SB FINANCIAL GROUP, INC. (SBFG) FY 2024 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, 2024, and 2023 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, 2024, the Company generated
$17.0 million in noninterest income, or 29.9 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, 2023, the Company generated
$17.7 million in noninterest income, or 31.1 percent of total operating revenue from fee-based products.

Strengthen
our penetration in all markets served: Over our 122-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.
On January 17, 2025, we established our presence in Ottawa County with the acquisition of The Marblehead Bank located in Marblehead,
Ohio.

Expand
product utilization by new and existing customers: As of December 31, 2024, we operated in 14 counties in Northwest Ohio, Central
Ohio and Northeast Indiana with 23 full-service offices, 23 ATM’s and seven loan production offices. Combined in the 14 counties
of operation, we command 0.94 percent of the deposit market share, which has steadily grown. In our traditional markets of Northwest
Ohio, the deposit market share is 4.40 percent.

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, 2024, the Company serviced 8,750 residential mortgage
loans with an aggregate principal balance of $1.43 billion. As of December 31, 2023, the Company serviced 8,549 loans with an aggregate
principal balance of $1.37 billion.

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Sustain
asset quality: As of December 31, 2024, the Company’s asset quality metrics remained strong. Specifically, total nonperforming
assets were $5.5 million, or 0.40 percent of total assets. Total delinquent loans at December 31, 2024 were 0.63 percent of total loans.
As of December 31, 2023, the Company had total nonperforming assets of $3.3 million, or 0.25 percent of total assets. Total delinquent
loans at December 31, 2023 were 0.15 percent of total loans.

The
successful execution of these five strategies has 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 $121.7
million, or 9.7 percent. The growth has been on both sides of the balance sheet over the five-year period, with loans growing $174.0
million or 19.9 percent and deposits growing $103.6 million or 9.9 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. As detailed in Note 23, we closed on an acquisition of another small community bank in
Marblehead, Ohio on January 17, 2025.

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, 2024 and 2023. 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.

Changes
in Financial Condition

Total
assets at December 31, 2024, were $1.38 billion, compared to $1.34 billion at December 31, 2023. Loans (excluding loans held for sale)
were $1.05 billion at December 31, 2024, compared to $1.00 billion at December 31, 2023. Total deposits were $1.15 billion at December
31, 2024, compared to $1.07 billion at December 31, 2023. The Company continued to allocate the reductions in our bond portfolio, from
scheduled amortization, into higher yielding loan balances.

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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:

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The
maturity distribution and weighted-average interest rates of debt securities available-for-sale at December 31, 2024, 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:

Loans
held for investment (“HFI”) increased $46.5 million, or 4.7 percent, to $1.05 billion at December 31, 2024, which was due
to an increase in commercial real estate lending during 2024. The Company allowed the residential real estate to amortize and minimal
new production on the balance sheet was generated.

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, 2024, commercial business and agricultural loans made up approximately 18.0 percent of the HFI loan portfolio while
commercial real estate loans accounted for approximately 43.9 percent of the HFI loan portfolio. As of December 31, 2024, residential
first mortgage loans, which are secured by first mortgages on residential real estate, made up approximately 30.0 percent of the HFI
portfolio, while consumer loans to individuals, which are primarily secured by consumer assets, made up approximately 6.5 percent of
the HFI loan portfolio.

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Maturities
and Sensitivities of Loans to Changes in Interest Rates: The following table shows the maturity distribution of loans outstanding
as of December 31, 2024. The amounts have been categorized between loans with a fixed or floating interest rate (floating rate loans
have an adjustable interest rate that changes based on a rate index).

Maturities
and Sensitivities of Loans to Changes in Interest Rates

As
of December 31, 2024

Total
deposits increased $82.4 million, or 7.7 percent, to $1.15 billion at December 31, 2024. The State of Ohio Homebuyer Plus program impacted
transactional deposit growth during 2024, as the Company added approximately $50 million in lower cost deposits from this program.

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, 2024, was $127.5 million, or 9.2 percent of total assets compared to $124.3 million or 9.3 percent of total assets
at December 31, 2023. Retained earnings increased during the year due to earnings of $11.5 million less dividends paid to common shareholders
of $3.8 million and repurchases of Company common shares of $4.7 million. The fair market value of the bond portfolio declined slightly
during 2024 due to the valuation adjustment on the portfolio, which resulted in accumulated other comprehensive loss (“AOCI”)
rising to $30.2 million from $29.8 million.

The
Company continued to repurchase its own common shares during the year under the Company’s publicly announced share repurchase programs.
Specifically, the Company repurchased 253,817 shares during 2024 at an average price of $18.43 per share. On December 18, 2024, the Company’s
Board of Directors approved a share repurchase program authorizing the repurchase of 500,000 shares through December 31, 2026. As of
December 31, 2024, the Company had repurchased a total of 17,460 shares, and 482,540 shares remained available for purchase, under this
program. The December 18, 2024, share repurchase program replaced the Company’s prior repurchase program announced on December
21, 2022, under which an aggregate of 500,000 common shares of the Company were repurchased through December 2024.

Nonperforming
assets totaled $5.5 million, or 0.40 percent of total assets at December 31, 2024, an increase of $2.2 million, or 65.7 percent from
2023. The Company had total net charge-offs on loans of $250,000 in 2024, as compared to net charge-offs of $92,000 in 2023. The Company’s
ACL at December 31, 2024, now covers nonperforming loans at 274 percent, down from 560 percent at December 31, 2023.

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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 $15.1 million at December 31, 2024, which reflects an increase of $6.3 million, or
72 percent. This increase was the result of $6.8 million in provision expense during the period and $1.0 million in net charge-offs over
the five-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:

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, 2024, 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 – 2024 vs. 2023

Net
income for 2024 was $11.5 million, or $1.72 per diluted share, compared with net income of $12.1 million, or $1.75 per diluted share,
for 2023. State Bank reported net income for 2024 of $13.0 million, which was down slightly from the $13.3 million of net income in 2023.
SBFG Title reported net income for 2024 of $0.36 million, which was up from net income of $0.24 million for 2023.

Positive
results for 2024 included loan growth of $46.5 million, with deposits higher by $82.4 million. Deposit growth was boosted by the Company’s
participation in the State of Ohio’s Homebuyer Plus program. For the full year of 2024, residential real estate loan production
was $261.3 million, with $4.6 million of revenue from gains on sale. The level of mortgage origination was up from the $215.5 million
in 2023. The Company’s loans serviced for others ended the year at $1.427 billion, up slightly from $1.367 billion at December
31, 2023.

Operating
revenue was steady at $57.0 million as increased mortgage volume offset the sale of Visa B shares that occurred in 2023 of $1.4 million.
SBFG Title revenue also remained level at $1.64 million.

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Operating
expense increased by $1.0 million, or 2.4 percent, from $42.0 million in 2023 to $43.0 million in 2024, due to higher incentive and commission
levels, which were partially offset by moving higher medical costs to the Captive.

Results
of Operations

Net
interest income was $39.9 million for 2024 and increased slightly from net interest income of $39.3 million for 2023. Average earning
assets increased slightly to $1.27 billion in 2024, compared to $1.25 billion in 2023, primarily due to the increase in our loan portfolio,
partially offset by lower cash and securities. The consolidated 2024 full year net interest margin on a fully-taxable equivalent (“FTE”)
basis was 3.16 percent compared to 3.16 percent for the full year of 2023.

Provision
for credit losses was taken in 2024 in the amount of $0.12 million compared to $0.32 million taken during 2023. For 2024, net charge-offs
totaled $0.25 million or 0.02 percent of average loans, compared to net charge-offs of $0.01 million or 0.01 percent of average loans,
for 2023.

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Total
noninterest income was $17.0 million for 2024 compared to $17.7 million for 2023, representing a decrease of $0.7 million, or 4.0 percent,
year-over-year. Gains on sale of residential mortgage loans was up from 2023 by $0.96 million, or 26.5 percent. The Company sold $216.0
million of originated mortgages into the secondary market in 2024, which due to being higher than the amortization on the serviced portfolio,
increased the size of our serviced loan portfolio to $1.428 billion at December 31, 2024 from $1.367 billion at December 31, 2023. Sales
of non-mortgage loans (small business and farm credits) in 2024 was just $0.7 million. The Company saw its wealth management assets under
management increase by $45.9 million to $547.7 million at December 31, 2024, with total wealth management fees of $3.5 million.

Total
noninterest expense was $43.0 million for 2024 compared to $42.0 million for 2023, representing a $1.0 million, or 2.4 percent, increase
year-over-year. Total full-time equivalent employees ended 2024 at 252, which was up 1 from year end 2023.

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.

Goodwill,
Intangibles and Capital Purchases

The
Company completed its most recent annual goodwill impairment review as of December 31, 2024. Due to declines in the Company’s share
price, a quantitative evaluation of goodwill was completed as of September 30, 2024, which revealed that impairment was not warranted.
No events have occurred since that assessment, which would warrant impairment. At December 31, 2024, 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 $235.9 million at December 31, 2024, which included pledged available-for-sale
securities of $132.8 million, compared to liquid assets of $246.7 million at December 31, 2023.

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.

The
Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $852.6 million
at December 31, 2024, 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, 2024, 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 $142.5 million of additional borrowing capacity
existed at December 31, 2024.

At
December 31, 2024 and 2023, the Company had $41.0 million in federal funds lines available. The Company also had $66.8 million in unpledged
securities at December 31, 2024 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 2024 and 2023
follows:

The
Company experienced positive cash flows from operating activities in 2024 and 2023. Net cash from operating activities was $9.5 million
and $14.0 million for the years ended December 31, 2024 and 2023, respectively. Significant operating items for 2024 included gain on
sale of loans of $4.7 million and net income of $11.5 million. Cash provided by the sale of loans held for sale were $216.0 million.
Cash used in the origination of loans held for sale were $217.8 million.

The
Company experienced negative cash flows from investing activities in 2024 and 2023. Net cash used in investing activities was $28.9 million
and $17.4 million for the years ended December 31, 2024 and 2023, respectively. A net increase in loans of $46.8 million was the primary
change in 2024. The primary change for 2023 was a net increase in loans of $38.7 million. The Company had proceeds from repayments, maturities,
sales and calls of securities of $18.8 million and $22.2 million in 2024 and 2023, respectively.

The
Company experienced positive cash flows from financing activities in 2024 and negative cash flows in 2023. Net cash provided by financing
activities was $22.5 million and net cash used in financing activities was $1.5 million for the years ended December 31, 2024 and 2023,
respectively. The increase in deposits of $82.4 million attributed to the positive cash flows in 2024 and the decrease in deposits of
$16.5 million attributed to the negative cash flows in 2023.

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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: