SB Financial Group, Inc.

Good morning, everyone, and welcome to the SB Financial third quarter 2020 conference call and webcast. I would like to inform you that this conference call is being recorded and that all participants are currently 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 would now like to turn the conference call over to Sarah Mekas with SB Financial. Ma'am, please go ahead.

Good morning, everyone. I would like to remind you that this conference call is being broadcast live over the Internet and will be archived and available on our website at ir.yourstatebank.com. Joining me today are Mark Klein, Chairman, President, and CEO, Tony Cosentino, Chief Financial Officer, Ernesto Guyton, Chief Technology, Innovation, and Operations Officer, and John Gaffman, Senior Lending Officer. This call may contain forward-looking statements regarding SB Financial's 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 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. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. I will now turn the call over to Mr. Klein.

Thank you, Sarah. Good morning, everyone. Welcome to our third quarter 2020 conference call and webcast. Great to have you all with us. We continued to recovery this quarter in many areas of our operation. We saw our loan pipeline rebuild, client liquidity stabilize, forbearances dissipate, and the Eden operations integrated in the state bank. All the while, the flat yield curve and low long-term rates continue to drive our mortgage volume, leading to record net income. Highlights for this quarter, including a $325,000 pre-tax mortgage servicing rate recapture, include net income of $5.3 million, up $1.5 million, or 40% increase over the prior year quarter. And when adjusted for those non-GAAP impairment issues, net income was $5 million, up 33%. Adjusted return on average assets, 164 basis points up from the prior year quarter of 144. Pre-tax, pre-provision ROA for the quarter was 2.74%, up 89 basis points, or 45% from the prior year. That interest income of $9.3 million, up 2.2% from the prior year, as our 6% reduction in interest income was more than offset by the 37% reduction in interest expense. This coupled with controlled non-interest expense delivered positive operating leverage in the quarter of 1.9 times. Loan balances from the linked quarter declined $16 million, which reduced our year-over-year growth to over $62 million or 7.6%. Included in that were PPP balances of $82 million and Eden acquisition loan balances of $16 million. Excluding those items, year-over-year loan balances were down $35 million. Deposits increased 166 million or approximately 20% year over year. Again, Eden balances of 54 million and retention of PPP funding in our business DDAs have increased well beyond our core levels. Expenses were up 1.8 million due to higher mortgage commissions, increase in our title insurance business and a full quarter of operational expense from the Eden acquisition. Mortgage origination volume increased to 200 million up over $42 million, or 27% year over year. Asset quality metrics were a bit elevated from the prior year, although our level of 60 basis points of non-performing assets remained strong. We set aside this quarter $1.8 million in provisions, all of which were related to COVID-19 future reserves. And finally, client loan deferrals. We're down substantially from the linked quarter with the number and dollar of loans in forbearance status down 60%. As you recall, our five key initiatives we've touched on every quarter remain revenue diversity, more scale for efficiency, more scale and more scope, as well as operational efficiency and asset quality. First, revenue diversity. This quarter, mortgage volume and loan sale gains were up from the prior year. 27% on volume, and 224% on gains. Non-interest income increased to $10.4 million from the prior year quarter of just $5.4 million, which includes a mortgage servicing impairment recovery, as I mentioned, of $325,000. Adjusting for that impact, non-interest income was up from the prior year by $4.7 million, or 88%. Non-interest income to total revenue increased to 53%, well above our traditional average of 35 to 40%. Our current mortgage pipeline continues to be near capacity with currently 325 loans in process for over 78 million. We are on pace to deliver our largest mortgage production year ever with total volume likely now to exceed 650 million. Peak Title had another strong quarter with revenue up 29% from the prior year quarter and for the year, up 91%. We remain focused on expanding the scope of Peak's business, not only with state bank, but our outside client banks throughout our tri-state region as well. In the coming quarters, we intend to improve our percentage of higher revenue commercial title insurance policy business versus lower revenue, higher volume title opinions to drive performance higher. Our Indianapolis mortgage loan operation and office continue to gain market share during the quarter as we originated over 12 million in volume. Thus far in 2020, we have originated now 35 million compared to just 4 million we produced over the same period last year. Our servicing portfolio in this newer market now reflects 143 households for over $28 million. Wealth management assets under our care continue to rebound over the prior year end with overall market improvement of $6 million, new sales of $20 million, and new contributions of over $11 million, leading to $522 million in total assets under management, or a net increase of $22 million. The pandemic has certainly revealed unique challenges in this business line But as we mentioned last quarter, we're committed to engaging each of our new 700 PPP clients in the coming months with potential wealth solutions. Secondly, more scale. Loan growth continued to be under pressure in the quarter as our markets slowly reopened from the coronavirus shutdown. Our $62.5 million in growth from the prior year is elevated due to our PPP loans and the loans we acquired from the Eden acquisition. As we adjust growth for these items year over year, our loan balances would fall on a core basis, as I mentioned, by 35 million. Interesting to note, over 19 million would be related to loan payoffs due to several companies selling their company. That said, our expectations to grow loan balances organically in the fourth quarter and on into 2021 remain strong. In fact, our current commercial loan pipeline today rests at approximately 31 million. Our deposit base expanded to 1.01 billion up 166 million or 20%. Included in that growth is 54 million in Eden deposits. And our estimate now that 50% of the PPP loan funding remains in our clients operating accounts. We expect these funds to gradually dissipate through the final quarter of the year and on into 2021. And finally, we continue to express interest in strategic partnerships opportunistically that can add scale and improve returns. As of October, we have successfully integrated the Eden transaction in the state bank with positive impact to our client base. Third is our strategy to develop deeper relationships, more scope. We continue to monitor and assist all of the 700 clients that we extended PPP loans to in the second quarter. One of the key initiatives from Our PPP client acquisition strategy was and is to expand these relationships and develop long-term partnerships. To date, we have added over 100 new deposit accounts from these clients, new clients, and we continue to call on each of them for additional banking services. In fact, beyond PPP cross-sales, we have identified now over 1,000 referrals to our business partners through the third quarter. that have led to over $71 million in additional business across all business lines in our entire company. Expanding our reach into the household to increase our share of wallet remains a critical ingredient to our growth strategy. We are excited to now include the opportunity to expand our presence in each of Eden's 1,400 households. While the pandemic has made in-person outreach certainly more difficult, we are contacting our clients every day via phone, text, emails, to discover new opportunities to expand relationships. We embrace customized communication channels with each of our clients. Additionally, we are in the midst of converting our CRM system to one that will provide a more dynamic view of not only the entire client relationship, but more importantly, one that will identify potential new opportunities as well. Fourth is operational excellence. The transition to a more normal residential purchase market continued in the third quarter. We originated 49% of our volume from purchase transactions or approximately 99 million compared to 35% or 79 million the prior quarter. With this trend expected to continue, We have focused our efforts on improving closing times and ensuring that our pipelines remain at or very near our capacity. In other words, optimizing our underwriting process and closing and loan sale capacity. As a result of our success, our servicing portfolio now stands at over 8,500 loans with principal balances of approximately $1.29 billion. Expense levels were up from the prior year quarter, but we improved our operating leverage to 1.9 times, as I mentioned, due to our revenue growth. For the full year, expenses and revenues were impacted by the servicing rights impairment and the EDEN merger costs. When we adjust for these non-GAAP items going forward, our operating leverage for the year improves from a reported 1.3 to the 1.9 times, as I mentioned. We continue to examine all of the expense control initiatives that we put in place earlier this year. And finally, fifth and final key initiative is asset quality. At quarter end, we had 204 loans in forbearance for a total dollar amount of actually $81 million, which was down by 306 loans and $114 million from the linked quarter, or 59%. Included in the totals were $42 million of sold mortgage loans, which reduces our unbalanced sheet exposure, to just $38 million, which was down $115 million, or 75%, from the linked quarter. These trends are encouraging. However, we still have concerns regarding certain segments of our portfolio, as we still see some weakness in our hotel, restaurant, and elder care exposures. We feel strongly that our prudent underwriting process over the past decade will continue to deliver a stable loan portfolio. However, should unexpected stress surface, we have made provisions to bolster our loan loss allocation and provision. This quarter, we increased our provision expense to $1.8 million, and for the year now, $3.7 million. Our loan loss reserve is now nearly $12 million, and the reserve ratio is up 30 basis points from the prior year to 1.33%. If you adjust the PEP balances out, our reserve would increase to 1.47%. Coverage of non-performing loans now stands at 164% and remains above median of our peer group. Charge-offs for the quarter were just 21,000, and year-to-date, our loan charge-off ratio was slightly above historical levels at 10 basis points, or 662,000. We feel our approach to build our reserve and stay ahead of market stress, if you will, will bode well for future quarters and operating performance. Before I turn the call over to Tony, I do want to make note of our dividend announcement this past week, up to 10.5 cents per share, which is up 11% from the prior year and up 5% from the linked quarter. We do continue to assess our capital strategies to fund balance sheet growth as we prudently return capital to our stockholders via our common stock buyback currently in place and will be in place throughout 2020. Now I'd like to have Tony give us a few more details on our quarterly performance. Tony?