Q2 2021 SB Financial Group Inc Earnings Call
Good morning, and welcome to the SB financial second quarter 'twenty 'twenty.
The 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'll begin with remarks by management and then open up the conference for the investment community for questions and answers I will now turn the conference over to Sarah Amicus with SB financial.
Please go ahead Sir.
Thank you 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 Dot Your state Bank Dotcom joined.
Joining me today are Mark Klein, Chairman, President and CEO.
It's the only cousin Tino, Chief Financial 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.
The 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.
The issue 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 second quarter 2021.
For the call and webcast briefly reviewing some highlights for the quarter, which included the small mortgage servicing rights impairment.
Roughly 100000.
Net income.
Of a $3.8 million up 100.
We're 3% over the prior year quarter on a year to day basis, when adjusted for the non-GAAP impact in 2020 net income was $8.8 million.
860000 or nearly 11%.
Return on average assets was 1.3% pretax pre provision or away.
Quarter 139 net.
Net income net interest income of $9.2 million was up 3.2% from the prior year.
The decrease in interest income was supplemented by a nearly 42% reduction in interest expense.
Loan balances from the linked quarter Rose 2.4 million of them and we have.
Adjusted for PPP balances were up $21.9 million or 11%.
On an annualized basis compared to the prior year net of PPP loans were essentially flat.
Deposits declined from the linked quarter by $29 million, but were up over $100 million from the prior year expenses.
For the 600000 of 5% over the prior year quarter due to lower mortgage commissions and merger costs in the prior year.
Mortgage origination volume for the quarter was 165 million down over $58 million of 26% year over year.
Asset quality metrics.
We're down to remains strong.
Both of them of prior year, and the linked quarter and our level of 46 basis points of the nonperforming assets remained strong.
We achieved a significant milestone in the quarter.
As all clients that were on Covid related forbearance have now returned to full paying status.
Tangible.
Book value is now up to $17.26 per share.
And finally, we had a successful subordinated debt raise that closed the $20 million in debt capital certainly prepares us quite well for potential growth opportunities.
We continue to believe that our laser focus on those 5.
5 key strategic initiatives that we've discussed for a number of quarters. We will continue to lead the top quartile peer group performance.
Revenue diversity and growth of course more scale and the larger footprint certainly more services in those households, with our client base, which leads to more scope.
<unk> technology and excellence in.
Operations and communications with our clients as the key and of course, the foundation of all of high performing banks asset quality.
First revenue diversity of bit this quarter mortgage volume and loan sale gains were down from the prior year.
26% on volume and 48% on gains for.
For the last 12 months.
We delivered nearly $700 million in total mortgage origination volume Columbus.
Columbus region delivered 61%.
Northwest, Ohio of approximately a third and 6% from northeast and Central Indiana R.
Our volume continues to be bolstered by our newer <unk> fixed rate.
Our 15 year fixed then to a 1 year variable product that we underwrite and book in house.
Closed to date in this new first quarter 2021 product is $33 million and the pipeline of another $24 million or.
Of our metropolitan market of Columbus accounted for 6.
64% of this PSEG activity, which would include the volume and of course of the pipeline.
Non interest income decreased to $6.5 million from the prior year quarter of $8.6 million, but is up over $6.6 million for the year, primarily due to our year to date variance of over $6 million in.
Great for seeing rights impairment.
The current quarter includes a mortgage servicing impairment as I mentioned of 100000 compared to an impairment of $1.1 million last year.
Non interest income to total revenue remained strong at 42% and 2% of our average assets.
Peak title, our affiliates continue to take market share of with another strong quarter. This business lines of a great complement to our residential lending strategy as they will be clearly the impetus to leverage technology to deliver a fully integrated electronic closing soon.
We continue to seek out growth opportunities for this.
Fee based division across our entire footprint.
Our wealth management team achieved a significant milestone this quarter total assets under management now at over $600 million represents a $106 million increase in assets under management or 21, 4% improvement over.
The prior year, while providing 950000 revenue for the quarter of <unk>.
43% increase over the prior year.
With regard to scale the loan growth certainly showed improvement in the quarter compared to the pandemic headwinds that.
Nearly all banks encountered including ours in the last 15 months for.
From the linked quarter.
Loan balances were up by $2.3 million of when we adjust for the rapidly declining PPP balances linked quarter growth was nearly $22 million.
PPP activities are winding down for our calling officers as they have witnessed a shift.
The conversations with their clients to include the expansion.
Opportunity from that of liquidity and safety.
We join our clients' optimism and feel the economy will continue to grow as demand expands supply change improve and interest rates remain accommodated.
Our pipelines reflect this optimism as we currently have over 216 loan request.
And for $155 million.
Our recent expansion into Edgerton, Ohio market, we've discussed the somewhat in the past our fifth office in Williams County has been well received.
After just 3 months, we have over 100 transactional deposit accounts for over $1.5 million.
For our loan balances now of $4.5 million with another $4 million in the pipeline, we're pleased with our de Novo expansion.
Our overall deposit base decline from the linked quarter as both our retail and business clients began to open up their lives and businesses to reflect the change in pandemic status.
We still have significant.
Difficult liquidity, which was supplemented by the debt raise that we closed.
In the quarter as I mentioned earlier.
Although we did not have an imminent need we felt that the pricing and opportunity to build a stronger balance sheet was critical for our long term growth initiatives.
Third.
Third more scope.
We ended the quarter with $35 million of PPP loans outstanding was $7 million remaining from the $84 million. We originated in the first phase and $28 million from the recently initiated phase II.
We now have just 30 of our original 692 phase 1 loans.
That have not yet applied.
Applied for forgiveness of throttling 9 of our 451 round 2 loans have been forgiven.
This quarter, we expanded our number of households, and we continue to have great potential to expand our balance sheet further.
As our services per household and this.
Current footprint remain.
Well below.
Below 3 due in part to our rapid rise in single service mortgage households, we fully intend to onboard these new households, with multiple touches.
Additional operating operational excellence remains the for theme.
We encountered headwinds in our mortgage business line.
This quarter refinance activity was down 65 million from the prior year or 45% and the reduced inventory available for sale continued to constrain most of our market production.
The level of purchase and construction volume this quarter at 51% of our total volume was the highest percentage.
During the <unk> since well before the pandemic.
The expense levels for the quarter that Tony will touch more in greater detail were down from the prior year, although mainly as a result of the significant 1 time merger cost it we realized second quarter of last year.
We are continuing on the path of reinvestment in technology.
We've mentioned in prior quarters to improve our client experience and interaction.
We're well aware of the need to improve our digital platform.
And allow our clients to reach us through multiple channels.
We have also moved aggressively in a number of our rural markets to capture market share from the regional banks stepping away from their traditional end market.
That will all of using their digital platform as an end market substitute where clearly we continue to use the digital dimension as a complement to our client centric brand.
Fifth and final asset quality.
At quarter end as I indicated my opening remarks, we had zero of loans and Covid forbearance.
Which obviously could portend a different approach to reserve levels as we begin to see growth in our owned portfolio now.
Coverage of our non performing loans, which is a metric that I continue to believe is the.
As a key measurement for healthy banking environment now eclipsed the 300% Mark at the end of the quarter.
Even with an overall delinquency at an all time low of <unk> for 1%.
We continue to believe that our disciplined approach.
The lending during the good times has helped our client base withstand the unknown effects of the eminent downturn.
Our profitability of the past 4 quarters has also enabled us to continue to build a healthy reserve level now at the 156% of total loans for a year over year increase.
Of 41% just in case, we witnessed a slowing economy.
Now I'd like to turn it over to Tony Constantino of our CFO for some detailed remarks on our <unk>.
Tony.
Thanks, Mark and good.
Again, everyone again for the quarter, we had GAAP net income as Mark indicated of $3.8 million or <unk> 52 cents per diluted share.
Some of the highlights in the quarter operating revenue was down $1.8 million or 10, 3% is mortgage gains on the lower activity was.
Performed nearly $3.9 million of 48%.
We were however, able to offset that large mortgage variance with higher wealth and deposit fees, which were both up 23%.
Loan sales delivered gains of $4.3 million mortgage small business and agriculture.
Margin revenue was up 3.2% due to.
The decline continued decline in funding costs, which were lower by over 700000.
The acceleration from PPP forgiveness, offset a portion of the core decline in interest income.
Now we want to break down further the second quarter income statement, starting with margin.
Average loan yield for the quarter of for.
As of <unk>, 1% decreased by 7 basis points from the prior year.
It was down just 1 basis point from the linked quarter overall, earning asset yields were down 70 basis points for the prior year due to the change in mix of the balance sheet.
And down 31 basis points from the linked quarter.
Loan yields were impacted by the fees from the P.
P P portfolio, which were 651000 compared to $1.2 million from the linked quarter.
We still have $1.6 million in unamortized fees of the original for $9 million from Booth, both phases of the PPP initiative.
We continue to expect the large majority of these fees will be.
Realized within this fiscal year.
On the funding side, we again reduced the cost of our interest bearing liabilities from the prior year.
For the quarter of the rate on our interest bearing liabilities was 44 basis points, which is down from the prior year by 44.
And down from the linked quarter by 6 basis points.
Net interest margin.
<unk> at 294% was down 38 basis points from the prior year, but remained flat to the linked quarter.
Due to the negative impact of excess cash and restraints on our ability to increase loan growth.
Total interest expense costs were down by 42% from the prior year and down again, 7% from the linked quarter.
When we exclude.
The impact of P. P. P fees from both years, the second quarter margin would decline 14 additional basis points to 2.8 O per cent.
And on a year to date basis, our GAAP margin of 3 point O, 7% would be reduced for the P. P. P impact by 21 basis points to $2.86 per cent.
Total noninterest income was down $2.1 million of 24% from the prior year, reflecting lower mortgage origination volume and the $1.1 million negative swing in servicing rights.
As I discussed last quarter.
Gain on sale yields had reached the high end in the first quarter and we will not see the those levels nor of the levels.
Level, we realized in 2020 again.
Gain on sale yield for mortgage sales. This quarter was 3.6%, which is a strong historical level, but well off of the high 4% range that we took to the bottom line in 2020.
Coupled with the lower level of sales due to the private client strategy. We have discussed is made.
The annual comparisons of our mortgage operation challenging.
Our service servicing portfolio does continue to grow and is now at 132 billion and provided revenue for the quarter of 830000.
The market value of our mortgage servicing rights declined slightly this quarter with the calculated fair value of 80.
The 4 basis points.
The fair value was up 19 basis points from the prior year, but down 2 basis points from the linked quarter.
We now have of servicing rights balance of $10.7 million in remaining temporary impairment of $2.3 million.
We are hopeful that of continued slight rise in the rate curve and a slowdown in prepayment speeds will allow us.
The recapture of this remaining balance yet this year.
As Mark indicated total operating expenses this quarter were down 600000, or 5% compared to the prior year and were flat to the linked quarter.
Prior year quarter included $1.2 million in costs related to the Eaton merger.
And when we adjust the prior year for these merger expenses operating costs would be up 655000 or 6.3%.
Now, let me turn to look at the balance sheet loan Outstandings at June 32021 stood at $855 million, which was 65% of the total assets of the company.
As we have discussed deposit levels continued to be above our expectations of certainly impacted total asset growth.
Absent what has been some loan growth, we have reallocated cash balances to supplement our investment portfolio.
And that portfolio of $217 million is now up $108 million.
100% from the prior year.
Looking at our capital position, we finished the quarter of 144 million up $6.1 million of 4.4% from June 30 of 2020.
And our equity to asset ratio stands at 11% for.
Or 11, 3% when we exclude the remaining piece.
Nearly the balances.
On a per share basis tangible book value was up $2.25 per <unk> per share from the prior year or 15%.
And the buyback that we had announced continued at a brisk pace in the quarter with 215000 shares repurchased at an average price slightly above tangible book value.
The people that are market price of 1 O 7 of tangible book our shares are still well undervalued in our opinion and repurchasing aggressively at these prices is an effective strategy.
The reduction in nonperforming loans too.
51 basis points reflects not only improve quality in our loan portfolio, but also the movement of the large.
<unk> credit into Oreo, we are in the process of marketing this property and hopeful as the economy reopens, we will realize the full appraise value.
Because we said we decided to forgo any additional provision for the quarters, we feel the significant increase in our reserve that we achieved in 2020 in and of the first quarter of 2021 now.
Now puts us at the appropriate level.
Lots of <unk> loans are down over 21% and net charge offs for the quarter were minimal at 20000.
Now all of them, we're going to turn the call back over to Mark.
Thank you Tony I want to conclude my remarks by acknowledging our recent the dividend announcement, we made last week of <unk> 11 per share which.
<unk>, 21% payout ratio on the dividend yield of approximately 2.4%.
We continue to identify opportunities to enhance shareholder value and certainly 1 that includes the dividends and the conscious and deliberate return of capital to our shareholders in the form of stock buybacks as Tony mentioned.
I'll now turn the call back to Sara for questions from our audience.
Thank you Mark now we're ready for the first question.
And while we're waiting for additional questions I would like to remind you that today's call will be accessible on our website.
They are that your state bank dotcom.
We will now begin the question and answer session to ask the question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
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And our first question day comes.
Comes from Celine <unk> with Janney Montgomery Scott. Please go ahead.
Yes.
Hey, good morning.
Morning.
Yes.
I'm asking question for Greg Martin Joe. The first 1 is what's your outlook is for mortgage production finished gain of sale margin.
Sure.
The mortgage production for this year is certainly going to be the low the.
The prior year again, we've discussed the true.
12 months here at the 700 million pace.
Tony can give us some additional color for that but I would think that we would hopefully come in to that 500 to 550.
The number this year given the pace that we're on the absent.
Any aberrations in the 10 year treasury yields yields are still very accommodative to our borrowers.
As we've mentioned in prior quarters and certainly this quarter the.
The inventory levels have remained quite constrained.
The mill with the which is going to have an effect on our volume.
And of course, we've had a very robust refinancing of.
Opportunity of the last year or 2 and that has begun to slow a bit and.
And further and finally as we mentioned the <unk> 1 that we've begun to underwrite on a private client basis for.
Strained higher end clientele and some of our urban markets have certainly short up the balance of.
Which again will not come to Washington of form of loan sale gains, but rather and on balance of growth. So we're optimistic that we've begun to play literally on both sides of that equation.
But I would say, we ultimately of this year will probably be off.
All right, maybe 20% from that which we realized the prior year Tony of an additional comment.
Yeah, I think I think market. That's good color. There you know if you look if you look at our mortgage business. You know we've done about 321 million. Thus far this year versus 325 million for the first half of 2020 our interest.
We've done about 9.5% less.
Actual mortgage.
Units.
So our dollar items per ticket has gone up to about 236000 average loan size.
I would suspect our third quarter.
Mortgage volume will be down.
<unk> got 10% to 12% from from the second quarter of 2021.
And I would think that that 525 to 575 type range for the full year as we look at 2021 is a pretty accurate number as we sit here today looking at our pipeline of.
On the yield side you also asked about.
Colin I think you know we're kind of continue to see gain on sale yields probably decline about 15 basis points over the prior quarter.
I would guess through the first quarter of 2022, and then it will start to stabilize so we'll probably end up at a stabilized.
<unk> range of probably $2.85 to $2.75 somewhere in the first quarter of 2022 and stay in that range going forward.
Okay. Thanks for the color.
So next question is Barbara for loan growth for this quarter they already nice for Whatsapp.
What's your outlook for probably.
The loan growth in your pipeline going forward.
This is John.
You're right I think the second quarter began a nice trend for us.
As we look at the third quarter, we're very optimistic theres still a lot of cash out there providing headwinds of the governor.
The supply of borrowers but.
With the combination of low interest rates and an improving economy.
And hopefully a little bit of an improving supply chain of lot of our clients are looking to borrow they just can't get the materials, they need to build or do a machine or whatever they're looking to do so if we can get a combination of some of those I feel really good about our prospects in the third.
Third quarter, if you look at our loan growth.
Commercial real estate all through the pandemic continue to grow and continue to grow in the had a very nice second quarter and we would expect that trend to continue we get some improvement back in the C&I through the supply chain and maybe people using up cash or paying down something else or better yet.
Buying an investment I think I think we're in good shape and as Tony mentioned in the web call pipeline is the strong now as its been in probably year and a half 2 years.
Okay great.
When do you expect the net interest margin to increase as you mentioned the interest range.
Thanks.
Really low.
Yeah, I think you know as we look at it.
At NIM going forward I think Q3 will start to see.
Much larger acceleration of our phase 2 P. P. P fees are I think that's going to provide a boost.
You know you know we had a big first quarter of P. P. P fees down fairly significantly here in Q2 Q3, it'll get back up you know we have of million 5 remaining on the phase 2 P. P. P fees and I would suspect Jon will take a big portion of those there you know as John said, we got a fairly large total pipeline and I would think.
We're going to fund 30 plus million of that in the next 60 days, which is a pretty strong level of funding growth for us in a in a 60 day period.
You know so I think that's going to be additive to margin and we continue to be very aggressive on the funding side and we've seen the clients.
Have been you know not okay, but you know not moving large amounts of deposits out even as we've move rates down fairly aggressively, but we'll see how that that potentially may turn going forward.
I think the swing this is mark and I think it's safe to say and John can confirm this but the.
Literally the conversations are with our.
C&I clients as well as maybe some CRA clients have changed from again safety and free strained to optimism and potentially leverage because once that liquidity gets levered 2 to 3.4.
Plus times theres going to be more opportunities and I think we're seeing that in our pipeline as we speak today.
So I can imagine the liquidity so.
Do you expect the deposit inflow to slow down.
Yeah, so many pockets of many of the bonds.
But just the high level comment and Tony can kind of clean this off with the again we've.
The other bite out of our another rural market and so we think there is a lot of opportunities not only just from a household growth, but a little more scope in every household but we're continuing to see a lot of larger regionals.
Assume that they can attract clients in rural markets with the again the digital.
Platform as a substitute in and we're using that as the lever to get into the household as a complement and we think they will continue but as John mentioned the real wildcard here is the optimism that the.
Might emerge from the market and whether anyone is going to continue to want to.
Constrain that loss.
Taken for a day or whether they want to go to the other end of the spectrum and leverage of that liquidity I think that's the big key but.
Generally speaking.
We've been.
Mildly aggressive on.
The CD side, maybe just mildly extending the maturities of about just in case the rates do go.
The other way in the midst of impending.
The inflationary fears.
So we've tried to hedge that a bit.
But clearly on the asset side, we remain.
Asset sensitive but that.
Well it might be changing just a little bit as the we.
We changed the mix in our balance sheet.
The comments, yeah I think.
We saw $30 million decline in total deposits this quarter.
Really the first decline we've had in gosh 5.6 quarters I would suspect we'll probably see a similar decline here in in Q3, and then it'll start.
To stabilize a bit I, just think of the consumer's going to spend a little bit of the money that they have and in their DDA accounts and we've seen some of our businesses start to spend a little bit of their liquidity and I think that's gonna be reflective of our balance sheet as well.
Okay. So.
Sorry, a bunch of years.
We ended up all of the excess liquidity in the loan production or what's your outlook for day.
I'm, sorry, I didn't get the question there could you repeat the question.
Oh sure. So the are you not.
The.
Most of the excess liquidity on loan production or.
What's your plan for that.
Well right now as Tony mentioned of the other investments signs up dramatically is not where we would like it but we were pretty disciplined as I mentioned, that's 1 of the reasons around the asset quality and the total of $20000 losses of loan losses today. So.
We really we really like our our asset.
The quality of positioning and were pretty standard with who we loan money to do so.
That liquidity is eventually going to be deployed prudently.
And again, if you just take a 100 million growth plus or minus and you'd love for that 3 times by our clients, which is mild leverage in our in our estimation.
That could yield a.
The growth of 25% of our balance sheet. So.
As our clients remain optimistic and begin to deploy that liquidity to other opportunities. We think that's kind of in order to our benefit and we will move that liquidity over to the so the.
The size of the balance sheet.
And the loans with higher yielding loans, albeit with an.
Asset sensitive balance sheet, increasing with.
We think potential market increases in rates.
Some day.
Okay got it thanks for color. So the last question is for all day.
Reserve so for this quarter of theirs.
The provision despite of loan growth for what's your outlook of reserve ratio going forward.
Yeah. The this is Tony you know so we look at this quarter net of P. P. P.
Our allowance of 163 versus $1.22, a year ago.
There is now 34% you know given our Covid deferrals and.
The lack of actual losses, I think were as Mark said in the call well prepared for any for any downside.
We will be prudent as we go forward with our loan growth.
And how we how we manage our allowance levels.
<unk> to loan growth, but I wouldn't think we'd be dramatically different from our current stance about where we are from a percentage standpoint somewhere in that 1 for 215 type range.
Okay, I really appreciate that thanks.
Thank you. Thank you.
As a reminder, if you have a question. Please press star then 1 to be joined into the queue.
This concludes our question and answer session I would like to turn the conference back over to Mark Klein for any closing remarks.
And once again, thanks, everyone for joining I'm excited about the.
What the next quarter is going to bring we have a lot of optimism and we're looking forward to reporting on those results in October.
For third quarter, Thanks, again and have a great weekend take care.
The conference has now concluded thank you for.
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