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 Mykus 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 Gayton, Chief Technology Innovation and Operations Officer, and Jon Gathman, 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 statements 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 the recovery this quarter in many areas of our operation. We saw our loan pipeline rebuild, client liquidity stabilized, forbearances dissipate and the Edon operations integrated into 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 pretax mortgage servicing right 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 Pyramid [ph] issues, net income was $5 million a 33%. Adjusted return on average assets 164 basis points, up from the prior year quarter of 144. Pretax pre-provision ROA for the quarter was 2.74%, up 89 basis points, or 45% from the prior year. Net 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 Edon 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, Edon 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…

Thanks, Mark. And good morning everyone. For the quarter we had net income of $5.3 million or $0.69 per diluted share. As Mark noted, earnings were impacted by 300,000 recapture of our prior mortgage servicing rights impairment. And absent that item, net income would have been $5 million up $1.2 million, which is a 32.7% increase. Quarterly highlights include total operating revenue up 36.4% from the prior year and up 34.2%, when we adjust for the MSR recapture. Operating expense was up 19.3% from the prior year. Loan sales delivered gains of $8.2 million for mortgage small business and agriculture, which are up $5.2 million from the prior year. Margin revenue up 2.2% as our reductions in funding costs from Edon and some other activities offset the 6% reduction in interest income we experienced. As we break down further the third quarter income statement starting with margin, as I said an interest income was up 2.2% from the prior year and up 4.4% of the linked quarter. Average loan yield for the quarter of 4.51% decreased by 64 basis points from the prior year. Overall earning asset yield was down 102 basis points in the prior year. Literally the PPP loans depressing loan yield, as well as the higher levels of cash balances we continue to experience in the quarter. As our clients PPP fundings are utilized in the coming quarter, and beyond cash levels will naturally decrease and we're starting to see some improvement in our loan pipelines. On the funding side, as expected, we again reduce the cost of our interest-bearing liabilities from the prior year. For the quarter a rate on our interest-bearing liabilities was 75 basis points which is down from the prior year by 58 basis points and down from the linked quarter by 14…

Thank you, Tony. Clearly a very good quarter financially, as we continue to manage the complexities of the pandemic while assisting our current clients and prospecting in new ways for new ones. In addition to our solid financial results, we achieve several additional milestones in the quarter, first and foremost, we completed the operational and system integration as we've discussed with our Edon operation and those Edon clients. It was a tremendous team effort that enabled us to add nearly 4000 loan and deposit accounts with $73 million and combined balances to our existing infrastructure. The Edon team has done a great job in ensuring a smooth transition for our new clients and offering new products to those clients. As a result, we've increased deposits by now over $4 million since the merger announcement back in February. Our two 120 plus year old brands are and will remain client centric as we focus on client needs and community care to improve performance. Also, we recently relocated our office in Wauseon to a more visible central business district. This improved exposure will enhance our ability to remain relevant in one of our key Ag markets. And finally, we are pleased to report the recent opening of our newest location in the heart of Downtown Findlay, a market we know well. We intend to leverage our new office in one of Ohio's best regions to drive and grow private client group and our wealth management business line. Now, I'll turn the call back over to Sarah, for questions.

Thank you. We are now ready for our first question.

[Operator Instructions]. And our first question today comes from Brian Martin from Jannie Montgomery. Please go ahead with your question.

Hey, good morning, everyone.

Good morning, Brian.

Hey, Brian.

Hey, say, could you guys just start maybe just a little bit, obviously, two really strong quarters here on the mortgage side. Just, just your outlook on maybe fourth quarter and kind of big picture next year. I mean, obviously, the Tony, the gain on sale was really strong this quarter. So just based on what you guys did on the pricing side, and hedging side, just kind of curious how you're thinking about that in the production next year, and in the coming quarters here.

Just a couple of comments, Brian, Tony can kind of clean it up. But at a high level, we're committed to the business line, we brought a one of our executives into the business line to give some more depth and bench strength. David Homily, is a Regional President in Columbus was now overseeing that business line. And he certainly has a clear vision for driving that volume on up, above that $600 million and $700 million annual range. And so that in addition to practicing a and lifting out a team in northeast Indiana we're looking at, and then also doing the same thing in the Indie [ph] market where we're now gaining a little bit of traction. So I would hope that we've set the bar now higher than where we've been before. And with our new management in that business line, as well as additional focus on Northeast Indiana and Central Indiana, we can continue to do volume that we've seen here in this year. And fourth quarter appears to be very strong as well, as I mentioned, pretty strong pipeline. And again, optimizing all those operational pieces that enables us to price and keep that pipeline full, so that we're using our talent 100% plus. So Tony, I know you've got some thoughts on some numbers fourth quarter.

Yes, Brian, I think, we saw kind of Q3 be down 40ish million from Q2 in terms of maybe an 80% level. And I think as we look at the pipeline, today, we're probably on that same kind of 70% to 80% pace of Q3. So somewhere in that $150 million to $160 million range is what the pipeline looks like as Q4, as we see some seasonality. I think we're not naive that no, 2020 has been a very unique year, and competition has kind of allowed pricing to be at a premium level throughout this year. And we've certainly felt like we've taken extreme advantage of that pricing. We think pricing will probably get a little bit more competitive, we already see some more players getting into the market and competition for MLOs and underwriters is getting higher and more competitive. But we're still, as Mark indicated, very engaged in the business. And I don't know that we've come to a realization yet of what our expectation is for 2021. Do I think we can do 650? We certainly have the capacity is the marketplace there. Who knows? And I think we'll know more about that soon.

Well, one final comment, Brian, as we've talked with our staff, the variable is not the number, I mean, the way we plan is that we choose a number of what we think we're capable of, and then we go build the plan around the number. So it's not a matter of saying, here's all we can do, we say here's what we need to do, and then build a plan around that just like we've done for the last 10 years. So that's going to require some more producers and Northeast Indiana and Central Indiana, as well as Columbus is going to be where that's going to happen. So my expectation would be that we continue to shove the business line on up the curve to higher numbers, all while the economy recovers and the yield curve steepens and commercial then takes over with NIM.

Got you. Okay. That's helpful hearing about the new the Northeast Indiana in a little bit more depth and Indie [ph] will certainly help in the production next year. So okay. How about just Tony, you mentioned or Mark the loan pipeline, as looks like it's picked up a little bit, but just as it gets relative to pay offs and whatnot, just how you're thinking about the loan, the commercial loan book as you go forward here, and just what your what demand looks like with some cautiousness surrounding the pandemic here.

Yes, Brian, this is Jon Gathman. Just quickly to address that, yes, we've seen the pipeline build considerably here at last couple months. As you pointed out, and as we talked in the transcript that we took some payoffs on some businesses that sold the large conglomerate so there really wasn't much we can do about that. And probably an unforeseen event in the pandemic, as some of those business owners decided to sell their businesses and there wasn't going to be a whole lot better time given where the market was for them to sell, given everything else going on in the world and just eliminate some of those other concerns. That said, our pipeline remains strong, notwithstanding the second quarter, largely because of the PPP in the pandemic. But our pipeline remains strong in the third quarter and the fourth quarter, and we've seen a nice uptick in a variety of businesses in a variety of regions. It's pretty diverse in terms of where it's coming from and geographically in and loan type. So pretty pleased that $31 million is probably a conservative number, we're optimistic that we'll do a little bit better than that here in remainder of 2020, and heading into 2021.

Got you. In the payoffs, Jon, I guess, is there any change in what you're seeing on that, I know they're hard to tell. But just any change in that, as you - in the next couple of quarters?

Yes, Brian, I think we saw most of that happen here in the late second, early third quarter. And we've haven't really seen much of anything happened since then. I think most of those businesses, again, follow what you will. But I think the pandemic hastened some of those decisions. And as that is now sort of seated in a lot of the businesses that we're going to sell have already sold and some of our other customers that may have considered that and moved on and moved into growth mode. So I think we have seen that slow years, we've entered the fourth quarter. And I - not to say we won't see any. But I think we'll return to our normal pace here in the fourth quarter and beyond in 2021.

And, Jon, I think we would also agree that several of the businesses that we've financed, we've been on the other side of the coin, they've been they've sold and we were the bank, they're ready to help the people that bought the company. So what's good on one side of it's not so good on the other side, but we've been the benefactor in some of the acquisitions.

Yes, absolutely. And that's a fair amount of our current pipeline as we speak. That's a great point.

And Brian, I might add, just one other thing that conversely, helped us a little bit on NIM is that several of those companies that sold were fairly large PPP borrowers. And when those were paid off as part of the transaction, then we were able to accelerate those fees that we were holding. So that actually boosts a little bit of our margin this quarter.

Got you. So I was going to ask Tony, or whomever Jon, the PPP. Where does that stand today as far as forgiveness and just if you can remind maybe the remaining unearned fees expect to collect today, how much lay is left to be booked into the P&L.

Tony can help me with the exact number. But in terms of where we are with PPP, we just started accepting applications Monday, formally, we had accepted some before that, but formally, we've put a number of communications out to our clients about how that process will work. As you're aware, Brian, Congress passed some guides or SBA aid, rather, some guidance on how that work on $50,000 or some less, which is a little right around half of our total PPP portfolio in terms of numbers, not dollars, it's a very small dollar amount. But, since we have just started and the SBA has finally started moving on some of them, my anticipation would be we'll see very little of that some, but very little of that in the fourth quarter here of 2020. And probably the vast majority, if not 100% of it will hit in 2021. Because we have 60 days to work through those and then SBA has another 90 days decision them. So, I think the timeline will prove out to be more of a factor of 2021. And our total number Tony was way around.

Yes, we had initial booking of $3.1 million, we've taken about $600,000 through the first, call it four or five months of that. So we have $2.5 million on amortized left on our book. And as Jon said, we'll probably be very similar to Q3 and Q4, as we have the normal amortization, and we might have a few payoffs. And if all things go where we think then the bulk of that will probably be realized by April 15 of 2021, I would suspect.

Okay. And the amount that was in the third quarter, Tony was about how much just whether it be either the unearned fee, or just the total benefit to NII from PPP, including the fees of the loan interest?

Yes, so Q2 was about $400,000 and that boosted by 50%, in Q3 to about $600,000. So, we've taken a million dollars between the fee amortization and the 1% interest through September.

Got you. Okay. Perfect, thank you. And just the last couple, just you talked about using the - obviously, there's credit quality, still really strong and the mortgage earnings taking some of that and putting it in reserves for the potential risk of the pandemic. And I guess is your expectation or, and the fact that the deferrals are down, that you can still build the reserve a bit more, as you go to the final quarter of the year here is to boost it even further, or I guess is your sense that the reserve build is largely done now from the pandemic given kinds of trends you're seeing in credit.

Just a couple of high-level comments, Jon can pine on this one, but just at a high level, Brian. Yes, it always been a vocal proponent of building reserve when you're making the money. And for some of our models don't allow us to put money away if you don't have any losses. Well, this year is taking care of a little bit of that. But that said, we think we got a pretty strong portfolio and short of Jon, one of our larger losses, if you take one of our one credit out of the last piece, I think we'd be like, I don't like one basis point or something. But we want to continue to build it. And I think we're getting it up to where we need to have it. I think it'll, as I mentioned in the webcast, Brian, I think it'll bode well for subsequent quarters. As we see this pandemic play out and the asset quality, we think we have actually emerging. But, Jon, I know you got some thoughts on all that?

Well, I would just say, I mean, there's no accounting for what I prolonged, pandemic and or more closures will do. And that's probably that is exactly why we are building our reserve. That said, our current situation, I agree with Mark that, we believe strongly that we've prepared our borrowers in terms of borrowing structures, and the types of borrowers were brought in to can survive some of these issues that they're currently in. And I look at our hotel portfolio, for example, we have some pretty well-heeled borrowers in there with a fair amount of cash. So we think that'll help them in the short run. So absent something else happening in the pandemic world, which again, is why we're putting money aside, we think our asset quality is going to hold in there about current levels, and maybe slight elevation with some credits. But a lot of those borrowers have already entered into the repayment structure or operating and doing presumably, well.

And Brian, just to follow up on that, I just participated in a Federal Reserve conference call and there's a fair amount of latitude that they're certainly giving everyone, particularly when it comes to hotels, because we've got operators, as Jon said, they're very liquid. But if you're willing to offer forbearance mean they've generally willing to take it. But we could have stood firm, and said, we're not going to do any more, I think we would be fine, which would have decreased our loans under forbearance if we would have done that. But we didn't, we've accommodated though they've given us the Federal Reserve have given us the latitude in that arena. And so we've kind of taken it. But we could have decreased our balances even more if we just stood and said, nope, this is it, too, is it. But I do know that Dave proclaimed the Federal Reserve, that going even up to a full year and that industry has been witness and merited. We're not there yet. But we're still probably pretty bullish on liquidity and the clients that we have in those hospitality arenas.

Got you. Okay. And then the last two for me was just the - was there any change, it doesn't sound as though, but when you look at the criticizing classifieds, so any change in trends in the special mention of classified this quarter, I know you talked about, some of the hotels and eldercare, just not sure how they're performing. If you're seeing any migration on those or any trends of note?

In the - well, for 2021 holistically, we saw one credit migrate earlier this year, that had nothing to do with the pandemic. That's right around $1.8 million. We did see an eldercare facility that probably has been severely impacted by the pandemic. But that's a fairly small balance net, we're carrying a USDA guarantee on that loan. And we feel pretty good about the prospects of that, again, not a huge balance, but really know most of our increase in the second and third quarter has then been brought on by non-pandemic related issues that we feel like we have appropriately addressed in every case.

Okay, so there was a bit of it was some increase in the special mention in classified from 2Q to 3Q, nothing significant is what it sounds like Jon?

Yes, it really comes down to three credits, Brian, again, two of them non-pandemic related one pandemic related, but three large commercial credits probably drove the number as much as anything.

Got you. Okay. And then just the last one for me was just on your outlook for just kind of the margin and liquidity and just how you're thinking about that, it sounds like as though you are pretty optimistic, Tony, with regard to bring the deposits down a bit more and maybe holding the asset side with maybe a few more loan fees, but just any more commentary would be appreciated?

Yes, I think that that summarizes it very well. I mean, I think we've all been surprise blown away by the amount of liquidity by our consumer clients, I mean, the amount of liquidity and cash out there. And what the majority of customers are doing is leaving it in the bank, they're not spending money on boats, or cars, or those kinds of things. Now, that may change, we don't know, but we've seen the bulk of our CD maturities, and customers looking at that, and just happy to roll it over and put it in a money market or a savings account and just sitting on the sidelines and waiting. And decision tree has been, how comfortable are we that the loan pipelines are going to improve enough that we can sit on cash for a little bit longer, or should we go into the bond market and make some long-term investments. We've taken a little bit of that off the table. But we still are fairly convinced that our loan pipelines are real. And we've got confidence that they're going to come back to us in fourth quarter and into 2021. So if we have to take a temporary blip on a little bit more cash, we're happy to do that.

Got you. Okay, I appreciate all the color and a nice quarter, guys.

Thanks, Brian. Talk soon.

[Operator Instructions]. And ladies and gentlemen at this time it showing no additional questions, I'd like to turn the conference call back over to the management team for any closing remarks.

Thanks, Jamie. Once again, thanks for joining us. We certainly look forward to talking with you again in January, as we report our fourth quarter of 2020 as well as overall year end results. Thanks for joining. Goodbye.

And ladies and gentlemen with that will conclude today's conference. We do thank you for attending. You may now disconnect your lines.