SB FINANCIAL GROUP, INC. (SBFG) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.

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, including The State Bank and Trust Company (“State Bank”),
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 Notes as of and
for the years ended December 31, 2023 and 2022 included in this Annual Report on Form 10-K.

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, 2023, the Company generated $17.7 million in noninterest income, or
31.1 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, 2022, the Company generated $18.2 million in noninterest income, or
31.6 percent of total operating revenue from fee-based products.

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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. Over
the past few years, we have expanded and committed additional resources to our presence in the Findlay and Edgerton markets in particular;
however, 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, 2023, we operated in 14 counties in Northwest Ohio, Central Ohio and Northeast Indiana with 23 full
service offices, 23 ATM’s and six loan production offices. Combined in the 14 counties of operation, we command 4.4 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, 2023, the Company serviced 8,549 residential mortgage loans with an aggregate principal
balance of $1.37 billion. As of December 31, 2022, the Company serviced 8,514 loans with an aggregate principal balance of $1.35 billion.

Sustain asset quality: As of December
31, 2023, the Company’s asset quality metrics remained strong. Specifically, total nonperforming assets were $3.3 million, or 0.25
percent of total assets. Total delinquent loans at December 31, 2023 were 0.15 percent of total loans. As of December 31, 2022, the Company
had total nonperforming assets of $5.1 million, or 0.38 percent of total assets. Total delinquent loans at December 31, 2022 were 0.27
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 $303.8 million, or 29.3 percent. The growth
has been on both sides of the balance sheet over the five year period, with loans growing $174.7 million or 21.2 percent and deposits
growing $230.0 million or 27.4 percent.

During the prior five-year period, the Company
has raised capital through the issuance of debt securities to the market, which has improved capital significantly and expanded liquidity
for potential strategic expansion. Strategic expansion has also occurred during the period with the acquisition of a small community
bank (The Edon State Bank of Edon, Ohio) in 2020, the opening of three branch offices and the acquisition of two full service title agencies.

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Financial Highlights

Year Ended December 31,

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Critical Accounting Policies and Estimates

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, 2023 and 2022. 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 Credit
Losses: The Company believes the determination of the ACL involves a higher degree of judgment and complexity
than its other significant accounting policies. The ACL is calculated with the objective of maintaining a reserve
level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit
exposure. Management’s determination of the adequacy of the ACL is based on periodic evaluations of past
events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable
and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.
However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected
loss given default, the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based
on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the
extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely
impact earnings in future periods.

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.

Income Taxes: Income tax expense is the
total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes
paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax
assets will be realized. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

An effective tax rate of 21% is used to determine
after-tax components of other comprehensive income (loss) included in the statements of shareholders’ equity.

A tax position is recognized as a benefit only
if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being
presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

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Changes in Financial Condition

Total assets at December 31, 2023, were
$1.343 billion, compared to $1.335 billion at December 31, 2022. Loans (excluding loans held for sale) were $1.000 billion at
December 31, 2023, compared to $962.1 million at December 31, 2022. Total deposits were $1.070 billion at December 31, 2023,
compared to $1.087 billion at December 31, 2022. As client balance sheets and liquidity was utilized in the economy, deposit levels
moderated and assets were reallocated from cash and securities into loans.

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

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

The maturity distribution and weighted-average
interest rates of debt securities available-for-sale at December 31, 2023, 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:

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Loans held for investment
(“HFI”) increased $38.1 million, or 4.0 percent, to $1.0 billion at December 31, 2023, which was due to an increase in
residential and commercial real estate lending during 2023. The Company booked a much higher portion of residential real estate
production on the balance sheet as increases in rates moved customers to variable rate mortgage products.

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, 2023, commercial
business and agricultural loans made up approximately 19.2 percent of the HFI loan portfolio
while commercial real estate loans accounted for approximately 42.4 percent of the HFI loan portfolio. As of December 31, 2023, residential
first mortgage loans, which are secured by first mortgages on residential real estate, made up approximately 31.8 percent of the HFI
portfolio, while consumer loans to individuals, which are primarily secured by consumer assets, made up approximately 6.6 percent of
the HFI loan portfolio.

Maturities and Sensitivities of Loans to Changes
in Interest Rates: The following table shows the maturity distribution of loans outstanding as of December 31, 2023. 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).

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Maturities and Sensitivities of Loans to Changes
in Interest Rates

As of December 31, 2023

Deposits decreased $16.5 million, or 1.5 percent,
to $1.07 billion at December 31, 2023. Increased inflation and interest rates resulted in clients seeking higher returns on their deposit
accounts. As a result, during 2023, we experienced a shift in the mix of our deposit balances as more of our clients moved balances to
long-term time deposit accounts. Specifically, during 2023, time deposits increased $64.6 million, or 34 percent, while other deposits
decreased $81.1 million, or 6 percent.

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

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

Shareholders’ equity at December 31, 2023,
was $124.3 million, or 9.3 percent of total assets compared to $118.4 million or 8.9 percent of total assets at December 31, 2022. Retained
earnings increased during the year due to earnings of $12.1 million less dividends paid to common shareholders of $3.6 million and repurchases
of Company common shares of $3.5 million. The fair market value of the bond portfolio improved slightly during 2023 due to the valuation
adjustment on the portfolio, which resulted in accumulated other comprehensive income (“AOCI”) falling to $29.8 million from
$32.1 million.

The Company continued to repurchase its own common
shares during the year under the Company’s repurchase program authorized by the Board of Directors on December 21, 2022. Specifically,
the Company repurchased 244,325 shares during 2023 at an average price of $13.98 per share. As of December 31, 2023, the Company had
255,675 shares remaining of the 500,000 shares authorized for repurchase under the Company’s existing share repurchase program,
which expires December 31, 2024.

Nonperforming assets totaled $3.3 million, or 0.25 percent of total assets at December 31, 2023, a decrease of
$1.1 million, or 25.3 percent from 2022. The Company had total net charge-offs on loans of $92,000 in 2023, as compared to net recoveries
of $13,000 in 2022. The Company’s ACL at December 31, 2023, now covers nonperforming loans at 560 percent,
up from 319 percent at December 31, 2022.

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

The ACL balance and the
provision for credit 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 its reserve
level over the last several years. Specifically, the Company’s ACL balance has increased from $8.8 million
at December 31, 2019 to $15.8 million at December 31, 2023, which reflects an increase of $7.0 million, or 80 percent. This increase was
the result of $6.7 million in provision expense during the period and minimal charge-offs, which were just $0.8 million over the four-year
period. The reserve increased during 2023 due to the one-time CECL adjustment of $1.4 million taken in January of 2023 upon the Company’s
adoption of the CECL methodology.

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

As further detailed in ITEM 1A. 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, 2023, State Bank met all regulatory capital levels required to be considered well-capitalized (see
Note 16 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. 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 Subordinated Notes have a maturity of 10 years.

Earnings Summary – 2023 vs. 2022

Net income for 2023 was $12.1 million, or $1.75
per diluted share, compared with net income of $12.5 million, or $1.77 per diluted share, for 2022. State Bank reported net income for
2023 of $13.3 million, which was down slightly from the $13.4 million of net income in 2022. SBFG Title reported net income for 2023 of
$0.24 million, which was down from net income of $0.39 million for 2022.

Positive results for 2023 included loan growth
of $38.1 million, while deposits were slightly lower by $16.5 million. The Company completed the final forgiveness in January of 2023
from the nearly 1,200 PPP loans processed during 2020 and 2021. The mortgage banking business line was impacted by the rapidly rising
rates, which contributed to the reduction in both balance growth and gains on sale. For the full year of 2023, residential real estate
loan production was $215.5 million, with $3.6 million of revenue from gains on sale. The level of mortgage origination was down from the
$313.0 million in 2022. The Company’s loans serviced for others ended the year at $1.367 billion, up slightly from $1.352 billion
at December 31, 2022.

Operating revenue decreased just slightly by $0.6
million, or 1.1 percent, from $57.6 million in 2022 to $57.0 million in 2023 due to decreased originated mortgage servicing rights (“OMSR”)
recapture, significantly lower mortgage gain revenue offset by a $1.4 million gain on the sale of equity securities. SBFG Title revenue
decreased by $0.6 million to $1.6 million for 2023.

Operating expense decreased by $0.35 million,
or 0.8 percent, from $42.3 million in 2022 to $42.0 million in 2023, due to lower incentive and commission levels, which were partially
offset by higher medical costs and increased spending on technology.

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Results of Operations

Net interest income was $39.3 million for 2023
and decreased slightly from net income of $39.4 million for 2022. Average earning assets increased slightly to $1.25 billion in 2023,
compared to $1.23 billion in 2022, primarily due to the increase in our loan portfolio, partially offset by lower cash and securities.
The consolidated 2023 full year net interest margin on an fully-taxable equivalent (“FTE”) basis decreased 6 basis points
to 3.16 percent compared to 3.22 percent for the full year of 2022.

Provision for credit losses was taken in 2023
in the amount of $0.32 million compared to zero provision taken during 2022. For 2023, net charge-offs totaled $0.1 million or 0.01 percent
of average loans, compared to net recoveries of $0.01 million or (0.00) percent of average loans, for 2022.

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Total noninterest income was $17.7 million for
2023 compared to $18.2 million for 2022, representing a decrease of $0.5 million, or 2.8 percent, year-over-year. Gains on sale of residential
mortgage loans was down from 2022 by $0.7 million, or 16.0 percent. The Company sold $161.2 million of originated mortgages into the secondary
market in 2023, which due to being slightly more than the amortization on the serviced portfolio, increased the size of our serviced loan
portfolio to $1.367 billion at December 31, 2023 from $1.352 billion at December 31, 2022. Sales of non-mortgage loans (small business
and farm credits) in 2023 was the same as in 2022 at $4.2 million. The Company saw its wealth management assets under management decline
by $5.3 million to $501.8 million at December 31, 2023, with total wealth management fees declining $0.2 million to $3.5 million.

Total noninterest expense was $42.0 million for
2023 compared to $42.3 million for 2022, representing a $0.3 million, or 0.8 percent, decrease year-over-year. Total full-time equivalent
employees ended 2023 at 251, which was down 17 from year end 2022.

Earnings Summary – 2022 vs. 2021

Net income for 2022 was $12.5 million, or $1.77
per diluted share, compared with net income of $18.3 million, or $2.56 per diluted share, for 2021. State Bank reported net income for
2022 of $13.4 million, which was down from the $18.6 million in net income in 2021. SBFG Title reported net income for 2022 of $0.4 million,
which was down from net income of $0.5 million in 2021.

Positive results for 2022 included loan growth
of $135.9 million when excluding the impact of the PPP initiative, while total deposits declined in 2022 by $23.5 million. The mortgage
banking business line contributed gain on sale revenues of $4.3 million, with residential real estate loan production of $312.6 million
and sales of loans of $184.8 million for the year. The level of mortgage origination declined in 2022 to $313.0 million from the $600.0
million in 2021.

Operating revenue decreased by $11.0 million,
or 16.0 percent, from $68.6 million in 2021 to $57.6 million in 2022 due to decreased PPP fees, OMSR recapture and lower mortgage gain
revenue. SBFG Title increased revenue by $0.2 million to $2.3 million for 2022.

Operating expense decreased by $2.5 million, or
5.6 percent, from $44.8 million in 2021 to $42.3 million in 2022, due to compensation and fringe benefit cost decreases partially offset
by higher spend on technology/digital initiatives.

Goodwill, Intangibles and Capital Purchases

The Company completed its most recent annual goodwill
impairment review as of December 31, 2023. Due to declines in the Company’s share price, a quantitative evaluation of goodwill was
completed as of September 30, 2023, which revealed that impairment was not warranted. No events have occurred since that assessment, which
would warrant impairment. At December 31, 2023, 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 6 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.

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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 $246.7 million at December 31, 2023, which included pledged available-for-sale securities of $102.3 million, compared
to liquid assets of $270.8 million at December 31, 2022.

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 $807.8 million at December 31, 2023, 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, 2023, all eligible commercial
real estate, residential first, multi-family mortgage and agricultural loans were pledged under a 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 $81.9 million of additional borrowing capacity existed at December 31, 2023.

At December 31, 2023 and 2022, the Company had
$41.0 million and $56.0 million in federal funds lines available. The Company also had $105.5 million in unpledged securities at December
31, 2023 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 2023 and 2022 follows:

The Company experienced positive cash flows from
operating activities in 2023 and 2022. Net cash from operating activities was $14.0 million and $25.6 million for the years ended December
31, 2023 and 2022, respectively. Significant operating items for 2023 included gain on sale of loans of $4.0 million and net income of
$12.1 million. Cash provided by the sale of loans held for sale were $161.2 million. Cash used in the origination of loans held for sale
were $159.3 million.

The Company experienced negative cash flows from
investing activities in 2023 and 2022. Net cash used in investing activities was $17.4 million and $165.7 million for the years ended
December 31, 2023 and 2022, respectively. A net increase in loans of $38.7 million was the primary change in 2023. The changes for 2022
include the purchase of available-for-sale securities of $50.6 million and net increase in loans of $139.7 million. The Company had proceeds
from repayments, maturities, sales and calls of securities of $22.2 million and $35.9 million in 2023 and 2022, respectively.

The Company experienced negative cash flows from
financing activities in 2023 and positive cash flows in 2022. Net cash used in financing activities was $1.5 million and net cash provided
by financing activities was $18.4 million for the years ended December 31, 2023 and 2022, respectively. Negative cash flows of $16.5 million
and $26.4 million are attributable to the change in deposits for 2023 and 2022, respectively.

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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 -400 basis points to +400 basis points. The results of this analysis are reflected in the following
table, which reflects the Company’s neutral balance sheet that directionally is trending to a liability sensitive position:

Economic Value of Equity

December 31, 2023

($ in thousands)

Economic Value of Equity

December 31, 2022

($ in thousands)