SB FINANCIAL GROUP, INC. (Form: 10-Q, Received: 05/10/2017 16:20:15)

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, 2017

☐ 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.)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☒

Title of each class		Name of each exchange on which registered
Common Shares, No Par Value		The NASDAQ Stock Market, LLC
4,827,419 Outstanding at May 10, 2017		(NASDAQ Capital Market)

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	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	34

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35

Signatures		36

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SB Financial Group, Inc.

Condensed Consolidated Balance Sheets

March 31, 2017 and December 31, 2016

	March			December
($ in Thousands)	2017			2016
	(Unaudited)
ASSETS
Cash and due from banks	$	45,740		$	17,012

Securities available for sale, at fair value		107,937			90,128
Other securities - FRB and FHLB Stock		3,748			3,748
Total investment securities		111,685			93,876

Loans held for sale		5,104			4,434

Loans, net of unearned income		626,722			644,433
Allowance for loan losses		(7,679	)		(7,725	)
Net loans		619,043			636,708

Premises and equipment, net		19,909			19,129
Cash surrender value of life insurance		13,791			13,725
Goodwill & other intangibles		16,419			16,422
Foreclosed assets held for sale, net		950			994
Mortgage servicing rights		8,727			8,422
Accrued interest receivable		1,462			1,512
Other assets		4,018			3,771
Total assets	$	846,848		$	816,005

LIABILITIES AND EQUITY
Deposits
Non interest bearing demand	$	124,664		$	125,189
Interest bearing demand		133,388			131,598
Savings		103,901			95,594
Money market		138,915			122,976
Time deposits		212,047			197,716
Total deposits		712,915			673,073

Advances from Federal Home Loan Bank		15,500			26,500
Repurchase agreements		11,796			10,532
Trust preferred securities		10,310			10,310
Accrued interest payable		450			408
Other liabilities		7,849			8,634
Total liabilities		758,820			729,457

Commitments & Contingent Liabilities		-			-

Stockholders’ Equity
Preferred stock, Series A		13,983			13,983
Common stock		12,569			12,569
Additional paid-in capital		15,224			15,362
Retained earnings		48,118			46,688
Accumulated other comprehensive income		136			51
Treasury stock, at cost		(2,002	)		(2,105	)
Total equity		88,028			86,548

Total liabilities and equity	$	846,848		$	816,005

See notes to condensed consolidated financial statements (unaudited)

Note: The balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date

SB Financial Group, Inc.

Condensed Consolidated Statements of Income (Unaudited)

($ in thousands, except share data)	Three Months Ended
	March		March
Interest income	2017		2016
Loans
Taxable	$	6,800	$	6,260
Nontaxable		20		9
Securities
Taxable		461		402
Nontaxable		133		156
Total interest income		7,414		6,827

Interest expense
Deposits		748		545
Repurchase Agreements & Other		4		5
Federal Home Loan Bank advances		86		106
Trust preferred securities		70		59
Total interest expense		908		715

Net interest income		6,506		6,112

Provision for loan losses		-		250

Net interest income after provision for loan losses		6,506		5,862

Noninterest income
Wealth Management Fees		667		633
Customer service fees		640		680
Gain on sale of mtg. loans & OMSR’s		1,250		1,383
Mortgage loan servicing fees, net		383		(446	)
Gain on sale of non-mortgage loans		430		449
Data service fees		193		277
Net gain on sale of securities		-		111
Gain/(loss) on sale/disposal of assets		2		22
Other income		237		330
Total non-interest income		3,802		3,439

Noninterest expense
Salaries and employee benefits		4,386		3,779
Net occupancy expense		560		565
Equipment expense		641		595
Data processing fees		370		305
Professional fees		363		316
Marketing expense		195		171
Telephone and communication		116		99
Postage and delivery expense		174		197
State, local and other taxes		167		99
Employee expense		145		118
Other expenses		265		651
Total non-interest expense		7,382		6,895

Income before income tax expense		2,926		2,406
Income tax expense		933		751

Net income	$	1,993	$	1,655

Preferred Stock Dividends		244		244

Net income available to common shareholders		1,749		1,411

Common share data:
Basic earnings per common share	$	0.36	$	0.29
Diluted earnings per common share	$	0.31	$	0.26

Average common shares outstanding (in thousands):
Basic:		4,855		4,896
Diluted:		6,387		6,401

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended Mar. 31,
($’s in thousands)	2017			2016

Net income	$	1,993		$	1,655
Other comprehensive income:
Available-for-sale investment securities:
Gross unrealized holding gain arising in the period		129			1,090
Related tax expense		(44	)		(371	)
Less: Reclassification for gain realized in income		-			(111	)
Related tax expense		-			38
Net effect on other comprehensive income		85			646
Total comprehensive income	$	2,078		$	2,301

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		Treasury
($’s in thousands - except per share data)	Stock		Stock		Capital			Earnings			Income		Stock			Total

Balance, January 1, 2017	$	13,983	$	12,569	$	15,362		$	46,688		$	51	$	(2,105	)	$	86,548
Net income		-		-		-			1,993			-		-			1,993
Other comprehensive income		-		-		-			-			85					85
Dividends on common, $0.065 per share		-		-		-			(319	)		-		-			(319	)
Dividends on preferred, $0.1625 per share		-		-		-			(244	)		-		-			(244	)
Restricted stock vesting		-		-		(163	)		-			-		163			-
Stock options exercised		-		-		(66	)		-			-		395			329
Stock buyback		-		-		-			-			-		(455	)		(455	)
Share based compensation expense		-		-		91			-			-		-			91
Balance, March 31, 2017	$	13,983	$	12,569	$	15,224		$	48,118		$	136	$	(2,002	)	$	88,028

Balance, January 1, 2016	$	13,983	$	12,569	$	15,438		$	40,059		$	650	$	(1,458	)	$	81,241
Net income		-		-		-			1,655			-		-			1,655
Other comprehensive income		-		-		-			-			646		-			646
Dividends on common, $0.055 per share		-		-		-			(271	)		-		-			(271	)
Dividends on preferred, $0.1625 per share		-		-		-			(244	)		-		-			(244	)
Restricted stock vesting		-		-		(97	)		-			-		97			-
Stock options exercised		-		-		(3	)		-			-		10			7
Stock buyback		-		-		-			-			-		(10	)		(10	)
Share based compensation expense		-		-		27			-			-		-			27
Balance, March 31, 2016	$	13,983	$	12,569	$	15,365		$	41,199		$	1,296	$	(1,361	)	$	83,051

See notes to condensed consolidated financial statements (unaudited)

SB Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended Mar. 31,
($’s in thousands)	2017			2016
Operating Activities
Net Income	$	1,993		$	1,655
Items providing/(using) cash
Depreciation and amortization		367			340
Provision for loan losses		-			250
Expense of share-based compensation plan		91			24
Amortization of premiums and discounts on securities		169			234
Amortization of intangible assets		3			3
Amortization of originated mortgage servicing rights		218			172
Impairment (recovery) of mortgage servicing rights		(35	)		767
Proceeds from sale of loans held for sale		46,352			55,517
Originations of loans held for sale		(46,364	)		(52,363	)
Gain from sale of loans		(1,680	)		(1,832	)
(Gain)/loss on sale of assets		2			(22	)
Changes in
Interest receivable		50			(229	)
Other assets		179			(1,672	)
Interest payable and other liabilities		(743	)		246

Net cash provided by operating activities		602			3,090

Investing Activities
Purchases of available-for-sale securities		(23,307	)		(11,322	)
Proceeds from maturities of available-for-sale securities		5,459			3,866
Net change in loans		17,664			(19,716	)
Purchase of premises and equipment and software		(1,147	)		(109	)
Proceeds from sale of foreclosed assets		40			86

Net cash used in investing activities		(1,291	)		(27,195	)

Financing Activities
Net increase in demand deposits, money market, interest checking and savings accounts		25,511			29,739
Net increase in certificates of deposit		14,331			21,836
Net increase in securities sold under agreements to repurchase		1,264			2,118
Repayment of Federal Home Loan Bank advances		(11,000	)		(14,000	)
Share repurchase		(455	)		(10	)
Exercise of Stock Options		329			7
Dividends on Common Stock		(319	)		(271	)
Dividends on Preferred Stock		(244	)		(244	)

Net cash provided by financing activities		29,417			39,175

Increase in Cash and Cash Equivalents		28,728			15,070

Cash and Cash Equivalents, Beginning of Year		17,012			20,459

Cash and Cash Equivalents, End of Period	$	45,740		$	35,529

Supplemental Cash Flows Information

Interest paid	$	866		$	636
Income taxes paid	$	203		$	-
Transfer of loans to foreclosed assets	$	-		$	206

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 bank 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”) and State Bank Insurance, LLC (“SBI”).

The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, 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 months ended March 31, 2017, are not necessarily indicative of results for the complete year.

The condensed consolidated balance sheet of the Company as of December 31, 2016 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, 2016.

The following paragraphs summarize the impact of new accounting pronouncements:

Accounting Standards Update (ASU) No. 2017-08: Premium Amortization on Purchased Callable Debt

This ASU amends the amortization period for certain purchased callable debt securities held at a premium. The Board is shortening the amortization period to the earliest call date. Currently, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments in this ASU are effective for reporting periods beginning after December 15, 2018, and management does not believe the changes will have a material effect on the Company’s consolidated financial statements.

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, 2019, and management does not believe the changes will have a material effect on the Company’s accounting and disclosures.

ASU No. 2017-03: Accounting Changes and Error Corrections (Topic 250)

This amendment includes the text of “SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards are Adopted in a Future Period.” This staff announcement applies to ASU No. 2014-09, ASU No. 2016-02 and ASU 2016-03. The Company has enhanced its disclosures regarding the impact that recently issued accounting standards adopted in a future period will have on its accounting and disclosures in this footnote.

ASU No. 2016-15: Statement of Cash Flows (Topic 230)

This ASU provides specific guidance for eight cash flow classifications. The intention is to ensure that this ASU will eliminate any current or future diversity in classification and reporting. The amendments in this ASU are effective for reporting periods beginning after December 15, 2017, and management does not believe the changes will have a material effect on the Company’s consolidated financial statements.

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

This ASU 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 amendments in this ASU are effective for reporting periods beginning after December 15, 2019, and management will need further study to determine the impact on the Company’s consolidated financial statements.

ASU No. 2016-09: Stock Compensation (Topic 718)

This ASU affects all entities that issue share-based payment awards to their employees. The update is intended to simplify the accounting for these transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted the amendments in this ASU, and management has determined that the impact on the Company’s consolidated financial statements is immaterial.

ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606)

This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards. The core principle is that an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Management has determined that this update will not have a material impact on the Company’s consolidated financial statements.

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. Included in the diluted EPS for March 31, 2017 are the impact of the full conversion of the Company’s depositary shares. Based upon the current conversion price of $10.2905, the 1,500,000 outstanding depositary shares are convertible into an aggregate of 1,457,662 common shares. For the three month period ended March 31, 2016, share-based awards totaling 35,424 common shares were not considered in computing diluted EPS as they were anti-dilutive. There were no anti-dilutive shares in 2017. The average number of common shares used in the computation of basic and diluted earnings per share were:

	Three Months Ended Mar. 31,
($ in thousands - except per share data)	2017		2016

Distributed earnings allocated to common shares	$	319	$	271
Undistributed earnings allocated to common shares		1,427		1,138

Net earnings allocated to common shares		1,746		1,409
Net earnings allocated to participating securities		3		2
Dividends on convertible preferred shares		244		244

Net Income allocated to common shares and participating securities	$	1,993	$	1,655

Weighted average shares outstanding for basic earnings per share		4,855		4,896
Dilutive effect of stock compensation		74		53
Dilutive effect of convertible shares		1,458		1,452

Weighted average shares outstanding for diluted earnings per share		6,387		6,401

Basic earnings per common share	$	0.36	$	0.29

Diluted earnings per common share	$	0.31	$	0.26

Note 3 - Securities

The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at March 31, 2017 and December 31, 2016 were as follows:

			Gross		Gross
($ in thousands)	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Available-for-Sale Securities:
March 31, 2017
U.S. Treasury and Government agencies	$	21,105	$	82	$	(74	)	$	21,113
Mortgage-backed securities		72,469		217		(539	)		72,147
State and political subdivisions		14,087		546		(26	)		14,607
Equity securities		70		-		-			70

	$	107,731	$	845	$	(639	)	$	107,937

			Gross		Gross
($ in thousands)	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Available-for-Sale Securities:
December 31, 2016:
U.S. Treasury and Government agencies	$	13,341	$	69	$	(52	)	$	13,358
Mortgage-backed securities		62,035		204		(636	)		61,603
State and political subdivisions		14,606		530		(39	)		15,097
Equity securities		70		-		-			70

	$	90,052	$	803	$	(727	)	$	90,128

The amortized cost and fair value of securities available for sale at March 31, 2017, 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.

	Available for Sale
	Amortized		Fair
($ in thousands)	Cost		Value

Within one year	$	101	$	103
Due after one year through five years		12,372		12,503
Due after five years through ten years		12,160		12,324
Due after ten years		10,559		10,790
		35,192		35,720

Mortgage-backed securities & equity securities		72,539		72,217

Totals	$	107,731	$	107,937

The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $51.3 million at March 31, 2017 and $44.3 million at December 31, 2016. The fair value of securities delivered for repurchase agreements was $16.8 million at March 31, 2017 and $14.6 million at December 31, 2016.

There were no realized gains and losses from sales of available-for-sale securities for the three months ended March 31, 2017. For the three months ended March 31, 2016, there were gross gains of $0.11 million resulting from sales of available-for-sale securities, which was a reclassification from accumulated other comprehensive income (OCI) and was included in the net gain on sale of securities. The related $0.04 million in tax expense was a reclassification from OCI and was included in the income tax expense line item in the income statement.

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 $66.8 million at March 31, 2017, and $52.2 million at December 31, 2016, which was approximately 62 and 58 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, 2017 and December 31, 2016 are as follows:

($ in thousands)	Less than 12 Months					12 Months or Longer					Total
March 31, 2017	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale Securities:
U.S. Treasury and Government agencies	$	14,252	$	(74	)	$	-	$	-		$	14,252	$	(74	)
Mortgage-backed securities		50,810		(514	)		669		(25	)		51,479		(539	)
State and Political subdivisions		1,105		(26	)		-		-			1,105		(26	)

	$	66,167	$	(614	)	$	669	$	(25	)	$	66,836	$	(639	)

($ in thousands)	Less than 12 Months					12 Months or Longer					Total
December 31, 2016	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale Securities:
U.S. Treasury and Government agencies	$	6,044	$	(52	)	$	-	$	-		$	6,044	$	(52	)
Mortgage-backed securities		44,344		(607	)		703		(29	)		45,047		(636	)
State and political subdivisions		1,095		(39	)		-		-			1,095		(39	)

	$	51,483	$	(698	)	$	703	$	(29	)	$	52,186	$	(727	)

The total potential unrealized loss as of March 31, 2017 in the securities portfolio was $0.64 million, which was down from the $0.73 million unrealized loss at December 31, 2016. 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 these securities.

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 non-accrual 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 non-accrual 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 non-accrual 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, 2017 and December 31, 2016 include:

	Total Loans						Non-Accrual Loans
($ in thousands)	Mar. 2017			Dec. 2016			Mar. 2017		Dec. 2016

Commercial & Industrial	$	102,022		$	108,752			184		190
Commercial RE & Construction		282,951			284,084			939		1,194
Agricultural & Farmland		47,580			52,475			3		4
Residential Real Estate		136,762			142,452			1,126		1,162
Consumer & Other		57,037			56,335			130		187

Total Loans	$	626,352		$	644,098		$	2,382	$	2,737

Unearned Income	$	370		$	335

Total Loans, net of unearned income	$	626,722		$	644,433

Allowance for loan losses	$	(7,679	)	$	(7,725	)

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, 2017, December 31, 2016 and March 31, 2016.

	Commercial			Commercial RE			Agricultural		Residential			Consumer
($’s in thousands)	& Industrial			& Construction			& Farmland		Real Estate			& Other			Total

ALLOWANCE FOR LOAN AND LEASE LOSSES
For the Three Months Ended - March 31, 2017

Beginning balance	$	1,204		$	3,321		$	347	$	1,963		$	890		$	7,725
Charge Offs		-			-			-		(22	)		(29	)	$	(51	)
Recoveries		1			-			1		-			3			5
Provision		(207	)		(125	)		121		72			139			-
Ending Balance	$	998		$	3,196		$	469	$	2,013		$	1,003		$	7,679

Loans Receivable at March 31, 2017
Allowance:
Ending balance: individually evaluated for impairment	$	-		$	96		$	-	$	119		$	57		$	272
Ending balance: collectively evaluated for impairment	$	998		$	3,100		$	469	$	1,894		$	946		$	7,407
Loans:
Ending balance: individually evaluated for impairment	$	-		$	1,318		$	-	$	1,700		$	290		$	3,308
Ending balance: collectively evaluated for impairment	$	102,022		$	281,633		$	47,580	$	135,062		$	56,747		$	623,044

	Commercial		Commercial RE		Agricultural		Residential		Consumer
($’s in thousands)	& Industrial		& Construction		& Farmland		Real Estate		& Other		Total

Loans Receivable at December 31, 2016
Allowance:
Ending balance: individually evaluated for impairment	$	50	$	119	$	-	$	124	$	7	$	300
Ending balance: collectively evaluated for impairment	$	1,154	$	3,202	$	347	$	1,839	$	883	$	7,425
Loans:
Ending balance: individually evaluated for impairment	$	50	$	1,578	$	-	$	1,919	$	248	$	3,795
Ending balance: collectively evaluated for impairment	$	108,702	$	282,506	$	52,475	$	140,533	$	56,087	$	640,303

	Commercial			Commercial RE		Agricultural			Residential		Consumer
($’s in thousands)	& Industrial			& Construction		& Farmland			Real Estate		& Other			Total

ALLOWANCE FOR LOAN AND LEASE LOSSES
For the Three Months Ended - March 31, 2016
Beginning balance	$	914		$	3,886	$	204		$	1,312	$	674		$	6,990
Charge Offs		(92	)		-		-			-		(2	)	$	(94	)
Recoveries		35			-		-			-		24			59
Provision		68			234		(16	)		30		(66	)		250
Ending Balance	$	925		$	4,120	$	188		$	1,342	$	630		$	7,205

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

Commercial and Agricultural

Commercial 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 including Construction

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 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. Home equity loans 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 credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2017 and December 31, 2016.

March 31, 2017	Commercial		Commercial RE		Agricultural		Residential		Consumer
($ in thousands)	& Industrial		& Construction		& Farmland		Real Estate		& Other		Total

1-2	$	1,096	$	30	$	9	$	233	$	1	$	1,369
3		27,577		86,580		9,008		105,838		54,241		283,244
4		72,753		189,731		38,563		28,435		2,481		331,963
Total Pass (1 - 4)		101,426		276,341		47,580		134,506		56,723		616,576

Special Mention (5)		42		5,257		-		523		125		5,947
Substandard (6)		-		404		-		619		62		1,085
Doubtful (7)		554		949		-		1,114		127		2,744
Loss (8)		-		-		-		-		-		-
Total Loans	$	102,022	$	282,951	$	47,580	$	136,762	$	57,037	$	626,352

December 31, 2016	Commercial		Commercial RE		Agricultural		Residential		Consumer
($ in thousands)	& Industrial		& Construction		& Farmland		Real Estate		& Other		Total

1-2	$	1,149	$	33	$	9	$	234	$	3	$	1,428
3		28,461		89,406		9,985		113,403		53,386		294,641
4		78,517		188,007		42,481		26,510		2,625		338,140
Total Pass (1 - 4)		108,127		277,446		52,475		140,147		56,014		634,209

Special Mention (5)		-		5,030		-		518		123		5,671
Substandard (6)		150		1,291		-		625		61		2,127
Doubtful (7)		475		317		-		1,162		137		2,091
Loss (8)		-		-		-		-		-		-
Total Loans	$	108,752	$	284,084	$	52,475	$	142,452	$	56,335	$	644,098

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

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 Company’s loan portfolio aging analysis as of March 31, 2017 and December 31, 2016.

($ in thousands)	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
March 31, 2017	Past Due		Past Due		90 Days		Due		Current		Receivable

Commercial & Industrial	$	430	$	-	$	148	$	578	$	101,444	$	102,022
Commercial RE & Construction		12		-		689		701		282,250		282,951
Agricultural & Farmland		-		-		-		-		47,580		47,580
Residential Real Estate		412		107		106		625		136,137		136,762
Consumer & Other		123		6		94		223		56,814		57,037
Total Loans	$	977	$	113	$	1,037	$	2,127	$	624,225	$	626,352

($ in thousands)	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
December 31, 2016	Past Due		Past Due		90 Days		Due		Current		Receivable

Commercial & Industrial	$	35	$	50	$	104	$	189	$	108,563	$	108,752
Commercial RE & Construction		254		883		59		1,196		282,888		284,084
Agricultural & Farmland		-		-		-		-		52,475		52,475
Residential Real Estate		123		201		115		439		142,013		142,452
Consumer & Other		185		45		148		378		55,957		56,335
Total Loans	$	597	$	1,179	$	426	$	2,202	$	641,896	$	644,098

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, 2017 and 2016, and for the twelve months ended December 31, 2016:

Three Months Ended			Unpaid				Average		Interest
March 31, 2017	Recorded		Principal		Related		Recorded		Income
($’s in thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	-	$	-	$	-	$	-	$	-
Commercial RE & Construction		629		629		-		644		12
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		1,131		1,174		-		1,355		18
Consumer & Other		124		124		-		139		2
All Impaired Loans < $100,000		619		619		-		619		-
With a specific allowance recorded:
Commercial & Industrial		-		-		-		-		-
Commercial RE & Construction		689		689		96		788		(2	)
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		569		569		119		637		7
Consumer & Other		166		166		57		167		1
Totals:
Commercial & Industrial	$	-	$	-	$	-	$	-	$	-
Commercial RE & Construction	$	1,318	$	1,318	$	96	$	1,432	$	10
Agricultural & Farmland	$	-	$	-	$	-	$	-	$	-
Residential Real Estate	$	1,700	$	1,743	$	119	$	1,992	$	25
Consumer & Other	$	290	$	290	$	57	$	306	$	3
All Impaired Loans < $100,000	$	619	$	619	$	-	$	619	$	-

Twelve Months Ended			Unpaid				Average		Interest
December 31, 2016	Recorded		Principal		Related		Recorded		Income
($’s in thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	-	$	-	$	-	$	-	$	-
Commercial RE & Construction		637		637		-		655		24
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		1,248		1,290		-		1,470		70
Consumer & Other		129		129		-		151		11
All Impaired Loans < $100,000		452		452		-		452		-
With a specific allowance recorded:
Commercial & Industrial		50		50		50		50		3
Commercial RE & Construction		941		941		119		1,010		45
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		671		672		124		751		30
Consumer & Other		119		118		7		123		7
Totals:
Commercial & Industrial	$	50	$	50	$	50	$	50	$	3
Commercial RE & Construction	$	1,578	$	1,578	$	119	$	1,665	$	69
Agricultural & Farmland	$	-	$	-	$	-	$	-	$	-
Residential Real Estate	$	1,919	$	1,962	$	124	$	2,221	$	100
Consumer & Other	$	248	$	247	$	7	$	274	$	18
All Impaired Loans < $100,000	$	452	$	452	$	-	$	452	$	-

Three Months Ended	Average Recorded		Interest Income
March 31, 2016	Investment		Recognized

With no related allowance recorded:
Commercial & Industrial	$	-	$	-
Commercial RE & Construction		667		4
Agricultural & Farmland		-		-
Residential Real Estate		1,137		15
Consumer & Other		98		2
All Impaired Loans < $100,000		381		-
With a specific allowance recorded:
Commercial & Industrial		-		-
Commercial RE & Construction		4,924		-
Agricultural & Farmland		-		-
Residential Real Estate		1,063		11
Consumer & Other		363		5
Totals:
Commercial & Industrial	$	-	$	-
Commercial RE & Construction	$	5,591	$	4
Agricultural & Farmland	$	-	$	-
Residential Real Estate	$	2,200	$	26
Consumer & Other	$	461	$	7
All Impaired Loans < $100,000	$	381	$	-

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. 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.

The following presents the activity of TDRs during the three months ended March 31 2016. During the first three months of 2017, there was no TDR activity.

	March 31, 2016
($ in thousands)	Number of Loans		Pre- Modification Recorded Balance		Post Modification Recorded Balance

Residential Real Estate		-	$	-	$	-
Commercial		-		-		-
Consumer & Other		1		222		-

Total Modifications		1	$	222	$	-

($ in thousands)	Interest						Total
	Only		Term		Combination		Modification

Residential Real Estate	$	-	$	-	$	-	$	-
Commercial		-		-		-		-
Consumer & Other		-		222		-		222

Total Modifications	$	-	$	222	$	-	$	222

There were no TDR’s modified during the past twelve months that have subsequently defaulted as of March 31, 2017.

NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS AND REPURCHASE AGREEMENTS

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 offset by 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. As of March 31, 2017 and December 31, 2016, the notional amount of customer-facing swaps was approximately $29.7 million and $33.2 million, respectively. The same amounts were offset with third party counterparties, as described above.

The Company has minimum collateral posting thresholds with its derivative counterparties. As of March 31, 2017 and December 31, 2016, the Company had posted cash as collateral in the amount of $0.0 million and $0.1 million, respectively.

The table below presents the fair value of the Company’s derivative financial instruments, as well as their classification on the Balance Sheet, as of March 31, 2017 and December 31, 2016.

Asset Derivatives

Liability Derivatives

March 31, 2017

($ in thousands)

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

611

Other Liabilities

611

Asset Derivatives

Liability Derivatives

December 31, 2016

($ in thousands)

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

623

Other Liabilities

623

The Company’s derivative financial instruments had no net effect on the condensed consolidated Income Statements for the three months ended March 31, 2017 and 2016.

Securities Sold Under Repurchase Agreements

State Bank 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. The agreements mature within one month. These repurchase agreements are secured by agency securities and mortgage-backed securities with corresponding liabilities of $3.5 million and of $13.3 million. These securities have various maturity dates beyond 2020.

NOTE 6 - 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, obligations of political and state subdivisions and equity securities. 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.

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, 2017 and December 31, 2016.

Fair Value Measurements Using:

($ in thousands) Available-for-Sale Securities:	Fair Values at 3/31/17			(Level 1)		(Level 2)			(Level 3)
U.S. Treasury and Government Agencies	$	21,113		$	-	$	21,113		$	-
Mortgage-backed securities		72,147			-		72,147			-
State and political subdivisions		14,607			-		14,607			-
Equity securities		70			-		70			-
Interest rate contracts - assets		611			-		611			-
Interest rate contracts - liabilities		(611	)		-		(611	)		-

Fair Value Measurements Using:

($ in thousands) Available-for-Sale Securities:	Fair Values at 12/31/2016			(Level 1)		(Level 2)			(Level 3)
U.S. Treasury and Government Agencies	$	13,358		$	-	$	13,358		$	-
Mortgage-backed securities		61,603			-		61,603			-
State and political subdivisions		15,097			-		15,097			-
Equity securities		70			-		70			-
Interest rate contracts - assets		623			-		623			-
Interest rate contracts - liabilities		(623	)		-		(623	)		-

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 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, 2017 and December 31, 2016.

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.

Fair Value Measurements Using:

($ in thousands) Description	Fair Values at 3/31/2017		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	593	$	-	$	-	$	593
Mortgage Servicing Rights		2,402		-		-		2,402

($ in thousands) Description	Fair Values at 12/31/2016		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	786	$	-	$	-	$	786
Mortgage Servicing Rights		1,993		-		-		1,993

Level 1 - Quoted Prices in Active Markets for Identical Assets

Level 2 - Significant Other Observable Inputs

Level 3 - Significant Unobservable Inputs

	Fair Value at		Valuation			Range (Weighted
($’s in thousands)	3/31/2017		Technique	Unobservable Inputs		Average)

Collateral-dependent impaired loans	$	593	Market comparable	Comparability adjustments	(%)		Not available
			properties
Mortgage servicing rights		2,402	Discounted cash flow	Discount Rate			9.77	%
				Constant prepayment rate			7.50	%
				P&I earnings credit			0.98	%
				T&I earnings credit			2.03	%
				Inflation for cost of servicing			1.50	%

	Fair Value at		Valuation			Range (Weighted
($’s in thousands)	12/31/2016		Technique	Unobservable Inputs		Average)

Collateral-dependent impaired loans	$	786	Market comparable	Comparability adjustments	(%)		Not available
			properties
Mortgage servicing rights		1,993	Discounted cash flow	Discount Rate			9.65	%
				Constant prepayment rate			7.61	%
				P&I earnings credit			0.76	%
				T&I earnings credit			1.60	%
				Inflation for cost of servicing			1.50	%

Unobservable (Level 3) Inputs

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

There were no changes in the inputs or methodologies used to determine fair value at March 31, 2017 as compared to December 31, 2016.

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 for loans receivable is based on estimates of the rate State Bank would charge for similar loans at March 31, 2017 and December 31, 2016, applied for the time period until the loans are assumed to re-price or be paid.

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.

Deposits, FHLB advances & Repurchase agreements

Deposits include demand deposits, savings accounts, NOW 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, 2017 and December 31, 2016.

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, 2017 and December 31, 2016 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.

	March 31, 2017
	Carrying		Fair Value Measurements Using
	Amount		(Level 1)		(Level 2)		(Level 3)

Financial assets
Cash and cash equivalents	$	45,740	$	45,740	$	-	$	-
Loans held for sale		5,104		-		5,212		-
Loans, net of allowance for loan losses		619,043		-		-		620,113
Federal Reserve and FHLB Bank stock		3,748		-		3,748		-
Mortgage servicing rights		8,727		-		-		10,151
Accrued interest receivable		1,462		-		1,462		-

Financial liabilities
Deposits	$	712,915	$	124,664	$	591,668	$	-
FHLB advances		15,500		-		15,515		-
Repurchase agreements		11,796		-		11,796		-
Trust preferred securities		10,310		-		7,408		-
Accrued interest payable		450		-		450		-

	December 31, 2016
	Carrying		Fair Value Measurements Using
	Amount		(Level 1)		(Level 2)		(Level 3)

Financial assets
Cash and due from banks	$	17,012	$	17,012	$	-	$	-
Loans held for sale		4,434		-		4,503		-
Loans, net of allowance for loan losses		636,708		-		-		636,909
Federal Reserve and FHLB Bank stock, at cost		3,748		-		3,748		-
Mortgage servicing rights		8,422		-		-		9,656
Accrued interest receivable		1,512		-		1,512		-

Financial liabilities
Deposits	$	673,073	$	125,189	$	550,990	$	-
FHLB advances		26,500		-		26,477		-
Repurchase agreements		10,532		-		10,532		-
Trust preferred securities		10,310		-		7,422		-
Accrued interest payable		408		-		408		-

NOTE 7 - 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 $917.4 million at March 31, 2017 and $899.7 million at December 31, 2016. Contractually specified servicing fees of approximately $0.6 million and $0.5 million were included in mortgage loan servicing fees in the income statement for the periods ending March 31, 2017 and 2016, respectively.

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

($ in thousands)	2017			2016

Carrying amount, January 1	$	8,422		$	7,152
Mortgage servicing rights capitalized during the year		488			395
Mortgage servicing rights amortization during the year		(218	)		(172	)
Net change in valuation allowance		35			(767	)
Carrying amount, March 31	$	8,727		$	6,608

Valuation allowance:
January 1	$	228		$	296
Increase/(reduction)		(35	)		767
March 31	$	193		$	1,063

NOTE 8 - SHARE BASED COMPENSATION

In April 2008, the shareholders approved a share-based incentive compensation plan, the SB Financial Group, Inc. 2008 Stock Incentive Plan (the “2008 Plan”). The 2008 Plan permits the grant or award of incentive stock options, nonqualified stock options; stock appreciation rights (“SARs”) and restricted stock for up to 250,000 Common shares of the Company. 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.

A summary of incentive option activity under the Company’s plans as of March 31, 2017 and changes during the quarter then ended, is presented below:

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Term

Outstanding, December 31, 2016		145,894		$	7.85
Granted		-			-
Exercised		(36,517	)		10.29
Forfeited		-			-
Expired		(10,127	)		11.50
Outstanding, March 31, 2017		99,250			6.97		2.90

Exercisable, March 31, 2017		99,250			6.97		2.90

A summary of restricted stock activity under the Company’s plans as of March 31, 2017 and changes during the quarter then ended, is presented below:

	Shares			Weighted-Average Value per Share

Nonvested, December 31, 2016		35,498		$	9.44
Granted		24,352			18.84
Vested		(13,429	)		9.04
Forfeited		-			-
Nonvested, March 31, 2017		46,421		$	14.57

NOTE 9 - 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 such claims, lawsuits and examinations will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Company.

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, 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, 2016. 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” or the “Company”) is an Ohio corporation and a bank 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. SB Financial’s technology subsidiary, Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), provides item processing services to community banks and businesses.

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 the Company in exchange for junior subordinated debentures of the Company 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 the Company of the obligations of RST II.

RFCBC, Inc. (“RFCBC”) is an Ohio corporation and wholly-owned subsidiary of the Company 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.

Unless the context indicates otherwise, all references herein to “we”, “us”, “our”, or the “Company” refer to SB Financial Group, Inc. 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, 2016 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, 2017 compared to Three Months Ended March 31, 2016

Net Income : Net income for the first quarter of 2017 was $2.0 million compared to net income of $1.7 million for the first quarter of 2016, an increase of 20 percent. Earnings per diluted share (EPS) of $0.31 were up 19 percent from the $0.26 for the first quarter of 2016.

Provision for Loan Losses : The first quarter provision for loan losses was $0.0 million compared to $0.25 million for the year-ago quarter. Net charge-offs for the quarter were $0.05 million compared to $0.04 million for the year-ago quarter. Total delinquent loans ended the quarter at $2.1 million, or 0.34 percent of total loans, which was down $4.3 million from the prior year.

Asset Quality Review – For the Period Ended ($’s in Thousands)	Mar. 31, 2017			Mar. 31, 2016
Net charge-offs	$	46		$	35
Nonaccruing loans		2,382			6,584
Accruing Trouble Debt Restructures		1,383			1,482
Nonaccruing and restructured loans		3,765			8,066
OREO / OAO		950			406
Nonperforming assets		4,715			8,472
Nonperforming assets/Total assets		0.56	%		1.09	%
Allowance for loan losses/Total loans		1.23	%		1.25	%
Allowance for loan losses/Nonperforming loans		204.0	%		89.3	%

Consolidated Revenue : Total revenue, consisting of net interest income and noninterest income, was $10.3 million for the first quarter of 2017, an increase of $0.7 million, or 7.9 percent, from the $9.6 million generated during the 2016 first quarter.

Net interest income was $6.5 million, which is up $0.4 million from the prior year first quarter’s $6.1 million. The Company’s earning assets increased $72.5 million, coupled with a 10 basis point decrease in the yield on earning assets. The net interest margin for the first quarter of 2017 was 3.59 percent compared to 3.75 percent for the first quarter of 2016. Funding cost for interest bearing liabilities for the first quarter of 2017 were 0.60 percent compared to 0.51 percent for the prior year first quarter.

Noninterest income was $3.8 million for the 2017 first quarter, which is up $0.4 million from the prior year first quarter’s $3.4 million. In addition to the mortgage revenue detailed below, gains from the sale of non-mortgage loans was $0.4 million and wealth management revenue was $0.7 million. Noninterest income as a percentage of average assets for the first quarter of 2017 was 1.84 percent compared to 1.81 percent for the prior year first quarter.

State Bank originated $56.7 million of mortgage loans for the first quarter of 2017, of which $50.5 million was sold with the remainder in loans held for investment. This compares to $71.9 million for the first quarter of 2016, of which $59.4 million was sold with the remainder in loans held for investment. These first quarter 2017 originations and subsequent sales resulted in $1.3 million of gains, down $0.1 million from the gains for the first quarter of 2016. Net mortgage banking revenue was $1.6 million for the first quarter of 2017 compared to $0.9 million for the first quarter of 2016. The 2016 first quarter included an $0.8 million negative valuation impairment on our mortgage servicing rights, due to increased prepayment speeds in the portfolio.

Consolidated Noninterest Expense: Noninterest expense for the first quarter of 2017 was $7.4 million, which is up $0.5 million compared to $6.9 million in the prior-year first quarter. Total staffing levels are up 6 percent as additional resources have been placed in mortgage, wealth management and private banking.

Income Taxes: Income taxes for the first quarter of 2017 were $0.9 million (effective rate 31.9 percent) compared to $0.8 million (effective rate 31.2 percent) for the first quarter of 2016. This increase was driven by the increase in pretax income for the Company.

Changes in Financial Condition

Total assets at March 31, 2017 were $846.8 million, an increase of $30.8 million or 3.8 percent since 2016 year end. Total loans, net of unearned income, were $626.7 million as of March 31, 2017, down $17.7 million from year-end, a decrease of 2.7 percent.

Total deposits at March 31, 2017 were $712.9 million, an increase of $39.8 million or 5.9 percent since 2016 year end. Borrowed funds (consisting of FHLB advances, and REPOs) totaled $27.3 million at March 31, 2017. This is down from year-end when borrowed funds totaled $37.0 million due to an decrease in FHLB advances of $11.0 million. Total equity for the Company of $88.0 million now stands at 10.4 percent of total assets, which is up from the December 31, 2016 level of $86.5 million and 10.6 percent of total assets.

The allowance for loan loss of $7.7 million is down from the 2016 year end by 0.6 percent. This decrease combined with the loan decline of 2.8 percent results in an allowance to loans of 1.23 percent. The 1.23 percent level is considered appropriate by management given the risk profile of the portfolio.

Capital Resources

As of March 31, 2017, based on the computations for the call report the Bank is 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, 2017 that management believes have changed State Bank’s capital classification.

State Bank’s actual capital levels and ratios as of March 31, 2017 and December 31, 2016 are presented in the following table. Capital levels are presented for State Bank only as the Company is now exempt from quarterly reporting on capital levels at the holding company level ($’s in thousands):

											To Be Well Capitalized Under
						For Capital Adequacy					Prompt Corrective Action
	Actual					Purposes					Procedures
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2017
Tier I Capital to average assets	$	76,096		9.40	%	$	28,528		4.0	%	$	35,660		5.0	%
Tier I Common equity capital to risk-weighted assets		76,096		10.67	%		32,094		4.5	%		46,358		6.5	%
Tier I Capital to risk-weighted assets		76,096		10.67	%		42,792		6.0	%		57,056		8.0	%
Total Risk-based capital to risk-weighted assets		83,775		11.75	%		57,056		8.0	%		71,320		10.0	%

As of December 31, 2016
Tier I Capital to average assets	$	74,183		9.31	%	$	31,875		4.0	%	$	39,844		5.0	%
Tier I Common equity capital to risk-weighted assets		74,183		10.28	%		32,477		4.5	%		46,912		6.5	%
Tier I Capital to risk-weighted assets		74,183		10.28	%		43,303		6.0	%		57,737		8.0	%
Total Risk-based capital to risk-weighted assets		81,908		11.35	%		57,738		8.0	%		72,172		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, 2017 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 Banks 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 $158.8 million at March 31, 2017, compared to $111.6 million at December 31, 2016.

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 $467.3 million at March 31, 2017 and $479.0 million at December 31, 2016, 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, 2017, 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, 2017 and 2016 follows.

The Company experienced positive cash flows from operating activities for the three months ended March 31, 2017 and March 31, 2016. Net cash provided by operating activities was $0.6 million for the three months ended March 31, 2017 and $3.1 million for the three months ended March 31, 2016. Highlights for the current year include $46.4 million in proceeds from the sale of loans, which is down $9.1 million from the prior year. Originations of loans held for sale was a use of cash of $46.4 million, which is also down from the prior year, by $6.0 million. For the three months ended March 31, 2017, there was a gain on sale of loans of $1.7 million, and depreciation and amortization of $0.4 million.

The Company experienced negative cash flows from investing activities for the three months ended March 31, 2017 and March 31, 2016. Net cash flows used in investing activities was $1.3 million for the three months ended March 31, 2017 and $27.2 million for the three months ended March 31, 2016. Highlights for the three months ended March 31, 2017 include $23.3 million in purchases of available-for-sale securities. These cash payments were offset by $5.5 million in proceeds from maturities and sales of securities, which is up $1.6 million from the prior three-month period. The Company experienced a $17.7 million decrease in loans, which is down $37.4 million from the prior year three-month period.

The Company experienced positive cash flows from financing activities for the three months ended March 31, 2017 and March 31, 2016. Net cash flow provided by financing activities was $29.4 million for the three months ended March 31, 2017 and $39.2 million for the three months ended March 31, 2016. Highlights for the current period include a $25.5 million increase in transaction deposits for the three months ended March 31, 2017, which is down from the $29.7 million increase in transaction deposits for the three months ended March 31, 2016. Certificates of deposit increased by $14.3 million in the current year compared to an increase of $21.8 million for the prior year.

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 decrease in rates as of March 31, 2017 and December 31, 2016 was considered unlikely given the current interest rate environment and therefore, only the minus 100 basis point rate change was included in this analysis. The results of this analysis are reflected in the following tables for March 31, 2017 and December 31, 2016.

March 31, 2017 Economic Value of Equity ($’s in thousands)
Change in Rates	$ Amount		$ Change			% Change
+400 basis points	$	173,064	$	28,961			20.10	%
+300 basis points		167,377		23,274			16.15
+200 basis points		161,045		16,942			11.76
+100 basis points		153,321		9,218			6.40
Base Case		144,103		-			-
-100 basis points		134,098		(10,005	)		(6.94	)

December 31, 2016 Economic Value of Equity ($’s in thousands)
Change in Rates	$ Amount		$ Change			% Change
+400 basis points	$	169,809	$	26,322			18.34	%
+300 basis points		164,815		21,328			14.86
+200 basis points		159,285		15,798			11.01
+100 basis points		152,119		8,632			6.02
Base Case		143,487		-			-
-100 basis points		134,175		(9,312	)		(6.49	)

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 $467.3 million were pledged to meet FHLB collateralization requirements as of March 31, 2017. Based on the current collateralization requirements of the FHLB, the Company had approximately $63.5 million of additional borrowing capacity at March 31, 2017. The Company also had $39.7 million in unpledged securities to pledge for additional borrowings.

The Company’s contractual obligations as of March 31, 2017 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 $15.5 million and Trust Preferred Securities of $10.3 million. Total time deposits at March 31, 2017 were $212.0 million, of which $113.5 million mature beyond one year.

In addition, as of March 31, 2017, the Company had commitments to sell mortgage loans totaling $32.8 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 for the year ended December 31, 2016.

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, 2017, 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, 2016. There have been no material changes to the risk factors as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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

(a)	Not Applicable

(b)	Not Applicable

(c)	Repurchases of Common Shares

The table below includes certain information regarding the Company’s purchase of SB Financial Group, Inc. common stock during the quarterly period ended March 31, 2017:

	Total # of Shares Purchased		Weighted Avg. Price per Share		Total # of Shares Purchased Under Program		Maximum # of Shares yet to be Purchased Under Program

01/01/17 - 01/31/17		15,700	$	15.62		87,365		112,635

02/01/17 - 02/28/17		-	$	-		87,365		112,635

03/01/17 - 03/31/17		16,122	$	16.89		103,487		96,513

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
10.1	–	SB Financial Group 2017 Stock Incentive Plan
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 10, 2017	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

Exhibit 10.1

SB FINANCIAL GROUP

2017 STOCK INCENTIVE PLAN

ARTICLE I

Definitions

Section 1.1 Definitions. As used herein, the following terms shall have the meaning set forth below, unless the context clearly requires otherwise:

(a)	“Applicable Event” shall mean:

(i)

Any “person,” including a “group” (as such terms are used in Subsections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules promulgated thereunder, but excluding the Company, any Subsidiary or any employee benefit plan of the Company or any Subsidiary) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of, or acquires the power to direct, directly or indirectly, the exercise of voting power with respect to, securities which represent 50% or more of the combined voting power of the Company’s outstanding securities thereafter;

(ii)

Any merger or consolidation of the Company, other than a merger or consolidation in which the voting securities of the Company immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) 80% or more of the combined voting power of the Company or surviving entity immediately after the merger or consolidation with another entity; or

(iii)

The consummation of a sale or disposition by the Company of all or substantially all of the Company’s assets (or any transaction having a similar effect).

(b)	“Award” shall mean any Option, Restricted Stock, Restricted Stock Unit or Stock Appreciation Right granted under the Plan.

(c)	“Award Agreement” shall mean an agreement between the Company and a Participant that describes the terms and conditions of each Award.

(d)	“Board” shall mean the Board of Directors of the Company.

(e)

“Change in Control Price” shall mean the transaction price per share of Stock (whether paid in cash or other property) paid in conjunction with any transaction resulting in an Applicable Event or, in the case of an Applicable Event occurring solely by reason of events not related to a transfer of Stock, the Fair Market Value of a share of Stock on the last trading day before the Applicable Event occurs.

(f)

“Code” shall mean the Internal Revenue Code of 1986, as amended.

(g)

“Committee” shall mean the Compensation Committee of the Board.

(h)

“Company” shall mean SB Financial Group.

(i)

“Director” shall mean an individual (i) who is a member of the Board, a member of the Board of Directors of a Subsidiary, or a member of an advisory board who is appointed by the Board and (ii) who is not an Employee.

(j)

“Disability” shall mean:

(i)

With respect to Incentive Stock Options, disability as defined in Section 22(e)(3) of the Code; and

(ii)

With respect to any other Award, (A) the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (B) the Participant is determined to be totally disabled by the Social Security Administration.

(k)

“Effective Date” shall mean, with respect to the Plan, the date specified in Section 2.3 as the Effective Date.

(l)

“Employee” shall mean any person, including an executive officer, who is employed by the Company or any of its Subsidiaries.

(m)

“Fair Market Value” shall mean the value of a share of Stock on any relevant date, determined as follows:

(i)

If the Stock is traded on an exchange, the reported “closing price” on the relevant date if it is a trading day or, otherwise, the reported “opening price” on the next trading day;

(ii)

If Section 1.1(m)(i) does not apply:

	(1)	With respect to any Incentive Stock Option, fair market value within the meaning of Section 422 of the Code;

	(2)	With respect to any Award that is subject to Section 409A of the Code or any Nonqualified Stock Option or Stock Appreciation Right, fair market value shall be determined by the reasonable application of a reasonable valuation method within the meaning of Treasury Regulation §1.409A-1(b)(5)(iv)(B); and

	(3)	With respect to any other Award, fair market value shall be determined by application of such reasonable valuation methods as the Committee shall adopt or apply.

(n)

“Incentive Stock Option” shall mean an Option to purchase shares of Stock which is designated as an Incentive Stock Option by the Committee and is intended to meet the requirements of Section 422 of the Code.

(o)

“Nonqualified Stock Option” shall mean an Option to purchase shares of Stock which is not an Incentive Stock Option.

(p)

“Option” shall mean an option to purchase shares of Stock granted pursuant to the provisions of the Plan. Options granted under the Plan shall be either Nonqualified Stock Options or Incentive Stock Options.

(q)

“Participant” shall mean a Director or Employee to whom an Award has been granted under the Plan.

(r)

“Plan” shall mean the SB Financial Group 2017 Stock Incentive Plan, the terms of which are set forth herein and in any amendment which may be made hereto.

(s)

“Restricted Stock” shall mean a share of Stock granted to a Participant pursuant to Article VIII of the Plan.

(t)

“Restricted Stock Unit” shall mean an Award granted pursuant to Article IX of this Plan under which a Participant is issued a right to receive a specified number of shares of Stock or a cash payment equal to a specified number of shares of Stock, the settlement of which is subject to specified restrictions on vesting and transferability.

(u)

“Retirement” shall mean a voluntary termination by the Participant after (i) attaining the age of 65 and (ii) completing five years of service to the Company or a Subsidiary.

(v)

“Stock” shall mean the common shares, without par value, of the Company or, in the event that the outstanding shares of Stock are changed into or exchanged for different shares or securities of the Company or some other entity, such other shares or securities.

(w)

“Stock Appreciation Right” shall mean a right to receive an amount equal to the excess of the Fair Market Value on the exercise date over the Fair Market Value on the date the Stock Appreciation Right is granted pursuant to the provisions of the Plan.

(x)

“Subsidiary” shall mean:

(i)

With respect to an Incentive Stock Option, a “subsidiary corporation” as defined in Section 424(f) of the Code; and

(ii)

With respect to any other Award, any person with whom the Company would be considered to have a controlling interest, as defined in Treasury Regulation §1.409A-1(b)(5)(iii)(E)(1).

ARTICLE II

The Plan

Section 2.1 Name. The Plan shall be known as the “SB Financial Group 2017 Stock Incentive Plan.”

Section 2.2 Purpose. The purpose of the Plan is to advance the interests of the Company and its shareholders by affording to Directors and Employees an opportunity to acquire or increase their proprietary interest in the Company by the grant to such persons of Awards under the terms set forth herein. By encouraging such persons to become owners of the Company, the Company seeks to attract, motivate, reward and retain those highly competent individuals upon whose judgment, initiative, leadership and efforts are key to the success of the Company.

Section 2.3 Effective Date and Termination of Plan. The Plan shall become effective upon the affirmative vote of the Board on February 15, 2017 (the “Effective Date”); provided, however, that if the Plan is not approved by the shareholders of the Company within twelve (12) months following such adoption, the Plan and all outstanding Awards, if any, shall be deemed null and void and shall be of no force or effect. No shares of Stock may be issued pursuant to this Plan prior to approval of the Plan by the shareholders of the Company. The Plan shall terminate upon the earliest of (a) February 15, 2027; (b) the date on which all Stock available for issuance under the Plan has been issued pursuant to the exercise or settlement, as applicable, of Awards granted hereunder or with respect to which payments have been made upon the exercise of Stock Appreciation Rights or other rights; or (c) the determination of the Board that the Plan shall terminate. No Awards may be granted under the Plan after such termination date, provided that the Awards granted and outstanding on such date shall continue to have force and effect in accordance with the provisions of the Award Agreements evidencing such Awards.

ARTICLE III

Administration

Section 3.1 Administration.

(a)

The Plan shall be administered by the Committee. Subject to the express provisions of the Plan, the Committee shall have sole discretion and authority to determine from time to time the individuals to whom Awards may be granted, the number of shares of Stock to be subject to each Award, the period during which each Option or Stock Appreciation Right may be exercised, the price at which each Option or Stock Appreciation Right may be exercised, and the terms and conditions of any Award.

(b)

Meetings of the Committee shall be held at such times and places as shall be determined from time to time by the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business. The vote of a majority of the members of the Committee shall decide any question brought before the meeting. In addition, the Committee may take any action otherwise proper under the Plan by the execution of a written action, taken without a meeting, and signed by all of the members of the Committee.

(c)

All questions of interpretation and application with respect to the Plan or Awards granted thereunder shall be subject to the determination, which shall be final and binding, of a majority of the whole Committee.

(d)

The Committee shall have the sole discretion and authority to determine whether an Option shall be an Incentive Stock Option or a Nonqualified Stock Option; provided that Incentive Stock Options may be granted only to persons who are Employees.

(e)

Notwithstanding any provision contained herein, a grant of an Award to a Director must be approved by the full Board.

(f)

Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company’s approval, or paid by him in satisfaction of judgment in any such action, suit or proceeding against him; provided that he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Company’s articles of incorporation or regulations, as a matter of law, or otherwise, or any power that the Company may have to indemnify him or hold him harmless.

Section 3.2 Company Assistance. The Company and its Subsidiaries shall supply full and timely information to the Committee on all matters relating to eligible Employees, their employment, death, Retirement, Disability or other termination of employment and such other pertinent facts as the Committee may require. The Company shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties.

Section 3.3 Repricing . Except in connection with a corporate transaction involving the Company (including, without limitation, any Stock dividend, Stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares of Stock), the terms of outstanding Awards may not be amended without shareholder approval to reduce the exercise price of outstanding Options or Stock Appreciation Rights or to cancel outstanding Options or Stock Appreciation Rights in exchange for cash, Options or Stock Appreciation Rights with an exercise price that is less than the exercise price of the original Options or Stock Appreciation Rights, or other Awards or property.

ARTICLE IV

Participants

Section 4.1 Eligibility. Directors and Employees shall be eligible to participate in the Plan. The Committee may grant Awards to any eligible individual subject to the provisions of Sections 3.1(e) and 5.1.

ARTICLE V

Shares of Stock Subject to Plan

Section 5.1 Grant of Awards and Limitations.

(a)

Grant of Awards. The Committee shall designate the Employees and Directors eligible to receive Awards and the number of shares of Stock subject to such Awards.

(b)

Stock Available for Awards. Subject to adjustment pursuant to the provisions of Section 11.4 hereof, the aggregate number of shares of Stock with respect to which Awards may be granted during the term of the Plan shall not exceed 500,000. Shares with respect to which Awards may be granted may be either authorized and unissued shares of Stock or shares of Stock issued and thereafter acquired by the Company.

(c)

Incentive Stock Options. In the case of Incentive Stock Options, the aggregate Fair Market Value of the shares of Stock (under all plans of the Company and all of its Subsidiaries), with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year, may not exceed $100,000. Such Options that exceed $100,000 shall be treated as Nonqualified Stock Options. The maximum number of shares of Stock that may be granted under the Plan through the exercise of Incentive Stock Options shall be 500,000.

(d)

Fiscal Year Limits . Subject to Section 12.4 of this Plan, during any fiscal year of the Company, the Committee may not make grants of all forms of Awards to a single Participant in this Plan covering more than an aggregate of 50,000 shares of Stock.

Section 5.2 Awards Under the Plan. Shares of Stock with respect to which an Award granted hereunder shall have been exercised or settled, as applicable, shall not again be available for grant hereunder. If Awards granted hereunder shall expire, terminate or be canceled for any reason without being wholly exercised or settled, as applicable, new Awards may be granted hereunder covering the number of shares of Stock to which such Award’s expiration, termination or cancellation relates. For purposes of clarity, shares of Stock that are withheld from or that are tendered by a Participant (either by delivery or attestation) in payment of an exercise price or to cover withholding tax obligations shall not be available to future grants under the Plan.

ARTICLE VI

Options

Section 6.1 Grant of Options. Subject to the terms, restrictions and conditions specified in the Plan and the associated Award Agreement, the Committee may grant Nonqualified Stock Options and Incentive Stock Options to Employees and Nonqualified Stock Options to Directors at any time during the term of the Plan. Each Option granted hereunder shall be evidenced by minutes of a meeting or the written consent of all of the members of the Committee or the Board, as applicable, and by a written Award Agreement in such form as the Committee shall approve from time to time. The Award Agreement shall set forth such terms and conditions of the Option as may be determined by the Committee, consistent with the Plan.

Section 6.2 Exercise Price. The exercise price of the Stock subject to an Option shall not be less than the Fair Market Value on the date the Option is granted; provided, however, that the exercise price for an Incentive Stock Option granted to a Participant who owns or who is deemed to own shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or any Subsidiary as determined under Section 422 of the Code (a “10 Percent Owner”), shall not be less than 110% of the Fair Market Value on the date the Incentive Stock Option is granted.

Section 6.3 Option Grant and Exercise Periods. No Option may be granted after the tenth anniversary of the Effective Date. The period for exercise of each Option shall be determined by the Committee, but in no instance shall such period extend beyond the tenth anniversary of the date of grant of the Option. The period of exercise for each Incentive Stock Option granted to a 10 Percent Owner may not be more than 5 years from the date of grant of the Option.

Section 6.4 Option Exercise.

(a)

Subject to Section 6.4(b) and such terms and conditions as may be determined by the Committee in its sole discretion upon the grant of an Option, an Option may be exercised in whole or in part (but with respect to whole shares only) and from time to time by delivering to the Company at its principal office written notice of intent to exercise the Option with respect to a specified number of shares of Stock.

(b)

Options shall be exercisable according to respective vesting schedules set forth in each Award Agreement as determined by the Committee; provided that vesting of any Option that is based in whole or in part on performance conditions and/or the level of achievement versus such performance conditions shall be subject to a performance period of not less than one year, and vesting of any Option based solely upon continued employment or the passage of time shall vest over a period of not less than three years from the date the Award is made, provided that such vesting may occur in pro rata installments over the three-year period, with the first installment vesting no sooner than the first anniversary of the date of grant of such Award.

(c)

Subject to such terms and conditions as may be determined by the Committee in its sole discretion upon grant of any Option, payment for the shares of Stock to be acquired pursuant to exercise of the Option shall be made as follows:

(i)

By delivering to the Company at its principal office a check payable to the order of “SB Financial Group” in the amount of the exercise price for the number of shares of Stock with respect to which the Option is then being exercised; or

(ii)

By tendering to the Company shares of Stock owned by the Participant for at least six months prior to the date the Option is exercised (or such other period acceptable under the generally accepted accounting principles) having an aggregate Fair Market Value as of the date of exercise equal to the exercise price for the number of shares of Stock with respect to which the Option is then being exercised; or

(iii)

By a cashless exercise (including by withholding shares of Stock deliverable upon exercise and through a broker-assisted arrangement to the extent permitted by applicable law); or

(iv)

By any combination of payments delivered pursuant to paragraphs (c)(1), (c)(2), and (c)(3) above.

Section 6.5 Rights as a Shareholder. A Participant shall have no rights as a shareholder with respect to any share of Stock subject to such Option prior to the exercise of the Option and the purchase of such shares of Stock.

ARTICLE VII

Stock Appreciation Rights

Section 7.1 Stock Appreciation Rights. Subject to the terms and conditions of the Plan, the Committee may grant Stock Appreciation Rights to Participants at any time during the term of the Plan, either alone or in tandem with other Awards. Such Stock Appreciation Rights shall be evidenced by an Award Agreement in such form as the Committee shall from time to time approve. Such Award Agreements shall comply with, and be subject to, the following terms and conditions:

(a)

Exercise Price. The exercise price of a Stock Appreciation Right may not be less than 100% of the Fair Market Value on the date of grant.

(b)

Period and Exercise. The Award Agreement will specify the period over which a Stock Appreciation Right may be exercised and the terms and conditions that must be met before it may be exercised; provided, however, that an Award Agreement may not permit the Stock Appreciation Right to be exercisable more than 10 years after the date of grant. A Participant may exercise a Stock Appreciation Right by giving written notice of exercise on a form acceptable to the Committee specifying the portion of the Stock Appreciation Right being exercised.

(c)

Vesting . Stock Appreciation Rights shall be exercisable according to respective vesting schedules set forth in each Award Agreement as determined by the Committee; provided that vesting of any Stock Appreciation Right that is based in whole or in part on performance conditions and/or the level of achievement versus such performance conditions shall be subject to a performance period of not less than one year, and vesting of any Stock Appreciation Rights based solely upon continued employment or the passage of time shall vest over a period of not less than three years from the date the Award is made, provided that such vesting may occur in pro rata installments over the three-year period, with the first installment vesting no sooner than the first anniversary of the date of grant of such Award.

(d)

Calculation of Appreciation. Upon the exercise of Stock Appreciation Right, the Participant shall be entitled to receive either (i) cash equal to the excess of the Fair Market Value on the exercise date over the Fair Market Value on the date the Stock Appreciation Right was granted, multiplied by the number shares of Stock with respect to which the Stock Appreciation Right is being exercised (the “Cash Amount”), or (ii) a number of shares of Stock equal to the Cash Amount, divided by the Fair Market Value on the exercise date of the Stock Appreciation Right.

(e)

Payment of Appreciation. The total appreciation available to a Participant from an exercise of a Stock Appreciation Right shall be paid in a single lump sum payment in either cash or shares of Stock, as determined by the Committee.

(f)

Rights as a Shareholder. A Participant shall have no rights as a shareholder with respect to any share of Stock subject to a Stock Appreciation Right.

ARTICLE VIII

Restricted Stock

Section 8.1 Grant of Restricted Stock. Subject to the terms and conditions of the Plan, the Committee may grant Restricted Stock to Participants at any time during the term of the Plan. Such Restricted Stock shall be subject to the terms and conditions that the Committee specifies in the Award Agreement and to the terms and conditions of the Plan. At the Committee’s sole discretion, all shares of Restricted Stock will be held by the Company as escrow agent or issued to the Participant in the form of certificates bearing a legend describing the restrictions imposed on the shares.

Section 8.2 Earning Restricted Stock. Restricted Stock may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until the terms, restrictions and conditions imposed on the Restricted Stock have lapsed as described in the Award Agreement. Restricted Stock will be (a) forfeited if all terms, restrictions and conditions described in the Award Agreement have not been satisfied or (b) released from escrow and distributed (or any restrictions described in the certificates removed) as soon as practicable after all terms, restrictions and conditions described in the Award Agreement have been satisfied. Vesting of any Restricted Stock that is based in whole or in part on performance conditions and/or the level of achievement versus such performance conditions shall be subject to a performance period of not less than one year, and vesting of any Restricted Stock based solely upon continued employment or the passage of time shall vest over a period of not less than three years from the date the Award is made, provided that such vesting may occur in pro rata installments over the three-year period, with the first installment vesting no sooner than the first anniversary of the date of grant of such Award.

Section 8.3 Rights Associated with Restricted Stock. During the applicable period of restriction and unless the Award Agreement provides otherwise, each Participant to whom Restricted Stock has been granted (a) may exercise full voting rights associated with that Restricted Stock and (b) will be entitled to receive all dividends and other distributions paid with respect to that Restricted Stock; provided, however, that such dividends or other distributions shall be subject to the same restrictions on transferability and forfeitability as the shares of Restricted Stock with respect to which they were issued. This means that no accrued dividends shall be paid to the Participant until the restrictions on the Restricted Stock lapse and such dividends shall be forfeited to the extent that the Participant forfeits the related Restricted Stock.

ARTICLE IX

RESTRICTED STOCK UNITS

Section 9.1 Grant of Restricted Stock Units . Subject to the terms and conditions of this Plan, the Committee may grant Restricted Stock Units to Participants at any time during the term of the Plan. Such Restricted Stock Units shall be subject to the terms and conditions that the Committee specifies in the Award Agreement and the terms and conditions of the Plan.

Section 9.2 Award Agreement . Each Award of Restricted Stock Units shall be evidenced by an Award Agreement that specifies the number of shares of Stock underlying the Award, the restricted period, the conditions upon which the restrictions on the Restricted Stock Units will lapse, the time at which and form in which the Restricted Stock Units will be settled, and such other terms and conditions as the Committee determines and which are not inconsistent with the terms and conditions of this Plan.

Section 9.3 Terms, Conditions and Restrictions . The Committee shall impose such other terms, conditions and restrictions on any Award of Restricted Stock Units as the Committee may deem advisable, including, without limitation, restrictions based on the achievement of specific performance goals, time-based restrictions, holding requirements or sale restrictions placed on the underlying shares of Stock by the Company upon vesting of such Restricted Stock Units. Vesting of any Restricted Stock Unit that is based in whole or in part on performance conditions and/or the level of achievement versus such performance conditions shall be subject to a performance period of not less than one year, and vesting of any Restricted Stock Unit based solely upon continued employment or the passage of time shall vest over a period of not less than three years from the date the Award is made, provided that such vesting may occur in pro rata installments over the three-year period, with the first installment vesting no sooner than the first anniversary of the date of grant of such Award.

Section 9.4 Form of Settlement . An Award of Restricted Stock Units may be settled in full shares of Stock, in cash or in a combination thereof, as specified by the Committee in the related Award Agreement.

Section 9.5 Dividend Equivalents . Awards of Restricted Stock Units may provide the Participant with dividend equivalents, as determined by the Committee in the Committee’s sole discretion and as set forth in the related Award Agreement; provided, however, that such dividend equivalents shall be subject to the same terms and conditions, including the applicable forfeiture conditions, as the Restricted Stock Units. This means that no amount shall be paid in connection with a dividend equivalent right until shares of Stock are issued or cash is paid in connection with the Restricted Stock Units and any dividend equivalents shall be forfeited to the extent that the Participant forfeits the related Restricted Stock Units.

Section 9.6 No Voting Rights . In no event will a Participant have any voting rights with respect to the shares of Stock underlying the Restricted Stock Units.

ARTICLE X

Amendment and Modification of Plan

Section 10.1 Amendment. The Board may from time to time amend or modify or make such changes in and additions to the Plan as it may deem desirable, without further action on the part of the shareholders of the Company except as such shareholder approval may be required (a) to satisfy the requirements of Rule 16b-3 under the Exchange Act or any successor rule or regulation; (b) to satisfy applicable requirements of the Code; or (c) to satisfy applicable requirements of the NASDAQ Stock Market or any securities exchange on which are listed any of the Company’s equity securities. No such action to amend the Plan shall reduce the then-existing number of Awards granted to any Participant or adversely change the terms and conditions thereof without such Participant’s consent.

ARTICLE XI

Taxation and Withholding

Section 11.1 Tax Withholding. With respect to Employees, the Company shall have the power and the right to deduct or withhold an amount sufficient to satisfy federal, state and local taxes required by law to be withheld with respect to any grant, exercise, or payment made under or as a result of the Plan. At the discretion of the Committee, a Participant may be permitted to pay to the Company the withholding amount in the form of cash, shares of Stock owned by the Participant for at least the previous six months (or such other period acceptable under the generally accepted accounting principles) or by having the Company withhold shares of Stock from the settlement of the Award. If payment of the withholding amount is made by tendering shares of Stock, the value of the shares of Stock delivered shall equal the Fair Market Value on the applicable day.

Section 11.2 Required Consent to and Notification of Code Section 83(b) Election . No election under Section 83(b) of the Code (to include in gross income in the year of transfer the amounts specified in Code Section 83(b)) or under a similar provision of the laws of a jurisdiction outside the United States may be made unless expressly permitted by the terms of the Award document or by action of the Committee in writing prior to the making of such election. In any case in which a Participant is permitted to make such an election in connection with an Award, the Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b) or other applicable provision.

Section 11.3 Requirement of Notification Upon Disqualifying Disposition Under Code Section 421(b) . If any Participant shall make any disposition of shares of Stock delivered pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b) (i.e., a disqualifying disposition), such Participant shall notify the Company of such disposition within ten days thereof.

ARTICLE XII

Miscellaneous

Section 12.1 Transferability. Except as specifically permitted in an Award Agreement, during the Participant’s lifetime, any Award may be exercised only by the Participant or any guardian or legal representative of the Participant, and the Award shall not be transferable except by will or the laws of descent and distribution.

Section 12.2 Designation of Beneficiary. A Participant may file a written designation of a beneficiary who is to receive any Stock that is unsettled and/or cash that is unpaid in the event of the Participant’s death. Such designation of beneficiary may be changed by the Participant at any time by written notice to the Company. Upon the death of a Participant and upon receipt by the Company of proof of identity and the existence of a beneficiary at the time of the Participant’s death validly designated by the Participant under the Plan, the Company shall deliver such Stock and/or cash to such beneficiary. In the event of the death of a Participant in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant’s death, the Company shall deliver such Stock and/or cash to the executor or the administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Stock and/or cash to the spouse or to any one or more dependents of the Participant as the Company may designate. No beneficiary shall, prior to the death of the Participant by whom he has been designated, acquire any interest in the Stock and/or cash credited to the Participant under the Plan.

Section 12.3 Effect of Termination, Death, Disability and Retirement. Unless otherwise specified in the Award Agreement, all Awards will be exercisable or forfeited as described in this Section 12.3:

(a)

Termination. If a Participant’s service as a Director or an Employee terminates for any reason, other than his Retirement, death or Disability, before the date of expiration of the Awards held by such Participant, (i) any Options and Stock Appreciation Rights that are not exercisable and any unvested Restricted Stock shall become null and void on the date of such termination and (ii) all exercisable Options and Stock Appreciation Rights shall terminate on the earlier of (1) the date of expiration of the Options and Stock Appreciation Rights, as applicable, or (2) 30 days following the date of the Participant’s termination. A Participant who terminates employment with the Company, but retains his status as a Director is not considered terminated with respect to any outstanding Award until the date the Participant ceases to be both a Director and an Employee of the Company, provided that any Incentive Stock Option that is outstanding as of the date that the Participant terminates employment with the Company shall be treated as a Nonqualified Stock Options following the date of the Participant’s termination as an employee.

(b)

Death. If a Participant’s service as a Director or an Employee terminates due to his death before the expiration of the Awards held by the Participant, (i) any Options and Stock Appreciation Rights that are not exercisable shall become exercisable and all Options and Stock Appreciation Rights shall terminate on the earlier of (1) the date of expiration of the Options and Stock Appreciation Rights, as applicable, or (2) one year following the date of the Participant’s death; and (ii) any unvested Restricted Stock shall become fully vested. The executor, administrator or personal representative of the estate of a deceased Participant, or the person or persons to whom an Award granted hereunder shall have been validly transferred by the executor, the administrator or the personal representative of the Participant’s estate, shall have the right to exercise the Participant’s Option or Stock Appreciation Right or receive the Participant’s Restricted Stock. To the extent that such Options and Stock Appreciation Rights would otherwise be exercisable under the terms of the Plan and the Participant’s Award Agreement, such exercise may occur at any time prior to the termination date specified in this Section 12.3(b).

(c)

Disability. If a Participant’s service as a Director or an Employee terminates due to his Disability before the expiration of the Awards held by the Participant, (i) any Options and Stock Appreciation Rights that are not exercisable shall become exercisable and all Options and Stock Appreciation Rights shall terminate on the earlier of (1) the date of expiration of the Options and Stock Appreciation Rights, as applicable, or (2) one year following the date of the Participant’s termination of service due to Disability; and (ii) any unvested Restricted Stock shall become fully vested.

(d)

Retirement. If a Participant Retires before the date of expiration of the Awards held by such Participant, (i) any Options and Stock Appreciation Rights that are not exercisable shall become exercisable and all Options and Stock Appreciation Rights shall terminate on the earlier of (1) the date of expiration of the Options and Stock Appreciation Rights, as applicable, or (2) one year following the date of the Participant’s Retirement; provided, however, that an Incentive Stock Option that is not exercised within three months after the date of the Participant’s Retirement shall be treated as a Nonqualified Stock Option; and (ii) any unvested Restricted Stock shall become fully vested.

Section 12.4 Antidilution. If there is a Stock dividend, Stock split, recapitalization (including payment of an extraordinary dividend), merger, consolidation, combination, spin-off, distribution of assets to shareholders, exchange of shares or other similar corporate change affecting the Stock, the Committee will appropriately adjust (a) the number of shares of Stock that may be issued subject to Awards that may be granted to Participants during any period, (b) the aggregate number of shares of Stock available for Awards or subject to outstanding Awards (as well as any Stock-based limits imposed under the Plan), (c) the respective exercise price, number of shares of Stock and other limitations applicable to outstanding Awards, and (d) and other factors, limits or terms affecting any outstanding Awards. Notwithstanding the foregoing, an adjustment pursuant to this Section 12.4 shall be made only to the extent such adjustment complies, to the extent applicable, with Section 409A of the Code.

Section 12.5 Applicable Event. In the event an Applicable Event occurs, (a) if determined by the Committee in the applicable Award Agreement or otherwise determined by the Committee in its sole discretion, any outstanding Awards then held by Participants which are unexercisable or otherwise unvested or subject to lapse restrictions may automatically be deemed exercisable or otherwise vested or no longer subject to lapse restrictions, as the case may be, immediately prior to such Applicable Event and (b) the Committee may, but shall not be obligated to (i) cancel such Awards for the Change in Control Price or (ii) provide for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted hereunder as determined by the Committee in its sole discretion or (iii) provide that for a period of at least fifteen (15) days prior to the Applicable Event, any Options or Stock Appreciation Rights shall be exercisable as to all shares of Stock subject thereto and that upon the occurrence of the Applicable Event, such Options and Stock Appreciation Rights shall terminate and be of no further force and effect.

Section 12.6 Application of Funds. The proceeds received by the Company from the sale of Stock pursuant to Awards shall be used for general corporate purposes.

Section 12.7 Tenure. Nothing in the Plan or in any Award granted hereunder or in any Award Agreement relating thereto shall confer upon any Director or Employee the right to continue in such position with the Company or any Subsidiary.

Section 12.8 Other Compensation Plans. The adoption of the Plan shall not affect any other stock option or incentive or other compensation plans in effect for the Company or any Subsidiary, nor shall the Plan preclude the Company or any Subsidiary from establishing any other forms of incentive or other compensation for Directors or Employees.

Section 12.9 No Obligation to Exercise Awards. The granting of an Award shall impose no obligation upon the Participant to exercise or accept such Award.

Section 12.10 Plan Binding on Successors. The Plan shall be binding upon the successors and assigns of the Company.

Section 12.11 Compliance with Section 16. If the Company has a class of equity securities registered under Section 12 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent that any transaction or action by the Committee fails to so comply, the Committee may amend the Plan and the terms of any outstanding Award, and any action of the Committee which fails to comply shall be deemed void to the extent permitted by law and deemed advisable by the Committee.

Section 12.12 Requirements of Law. The grant of Awards and the issuance of shares of Stock will be subject to all applicable laws, rules and regulations and to all required approvals of any governmental agencies or exchange, market or other quotation system on or though which the securities of the Company are then traded. Also, no shares of Stock will be issued under the Plan unless the Company is satisfied that the issuance of those shares of Stock will comply with applicable federal and state securities laws. Shares of Stock tendered under the Plan may be subject to any stock transfer orders and other restrictions that the Committee believes to be advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any exchange, market or other quotation system on or through which the Company’s securities are then traded, or any other applicable federal or state securities law. The Committee may cause a legend or legends to be placed on any certificates issued under the Plan to make appropriate reference to restrictions within the scope of this section.

Section 12.13 Singular, Plural and Gender. Whenever used herein, nouns in the singular shall include the plural, and the masculine pronoun shall include the feminine.

Section 12.14 Headings. Headings are inserted for convenience of reference; they constitute no part of the Plan.

Section 12.15 Governing Law. Except as otherwise required by law, the validity, construction and administration of the Plan shall be determined under the laws of the State of Ohio.

Section 12.16 Section 409A of the Code. It is intended that Awards granted under the Plan comply with or be exempt from the requirements of Section 409A of the Code and the Treasury Regulations promulgated thereunder (and any subsequent notices or guidance issued by the Internal Revenue Service), and the Plan will be interpreted, administered and operated accordingly. Nothing herein shall be construed as an entitlement to or guarantee of any particular tax treatment to a Participant.

Section 12.17 Additional Award Forfeiture Provisions.

(a)

Forfeiture of Options and Other Awards and Gains Realized Upon Prior Option Exercises or Award Settlements . Unless otherwise determined by the Committee, each Award granted shall be subject to the following additional forfeiture conditions, to which the Participant, by accepting an Award hereunder, agrees. If any of the events specified in Section 12.17(b) occurs (a “Forfeiture Event”), all of the following forfeitures will result:

(i)

The unexercised portion of each Option held by the Participant, whether or not vested, and any other Award not then settled will be immediately forfeited and canceled upon the occurrence of the Forfeiture Event; and

(ii)

The Participant will be obligated to repay to the Company, in cash, within five business days after demand is made therefor by the Company, the total amount of Award Gain (as defined herein) realized by the Participant upon each exercise of an Option or settlement of an Award that occurred on or after (A) the date that is six months prior to the occurrence of the Forfeiture Event, if the Forfeiture Event occurred while the Participant was employed by the Company or a subsidiary or affiliate of the Company, or (B) the date that is six months prior to the date the Participant’s employment by the Company or a subsidiary or affiliate of the Company terminated, if the Forfeiture Event occurred after the Participant ceased to be so employed. For purposes of this Section, the term “Award Gain” shall mean (X) in respect of a given Option exercise, the product of (1) the Fair Market Value per share of Stock at the date of such exercise (without regard to any subsequent change in the market price of shares) minus the exercise price times (2) the number of shares as to which the Option was exercised at that date, and (Y) in respect of any other settlement of an Award granted to the Participant, the Fair Market Value of the cash or Stock paid or payable to the Participant less any cash or the Fair Market Value of any Stock or property (other than an Award or award which would have itself then been forfeitable hereunder and excluding any payment of tax withholding) paid by the Participant to the Company as a condition of or in connection such settlement.

(b)

Events Triggering Forfeiture . The forfeitures specified in Section 12.17(a) will be triggered upon the occurrence of any one of the following Forfeiture Events at any time during a Participant’s employment by the Company or a subsidiary or affiliate of the Company, or during the one-year period following termination of such employment:

(i)

If the Company or a Subsidiary is required to prepare an accounting restatement due to material non-compliance of the Company or a Subsidiary with any financial reporting requirement under any applicable laws;

(ii)

The Participant, acting alone or with others, directly or indirectly, (A) engages, either as employee, employer, consultant, advisor, or director, or as an owner, investor, partner, or stockholder unless the Participant’s interest is insubstantial, in any business in an area or region in which the Company or any of its Subsidiaries conducts business at the date the event occurs, which is directly in competition with a business then conducted by the Company or s Subsidiary; (B) induces any customer or supplier of the Company or any Subsidiary with which the Company or a Subsidiary has a business relationship, to curtail, cancel, not renew, or not continue his or her or its business with the Company or such Subsidiary; or (C) induces, or attempts to influence, any associate of or service provider to the Company or a Subsidiary to terminate such employment or service. The Committee shall, in its discretion, determine which lines of business the Company and its Subsidiaries conduct on any particular date and which third parties may reasonably be deemed to be in competition with the Company or a Subsidiary. For purposes of this Section 12.17(b)(i), a Participant’s interest as a stockholder is insubstantial if it represents beneficial ownership of less than five percent of the outstanding class of stock, and a Participant’s interest as an owner, investor, or partner is insubstantial if it represents ownership, as determined by the Committee in its discretion, of less than five percent of the outstanding equity of the entity;

(iii)

The Participant discloses, uses, sells, or otherwise transfers, except in the course of employment with or other service to the Company or any Subsidiary, any confidential or proprietary information of the Company or any Subsidiary, including but not limited to information regarding the Company’s and its Subsidiaries’ current and potential customers, organization, associates, finances, and methods of operations and investments, so long as such information has not otherwise been disclosed to the public or is not otherwise in the public domain (other than by the Participant’s breach of this provision), except as required by law or pursuant to legal process, or the Participant makes statements or representations, or otherwise communicates, directly or indirectly, in writing, orally, or otherwise, or takes any other action which may, directly or indirectly, disparage or be damaging to the Company or any of its Subsidiaries or their respective officers, directors, associates, advisors, businesses or reputations, except as required by law or pursuant to legal process; or

(iv)

The Participant fails to cooperate with the Company or any Subsidiary in any way, including, without limitation, by making himself or herself available to testify on behalf of the Company or such Subsidiary in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, or otherwise fails to assist the Company or any Subsidiary in any way, including, without limitation, in connection with any such action, suit, or proceeding by providing information and meeting and consulting with members of management of, other representatives of, or counsel to, the Company or such Subsidiary, as reasonably requested.

(v)

The Participant, alone or in conjunction with another person, (A) interferes with or harms, or attempts to interfere with or harm, the relationship of the Company or any Subsidiary with any person who at any time was a customer or supplier of the Company or any Subsidiary or otherwise had a business relationship with the Company or any Subsidiary; or (A) hires, solicits for hire, aids in or facilitates the hire, or causes to be hired, either as an employee, contractor or consultant, any person who is currently employed, or was employed at any time during the six-month period prior thereto, as an employee, contractor or consultant of the Company or any Subsidiary.

	(c)	Agreement Does Not Prohibit Competition or Other Participant Activities . Although the conditions set forth in this Section 12.17 shall be deemed to be incorporated into an Award, a Participant is not thereby prohibited from engaging in any activity set forth in Section 12.17(b), including but not limited to competition with the Company and its Subsidiaries. The non-occurrence of the Forfeiture Events set forth in Section 12.17(b) is a condition to the Participant’s right to realize and retain value from his or her compensatory Options and Awards, and the consequence under the Plan if the Participant engages in an activity giving rise to any such Forfeiture Event are the forfeitures specified herein. The Company and a Participant shall not be precluded by this provision or otherwise from entering into other agreements concerning the subject matter of Section 12.17.

(d)

Committee Discretion . The Committee may, in its discretion, waive in whole or in part the Company’s right to forfeiture under this Section 12.17, but no such waiver shall be effective unless evidenced by a writing signed by a duly authorized officer of the Company. In addition, the Committee may impose additional conditions on Awards, by inclusion of appropriate provisions in the document evidencing or governing any such Award.

Exhibit 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Mark A. Klein, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 of SB Financial Group, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2017	/s/ Mark A Klein
	Mark A. Klein
	Chairman, President & CEO
	(Principal Executive Officer)

Exhibit 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Anthony V. Cosentino, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 of SB Financial Group, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2017	/s/ Anthony V. Cosentino
	Anthony V. Cosentino
	Executive Vice President &
	Chief Financial Officer
	(Principal Financial Officer)

Exhibit 32.1

SECTION 1350 CERTIFICATION*

In connection with the Quarterly Report of SB Financial Group, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark A. Klein, the Chief Executive Officer of the Company, certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.

	/s/ Mark A. Klein
	Mark A. Klein
	Title: Chairman, President & CEO
	(Principal Executive Officer)

	Date: May 10, 2017

* This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into any such filing.

Exhibit 32.2

SECTION 1350 CERTIFICATION*

In connection with the Quarterly Report of SB Financial Group, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony V. Cosentino, the Chief Financial Officer of the Company, certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.

	/s/ Anthony V. Cosentino
	Anthony V. Cosentino
	Title: Chief Financial Officer (Principal Financial Officer)

	Date: May 10, 2017

* This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into any such filing.