SB FINANCIAL GROUP, INC. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 1-36785

SB FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Ohio		34-1395608
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

401 Clinton Street, Defiance, Ohio 43512

(Address of principal executive offices)

(Zip Code)

(419) 783-8950

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, No Par Value	SBFG	The NASDAQ Stock Market, LLC
7,698,623 Outstanding at May 7, 2020		(NASDAQ Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerate Filer ☐	Accelerated Filer ☒
Non-Accelerated Filer ☐	Smaller Reporting Company ☒
	Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

SB FINANCIAL GROUP, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40

Signatures		41

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SB Financial Group, Inc.

Condensed Consolidated Balance Sheets

	March 2020			December 2019
($ in thousands)	(unaudited)			(audited)
Assets
Cash and due from banks	$	56,393		$	27,064
Available-for-sale securities		107,727			100,948
Loans held for sale		11,328			7,258
Loans, net of unearned income		830,764			825,510
Allowance for loan losses		(8,958	)		(8,755	)
Premises and equipment, net		23,599			23,385
Federal Reserve and Federal Home Loan Bank Stock, at cost		4,648			4,648
Foreclosed assets held for sale, net		85			305
Interest receivable		2,940			3,106
Goodwill and other intangibles		17,830			17,832
Cash value of life insurance		17,299			17,221
Mortgage servicing rights		8,974			11,017
Other assets		15,684			9,038

Total assets	$	1,088,313		$	1,038,577

Liabilities and shareholders’ equity

Liabilities
Deposits
Non interest bearing demand	$	170,920		$	158,357
Interest bearing demand		133,722			131,084
Savings		138,863			119,359
Money market		169,209			173,666
Time deposits		251,177			257,753
Total deposits		863,891			840,219

Short term borrowings		36,881			12,945
Federal Home Loan Bank advances		16,000			16,000
Trust preferred securities		10,310			10,310
Interest payable		1,131			1,191
Other liabilities		24,195			21,818
Total liabilities		952,408			902,483

Commitments & Contingent Liabilities		-			-

Shareholders’ Equity
Common stock, no par value; (authorized 10,000,000 shares; 2020 - 8,180,712 shares issued, 2019 - 8,180,712 shares issued)		54,463			54,463
Additional paid-in capital		14,655			15,023
Retained earnings		72,641			72,704
Accumulated other comprehensive income		2,049			659
Treasury stock, at cost; (2020 - 433,682 common shares, 2019 - 417,785 common shares)		(7,903	)		(6,755	)
Total shareholders’ equity		135,905			136,094
Total liabilities and shareholders’ equity	$	1,088,313		$	1,038,577

See notes to condensed consolidated financial statements (unaudited)

Note: The balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date.

SB Financial Group, Inc.

Condensed Consolidated Income Statement (unaudited)

	Three Months Ended
	March			March
($ in thousands, except per share data)	2020			2019
Interest Income
Loans
Taxable	$	9,795		$	9,427
Tax exempt		79			62
Securities
Taxable		692			911
Tax exempt		78			98
Total interest income		10,644			10,498

Interest Expense
Deposits		1,880			1,918
Repurchase agreements & other		28			26
Federal Home Loan Bank advance expense		100			100
Trust preferred securities expense		88			114
Total interest expense		2,096			2,158

Net Interest Income		8,548			8,340
Provision for loan losses		600			-

Net interest income after provision for loan losses		7,948			8,340

Noninterest Income
Wealth management fees		768			734
Customer service fees		682			631
Gain on sale of mortgage loans & OMSR		1,949			1,192
Mortgage loan servicing fees, net		(2,052	)		(280	)
Gain on sale of non-mortgage loans		104			327
Title insurance income		265			19
Loss on sale/disposal of assets		(46	)		(2	)
Other income		491			379
Total noninterest income		2,161			3,000

Noninterest Expense
Salaries and employee benefits		5,427			4,902
Net occupancy expense		698			645
Equipment expense		700			711
Data processing fees		548			443
Professional fees		757			617
Marketing expense		208			239
Telephone and communications		115			115
Postage and delivery expense		115			84
State, local and other taxes		254			255
Employee expense		184			153
Other expenses		400			462
Total noninterest expense		9,406			8,626

Income before income tax		703			2,714

Provision for income taxes		22			488

Net Income	$	681		$	2,226

Preferred share dividends		-			244

Net income available to common shareholders	$	681		$	1,982

Basic earnings per common share	$	0.09		$	0.31

Diluted earnings per common share	$	0.09		$	0.28

Average common shares outstanding (in thousands):
Basic:		7,749			6,482
Diluted:		7,756			7,994

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

	Three Months Ended
	March			March
($ in thousands)	2020			2019

Net income	$	681		$	2,226
Other comprehensive income:
Available for sale investment securities:
Unrealized holding gain arising in the period		1,759			856
Related tax expense		(369	)		(180	)
Net effect on other comprehensive income		1,390			676
Total comprehensive income	$	2,071		$	2,902

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

	Preferred			Common		Additional Paid-in			Retained			Accumulated Other Comprehensive  Income			Treasury
($ in thousands, except per share data)	Stock			Stock		Capital			Earnings			(Loss)			Stock			Total

Balance, January 1, 2020	$	-		$	54,463	$	15,023		$	72,704		$	659		$	(6,755	)	$	136,094
Net income										681									681
Other comprehensive income													1,390						1,390
Dividends on common, $0.095 per share										(744	)								(744	)
Restricted stock vesting							(225	)								225			-
Stock options exercised							(253	)								441			188
Repurchased stock																(1,814	)		(1,814	)
Stock based compensation expense							110												110
Balance, March 31, 2020	$	-		$	54,463	$	14,655		$	72,641		$	2,049		$	(7,903	)	$	135,905

Balance, January 1, 2019	$	13,979		$	40,485	$	15,226		$	64,012		$	(552	)	$	(2,715	)	$	130,435
Net income										2,226									2,226
Other comprehensive income													676						676
Conversion of preferred to common		(1	)		1														-
Stock reissue for purchase of Peak Title							22									117			139
Dividends on common, $0.085 per share										(556	)								(556	)
Dividends on preferred, $0.1625 per share										(244	)								(244	)
Restricted stock vesting							(208	)								208			-
Stock options exercised							(10	)								21			11
Repurchased stock																(1,294	)		(1,294	)
Stock based compensation expense							113												113
Balance, March 31, 2019	$	13,978		$	40,486	$	15,143		$	65,438		$	124		$	(3,663	)	$	131,506

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Three Months Ended March 31,
($ in thousands)	2020			2019
Operating Activities
Net Income	$	681		$	2,226
Items not requiring (providing) cash
Depreciation and amortization		477			419
Provision for loan losses		600			-
Expense of share-based compensation plan		110			113
Amortization of premiums and discounts on securities		70			74
Amortization of intangible assets		2			2
Amortization of originated mortgage servicing rights		597			255
Impairment of mortgage servicing rights		2,212			708
Deferred income taxes		(279	)		324
Proceeds from sale of loans held for sale		84,476			44,502
Originations of loans held for sale		(87,259	)		(43,373	)
Gain from sale of loans		(2,053	)		(1,519	)
Loss (gain) on sales of assets		46			2
Changes in
Interest receivable		166			(301	)
Other assets		(7,089	)		(1,577	)
Interest payable & other liabilities		2,596			2,199
Net cash provided (used) by operating activities		(4,647	)		4,054

Investing Activities
Purchases of available-for-sale securities		(45,065	)		(8,601	)
Proceeds from maturities of available-for-sale securities		39,975			4,550
Net change in loans		(5,656	)		(10,558	)
Purchase of premises, equipment		(691	)		(451	)
Proceeds from sales of premises, equipment		-			7
Purchase of bank owned life insurance		-			(50	)
Proceeds from sale of foreclosed assets		175			15
Acquisition, net of cash acquired		-			(2,600	)
Net cash used in investing activities		(11,262	)		(17,688	)

Financing Activities
Net increase in demand deposits, money market, interest checking & savings accounts		30,248			7,944
Net increase in certificates of deposit		(6,576	)		17,162
Net increase (decrease) in short term borrowings		23,936			(2,929	)
Proceeds from Federal Home Loan Bank advances		-			8,000
Net proceeds from share-based compensation plans		188			11
Stock repurchase plan		(1,814	)		(1,294	)
Issuance of common shares		-			139
Dividends on common shares		(744	)		(556	)
Dividends on preferred shares		-			(244	)
Net cash provided by financing activities		45,238			28,233
Increase in cash and cash equivalents		29,329			14,599
Cash and cash equivalents, beginning of period		27,064			48,363
Cash and cash equivalents, end of period	$	56,393		$	62,962
Supplemental cash flow information
Interest paid	$	2,156		$	1,944
Income taxes paid	$	-		$	620
Fair value of assets acquired - premises and equipment	$	-		$	1,161
Supplemental non-cash disclosure
Initial recognition of right-of-use lease assets	$	-		$	293
Transfer of loans to foreclosed assets	$	5		$	199

See notes to condensed consolidated financial statements (unaudited)

SB FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—BASIS OF PRESENTATION

SB Financial Group, Inc., an Ohio corporation (the “Company”), is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”). In addition, State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), which is inactive, and State Bank Insurance, LLC (“SBI”).

In March 2019, the Company formed SBFG Title, LLC (“Title”) and purchased all of the assets and real estate of an Ohio based title agency. The purchase was completed effective March 15, 2019, and the purchase resulted in an increase in goodwill, which is detailed in Note 6.

In March 2019, the Company formed SB Captive, Inc. (“Captive”), which is a captive insurance company based in Nevada. The Captive allows the Company to share insurance risk among a pool of similar sized banks.

The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, Title, Captive and SBI. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three ended March 31, 2020, are not necessarily indicative of results for the complete year.

The condensed consolidated balance sheet of the Company as of December 31, 2019 has been derived from the audited consolidated balance sheet of the Company as of that date.

For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

New and applicable accounting pronouncements:

ASU No. 2018-13: Fair Value Measurement - Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)

The updated guidance improves the disclosure requirements for fair value measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted- average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. The impact of this new guidance did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards not yet adopted:

ASU No. 2020-04: Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)

This guidance provides temporary options to ease the potential burden in accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective as of March 12, 2020 through December 31, 2022. The Company anticipates being fully prepared to implement a replacement for the reference rate and has determined that any change will not have a material impact to the consolidated financial statements.

ASU No. 2020-01: Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323 and Topic 815

This guidance was issued in January 2020 to clarify that a company should consider observable transaction that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective beginning after December 15, 2020. The Company is assessing the impact on its accounting and disclosures.

ASU No. 2017-04: Intangibles – Goodwill and Other (Topic 350)

This ASU simplifies the test for goodwill impairment. Specifically, these amendments eliminate Step 2 from the goodwill impairment test, and also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual goodwill impairment tests in fiscal years beginning after December 15, 2022, and management does not believe the changes will have a material effect on the Company’s accounting and disclosures.

ASU No. 2016-13: Financial Instruments – Credit Losses (Topic 326)

This ASU, which is commonly known as “CECL,” replaces the current GAAP incurred impairment methodology regarding credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP.

The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities.

In December 2018, the OCC, the Federal Reserve Board, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

On November 15, 2019, the FASB delayed the effective date for certain small public companies and other private companies. As the Company is currently a smaller reporting company, the amendment will delay the effective date of ASU No. 2016-13 to the fiscal year beginning after December 15, 2022.

While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date. The Company implemented a process to track required data by utilizing accounting software in preparation for compliance. We anticipate being fully prepared for implementation by December 15, 2022.

Reclassifications:

Certain reclassifications have been made to prior period financial statements to conform to the current financial statement presentation. These reclassifications had no effect on net income.

NOTE 2—EARNINGS PER SHARE

Earnings per share (EPS) have been computed based on the weighted average number of common shares outstanding during the periods presented. There were no anti-dilutive shares in 2020 or 2019. The average number of common shares used in the computation of basic and diluted earnings per share are set forth in the tables below:

	Three Months Ended Mar. 31,
($ and outstanding shares in thousands - except per share data)	2020			2019

Distributed earnings allocated to common shares	$	744		$	556
Undistributed (in excess of) earnings allocated to common shares		(67	)		1,422
Net earnings allocated to common shares		677			1,978
Net earnings allocated to participating securities		4			4
Dividends on convertible preferred shares		-			244
Net Income allocated to common shares and participating securities	$	681		$	2,226

Weighted average shares outstanding for basic earnings per share		7,749			6,482
Dilutive effect of stock compensation		7			38
Dilutive effect of convertible shares		-			1,474
Weighted average shares outstanding for diluted earnings per share		7,756			7,994

Basic earnings per common share	$	0.09		$	0.31
Diluted earnings per common share	$	0.09		$	0.28

Note 3 – AVAILABLE FOR SALE Securities

The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at March 31, 2020 and December 31, 2019 were as follows:

			Gross		Gross
($ in thousands)	Amortized		Unrealized		Unrealized
March 31, 2020	Cost		Gains		Losses			Fair Value

U.S. Treasury and Government agencies	$	21,846	$	298	$	-		$	22,144
Mortgage-backed securities		73,318		1,858		(12	)		75,164
State and political subdivisions		9,970		449		-			10,419

Totals	$	105,134	$	2,605	$	(12	)	$	107,727

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2019	Cost		Gains		Losses			Fair Value

U.S. Treasury and Government agencies	$	12,023	$	181	$	(2	)	$	12,202
Mortgage-backed securities		77,892		492		(202	)		78,182
State and political subdivisions		10,199		366		(1	)		10,564

Totals	$	100,114	$	1,039	$	(205	)	$	100,948

The amortized cost and fair value of securities available for sale at March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
($ in thousands)	Cost		Value

Within one year	$	15,504	$	15,508
Due after one year through five years		6,088		6,273
Due after five years through ten years		4,561		4,788
Due after ten years		5,663		5,994
		31,816		32,563

Mortgage-backed securities		73,318		75,164

Totals	$	105,134	$	107,727

The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $37.9 million at March 31, 2020 and $34.8 million at December 31, 2019. The fair value of securities delivered for repurchase agreements was $24.8 million at March 31, 2019 and $19.5 million at December 31, 2019.

There were no realized gains and losses from sales of available-for-sale securities for the three months ended March 31, 2020 or March 31, 2019.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments was $3.1 million at March 31, 2020, and $38.8 million at December 31, 2019, which was approximately 3 and 38 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019 are as follows:

($ in thousands)	Less than 12 Months					12 Months or Longer					Total
March 31, 2020	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

U.S. Treasury and Government agencies	$	-	$	-		$	-	$	-		$	-	$	-
Mortgage-backed securities		1,985		(3	)		1,154		(9	)		3,139		(12	)
State and political subdivisions		-		-			-		-			-		-

Totals	$	1,985	$	(3	)	$	1,154	$	(9	)	$	3,139	$	(12	)

	Less than 12 Months					12 Months or Longer					Total
December 31, 2019	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

U.S. Treasury and Government agencies	$	872	$	(1	)	$	2,598	$	(1	)	$	3,470	$	(2	)
Mortgage-backed securities		30,692		(157	)		4,264		(45	)		34,956		(202	)
State and political subdivisions		339		(1	)		-		-			339		(1	)

Totals	$	31,903	$	(159	)	$	6,862	$	(46	)	$	38,765	$	(205	)

The total unrealized loss in the securities portfolio was $0.01 million as of March 31, 2020 compared to a $0.2 million unrealized loss at December 31, 2019. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost. Management has determined there is no other-than-temporary-impairment on its securities as of March 31, 2020.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, all loan classes are placed on nonaccrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected on the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

When State Bank moves a loan to nonaccrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, State Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Categories of loans at March 31, 2020 and December 31, 2019 include:

	Total Loans						Nonaccrual Loans
($ in thousands)	March 2020			December 2019			March 2020		December 2019

Commercial & industrial	$	150,790		$	151,047		$	1,309	$	1,772
Commercial real estate - owner occupied		101,289			98,488			1,358		1,362
Commercial real estate - nonowner occupied		274,442			268,294			458		464
Agricultural		47,660			50,994			-		-
Residential real estate		193,501			193,159			2,369		1,635
Home equity line of credit (HELOC)		48,213			48,070			263		249
Consumer		14,121			14,738			25		18
Total Loans	$	830,016		$	824,790		$	5,782	$	5,500

Net deferred costs	$	748		$	720

Total Loans, net deferred costs	$	830,764		$	825,510

Allowance for loan losses	$	(8,958	)	$	(8,755	)

The risk characteristics of each loan portfolio segment are as follows:

Commercial & Industrial and Agricultural

Commercial & industrial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate (Owner and Nonowner Occupied)

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential Real Estate, HELOC and Consumer

Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers.

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2020, December 31, 2019 and March 31, 2019.

Allowance for loan losses
($ in thousands)
For the Three Months Ended March 31, 2020	Commercial & industrial			Commercial real estate		Agricultural		Residential real estate		Consumer			Total

Beginning balance	$	1,883		$	3,602	$	434	$	2,203	$	633		$	8,755
Charge offs		(388	)		-		-		-		(12	)		(400	)
Recoveries		1			-		-		1		1			3
Provision		153			66		41		238		102			600
Ending balance	$	1,649		$	3,668	$	475	$	2,442	$	724		$	8,958

For the Three Months Ended March 31, 2019	Commercial & industrial			Commercial real estate		Agricultural			Residential real estate			Consumer			Total

Beginning balance	$	1,435		$	2,923	$	482		$	2,567		$	760		$	8,167
Charge offs		(48	)		-		-			-			(12	)		(60	)
Recoveries		-			-		-			-			14			14
Provision		(53	)		346		(16	)		(251	)		(26	)		-
Ending balance	$	1,334		$	3,269	$	466		$	2,316		$	736		$	8,121

Loans Receivable at March 31, 2020	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance: individually evaluated for impairment	$	1	$	-	$	-	$	66	$	-	$	67
Ending balance: collectively evaluated for impairment	$	1,648	$	3,668	$	475	$	2,376	$	724	$	8,891

Totals	$	1,649	$	3,668	$	475	$	2,442	$	724	$	8,958

Loans:
Ending balance: individually evaluated
for impairment	$	1,261	$	1,766	$	-	$	2,950	$	27	$	6,004
Ending balance: collectively evaluated for impairment	$	149,529	$	373,965	$	47,660	$	190,551	$	62,307	$	824,012

Totals	$	150,790	$	375,731	$	47,660	$	193,501	$	62,334	$	830,016

Loans Receivable at December 31, 2019	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance: individually evaluated for impairment	$	511	$	147	$	-	$	68	$	-	$	726
Ending balance: collectively evaluated for impairment	$	1,372	$	3,455	$	434	$	2,135	$	633	$	8,029

Totals	$	1,883	$	3,602	$	434	$	2,203	$	633	$	8,755

Loans:
Ending balance: individually evaluated for impairment	$	1,722	$	1,558	$	-	$	2,274	$	31	$	5,585
Ending balance: collectively evaluated for impairment	$	149,325	$	365,224	$	50,994	$	190,885	$	62,777	$	819,205

Totals	$	151,047	$	366,782	$	50,994	$	193,159	$	62,808	$	824,790

Credit Risk Profile

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination.

Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not warranted. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of March 31, 2020 and December 31, 2019.

($ in thousands) March 31, 2020	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner occupied		Agricultural		Residential real estate		HELOC		Consumer		Total
Pass (1 - 4)	$	147,732	$	99,649	$	272,021	$	47,649	$	190,334	$	47,891	$	14,014	$	819,290
Special Mention (5)		575		-		539		-		-		-		-		1,114
Substandard (6)		1,581		282		1,424		11		3,136		322		107		6,863
Doubtful (7)		902		1,358		458		-		31		-		-		2,749
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	150,790	$	101,289	$	274,442	$	47,660	$	193,501	$	48,213	$	14,121	$	830,016

December 31, 2019	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner		Agricultural		Residential real estate		HELOC		Consumer		Total
Pass (1 - 4)	$	147,667	$	96,836	$	265,839	$	50,994	$	190,438	$	47,787	$	14,706	$	814,267
Special Mention (5)		597		-		543		-		-		-		-		1,140
Substandard (6)		1,444		290		1,663		-		2,689		283		32		6,401
Doubtful (7)		1,339		1,362		249		-		32		-		-		2,982
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	151,047	$	98,488	$	268,294	$	50,994	$	193,159	$	48,070	$	14,738	$	824,790

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis.

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2020 and December 31, 2019.

($ in thousands)	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
March 31, 2020	Past Due		Past Due		90 Days Past Due		Due		Current		Receivable

Commercial & industrial	$	158	$	-	$	875	$	1,033	$	149,757	$	150,790
Commercial real estate - owner occupied		-		88		1,358		1,446		99,843		101,289
Commercial real estate - nonowner occupied		42		-		215		257		274,185		274,442
Agricultural		-		-		-		-		47,660		47,660
Residential real estate		40		613		1,481		2,134		191,367		193,501
HELOC		122		115		63		300		47,913		48,213
Consumer		29		224		17		270		13,851		14,121
Total Loans	$	391	$	1,040	$	4,009	$	5,440	$	824,576	$	830,016

	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
December 31, 2019	Past Due		Past Due		90 Days Past Due		Due		Current		Receivable

Commercial & industrial	$	64	$	-	$	312	$	376	$	150,671	$	151,047
Commercial real estate - owner occupied		-		-		-		-		98,488		98,488
Commercial real estate - nonowner occupied		-		-		215		215		268,079		268,294
Agricultural		13		-		-		13		50,981		50,994
Residential real estate		309		415		644		1,368		191,791		193,159
HELOC		166		91		56		313		47,757		48,070
Consumer		65		93		14		172		14,566		14,738
Total Loans	$	617	$	599	$	1,241	$	2,457	$	822,333	$	824,790

All loans past due 90 days are systematically placed on nonaccrual status.

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following tables present impaired loan information as of and for the three months ended March 31, 2020 and 2019, and for the twelve months ended December 31, 2019:

($ in thousands)
Three Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
March 31, 2020	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	1,069	$	1,769	$	-	$	1,922	$	15
Commercial real estate - owner occupied		1,358		1,358		-		1,362		-
Commercial real estate - nonowner occupied		408		408		-		473		3
Agricultural		-		-		-		-		-
Residential real estate		2,303		2,370		-		2,663		2
HELOC		14		14				15		-
Consumer		13		13		-		15		-
With a specific allowance recorded:
Commercial & industrial		192		249		1		249		-
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		-		-		-		-		-
Agricultural		-		-		-		-		-
Residential real estate		647		647		66		652		5
HELOC		-		-		-		-		-
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	1,261	$	2,018	$	1	$	2,171	$	15
Commercial real estate - owner occupied	$	1,358	$	1,358	$	-	$	1,362	$	-
Commercial real estate - nonowner occupied	$	408	$	408	$	-	$	473	$	3
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,950	$	3,017	$	66	$	3,315	$	7
HELOC	$	14	$	14	$	-	$	15	$	-
Consumer	$	13	$	13	$	-	$	15	$	-

($ in thousands)
Twelve Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
December 31, 2019	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	722	$	1,092	$	-	$	1,377	$	114
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		196		197		-		259		21
Agricultural		-		-		-		-		-
Residential real estate		1,621		1,687		-		2,001		106
HELOC		16		16				18		1
Consumer		15		15		-		19		1
With a specific allowance recorded:
Commercial & industrial		1,000		1,000		511		823		49
Commercial real estate - owner occupied		1,362		1,362		147		1,362		38
Commercial real estate - nonowner occupied		-		-		-		-		-
Agricultural		-		-		-		-		-
Residential real estate		653		653		68		666		31
HELOC		-		-		-		-		-
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	1,722	$	2,092	$	511	$	2,200	$	163
Commercial real estate - owner occupied	$	1,362	$	1,362	$	147	$	1,362	$	38
Commercial real estate - nonowner occupied	$	196	$	197	$	-	$	259	$	21
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,274	$	2,340	$	68	$	2,667	$	137
HELOC	$	16	$	16	$	-	$	18	$	1
Consumer	$	15	$	15	$	-	$	19	$	1


Three Months Ended March 31, 2019	Average Recorded		Interest Income
($ in thousands)	Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	949	$	25
Commercial real estate - owner occupied		-		-
Commercial real estate - nonowner occupied		259		7
Agricultural		-		-
Residential real estate		1,608		24
HELOC		20		-
Consumer		-		-
With a specific allowance recorded:
Commercial & industrial		-		-
Commercial real estate - owner occupied		-		-
Commercial real estate - nonowner occupied		-		-
Agricultural		-		-
Residential real estate		1,003		12
HELOC		-		-
Consumer		21		-
Totals:
Commercial & industrial	$	949	$	25
Commercial real estate - owner occupied	$	-	$	-
Commercial real estate - nonowner occupied	$	259	$	7
Agricultural	$	-	$	-
Residential real estate	$	2,611	$	36
HELOC	$	20	$	-
Consumer	$	21	$	-

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

Troubled Debt Restructured (TDR) Loans

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

TDR Concession Types

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved by management. The types of concessions provided to borrowers include:

●

Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the loan. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.

●

Amortization or maturity date change: A change in the amortization or maturity date beyond what the collateral supports, including a concession that does any of the following:

(1)

Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(2)

Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(3)

Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

●

Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

During the three months ended March 31, 2020, the Company had no new TDR activity.

The following table represents new TDR activity for the three months ended March 31, 2019:

($ in thousands)	Number of Loans		Pre-Modification Recorded Balance		Post Modification Recorded Balance

Commercial & industrial		3	$	763	$	763

Total modifications		3	$	763	$	763

	Interest						Total
	Only		Term		Combination		Modification

Commercial & industrial	$	150	$	613	$	-	$	763

Total modifications	$	150	$	613	$	-	$	763

There were no TDR’s modified during the three months ended March 31, 2020 that have subsequently defaulted.

The following table represents TDR’s modified during the three months ended March 31, 2019:

($ in thousands)	Number of Contracts		Recorded Balance

Residential real estate		2	$	102

Total Modifications		2	$	102

NOTE 5 – MORTGAGE SERVICING RIGHTS

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $1.2 billion at March 31, 2020 and $1.2 billion at December 31, 2019. Contractually specified servicing fees of approximately $0.8 million and $0.7 million were included in mortgage loan servicing fees in the income statement for the three months ended March 31, 2020 and 2019, respectively.

The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance:

($ in thousands)	2020			2019

Carrying amount, January 1	$	11,017		$	11,365
Mortgage servicing rights capitalized during the year		766			436
Mortgage servicing rights amortization during the year		(597	)		(255	)
Net change in valuation allowance		(2,212	)		(708	)
Carrying amount, March 31	$	8,974		$	10,838

Valuation allowance:
January 1	$	1,306		$	212
Increase (reduction)		2,212			708

March 31	$	3,518		$	920

NOTE 6 – GOODWILL

On March 15, 2019, the Company purchased all of the assets of an Ohio-based title agency through a newly-formed, wholly-owned subsidiary, SBFG Title, LLC. This acquisition resulted in approximately $1.4 million in goodwill.

A summary of the activity in goodwill is presented below:

	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
($ in thousands)	Carrying Amount		Carrying Amount

Beginning Balance	$	17,792	$	16,353
Acquired goodwill		-		1,439

Ending Balance	$	17,792	$	17,792

NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable-rate assets.

Non-designated Hedges

The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets.

The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of March 31, 2020 and December 31, 2019.

	March 31, 2020					December 31, 2019
	Notional		Fair			Notional		Fair
($ in thousands)	Amount		Value			Amount		Value
Asset Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans	$	91,506	$	9,155		$	82,826	$	2,846
IRLCs		77,462		726			16,347		55
Total contracts	$	168,968	$	9,881		$	99,173	$	2,901

Liability Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans	$	91,506	$	(9,155	)	$	82,826	$	(2,846	)
Forward contracts		78,500		(1,085	)		22,000		(32	)
Total contracts	$	170,006	$	(10,240	)	$	104,826	$	(2,878	)

The fair value of interest rate swaps were estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date.

The following table presents the amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the three months ended March 31, 2020 and 2019.

		Amount of gain (loss)
($ in thousands)	Statement of income classification	2020			2019
Interest rate swap contracts	Other income	$	180		$	78
Interest rate swap contracts	Other expense		-			-
IRLCs	Gain on sale of mortgage loans & OMSR		671			10
Forward contracts	Gain on sale of mortgage loans & OMSR		(1,053	)		(36	)

The following table shows the offsetting of financial assets and derivative assets at March 31, 2020 and December 31, 2019.

			Gross amounts		Net amounts of assets		Gross amounts not offset in the consolidated balance sheet
($ in thousands)	Gross amounts of recognized assets		offset in the consolidated balance sheet		presented in the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount
March 31, 2020
Interest rate swaps	$	9,155	$	-	$	9,155	$	-	$	-	$	9,155

December 31, 2019
Interest rate swaps	$	2,901	$	55	$	2,846	$	-	$	-	$	2,846

The following table shows the offsetting of financial liabilities and derivative liabilities at March 31, 2020 and December 31, 2019.

			Gross amounts		Net amounts of liabilities		Gross amounts not offset in the consolidated balance sheet
($ in thousands)	Gross amounts of recognized liabilities		offset in the consolidated balance sheet		presented in the consolidated balance sheet		Financial instruments		Cash collateral pledged		Net amount
March 31, 2020
Interest rate swaps	$	9,155	$	-	$	9,155	$	-	$	9,234	$	(79	)

December 31, 2019
Interest rate swaps	$	2,901	$	55	$	2,846	$	-	$	3,242	$	(396	)

NOTE 8 – SHORT-TERM BORROWINGS

($ in thousands)	March 31, 2020		December 31, 2019

Securities Sold Under Repurchase Agreements	$	16,881	$	12,945
Federal Reserve Disount Window		20,000		-
Totals	$	36,881	$	12,945

The Company has retail repurchase agreements to facilitate cash management transactions with commercial customers. These obligations are secured by agency and mortgage-backed securities and such collateral is held by the Federal Home Loan Bank. These securities have various maturity dates from 2022 through 2044. As of March 31, 2020, these repurchase agreements were secured by agency securities and mortgage-backed securities with corresponding liabilities of $10.4 million and $14.4 million, respectively. The repurchase agreements mature within one month.

The Company has borrowing capabilities at the Federal Reserve Discount Window by pledging either securities or loans as collateral. As of March 31, 2020, The Company borrowed $20.0 million for a maturity date of less than 30 days by pledging securities as collateral.

At March 31, 2020 and December 31, 2019, the Company had $41.0 million in federal funds lines, of which none were drawn.

NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES

The FHLB advances were secured by $166.0 million in mortgage loans at March 31, 2020. Advances, at interest rates from 1.84 to 2.93 percent, are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of FHLB advances at March 31, 2020 were:

($ in thousands)	Debt
2020	$	8,000
2021		2,500
2022		3,000
2023		2,500
Total	$	16,000

NOTE 10 – TRUST PREFERRED SECURITIES

On September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. Distributions on the Capital Securities are payable quarterly at a variable rate that is based upon the 3-month LIBOR plus 1.80 percent and are included in interest expense in the consolidated financial statements. These securities may be included in Tier 1 capital and may be prepaid at anytime without penalty (with certain limitations applicable) under current regulatory guidelines and interpretations. The balance of the Capital Securities as of March 31, 2020 and December 31, 2019 was $10.3 million, with a maturity date of September 15, 2035.

NOTE 11 – FAIR VALUE OF ASSETS AND LIABILITIES

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities

The fair values of available-for-sale securities are determined by various valuation methodologies. Level 1 securities include money market mutual funds. Level 1 inputs include quoted prices in an active market. Level 2 securities include U.S. treasury and government agencies, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

Interest Rate Contracts

The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

Forward contracts

The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1).

Interest Rate Lock Commitments

The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and December 31, 2019.

($ in thousands) Available-for-sale securities:	Fair Values at 03/31/2020			(Level 1)			(Level 2)			(Level 3)

U.S. Treasury and Government Agencies	$	22,144		$	-		$	22,144		$	-
Mortgage-backed securities		75,164			-			75,164			-
State and political subdivisions		10,419			-			10,419			-
Interest rate contracts - assets		9,155			-			9,155			-
Interest rate contracts - liabilities		(9,155	)		-			(9,155	)		-
Forward contracts		(1,085	)		(1,085	)		-			-
IRLCs		726			-			-			726

($ in thousands) Available-for-sale securities:	Fair Values at 12/31/2019			(Level 1)			(Level 2)			(Level 3)

U.S. Treasury and Government Agencies	$	12,202		$	-		$	12,202		$	-
Mortgage-backed securities		78,182			-			78,182			-
State and political subdivisions		10,564			-			10,564			-
Interest rate contracts - assets		2,846			-			2,846			-
Interest rate contracts - liabilities		(2,846	)		-			(2,846	)		-
Forward contracts		(32	)		(32	)		-			-
IRLCs		55			-			-			55

Level 1 – Quoted Prices in Active Markets for Identical Assets

Level 2 – Significant Other Observable Inputs

Level 3 – Significant Unobservable Inputs

The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Collateral-dependent Impaired Loans, NET of ALLL

Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The estimated fair value of collateral-dependent impaired loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining an independent appraisal of the collateral, which is reviewed for accuracy and consistency by Credit Administration. These appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All impaired loans held by the Company were collateral dependent at March 31, 2020 and December 31, 2019.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees; miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.

($ in thousands)	Fair values at 03/31/2020		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	2,354	$	-	$	-	$	2,354
Mortgage servicing rights		8,211		-		-		8,211
IRLCs		726		-		-		726

($ in thousands)	Fair values at 12/31/2019		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	2,527	$	-	$	-	$	2,527
Mortgage servicing rights		5,084		-		-		5,084
IRLCs		55		-		-		55

Level 1 - quoted prices in active markets for identical assets

Level 2 - significant other observable inputs

Level 3 - significant unobservable inputs

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

	Fair value at		Valuation		Range (weighted-
($ in thousands)	3/31/2020		technique	Unobservable inputs	average)

Collateral-dependent impaired loans	$	2,354	Market comparable properties	Comparability adjustments (%)		2 - 41% (17	)%
Mortgage servicing rights		8,211	Discounted cash flow	Discount Rate		9.10	%
				Constant prepayment rate		16.56	%
IRLCs		726	Discounted cash flow	P&I earnings credit		0.92	%
				T&I earnings credit		1.23	%
				Inflation for cost of servicing		1.50	%

	Fair Value at		Valuation		Range (weighted-
($ in thousands)	12/31/2019		technique	Unobservable inputs	average)

Collateral-dependent impaired loans	$	2,527	Market comparable properties	Comparability adjustments (%)		2 - 62% (28	)%
Mortgage servicing rights		5,084	Discounted cash flow	Discount Rate		9.36	%
				Constant prepayment rate		10.19	%
IRLCs		55	Discounted cash flow	P&I earnings credit		1.78	%
				T&I earnings credit		1.93	%
				Inflation for cost of servicing		1.50	%

There were no changes in the inputs or methodologies used to determine fair value at March 31, 2020 as compared to December 31, 2019.

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Due From Banks, Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest Receivable and Payable

The carrying amount approximates the fair value.

Loans Held for Sale

The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.

Loans

The estimated fair value of loans as of March 31, 2020 follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.

Deposits, FHLB advances & Repurchase agreements

Deposits include demand deposits, savings accounts, and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at March 31, 2020 and December 31, 2019.

Loan Commitments

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at March 31, 2020 and December 31, 2019 and are not considered significant to this presentation.

Trust Preferred Securities

The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate.

The following table presents estimated fair values of the Company’s other financial instruments carried at other than fair value. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

($ in thousands)	Carrying		Fair		Fair value measurements using
March 31, 2020	amount		value		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	56,393	$	56,393	$	56,393	$	-	$	-
Loans held for sale		11,328		11,738		-		11,738		-
Loans, net of allowance for loan losses		821,806		815,587		-		-		815,587
Federal Reserve and FHLB Bank stock, at cost		4,648		4,648		-		4,648		-
Interest receivable		2,940		2,940		-		2,940		-

Financial liabilities
Deposits	$	863,891	$	867,253	$	612,713	$	254,540	$	-
Short term borrowings		36,881		36,881		-		36,881		-
FHLB advances		16,000		16,391		-		16,391		-
Trust preferred securities		10,310		8,772		-		8,772		-
Interest payable		1,131		1,131		-		1,131		-

($ in thousands)	Carrying		Fair		Fair value measurements using
December 31, 2019	amount		value		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	27,064	$	27,064	$	27,064	$	-	$	-
Loans held for sale		7,258		7,419		-		7,419		-
Loans, net of allowance for loan losses		816,755		804,808		-		-		804,808
Federal Reserve and FHLB Bank stock, at cost		4,648		4,648		-		4,648		-
Interest receivable		3,106		3,106		-		3,106		-

Financial liabilities
Deposits	$	840,219	$	840,272	$	582,466	$	257,806	$	-
Repurchase agreements		12,945		12,945		-		12,945		-
FHLB advances		16,000		16,149		-		16,149		-
Trust preferred securities		10,310		9,201		-		9,201		-
Interest payable		1,191		1,191		-		1,191		-

NOTE 12 – SHARE BASED COMPENSATION

In April 2017, the Company’s shareholders approved a new share-based incentive compensation plan, the SB Financial Group, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which replaced the Company’s 2008 Stock Incentive Plan (the “2008 Plan” and, together with the 2017 Plan, the “Plans”). The 2017 Plan permits the Company to grant or award incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, and restricted stock units to employees and directors of the Company and its subsidiaries. A total of 500,000 common shares of the Company are available for grants or awards under the 2017 Plan, of which 57,609 shares had been granted under the plan as of March 31, 2020.

The 2008 Plan, which was approved by the Company’s shareholders in April 2008, permitted the grant or award of incentive stock options, nonqualified stock options, stock appreciation rights, and restricted stock for up to 250,000 common shares of the Company. While awards granted under the 2008 Plan remain outstanding, no further awards could be granted under the 2008 Plan after April 2018.

The Plans are intended to advance the interests of the Company and its shareholders by offering employees, directors and advisory board members of the Company and its subsidiaries an opportunity to acquire or increase their ownership interest in the Company through grants of equity-based awards. The Plans permit equity-based awards to be used to attract, motivate, reward and retain highly competent individuals upon whose judgment, initiative, leadership and efforts are key to the success of the Company by encouraging those individuals to become shareholders of the Company.

Stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant and those option awards vest based on 5 years of continuous service and have 10-year contractual terms. The fair value of each option award was estimated on the date of grant using the Black-Scholes valuation model. No options were granted in the first three months of 2020.

A summary of stock option activity under the Company’s plans as of March 31, 2020 and changes during the quarter then ended, is presented below:

($ in thousands - except per share data)	Shares			Weighted Average Exercise Price		Weighted Average Remaining Term		Aggregate Intrinsic Value

Outstanding, December 31, 2019		28,250		$	6.98
Granted		-			-
Exercised		(26,950	)		6.98
Forfeited		-			-
Expired		(1,300	)		6.98

Outstanding, March 31, 2020		-			-		-		-

Exercisable, March 31, 2020		-		$	-		-	$	-

All stock options included in the table above were granted under the 2008 Plan. These shares had an expiration date of February 17, 2020. During the first quarter, the 26,950 option shares exercised had a total intrinsic value of $0.3 million and the cash received from these exercised options was $0.2 million. The tax benefit from these transactions was immaterial. On February 17, 2020, the remaining 1,300 unexercised option shares expired. As of March 31, 2020, there were no outstanding or exercisable options remaining, and no unrecognized compensation cost related to stock option awards granted under the 2008 Plan.

On February 5, 2013, the Company adopted a Long Term Incentive (LTI) Plan. The Plan awards restricted stock in the Company to certain key executives under the Plans. These restricted stock awards vest over a four-year period and are intended to assist the Company in retention of key executives. During 2019, the Company met certain performance targets and restricted stock awards were approved and issued in February of 2020. The compensation cost charged against income for the LTI Plan was $0.1 million, with a total income tax benefit recognized in the income statement of $0.02 million.

As of March 31, 2020, there was $0.71 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to the restricted stock awards under the Plans which were granted in accordance with the LTI plan. That cost is expected to be recognized over a weighted-average period of 2.5 years.

A summary of restricted stock activity under the Company’s plans as of March 31, 2020 and changes during the quarter then ended, is presented below:

	Shares			Weighted- Average Value per Share

Nonvested, December 31, 2019		43,741		$	17.41

Granted		16,082			19.70
Vested		(17,426	)		16.45
Forfeited		-			-

Nonvested, March 31, 2020		42,397		$	18.67

NOTE 13 – GENERAL LITIGATION

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Additionally, the Company is subject to periodic examinations by various regulatory agencies. It is the opinion of management that the disposition or ultimate resolution of any such claims, lawsuits and examinations pending at March 31, 2020, will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Company.

NOTE 14 – SUBSEQUENT EVENT

On February 6, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Edon Bancorp, Inc. (“Edon”). Under the terms of the Merger Agreement, each outstanding share of Edon common stock will be converted into the right to receive $103.50 in cash, for a transaction value in aggregate of approximately $15.5 million. The Company is anticipating the receipt of all regulatory and shareholder approvals in the near term and expects to close the merger in the second quarter of 2020.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Business and consumer customers of the Bank are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This uncertainty may negatively impact the balance sheet, income statement, and cash flows of the Company.

The Company has responded to the pandemic by actively participating in the Paycheck Protection Program (“PPP”) and has disbursed nearly $82 million to small businesses in our markets. In addition, we have approved over $136 million in loan forbearances to clients. These actions may impact our financial statements during the remainder of 2020 although the specific details cannot be determined at this time.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. Examples of forward-looking statements include: (a) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial items; (b) statements of plans and objectives of the Company or our management or Board of Directors, including those relating to products or services; (c) statements of future economic performance; (d) statements regarding future customer attraction or retention; and (e) statements of assumptions underlying such statements. Words such as “anticipates”, “believes”, “plans”, “intends”, “expects”, “projects”, “estimates”, “should”, “may”, “would be”, “will allow”, “will likely result”, “will continue”, “will remain”, or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying those statements. Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, risks and uncertainties inherent in the national and regional banking industry including impacts from the COVID-19 pandemic on local, national and global economic conditions as well as the various governmental responses to the COVID-19 pandemic, including the stimulus packages and programs, changes in economic conditions in the market areas in which the Company and its subsidiaries operate, changes in policies by regulatory agencies, changes in accounting standards and policies, changes in tax laws, fluctuations in interest rates, demand for loans in the market areas in which the Company and its subsidiaries operate, increases in FDIC insurance premiums, changes in the competitive environment, losses of significant customers, geopolitical events and the loss of key personnel. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations is available in the Company’s filings with the Securities and Exchange Commission, including the risks identified under the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement to reflect unanticipated events or circumstances after the date on which the statement is made.

Overview of SB Financial

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

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

RFCBC, Inc. (“RFCBC”) is an Ohio corporation and wholly-owned subsidiary of SB Financial that was incorporated in August 2004. RFCBC operates as a loan subsidiary in servicing and working out problem loans.

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

SBFG Title, LLC (“Title”) is an Ohio corporation that was formed in March 2019. SBFG Title engages in the sale of title insurance services.

SB Captive, Inc. (“Captive”) is a Nevada corporation that was formed in March 2019. SB Captive pools insurance risk among like sized banking institutions.

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

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 describes the significant accounting policies used in the development and presentation of the Company’s financial statements. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, and/or complex.

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

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

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

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

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Net Income: Net income for the first quarter of 2020 was $0.7 million compared to net income of $2.2 million for the first quarter of 2019, a decrease of 69.4 percent. Earnings per diluted share (EPS) of $0.09 were down 67.9 percent from EPS of $0.28 for the first quarter of 2019.

Provision for Loan Losses: The first quarter provision for loan losses was $0.6 million compared to $0.0 million for the year-ago quarter. Net charge-offs for the quarter were $0.4 million compared to $0.05 million for the year-ago quarter. Total delinquent loans ended the quarter at $5.4 million, or 0.65 percent of total loans, which is up $3.7 million from the prior year.

Asset Quality Review – For the Period Ended ($ in thousands)	March 31, 2020			March 31, 2019
Net charge-offs – QTD	$	397		$	47
Nonaccruing loans		5,782			3,147
Accruing Troubled Debt Restructures		816			827
Nonaccruing and restructured loans		6,598			3,974
OREO / OAO		85			313
Nonperforming assets		6,683			4,287
Nonperforming assets/Total assets		0.61	%		0.42	%
Allowance for loan losses/Total loans		1.08	%		1.04	%
Allowance for loan losses/Nonperforming loans		135.8	%		204.4	%

Consolidated Revenue: Total revenue, consisting of net interest income and noninterest income, was $10.7 million for the first quarter of 2020, a decrease of $0.6 million, or 5.6 percent, from the $11.3 million generated during the first quarter of 2019.

Net interest income was $8.5 million, which was up $0.2 million from the prior year first quarter’s $8.3 million. The Company’s earning assets increased $106.8 million, coupled with a 46 basis point decrease in the yield on earning assets. The net interest margin (FTE) for the first quarter of 2020 was 3.48 percent compared to 3.81 percent for the first quarter of 2019. Funding costs for interest bearing liabilities for the first quarter of 2020 were 1.12 percent compared to 1.20 percent for the prior year first quarter.

Noninterest income was $2.2 million for the first quarter of 2020, which was down $0.8 million from the prior year first quarter’s $3.0 million. In addition to the mortgage revenue detailed below, gains from the sale of non-mortgage loans was $0.1 million, wealth management revenue was $0.8 million and revenue from our title agency was $0.3 million. Noninterest income as a percentage of average assets for the first quarter of 2020 was 0.81 percent compared to 1.20 percent for the prior year first quarter.

The Company originated $101.5 million of mortgage loans for the first quarter of 2020, of which $84.5 million was sold with the remainder in loans held for investment. This compares to $51.4 million for the first quarter of 2019, of which $43.5 million was sold with the remainder in loans held for investment. These first quarter 2020 originations and subsequent sales resulted in $1.9 million of gains, up $0.8 million from the gains for the first quarter of 2019. Net mortgage banking revenue was negative $0.1 million for the first quarter of 2020 compared to positive $0.9 million for the first quarter of 2019. Impairment to mortgage servicing rights increased from $0.7 million in the first quarter of 2019 to $2.2 million in the first quarter of 2020.

Consolidated Noninterest Expense: Noninterest expense for the first quarter of 2020 was $9.4 million, which was up $0.8 million compared to $8.6 million in the prior-year first quarter. The first quarter of 2020 included higher commission on mortgage sales of $0.4 million and title agency expense of $0.3 million.

Income Taxes: Income taxes for the first quarter of 2020 were $0.02 million (effective rate 3.1 percent) compared to $0.5 million (effective rate 18.0 percent) for the first quarter of 2019. The reduction in taxes was due to the reduction in pretax income from the prior year and the full year impact of our Captive insurance agency and higher stock compensation in the first quarter of 2020.

Changes in Financial Condition

Total assets at March 31, 2020 were $1,088.3 million, an increase of $49.7 million or 4.8 percent since 2019 year end. Total loans, net of unearned income, were $830.8 million as of March 31, 2020, up $5.3 million from year-end, an increase of 0.6 percent.

Total deposits at March 31, 2020 were $863.9 million, an increase of $23.7 million or 2.8 percent since 2019 year end. Borrowed funds (consisting of FHLB advances, Federal Reserve Discount Window, TRUP and REPOs) totaled $63.2 million at March 31, 2020. This is up from year-end when borrowed funds totaled $39.3 million due to an increase in Fed discount window borrowing. Total equity for the Company of $135.9 million now stands at 12.5 percent of total assets compared to the December 31, 2019 level of $136.1 million and 13.1 percent of total assets.

The allowance for loan losses of $9.0 million was up $0.2 million from the 2019 year end level. The allowance for loan losses is 1.08 percent of total loans, which is considered appropriate by management given the risk profile of the portfolio.

Capital Resources

As of March 31, 2020, based on the computations for the FFIEC 041 Consolidated Reports of Condition and Income filed by State Bank with the Federal Reserve, State Bank was classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since March 31, 2020 that management believes have changed State Bank’s capital classification.

State Bank’s actual capital levels and ratios as of March 31, 2020 and December 31, 2019 are presented in the following table. Capital levels are presented for State Bank only as the Company is exempt from quarterly reporting on capital levels at the holding company level:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Procedures
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2020
Tier I Capital to average assets	$	117,769		11.35	%	$	41,519		4.0	%	$	51,898		5.0	%
Tier I Common equity capital to risk-weighted assets		117,769		12.17	%		43,549		4.5	%		62,903		6.5	%

Tier I Capital to risk-weighted assets		117,769		12.17	%		58,065		6.0	%		77,420		8.0	%
Total Risk-based capital to risk-weighted assets		126,727		13.10	%		77,420		8.0	%		96,775		10.0	%

As of December 31, 2019
Tier I Capital to average assets	$	116,884		11.36	%	$	41,165		4.0	%	$	51,456		5.0	%
Tier I Common equity capital to risk-weighted assets		116,884		12.46	%		42,204		4.5	%		60,962		6.5	%

Tier I Capital to risk-weighted assets		116,884		12.46	%		56,273		6.0	%		75,030		8.0	%
Total Risk-based capital to risk-weighted assets		125,639		13.40	%		75,030		8.0	%		93,788		10.0	%

Effective January 1, 2015, new regulatory capital requirements commonly referred to as “Basel III” were implemented and are reflected in the March 31, 2020 capital table above. Management opted out of the accumulated other comprehensive income treatment under the new requirements and as such unrealized gains and losses from available-for-sale securities will continue to be excluded from State Bank’s regulatory capital.

LIQUIDITY

Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions, securities available-for-sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets were $175.4 million at March 31, 2020, compared to $135.3 million at December 31, 2019.

Liquidity risk arises from the possibility that the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates the Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO reviews liquidity regularly and evaluates significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Asset Liability Manager.

The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $615.6 million at March 31, 2020 and $610.9 million at December 31, 2019, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs. At March 31, 2020, all eligible commercial real estate, first mortgage residential and multi-family mortgage loans were pledged under an FHLB blanket lien.

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for the three months ended March 31, 2020 and 2019 follows.

The Company experienced negative cash flows from operating activities for the three months ended March 31, 2020 and positive cash flows from operating activities for the three months ended March 31, 2019. Net cash used by operating activities was $4.6 million for the three months ended March 31, 2020 and net cash provided by operating activities was $4.1 million for the three months ended March 31, 2019. Highlights for the current year include $84.5 million in proceeds from the sale of loans, which is up $40.0 million from the prior year. Originations of loans held for sale was a use of cash of $87.3 million, which is up from the prior year, by $43.9 million. For the three months ended March 31, 2020, there was a gain on sale of loans of $2.1 million, and depreciation and amortization of $.5 million.

The Company experienced negative cash flows from investing activities for the three months ended March 31, 2020 and March 31, 2019. Net cash flows used in investing activities was $11.3 million for the three months ended March 31, 2020 and $17.7 million for the three months ended March 31, 2019. Highlights for the three months ended March 31, 2020 include $45.1 million in purchases of available-for-sale securities, which is up $36.5 million from the prior year. These cash payments were offset by $40.0 million in proceeds from maturities and sales of securities, which is up $35.4 million from the prior year three-month period. The Company experienced a $5.7 million increase in loans, which is down $4.9 million from the prior year three-month period.

The Company experienced positive cash flows from financing activities for the three months ended March 31, 2020 and March 31, 2019. Net cash flow provided by financing activities was $45.2 million for the three months ended March 31, 2020 and $28.2 million for the three months ended March 31, 2019. Highlights for the current period include a $17.1 million increase in transaction deposits for the three months ended March 31, 2020, which is up from the $7.9 million increase in transaction deposits for the three months ended March 31, 2019. Certificates of deposit increased by $6.6 million in the current year compared to an increase of $17.2 million for the prior year. Short term borrowings increased by $23.9 million for the three months ended March 31, 2020, which is up from the $2.9 million decrease in short term borrowings for the three months ended March 31, 2019.

ALCO uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The likelihood of a significant decrease in rates as of March 31, 2020 and December 31, 2019 was considered unlikely given the current interest rate environment and therefore, only the minus 100 basis point rate change was included in this analysis as of March 31, 2020 and only the minus 100 and minus 200 basis point changes were included in this analysis as of December 31, 2019. The results of this analysis are reflected in the following tables for March 31, 2020 and December 31, 2019.

Economic Value of Equity
March 31, 2020
($ in thousands)
Change in rates	$ Amount		$ Change			% Change
+400 basis points	$	232,538	$	51,572			28.50	%
+300 basis points		222,848		41,882			23.14	%
+200 basis points		211,730		30,764			17.00	%
+100 basis points		197,939		16,973			9.38	%
Base Case		180,966		-			-
-100 basis points		154,922		(26,044	)		-14.39	%

Economic Value of Equity
December 31, 2019
($ in thousands)
Change in rates	$ Amount		$ Change			% Change
+400 basis points	$	222,686	$	26,861			13.72	%
+300 basis points		218,252		22,427			11.45	%
+200 basis points		212,838		17,013			8.69	%
+100 basis points		205,405		9,580			4.89	%
Base Case		195,825		-			-
-100 basis points		180,152		(15,673	)		-8.00	%
-200 basis points		156,430		(39,395	)		-20.12	%

Off-Balance-Sheet Borrowing Arrangements:

Significant additional off-balance-sheet liquidity is available in the form of FHLB advances and unused federal funds lines from correspondent banks. Management expects the risk of changes in off-balance-sheet arrangements to be immaterial to earnings.

The Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolios in the total amount of $615.6 million were pledged to meet FHLB collateralization requirements as of March 31, 2020. Based on the current collateralization requirements of the FHLB, the Company had approximately $113.8 million of additional borrowing capacity at March 31, 2020. The Company also had $22.0 million in unpledged securities to pledge for additional borrowings.

The Company’s contractual obligations as of March 31, 2020 were comprised of long-term debt obligations, other debt obligations, operating lease obligations and other long-term liabilities. Long-term debt obligations were comprised of FHLB Advances of $16.0 million and Trust Preferred Securities of $10.3 million. Total time deposits at March 31, 2020 were $251.2 million, of which $82.2 million mature beyond one year.

In addition, as of March 31, 2020, the Company had commitments to sell mortgage loans totaling $106.9 million. The Company believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

ASSET LIABILITY MANAGEMENT

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

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

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

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

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

There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening or lengthening terms of new loans, investments, or liabilities; 2) selling existing assets or repaying certain liabilities; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contracts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management’s expertise to be effective. The Company does not currently utilize any derivative financial instruments to manage interest rate risk. As market conditions warrant, the Company may implement various interest rate risk management strategies, including the use of derivative financial instruments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no material change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

With the participation of the President and Chief Executive Officer (the principal executive officer) and the Executive Vice President and Chief Financial Officer (the principal financial officer) of the Company, the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and the Company’s Executive Vice President and Chief Financial Officer have concluded that:

●

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;

●

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

●

the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of our business, the Company and its subsidiaries are parties to various legal actions which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors is included in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The following information supplements our risk factors previously disclosed in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

We may be adversely affected by the world-wide coronavirus (COVID-19) pandemic.

The coronavirus (COVID-19) outbreak may have an adverse impact on certain of our customers directly or indirectly. Entire industries within our loan and lease portfolio such as motor coach, shuttle bus and auto rental have been impacted due to reduced demand related to quarantines and travel restrictions. Other industries within our loan and lease portfolio or the communities we serve are likely to experience similar disruptions and economic hardships as the current coronavirus pandemic persists. In addition, such events could affect the stability of our deposit base, lead to mass layoffs and furloughs which could impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue or cause us to incur additional expenses.

Additionally, the Federal Reserve has reduced interest rates substantially in an attempt to boost consumer spending due to the coronavirus pandemic which could have a sustained negative impact on our results of operations. The U.S. Congress has also passed a massive stimulus package (the “Coronavirus Aid, Relief, and Economic Security Act”) intended to provide relief to consumers and small businesses however the effectiveness of this package could be disrupted by operational challenges in successfully implementing all of its provisions in a timely manner and could ultimately prove to be insufficient in scale.

Although we maintain contingency and disaster recovery plans for pandemic outbreaks, we created a dedicated executive COVID-19 response team that is closely monitoring developments and providing guidance for additional precautions and initiatives. We have established separate teams within departments to help ensure that infection will not spread across entire departments. We are encouraging virtual meetings and conference calls in place of in-person meetings, including our annual shareholder meeting which will be held virtually this year. Employees with health conditions putting them at higher risk of adverse effects from coronavirus infection are working remotely. Additionally, travel has been restricted. We are promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. Our banking center lobbies have been closed except for advance appointments only. Banking center drive-ups, ATMs and online/mobile banking services continue to operate.

Even with precautions, the continued spread or prolonged impact of the coronavirus could negatively impact the availability of key personnel or significant numbers of our staff, who are necessary to conduct our business. Such a spread or outbreak could also impact the business and operations of third party service providers who perform critical services for our business. If the coronavirus spreads or the containment and mitigation response is unsuccessful for a prolonged period of time, we could experience a material adverse effect on our business, financial condition, and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not Applicable

(b)

Not Applicable

(c)

Repurchases of Common Shares

The Company announced on June 21, 2019, a share repurchase program authorizing the repurchase of up to 400,000 common shares of the Company through December 31, 2019. On February 7, 2020, the Company announced that its board of directors has authorized the extension of the Company’s share repurchase program through December 31, 2020. The table below sets forth information regarding common shares repurchased by the Company during the quarter ended March 31, 2020.

	(a)		(b)		(c)		(d)
Period	Total Number of Shares Purchased		Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
01/01/20 - 01/31/20		-	$	0.00		-		189,371
02/01/20 - 02/28/20		44,345		19.63		44,345		145,026
03/01/20 - 03/31/20		54,264		15.92		54,264		90,762
Total		98,609	$	17.59		98,609		90,762

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

Exhibits
31.1		– Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2		– Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
32.1		– Section 1350 Certification (Principal Executive Officer)
32.2		– Section 1350 Certification (Principal Financial Officer)
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	SB FINANCIAL GROUP, INC.

Date: May 7, 2020	By:	/s/ Mark A. Klein
		Mark A. Klein
		Chairman, President & CEO

	By:	/s/ Anthony V. Cosentino
		Anthony V. Cosentino
		Executive Vice President &
		Chief Financial Officer