Melissa Martin - IR Mark Klein - Chairman, President and CEO Tony Cosentino - CFO Jon Gathman - Senior Lending Officer.

Chas Craig - Meliora Capital.

Good morning, and welcome to the SB Financial Group's Second Quarter 2016 Conference Call and Webcast. I would like to inform you that this conference call is being recorded, and that all participants are in a listen-only mode.

We will begin with remarks by management, and then open the conference up to the investment community for questions and answers. I will now turn the conference over to Melissa Martin with SB Financial. Please go ahead, Melissa..

Good morning, everyone. I would like to remind you this conference call is being broadcast live over the Internet and will also be archived and available on our Web site 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. Before I turn the call over to Mr.

Klein, let me add that this call may contain certain 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 and you are encouraged to review those factors. 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..

organic balance sheet growth yielding top line revenue expansion, as well as that all-important fee-based business line delivering non-interest income, developing newer higher growth low share markets we've discussed at linked, cross-selling and on-boarding existing clients while attracting new clients, providing that all-important world-class client service we've spoken up several times, and lastly, delivering asset quality metrics that provide us potentially a sustainable competitive advantage.

And now a little detail on each, first, revenue diversity. We continue to drive performance improvement with a market-leading mix of net interest margin and non-interest income. This focus enabled us to drive bottom line improvement where net interest margin expanded 5% and non-interest income grew 25%.

Collectively, total revenue improved $1.2 million or 12.5%. Our business lines and wealth management, residential and commercial loan sales, and revenue enhancement as a result of our deposit, services, realignment from 2014 provide unique balance.

As a result, fee-based revenue remain strong at over 40% of our total revenue even when including a 10-year treasury rate decline that drove an additional portfolio impairment of nearly $500,000 this quarter. And Tony will speak a bit more on the impairment of our servicing rights shortly.

We continue to drive household growth and a significant portion of our non-interest income through our residential loan origination strategy. This quarter, we produced over $110 million as I mentioned, a record quarter for our company and a direct reflection of the expansion of our geographic footprint that we discussed last year.

When you consider our average gain of 2.4% on sales, of over $95 million revenue grows and performance improves. Our ability to take market share was further revealed in our growth of our mortgage banking net revenue, in fact, it expanded over to $2 million even after our impairment, representing 114% improvement from the linked quarter.

Our servicing portfolio now stands at a record high $830 million. This business line also continues to drive our household growth, but now stands at over 26,773 households. Competitive products, professional sales people, and an engaged backroom continue to provide the momentum.

Agriculture and small business loan sale gains remain an integral part of our strategy to diversify our revenue stream. Agricultural loan sale gains for the quarter were $31,000, whereas SBA loan production was $1.3 million compared to $3.3 million from a linked quarter, and represented gains of $118,000.

We continue to identify and deploy initiatives to grow both of these business lines into our new and existing markets. Aggregately, all sales including residential generated $2.4 million in gains or 57% of our non-interest income and 23% of total revenue.

Our results clearly are consistent with our strategy to leverage our expertise into our new markets. Expanding our reach through the wealth management business line continues to be a focus for our company.

Our assets under management increased by 2.7%, to $367 million or over $10 million from the linked quarter, and $6 million, or 1.6% from the year ago period.

In order to continue to expand this line of business, we realize it is incumbent upon us to not only identify additional talent to lead, but to also position ourselves to capitalize on opportunities in our prime target markets as well. Aligning these initiatives with our desire to grow will provide for continued expansion here.

Finally, our deposit fees continue to be a stable source of non-interest income. Revenue for the quarter was up slightly and reflects a year-to-date increase of 1.9% over the prior year.

The realignment of our consumer deposit product line-up in 2014 has contributed to a 6.7% increase over the same period in 2014, and a 1.9% increase over the same period in 2015. Cultural initiatives to grow the franchise through our world-class client experience levels, embraced by all 220 of our staff members are delivering the improvement.

Second initiative adding scale to our organization; our Findlay office is now been opened for over a year and is gaining traction every quarter. Currently, loan balance expanded over $15 million and loan pipeline is strong at over $12 million.

This new economically healthy commerce-rich growing market is fitting nicely into our plans to add scale and improve our efficiency. The prospects for growth with this diverse well-seasoned local team remain strong.

Our new full service expansion in Columbus compliments and leverages our eight-year lending focus, but now reflects loan balances of over $150 million an all-time high.

With our full service banking strategy now in place in the Columbus for over seven months, deposit balances have expanded over a $5.8 million or 43% over year end and now stand at nearly $20 million. This market are staffed the regional demographics or complement our strategic growth initiatives quite well.

And finally, we continue to prepare for our full service entrance into the Bowling Green, Ohio market. As with each of our earlier market expansion, success here rest with our ability to identify and attract local talent. Plans remain to enter this market in the fourth quarter of this year with full business line deployment.

As we discussed last quarter, mortgage lending has to begun this month with calls on commercial clients to begin shortly thereafter. Our third initiative is to grow our franchise by expanding our relationships. Organic growth is the most efficient way to create stockholder value.

This quarter we expanded our household as I mentioned to $26,773 and represented 2.67% growth over the prior year end and over 1000 households or 4% from the year ago quarter. Proactive patient and care of our clients with a focus on building in relationships that we know we want to last the life time just driving our lift.

We discussed our business lines and corporate initiatives regularly and we realign them monthly. As a result, our performance is a direct reflection of our levels of execution.

A strong brand that include identifying clients needs proactively and meeting and exceeding our clients expectations every day continues to build franchise value and along with it a loyal broader client base across our entire footprint. By identifying opportunities and resolving client needs, everyone wins.

We intend to build on our referral initiatives that enable us this quarter to identify another 488 opportunities that led to 239 referrals to business partners that represented over $20 million in an additional do business for our company.

Operational excellence remains the fourth key theme required for us to deliver on our performance improvement commitment. We now serve as 5997 mortgage loans predominately throughout Ohio, Indiana and Michigan.

These newer generally single service household in aggregate now represent 1.77 services per household and has significant potential to expand well beyond the company-wide level of 2.67 services per household.

Cross-selling, on-boarding and re-boarding by our entire retail staff will continue to drive our share of the wallet in each household to a higher level. Maintaining our asset quality is the fifth and is to come and remain high performance company.

Our loan growth year-to-date of over $47 million or 78% annualized has come with comprising our loan underwriting standards. We remain steadfast in our calling efforts to expand a quality loan portfolio. Delivering quality loan portfolio growth without comprising prudent underwriting standard is the path to our top-decile performance.

Our quality metrics are revealed in our numbers. Non-performing assets rate at 1%, net charge-offs were recoveries of 245,000 and NOL it's now at 1.23% was up representing over 90% coverage of non-performing assets. I'd now like to ask Tony Cosentino to provide a few more details, Tony, on our numbers this past quarter.

Tony?.

Thanks, Mark, and good morning everyone. For the quarter, we had net income of $2.3 million or $0.35 per diluted earnings per share. Our EPS was up $0.04 and $0.09 from the prior year and linked quarter was 13% and 35% respectively. Through six months, our diluted EPS of $0.61 was up 13% from the prior year.

Now let's look at some highlights for the quarter. First, total operating revenue on a fully tax equivalent basis for the quarter was up 5% from the prior year, and up 12.5% from the linked quarter.

We had loan growth, up $82 million from the prior year or 15.8%; loans sales delivered gains of $2.4 million from mortgage, small business and agriculture up 16% for the prior year. And lastly as Mark said we had a negative valuation adjustment to our mortgage servicing rights of just under $500,000.

Now as we break down the second quarter income statement further, let's begin with net interest margin. Net interest income on a FTE basis was up from the prior year by 11.2% and up 5.1% from the linked quarter.

End of period loan balances from the prior year were up $82.4 million, an increase of 13.8% and were up $27.6 million or 19% annualized from the linked quarter. This quarter's loan growth surpassed the very strong first quarter 2016 when we added $19.5 million of balance sheet loan growth.

We continue to grow our loan book without sacrificing quality or price. Delinquencies when we net out identified non-performing loans or zero. And our average loan yield decreased by just one basis point from the prior year.

In addition, our overall earning asset yield was up 2 basis points from the prior year as our mix trended slightly away from the bond portfolio. On the funding side, we experienced an increase in the cost of our interest-bearing liabilities coming in at 55 basis points for the quarter, up six basis points from the prior year.

Our need for retail funding to facilitate loan growth is driving deposit costs higher. Net interest margin at 3.75% was down just one basis points from the prior year and flat to the linked quarter. Loan activity has had a major impact on margin income from the prior year, with total loan interest income of $6.7 million, up 14%.

Clearly the key driver was the $82 million of increased loan balance which was the net result of $256 million in loan production over the last four quarters.

We remain pleased as pricing has not been comprised with our average loan yield down just one basis point for the current quarter versus the prior year and on a year-to-date basis actually loan yields are higher by 3 basis points. Total non-interest income of $4.3 million was down 3% from the prior year, but up 25% from the linked quarter.

However, adjusting for the servicing rights and securities gains we took, we would be up 12% and 14% respectively. Likewise, when we adjust fee income as a percentage of revenue it rises from the reported 40% to 42%.

For the quarter, mortgage originations of $110 million were up from the prior year by $16.6 million or 18% and we are up $38 million or 53% from the linked quarter.

The rapid decline in the tenure treasury has been challenging as our servicing gains and rights have declined, but also we are seeing significantly higher application volumes than we anticipated in our plans given the expanded disclosure requirements and how much new purchase volume we are seeing.

We have tweaked pricing recently on refinance business to manage volume. As we have noted this quarter's new purchase volume was 90% and we expect to maintain that level into the third quarter. Little gains on sale in residential came in at $2.3 million which was in excess of 2.4% on our sold volume at $95 million.

Our servicing portfolio of $832 million provided revenue for the quarter of $505,000 and the servicing portfolios increased by $109 million or 15% from the prior year sold volume of $281 million. The impact of the declining tenure yield and accelerated prepayment speeds reduced the market value of our mortgage servicing rights this quarter.

Our calculated fair value of 78 basis points was down 13 basis points from the prior year and resulted in $469,000 write down in the quarter. This is a swing of $737,000 from the prior year. Through the first six months the impairment has negatively impacted our mortgage business by $1.2 million.

At June 30, 2016 the servicing rights were $6.5 million flat to the second quarter of 2015 and declined 2% from the linked quarter. As at the end of the quarter our total temporary impairment remaining for recapture is $1.5 million. Other fee income for the quarter was at $2.3 million up from the prior year by 7%.

This growth was driven by non-residential loan sale gains, increases in deposit fees and securities gains taken offset the MSR impairment discussed earlier. We had SBA loan sale gains that exceeded $0.1 million in the quarter. This quarter also included a gain on the sale of commercial OREO property of $0.2 million.

Total operating expenses were up $0.6 million or 8.6% from the prior year and compared to the linked quarter expenses were up $0.5 million or 7.4%. Total headcount for our company is up by 16 since the prior year, reflecting staffing levels in our new locations in addition to added resources and compliance, loan review and mortgage administration.

The higher staffing levels in addition to merit adjustments and higher commission and incentive costs make up the bulk of our year-over-year total expense increase. Operating leverage for the quarter was a negative 0.6 times, but if we adjusted for the one time revenue items it would improve to a positive 1.4.

Our non-interest expense to average assets for the quarter was 3.78%, which was improved from the 3.81% achieved in the second quarter of 2015. When we calculate our net number which includes non-interest income to average assets of 2.2%, we are at 1.58%.

This net income interest metric has declined from the prior year, but when adjusted for the one-time items the change is positive. Now, as we turn to our balance sheet, loan outstandings at June 30 stood at $605 million, 76.2% of the total assets of the company. We had growth of $82 million from the prior year and $27.6 million for the linked quarter.

These growth levels were 15.8% and 19.2% annualized. Compared to the prior year, our loan growth was diverse with commercial real estate leading the way with $37.9 million, followed by residential real estate of $18.6 and CNI of $16.4.

On the deposit side we are up from the prior year by $85 million which is 15.2% growth rate and up from the linked quarter by 10.3. Due to the strength of our loan pipeline, we continue to be more aggressive on the project pricing and marketing in order to meet our funding needs.

Matching our loan growth for last 12 months with lower cost retail funding is a key accomplishment. Our loan to deposit ratio exceeded 93% on June 30th in line with our goals. Our balance sheet continues to be in an asset sensitive position with the trend line over the last five quarters being more asset sensitive.

We feel that this strategy is prudent as we maintain short term cash flow and flexibility. With a structure we are prepared to move resources into higher yielding products and to take advantage of potential rate increases. Looking at our capital position we finished the quarter at 85 million up 6.8%, up 6.8 million or 8.7% from June 30 of last year.

The equity to asset ratio of 10.7% was down slightly from the prior year but our tangible equity level was up 13 basis points. We announced the share we purchased late in the second quarter and the impact on our share account was minimal in this release.

We expect to accelerate our buying in the coming two quarters given the market discount that SBFG shares currently maintain. These acquired shares should provide the necessary supply to meet the needs of our compensation programs in the near term without issuing new shares that are future higher priced.

Regarding asset quality total non-performing assets now stand at 8.2 million or 1.04% of total assets with 98% and in non-performing loans in 2% or 150,000 in OREO property. Total level of non-performing assets is up 2.8 million from the prior year but flat to the link quarter.

Brooding in the non-performing asset total is 1.4 million and accruing restructured credits which are nearly all maturity extensions in which elevator non-performing level by 17 basis points. Absentees accruing restructure credits total non-performing asset ratio would be just 87 basis points.

We continue to manage two large credits that comprise 56% of our total problem assets. Both of these credits are commercial real estate properties and we expect these credits to be resolved this year at or near our current carrying value.

Our OREO balance of 157,000, our residential real estate and our stated values should match closely to proceeds upon disposition. Provision expense of the second quarter 16 was zero down from 0.5 million in the prior year and 0.3 million from the linked quarter.

Our absolute level of low loss allowance is up from the prior year and linked quarter by 6.4% and 3.4%. This is due to our low losses for the quarter and year to date being net recoveries of 245,000 and 210,000 respectively. Due to loan growth our allowance total owned percentage has declined from 1.34% at June 30 of last year to 1.23% currently.

This allowance of level places it at the median of our peer group which bodes well given our top quartile peer and PA ratio. So as we summarize the quarter despite the impairment to our servicing rights we reported diluted EPS of 35 cents a share, up 13% with a trailing-12 month TPS of a $1.25 per share.

In addition we have grown total assets under our care from the prior year by over 11% to 2 billion. I will now turn the call back over to Mark..

Thank you, Tony. It literally was a good quarter on all fronts for SB Financial. We are delivering on our commitments. We expanded our loan and deposit base, provided top line revenue growth, delivered record quarterly mortgage originations and expanded that income as Tony indicated by more than 13%.

These improvements are a direct reflection of our robust markets we've entered, diversified product line and regional sales leadership all bound by our commitment to execute on the strategies we've identified. We remain committed to our vision up top-decile performance.

Now I'd like to turn back over to Melissa for some questions from our investor community.

Melissa?.

Thank you, Mark. Operator, we're ready for questions now..

We will now begin the question-and-answer session. [Operator Instructions].

While we are waiting for questions to come in, I'd like to remind you that today's call will be accessible on our Web site at www.yoursbfinancial.com under Investor Relation..

Our first question comes from Chas Craig with Meliora Capital. Please go ahead..

Hi, guys, thanks for taking my question. Firstly, I want to congratulate you on really couple good years now of organic growth.

My question though is, as we are continuing to build out the infrastructure, have been and continue to, pretty clear -- I recognize that it's hard to get your expenses fully under control, under that more of a growth orientation, but it seems to me that a fairly low-hanging fruit to increase EPS by a pretty significant amount would be shaving 5% to 10% off your efficiency ratio, and I'm curious if you have line of sight on your ability to do that while you are continuing to grow.

Thank you..

Sure. Thanks Chas for the question. We are always looking hard at all of our expense line items. We continue to deploy strategies, and what we caught up a bit with ourselves [ph] here in 2015 by delivering top line revenue with our bets and expanding on expenses and personnel in new markets. We've now ramped that up again.

And as Tony indicated, we are up 15 to 17 individuals from the prior year or so. We are kind of in the midst of a growth phase.

We've certainly gathered some inertia and momentum in our new markets, and we fully expected those bets to play out like we have in the past and continuing to improve our efficiency ratio with organic balance sheet growth, but it's going to take a few quarters to digest some of the bets that we've made..

Okay, great..

[Operator Instructions] We have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mark Klein for any closing remarks..

Once again, thank you all for joining us. We are proud of the quarter that we produced. We have high expectations for the last half of the year, and we certainly look forward to getting back together with you all in October for reporting our third quarter. Thank you all for joining us, and we'll talk soon. Good-bye..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..