SB FINANCIAL GROUP, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

SB Financial Group, Inc. ("SB Financial"), is a financial holding company
registered with the Federal Reserve Board and subject to regulation under the
Bank Holding Company Act of 1956, as amended. Through its direct and indirect
subsidiaries, SB Financial is engaged in commercial and retail banking, wealth
management and private client financial services.

The following discussion provides a review of the consolidated financial
condition and results of operations of SB Financial and its subsidiaries
(collectively, the "Company"). This discussion should be read in conjunction
with the Company's consolidated financial statements and related footnotes as of
and for the years ended December 31, 2021 and 2020.

Strategic discussion

The focus and strategic goal of the Company is to grow into and remain a top
decile (>90th percentile) independent financial services company. The Company
intends to achieve and maintain that goal by executing our five key initiatives.

Increase profitability through ongoing diversification of revenue streams: For
the twelve months ended December 31, 2021, the Company generated $30.7 million
in noninterest income, or 44.8 percent of total operating revenue, from
fee-based products. These revenue sources include fees generated from saleable
residential mortgage loans, retail deposit products, wealth management services,
saleable business-based loans (small business and farm service) and title agency
revenue. For the twelve months ended December 31, 2020, the Company generated
$30.1 million in revenue from fee-based products, or 45.6 percent of total
operating revenue.

Strengthen our penetration in all markets served: Over our 119-year history of
continuous operation in Northwest Ohio, we have established a significant
presence in our traditional markets in Defiance, Fulton, Paulding and Williams
counties in Ohio. In our newer markets of Bowling Green, Columbus, Findlay,
Toledo (Ohio) and Ft. Wayne (Indiana), our current market penetration is minimal
but we believe our potential for growth is significant. We have expanded and
committed additional resources to our presence in the Findlay and Edgerton
markets. We continue to seek to expand the presence and penetration in all of
our markets.

Expand product utilization by new and existing customers: As of December 31,
2021, we operated in ten counties in Northwest Ohio and Northeast Indiana with
23 full service offices, 24 full service ATM's and five loan production offices.
Combined in the ten counties of operation, we command 4.47 percent of the
deposit market share, which has steadily grown.

Deliver gains in operational excellence: Our management team believes that
becoming and remaining a high-performance financial services company will depend
upon seamlessly and consistently delivering operational excellence, as
demonstrated by the Company's leadership in the origination and servicing of
residential mortgage loans. As of December 31, 2021, the Company serviced 8,614
residential mortgage loans with a principal balance of $1.36 billion. As of
December 31, 2020, the Company serviced 8,543 loans with a principal balance of
$1.30 billion.

Sustain asset quality: As of December 31, 2021, the Company's asset quality
metrics remained strong. Specifically, total nonperforming assets were $6.5
million, or 0.49 percent of total assets. Total delinquent loans at December 31,
2021 were 0.46 percent of total loans. As of December 31, 2020, the Company had
total nonperforming assets of $7.3 million, or 0.58 percent of total assets.
Total delinquent loans at December 31, 2020 were 0.75 percent of total loans.

The successful execution of these five strategies have enabled the Company to
improve financial performance across a broad series of metrics. These metrics
over the last five years are outlined in the following table. Specifically, the
Company has increased total assets by $454.3 million, or 52 percent. The growth
has been on both sides of the balance sheet over the five year period, with
loans growing $126.1 million or 18 percent and deposits growing $383.4 million
or 52.6 percent.

The Company has raised capital through the issuance of equity and debt to the
market on two separate occasions during the period, which has raised equity
capital significantly and expanded liquidity for potential strategic expansion.
Strategic expansion has occurred with the acquisition of a small community bank,
the opening of three branch offices and the acquisition of two full service
title agencies.


                                       30




                              Financial Highlights
                            Year Ended December 31,

($ in thousands, except per
share data)
Earnings                             2021            2020            2019           2018          2017
Interest income                   $    41,904     $    42,635     $    44,400     $  39,479     $  32,480
Interest expense                        4,020           6,705           9,574         6,212         4,094
Net interest income                    37,884          35,930          34,826        33,267        28,386
Provision for loan losses               1,050           4,500             800           600           400
Noninterest income                     30,697          30,096          18,016        16,624        17,217
Noninterest expense                    44,808          43,087          37,410        34,847        31,578
Provision for income taxes              4,446           3,495           2,659         2,806         2,560
Net income                             18,277          14,944          11,973        11,638        11,065
Preferred stock dividends                   -               -             950           975           975
Net income available to common
shareholders                           18,277          14,944          11,023        10,663        10,090

Per Common Share Data
Basic earnings                    $      2.58     $      1.96     $      1.71     $    1.72     $    2.10
Diluted earnings                         2.56            1.96            1.51          1.51          1.74
Cash dividends declared                  0.44            0.40            0.36          0.32          0.28
Total equity per share                  21.05           19.39           17.53         16.36         15.03
Total tangible equity per share         17.60           16.30           15.23         15.39         13.27

Average Balances
Average total assets              $ 1,322,253     $ 1,161,396     $ 1,027,932     $ 947,266     $ 854,569
Average equity                        144,223         139,197         133,190       121,094        89,538

Ratios
Return on average total assets           1.38 %          1.29 %          1.16 %        1.23 %        1.29 %
Return on average equity                12.67           10.74            8.99          9.61         12.36
Cash dividend payout ratio1             17.18           20.54           23.84         19.60         13.50
Average equity to average
assets                                  10.91           11.99           12.96         12.78         10.48

Period End Totals
Total assets                      $ 1,330,854     $ 1,257,839     $ 1,038,577     $ 986,828     $ 876,627
Available-for-sale securities         263,259         149,406         100,948        90,969        82,790
Loans held for sale                     7,472           7,234           7,258         4,445         3,940
Total loans & leases                  822,714         872,723         825,510       771,883       696,615
Allowance for loan losses              13,805          12,574           8,755         8,167         7,930
Total deposits                      1,113,045       1,049,011         840,219       802,552       729,600
Advances from FHLB                      5,500           8,000          16,000        16,000        18,500
Trust preferred securities             10,310          10,310          10,310        10,310        10,310
Subordinated debt, net                 19,546               -               -             -             -
Total equity                          144,929         142,923         136,094       130,435        94,000





1 Cash dividends on common shares divided by net income available to common.




                                       31




Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with
generally accepted accounting principles in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
Consolidated Financial Statements for the years ended December 31, 2021 and
2020. 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 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 the nature and amount of problem assets and associated collateral,
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 each impaired 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 valuations, 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.

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 and 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.

Deferred Tax Liability: The Company has evaluated its deferred tax liability to
determine if it is more likely than not that the liability will be realized in
the future. The Company's most recent evaluation has determined that the Company
will more likely than not be able to realize the remaining deferred tax
liability.

Income Tax Accounting: The Company files a consolidated federal income tax
return. The provision for income taxes is based upon income in the consolidated
financial statements, rather than amounts reported on our income tax return.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect of a change in rates on the deferred tax
assets and liabilities is recognized as income or expense in the period that
includes the enactment date.


                                       32



Changes in financial situation

Total assets at December 31, 2021, were $1.33 billion, compared to $1.26 billion
at December 31, 2020. Loans (excluding loans held for sale) were $822.7 million
at December 31, 2021, compared to $872.7 million at December 31, 2020. Total
deposits were $1.11 billion at December 31, 2021, compared to $1.05 billion at
December 31, 2020. The Company continued to experience elevated levels of
liquidity as the balance sheets of both personal and business clients were
supplemented by government intervention and support. The increase in liquidity
by these parties has resulted in higher deposit levels, which in turn increased
the overall asset size of the Company.

The following are the Company’s condensed average balance sheets for the years ending the 31st of December and includes interest earned or paid, and the average interest rate, on each asset and liability:

                                                   2021                                        2020                                        2019
                                    Average                      Average        Average                      Average        Average                      Average
($ in thousands)                    Balance       Interest        Rate     

Balance Interest rate Balance Interest

Rate

Assets

Taxable securities/cash           $   380,770     $   3,386          0.89 %

$185,480 $2,328 1.26% $95,216 $3,226

      3.39 %
Non-taxable securities                  7,802           353          4.52 %         6,625           333          5.03 %        10,108           345          3.41 %
Loans, net1                           854,521        38,165          4.47 %       880,338        39,974          4.54 %       809,651        40,829          5.04 %
Total earning assets                1,243,093        41,904          3.37 %

1,072,443 42,635 3.98% 914,975 44,400

     4.85 %
Cash and due from banks                 7,290                                      14,553                                      47,135
Allowance for loan losses             (13,422 )                                   (10,165 )                                    (8,370 )
Premises and equipment                 24,710                                      23,776                                      23,779
Other assets                           60,582                                      60,789                                      50,413
Total assets                      $ 1,322,253                                 $ 1,161,396                                 $ 1,027,932

Liabilities
Savings and interest-bearing
demand deposits                   $   672,296     $   1,813          0.27 %   $   492,267     $   3,152          0.64 %   $   427,858     $   2,846          0.67 %
Time deposits                         177,918         1,316          0.74 %       247,955         2,918          1.18 %       262,040         5,814          2.22 %
Repurchase agreements & other          22,821            42          0.18 %
       22,832            70          0.31 %        15,288            82          0.54 %
Advances from FHLB                      6,507           188          2.89 %        14,186           309          2.18 %        16,066           402          2.50 %
Trust preferred securities             10,310           199          1.93 %        10,310           256          2.48 %        10,310           430          4.17 %
Subordianted debt                      12,057           462          3.83 %
Total interest-bearing
liabilities                           901,909         4,020          0.45 %       787,550         6,705          0.85 %       731,562         9,574          1.31 %

Demand deposits                       255,908                                     211,004                                     146,401
Other liabilities                      20,213                                      23,645                                      16,779
Total liabilities                   1,178,030                                   1,022,199                                     894,742
Shareholders' equity                  144,223                                     139,197                                     133,190
Total liabilities and
shareholders' equity              $ 1,322,253                                 $ 1,161,396                                 $ 1,027,932

Net interest income (tax
equivalent basis)                                 $  37,884                                   $  35,930                                   $  34,826

Net interest income as a
percent of average
interest-earning assets - GAAP
measure                                                              3.05 %                                      3.35 %                                      3.81 %

Net interest income as a
percent of average
interest-earning assets -
Non-GAAP measure 2                                                   3.06 %                                      3.36 %                                      3.82 %
-- Computed on a fully tax
equivalent basis (FTE)





1 Unexpected loans and loans held for sale are included in average balances.

2 Interest on tax-exempt securities and loans is calculated on a tax equivalent

based on a statutory tax rate of 21%, and added to net interest

Income. The tax equivalent adjustment was $0.15, $0.15 and $0.17 million in

  2021, 2020 and 2019, respectively.




                                       33



The following tables show the effect of volume and rate changes on interest income and expense for the periods indicated. For the purposes of these tables, interest changes due to volume and rate have been determined as follows:

? Volume Gap – volume change multiplied by the previous year’s rate.

? Rate spread – rate change multiplied by previous year’s volume.

? Rate/Volume Deviation – change in volume multiplied by change in rate. This

spread allocates the volume spread and the rate spread in proportion to the

   relationship of the absolute dollar amount of the change in each.



                                                        Total
                                                      Variance          Variance Attributable To
($ in thousands)                                      2021/2020         Volume              Rate
Interest income
Taxable securities                                   $     1,058     $      2,451       $     (1,393 )
Non-taxable securities1                                       20               59                (39 )

Loans, net of unearned revenue and deferred charges1 (1,809 ) (1,172 )

             (637 )
Total interest income                                       (731 )          1,338             (2,069 )

Interest expense
Savings and interest-bearing demand deposits              (1,339 )         
1,153             (2,492 )
Time deposits                                             (1,602 )           (824 )             (778 )
Repurchase agreements & other                                (28 )             (0 )              (28 )
Advances from FHLB                                          (121 )           (167 )               46
Trust preferred securities                                   (57 )              -                (57 )
Subordinated debt                                            462              462                  -
Total interest expense                                    (2,685 )            623             (3,308 )

Net interest income                                  $     1,954     $        715       $      1,239





1 Interest on non-taxable securities and loans has been adjusted to be fully

  equivalent



The maturity distribution and weighted-average interest rates of debt securities
available-for-sale at December 31, 2021, are set forth in the table below. The
weighted-average interest rates are based on coupon rates for securities
purchased at par value and on effective interest rates considering amortization
or accretion if the securities were purchased at a premium or discount:

                                                                                              Maturing
                                        Weighted                       Weighted                        Weighted                     Weighted                     Weighted
                           Within       Average                        Average                         Average         After        Average                      Average
($ in thousands)           1 Year        Yield         1-5 Years        Yield         5-10 Years        Yield        10 Years        Yield          Total         Yield
Available for sale:
U.S. Treasury and
Government agencies       $    606           0.44 %   $       707           2.13 %   $      7,792           2.02 %   $       -                    $   9,105           1.92 %
Mortgage-backed
securities                      63           1.93 %         1,668           3.01 %         31,293           1.49 %     195,110           1.36 %     228,134           1.39 %
State and political
subdivisions                     -                          2,065           3.21 %          2,473           4.28 %       8,341           2.64 %      12,879           3.04 %
Other corporate
securities                       -                              -                          13,141           3.47 %           -                       13,141           3.47 %
Total securities by
maturity                  $    669           0.58 %   $     4,440           2.96 %   $     54,699           2.17 %   $ 203,451           1.41 %   $ 263,259           1.59 %





1 Returns are presented on a tax equivalent basis.



                                       34



In June of 2020, we completed the acquisition of The Edon State Bank, which
added approximately $50 million in deposits and $15 million in loans. Building
on the success of our entry into the city of Edon, we opened an office in nearby
Edgerton, Ohio in May of 2021. The Edgerton expansion has also been positive as
we ended the year with over $15 million in both loans and deposits in that
office.

($ in thousands)                               Years Ended December 31,
                                           2021          2020        % Change
Total loans
Commercial business & agriculture        $ 179,653     $ 260,002         -30.9 %
Commercial real estate                     381,168       370,820           2.8 %
Residential real estate                    206,424       182,165          13.3 %
Consumer & other                            55,156        61,157          -9.8 %
Total loans                                822,401       874,144          -5.9 %

Net deferred costs (fees)                      313        (1,421 )      -122.0 %

Total loans, net deferred costs (fees)     822,714       872,723          -5.7 %

Loans held for sale                      $   7,472     $   7,234           3.3 %






                                2021            2020          % Change
Total deposits
Noninterest bearing demand   $   247,044     $   251,649           -1.8 %
Interest-bearing demand          195,464         176,785           10.6 %
Savings & money market           514,033         391,028           31.5 %
Time deposits                    156,504         229,549          -31.8 %
Total deposits                 1,113,045       1,049,011            6.1 %

Total shareholders' equity   $   144,929     $   142,923            1.4 %




Loans held for investment decreased $50.0 million, or 5.7 percent, to $822.7
million at December 31, 2021, which was due to a decrease in outstanding PPP
loans during 2021. The Company participated fully in the PPP initiative in both
2020 and 2021, which in total, encompassed 1,100 loans with an aggregate
principal amount of $111.4 million. At year-end 2021, the balance of PPP was
down to approximately 50 loans, with an aggregate principal amount of $2
million, as a result of SBA forgiveness of a majority of the PPP loans that we
originated. Adjusted for PPP activity, loan growth compared to 2020 was up $18.5
million, or 2.3 percent. In the first quarter of 2021, the Company introduced a
Private Client Residential Mortgage product. This product, of which $76 million
was originated during 2021, offset the refinance activity that occurred in
our
portfolio during the year.



Concentrations of Credit Risk: The Company makes commercial, real estate and
installment loans to customers located mainly in the Tri-State region of Ohio,
Indiana and Michigan. Commercial loans include loans collateralized by
commercial real estate, business assets and, in the case of agricultural loans,
crops and farm equipment and the loans are expected to be repaid from cash flow
from operations of businesses. As of December 31, 2021, commercial business and
agricultural loans made up approximately 29.6 percent of the loans held for
investment ("HFI") loan portfolio while commercial real estate loans accounted
for approximately 42.5 percent of the HFI loan portfolio. Residential first
mortgage loans made up approximately 20.9 percent of the HFI loan portfolio and
are secured by first mortgages on residential real estate, while consumer loans
to individuals made up approximately 7.0 percent of the HFI loan portfolio and
are primarily secured by consumer assets.


                                       35




Maturities and Sensitivities of Loans to Changes in Interest Rates: The
following table shows the maturity distribution of loans outstanding as of
December 31, 2021. The amounts have been categorized between loans with a fixed
or floating interest rate (floating rate loans have an adjustable interest rate
that changes in accordance to a rate index).

                                                  After one,        After five,
                                    Within        but within        but within             After
($ in thousands)                   one year       five years       fifteen years       fifteen years        Total
Loans with fixed interest
rates:
Commercial & industrial           $      981     $     20,715     $        28,106     $            23     $  49,825
Commercial real estate - owner
occupied                                 168            9,567              10,302                   -        35,051
Commercial real estate -
nonowner occupied                      6,828           14,246              13,815                 162        20,037
Agricultural                             122            4,094               5,557               1,362        11,135
Residential real estate                1,615            1,915              12,774              25,328        41,632
HELOC                                      5                -                   -                   -             5
Consumer                               2,416            6,364               2,380                   -        11,160
Total                             $   12,135     $     56,901     $        72,934     $        26,875     $ 168,845

Loans with floating interest
rates:
Commercial & industrial           $   28,754     $      6,213     $        35,464     $         1,994     $  72,425
Commercial real estate - owner
occupied                                   -           11,109              44,565              43,180       227,226
Commercial real estate -
nonowner occupied                      8,739           26,514             120,819              71,154        98,854
Agricultural                           1,646            7,846              16,670              20,106        46,268
Residential real estate                4,558              485              13,294             146,455       164,792
HELOC                                    223              469              30,487              10,498        41,677
Consumer                                 990            1,324                   -                   -         2,314
Total                             $   44,910     $     53,960     $       261,299     $       293,387     $ 653,556

Total loans:
Commercial & industrial           $   29,735     $     26,928     $        63,570     $         2,017     $ 122,250
Commercial real estate - owner
occupied                                 168           20,676              54,867              43,180       118,891
Commercial real estate -
nonowner occupied                     15,567           40,760             134,634              71,316       262,277
Agricultural                           1,768           11,940              22,227              21,468        57,403
Residential real estate                6,173            2,400              26,068             171,783       206,424
HELOC                                    228              469              30,487              10,498        41,682
Consumer                               3,406            7,688               2,380                   -        13,474
Total loans                       $   57,045     $    110,861     $       334,233     $       320,262     $ 822,401



Deposits increased $64.0 million, or 6.1 percent, to $1.11 billion at December
31, 2021. Deposits continued growing in 2021 on top of the over $200 million in
growth experienced during 2020. Expanded government support and reduced economic
activity has resulted in higher balances in client deposit accounts. During
2021, we experienced a shift in the mix of our deposit balances as more of our
clients moved balances to short-term transactional accounts. Specifically,
during 2021, time deposits decreased $73.0 million or 32 percent while other
deposits increased $137.1 million or 17 percent.

The average amount of deposits and weighted average rates paid are summarized as follows for the years ended the 31st of December:

                                   2021                          2020                         2019
                          Average        Average        Average       Average        Average       Average
($ in thousands)          Amount           Rate         Amount          Rate         Amount          Rate
Savings and interest
bearing demand
deposits                $   672,296           0.27 %   $ 492,267           0.64 %   $ 427,858           0.67 %
Time deposits               177,918           0.74 %     247,955           1.18 %     262,040           2.22 %
Non interest bearing
demand deposits             255,908              -       211,004              -       146,401              -
Totals                  $ 1,106,122           0.28 %   $ 951,226           0.64 %   $ 836,299           1.04 %




                                       36




Time deposits that exceeded the FDIC insurance limit of $250,000 are summarized
as follows:

($ in thousands)                             2021         2020
Three months or less                        $ 1,033     $    811
Over three months through six months            415        4,894
Over six months and through twelve months     3,083        1,658
Over twelve months                              238        2,640
Total                                       $ 4,769     $ 10,003



Stockholders' equity at December 31, 2021, was $144.9 million or 10.9 percent of
total assets compared to $142.9 million or 11.4 percent of total assets at
December 31, 2020. Retained earnings increased during the year by $15.1 million
due to earnings of $18.3 million less dividends paid to common shareholders of
$3.2 million. The fair market value of the bond portfolio decreased during 2021
due to the rise in interest rates, which resulted in a decrease in Other
Comprehensive Income ("OCI") of $4.1 million.

The Company continued to repurchase its own stock during the year. Specifically,
the Company repurchased approximately 500,000 shares during 2021 at an average
price of $18.50 per share, which was just slightly below book value. As of
December 31, 2021, the Company had 495,639 shares remaining of the 750,000
shares authorized for repurchase under the Company's existing share repurchase
program which was authorized on May 25, 2021 and expires May 21, 2022.

Asset Quality                                                  Years Ended December 31,
($ in thousands)                                          2021          2020         % Change
Nonaccruing loans                                       $   3,652     $   6,426          -43.2 %
Accruing restructured loans (TDRs)                            725           810          -10.5 %
Foreclosed assets and other assets held for sale, net       2,104          
 23         9047.8 %
Nonperforming assets                                        6,481         7,259          -10.7 %
Net charge offs (recoveries)                                 (181 )         681         -126.6 %
Loan loss provision                                         1,050         4,500          -76.7 %
Allowance for loan losses                                  13,805        12,574            9.8 %

Nonaccruing loans/total loans                                0.44 %        0.74 %        -39.7 %
Allowance/nonaccruing loans                                378.01 %      195.67 %         93.2 %
Nonperforming assets/total assets                            0.49 %       
0.58 %        -15.6 %
Net charge offs/average loans                               -0.02 %        0.08 %       -125.0 %
Allowance/loans                                              1.68 %        1.44 %         16.5 %
Allowance/nonperforming loans                              315.40 %      173.80 %         81.5 %


Nonperforming assets consisting of loans, Other Real Estate Owned ("OREO") and
accruing TDRs totaled $6.5 million, or 0.49 percent of total assets at December
31, 2021, a decrease of $0.8 million or 10.7 percent from 2020. Net charge offs
were down significantly during 2021, with total recoveries of $0.18 million,
which was a $0.86 million decrease compared to total charge offs of $0.68
million for 2020. The Company's loan loss allowance at December 31, 2021, now
covers nonperforming loans at 315 percent, up from 174 percent at December
31,
2020.


                                       37




The following schedule presents an analysis of the allowance for loan losses,
average loan data and related ratios at December 31 for the years indicated:

                                                                                                         Ratio of
                                                                                                      annualized net
                                                                                                       (chargeoffs)
                                              Provision for       Net (Chargeoffs)       Average       recoveries to
($ in thousands)                                Loan Loss            Recoveries           Loans        average loans
December 31, 2021
Commercial & industrial                      $        (1,411 )   $              227     $ 160,267                0.14 %
Commercial real estate - owner occupied                  505                      -       118,713                0.00 %
Commercial real estate - nonowner occupied               825               
      -       264,980                0.00 %
Agricultural                                             103                      -        53,122                0.00 %
Residential real estate                                  975                      6       195,277                0.00 %
HELOC                                                    (16 )                    -        43,488                0.00 %
Consumer                                                  69                    (52 )      11,546               -0.45 %
Total                                        $         1,050     $              181     $ 847,393                0.02 %

December 31, 2020
Commercial & industrial                      $         1,757     $             (566 )   $ 198,991               -0.28 %
Commercial real estate - owner occupied                  721                      -       104,856                0.00 %
Commercial real estate - nonowner occupied             1,128               
      -       269,924                0.00 %
Agricultural                                              62                      -        51,840                0.00 %
Residential real estate                                  373                    (42 )     185,311               -0.02 %
HELOC                                                    203                     (8 )      47,227               -0.02 %
Consumer                                                 256                    (65 )      11,595               -0.56 %
Total                                        $         4,500     $             (681 )   $ 869,744               -0.08 %

December 31, 2019
Commercial & industrial                      $           582     $             (134 )   $ 139,616               -0.10 %
Commercial real estate - owner occupied                  210                      -        96,106                0.00 %
Commercial real estate - nonowner occupied               468               
      1       257,756                0.00 %
Agricultural                                             (48 )                    -        51,836                0.00 %
Residential real estate                                 (325 )                  (39 )     194,390               -0.02 %
HELOC                                                   (102 )                   10        47,770                0.02 %
Consumer                                                  15                    (50 )      11,862               -0.42 %
Total loans                                  $           800     $             (212 )   $ 799,336               -0.03 %


The allowance for loan losses balance and the provision for loan losses are
determined by management based upon periodic reviews of the loan portfolio. In
addition, management considers the level of charge offs on loans, as well as the
fluctuations of charge offs and recoveries on loans, in the factors which caused
these changes. Estimating the risk of loss and the amount of loss is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated based on past
loss experience, economic conditions, information about specific borrower
situations, including their financial position and collateral values, and other
factors and estimates which are subject to change over time.

The Company has substantially increased the reserve level over the last two
years. Specifically, since December 31, 2019 the allowance balance has increased
from $8.8 million to $13.8 million at December 31, 2021, which is an increase of
$5.0 million or 59 percent. This increase was the result of $5.6 million in
provision expense during the period ($4.5 million in 2020 and $1.1 million in
2021) and minimal charge-offs, which were just $0.5 million over the two year
period.


                                       38




The following schedule provides a breakdown of the allowance for loan losses
allocated by type of loan and related ratios at December 31 for the years
indicated:

                                            Percentage                        Percentage                        Percentage
                                            of Loans In                       of Loans In                       of Loans In
                                               Each                              Each                              Each
                            Allowance       Category to       Allowance       Category to       Allowance       Category to
                             Amount         Total Loans        Amount         Total Loans        Amount         Total Loans
($ in thousands)                       2021                              2020                              2019
Commercial & industrial    $     1,890              14.9 %   $     3,074              23.4 %   $     1,883              18.3 %
Commercial real estate -
owner occupied                   2,588              14.5 %         2,059              12.9 %         1,220              11.9 %
Commercial real estate -
nonowner occupied                4,193              31.9 %         3,392              29.5 %         2,382              32.5 %
Agricultural                       599               7.0 %           496               6.3 %           434               6.2 %
Residential real estate          3,515              25.1 %         2,534   
          20.8 %         2,203              23.4 %
Home equity line of
credit (HELOC)                     631               5.1 %           647               5.3 %           454               5.8 %
Consumer                           389               1.6 %           372               1.7 %           179               1.8 %
                           $    13,805             100.0 %   $    12,574             100.0 %   $     8,755             100.0 %



As detailed in the risk factors, the CARES Act provided for significant consumer
and small business relief due to the impact of the COVID-19 pandemic. The
Company provided payment relief to a number of consumer and small business
customers throughout 2020 and 2021, which we believe was successful and enabled
our clients to weather the pandemic effectively. All such COVID-related payment
deferrals had expired or been removed by December 31, 2021 and all clients were
back to contractual terms at such date.

Regulatory capital reporting is required for State Bank only, as the Company is
currently exempt from quarterly regulatory capital level measurement pursuant to
the Small Bank Holding Company Policy Statement. As of December 31, 2021, State
Bank met all regulatory capital levels required to be considered
well-capitalized (see Note 18 to the Consolidated Financial Statements).

On May 27, 2021, the Company issued and sold $20.0 million in aggregate
principal amount of its 3.65% Fixed to Floating Rate Subordinated Notes due 2031
in a private placement exempt from the registration requirements under the
Securities Act of 1933, as amended. The Subordinated Notes bear interest at a
fixed rate of 3.65% through May 31, 2026. From June 1, 2026 to the maturity date
or earlier redemption of the Subordinated Notes, the interest rate will reset
quarterly to an interest rate per annum, equal to the then-current-three-month
Secured Overnight Financing Rate ("SOFR") provided by the Federal Reserve Bank
of New York plus 296 basis points. The proceeds from the Subordinated Notes will
be used to assist the Company in meeting various corporate obligations,
including share buyback, acquisition costs and organic asset growth. The
Subordinated Notes have a maturity of 10 years.

Revenue Summary – 2021 vs 2020

Net income for 2021 was $18.3 million, or $2.56 per diluted share, compared with
net income of $14.9 million, or $1.96 per diluted share, for 2020. State Bank
reported net income for 2021 of $18.6 million, which was up from the $16.0
million in net income in 2020. SBFG Title reported net income for 2020 of $0.5
million, which was down from net income of $0.6 million in 2020.


Positive results for 2021 included loan growth of $18.5 million when excluding
the impact of the PPP initiative, and deposit growth of $64.0 million. The
Company fully participated in both phases of PPP, with a total of $111.4 million
in loans to over 1,100 clients with revenue of $3.4 million for 2021 compared to
$1.4 million for 2020. The mortgage banking business line continued to
contribute significant revenues, with residential real estate loan production of
$600.0 million for the year, resulting in $17.3 million of revenue from gains on
sale. The level of mortgage origination was down from the $694.2 million in
2020. The Company's loans serviced for others ended the year at $1.36 billion,
up from $1.30 billion at December 31, 2020.



                                       39




Operating revenue increased by $2.6 million, or 3.9 percent, from $66.0 million
in 2020 to $68.6 million in 2021 due to increased PPP fees and OMSR recapture
which offset lower mortgage gain revenue. SBFG Title increased revenue by $0.1
million of $2.1 million for 2021.

Operating expense increased by $1.7 million, or 4.0 percent, from $43.1 million
in 2020 to $44.8 million in 2021, due to compensation and fringe benefit cost
increases and higher spend on technology/digital initiatives. These expense
increases were offset by lower mortgage commission expense due to lower volume.

Results of Operations

                                                   Years Ended December 31,
($ in thousands, except per share data)      2021            2020         
% Change
Total assets                              $ 1,330,854     $ 1,257,839            5.8 %
Total investments                             263,259         149,406           76.2 %
Loans held for sale                             7,472           7,234            3.3 %
Loans, net of unearned income                 822,714         872,723           -5.7 %
Allowance for loan losses                      13,805          12,574            9.8 %
Total deposits                              1,113,045       1,049,011            6.1 %

Total operating revenue1                  $    68,581     $    66,026            3.9 %
Net interest income                            37,884          35,930            5.4 %
Loan loss provision                             1,050           4,500          -76.7 %
Noninterest income                             30,697          30,096            2.0 %
Noninterest expense                            44,808          43,087            4.0 %
Net income                                     18,277          14,944           22.3 %
Diluted earnings per share                       2.56            1.96           30.6 %





1 Operating income is net interest income plus non-interest income.



Net interest income was $37.9 million for 2021 compared to $35.9 million for
2020, an increase of $2.0 million or 5.4 percent. Average earning assets
increased to $1.24 billion in 2021, compared to $1.07 billion in 2020, an
increase of $170.7 million or 15.9 percent due to a higher bond portfolio, which
offset slightly lower loan volume. The consolidated 2021 full year net interest
margin on an FTE basis decreased 30 basis points to 3.06 percent compared to
3.36 percent for the full year of 2020. PPP activity during 2021 increased
margin revenue by $3.0 million for the full year of 2021.

Provision for loan losses of $1.0 million was taken in 2021 compared to $4.5
million taken for 2020. For 2021, net recoveries totaled $0.18 million, or
(0.02) percent of average loans. This charge off level was significantly lower
than 2020, in which net charge offs were $0.68 million or 0.08 percent of
average loans.

Noninterest Income                                  Years Ended December 31,
($ in thousands)                                2021         2020        % Change
Wealth management fees                        $  3,814     $  3,245           17.5 %
Customer service fees                            3,217        2,807           14.6 %
Gains on sale of residential loans & OMSR's     17,255       25,350          -31.9 %
Mortgage loan servicing fees, net                2,940       (5,138 )        157.2 %
Gain on sale of non-mortgage loans                 158          453        
 -65.1 %
Title Insurance income                           2,089        1,913            9.2 %
Other                                            1,224        1,466          -16.5 %
Total noninterest income                      $ 30,697     $ 30,096            2.0 %




                                       40




Total noninterest income was $30.7 million for 2021 compared to $30.1 million
for 2020, representing an increase of $0.6 million, or 2.0 percent,
year-over-year. Although mortgage gain on sale was down from the record year in
2020 by $8.1 million, or 31.9 percent, the Company was able to offset that
reduction by recapture of mortgage servicing rights of $3.9 million during 2021.
The Company sold $489.4 million of originated mortgages into the secondary
market in 2021, which allowed our serviced loan portfolio to grow to $1.36
billion at December 31, 2021 from $1.30 billion at December 31, 2020. The higher
servicing balance of the portfolio led to the 5.6 percent increase in mortgage
loan servicing income. Sales of non-mortgage loans (small business and farm
credits) decreased in 2021 as compared to 2020, as SBA activity continued to be
focused on the PPP initiative. The Company expanded its wealth management assets
under management to $618.3 million, up $59.9 million, which resulted in a 17.5
percent increase in wealth fee income.

Noninterest Expense                  Years Ended December 31,
($ in thousands)                 2021         2020        % Change
Salaries & employee benefits   $ 26,838     $ 25,397            5.7 %
Net occupancy expense             3,048        2,891            5.4 %
Equipment expense                 3,281        3,186            3.0 %
Data processing fees              2,579        3,055          -15.6 %
Professional fees                 3,027        3,307           -8.5 %
Marketing expense                   784          658           19.1 %
Telephone and communications        581          535            8.6 %
Postage and delivery expense        414          415           -0.2 %
State, local and other taxes      1,175        1,146            2.5 %
Employee expense                    663          535           23.9 %
Other expense                     2,418        1,962           23.2 %
Total noninterest expense      $ 44,808     $ 43,087            4.0 %



Total noninterest expense was $44.8 million for 2021 compared to $43.1 million
for 2020, representing a $1.7 million, or 4.0 percent, increase year-over-year.
Total full-time equivalent employees ended 2021 at 269, which was up 25 from
year end 2020.

Salaries and benefits were driven by the increase in total full time employees
as we filled a number of open positions during the year. We also have seen
higher costs in technology as we have continued to add resources and digital
options for our clients.

Revenue Summary – 2020 vs. 2019

Net income for 2020 was $14.9 million, or $1.96 per diluted share, compared with
net income of $12.0 million and net income available to common of $11.0 million,
or $1.51 per diluted share, for 2019. State Bank reported net income for 2020 of
$16.0 million, which was up from the $12.5 million in net income in 2020. SBFG
Title reported net income for 2020 of $0.6 million, which was up from the $0.3
million in 2019.

Positive results for 2020 included loan growth of $47.2 million, and deposit
growth of $208.8 million. The mortgage banking business line continues to
contribute significant revenues, with residential real estate loan production of
$694.2 million for the year, resulting in $25.4 million of revenue from gains on
sale. The level of mortgage origination was up from the $445.3 million in 2019.
The Company's loans serviced for others ended the year at $1.3 billion, up from
$1.2 billion at December 31, 2019. The Company realized over $1.4 million in
revenue from the PPP initiative.

Operating revenue was up compared to the prior year by $13.2 million, or 25.0
percent, which was impacted by a $3.6 million temporary OMSR impairment. Our
2020 results include the full year impact from SBFG Title with net income of
$0.6 million, and SB Captive, with net income of $0.9 million. Net interest
margin on a fully tax equivalent basis ("FTE") for 2020 was 3.36 percent, down
46 basis points from 2019.

Operating expense was up compared to the prior year by $5.7 million, or 15.2
percent, due to compensation and fringe benefit cost increases as a result of
higher mortgage commission levels. Operating leverage (growth in revenue divided
by growth in operating expense) for the year was a positive 1.6 times.

Net charge offs for 2020 of $0.68 million resulted in a loan loss provision of
$4.5 million, compared to net charge offs of $0.21 million and a $0.8 million
loan loss provision in 2019.


                                       41



Good willIntangible assets and fixed asset purchases

The Company completed its most recent annual goodwill impairment review as of
December 31, 2021. At December 31, 2021, the Company concluded that it was more
likely than not that the fair value of the reporting unit exceeded its carrying
value, resulting in no impairment. The Company's goodwill is further discussed
in Note 8 to the Consolidated Financial Statements.

Management plans to continue from time to time to purchase additional premises
and equipment and improve current facilities to meet the current and future
needs of the Company's customers. These purchases will include buildings,
leasehold improvements, furniture and equipment. Management expects that cash on
hand and cash generated from current operations will fund these capital
expenditures and purchases.

Liquidity

Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Sources used to satisfy these needs consist of cash and due from banks,
interest-bearing deposits in other financial institutions, securities
available-for-sale, loans held for sale and borrowings from various sources.
These assets, excluding the borrowings, are commonly referred to as liquid
assets. Liquid assets were $422.9 million at December 31, 2021, compared to
$303.2 million at December 31, 2020.

The Company does not have material cash requirements for capital expenditures
over the next year. Any cash needs for capital requirements would be funded by
cash existing at the Company. It is not anticipated that the Company will be
required to initiate external borrowings in order to fund ongoing operations.

The Company's commercial real estate, first mortgage residential, agricultural
and multi-family mortgage portfolio of $645.1 million at December 31, 2021, can
and is readily used to collateralize borrowings, which is an additional source
of liquidity. Management believes the Company's current liquidity level, without
these borrowings, is sufficient to meet its current and anticipated liquidity
needs. At December 31, 2021, all eligible commercial real estate, residential
first, multi-family mortgage and agricultural loans were pledged under a Federal
Home Loan Bank ("FHLB") blanket lien.

Significant additional off-balance-sheet liquidity is available in the form of
FHLB advances, unused federal funds lines from correspondent banks and the
national certificate of deposit market. Management expects the risk of changes
in off-balance-sheet arrangements to be immaterial to earnings. Based on the
current collateralization requirements of the FHLB, approximately $110.5 million
of additional borrowing capacity existed at December 31, 2021.

At December 31, 2021 and 2020, the Company had $41.0 million in federal funds
lines available. The Company also had $184.9 million in unpledged securities at
December 31, 2021 available for additional borrowings.

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 2021 and 2020 follows:


The Company experienced positive cash flows from operating activities in 2021
and 2020. Net cash from operating activities was $17.3 million and $23.9 million
for the years ended December 31, 2021 and 2020, respectively. Significant
operating items for 2021 included gain on sale of loans of $17.4 million and net
income of $18.3 million. Cash provided by the sale of loans held for sale were
$490.6 million. Cash used in the origination of loans held for sale were $478.1
million.



The Company experienced negative cash flows from investing activities in 2021
and 2020. Net cash used in investing activities was $72.0 million and $57.2
million for the years ended December 31, 2021 and 2020, respectively. The
changes for 2021 include the purchase of available-for-sale securities of $170.7
million, and net decrease in loans of $48.5 million. The changes for 2020
include the purchase of available-for-sale securities of $129.8 million and net
increase in loans of $31.7 million. The Company had proceeds from repayments,
maturities, sales and calls of securities of $50.5 million and $84.0 million in
2021 and 2020, respectively.

The Company experienced positive cash flows from financing activities in 2021
and 2020. Net cash from financing activities was $63.6 million and $146.9
million for the years ended December 31, 2021 and 2020, respectively. Positive
cash flows of $64.0 million and $157.7 million is attributable to the change in
deposits for 2021 and 2020, respectively.


                                       42




The Company 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 -100 basis points to +400 basis points. The results of this analysis
are reflected in the following table.

                 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 %




                 Economic Value of Equity
                     December 31, 2020
                    ($ in thousands)
Change in rates     $ Amount      $ Change      % Change
+400 basis points   $ 243,779     $  61,586         33.80 %
+300 basis points     231,590        49,398         27.11 %
+200 basis points     217,936        35,743         19.62 %
+100 basis points     202,260        20,067         11.01 %
Base Case             182,193             -             -
-100 basis points     154,509       (27,684 )      -15.19 %

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