insurance risks among banking institutions of the same size.

Unless the context indicates otherwise, all references herein are to “we”, “us”, “our” or the “Company”. SB Finance and its consolidated subsidiaries.

Critical Accounting Principles



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, 2021 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 Loan Losses - The allowance for loan losses provides coverage for
probable losses inherent in the Company's loan portfolio. Management evaluates
the adequacy of the allowance for loan losses each quarter based on changes, if
any, in underwriting activities, loan portfolio composition (including product
mix and geographic, industry or customer-specific concentrations), trends in
loan performance, regulatory guidance and economic factors. This evaluation is
inherently subjective, as it requires the use of significant management
estimates. Many factors can affect management's estimates of specific and
expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.



The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for loan losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.



                                       33




Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors,
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
subjective nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are also factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecise
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment. To the extent that actual
results differ from management's estimates, additional loan loss provisions may
be required that could adversely impact earnings for future periods.



Goodwill and Other Intangibles - The Company records all assets and liabilities
acquired in purchase acquisitions, including goodwill and other intangibles, at
fair value as required. Goodwill is subject, at a minimum, to annual tests for
impairment. Other intangible assets are amortized over their estimated useful
lives using straight-line or accelerated methods, and are subject to impairment
if events or circumstances indicate a possible inability to realize the carrying
amount. The initial goodwill and other intangibles recorded and subsequent
impairment analysis requires management to make subjective judgments concerning
estimates of how the acquired asset will perform in the future. Events and
factors that may significantly affect the estimates include, among others,
customer attrition, changes in revenue growth trends, specific industry
conditions and changes in competition. A decrease in earnings resulting from
these or other factors could lead to an impairment of goodwill that could
adversely impact earnings for future periods.



Three months ended 09/30/2022 compared to Three Months Ended September 30, 2021



Net Income: Net income for the third quarter of 2022 was $3.3 million compared
to net income of $4.1 million for the third quarter of 2021, a decrease of 18.5
percent. Diluted earnings per share ("DEPS") of $0.47 were down 19.0 percent
from DEPS of $0.58 for the third quarter of 2021. Net income for the third
quarter of 2022 was positively impacted by the Company's recapture of temporary
impairment of $0.07 million on its mortgage servicing rights, while net income
for the 2021 third quarter was positively impacted by a recovery of mortgage
servicing rights of $0.25 million. Net income for the third quarter of 2022 was
negatively impacted by the significant decline in mortgage loan volume and loan
sales, as compared to the same period in 2021, as rising rates have nearly
eliminated all refinance activity and continued compression of available housing
inventory has constrained new purchase volume. Mortgage loan volume was down
over 55 percent during the third quarter of 2022, and a lower percentage of
originated volume was sold on the secondary market, as compared to the same
period in 2021. In addition, Paycheck Protection Program ("PPP") related revenue
compared to the prior year was down by $1.13 million.



Provision for Loan Losses: The third quarter provision for loan losses was zero
as compared to $0.3 million for the prior year quarter. Net recoveries for the
quarter were $23,000 compared to net recoveries of $206,000 for the year-ago
quarter. Total delinquent loans ended the quarter at $2.9 million, or 0.31
percent of total loans, which is flat to the prior year.



Asset Quality Review - For the Period Ended      September 30,       September 30,
($ in thousands)                                     2022                2021

Net recoveries - QTD/YTD                            ($23)/($19)       ($206)/($188)
Nonaccruing loans                                         3,746               3,188
Accruing Troubled Debt Restructures                         667            

805

Nonaccruing and restructured loans                        4,413            

3,993

OREO / Other Assets Owned (OAO)                             756            

1,601

Nonperforming assets                                      5,169            

5,594

Nonperforming assets/Total assets                          0.40 %              0.42 %
Allowance for loan losses/Total loans                      1.49 %              1.63 %
Allowance for loan losses/Nonperforming loans             313.2 %          
  351.5 %




                                       34




Consolidated Revenue: Total revenue, consisting of net interest income and
noninterest income, was $14.5 million for the third quarter of 2022, a decrease
of $2.2 million, or 13.2 percent, from the $16.7 million generated during the
third quarter of 2021.



Net interest income ("NII") for the third quarter of 2022 was $10.4 million,
which was up $0.4 million from the prior year third quarter's $10.0 million.
Comparing the third quarter of 2022 to the prior year third quarter, the
Company's earning assets decreased $43.8 million, but the average yield on
earning assets increased by 47 basis points. The net interest margin, for the
third quarter of 2022 was 3.46 percent compared to 3.21 percent for the third
quarter of 2021. Funding costs (interest paid to consumers and other entities)
for interest bearing liabilities for the third quarter of 2022 were 0.58 percent
compared to 0.44 percent for the prior year third quarter. PPP fees and interest
increased the 2021 net interest margin by 31 basis points.



Noninterest income was $4.0 million for the third quarter of 2022, which was
down $2.6 million from the prior year third quarter's $6.6 million. In addition
to the mortgage revenue detailed below, wealth management revenue was $0.9
million for the third quarter of 2022. Recapture of our mortgage servicing
rights impairment increased noninterest income by $0.07 million in the quarter.
Our title agency contributed revenue of $0.5 million in the third quarter of
2022, even to the prior year. Noninterest income as a percentage of average
assets for the third quarter of 2022 was 1.24 percent compared to 1.99 percent
for the prior year third quarter.



State Bank originated $68.6 million of mortgage loans for the third quarter of
2022, of which $39.2 million was sold with the remainder of loans held for
investment. This compares to $152.6 million originated for the third quarter of
2021, of which $123.1 million was sold with the remainder of loans held for
investment. These third quarter 2022 originations and subsequent sales resulted
in $0.9 million of gains, down $3.1 million from the gains for the third quarter
of 2021. Net mortgage banking revenue was $1.4 million for the third quarter of
2022 compared to $4.1 million for the third quarter of 2021. The 2022 third
quarter included a $0.07 million recapture of our mortgage servicing rights
impairment compared to a $0.25 million valuation recapture for the third quarter
of 2021. As detailed above, mortgage loan originations have decreased
significantly in 2022 as rising rates have reduced refinance activity and
compressed inventories of available housing have constrained new purchase
volume.



Consolidated Noninterest Expense:Noninterest expense for the third quarter of
2022 was $10.4 million, which was down $0.9 million compared to $11.3 million in
the prior-year third quarter. The third quarter of 2022 included lower
commission and incentives on mortgage sales, offset by higher equipment expense
due to several technology related improvements.



Income Taxes: Income taxes for the third quarter of 2022 were $0.7 million
(effective interest rate of 18.2 percent). $1.0 million (effective interest rate of 19.8 percent) for the third quarter of 2021.

Nine months over 09/30/2022 compared to Nine Months Ended September 30, 2021



Net Income: Net income for the first nine months of 2022 was $9.0 million
compared to net income of $14.9 million for the first nine months of 2021, a
decrease of 39.9 percent. DEPS of $1.27 were down 38.9 percent from DEPS of
$2.08 for the first nine months of 2021. Net income for both periods were
positively impacted by the recapture of the Company's temporary mortgage
servicing rights impairment in the amounts of $1.2 million and $2.9 million for
the first nine months of 2022 and 2021, respectively. Net income for the first
nine months of 2022 was negatively impacted by the significant decline in
mortgage loan volume and loan sales, as compared to the same period in 2021, as
rising rates reduced refinance activity and compressed inventories of available
housing constrained new purchase volume. Mortgage loan volume was down nearly 45
percent from the prior year and a lower percentage of originated volume was
sold
on the secondary market.


Credit growth since December 31, 2021 was $102.7 million with remaining balance on PPP loans up to $0.1 million at 09/30/2022.



Provision for Loan Losses: Provision for loan losses for the first nine months
of 2022 was $0.0 million, compared to $1.05 million for the year-ago period. The
Company had net recoveries of $19,000 for the first nine months of 2022 compared
to net recoveries of $188,000 for the year-ago period.



Consolidated Revenue: Total revenue, consisting of net interest income and noninterest income, was $43.0 million for the first nine months of 2022 a decrease of $9.9 millionor 18.7 percent, from $52.9 million generated in the first nine months of 2021.


                                       35





Net interest income was $28.5 million for the first nine months of 2022, which
was down $0.3 million from $28.8 million for the prior year first nine months.
Included in NII for the first nine months of 2022 was $0.1 million in fees and
interest from PPP loans compared to $3.3 million for the prior year first nine
months. Comparing the first nine months of 2022 to the first nine months of
2021, the Company's earning assets decreased $4.4 million, and the yield on
average earning assets decreased 2 basis points. The net interest margin for the
first nine months of 2022 was 3.09 percent compared to 3.12 percent for the
first nine months of 2021. Funding costs for interest bearing liabilities for
the first nine months of 2022 were 0.45 percent compared to 0.46 percent for the
prior year similar period.



Noninterest income was $14.5 million for the first nine months of 2022, which
was down $9.6 million from $24.1 million for the prior year first nine months.
In addition to the mortgage revenue detailed below, wealth management revenue
was $2.8 million. During the first nine months, we sold $3.7 million in Small
Business Administration ("SBA") loans, with gains on sale of $0.5 million. Our
title agency contributed revenue of $1.8 million in the first nine months of
2022. Noninterest income as a percentage of average assets for the first nine
months of 2022 was 1.47 percent compared to 2.44 percent for the prior year
first nine months.



State Bank originated $261.4 million of mortgage loans for the first nine months
of 2022, which resulted in $161.2 million in loan sales, with the remainder of
loans held for investment. This compares to $473.3 million originated for the
first nine months of 2021, of which $378.9 million of loans were sold with the
remainder of loans held for investment. These originations and subsequent sales
resulted in $3.7 million of gains for the first nine months of 2022, compared to
$14.1 million of gains for the first nine months of 2021. Net mortgage banking
revenue was $6.1 million for the first nine months of 2022 compared to $16.4
million for the first nine months of 2021.



Consolidated Noninterest Expense:Noninterest expense for the first nine months
of 2022 was $32.0 million, which was down $1.2 million compared to the $33.2
million in the prior-year first nine months. For the year to date in 2022, lower
incentives on mortgage activity and higher unfilled salaried positions
throughout the Company, were offset by higher data processing and professional
fee expense due to expanded implementation of technology solutions.



Income Taxes: Income taxes for the first nine months of 2022 were $2.0 million
(effective rate of 18.1 percent) compared to $3.7 million (effective rate of
19.8 percent) for the first nine months of 2021. In addition to the impact of
the lower pretax income, the first nine months of 2022 was impacted by having
additional earning assets that are tax free in nature.



Changes in Financial Position

Total assets at September 30, 2022 were $1.30 billion, a decrease of $27.5
million, or 2.1 percent, since December 31, 2021. Total loans, net of unearned
income, were $925.2 million as of September 30, 2022, up $102.7 million, or 12.5
percent, from year-end. PPP loan balances of $0.1 million and $2.0 million were
included in our total loans at September 30, 2022 and December 31, 2021,
respectively.



Total deposits at September 30, 2022 were $1.09 billion, a decrease of $27.2
million, or 2.4 percent, since 2021 year end. Borrowed funds (consisting of FHLB
advances, federal funds borrowed, REPO agreements, trust preferred securities
and subordinated debt) totaled $84.6 million at September 30, 2022. This is up
from year-end 2021 when borrowed funds totaled $50.7 million due to an increase
in REPO agreements and FHLB advances. Total equity for the Company of $114.6
million now stands at 8.8 percent of total assets compared to the December 31,
2021 level of $144.9 million and 10.9 percent of total assets. The reduction was
due to a $31.6 million increase in the unrealized loss on the Company's
investment portfolio.



The allowance for loan loss of $13.8 million is flat from the December 2021 year
end level. The Company's loan growth was offset by continued improvement of
overall asset quality metrics, including reductions in non-performing assets and
delinquencies.



                                       36





Other liabilities are down $4.3 million from December 31, 2021 due to escrow
balances held for our serviced mortgage customers at December 31 that were paid
in the first quarter of 2022, and a reclassification of deferred taxes resulting
from a change in unrealized losses in the securities portfolio.



Capital Resources



As of September 30, 2022, based on the computations for the FFIEC 041
Consolidated Reports of Condition and Income filed by State Bank with the
Federal Reserve Board, State Bank was classified as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, State Bank must maintain capital ratios as set forth in the table
below. There are no conditions or events since September 30, 2022 that
management believes have changed State Bank's capital classification.



state banks actual capital levels and ratios as of 09/30/2022 and
December 31, 2021 are shown in the table below. Capital levels are presented for state bank only as the company is exempt from quarterly reporting of the amount of capital at holding company level:


                                                                                          To Be Well Capitalized Under
                                                         For Capital Adequacy               Prompt Corrective Action
                                Actual                         Purposes                            Procedures
($ in thousands)         Amount         Ratio          Amount             Ratio             Amount                Ratio

As of September 30,
2022
Tier I Capital to
average assets          $ 142,787         10.95 %   $      52,136              4.0 %   $          65,170               5.0 %
Tier I Common equity
capital to
risk-weighted assets      142,787         13.32 %          48,221              4.5 %              69,653               6.5 %

Tier I Capital to
risk-weighted assets      142,787         13.32 %          64,295              6.0 %              85,727               8.0 %
Total Risk-based
capital to
risk-weighted assets      156,187         14.58 %          85,727          
   8.0 %             107,158              10.0 %

As of December 31,
2021
Tier I Capital to
average assets          $ 133,202         10.18 %   $      52,324              4.0 %   $          65,405               5.0 %
Tier I Common equity
capital to
risk-weighted assets      133,202         13.94 %          42,986              4.5 %              62,090               6.5 %

Tier I Capital to
risk-weighted assets      133,202         13.94 %          57,314              6.0 %              76,419               8.0 %
Total Risk-based
capital to
risk-weighted assets      145,165         15.20 %          76,419          
   8.0 %              95,523              10.0 %




Regulatory capital requirements commonly referred to as "Basel III" were fully
phased in as of January 1, 2019 and are reflected in the September 30, 2022
capital table above. Management opted out of the accumulated other comprehensive
income treatment under the new requirements and, as such, unrealized gains and
losses from available-for-sale securities will continue to be excluded from
State Bank's regulatory capital.



                                       37





LIQUIDITY



Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash and due from banks, federal
funds sold, interest-earning deposits in other financial institutions,
securities available-for-sale and loans held for sale. These assets are commonly
referred to as liquid assets. Liquid assets totaled $276.3 million at September
30, 2022, compared to $422.9 million at December 31, 2021.



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 $730.9 million at September 30, 2022 and
$645.1 million at December 31, 2021, 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 September 30, 2022, all eligible
commercial real estate, first mortgage residential 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 nine months ended September 30, 2022 and 2021 follows.



The Company experienced positive cash flows from operating activities for the
nine months ended September 30, 2022 and September 30, 2021. Net cash provided
by operating activities was $12.8 million for the nine months ended September
30, 2022 and $6.0 million for the nine months ended September 30, 2021.
Highlights for the current year include $165.3 million in proceeds from the sale
of loans, which is down $213.6 million from the prior year. Originations of
loans held for sale was a use of cash of $158.3 million, which is down from the
prior year by $213.2 million. For the nine months ended September 30, 2022,
there was a gain on sale of loans of $4.2 million, and depreciation and
amortization of $1.6 million.



The Company experienced negative cash flows from investing activities for the
nine months ended September 30, 2022 and September 30, 2021. Net cash used in
investing activities was $133.0 million for the nine months ended September 30,
2022 and $77.9 million for the nine months ended September 30, 2021. Highlights
for the current year include purchases of available-for-sale securities of $50.6
million. These cash payments were offset by $29.9 million in proceeds from
maturities and sales of securities, which is down $4.7 million from the prior
year nine-month period. The Company experienced a $102.7 million increase in
loans, which is up $127.4 million from the prior year nine-month period.



The Company experienced negative cash flows from financing activities for the
nine months ended September 30, 2022 and positive cash flows for the nine months
ended September 30, 2021. Net cash used by financing activities was $1.4 million
for the nine months ended September 30, 2022 and net cash provided by financing
activities was $69.2 million for the nine months ended September 30, 2021.
Highlights for the current period include a $45.9 million decrease in
transaction deposits for the nine months ended September 30, 2022, which is down
$179.5 million from the prior year. Certificates of deposit increased by $18.7
million in the current year compared to a decrease of $71.0 million for the
prior year nine-month period. Net proceeds from Federal Home Loan Bank advances
for the nine months ended September 30, 2022 were $29.5 million, an increase of
$27.0 million from the prior year nine-month period.



                                       38





ALCO uses an economic value of equity ("EVE") analysis to measure risk in the
balance sheet incorporating all cash flows over the estimated remaining life of
all balance sheet positions. The EVE analysis calculates the net present value
of the Company's assets and liabilities in rate shock environments that range
from -400 basis points to +400 basis points. The likelihood of a significant
decrease in rates as of September 30, 2022 and December 31, 2021 was considered
unlikely given the current interest rate environment and therefore, only the
minus 100 and 200 basis point rate change was included in this analysis. The
results are reflected in the following tables for September 30, 2022 and
December 31, 2021.



                            Economic Value of Equity
                               September 30, 2022
                                ($ in thousands)



Change in rates     $ Amount      $ Change       % Change
+400 basis points   $ 291,715     $   8,927           3.16 %
+300 basis points     292,161         9,374           3.31 %
+200 basis points     290,280         7,492           2.65 %
+100 basis points     287,523         4,736           1.67 %
Base Case             282,788             -              -
-100 basis points     273,051        (9,737 )        -3.44 %
-200 basis points     257,735       (25,053 )        -8.86 %




                            Economic Value of Equity
                               December 31, 2021
                                ($ in thousands)

Change in rates     $ Amount      $ Change      % Change
+400 basis points   $ 278,254     $  35,684         14.71 %
+300 basis points     273,190        30,620         12.62 %
+200 basis points     265,711        23,142          9.54 %
+100 basis points     256,110        13,540          5.58 %
Base Case             242,570             -             -
-100 basis points     217,281       (25,289 )      -10.43 %



Off-balance sheet borrowings:

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 $732.4 million were
pledged to meet FHLB collateralization requirements as of September 30, 2022.
Based on the current collateralization requirements of the FHLB, the Company had
approximately $92.3 million of additional borrowing capacity at September 30,
2022. The Company also had $154.6 million in unpledged securities available to
pledge for additional borrowings.



The Company's contractual obligations as of September 30, 2022 were comprised of
long-term debt obligations, other debt obligations, operating lease obligations
and other long-term liabilities. Long-term debt obligations were comprised of
trust preferred securities of $10.3 million, and subordinated debt of $20.0
million, or $19.5 million, net of issuance costs. Total time deposits at
September 30, 2022 were $175.2 million, of which $144.2 million mature beyond
one year.


In addition, as of September 30, 2022, the Company had commitments to sell
mortgage loans totaling $9.3 million. The Company believes that it has adequate
resources to fund commitments as they arise and that it can adjust the rate on
savings certificates 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.

                                       39





ASSET LIABILITY MANAGEMENT



Asset liability management involves developing, executing and monitoring
strategies to maintain appropriate liquidity, maximize net interest income and
minimize the impact that significant fluctuations in market interest rates would
have on current and future earnings. The business of the Company and the
composition of its balance sheet consist of investments in interest-earning
assets (primarily loans, mortgage-backed securities, and securities available
for sale) which are primarily funded by interest-bearing liabilities (deposits
and borrowings). With the exception of specific loans which are originated and
held for sale, all of the financial instruments of the Company are for other
than trading purposes. All of the Company's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. In addition, the Company has
limited exposure to commodity prices related to agricultural loans. The impact
of changes in foreign exchange rates and commodity prices on interest rates are
assumed to be insignificant. The Company's financial instruments have varying
levels of sensitivity to changes in market interest rates resulting in market
risk. Interest rate risk is the Company's primary market risk exposure; to a
lesser extent, liquidity risk also impacts market risk exposure.



Interest rate risk is the exposure of a banking institution's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and shareholder value; however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risks at prudent levels is essential to the Company's safety
and
soundness.


Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
interest rate risk and the organization's quantitative level of exposure. When
assessing the interest rate risk management process, the Company seeks to ensure
that appropriate policies, procedures, management information systems and
internal controls are in place to maintain interest rate risks at prudent levels
of consistency and continuity. Evaluating the quantitative level of interest
rate risk exposure requires the Company to assess the existing and potential
future effects of changes in interest rates on its consolidated financial
condition, including capital adequacy, earnings, liquidity and asset quality
(when appropriate).



The Federal Reserve Board together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation adopted a Joint Agency
Policy Statement on Interest Rate Risk effective June 26, 1996. The policy
statement provides guidance to examiners and bankers on sound practices for
managing interest rate risk, which will form the basis for ongoing evaluation of
the adequacy of interest rate risk management at supervised institutions. The
policy statement also outlines fundamental elements of sound management that
have been identified in prior Federal Reserve Board guidance and discusses the
importance of these elements in the context of managing interest rate risk.
Specifically, the guidance emphasizes the need for active board of director and
senior management oversight and a comprehensive risk management process that
effectively identifies, measures and controls interest rate risk.



Financial institutions derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest rate
changes. For example, assume that an institution's assets carry intermediate or
long-term fixed rates and that those assets are funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or possibly, net interest expense. 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.



                                       40





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.

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