Good morning and welcome to the SB Financial Group First Quarter 2018 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Melissa Martin, Executive Assistant. Please go ahead.

Good morning, everyone. I would like to remind you that this call is being broadcast live over the Internet and will be archived and available on our website at www.yoursbfinancial.com under Investor Relations. Joining me today are Mark Klein, Chairman, President and CEO; Tony Cosentino, Chief Financial Officer; and Jon Gathman, Senior Lending Officer. This call may contain forward-looking statements regarding SB Financial Group's financial performance, anticipated plans, operational results and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today. We have identified a number of different factors within the forward-looking statements at the end of our earnings release which you are encouraged to review. SB Financial Group undertakes no obligation to update any forward-looking statement except as required by law after the date of this call. In addition to the financial results presented in accordance with GAAP, this call will also contain certain non-GAAP financial measures. I will now turn the call over to Mr. Klein.

Thank you, Melissa and good morning everyone. Welcome to our first quarter 2018 webcast. Our comments today on our first quarter performance are supplement to the earnings release that we filed yesterday. Briefly highlights for the quarter include GAAP net income was $2.5 million, a 23% improvement over the prior year quarter representing return average assets of 1.08% or a 12.5% increase. Net income available to common shares for the quarter was 2.2 million or $.35 per share representing a 13% improvement over the prior year quarter. Trailing 12 months EPS now stands at a $1.79, a 25% improvement over the prior year of $1.43. Operating revenue expanded over $1.6 million or 16%. Loan balances expanded nearly $11 million or 1.5%, while deposits grew over $19 million this quarter or 2.6% and over 5% from the year ago quarter. Expenses expanded from the linked quarter by over 6% reflecting the tax incentive initiatives that benefit our staff, clients and our communities that we announced earlier this year. Assets under management in our wealth management division contracted this quarter to $412 million, a 5.8% decline from the linked quarter, but we're up 1.8% over the year ago quarter and I'll talk about that more in just a moment. Mortgage origination volume was down nearly 19% from the linked quarter, the $58 million were up over 3% from the year ago quarter. Our production continues to be constrained by marginally higher rates and limited housing inventory for sale. Asset quality metrics continue to be one of our core competencies and strengths. SBA loan volume for the quarter was over $10.6 million representing a 300% increase over the linked quarter and 130% over the year ago quarter. And finally, we finalize our divestiture of our item processing and statement production shop known as…

Thanks Mark. Good morning everyone. For the quarter as Mark indicated, net income of 2.5 million or $0.35 per share, that EPS of $0.35 was up $0.04 or 13% from the prior year, and when we adjust for the $1.7 million, our tax credit in the linked quarter EPS was down just slightly $0.02 per share. Highlights for the quarter include operating revenue up 15.9% from the prior year and up 1.7% from the linked quarter. Loan growth was up $80.5 million from the prior year or 13%, loan sales delivered gains of $1.8 million from mortgage, small business and agriculture. Reduction in our income tax rate year-over-year from 32% to 19% added 4 million and netting $0.4 million to net income or $0.05 per share. As Mark indicated, we did complete the sale of our processing company DCM which resulted in the $0.4 million in revenue and $0.2 million in expense for the quarter netting about 200,000 roughly after-tax. The common capital raise we completed in February added 715,000 shares to our average share count for the quarter. And lastly as we've indicated we continue to reduce our nonperforming ratio which is now down to 38 basis points. Our year-over-year comparison as you can imagine has some noise in it. I thought I'd just take a few minutes to reconcile our EPS growth. This quarter we had provision expense of $0.3 million which reduced EPS by $0.03 per share as we had no provision in Q1 of 2017. This was offset – this $0.03 by our 10% earnings growth for the quarter. The sale of DCM as we indicated added $0.02, the decrease in the tax rate added $0.05 and finally our new shares reduce EPS by $0.03 in the prior year netting our $0.04 year-over-year calculation. As we…

Thanks Tony, great job. Overall, as Tony indicated it was a great start to a new year certainly with an expanding economy, stable margin, strong asset quality and certainly much stronger capital position we are poised to deliver another strong performance in 2018. Our marginal revenue and marginal cost structure remains favorable to deliver higher operating revenues since our average commercial lender portfolio with just 32 million, lot of opportunity. Clearly, organic balance sheet growth is optimal in building shareholder value, but it certainly doesn’t temper our desire to expand, our reach in the new markets and leverage our expertise and business lines. I will now turn the call back to Melissa for questions and comments. Melissa?

Thank you, Mark. Debby, we are now ready for our first question.

We will now begin the question-and-answer session. [Operator Instructions]. While we are waiting for questions to assemble I would like to remind you that today’s call will be accessible on our website at www.yoursbfinancial.com under Investor Relations. Our first question comes from Brian Martin with FIG Partners.

Hey, good morning guys.

Good morning Brian.

Hey, good updates. Just a couple of things for me. Just more big picture kind of questions for you guys, just I don’t know how you want to take in, but maybe just a little bit of commentary if you can about the margin. I know, Tony, you talked about deposit cost going up, just kind a looking at the rate environment and a couple more rate increases, and just kind a how you expect the margin to kind a unfolded, that puts and the takes over the next couple quarters, kind of from the current level. So you can give a little color on that it would be helpful.

Yes, Brian thanks for the question. Thanks for joining us today. Certainly, we know that our betas on deposits are going to certainly increase. We are at 96 plus probably percent loan to deposit. So we were out on the street and as Tony indicated, we’ve got some great strategies on the treasury management side to keep pace with the lending side, but there is no question about it. We’ve certainly received the Fed increases quite enthusiastically, but clearly our betas are going to increase and I know Tony you’ve got some additional comments on that.

Sure. Thanks Brian for the question. Q4 we had a little bit of a one-time event. We captured some non-performing, interest that added about 7 basis points to margin relative to this quarter. I would say as we look out going forward we have about 100 million of our loans that are directly impacted by immediate rate increases that have passed those floors. So, it’s kind of $250,000 impact to any of normal Fed rate increases. Deposits – really we don’t have a lot of rate sensitivity, but that’s going to be driven by competition, which we are already seeing is moving fairly, swiftly in some of our markets. Columbus is very competitive, Toledo is very competitive and candidly we’ve probably utilized all we can out of some of our legacy markets in terms of our low-cost funding.

Just one last comment, Brian, the good part about our diverse broad market footprint is that we have an opportunity to go to various markets to obtain the best marginal cost of funding and so we plan that strongly and we certainly have a renewed focus on C&I lending, which is hopefully going to bolster those lower cost to core transactional deposits.

Okay. So I mean I guess the bias if we do get a couple more rate increase, if you get another one this year, then maybe another one late, I mean the general bias would be kind of upward bias on the margin is how you would think about it from the current level? I mean, it seems like you are leaning more towards the pressure on the funding side as opposed to the benefit on the loan side, which maybe suggested it’s kind of downward bias, so I guess just trying to understand where the bias is and given the environment with rates going higher here?

Well, yes, I would say on paper the bias certainly would be that rate increases are good for us. I would say we have seen reaction in the marketplace quicker on the deposit front than we’ve seen on the loan side. I think the loan pricing will get there. It might be a little bit delayed. We are starting to see some inklings that something with a four handle on it is becoming rarer and rarer for us on the loan side and that had not been the case most of the last 12 to 18 months.

Okay. So, maybe it’s flattish to down a little bit in the near-term until the loan pricing catches up with what you are going to have to do on the funding side?

I think that right.

I would say Brian that’s exactly what we are seeing and as Tony mentioned we’re still seeing certainly a lot of pressure on the lending side, because everyone certainly knows the advantages of greater scale. So, that’s very competitive and we are going to see probably a bit tighter margin before we see widening one.

Yes. Okay, that makes sense. I appreciate that and I also appreciate the comment on the kind of loan outlook. I mean I guess as far as geographically it sounds like most of the markets are doing pretty well this quarter and I guess just kind of your thoughts on loan growth for the year. Maybe can you put a little color on how you are thinking about it? I mean, this quarter was a good start to the year, it kind of seems like it’s a seasonally soft quarter for a lot of people. So kind of that high single digit, low double digit type of growth is that kind of how you guys are thinking about the balance of the year.

Yes. I will make a couple of comments and then I will have Jon add some color to this, but certainly as I mentioned Brian with the $30 million average portfolio balance, if you look at our structure and our marginal revenue and marginal cost structure, we’ve got a lot of upside potential. We are poised for growth and I think you can see from the past several years growing a couple of 100 million, our expectations are equally high and that double digit I think is certainly in our real house and we kind of referencing in the past a number of times that we have like eight cylinders in our vehicle and from time to time we hit on four or five of them and certainly with the economy the way it’s going, I think Jon would probably agree that maybe six or seven of them have begun to fire. So all this is good I think, but John, what are your thoughts?

No, just quickly I agree we are off to a good start and we are optimistic about the pipeline here in the second quarter. We’ve got our staff, I think it’s the first full year, where we are fully staffed everywhere with the right people in the right places and have the time to build the pipelines, some newer markets, obviously are doing well as Mark alluded to earlier Findlay, Toledo, Fort Wayne and so forth. Its worth to know we also had a fair amount of notes that we closed towards the tail-end of the fourth quarter that are drawn notes. There is significant level of those that can weave and tend to see draw up here through the second and third quarters of 2018.

Perfect! Now, that’s very helpful. So thanks guys. In the markets I guess it sounds like there is some of the metro markets are maybe a little bit bigger drivers of the growth this year, is that how you guys would kind of see things unfolding.

Well Brian, it’s certainly, I think we have talked about low share, high growth market for a long, long time and clearly win in the markets that we play and in the specific counties in Ohio and Indiana, Lower Michigan is about $72 billion worth of deposits and we have less than 1% of that total. So our opportunity for organic loan and deposit growth is quite high and as I mentioned in our annual meeting webcast, we expect to certainly gather our fair share of that larger market deposit base. So a lot of opportunity and as Jon mentioned we are well staffed and certainly well poised to ride this economic expansion to a much higher level of asset.

Perfect! Okay. That’s helpful. And then on the fee income side, just kind of talking about both the, I guess your lead businesses, the SBA and the mortgage. You gave a little bit of color on the SBA business and kind of your goal of where you are going over time, I think it’s about 11 million right now and your goal was 40. Do you expect that business to be pretty consistent as it going to be lumpy? I know you had a nice increase this quarter, but some of that I know you have hired some folks as well, but just how do we think about that business and kind of your goal, should we expect it to be able little volatile?

Jon?

Well, I think we expect as we continue to on SBA specifically. Yes, we expect that to level out a bit by virtue of adding BDOs. We continue to add BDOs. We’re currently in process. We believe hiring too. We have some offers out to a couple. So, we think that will smooth it out a bit, but as you saw on the first quarter, we had two very large SBA loans close. So, those large numbers are going to continue to create some variability, but our direction and our plan is to continue to smooth those numbers out.

Yes, Brian just one comment. We are very bullish on SBA lending. We kind of have an idea of knowing what we are doing. As of the third quarter of 2017 given the fiscal year of the government at year-end we were 283rd out of 2000 banks that are active in US and SBA lending. So, we have the expertise. We are expanding out on the fringes of our current market and that’s a space that we never played in before. It was a product that if we didn’t have SBA, we would have walked away from the past 30 or 40 million that we would have done. So we like the space. We like the incremental benefit of building balance sheet with the nonguaranteed portion and it gives us certainly some place to go when it comes to C&I in some of our faster growing market. So, we like it a lot and we intend to achieve our 2020 vision and goal of generating $40 million in annual volume.

Okay. And how is that nonguaranteed portion on the balance sheet today?

We have done about 42 million or so in total volume since we ramped up and we’ve got about 11.5 million on our books as we sit here today, so, right about that kind of 25% on average level.

And Tony, a nice incremental New York and [probably two] generally on the balance sheet ran, so it’s a win-win all the way round on that front.

Okay. Perfect! And then just same thing on the mortgage – just I guess there’s been a lot of angst I guess in the market about higher rates, I mean guys had a nice quarter here and up year-over-year and just you try and understand what your expectations are just it sounds like you are also hiring a couple folks to maybe offset some of that, that rate increases in the challenging environment. I guess maybe just your kind of big picture thoughts of how mortgage unfolds over the balance of the year.

Right. Well, again I have said a number of times in various webcast, but the variable isn't the production number. The variables number are people and we have an offer out to a very high producer in northeast Indian. We just brought two more in Columbus and our goal is to get that 500 million annually. Last year, we had a budget of 475 and only brought 316 and so the constrained inventory and higher rates are certainly dampened that, but now we’re backup to an expectation of 375 to 400 and we just again brought on three high producers and if they get 15 million, 20 million each eye, we have high expectations of delivering our budget with 375, but 94% of our client this past year were all new to our company so you can bet that we are leveraging our retail presence and social media channels to a reach out to those people and increase our service per household that’s something certainly greater than three per household. And as I mentioned in our annual meeting Brian is, if we could just get one more service per household we could increase the size our bank by nearly 35%. So, a lot of opportunity and new markets certainly are poised for more opportunity for SB Financial all way around.

Okay. And how many people have you hired Mark, I guess recently and then I know you said, you can offer out but is there been a lot of recent hires, was it two you said. I guess I missed what you said on that front.

Yes. We have an offer currently out to a high producing individual in northeast Indiana, which is going to expand us by one, and we just brought on two additional high producers in the Columbus market and of course we are looking for more producers in each of our existing footprint. So, again, if we take an average of 12 million to 15 million per producer we know we have to gather at least several more in this upcoming couple of quarters. So, again, we’re intent on delivering, we're restructured to deliver of 400 million plus and again the variable is number of producers not the dollars.

Right. Okay. That’s helpful and just it’s kind of gain on the sale margin, I guess that was down. It look like a little bit on a linked quarter basis, but up year-over-year. Just around where it’s at today does it feel like it's at sustainable level, how do you see that unfolding?

Yes, I think that 2.7% range is if you look back a couple years we’re clearly 50 to 60 basis points better than we were in the past. We made some efficiencies on the backend with some hedging with our pricing structure and I think as rate move as you know higher pricing is a little bit tighter, but I would be confident we’re going to be in at 2.7 to 2.8% range for most of this year.

Okay. Thanks Tony. And maybe just a last couple of things for me. You talked about the expenses Tony and kind of simply get color or at least kind of the pulling out the divestiture in the quarter. The current run rate or how do we think about expenses? If you back out that the noise in the quarter that you talked about with the sale, is this a pretty good benchmark to 8.4 million or so a quarter and how do you see that kind of unfolding in the next couple quarters based on what you guys are anticipating from the budgeting standpoint?

Yes. I mean, if we take out the impact of DCM, we will call it an 8.4 million. We had some one-time events related to some of the tax initiatives we shared with our people, which is probably a net-net a $200,000 number. So, based upon volume on the mortgage side, which is really a variable that 8.2 million to $8.3 million level per quarter I think would be a good baseline, and then it'll drive up or down based upon mortgage origination and significant SBA origination.

Okay. So at least that’s a pretty decent level to think about as a baseline. So, alright! And then just the last two, just the tax rate. I think where it’s out today, now that we’ve made a change with Trump here, I guess this is a pretty good level to use as an effective tax rate going forward or does it modify much from where it's at today?

We had a little noise in the first quarter not much but we do most of our stock incentives in Q1 and with the new FASB we got a little bit of a pickup, so we're going to be between 19 the probably high 19 to 20% based upon your municipal volume and some of that kind of stuff. So I certainly think 19 would be the absolute floor we would have. We're going to trend probably closer to 20% tax rate by the end of the year.

Okay. Perfect. That's helpful. And then I guess just the last thing, as far as we leverage in the new capital obviously I guess you guys sound like a plenty of organic opportunity to put that to work maybe just you guys haven't been overly active on the M&A side in number of years, I guess just wondering what – how you're thinking about the external through the M&A part of it and just got opportunities that are out there that I guess are there seem to be opportunities today than there have been in the past? I guess, if there's just any color or commentary you can offer on the M&A side of thing, just how to think about it would be helpful?

Couple of comments, Brian and certainly Tony will have some comments I'm sure, but now with little bit of strength in the currency that we found in the last several years at a 150% of tangible book, and in that arena its kind of put us in the game and we've had some – certainly some great meaningful conversations with some potential strategic partnerships here. So, now that we have about the capital, we know where the value is going to come from and the incremental effect to been ever leverage that capital 10 times is going to be better than just lending the money out. We know how that works. But given our organic balance sheet growth which we have really concentrate on so that we could maintain 80% of our sustainable growth rate by our own generated profits is what we've keyed on. Keep our capital, hand out a few dividends, but primarily keep that capita grow organically. Now that we've got a performance something toward the top decile of our 65 bank peer group now we're getting a little more bullish and certainly having more meaningful conversations with some strategic partnerships that could really put us at that next level and well above that $1 billion mark that we're looking for. And 160 million on our full market capitalization which are quite possibly will get us a ticket to the Russell 2000, and That's the overarching goal and that's what we want to do with our new-found capital.

Okay. And just – go ahead Tony, sorry.

No. I've just find it. We have fairly consistently been able to grow with the level of earnings, so we think this is why the capital raise was so critical to us. It gives us a bigger check book and we're looking at a number of deals and we feel very confident that the marketplace is going to be very positive towards our company expanding in an M&A front someway and somehow based on the right price and the right transaction.

Okay. And just geographically, it sounds like from the comments it's more kind of I guess in market are contiguous, is that kind of how I guess could we expect maybe potentially see a lead to a different area. I guess, how are you thinking geographically? What are kind of parameters if you will on where you guys would entertain looking?

Organically it has certainly been the focus in market. We certain would shy away from in market. We think there are some key opportunities there. And quite honesty we just think we have the best strength in the products and services and talent to grow to 1.5 billion to 3 billion. So with a certainly an increased emphasis on the fringes which would be contiguous and on the borders of our current footprint would certainly be a focus. And that we think there's number of opportunities out there today then we're certainly pursuing each.

Okay. All right. I think that's all I had guys. I appreciate the time and taking my questions.

Great. Let's do it again. Thanks for joining.

This concludes our question and answer session. I'd like to turn the conference back over to Mr. Mark Klein for any closing remarks.

Once again, thank you all for joining us and we certainly look forward to delivering on our second quarter results, July of this year. Good bye.