Q2 2022 SB Financial Group Inc Earnings Call

Good morning, and welcome to the SB Financial's second quarter 2022 conference call and webcast I would like to inform you that this conference call is being recorded and they've all participants are in 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 Sir.

Thank you and good morning, everyone I would like to remind you that this conference call is being broadcast live over the Internet and will be archived and available on our website at IR Scott Your state bank's dotcom.

Joining me today are Mark Klein, Chairman, President and CEO , Tony Constantino, Chief Financial Officer, and Steve well peak lending officer.

This call may contain forward looking statements regarding SB financial's performance.

You stated plans operational results and objectives.

I've been 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.

Could 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.

That'd be 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.

Yeah.

Thank you Sarah and good morning, everyone welcome to our third quarter conference call and webcast.

For the quarter, including a small mortgage servicing rights recapture of 239000 include the following net income as we disclosed in our earnings release, $2 8 million down 1 million or 5% from the prior year quarter on a year to date basis net income was $5 6 million.

The year to date impact from the PPP initiative on our results compared to the prior year as a reduction in revenue $2 1 million and net income of $1 6 million withdraw.

Return on average assets of <unk>.

87% up from prior quarter.

Quarter 83 diluted EPS of <unk> 40.

Net interest income of $9 6 million was up four 8% from the prior year as loan growth and rate increases were supplemented by the 12, 4% reduction in that.

Interest expense.

Loan balances from the linked quarter rose $45 million and when we adjust for PPP balances loans.

Loans are up nearly $80 million.

Our strong nine 7% compared to the prior year.

The annualized our first half loan growth was 17, 7%.

I drove our loan to deposit ratio up from 75% to $84.

Deposits declined from the linked quarter by $66 million and were down $19 million from the prior year.

Expenses were down 274000, or two 5% primarily due to lower mortgage commissions.

Mortgage origination volume for the quarter was $95 million down $69 million and 42% year over year.

The mortgage business line contributed $4 7 million in total revenue for the first six months of the year compared to $12 3 million for the same period in 2021.

Don.

Asset quality metrics improved from both the prior year and linked quarter and our consistent level of 42 basis points.

Nonperforming assets remained strong.

<unk> tangible book value when adjusted for OCI.

At $10 53.

As with prior quarters, we continue to believe that our focus on our five key strategic initiatives will drive our future success.

Our revenue diversity and expansion organic growth scale more products and services in that household for scope excellence in operation then more intimacy with client communications and of course asset quality.

Revenue diverse.

Peak title will continue to bolster revenue this quarter by nearly 700000 net income by 168 or nine cents EPS annualized.

We made a strategic shift last quarter to.

Generally follow legal protocol and required title insurance on nearly all real estate transactions, while driving operational revenue higher with a more intentional focus on our commercial real estate segment.

These initiatives are responsible for the 23% increase we delivered in revenue and 12% of net income.

This quarter mortgage volume and loan sale gains were down from the prior year, 42% on volumes.

72% on gains.

For the trailing 12 months, we have delivered nearly $500 million in total mortgage origination volume is down 24% from 2020 and 32% from 2021.

Our initiatives to drive our volume of private client originations higher are clearly working.

This quarter, 27% or $25 $5 million of our total residential real estate volume originated from our <unk> business line.

Of that production.

41% came from our Columbus market, 22% from northwest, Ohio, Northeast, Indiana and over a third from our newer Indianapolis market.

Outside of our <unk> initiatives higher rate than compressed inventories continue to constrain our level of production.

Non interest income decreased to $4 7 million from the prior year quarter of $6 5 million.

The current quarter includes a mortgage servicing recapture as I mentioned up 239000 compared to.

99, <unk> in the second quarter of last year.

Non interest income to total revenue remained relatively strong at 33%, but well below our expectations on historical levels of near 40%.

Our wealth management team contributed 936000 in revenue.

And are on pace to achieve total revenue in 2022 of nearly $4 million. Despite.

Despite the volatility in the markets that we've all witnessed we have retained balances in excess of $500 million and that includes $38 million on a brokerage platform.

Secondly, more scale.

Growth in the quarter was very good as we were up $45 million from the linked quarter and up $79 million net of PPP from the prior year.

All of our regional markets have very strong pipelines, including a number of client proposals currently in and under credit analysis.

With this quarterly gross noted we have now brought our book.

The last five quarters.

This quarter saw evidence of consumer and our small business clients, drawing down their liquidity and deposits declined from the linked quarter.

Funding needs to support our loan pipelines are already much more important today and as a result of our current deposit run off.

We have begun to selectively increase deposit rates. So not only is higher future registry, but also protect the existing balances and grow newer relationships.

Third.

More scope.

The traditional SBA market has begun to loosen a bit as we witness and at peak.

<unk> focus is currently all but gone.

Thus far this year with originated nearly $5 $5 million in qualified SBA products.

We continue to execute our strategies in each of our markets that include more calls on clients and prospects.

There is either a growth mode.

Or a business acquisition Mojo has identified a strong need for capital.

We remain committed to this true complement to our commercial loan production machine and intend to return to the production levels, we experienced prior to the pandemic.

2015 through 2019, when we average approximately $12 $3 billion production each year in that five year period.

Operational excellence, our fourth theme.

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The mortgage business line has certainly been a key contributor to our success for the entire past decade.

However rate increases operational challenges.

Construction lending limited housing inventory and a rapid increase in inflation have compressed our volume.

That said, we have focused on flexibility on our products and structure.

Remain to improve our market share.

With Freddie fixed rate pricing now at or above 5% our portfolio arm products have become certainly more relevant.

These portfolio of Walmart's have increased our balance sheet outstanding.

The potential for expanding margins as rates rise.

Expense levels for the quarter were down for both the linked and prior year quarters, driven by the variable nature of our mortgage production.

As we discussed last quarter, we are evaluating the resource allocated to both our mortgage and retail business lines.

Our goal is that have been.

For the residential business line in the past six months.

To elevate our number of producers in order to keep our ecosystem in balance and optimize.

I am pleased to report that in the last 30 days. We have made offers to over a handful of MLR was and we have landed three of those producers, one and a greater west Central Ohio market Lima, and two additional producers in the Columbus market.

And Thats five over the same quarter last year and number of producers and brings our MLR number to 25, an increase over the prior year and up three or 'twenty two.

Additionally, we intend to selectively utilize some of our traditional retail staff.

Who do non salable consumer loans to originate some salable residential loss to more broad in our production capacity as we discussed in the prior quarter.

Likewise with walk in visits moderating in our retail offices are due in part by our commitment to leverage our digital platform to enable access to our clients' data 24, 7%.

We continue to reevaluate our hours, we staff and operate our offices.

This strategy and as all of the deployment of our new contact center that we delivered in early July that seeks to provide seamless service to clients using multiple communication channels.

Rebalancing our resources here with market requirements.

We will improve efficiency.

Our fifth and final initiative asset quality.

This quarter saw again, a strong result of key asset quality metrics.

The significant loan growth in the quarter, we remain quite pleased with our current allowance of nearly $14 million third point in 'twenty, one when PPP and mortgage refinance volume was adding to our revenue we chose to add $5 5 million into our allowance.

We do not intend to release reserves anytime soon.

Currently our level of allowance to total loans, 154% and our nonperforming coverage ratio is now 295%.

Both metrics are real.

Above the median level of our peer group.

And now I would like to ask our CFO , Tony Casciano to provide a few more details on our quarter Tony.

Thanks, Mark Good morning, everyone again, as Mark indicated for the quarter, we had GAAP net income of $2 8 million or <unk> 40 per diluted share.

So were a highlight this quarter operating revenue down $1 4 million or nine 1% as mortgage gains from lower volume and reduced sales percentage were down nearly $3 1 million or 72%, we were able to offset a portion of the mortgage periods with higher title agency revenue and deposit fees.

Loan sales delivered gains of $1 4 million from mortgage small business and AG loans.

And margin revenue was up 436000, or four 8% due to slightly lower funding costs and higher securities revenue.

Adjusted for PTT loan interest income was higher by 468.

Five 5%.

Looking further into our income statement for.

On the margin side, our average loan yield for the quarter $4, one 1% decreased by 22 basis points for the prior year.

It increased 21 basis points from the linked quarter.

Marc discussed earlier ppt impact on loan yields for 2021 was significant.

Is that in fact, our average loan yield would have decreased by just nine basis points from the prior year.

Overall, earning asset yields were up 20 basis points from the prior year and <unk> 49 from the linked quarter due to the change in mix of the balance sheet the higher loan growth.

Loan yields are impacted by the fees of the PPP portfolio, which were $2. One 5 million for the first six months of 'twenty, one compared to <unk> 98 for.

For the 2022 six months period.

As we've indicated funding needs and costs will begin to accelerate customer liquidity draws down and our loan pipelines are closed.

As we look at funding cost for the current quarter, our deposit cost of funds came in at 21 basis points with the cost for interest bearing liabilities.

At 36 basis points.

This compares to 22% and 39 basis points, respectively for the linked quarter.

Given the rise in funding rates, we were pleased with the negative data on funding costs in the quarter. However, we recognize that our liquidity was a bit high by our standards coming into the quarter and we expect deposit in overall funding costs to rise in the coming quarters.

Net interest margin of three 6% was up 22 basis points for the prior year and up 34 basis points when PPP is excluded.

Compared to linked quarter NIM was up 48 basis points.

That's significant NIM improvement from the linked quarter was driven by a positive change in mix on the asset side of the balance sheet is interest bearing cash was allocated loans and deposit levels declined.

Total interest expense costs were down from both the prior year and linked quarters.

Total noninterest income was down $1 9 million or 28, 5% from the prior year, reflecting lower mortgage origination and sales volume.

Which offset the 336000 positive swing in servicing rights recapture.

As I discussed last quarter gain on sale yields have seem to stabilize at the mid 2% level.

Gain on sale yield for mortgage sales. This quarter was two 4%, which is still strong historically, but well off from the three 6% yield in the second quarter of 'twenty one.

This quarter, our sale percentage, which is 52% and 63% for the year.

As we have done much more portfolio and private client loan originations.

These levels are well off from our traditional 85% sale percentage.

Our servicing portfolio. However, does continue to grow and is now at $1 37 billion and provided revenue for the quarter of 863000.

Market value of our mortgage servicing rights improved slightly this quarter with a calculated fair value of 111 basis points. This.

Yes fair value was up 27 basis points from the prior year and up six basis points from the linked quarter.

We now have a servicing right balance of $13 4 million in remaining temporary impairment of just 327000.

We have held expenses relatively flat for the last five quarters and for the year to date total expenses are down one 5% we.

We expect to expect to trend down in the coming quarters as we just resources in our retail mortgage business lines as markets Scott.

The impact of the mortgage business line under our efficiency ratio was significant as our 25% decline in efficiency through 2021 would be reduced to an 11% decline with.

With the results of that business line are excluded.

Now as we finish up turning to the balance sheet loan Outstandings at June 30 stood at $895 million, which was 69, 2% of the total assets of the company.

As we said the quarter saw a significant mix shift within our earning assets as we saw cash and securities declined by nearly $100 million from the linked quarter due to loan growth and deposit growth.

Our loan to deposit ratio ended the quarter at 83, 6% up nearly six percentage points into our highest level since third quarter 2020.

Looking at capital we finished the quarter at $124 6 million down $19 5 million or 13, 5% from June 30, with our equity to asset ratio standing at nine 6%. However, when we exclude the OCI at $22 million equity has grown from the prior year, despite nearly $7 million in stock by.

Backs at $3 3 million in <unk>.

Common dividends.

The payback continue the buyback excuse me continued in the quarter with 94000 shares repurchased at an average price just above book value.

We did also take advantage of our on balance sheet liquidity and purchased some additional fully policies in the quarter than some some time since we've added to this portfolio that has a nice benefit for both the company and.

Those participating employees.

And finally as Mark commented all of our asset quality metrics are improved and charge offs were minimal for both the quarter for the year to date.

Our reserves to loans was just two basis points down from the prior year.

Total delinquency levels are just 32 basis points in the quarter down 27 basis points from the linked quarter and down nine basis points from the prior year.

I'll now turn the call back over to Bob.

Thank you Tony I wanted to conclude again with acknowledging the dividend announcements, we made yesterday 12 cents per share.

Which equates to approximately a 30% payout ratio and a dividend yield approximately two 8%.

Clearly well mortgage volume and the resulting gains are off considerably.

Marginally higher rates and a steepening yield curve with our asset sensitive balance sheet provide some lift to our total operating revenue.

With continued organic loan growth with strong pipelines stable deposit cost standpoint catch all expense control.

We certainly expect to continue our earnings and growth momentum well into the second half of the year and then I'll turn it back to Sara for questions Sir.

Thank you now we are 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 Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And while we're waiting for any additional questions I'd like to remind you that today's call will be accessible on our website at IR Dot Your state Bank Dot com.

Again, if you have a question. Please press Star then one.

There are no questions at this time I would like to turn the conference back over to Mark Klein for closing remarks.

Once again, thanks for joining us on our conference call and webcast. We look forward to speaking with you again in October to discuss the third quarter of 2022 results.

Again for joining.

Goodbye.

Take care.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.