Q3 2021 SB Financial Group Inc Earnings Call
Yes.
Good morning, and welcome to the SB financial third quarter, 2021 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 will begin with remarks by management and then open the conference up to the investment community for questions and answers.
I will now turn the conference over to Sarah Amicus with SB financial. Please go ahead Sarah.
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 desktop Joy.
Joining me today are Mark Klein, Chairman, President and CEO.
Tony, causing Tino Chief Financial Officer, Ernesto Gaytan, Chief Technology, Innovation Officer, and Steve Walsh, Chief lending Officer.
This call may contain forward looking statements regarding SB financial's performance.
Dissipated 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'll now turn the call over to Mr. Klein.
Yeah.
Thank you Sarah and good morning, everyone welcome to our third quarter conference call and webcast I'll briefly at a high level overall were quite pleased with our quarterly performance as well as our year to date results for the quarter, we realized positive loan growth that has now expanded for two consecutive quarters.
Your operating revenue improved earning asset yields and realized negative net charge offs year to date.
We've expanded both total assets and total deposits by nearly double digit percentages.
Positive operating leverage.
When does the decline in delinquencies to an all time low and drove our allowance to nonperforming loans to a record three and a half times. We are certainly pleased with our progress and momentum but of course not satisfied.
Briefly at a high level for the quarter net income $4 1 million, yielding an ROA of one two or three pre tax pre provision ROA of 163.
Net interest income of $10 million was up eight 3% from the prior year due to the P. P. P forgiveness loan growth and a 35% reduction in interest expense.
Loan balances from the linked quarter, excluding PPP effects were up $21 million or 10% annualized.
This follows a similar $22 million increase in the prior quarter.
Deposits quarter over quarter continued the increased $21 million up by 97 million year over year.
France is down for the prior quarter flat to the linked quarter.
Mortgage origination volume of 153 million down 24% year over year.
Key asset quality metrics, including nonperforming assets at 42 basis points and delinquent loans are just 35 basis points, where improved both the prior year and linked quarter and finally tangible book value now up to $17 55.
11, 6% increase year over year or $1 83.
Our five key strategic initiatives remain we are impassioned by growing and diversifying that revenue, adding more scale organically now again post COVID-19 and M&A when prudent more products and services, which would be scope and of course deploying technology.
Better technology for customized client care and communications and finally, the foundation of all high performing companies, we feel asset quality.
First revenue diversity.
This quarter mortgage volume and loan sale gains were down from prior year of 24% on volume 51 off gains for the last 12 months, we delivered 650 million in originations.
Our volume continues to be bolstered by our newer P. C. G fixed rate product. The 15, one product that we announced the first of this year.
And of course, we underwrite and book in House.
At here State Bank.
We expect to close nearly $70 million this product for the year.
Noninterest income decreased to $6 6 million from the prior year quarter of $10 4 million, but is up slightly compared to the linked quarter.
Current quarter includes a mortgage servicing recapture of 248000 compared to a recapture of 326003rd quarter of last year.
Non interest income remained strong at that 40% Mark that's traditional for us and 2% of average assets.
Our affiliate peak title contributed over 500000 of revenue this quarter and we anticipate a full year of over 2 million with net income of approximately $400 million.
Our president and Abby waters Entertainment made great strides and doubling the revenue of this business line and three short years, we intend to leverage this true complement deeper into our core business lines and across all 14 County footprint.
The stock market expansion has certainly assisted our wealth management team to consistently a mass assets under management at or above that 600 million Mark.
This quarter's levels are up by $66 million or nearly 13% from the prior year.
While providing.
Over 959000 revenue, which is up 14% over the prior year.
Year to date wealth revenue is up nearly 19% from the prior year.
Second more scale.
Loan growth continued to show improvement in the quarter net of P. P. P paydowns.
P. P activities are winding down for our calling officers and the feeling on the ground in our markets is one of optimism as.
As we now have pivoted to servicing our clients and addressing their expansion plans.
Our recent expansion into the edges don't how market continues to exceed our expectations.
After just four months of operation that we have opened nearly 200 lower cost core deposit accounts with balances of $3 7 million Boe.
Booked loans of over 13 million and have a pipeline now of loans and deposits of nearly $2 million.
We continue to believe that capturing market share in our rural markets with our main street model that includes both bricks and clicks position.
Positions us nicely to grow our presence and build long term franchise value for our company.
Deposit levels continue to show growth and strength across all segments, including small business and consumer.
Our clients as I mentioned have begun to slowly released their liquidity.
As they gain confidence confidence in a more normal post COVID-19 world.
Leverage record levels of liquidity to undertake expansion activities.
Third deeper relationships more scope.
We ended the quarter with $10 million in PPP loans outstanding on essentially all of phase one loans fully forgiven.
We're all looking forward to the full forgiveness of the remaining PPP loans, yet this year and freeing up our calling officers.
To return to more normal lending activities in particular, SBA seven lending that has all but disappeared with the onslaught of PPP and returned to a more traditional levels of $10 million to $15 million annually.
We have begun internal discussions regarding 2022 budget and business plan and are certainly focused on expanding our presence into growing urban markets of Columbus and Indianapolis.
We are confident that our disciplined client calling model N loan prospecting initiatives.
The additional growth opportunities in the coming year.
Operational excellence in client care and better communications as our fourth theme.
The shift to purchase and construction lending in the mortgage arena accelerated substantially in the quarter.
That volume represented 61% of our total activity.
We expect origination volume to remain healthy in the coming quarter and anticipate nearly $600 million in origination for the full year.
Our mortgage ecosystem is built for higher production and the variable here is the number of producers and not necessarily the volume.
Expense levels were all tend to mirror, our mortgage origination volume as we continue to strive to make.
To make this business line more variable operating costs on both the front and the back end.
We are in the final stages of implementing our new loan origination and CRM system, and we anticipate operating costs will be elevated a bit in the short term until all operational efficiencies are realized mid 2022.
As such operating leverage for the quarter compared to the prior year is negative due to the decline in mortgage revenue. However.
Year to date revenue growth of 10, 5% is four one times the 2.6 annual expense growth.
And finally before I turn it over to Tony Constantino, our CFO for more detailed comments asset quality.
We continue to have zero loans in Covid forbearance, and we feel very positive about the direction of our asset quality.
We believe our discipline about disciplined approach to lending during good times is reflected in our palette of asset quality metrics has helped us and our client base.
To withstand the effects of the recent downturn.
Our profitability of the past seven quarters.
Has also enabled us to continue to build a healthy reserve level to 1.65% of total loans now for a year over year increase.
17%.
Tony.
Thanks, Mark and good morning, again, everyone again for the quarter, we had GAAP net income of $4 1 million or <unk> 58 per diluted share.
Some of the highlights for the quarter include.
Total operating revenue down <unk> 3 million or 15, 3% as mortgage gains due to lower activity and lower gain on sale yields was lower by $4 1 million or 51%.
We were able to offset the large mortgage variance with higher wealth and deposit fees, which were up 14 and 11% percent respectively.
Loan sales delivered gains of 4 million from mortgage small business and agriculture.
And margin revenue was up eight 3% due to the continued decline in funding costs loan growth as Mark pointed out N. P. P. P forgiveness.
Now as we break down further the third quarter income statement, beginning with our margin.
Average loan yields for the quarter of $4 six 7% increased by 16 basis points from the prior year and were up six basis points from the linked quarter.
Overall, earning asset yields were down 44 basis points compared to the prior year, but were up 27 basis points from the linked quarter.
Those loan yields were impacted by the revenue from the P. P. P portfolio, which were $1 1 million in the quarter compared to 780000 for the linked quarter.
And 642000 in the prior year quarter.
We have just 560000 remaining in unamortized.
Unamortized fees and we fully expect to this essentially all of these fees will be realized by December 31 of this year.
On the funding side, we again reduced the cost of our interest bearing liabilities from prior years.
For the quarter that rate was 44 basis points, which is down from the prior year by 31 basis points and flat to the linked quarter.
Net interest margin at 3.21%.
It was down 20 basis points from the prior year, but up compared to the linked quarter by 27 basis points.
Accounting for that improvement from the linked quarter, where our on balance sheet loan growth deploy.
Deployment of liquidity to higher earning assets.
And continued aggressive control of interest expense.
Total interest expense costs were down 539000 or 35% from the prior year.
When we exclude the impact of PPP fees from both years.
Third quarter margin would decline an additional 31 basis points.
Two 8%.
On a year to date basis, our GAAP margin of 3.12% would be reduced due to the PPP impact by 21 basis points to 286%.
Total noninterest income was down $3 8 million or 36, 2% for the prior year quarter, reflecting the significant decline in mortgage gain on sale.
We did continue to see good growth in the wealth arena as well as customer service fees as we have pointed out.
Yeah.
As we have discussed at length mortgage gain on sale yields have trended down each quarter since their peak in the fourth quarter of 2020.
The gain on sale yield for mortgage sales. This quarter was three 2%, which is a strong historical level, but well off the four 9% that we realized in the third quarter last year.
Coupled with the lower levels of sales due to the private client 15, one strategy. Mark mentioned is made annual comparisons of our mortgage operation challenging.
Our traditional servicing portfolio does continue to grow and is now at 134 billion and provided revenue for the quarter of 850000.
The market value of our mortgage servicing rights remain steady this quarter with a calculated fair value of 84 basis points. This fair value level was up 18 basis points from the prior year.
We know the servicing rights balance of $11 2 million in remaining temporary impairment of $2 million, we would expect that the increases in market rates and the slowdown in prepayment speeds will continue to increase the value of those servicing rights.
As we turn to operating expenses for the full year.
Which were $33 2 million.
They're up 80, 840000, or two 6% compared to the prior year first nine months.
The prior year did include a $1 2 million, one time charge for merger costs related to the merger and.
And when we adjust for these merger costs operating expense costs would be up six 7%.
Now, let me turn to the balance sheet, our loan Outstandings at September 30th.
Stood at $847 million, which was 63, 7% of the total assets of the company as.
As we have discussed deposit levels continue to be above our expectations and have certainly impacted total asset growth.
Absolute loan growth, we have reallocated cash balances to supplement our investment portfolio.
And now stands at $254 million and is up $118 million or over 86% from the prior year.
As we look at our capital position, we finished the quarter at 144 million, which is up $2 9 million or two 1% from September 30 of the prior year.
And our equity to asset ratio stands at 10, 9%.
The buyback continued at a brisk pace in the quarter with 107000 shares repurchased at an average price slightly above tangible book value.
With our market price just above tangible book value our shares were well undervalued in our opinion and repurchasing aggressively at these prices. We feel is an effective strategy.
Of our $20 million in earnings in the last 12 months, we have allocated over $15 million on the buyback and dividends to our common shareholders.
By most metrics the 300000 in provision we took for the quarter was fairly aggressive relative to the level of loan growth and especially considering the net recoveries, we realized in the quarter.
Our mortgage and P. P. P earnings have allowed us the flexibility to increase reserves as we enter a tougher rate cycle in 2022.
In addition to the improvements in N P. As in delinquent loans are criticized and classified loans are both down nearly 9% from the linked quarters.
And as I conclude my remarks, I want to point out year to date net income of $14 9 million is up $5 4 million or 56% compared to the prior year with an anticipated solid fourth quarter yet to report.
I will now turn the call back tomorrow.
Okay.
Thank you Tony I want to conclude by acknowledging the dividend announcement, we made last week of 11, five cents per share, which equates to a payout ratio of roughly 21% and a dividend yield of approximately 2.4%.
Our capital strategy continues to include an appropriate return of capital to our shareholders in an aggressive buyback as Tony mentioned of our stock I'll now turn the call back to Sarah and we'll open it up for questions.
Sure.
Thank you we're now ready for our first question.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Okay.
And the first question comes from Evan <unk> of Janney Montgomery Scott. Please go ahead.
Hey, guys. This is evan on for Bryan Good morning.
Good morning, Good morning, Thank you for joining.
Thanks for having me so I guess to begin with you.
You guys mentioned you know you gave some color on mortgage and just you know originations were healthy for the quarter and I was just curious on the outlook on mortgage production and then also on the gain on sale margins.
Yes. This is mark Gavin just this at a high level as I mentioned.
We've built this thing for not only noninterest income, but in particular in mortgage lending we liked that 600 to 650 million number. That's what we're built for that is what we're looking for and as I mentioned the variable here is a number of producers which were intent on finding to keep that number robust. So it's not a matter of what we can produce its matter.
What we want and then we build a strategy if MLR is to go get it.
So I like that number going into 2022, certainly going to have some pressure on the downside on refinancings that have begun to decline already but.
Clearly we've got some some nice products in some great markets for construction as well as the purchase market is $1, 61% of the volume So Tony comments.
Absolutely, Yes, and then I'll just add.
We're probably going to end 2021 with call it 45% of our volume in refinance.
I would expect that.
Gonna trend to probably a 30% number as we look out into 2022 of our total volume so that will put some pressure on on on our origination levels, but as mark talked about we want to expand in some other markets and originators and move forward on that.
Gain on sale, we did three 2% on a relative basis this quarter.
Which is down from where it was off the charts in 2020.
We're looking at that's probably going to settle in the mid two range as we look out the next.
Six quarters, or so which I still think historically is really a relatively pretty strong level of gain on sale.
Yeah.
Awesome, that's very helpful and just kind of your outlook on that you know I know.
Just on expenses I know there.
They're clearly kind of closely tied.
With that outlook is there a way of thinking about expenses moving into 'twenty two is it.
If theres going to be more production or volume as you know.
Is there going to be similar with expenses or how is that going to trend.
Yes, I think I think at the top of the house I think mortgage.
Fortunately or unfortunately drives a great deal of our.
Our <unk>.
Expense side, because we have gone almost exclusively variable not only on the origination side, but also a little bit on the backend incentive side.
I do think we're going to have.
Kind of elevated expenses, a little bit weak.
We've done a.
Relative to maybe what we see in the marketplace, we've really filled in a number of holes on the on the head count side in the last call. It three to four months that were.
Open positions for us.
And as we look into 'twenty two.
Already advertised that we put in.
And <unk> and Salesforce, which we think will help us from the origination and client.
Expansion capabilities, but in the short term, we're going to have a little bit of elevated expense side on the technology front.
Okay awesome. Thank you.
Next I guess kind of turning to loan growth you guys had nice annualized loan growth this quarter at all.
Just curious on your thoughts on this growth moving forward and just any color on the outlook on loan growth through the pipelines would be very helpful.
Yes, just a couple of comments and then our.
New Chief lending officer will tell us about the pipeline a little bit, but generally speaking you know we've always been content with that median level peer growth of 5% to 7% median level.
But of course this last quarter, we began to accelerate.
A 10% annualized pace so.
So we like that 75 to 100 million number all the time and were finally gathering a little different conversation from our clients from one of building liquidity to one of leveraging now and using that liquidity to expand and take on new projects.
Things have been fairly robust and I'll ask Steve wants to give us a little color on the pipeline as we see it across our entire footprint.
Yeah, Good morning, Evan.
I wouldn't worry.
With Mark's comments, there we've had several conversations with borrowers who are expressing increased optimism about deploying some of that liquidity.
Absent another COVID-19 curve ball as we all know, but but we have clients reaching out to us expecting expressing optum.
Optimism about the year ahead and.
Interest in borrowing making us aware frankly that we may have some purchases were interested in particularly on the equipment side.
That when those things become available when the supply chain normalizes.
But we will see some activity. So I think you know.
We've got a.
That $90 million to $100 million looking out.
And the pipeline in fourth quarter more like $25 million, we're looking to fund.
But again feel good about the pipeline as it stands we have had good conversations with borrowers were also all the P. P. P loans, we did we had new clients to the bank obviously in that case, and we are looking to mine those opportunities as well.
To maintain a prudent growth strategy that we've always employed.
Okay.
Thank you.
Yeah.
Thanks for that color and then kind of turning with that loan growth to just.
This quarter, you saw margin expansion and that was really driven by <unk>.
Average, earning asset yields improvement, which were driven by.
Partially.
Benefit and.
Your core loan yields. So I'm just curious you know you had mostly stable funding costs I'm just curious on the drivers of margin. How do you think about these levers moving forward and just where do you see margins playing out over the next couple of quarters.
Yeah, Yeah. Good point I think funding costs, we feel it's certainly hit the bottom of the.
The curve.
We were flat on deposit costs from from the linked quarter and I would suspect that's going to stay in that same range.
The majority of the of the funding that's going to go away I would suspect over the next two or three quarters is probably in that zero cost funding level is those clients certainly on the business side start to utilize that so I don't think we'll see much movement going forward on the funding side, but on the on the asset side, we were up 10 basis points from the linked quarter.
If you net out PPP.
From from both quarters, and I think of that half of it was.
We'd had a little bit of a pickup from some nonperforming interest on some nonperforming loans that paid off in the quarter. So call it five basis points of core.
NIM expansion, all driven by not only loan growth, but better yields on both the bond side and the loan side. So I would expect that level of growth and trend line to continue over the next.
Two to three to four quarters call. It a five to 10 basis point improvement as loans and loan growth start to pick up here are based upon our expectations and Evan. This is Marc just a high level comment as everyone knows and we reported for many quarters now that.
Our balance sheet of ours is clearly asset sensitive so we've borne the brunt of that on the way down.
Bit optimistic that we can.
Potentially moved out a bit wider as the yield curve steepens a bit and as we continue to expand our balance sheet. So.
We've taken a little bit off the table and taken some duration risk on that NGL 15, one.
Or P. C. G 15, one mortgage product.
<unk> done exactly what we wanted we knew there'd be a bit of a slowdown in the commercial arena in 2021, when do we need to bolster that with another product and that we came up with that a private client 15 year, one and it's been real nice for us in the.
The quality of the client and the Ltvs have been really good so we're pretty optimistic on where we find ourselves.
Awesome and you guys mentioned.
You mentioned PPP revenues, netting out, but just an update on that I think you know that grew 360 <unk> in the quarter you guys remaining you have what 500000 is that right.
Yeah.
Elaine unamortized fees I would suspect by the time, we get to 12 31 were going to have.
Maybe 20 loans left theyre going to go to full kind of maturity pay out just because of whatever happened with their understanding of the program, but it's going to be de minimis.
So I would suspect the bulk of that 550 is going to go into our earnings in Q4 and will really be a totally clean slate on PPP in 'twenty two.
Awesome. Thank you and then just kind of touch on liquidity has been in discussion.
You guys saw more deposit growth this quarter.
Are you guys thinking about balance sheet and just deposits moving forward.
Okay.
Well, we like we'd like to thank everyone. We're pretty good at what we've done we certainly are aligned well with our Treasury management services, which cleaned up a lot of these.
The lending that we do in all of our markets. So here we are sitting with.
The amount of liquidity and trying to deploy it in loans.
Albeit defaulting to the investment portfolio. Unfortunately.
But that said we continue to see that.
Everyone is pretty insistent on retaining that liquidity, but we have now as I mentioned began to see a little bit of <unk>.
Clients discovering the power of leverage if you will that they can take that 100000 that they had in their checking it now levered into a $1 10 to one kind of thing at the at the outside and so we've begun to have those conversations which I think has led to the development of a $25 million production in the next 30 to 45 days coming out.
The pipeline and then having a nice pipeline going into the middle of the fourth quarter.
So we don't see that going away, we see individual spending the money, but profits are good our confidence is high and we like our positioning taking care of all of our clients it's been good.
Awesome. Thank you that's very helpful. And then I think just a couple of in house questions for me I know you guys mentioned your repurchase program.
How many.
How are you thinking about that moving forward at your current price.
Do you I know you just announced this increased.
Increased dividend or just how are you thinking about this moving forward and just how many shares you have left on that and if you could remind me.
Just a comment Tony ill give us all the details.
Just at a high level, we talk about the strategy and we look at the sub debt, we raised at $365 million to $20 million, which sits at the holding company but.
The robust profit that we've realized has enabled us to we think make a good investment decision. We're looking at a potential M&A when youre talking 130 to $1, 48% of tangible book and we can do our own a 105, we think it's a pretty.
Pretty merited strategy that we've been able to deploy through profitability Tony.
Tony I'm not sure how much we have left I know it yeah. So we did 106000 107000 in this quarter, which was down a little bit from the linked quarter.
We still have 520000 remaining as we sit here today and we've done it we've done probably.
50000, thus far in the month of October So I would suspect we're going to be on that pace of you know.
150 to 200000 a quarter.
So we will probably be done with this allocation by.
June or July of 2022, and I think the board and all of US feel that at these prices. This is phenomenal use of our capital given our earnings stream and we don't anticipate backing off from our strategy.
And just a just a closing note that revenue and we continue to look at all of our capital strategies.
How do we make sure that we're.
We're recognized for our performance at eight or nine times trailing 12 months EPS is not terribly rewarding, but we think theres a lot of embedded value there. So.
You need to look at all of our capital strategies to improve market cap.
Our presence in the market.
Awesome Yeah.
Your point on M&A, just you know I guess, we all know the out you know.
The dialogue has picked up in the industry have you noticed that pick up in dialogue or you had any interesting conversations just any.
Any color on that would be very helpful as well.
Yeah, we continue to have meaningful conversations with individual banks that would be marginally smaller than us certainly nothing on a parity basis.
At this juncture.
But that said our currency doesn't provide tons of.
Paths to prosperity, but that said, we have certainly have plenty of capital to get something done there's lot I think of opportunistic kind of.
Potentials out there that we continue to talk with.
They are not going to overpay, we've been very disciplined on how we build the franchise organic we think is the way to prosperity.
But certainly M&A is kind of divine kind of a thing we continue to look at that but we want to be smart about it we want to make sure its accretive to certainly EPS and minimal tangible book value dilution that we would find a path back to in the.
354 to four and a half kind of period on a payback basis.
But conversations are good but as we all know when we've declined from many many thousands of banks down to 5000 performers are clearly left and so oh the.
The market is trading at the numbers not seen for a long time so.
We need to get our currency to where we have.
A little more.
Opportunity in the market to pay a higher number than where we're currently trading and we certainly look at those options today as we speak.
Yeah.
Awesome. That's it for me guys. Thanks for taking my questions and great quarter.
Thanks, Evan <unk>, Brian we settle out the calculator.
Alright sounds.
Sounds good guys alright.
Once again, if you would like to ask a question. Please press Star then one and please wait while we continue to poll for questions.
Yeah.
Okay.
Okay.
If there are no further questions I will now turn the call back to Mark Klein.
Thank you and once again, thank you all for joining US. This morning, we certainly look forward to speaking with you in January of our full year and our fourth quarter.
Have a great weekend, thanks for joining take care.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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