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

Caution 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-evolving effects of the novel coronavirus (COVID-19) pandemic – the

the duration, extent and severity of which are impossible to predict, including the

possibility of further resurgence of the spread of COVID-19 and its variants

– on national, regional and local economies, supply chains, workforce

markets and on our customers, counterparties, employees and third-party services

suppliers, as well as the effects of the various responses of governments and

non-governmental authorities to the COVID-19 pandemic, including public health

actions to contain the COVID-19 pandemic (such as

quarantines, closures and other travel and business, social restrictions

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

vaccines and the implementation of fiscal stimulus plans;

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

or in the states in which we operate, including the effects of inflation,

WE tax debt, budget and tax issues, geopolitical issues (including

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

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

and financial condition, any of which may adversely affect our

the levels and composition of deposits, the quality of investment securities available

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

loans and the value of collateral securing the loans;

? changes in interest rates resulting from national and local economic conditions

and the policies of regulatory authorities, including the monetary policies of the

Board of Governors of the Federal Reserve Systemwhich can harm

interest rates, interest margins, loan demand and interest rate sensitivity;

? the volatility of mortgage banking income, whether due to interest rates,

demand, fair value of mortgages or other factors;

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

changes in real estate values ​​and liquidity in our main market areas, the

the financial health of our borrowers and the success of construction projects that

   we finance;



? the abandonment of LIBOR as a reference rate for financial contracts,

which could negatively impact our income and expenses and the value of various

   financial contracts;



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

solvency may be different than expected due to continued impact

and the different responses to the COVID-19 pandemic;

? operational risks, reputational risks, legal and compliance risks, and others

risks related to possible fraud or theft by employees or third parties,

unauthorized transactions by employees or operational errors or failures,

disruptions or security breaches of our systems, including those resulting from

computer viruses or cyber attacks;



                                       31



? our ability to secure sensitive or confidential customer information against

unauthorized disclosure or access through computer and telecommunications systems

networks, including those of our third-party providers and other services

service providers, who may prove to be insufficient;

? a failure or breach of our operational or security systems or

infrastructure, or those of our third-party providers and other services

suppliers, resulting in failures or disruptions in the management of customer accounts,

ledger, deposit, loan or other systems, including as a result of

   cyber-attacks;



? competitive pressures and factors between financial services organizations could

increase significantly, including product and price pressures, changes

relationships with third parties and our ability to recruit and retain

management and banking staff;

? unexpected losses of service from our key management personnel, or the inability

recruiting and retaining qualified personnel in the future;

? risks inherent in pursuing strategic growth initiatives, including the integration

and other risks relating to past and potential future acquisitions;

? uncertainty regarding the nature, timing, cost and effect of legislative or

regulatory changes in the banking sector or otherwise affecting the Company,

including a major reform of the regulatory oversight structure of the

the service industry and changes in tax laws and regulations, FDIC

insurance premium levels, pensions, bankruptcy, consumer protection, rent

regulation and housing, accounting and financial reporting, environment

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

company capital and liquidity standards, fiduciary standards, securities and

other aspects of the financial services sector, as well as the reforms

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

and follow-on legislation in the Consolidated Appropriations and Credits Act 2021

the US Rescue Plan Act of 2021;

? the effect of changes in federal, state and/or local tax laws may

affect our financial condition or reported results of operations;

? the effect of changes in accounting methods and practices may have an adverse effect on

our reported financial condition or results of operations;

? exposure to litigation and regulatory compliance, including costs and effects

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

and the effects of adverse resolution of regulations and other

examinations or investigations;

? the continued availability of earnings and dividends from State Bank and excess

sufficient capital to service our debt and pay dividends to our

shareholders in compliance with applicable legal and regulatory obligations;

? our ability to anticipate and successfully follow technological developments

affecting the financial services industry; and

? other risks identified from time to time in other documents filed by the Company with

the Security and Exchange Commissionincluding the risks identified under

the item “Item 1A. Risk Factors” of Part I of the Company’s annual report on

   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.



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.



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RFCBC, Inc. (“RFCBC”) is a Ohio company and wholly owned subsidiary of SB Financial which was incorporated into August 2004. RFCBC operates as a lending affiliate in the servicing and structuring of problem loans.

State Bank Insurance, LLC (“SBI”) is a Ohio company and a wholly owned subsidiary of State Bank incorporated in June 2010. SBI is an insurance company that sells insurance products to retail and commercial customers of State Bank.

Title SBFG, LLC (“SBFG Title”) is a Ohio company which was incorporated in March 2019. SBFG Title engages in the sale of title insurance services.

SB Captive, Inc. (“SB Captive”) is a Nevada company which was incorporated in March 2019. SB Captive pools insurance risks between banking institutions of the same size.

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

Critical accounting policies



Note 1 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 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 credit 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.



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.



                                       33





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 completed June 30, 2022 compared to the three months ended June 30, 2021



Net Income: Net income for the second quarter of 2022 was $2.8 million compared
to net income of $3.8 million for the second quarter of 2021, a decrease of 24.6
percent. Diluted earnings per share ("DEPS") of $0.40 were down 23.1 percent
from DEPS of $0.52 for the second quarter of 2021. Net income for the second
quarter of 2022 was positively impacted by the Company's recapture of temporary
impairment of $0.24 million on its mortgage servicing rights. The 2021 second
quarter was negatively impacted by temporary impairment of mortgage servicing
rights of $0.1 million. Net income for the second 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 reduced refinance activity
and compressed inventories of available housing constrained new purchase volume.
Mortgage loan volume was down nearly 42 percent during the second 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 $2.05
million.


Provision for Loan Losses: The second quarter provision for loan losses was zero
for both the current and prior year quarters. The total reserve level of $13.8
million is up nearly 4 percent from the prior year. Given that level of reserve
(1.54 percent), zero provision for the quarter was appropriate. Net charge-offs
for the quarter were $3,000 compared to net charge-offs of $20,000 for the
year-ago quarter. Total delinquent loans ended the quarter at $2.9 million, or
0.32 percent of total loans, which is down $0.6 million from the prior year.



Asset Quality Review – For the Period Ended June 30th, June 30th(in thousands of dollars)

                                   2022          2021

Net charge-offs - QTD/YTD                           $3/$4        $20/$18
Nonaccruing loans                                   3,998         3,615
Accruing Troubled Debt Restructures                  683           758
Nonaccruing and restructured loans                  4,681         4,373
OREO / Other Assets Owned (OAO)                      730          1,603
Nonperforming assets                                5,411         5,976
Nonperforming assets/Total assets                   0.42   %      0.46   %
Allowance for loan losses/Total loans               1.54   %      1.56   %
Allowance for loan losses/Nonperforming loans       294.8  %      304.3  %




Consolidated Revenue: Total revenue, consisting of net interest income and
noninterest income, was $14.3 million for the second quarter of 2022, a decrease
of $1.4 million, or 9.1 percent, from the $15.7 million generated during the
second quarter of 2021.



                                       34




Net interest income ("NII") was $9.6 million, which is up $0.4 million from the
prior year second quarter's $9.2 million. The Company's earning assets decreased
$35.1 million, but the average yield on earning assets increased by 20 basis
points. The net interest margin, for the second quarter of 2022 was 3.16 percent
compared to 2.93 percent for the second quarter of 2021. Funding costs (interest
paid to consumers and other entities) for interest bearing liabilities for the
second quarter of 2022 were 0.39 percent compared to 0.44 percent for the prior
year second quarter. PPP fees and interest increased the 2021 net interest
margin by 12 basis points.



Noninterest income was $4.7 million for the second quarter of 2022, which was
down $1.9 million from the prior year second quarter's $6.5 million. In addition
to the mortgage revenue detailed below, wealth management revenue was $0.9
million. Recapture of our mortgage servicing rights impairment increased
noninterest income by $0.2 million in the quarter. Our title agency contributed
revenue of $0.7 million in the second quarter of 2022, up $0.2 million from the
prior year. Noninterest income as a percentage of average assets for the second
quarter of 2022 was 1.43 percent compared to 1.97 percent for the prior year
second quarter.



State Bank originated $95.4 million of mortgage loans for the second quarter of
2022, of which $49.9 million was sold with the remainder of loans held for
investment. This compares to $164.9 million originated for the second quarter of
2021, of which $119.1 million was sold with the remainder of loans held for
investment. These second quarter 2022 originations and subsequent sales resulted
in $1.2 million of gains, down $3.1 million from the gains for the second
quarter of 2021. Net mortgage banking revenue was $1.8 million for the second
quarter of 2022 compared to $4.0 million for the second quarter of 2021. The
2022 second quarter included a $0.2 million recapture of our mortgage servicing
rights impairment compared to a $0.1 million valuation impairment for the second
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 second quarter of
2022 was $10.8 million, which was down $0.3 million compared to $11.1 million in
the prior-year second quarter. The second 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 second quarter of 2022 have been $0.6 million
(effective rate of 18.2%) compared to $0.9 million (effective rate of 18.6%) for the second quarter of 2021.

Semester completed June 30, 2022 compared to the half-year ended June 30, 2021



Net Income: Net income for the first six months of 2022 was $5.6 million
compared to net income of $10.8 million for the first six months of 2021, a
decrease of 47.9 percent. DEPS of $0.79 were down 47.0 percent from DEPS of
$1.49 for the first six 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 $1.1 million and $2.6 million for
the first six months of 2022 and 2021, respectively. Net income for the first
six 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 40
percent from the prior year and a lower percentage of originated volume was
sold
on the secondary market.


Loan growth since December 31, 2021 has been $72.9 million with remaining balances on PPP loans reduced to $0.6 million at June 30, 2022.



Provision for Loan Losses: Provision for loan losses for the first six months of
2022 was $0.0 million, compared to $0.75 million for the year-ago period. The
Company had net charge-offs of $4,000 for the first six months of 2022 compared
to net charge-offs of $18,000 for the year-ago period.



                                       35




Consolidated revenues: total revenues, made up of net interest income and non-interest income, have been $28.5 million for the first six months of 2022, a decrease of $7.7 millionor 21.2 percent, of the $36.2 million generated in the first six months of 2021.



Net interest income was $18.1 million for the first six months of 2022, which
was down $0.7 million from $18.8 million for the prior year first six months.
Included in NII for the first six months of 2022 was $0.1 million in fees and
interest from PPP loans compared to $2.2 million for the prior year first six
months. The Company's earning assets increased $15.7 million, but the yield on
average earning assets decreased 20 basis points. The net interest margin for
the first six months of 2022 was 2.91 percent compared to 3.06 percent for the
first six months of 2021. Funding costs for interest bearing liabilities for the
first six months of 2022 were 0.38 percent compared to 0.47 percent for the
prior year similar period.



Noninterest income was $10.5 million for the first six months of 2022, which was
down $7.0 million from $17.5 million for the prior year first six months. In
addition to the mortgage revenue detailed below, wealth management revenue was
$1.9 million. Recapture of mortgage servicing rights impairment increased
noninterest income by $1.1 million in the period, compared to an increase of
$2.6 million in the prior year. During the first six months, we sold $2.7
million in Small Business Administration ("SBA") loans, with gains on sale of
$0.3 million. Our title agency contributed revenue of $1.3 million in the first
six months of 2022. Noninterest income as a percentage of average assets for the
first six months of 2022 was 1.58 percent compared to 2.67 percent for the
prior
year first six months.



State Bank originated $192.8 million of mortgage loans for the first six months
of 2022, which resulted in $122.1 million in loan proceeds, with the remainder
of loans held for investment. This compares to $320.7 million originated for the
first six months of 2021, of which $255.8 million of loans were sold with the
remainder of loans held for investment. These originations and subsequent sales
resulted in $2.9 million of gains, compared to $10.1 million of gains for the
first six months of 2021. Net mortgage banking revenue was $4.7 million for the
first six months of 2022 compared to $12.3 million for the first six months
of
2021.



Consolidated Noninterest Expense:Noninterest expense for the first six months of
2022 was $21.7 million, which was down slightly compared to the $22.0 million in
the prior-year first six months. The first half of 2022 included lower
incentives on mortgage activity and higher unfilled salaried positions
throughout the Company, which was offset by higher data processing and
professional fee expense due to expanded implementation of technology solutions.



Income Taxes: Income taxes for the first six months of 2022 were $1.2 million
(effective rate of 18.0 percent) compared to $2.7 million (effective rate of
19.7 percent) for the first six months of 2021. In addition to the impact of the
lower pretax income, the first six months of 2022 was impacted by having
additional earning assets that are tax free in nature.



Changes in financial situation



Total assets at June 30, 2022 were $1.29 billion, a decrease of $36.9 million,
or 2.8 percent, since December 31, 2021. Total loans, net of unearned income,
were $895.6 million as of June 30, 2022, up $73.0 million, or 8.9 percent, from
year-end. PPP loan balances of $0.6 million and $2.0 million were included in
our total loans at June 30, 2022 and December 31, 2021, respectively.



Total deposits at June 30, 2022 were $1.07 billion, a decrease of $41.3 million
or 3.77 percent since 2021 year end. Borrowed funds (consisting of FHLB
advances, federal funds borrowed, REPO agreements, trust preferred securities
and subordinated debt) totaled $85.7 million at June 30, 2022. This is up from
year-end 2021 when borrowed funds totaled $50.7 million due to an increase in
REPO agreements, federal funds borrowed, and FHLB advances. Total equity for the
Company of $124.6 million now stands at 9.6 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 $20.4 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.



Other liabilities are down $10.2 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.



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Capital Resources



As of June 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 June 30, 2022 that management believes have
changed State Bank's capital classification.



State Bank's actual capital levels and ratios as of June 30, 2022 and December
31, 2021 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:



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

As of June
30, 2022
Tier I
Capital to
average
assets          $ 139,209       10.72 %   $      51,953            4.0 %   $        64,941           5.0 %
Tier I Common
equity
capital to
risk-weighted
assets            139,209       13.21 %          47,426            4.5 %   
        68,505           6.5 %

Tier I
Capital to
risk-weighted
assets            139,209       13.21 %          63,235            6.0 %            84,313           8.0 %
Total
Risk-based
capital to
risk-weighted
assets            152,372       14.46 %          84,313            8.0 %           105,392          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 June 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.



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 $301.7 million at June 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 $706.5 million at June 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 June 30, 2022, all eligible
commercial real estate, first mortgage residential and multi-family mortgage
loans were pledged under an FHLB blanket lien.



                                       37




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, 2022 and 2021 follows.



The Company experienced positive cash flows from operating activities for the
six months ended June 30, 2022 and June 30, 2021. Net cash provided by operating
activities was $3.7 million for the six months ended June 30, 2022 and $2.0
million for the six months ended June 30, 2021. Highlights for the current year
include $125.1 million in proceeds from the sale of loans, which is down $130.7
million from the prior year. Originations of loans held for sale was a use of
cash of $119.9 million, which is down from the prior year by $129.6 million. For
the six months ended June 30, 2022, there was a gain on sale of loans of $3.2
million, and depreciation and amortization of $1.1 million.



The Company experienced negative cash flows from investing activities for the
six months ended June 30, 2022 and June 30, 2021. Net cash used in investing
activities was $111.3 million for the six months ended June 30, 2022 and $43.4
million for the six months ended June 30, 2021. Highlights for the current year
include purchases of available-for-sale securities of $50.6 million. These cash
payments were offset by $21.4 million in proceeds from maturities and sales of
securities, which is down $1.9 million from the prior year six-month period. The
Company experienced a $73.1 million increase in loans, which is up $93.7 million
from the prior year six-month period.



The Company experienced negative cash flows from financing activities for the
six months ended June 30, 2022 and positive cash flows for the six months ended
June 30, 2021. Net cash used by financing activities was $12.3 million for the
six months ended June 30, 2022 and net cash provided by financing activities was
$55.6 million for the six months ended June 30, 2021. Highlights for the current
period include a $27.0 million decrease in transaction deposits for the six
months ended June 30, 2022, which is down $125.9 million from the prior year.
Certificates of deposit decreased by $14.2 million in the current year compared
to $56.9 million for the prior year six-month period. Proceeds from Federal Home
Loan Bank advances for the six months ended June 30, 2022 were $25.0 million, an
increase of $25.0 million from the prior year six-month period.



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 June 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 June 30, 2022 and December 31,
2021.



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

                        $             $            %
Change in rates      Amount        Change       Change
+400 basis points   $ 276,969     $   9,281        3.47 %
+300 basis points     277,070         9,382        3.50 %
+200 basis points     274,829         7,141        2.67 %
+100 basis points     271,921         4,233        1.58 %
Base Case             267,688             -           -
-100 basis points     258,679        (9,009 )     -3.37 %
-200 basis points     244,064       (23,624 )     -8.83 %




                 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 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 $706.5 million were
pledged to meet FHLB collateralization requirements as of June 30, 2022. Based
on the current collateralization requirements of the FHLB, the Company had
approximately $96.6 million of additional borrowing capacity at June 30, 2022.
The Company also had $176.9 million in unpledged securities available to pledge
for additional borrowings.


The Company's contractual obligations as of June 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 June
30, 2022 were $142.3 million, of which $82.2 million mature beyond one year.



In addition, as of June 30, 2022, the Company had commitments to sell mortgage
loans totaling $15.5 million. The Company believes that it has adequate
resources to fund commitments as they arise and that it can adjust the rate on
savings 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 Company 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.



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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