SB Financial Group, Inc.

Good day and welcome to the SB Financial Group fourth quarter 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. If you would like to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sarah Mika. 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, 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 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, and good morning, everyone. Welcome to our fourth and final conference call and webcast for 2020. At a high level, I'm pleased to report that in the midst of this pandemic, we found a way to deliver our strongest performance ever. For the quarter, we continue to see mortgage volume at the top end of our current capacity, welcome the beginnings of processing PPP forgiveness and witness greater flexibility by our entire staff to service clients in this new and different environment. Briefly highlights for the quarter, which included a $611,000 pre-tax mortgage servicing rates impairment, include net income, $5.4 million, up $2 million or 60% over the prior year quarter, When adjusted for the non-GAAP impairment item, net income would have been $5.8 million, or 87% increase. For the year, GAAP net income of $14.9 million, up $3 million, or nearly 25%. Adjusted return on average assets was 1.89%, up from the prior year quarter of 1.26%. Pre-tax, pre-provision ROAA for the quarter was 2.41%, up 74 basis points, or 44% from the prior year. That interest income of $9.3 million was up 7.6% from the prior year, as our 5.5% reduction in interest income was more than offset by the 49% reduction in interest expense. This, coupled with controlled non-interest expense, delivered positive operating leverage of five times. Loan balances from the linked quarterly decline $13 million, which reduced our year-over-year growth to $47 million or 5.7%. However, included in those balances were PPP initiative loans and those loans acquired from the Eden acquisition in June. Deposits increased $209 million or 25% year-over-year. Again, Eden balances, retention of PPP funding and business DDAs, and overall consumer liquidity drove that growth. expenses up a half a million due to higher mortgage commissions and increase in our title insurance business and e-acquisition. Mortgage origination volume increased to 169 million, up 31 million or 23% year over year. While asset quality metrics remain stable from prior year in the linked quarter, we elected to set another 800,000 in provision during the quarter, all of which were related to the COVID-19 future reserves. And finally, client loan deferrals were down substantially from the linked quarter with the number and dollar of loans in forbearance status declining in excess of 50%. The five key initiatives we've referenced in prior quarters and continue to consume us would be revenue diversity, be it organic and or M&A, more scale, broader footprint, more scope, more services per household, excellence in operation and more intimacy with current clients, and asset quality. First, revenue diversity. This quarter, mortgage volume and loan sale gains were up from the prior year 23% on volume and 136% on gains. Non-interest income increased to 8.9 million from the prior year quarter of 6 million. Current quarter includes a mortgage service impairment of 611,000, as I just mentioned, compared to a recovery of $303,000 in the fourth quarter of 2019. Adjusting for those impacts, non-interest income was up from the prior year by $3.9 million, or 68%. For the year, non-interest income to total revenue increased to 49%, and was driven principally by a gain on sale in residential real estate lending volume of nearly $700 million, our largest annual production on record. Peak Title had another strong quarter with revenue up 33% from the prior year quarter and for the year over 700%. We are especially pleased with the progress made by Peak and that entire team to double the revenue of the operation from the prior year run rate before acquisition. Our Indianapolis residential loan production office continued to gain market share during the year as we inched a bit closer to the original expectation and originated over 43 million in volume. We not only remained committed to this central Indiana region, but we will be building another production team in northeast Indiana this year. We're looking to each of these robust Indiana markets to make meaningful contribution to our production levels in 2021. As with prior quarters, wealth management assets under our care continue to rebound. over the prior year end with an overall market improvement of $48 million and new sales of $21 million, which has led to total assets under management of $558 million a year end or a net increase of $51 million. Our bench is stronger than ever before and we expect to monetize these new resources to identify more opportunities across the entire footprint. Secondly, more scale. Loan growth continued to be under pressure in the quarter as market activity has been constrained but has begun to slowly recover from the virus shutdown. Our $47 million in growth from a prior year is elevated due to our PPP balances and the loans, as I mentioned, required from the Eden acquisition. As we adjust growth for these items year over year, loan balances would decline on a core basis by $45 million. We continue to see higher performing clients and their companies exit ownership and our loan balances on their way out. However, pipelines continue to steadily grow in most of our markets, and we do expect success in 2021, much along the lines of our historical loan growth in the middle single digits. Our deposit base expanded to $1.05 billion, up $209 million, or 25%. Included in that growth were Eden deposits and our estimate at approximately 50%. of the PPP loan funding remain in our clients' operating accounts. We expect these funds, however, to gradually dissipate as the forgiveness process ramps up here early in 2021. Third, more scope, more services per household. The PPP initiative allowed us to demonstrate to not only existing clients, but also to prospects that we are both agile and interested and have the resources and capacity to service their needs. Our team will again be tested as we begin in earnest the loan forgiveness process of round one and move on into round two. To date, roughly half of our round one clients have applied for forgiveness and we expect that percentage again to climb into the first quarter of 2021. We are prepared to handle a similar level of client applications in round two and the program and we feel the lessons learned from round one will make for an even more positive client experience this time around. In fact, to do more with the same, we have acquired the StreetShare software to ensure that our capacity to process requests matches our appetite for balanced growth from existing clients and prospects alike. Operational excellence. The continued transition to a more normal residential purchase market was evident in the fourth quarter as we originated 47% of our volume from purchase transactions or 81 million. Internal refinances were 28% of volume or 48 million with external refinances, the remaining 24% or 24 million. For the full year, 291 million, 42% of our total volume was from new purchases or construction activity. $217 million or 31% from refinancing our own mortgages internally and the remaining 27% or $187 million from outside competitor refinancing. As a result of these successes, our servicing portfolio now stands at $1.3 billion and over 8,500 loans for an increase of $101 million this year. Expense levels for the quarter were up from the prior year, but as I mentioned, our operating leverage improved for the quarter due to our revenue growth. This growth also provided the path to our best net non-interest expense level in recent times at a negative 0.6%. For the full year, expenses and revenue were impacted by our servicing rights impairment and the EDEN merger costs. To adjust for these non-GAAP items, our operating leverage for the year improved from a reported 1.6 to 2.5 times. To extend this trend, we continue to examine all of the expense control initiatives that we put in place earlier this year when COVID-19 arrived. Fifth and final, asset quality. At quarter end, we had 83 loans in forbearance for a total dollar amount of nearly $40 million, which was down by 121 loans and $41 million from the linked quarter, or 51%. Remaining in these totals were $11.7 million of sold mortgage loans, which reduces our unbalanced sheet exposure to just $28 million, and was down $10.4 million, or 27%, from the second quarter. Of the $28 million in balances remaining in forbearance, 95% related to the hotel industry. That said, we continue to feel strongly that our portfolio, and in particular our exposure to the hospitality industry, will continue to weather the COVID-19 storm well due to our prudent underwriting process and the quality of the clients we've embraced over the past decade. However, should unexpected stress surface, we have made provisions to bolster our loss allocation. Back this quarter, we increased our provision, as I mentioned, to 800,000, and for the year now, 4.5 million. Our loan loss reserve is now 12.6 million, and the reserve ratio is up 38 basis points from the prior year, to 1.44%. We adjust for PPP balances and it increases to 1.5%. Our coverage of non-performing loans now stands at 174% and remains above the median of our peer group. Charge-offs for the quarter were just 18,000 and near to date our loan charge-off ratio is slightly above historical levels at just 8 basis points or this year 680,000 from essentially two borrowers. We feel our approach to build our reserve and stay ahead of market stress will bode well for our performance in future quarters. Finally, before I turn it over to our CFO Tony Costantino for some more color on our year and quarter, I do want to make a note of our dividend announcement this past week of 10.5 cents per share, up 11% over the prior year. We continue to review our capital allocation and not only fund balance sheet growth prudently, but also to return capital to our shareholders. via dividends and our current stock buyback program. Tony, if you could give us some more details on our quarterly performance.