Q1 2022 SB Financial Group Inc Earnings Call
Good morning, everyone.
Algorithms and the SB financial first quarter 2022 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.
That will open the conference up Dominion buses now to you for questions and answers.
I will now turn the conference over in a ceremony with SB financial.
Financial Please go ahead Sir.
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 Your state Bank Dot com.
Joining me today are Mark Klein, Chairman, President and CEO , Tony Cosentino, Chief Financial Officer, and Steve Boyle, Chief lending Officer.
This call may contain forward looking statements regarding <unk> financial performance.
And their stated plan 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.
The big financial undertakes no obligation to update any forward looking statement, except as required by law. After the date of this call. In addition to the financial results presented in accordance with GAAP. This call will also contain certain non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP measures is included in our earnings release.
I will now turn the call over to Mr. Klein.
Thank you Sarah and good morning, everyone and welcome.
Turning to our first quarter 2020 conference call and webcast.
We issued our earnings for the first quarter.
With the start of the year to what we all know it may be a challenging year for many banks.
In the midst of these headwinds we remain focused on the screen.
Adding households for greater scale more services in those households, and remaining that preferred provider of additional services to our now over 36.
<unk>.
At the same time, we were especially pleased and honored to be included in <unk> Bank on the rule of high performing banks for the second year running now inclusion in a select group of publicly traded banks this year 117.
Strong statement to our earnings trend over the last 10 years.
I'd like for this quarter included $900000 pretax mortgage servicing right recapture and include net income of $2 eight 1 million down $4 3 million from the prior year quarter and when we adjust for non-GAAP impact in 2022 net income was $2 1 million.
Earnings per share <unk> 40.
Which is reduced to 38 cents per share when adjusting for the servicing rights recapture.
Net interest income of $8 5 million down nearly 12% from the prior year that was driven by the impact of PCB forgiveness in 2021.
Adjusting for the PPP impact.
Result in.
Generally flat to the prior year.
Loan balances adjusted for PPP, we're up from the prior year quarter by just over 56 million and the linked quarter $28 million.
Deposits continue to grow up $25 million from linked quarter $18 million in the prior year expenses down 50000, due to lower mortgage commissions and higher vacancy levels.
Mortgage origination volume.
87 million down 38% from the prior year, 23% from last quarter.
Our quality metrics were improved from both the prior year quarter.
Our level of 42 basis points of non performing assets remained strong.
We were comfortable with a zero provision during the quarter due to our strong asset quality metrics higher.
Higher reserve level and.
Negligible net charge offs for a quarter.
As we conveyed in our annual meeting in many quarters before we continue to reiterate that future success of our company is driven by our five key initiatives growing and diversifying revenue more scale with organic growth and of course, M&A went opportunistic more products and services for our client base.
Excellence in operations and customized client communication and of course asset quality.
First revenue diversity.
Peak title.
To provide support for our residential mortgage efforts, while expanding its reach into more clients outside of just APAC.
We completed the purchase of that small title agency in northwest, Ohio again 2021.
And the integration into these markets with our lending team has been very well received.
In addition, we now have a commercial lender to complement our existing residential real estate and title insurance business now and Indianapolis.
In fact, we were able to do a bit of commercial title business in the quarter to supplement the decline in residential volume.
To ensure our commercial traction remains we have even increased our incentives to our lenders to ensure that utilize our own title agency.
And the results are beginning to pay off.
Although mortgage originations in the quarter were below our $100 million, we feel good about the level of production in all of our markets given the headwinds from rising rates and continued compressed housing inventories.
Over the last 12 months, we have still delivered nearly $550 million in total mortgage origination volume.
Our private client group mortgage product, we developed in 2021.
It has enabled us to book approximately $57 million over the last 13 months that we would have missed absent launching this initiative some time ago.
Our wealth management group continues to be a key differentiator for our company, particularly as the.
As the number of our competitors appear to have adopted a more remote presence in this high touch business line.
Total assets under management ended the quarter at 561 million in revenue generated for the quarter was 955000.
Secondly, more scale.
Loan growth was positive in the quarter as we increased $28 million from the linked quarter net of PPP or an annualized 13, 6%.
We now have had positive adjusted loan growth in three of our last four quarters.
Compared to the prior year net loans were up seven 1% nearly all the way back to our high single digit low double digit rate that was more of the norm for our company pre pandemic.
Pipelines are building all of our markets and as I mentioned earlier, we recently named a new market and lending executive and the robust Indianapolis market.
This is a market that fits our product lineup well and we expect to mirror. The success that we've had in the Columbus market over time.
Our deposit base expanded to 114 billion up another $18 million from the prior year with impending rise in rates, we do expect that deposit pricing will return some normalcy during 2022.
Although we still have ample liquidity.
Our customers have slowly begun to spend and we will be focusing on hedging rising rates and continuing to grow deposits, albeit.
With a mild duration extension and appropriate pricing.
Third deeper relationships and more scope.
We ended the quarter with $1 billion remaining in PPP loans.
As we look back we were able to help a number of our clients and acquire new ones as a result of our flexibility and commitment to assist our businesses with those liquidity needs.
Our strategy was to take the majority of $5 million in fees from the program.
And build our loan loss reserve this past year by over $4 5 million.
Creasing it to nearly $14 million.
As it turned out the program was certainly a lot of work as we all know for SaaS.
It was a significant disruption.
But it was a great win for our franchise, a huge benefit to our clients and particularly the 200 prospects that we've developed and to new clients.
Now that at the end of the PPP program was within sight, we are being really returned to our traditional <unk> SBA lending strategy and in fact this quarter delivered gains on sale of 168.
Operational excellence our fourth.
Mortgage refinance volumes slowed in the quarter as the movement in rates made the refinance segment of our strategy certainly less attractive.
For the quarter, 14% came from internal refinances, 23% from external refinances and.
Pleased to report purchase and construction lending was 63% of our volume.
However, we are encountering a low inventory in all of our markets and certainly increased competition for new deals.
Expense levels for the quarter were down from the prior year literally having a third less in mortgage volume reduced commission expense and last year. We also moved all of our support staff in the mortgage arena too.
More of a profile compensation model that has realigned our levels of compensation.
Our levels of production.
We understand that the mortgage business line is highly variable and our model continues to be built for $500 million to $600 million in annual volume.
We will continue to look for ways to make the business line more efficient.
Of course more profitable.
As we have discussed in prior quarters. The variable here is not the level of production, but rather the number of producers to achieve that volume.
As such all of our regional real estate leaders are recruiting MLR rose everyday.
We think there will continue to be more disruption in the arena among our competitors and as we remain committed to the business line, we expect to leverage our products.
Our brand and our strong market presence to achieve our production goals.
Finally asset quality.
As we revealed last quarter, we were confident that $1 6 million in Oreo properties would sell this quarter, which they have.
And thereby has reduced overall npa's by nearly $1 million for both the <unk>.
Prior year and linked quarter.
However, our level of nonperforming loans.
Elevated a bit due to the slight increase in our residential loan portfolio.
As our communities have begun to allow the foreclosure process to move forward, we do expect to improve our metrics in the coming quarters.
As I stated earlier record earnings in 2021 from PPP of mortgage sales allowed us to build our reserve level, which now stands as I mentioned $14 million and 162% of loans.
Net charge offs were just $1000 in the quarter and we certainly have a runway within our reserves to easily handle anticipated loan growth throughout the year.
Now I'll ask Tony to give us a few more details Tony if you want on the quarterly performance.
Thanks, Mark good morning.
Again for the quarter as Mark stated, we had GAAP net income of $2 8 million or <unk> 40 per.
Per share.
And as Mark also another our earnings were impacted by the 900000 recapture of our prior mortgage servicing rights.
As we adjust for this recapture item net income would have been $2 1 million for the quarter.
Of which those highlights include.
Operating revenue down 35% for the prior year and down eight 9% from the linked quarter PPP forgiveness in the impact of the slowing mortgage business impacted our results.
Operating expenses were down nearly 1% from the prior year.
Margin revenue was down over the prior quarter due to the $1 $3 million decline in PPP for giving us revenue.
We were able to grow core margin a bit with loan growth and reduced funding costs that helped to offset the rate declines in the loan portfolio.
Now as we break down further the first quarter income statement, starting with market as I said net interest income was down 11, 9% for the prior year, but would be up one 8% when we adjust for the Pvp forgiveness.
Our average loan yield for the quarter of three 9% decreased by 72 basis points for the prior year.
Which would be reduced by 43 basis points with TPP is excluded.
Loan yield comparisons are impacted by the fees of the PTP Port, Florida, which are nearly all realized.
As such we earned nearly $5 billion in fees and interest for the program the bulk of which was taken during 2021.
On the funding side, we again reduced the cost of our interest bearing liabilities for the prior year for the quarter the rate on our interest bearing liabilities was 39 basis points, which is down from the prior year by 11 basis points down from the linked quarter by one basis point.
Net interest margin of $2 68 was down 53% and 21 basis points for the prior year and linked quarter.
Excluding PPP margin is down by 25% non and 90 basis points respectively.
Excess cash on our balance sheet continues to impact our market, but we are.
Optimistic that expanded loan growth and increased consumer spending will improve our balance sheet mix.
We clearly believe we are at the bottom of the cycle on margins.
Total noninterest income of $5 8 million was down $5 1 million or 47% from the prior year, reflecting lower mortgage volume and a $1 8 million negative swing in servicing rights.
If we remove the impact of the mortgage business line from fee income in both 2022 and 2021 other noninterest income would be up eight 8%.
Total residential gains on sale came in at $1 7 million, which was two 3% on our sold volume of $72 2 million.
As expected average yields on loan sales have tightened in this quarter was equally difficult due to the rapid rise in rates.
Our hedge position allowed us to lower the impact of the rate moves, but we do feel that this is the bottom of the curve on yields.
Our servicing portfolio is now nearly $1 4 billion with over 8600 loans and provided revenue for the quarter of 862000.
The market value of our mortgage servicing rights improved significantly this quarter with a calculated fair value of just 105 basis points.
This fair value was up 20 basis points from the prior year and up 12 basis points from the linked quarter.
Now have a servicing rights balance of $13 1 million in remaining temporary impairment of 600000.
Rising rates should provide additional momentum for future recapture.
Total operating expenses this quarter were $10 9 million, which were down 54.
Prior year, and down 708000, or six 1% linked quarter.
Our headwinds included rising labor costs, and technology spends with offsets from open employment positions and production based incentive pay.
Now, let me turn to the balance sheet loan Outstandings at March 31, 2022, So the 850 million, which were 63, 7% of total assets of the company.
As we have discussed in prior quarters deposit levels are well beyond expectations and is certainly impacted to a lesser growth.
We continue to optimize our balance sheet as appropriate and are optimistic that our team of commercial lenders and Treasury management management staff will identify additional opportunities to rebalance our assets.
As we look at our capital position, we finished the quarter at $132 6 million, which is down $11 3 million or seven 9% from the prior year.
With our equity to asset ratio standing at nine 9%.
On a per share basis tangible book value of $15 31 is down compared to the first quarter of 2021 due to the bond portfolio unrealized loss.
If we adjust for OCI year over year tangible book value would have increased by two 6%.
Buyback continued at a brisk pace this quarter with 131000 shares repurchased at an average price of $19 60.
Total nonperforming assets of $5 6 million or 42 basis points are down 900000 for both the prior year and the linked quarter.
Including in our numbers are 700000 in accruing restructured credits.
These restructured loans elevate our nonperforming level by six basis points and absent them. Our total nonperforming asset ratio would be reduced to 36 basis points.
As Mark indicated provision expense for the quarter was zero and our loan loss reserve is up for the prior year by $500 or three 6%.
Now I'll turn the call back over to Mark.
Yeah.
Thank you Tony a solid start to another year, albeit with a completely new conversation about higher inflation higher rates steepening yield curve higher mortgage rates that will drive more stable operating revenue and add scale and improved.
Asset mix.
In addition to the Great News, we received regarding our inclusion in the <unk> rollout once conclude with acknowledging the two events. This quarter that a continued our pattern of returning earnings to our shareholder base in a meaningful way.
First in February as you all know, we announced a 5% stock dividend and just this week, we announced a common stock cash dividend of <unk> 12 per share.
Which equates to a 30% approximately payout ratio and now a dividend yield of 244%. We continue to look for ways to prudently returning capital to our shareholder base.
Now I'll turn it back to Sara for questions.
Thank you and now we are ready for our first question.
Thank you and as a reminder, ladies and gentlemen, if you would like to ask a question. Please press Star then alone.
First question comes from Brian Martin with Janney Montgomery. Please go ahead.
Hey, good morning, guys.
Hey, Brian Good morning, Brian .
Maybe just a couple from me.
Just if you talk maybe just start with the just the news on the India expansion or just kind of that kind of what the outlook is there can you share a little bit more just on kind of what the what the plan is there I missed some of what you said, but just I heard youre going to India, and just kind of a what capacity and how are you thinking about that over time.
Yes sure.
<unk> talked about for a while as you all know we have <unk>.
Five mortgage I'll now for mortgage producers on the mortgage side there.
And Andy and doing some good work.
We had committed to expanding that region as well as the Columbus region.
And we now have an individual that has been in that market his entire life.
Some years in the commercial arena with a nice.
Portfolio of PSEG kind of lending balances and we're happy to have him with us. He has a larger bank experience and some community bank experience and we are looking for the $67 million growth in that market, Brian the last half of the year.
Got you, Okay, and so the plan would be just to build build the team around this person is that kind of over time, what youre thinking.
Yes.
You know we started in the Columbus market on the commercial side and then expanded in the residential and that's when we started the other way around and there's going to be some nice synergies between the group that we have there that also includes now.
Title insurance Lady who is helping us certainly with the expansion of peak underway Indianapolis, but now also a gentlemen, thats kind of be able to.
Tag team, if you will with our staff there and find some synergies between all those individuals'. We're looking forward to some great results like we have done in the last 12 13 years in Columbus, Yeah. Okay. No. That's exciting and then maybe just secondly, just high level on.
Maybe for Tony just Mark whomever, but just on the on the mortgage outlook given kind of what we've seen happen hearing just knowing your model is more of a purchase model, but certainly benefiting from the refinance activity just kind of how youre thinking about.
The volume change and kind of where the gain on sale margins are it sounds like there are obviously, a little bit lower for across the board for the industry, but.
Just any any kind of context, you can provide on that how you are thinking about it.
Yes, Brian .
Tony I'll clean all itself, but as you know we've dipped our toe into the <unk> World and Thats been nice for US is it gives us some great balances much to our chagrin. Obviously, you got gain on sale not only the volume is down but the gains as well.
We continue to expand in the Indianapolis market and certainly Columbus.
But as I mentioned also we're built for that $5 and 600 million and so.
We're bringing some additional people on as we speak and our expectation is we're going to deliver our numbers, albeit with more people at a variable cost structure in which we like.
The comment, yes, I think I think Brian .
We look at volume I do think it's a it's a person play I do think generally the market is going to be down.
Our numbers are down call it 38% on a year over year basis are in line with everybody Thats reported thus far in between somewhere between 30% to 40%.
I do think first quarter is a bit of an anomaly because of the craziness with rates I do think it will kind of settle into a 25% is kind of a year over year changeover.
So it will be up to us to take advantage of maybe some people that are that are backing out on the yield side.
I do think this has been the bottom of the market in the first quarter was especially tough on pricing.
And.
Our hedge is helping us quite a bit because we have a very good team of lenders that bring.
Very high percentage of.
What we contract to the to the finish line and I think that's very important for us we've gotten very good at it.
And I do think that two to three number that we had this quarter will trend up.
I'd like us to get back in the two four to two five range by the end of the year and I am hopeful that thats where were trading.
Gotcha Okay.
Just to be clear on the volume Tony is kind of maybe 25% off of if you look at the base. It was in 2021 is that kind of how youre thinking about that kind of haircut off of.
The total for 'twenty, one or is it just kind of.
And we did $700 million in 'twenty and $600 million in 'twenty one calendar.
25% I'd say, we're somewhere in that $4 50 to $4 75.
Target range as we look out as we sit today, but that's really all dependent on on.
The denominator, if we get more people on the ground I think we have a chance to have that maybe on the higher end of that number.
Yes, no that makes sense, okay I appreciate it and you sound.
Either one of them just optimistic on the loan growth front, a couple of quarters here three of the last four had nice.
Nice positive trends and just how are you I guess you.
I mean kind of the pipeline it sounded like there are good I guess are you optimistic that these.
And these kind of trends are sustainable or just you know maybe just any context on what you're hearing from your customers on on loan growth.
Yeah. Thanks, Brian Steve is here and he can certainly make some comments on what are you seeing in the pipeline but.
As we've communicated for many quarters, we expect the fundamentals you make joint calls we make individual calls in and we know if we stick to those fundamentals, we're trying to find some things, albeit at lower maybe rates than we want competition is pretty pretty key.
But we're finding some good traction and the nice thing is that Brian .
It's really coming from all the markets.
One one months, we'll have one market, that's making the $5 million contribution next month, we'll be growing five nine in a different market. So we love our diversity of our geography, and I know, Steve will probably seeing growth generally in everyone's pipelines.
Yes, absolutely Mark I would reiterate exactly what you said about the broad based.
Our growth we've seen in our footprint, both our rural markets as well as our urban markets.
Solid pipelines coming out of the fourth quarter, which we realized here in Q1 and our pipelines today are are as good as certainly they were coming out of the fourth quarter. So I feel good about where we are in the second quarter.
Okay, and assuming your optimism maybe there'd be that upper single digit mid to high single digit growth for the year. It seems attainable given where the pipelines are today and kind of the general outlook.
I think today, that's reasonable we don't it's hard to anticipate in the third and fourth quarter, what the interest rate environment May do certainly hard to believe we're talking about it but global events and what effect. It may have on the third and fourth quarter.
What we hear from clients.
Steady as she goes and we expect continued.
Continued loan growth.
Particularly as assets become available to borrowers, we still see constraints with equipment supply.
Wafer supply in some cases, the constraints of what those opportunities are merely waiting.
For those supply constraints to.
To be reduced and Brian is probably maybe as important as anything managements expectations of growth remain high.
And the variable is the amount of work to get it so.
So, yes, we're pretty fixated on that high single digit we'd love low double digit we don't want to be at the top quartile and being prudent in our lending practices, but we've remained pretty steadfast in how we do our loans and how we underwrite and the expectation of getting it back so.
Patients remain high and that drives a lot of our calling efforts.
Yeah, Okay, no it sounds good and I guess, maybe just.
Kind of to the margin and the rate hikes, and how that impacts things and maybe just how you guys are thinking about the the mix of the balance sheet today, given the elevated level of cash and securities and just how did things play out the balance sheet really kind of grow from here or is it just a remix of.
You put this loan growth on your kind of remixing it from the liquidity, but just any context on that and then how the how the rate impacts the rate potential rate increases will influence the margin.
Yes, Great question, Brian I think all banks are struggling with today.
We look at where we were at Q1 net of PPP.
Margin of $2 66.
I think obviously as well.
Well as we've ever seen it.
Optimistic we've got.
Call it 8% growth in that by the end of this year, which puts us kind of on the verge of a 3% margin number.
That's obviously contingent on the biggest part of that is going to be loan growth that we're extremely bullish I would say about Q2.
The bulk of our portfolio is variable call. It 78, plus percent, but only about $130 million to $140 million of that is just directly related to product. So.
We will get immediate pop on the $130 million based upon a number of rate rises that we have and we think theres going to be.
Call. It 100 to 150 basis points between now and the end of the year, that's kind of where we modeled.
And then the rest is variable portfolio will move over time. So I think generally we feel good about where we are.
Our current sensitivity is about 11% on an up 300 basis point move, which we think is kind of in line with what every other bank community Bank is on an asset sensitive basis. So.
I would say, that's where we are and that's what we're looking at.
Okay, and how about the mixed Tony how are you thinking about that.
The balance sheet today.
In terms of does it is it just really remixing and are you still seeing deposit flows where maybe the balance sheet grows a bit from here or is it.
It's more just a simplistic that you're going to grow loans and funded from that liquidity that you have to improve the you have to add to the margin expansion.
Yeah I think.
That's the big question for all of US I do think.
Deposit growth has.
Pete.
I do think we're going to see a little bit of opportunistic moves on deposits.
We've got we had a 100 plus million dollars in cash that we.
Kind of selfishly left on the sidelines, because we had enough mortgage.
Net income to sustain us.
And I think if that money gets moved into predominantly loan side I don't anticipate us moving the bond portfolio much higher than it is today and we will gradually begin to move that down as we get kind of the normal amortization.
So I think it's all about mix for us I mean, I think our total asset base, which was $1 billion three and some change will be in.
1 billion $2 75, or so at the end of Q2, just because of the reallocation.
The other wildcard Brian I have to say this because I watch it all the time and I keep track of it.
As a not only a referral perspective that we're consistent.
But those 8600 households.
Less than one additional service in each household we're working hard to expand that mortgage portfolio that we worked really hard to find the last 12 years. So that continues to be a wildcard for us and I know Tony as expectations are that we not only rebalance our mix, but also expand the size and scale.
We know that's an opportunity that we continue to lever that to build the balance sheet.
I think is an advantage for what was done last 10 years.
Yeah, no that makes sense.
Alright, maybe just.
Yes.
Two from me was just on the expense outlook, just given what we're seeing with <unk>.
Competitive pressures in the market on the inflationary front.
I guess, if you look at where the expenses are today is it is it I guess a.
Pretty good run rate to build off of as you look at the balance of the year I guess are you seeing potential.
Potential.
Higher higher levels of expenses, given what's going on in the marketplace.
They need to hire people.
Well you hit the nail Bryan.
Brian .
Witnessed fairly strong headwinds on staffing.
We've addressed them head on.
Adjusted solve several times.
We certainly think we have a great palette of benefits for SaaS, but those continue to rise which is why were so insistent on.
Identifying and gathering that scale, but.
We do have a good variable based model as we mentioned on the mortgage side I think we got that right in terms of we'd love to be having more commission expense because we all win when that happens, but if thats down obviously, our incentives are going to be down and with that our compensation expense.
All of the spend is still way out there.
I think as rates rise a bit and maybe slightly on the economy slows a bet that wont be as many openings.
Which I think will have a corresponding FX effect on our P&L, but tony's comments on expenses, otherwise, yes, I think.
I think the same pressures that everybody else is talking about we are seeing I think the.
Put it kind of a different way and a way to look at our total call. It net income basis I think we.
Probably put.
Could've done some more technology things with our PPP and mortgage money, we put that in reserves. So I think that gives us the ability to grow.
And maybe we have to encounter some of our expense raises.
Here over the next 18 months, we certainly know we've got to look at our branch structure and there are opportunities there.
In other things, but.
I think your first statement was it's a good base to move upon based upon where mortgage volume will be variable.
Gotcha Okay.
And I think just the last one was just on the buyback and the capital return it sounds like the expectation is that.
At least the.
The continued expectation that there would be some further repurchases depending on how opportunistic you are on the market with that with the stock price but.
Assuming that that cooperates then the expectation would be that continues at least in the near term.
Yes, absolutely we still got.
But a good bit of runway left on our existing authorization I would think we could stay at these quarter quarterly levels further.
Next two quarters and still we look at it probably in Q4 of this year, but we still think it's a great value for our internally generated capital and we've got we've done a number of capital raises we did the debt issuance last year. So we don't think having an aggressive buyback in any way you can flex us from being able to do whatever we can.
Need to do organically or strategically.
Right.
How much is left in the buyback today, Tony or if not I can look if you haven't if you don't know it right now no big deal.
340000 ish somewhere in that range, because I think that.
150 per quarter. The next two and then sometime in Q4, we probably.
On the back end it would probably be looking at where we are.
We visit okay, perfect alright, well on a nice quarter and good update guys. Thanks, so much.
Thank you Hi, Brian Hi, Brian Brian .
Ladies and gentlemen, as a reminder, if you wanted to ask a question. Please press Star then one.
There are no further questions I will now turn the call back to Mark Klein.
Thank you everyone for joining us. This morning, certainly look forward to speaking with you in July for Q2 here in the year of 2022, Thank you for joining and Goodbye take care.
Thank you everyone. Today's presentation has now concluded and we thank you all for attending you may now.
Your lines and have a wonderful day.