SB Financial Group, Inc.

Good morning, everyone, and welcome to the SB Financial second quarter 2023 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 floor over to Sarah Mekas with SB Financial. Ma'am, please go ahead.

Thank you, and 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 Steve Walz, Chief Lending Officer. Today's presentation may contain forward-looking information Cautionary statements about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investors' material. These materials are available on our website and we encourage participants to refer to them for a complete discussion of risk factors and forward-looking statements. These statements speak only as of the date made, and SB Financial undertakes no obligation to update them. I will now turn the call over to Mr. Klein.

Thank you, Sarah, and good morning, everyone. Highlights of this quarter's results include net income of $3.1 million, up $241,000, or 8.5%, from the prior year quarter, but would be up $443,000, or 16.7%. excluding the effects of the OMSR recapture for both years. Year-to-date adjusted net income is up $738,000 or approximately 15.5%. Return on average assets of 91 basis points with return on tangible common equity, 12.4%. Net interest income of $9.8 million was up $200,000 or 2.5% from the prior year as loan growth and better asset mix have offset higher funding costs. However, compared to the linked quarter, margin income was down 4.8% as the betas on funding costs had begun to exceed those on the asset side. Loan balances were higher from the linked quarter by just 8.5 million, but have now risen over 89 million or 10% over the prior year quarter. Deposits were down from both the linked and prior year quarters as challenges to identify funding at or below the margin continued. Expenses were down from the linked quarter by $434,000 or 4% and down $463,000 or 4.3% from the prior year. Mortgage origination volume strengthened in the quarter up 32% from the linked quarter. However, we're still down from the prior year. And asset quality metrics continued to trend in the positive direction on NPAs and our coverage of NPLs. As with prior webcasts, we continue to concentrate on our five key initiatives. Revenue diversity, more net interest income and fee-based revenue, more scale, more scope, seamless operations, and of course, asset quality. First, revenue diversity. For the quarter, our mortgage business line originated 65 million in volume, higher by 16 million, or 32% from the linked quarter. We also increased our percentage sold in the quarter to 73%, which is in line with more traditional levels and is a critical metric as we continue to manage both the size and makeup of the funding side of our balance sheet. The quest to seek out and find quality MLOs in our high growth markets continues and we expect that production in the coming quarters will show positive growth for both the linked quarter measurement and the prior year. Overall non-interest income was $4.4 million, which was up from the linked quarter and down just slightly compared to the prior year, primarily due to declining residential real estate volume. However, the gain on sale nearly doubled from the linked quarter and is reflective of more competitive pricing Once again, in the Freddie Fannie arena, as well as our initiative to constrain portfolio value. That said, the residential business line fee income was down by over 1.9 million for the first six months of the year versus the same period last year. Interestingly, this decline represents 79% of our year over year fee income variance. Our commitment to the title insurance business remains strong despite the headwinds in the residential lending space. As we discussed in prior webcasts, we intended to bolster our volume and revenue with a more conscious commitment to escalate title policy revenue that Peak receives from State Bank. As a result of our initiative, State Bank has generated transaction volume for the first six months for Peak of $36.2 million in revenue for PEAK of $183,000. As such, over 34% of PEAK's transactions, representing 21% of the revenue, was due to state bank-sponsored activity. Our goal is to not only diversify our sources revenue from our other 20-plus clients, but to also escalate state banks' title work revenue to PEAK title to at least that 50% mark of potential activity, all else being equal. The current environment of purchase transactions presents a greater challenge as the seller typically directs the title work. Year to date, our title policy revenue is off 36% over the prior year period, whereas our residential lending volume is off 40%. Wealth management continues to be a competitive advantage and a complement to our more traditional commercial banking services. Not only does it potentially provide a broader range of products and services to our now 36,000 households, but also a unique source of non-interest income and greater revenue diversity to which we aspire. While over 50 years of providing wealth management services in our market, we have a unique ability to manage much more of our clients' financial needs than most pure banks. We recently added new executive leadership, who has a long history of advising wealth clients in the region. We believe she'd not only be a complement to our other six business lines, but additive to our sales initiatives to expand our current level of assets under management. Additionally, the business line is on track to provide $3.8 million in revenue for this year. Secondly, more scale. In the current rate environment, loan growth must be accompanied by substantially higher rates in order to ensure margins remain stable. To our benefit, we have witnessed a number of our competitors pulling back on lending in our markets, which we clearly have not done. We continue to reach out to identify opportunities with new and existing clients, but we have also become much more selective in providing financing to higher risk loan sectors and structures that we are willing to provide our customers. Until funding at the margin retreats from the current 5 plus percent mark, loan growth we feel will be intentional and conscious, but yet selective. Loan growth in the quarter slowed as we were up just 8.5 million from the linked quarter, but as I mentioned, 89 million or 10% from the prior year quarter. Unfortunately, our commercial lending activity has been impacted by pay downs in the agricultural sector and limited growth in the level of business activity within our current book. We continue to call aggressively in all of our markets. For the first two quarters of the year, our commercial lenders have made over 1,900 client and prospect calls and have enabled us to log a current pipeline in excess of 60 million. As an organization, we have recommitted on our quest to garner a deeper deposit relationship with all borrowing clients, absent which pricing will be adjusted. Liquidity was fairly stable during the quarter with deposits declining slightly, which required us to replace funding with slightly more costly wholesale borrowings. Overall, the size of the company remained fairly flat. However, we forecast a slightly larger balance sheet for the remainder of 2023 in light of the pay downs in the investment portfolio, and the limited borrowings to fund loan growth. Third, more scope. SBA lending as a preferred lender continues to be another great compliment to our core business model. We began to drive a more intentional model in 2015. Since inception, we have now closed $64 million that we would have missed absent this strategy. As we discussed last quarter, timing of our SBA loan closings delayed our gain on sale to be recognized in this quarter. As such, we have now closed $7.5 million in the first half of the year and have sold $2.5 million for a gain on sale year to date, $242,000, while retaining $5 million on our books to drive both non-interest income as well as net interest income higher. We continue to be bullish on two of our growth markets, Columbus, Ohio, and Indianapolis, Indiana. Our lower cost funding continues to be provided by our legacy markets while loan demand is projected to provide greater asset left, particularly from these growth markets. The overarching goal here is to gain market share and expand relationships with clients that can provide not only lending opportunities, but also the expansion of our deposit gathering initiatives through our treasury management department. Our new corporate sales champion we referenced in prior quarters is singularly focused on expanding the number of services in each of our single service households. As we discussed in prior quarters, his focus remains on organic initiatives to drive scale on both sides of the balance sheet. Given our expansion in the mortgage business line over the last decade, in a number of markets where we're clearly underbranched, A number of these clients have a limited relationship beyond the initial mortgage product. With our expanded ability to service these clients digitally, we intend to continue to drive more scope by adding additional products and services to each household. In fact, to date, we have logged a service per household now of 2.90. Our goal is to add one more service per household in our 36,000 households to drive the depth of our relationship near to four, all else being equal. The need for us to provide seamless digital experience for our clients remains a key objective. We have begun the process of testing a more robust online account opening process, and we continue to make strides to improve our internal CRM usage and utilize the Encino platform to drive efficiency in our lending processes. Clearly, there remains more work to be done to fully realize the potential of our technology gains. Operating expenses have been on a general downward trend over the last 18 months due to not only our lower volume-driven commission levels that have led to a pullback in revenue, but also our targeted reduction in resources in those business lines. Our total headcount is down over 5% compared to the prior year, even with the additions we identified for our client contact center we launched this year and five new MLOs. As a result of our focus on cost containment, we have delivered positive operating leverage for both Q1 and Q2. We expect to continue this positive trend as the balance sheet expands, asset mix normalizes, and expenses moderate. Our client contact center was introduced in Q1 and is now, as I mentioned, assisting with client care. is now fielding approximately 12,000 calls per month. More success on referrals and cross-sells is in the queue as we begin to more effectively embrace the capabilities of our Salesforce platform. Fifth and final, asset quality. Asset quality continues to reflect strong credit underwriting. Charge-offs were down from the linked quarter to just 22,000, and for the year, our annualized charge-off rate is just two basis points. Thus far, the resilience of our clients has been as anticipated as they appear to have managed their exposure to higher interest rates quite well. Tony will discuss the favorable position that we continue to see with our allowance level that now includes coverage of our non-performing loans above 500%. This industry-leading metric is a direct reflection of our commitment to not only prudent lending practices, but Also the measures we took during the pandemic to build our reserve in order to provide greater earning stability post COVID. Delinquencies ended the quarter at 2.4 million or just 24 basis points with our less than 90 day delinquencies ending the quarter at just 10 basis points. With client credit bureau scores higher and household debt as a percentage of disposable income lower, All signs point toward continued positive trends in our loan portfolio. At this time, I'd like to ask Tony to give us a little more detail on the quarter. Tony? Thanks, Mark, and good morning again, everyone.