Q4 2022 SB Financial Group Inc Earnings Call
Good morning, and welcome to the SB financial fourth quarter, 2022 conference call and webcast.
I'd 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'll now turn the conference over to Sarah My guess 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 and I are that your state bank.
Joining me today are Mark Klein, Chairman, President and CEO .
Tony Cosentino Chief Financial Officer.
This call may contain forward looking statements regarding SB financial's performance anticipated.
Operational results and objectives.
We're 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.
That's the 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.
Reconciliation of GAAP to non-GAAP measures is included in our earnings release.
I will now turn the call over to Mr. Fong.
Thank you Sarah and good morning, everyone welcome to our fourth quarter 2022 conference call and webcast.
Highlights for the quarter net income of $3 5 million up 201000, or 6% from the prior year quarter and would've been up 38%, excluding the effects of the PPP program and the whole MSR recapture.
For the full year of 2022 net income was $12 5 million with diluted earnings per share of $1 77.
When we exclude the impact of Pvp.
Oh MSR from both full year earnings our results would it be off by just $1 2 million or nine 3%.
Return on average assets of 1.08% with return on equity of just over 12.
Net interest income of $10 9 million was up $1 8 million or just over 20% from the prior year as loan growth and increasing yields.
The increase in deposit and other funding costs.
Loan balances from the linked quarter Rose 37 million.
When we adjust for PPP balances over a 141 million.
Or 17, 2% compared to the prior year.
Deposits grew from the length or just slightly but were down $26 million from the prior year.
Expenses were down from the linked quarter by one 1% and for the year of 11, 2% decline.
Mortgage origination volume for the quarter was just $51 million for the full year $313 million.
The mortgage business lines contributed $7 3 million in total revenue for 2022 compared to just over $20 million for 2021.
This reduction of nearly $13 million in revenue it was difficult to fully overcome in 2022, however, our strong loan growth and expanding margins.
Did reduce the negative impact.
Asset quality metrics remained strong with NPA to just 38 basis points and for the second consecutive year.
Ported net recovery.
We continue to identify initiatives that will deliver our five key strategic initiatives.
Our revenue diversity and of course growth.
More scale through organic growth more products and services more households per scope operational excellence and as always ask Paul.
Revenue diversity.
For the full year, our mortgage business client generated $313 million in volumes well below our $600 million, we produced in 2021.
The impact of higher rates as evidenced in the percentage mix of volume for the full year with refinance of just 20%.
And purchase and construction lending of 80%.
This compares to 2021 wish split between refinance and purchase volume at 49% and 51% respectively.
Since we began the mortgage business line expansion strategy in 2006.
We have now originated over $5 billion.
Residential mortgages.
Overall non interest income decreased to $3 7 million from the prior year quarter of $6 six.
The current quarter includes a mortgage servicing recapture of 86000 compared to a recapture of 581000 for the.
Fourth quarter of last year.
When we exclude the full impact of the mortgage business lines from both years our year over year decline is just eight 5% compared to the adjusted level of a 43, 6% decline.
Looking forward, we fully expect residential mortgage volume has stabilized its something near our traditional levels of production. In fact, we are adding more mortgage lenders across our footprint in 2023 to deliver annual production at that run rate of approximately 500 million.
That said in light of the pullback in volume this year, we did achieve greater efficiency.
And the business lines as we right sized our background support.
To align staffing with the current level of production.
Yeah.
Our wealth management division faced risks headwind this year as distributions exceeded assets under.
Management, while the market contraction further constrain their contribution to our net income.
The equity markets, we're clearly under pressure during 2022 and that pressure was evident in our year over year decline, we experienced in assets under management.
Total AUM were down just over $111 million for the year or 18% to finish 'twenty to 'twenty two at just $507 million.
We delivered new assets from approximately 31 million.
60.
66 million in distributions asphalt market corrections.
And reduced our level of assets under management by another $76 million.
Despite these reductions total revenue for the wealth business line was that all just 86 million or two 3% and finished the year at $3 7 million.
We were able to keep our decline in revenue closer to neutral due to pricing adjustments that.
We implemented late 2021, and the lift we experienced from a renewed emphasis on our brokerage platform, which increased revenue this year by 24%.
Yeah.
Second initiative more scale.
Loan growth in the quarter was quite strong as we were up $37 million from the linked quarter and as I mentioned, the $141 million or over 17% net of PPP.
For the from the prior year quarter.
All of our regional markets continue to make inroads with solid pipelines and targeted call them as we implement our new CRM system.
With this quarterly growth noted we have now grown our loan portfolio consistently over every linked quarter during 2022.
We are committed to adding an additional lender.
And two of our key growth markets of Columbus, Ohio in Fort Wayne, Indiana, and leverage our newer one year presence in the Indianapolis market in 2023.
We also intend to place more emphasis on the C&I arena in 2023.
To provide lift to not only our level of higher earning assets well.
So more lower cost transactional deposits to fund those loans as well.
As a result of our quarterly on any loan growth are not off the deposit ratio reached a new post pandemic high of 88, 5%.
Which is up nearly 15 basis points over the prior year.
Deposit growth and funding have been challenged this year due to the effects of the inverted yield curve, leading to systemically higher deposit rates more competition post pandemic client spend down and the expansion of our investment portfolio.
As a result identifying sources for our loan growth has accelerated and we have been more aggressive in raising deposit rates to meet that need.
As I mentioned, we've also begun to pivot and emphasize more traditional C&I lending, which along with a renewed focused on SBA seven lending.
Should drive more opportunities for Treasury management services and growth and lower cost transactional deposits.
Third more scope.
We closed the last of our PPP loans right before year end and we continue to work to expand on the successes we identified from the initiative.
Traditional SBA lending made some headway during the year as we were able to close just over 6 million imbalances and deliver over 500000 in Vietnam.
As we look forward into 2023, we expect SBA loan originations to approach our pre COVID-19 historical levels.
Something around $15 million to $20 million.
Our pipeline is quite strong and we anticipate a very strong first quarter of this year.
Referrals continues to be the center post of our sales initiatives.
This year, our staff our board our advisory board deliberate over 1300, inter departmental referrals for just over $77 million of new business to our company.
The corporate sales champion.
That we hired in the fourth quarter is just starting to identify how and where we can work smarter to expand our number of households, and the products and services in those households to achieve greater market penetration.
The <unk> Salesforce platforms are now up and running.
And integration of these towards India, where our business development teams is a high priority for this new key role in our company.
Operational excellence, our fourth theme.
We have traditionally been a producer of salable mortgage product with a small amount of residential construction lending.
In fact in the 10 years prior to this year, we sold over 85% of our originated mortgage volume.
This drove non interest income as a percentage of revenue roughly 40% every year and built a highly profitable one $4 billion servicing portfolio.
With the rapid increase in rates and the inversion of the curve during 2022 residential portfolio of pricing became more attractive to home buying clients and this resulted in our total sale percentage for the year to drop to just 59%.
This is obviously added some mild duration risk as we've discussed in prior quarters, So our balance sheet.
That has necessitated and emphasis on competitive funding needs, but at the margin.
We intend to return to a more historical level of mortgage sales in 2023 as we anticipate.
Continuing squeeze on margins from higher funding costs.
Operating expenses were down from the prior year quarter by $1 3 million or nine 2% for the full year operating costs were down $2 5 million.
Or five 6%.
The majority of the full year reductions was.
Salary and benefits segment, reflecting the lower level of commission based payments to originators.
Included in these cost saves would also be the reduction in support staff in this business line.
Additionally, we're also in the process of right sizing retail office hours.
Select markets to better align with customer trends that will reduce pressure on hiring constraints going forward, our quarterly run rate for expenses should allow for a return to positive operating leverage in 2023.
Our client driven contact center staff.
Can you just take pressure off our retail office staffing requirements.
This initiative allows our community bankers to spend more time on the street out of the office engaging with local businesses to garner greater market share.
We believe this strategy will ensure an efficient and consistent client experience and one that will aid in our efforts to expand those single service households.
Fifth and finally asset quality.
Well, we chose to not take any provision in 2022, despite the significant loan growth I mentioned, the $5 5 million, we added to the reserve in 2021 2021 was certainly an offsetting factor.
Our nonperforming assets have declined this year by over 21% and as referenced earlier, we had 13000 of net recoveries in 2022, and 181000 of net recoveries for all of 'twenty one.
And finally before I turn it over to Tony our seasonal adoption will occur in here in the first quarter of 'twenty three.
We will add approximately $1 4 million to our reserve levels that Tony will talk about now so Tony.
Thanks, Mark and good morning, again, everyone again for the quarter GAAP net income of $3 5 million and $12 5 million for all of 2022.
Highlights for this quarter include operating revenue up slightly from the linked quarter, but down six 7% from the fourth quarter of 'twenty one.
Given the $2 6 million negative variance on mortgage gain on sale of less than 10% decline in revenue was actually quite positive.
Margin revenue, obviously, it was up for both the linked quarter in the prior year.
And our balance sheet efficiency continues to improve as Mark said with a loan to deposit ratio of 89% and total loans to assets at 72%.
Now breaking down the fourth quarter income statement getting with our larger.
We can finally close the book on the PTT initiative is our final loan paid off late in 2022.
However, the full year comparison and its impact on our margin was still significant zero over year change was a reduction in revenue of $3 6 million.
For the quarter, our net interest margin was 361% expanding 73 basis points from the prior year.
Or 90 basis points adjusted for PPP.
The improvement in earning asset yields as the main driver they were up 110 basis points to four 7%.
Partially offsetting this increase was the increase in interest bearing liability costs up 50 basis points in the prior year.
In addition to the positive impact of the seven frame rate increases we experienced in 2022 the mix shift on our balance sheet was key to the $1 8 million improvement in net interest income we reported.
Specifically, we had over $415 million in cash and securities on our balance sheet entering the year, yielding one 1%.
At the end of 2022, we have reduced our cash our level of cash and securities to $269 million yielding 235%.
That's $146 million reduction.
Was replaced almost dollar for dollar by the increase in our loan portfolio.
With total assets remained flat.
This made for a much more efficient balance sheet.
As I referenced earlier funding costs were up from both the prior year and the linked quarter, but trailed the increases realized in earning asset yields in both periods.
As our retail and private client teams have been calling on clients to increase our deposit levels competitive pressures have driven up deposit pricing.
Our deposit cost of funds for the fourth quarter came in at 53 basis points up 30 basis points from the prior year and up 22 basis points from the linked quarter.
We are pleased however that we were able to maintain deposit levels from the linked quarter with the deposit level a beta of only 14.
We understand the further pressure on funding costs are likely given the lower liquidity, we are seeing from our clients in a similar position.
That our competitor banks find themselves for funding.
Our strong regulatory relationships and excellent asset quality. It gives us access to a number of liquidity sources outside of the deposits.
The income as a percentage of average assets has been a strength of ours throughout the last 10 years.
We pay special attention to the net here.
Setting our noninterest expense to average assets.
Getting a number close to zero would be the ultimate and we feel good about a net number between one two which would place us in the upper quartile of our peer group.
Absence of $12 9 million variance in mortgage revenue compared to 2021 year over year comparisons however are difficult.
We certainly look forward to next year, what our earnings comparisons we no longer had the PPP, nor an outside exposure to mortgage gain on sale of areas.
Mortgage gain on sale yields have stabilized at the low to mid 2% level.
All off over 102 hundred basis points from the levels in 'twenty, one and 'twenty, we are returning to our historical level.
Late in the quarter saleable pricing returned to a more normal levels relative to portfolio residential product.
This again will bode well for 2023 as we seek a return to an 80% plus level of mortgage loan sales to originations.
On servicing rights the market value of those again improved slightly this quarter with a calculated fair value of 117 basis points.
This fair value level was up three basis points from the linked quarter and up 24 basis points from the prior year.
Our servicing rights balance remained level for the linked quarter at $13 5 million in remaining temporary impairment was down to just 176000.
Expenses of $10 $3 million were down from the linked quarter, just slightly and compared to the prior year. They were down $1 3 million or 11, 2%.
For the full year total operating expenses were down from the prior year due to lower volume related costs and mortgage and other incentives.
The total operating expense reduction for the year of $2 5 million or five 6% was critical to close the operating revenue gap that we experienced in 2022.
While our operating leverage was negative for the year due to declines in mortgage and PPP operating leverage from the linked quarter was positive.
Now, let me turn to the balance sheet loans outstanding at December 31, 2022 stood at $962 million or 72% of the total assets of the company.
Which compares to 61, 8% a year ago we.
We again saw improvement in our balance sheet and exited the quarter, but we did fall behind on our goal of funding loan growth with deposit balances.
GAAP required us to expand our use of wholesale funding, which did come in at an elevated marginal cost.
Pay downs in the investment portfolio in the quarter provided a small portion of our funding needs and we anticipate the continued decline in the portfolio for principal and interest payments.
Our portfolio of predominantly contained mortgage backed securities with good cash flow that will provide liquidity.
With the long end of the curve already declining cash flow could accelerate and the negative mark from Aoc I will decline.
Tangible common equity improved in the quarter is there a OCI exposure declined slightly when we brought $2 7 million to retained earnings from our quarterly net income less the common dividend.
Total equity net Aoc I have $155 million was up from the prior year and represented 11, 3% of total assets.
Regulatory capital continues to be strong with common equity tier one and total risk based capital at 13, 4% and 14, 7% respectively at the end of 2022.
Our loan loss reserve ended the year at 144% and we had and it is down $1 3 million and delinquencies were at just $2 6 million of total loans.
That delinquency rate of 27 basis points is the lowest we have had in some time.
As Mark indicated we'll be adopting Cecil in January and we anticipate an increase to our reserve roughly 12% to 15 basis points.
Relative to our peer group a reserve level still remains well above the median level I'll now turn the call back over to Mark.
Thank you Tony I would like to conclude with acknowledging once again the dividend announcement. We made this week of 12 five cents per share for 2022, we distributed $3 4 million to common shareholders, which equates to roughly a 27% pay out a dividend yield of approximately three.
1%.
2022 was certainly a challenging year in many respects in the banking industry as we saw at the end of certainly stimulus money and client liquidity begin to dissipate.
Our team worked to stay relevant to all of our constituents during the year and we would expect that our consistent calling efforts and our client attention well pay off.
Pay dividends in 2023.
Now I'll turn the call back to Sara for additional or some questions.
Thank you we are now ready for our first question.
Can I ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the key.
To withdraw from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Waiting for additional questions I'd like to remind you that today's call will be accessible on our website and I are that our state bank dotcom.
Again, if you'd like to ask a question. Please press Star then one.
Showing no questions I would like to turn the conference back over to Mark Klein for any closing remarks.
Once again, thanks again for joining US we look forward to speaking with you about our first quarter results in April .
Have a great day take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.