Q1 2023 SB Financial Group Inc. Earnings Call
Good morning, and welcome to the SB financial first quarter, 2023 conference call and webcast.
I would like to inform you that this conference call is being recorded and that 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 and I are just in the worst state Dot com joined.
Joining me today are Mark Klein, Chairman, President and CEO , Tony Thompson T now.
<unk> financial Officer, and Steve Boyle, Chief lending officer.
This presentation may contain forward looking information.
Narrowed statements about this information as well as reconciliation of non-GAAP financial measures are included in today's earnings release maturities as well as our SEC filings and other investor materials. These.
The materials are available on our website, we encourage participants to review referred to them for a complete discussion of risk factors and forward looking statements.
Statements speak only as of the date made.
The financial undertakes no obligation to update them.
I will now turn the call over to Mr. Klein.
Yeah.
Thank you Sarah and good morning, everyone welcome to our conference call and webcast highlights for the quarter and recapping our recent earnings release net income.
$2 5 million up 363000, or nearly 13% from the prior year quarter, but would have been up just 296000 or 14%.
The effect of the Oems are recapture that Tony will speak up shortly.
Return on average assets of <unk> seven three return on tangible common equity of 10 five.
Net interest income of $10 3 million was up one 8 million or 22% from the prior quarter as loan growth.
Better asset mix, an interesting, earning asset yields offset the increase in deposit and other funding costs.
But also from the linked quarter rose $14 million with loans rising by 126, 15% compared to the prior year quarter deposits grew from the linked quarter by $24 million, but were down $28 million year over year.
Expenses up slightly from the linked quarter, but down from the prior year mortgage origination volume just $49 million.
And asset quality metrics remained strong with NPA to just 35 basis points.
As with prior quarters, we discussed a number of times our path to deliver our five key strategic initiatives remain revenue diversity the balance of the net interest income with fee based revenue.
No.
Any growth and potentially M&A.
Bert.
Relationships with each household of course operational excellence.
To call it.
For the quarter, our mortgage business line originated $49 million volume just slightly below the level from a linked quarter.
The level of sales in the quarter was below our expectations. The trend in the production arena is strongly moving towards our traditional two primarily originate and sell allowance into the secondary market.
We do expect sales to increase above the 60% level in the second quarter after near our historical 80% level in the latter half of the year.
Given the expectation of continued higher funding costs limiting our level of residential portfolio loan growth. It was at the plant.
Overall non interest income was $3 7 million level to the linked quarter, but down from the prior year quarter of $5 8 million or a reduction of 37% primarily due to.
The decline in residential loan volume.
The current quarter included a mortgage servicing recapture as I mentioned, a 56000 compared to a recapture of 890000 in the first quarter of last year.
When we exclude the full impact of the mortgage business line from both years, our year over year decline would have been 16%.
The title business is also off due to the decline in residential volume as you would expect however, we remain confident of our ability to drive revenue expansion in the coming quarters.
While we have made resource reductions to more closely align expense with expected revenue.
We've also made provisions to more consciously drive a greater share of state banks title insurance policy revenue So big title.
Okay.
Our wealth management management Division showed growth from the linked quarter as both revenue and assets under management increase.
We understand what before the lumpy nature of this business line.
The value of the equity markets being one of the main drivers of our success.
As such we continue to identify a more holistic client experience and one that includes a complete banking relationship to complement our management all of their 401, Ks and individual retirement assets.
Second key initiative more scale.
<unk> concerns and the need to grow and maintain client deposits remains center stage four.
The recent bank failure conversations highlighting the potential concerns on liquidity and meeting client needs.
We worked very hard to grow deposits in the quarter and in fact, we have now grown total deposits in each of the last three quarters.
This growth has come at a cost to our margin as funding costs are up nearly 300% compared the prior year, although it was essentially a flat balance sheet.
The market has been very competitive and the desire of our clients to accelerate returns on their cash that's driven the marginal cost of funding up to that 4% to four 5% level.
Loan growth in the quarter was again fairly strong as we were up $14 million from the linked quarter and up now nearly 126 million or nearly 15% from the prior year quarter. The bulk of that loan growth came from our residential loan business line as they sell more.
<unk> finished product pricing due to the inversion of the yield curve remained elevated at certainly less desirable to our clients.
This pricing began to change later in the quarter, making favorable product to our class a preferred.
When we include the growth of our residential variable rate product on our books, we have now grown our loan book each over the last five quarters.
We were singularly focused in the quarter on reassuring our classic.
Strong well capitalized bank with many avenues to meet all of their liquidity needs.
Our average deposit size per account of 25000 is that the median level of their peer group and we are not reliant on any geographic region for the majority of our deposit funding.
In fact, our largest region comprises only 27% of total deposit balance sheet.
We have not had access either the fed discount window or the bank term funding program to meet any of our liquidity liquidity needs.
Third is our strategy to develop deeper relationships more scope.
P. P story has been completed and we.
Our focus on getting our teams back in to the market and calling our clients and prospects.
One dollar they need working capital to grow, albeit in a bit more challenging market.
We closed over $7 3 million of SBA credits in the quarter, but due to timing we were unable to get them sold and the gains realized in the quarter as we anticipated.
We expect meaningful fee income from sales in the second quarter with a pipeline of scheduled closings nearly $6 million.
We continue to expect 'twenty to 'twenty three to be one of our most meaningful years in SBA originations since we entered the business line.
2016.
The corporate sales champion we hired late last year is being integrated into the fabric of our sales culture. The emphasis here is to gain better utilization of our newer fintech platforms, including more and better data as we reported in prior quarters and semis the relevancy of each of our seven business.
Sure.
As a result, we expect to expand our household penetration and add additional products and services and are now over 36000 households throughout the coming year.
Operational excellence is our fourth key theme.
The mortgage business line has been and continues to be a key entry point for us into the household throughout our entire footprint.
Over the last 10 years, we've originated now $3 9 billion in residential loan products and the gain on sale during the several of those very low rate years drove the increase in our tangible book value and certainly earnings per share.
Clearly the impact of the rapid rise in rates in 2022, and the order of available housing stock and a number of our markets just hurt our profitability.
This quarters production was the lowest level that we've experienced in over nine years.
We believe that the market is showing some signs of life and we are growing our pipeline almost exclusively in the saleable purchase market.
We continue our quest to right size the level of resources for the business line.
And a return to more traditional levels of annual volume and net mortgage banking revenue.
Operating expenses were down from the prior year quarter, but increased from the linked quarter, we acknowledged that our efficiency and expense to average assets ratio are too high given the potential headwinds on the prospects of incremental revenue growth.
We have done a full review of our expense base and are confident that the coming quarters will show meaningful reductions from the baseline.
In fact, we recently developed a dynamic model that revealed cutting expenses that for lack of revenue enhancements for 2023 will deliver a more meaningful improvement in tangible book value improvement for our stockholders.
As such this initiative will provide us positive operating leverage anticipated for 2023.
Our client driven contact center staff has continued to expand its reach and has allowed us to forego, adding open positions to our retail network.
Particularly important as we have constrained hours of operations in some offices, reflecting.
Flight of the client to the digital platform.
Our contact center, although also allows us to do positive outreach and handle customer need with a seamless consistent message from a staff of six professions.
This focus along with the goals of our corporate sales champion.
It'll be hard.
Hard to expand single service households, and expand our deposit footprint without an expensive client acquisition strategy.
Fifth and finally asset quality.
Charge offs were slightly elevated in the quarter compared to the net recoveries, we have experienced in the last year last two years.
We have begun to see some weakness in our small credit card portfolio and the rise in interest rates has brought strains on the household with the escalation of interest payments on our prime base.
Yeah.
These significant additional provision we have set aside over the last several years that now includes the 2023 seasonal adjustments up nearly three additional million dollars puts us in a very strong position with the allowance coverage of nonperforming loans now.
Now stands at nearly 400%.
They like what she had ended the quarter at $3 6 million or 37 basis points, but when we exclude the identified npls from the delinquency number the percentage drops to just three basis points.
We continue to.
Robust internal review program, there and Kimberly uncovers problem credits and what is expected to be a bit stiffer headwind with a potential recession on the horizon, but we are prepared.
At this time I'd like to turn it over to Tony Constantino for some additional details around the quarter Tony.
Thanks Mark.
Good morning, everyone again for the quarter, we had GAAP net income of $2 5 million with EPS up <unk> 35 per share when we exclude the servicing recapture in the non core expense items core diluted EPS was <unk> 36.
Up 20% compared to the similar core earnings in the first quarter of 'twenty two.
Total operating revenue was down for both linked quarter and the prior year quarter. However, when we exclude the servicing rights you capture from both years operating revenue would be up four 1% also the continued lower level of mortgage gain on sale, which was down nearly one 1 million that had a significant impact on our ability to grow total operating revenue.
Yes.
Margin revenue was up 22% for the prior year.
And the efficiency of our balance sheet improved this quarter as our loan to deposit ratio rose to nearly 90% and total loans to assets rising to 73%.
Now as we break down further the first quarter income statement.
With margins.
For the quarter, our net interest margin came in at 333, 7%, which is up 69 basis points from the prior year due.
Due to the shift in our earning asset mix and a net positive beta of earning assets versus funding.
Compared to the linked quarter the impact of much higher funding costs as mark discussed could not be overcome by our loan growth and the improvement in earning asset yields.
Yeah.
Cash and securities as a percentage of total assets continued debt reduction in the quarter or is there now just 19, 5% of total assets.
This compares to 20 and 30% for the linked and prior year quarter.
Pre pandemic, we averaged just over 12% of assets in these lower yielding instruments.
This shift in mix has benefitted our interest income and is reflected in our earning asset yield improvement.
For the quarter with loan yield of five 4% up 21 basis points of the linked quarter and our overall, earning asset yield improved 22 basis points from the linked quarter.
So based on these two key measures were both 25 for the quarter.
Net interest income as a result of the improvement in these metrics was $13 8 million up 7% for the linked quarter and 47% from the prior year quarter.
So the first time since the fed began to raise interest rates, our funding betas were higher than our earning asset and loan betas for the quarter. Our deposit beta was 48 and our overall cost of funds beta was 55, well was approximately two times, the earning asset low betas referenced earlier.
We were able to raise deposits primarily in the one year window, roughly 50 basis points below the marginal wholesale funding rate.
Project cost. So you can expect rose substantially in the quarter up to 94 basis points from 53 in the linked quarter and up from 22 in the first quarter of 2022.
Not a cheap retail funds, which are approximately 17% of total assets, providing a diverse mix of funding for our operations.
Predominantly using the seniors in Ics product with some term it overnight FHL the borrowing this pool of funds as a weighted average rate of $2 six 5%.
The income as a percentage of average assets was flat to the linked quarter at one 1% driven by lower mortgage gain on sale in the absence of any SBA loan sales.
Mark indicated we expect a strong second quarter in SBA fees as we have several large credits that we were in the process of pricing in the secondary market.
Any kind of prior year comparison on fee income would not be meaningful given the large servicing rights recapture in the prior year and a strong mortgage activity we've experienced in early 2022.
Higher to interest rate increases that began in March of last year.
Mortgage gain on sale yields came in at the mid twos for the quarter, which are not a harbinger of the future state as the volume of loan sales in the quarter was quite small.
At these current levels of Freddie pricing, we would expect a prudent use of our hedge will allow us to realize yield levels between 225, and two 5% moving forward.
At that level, our breakeven origination volume, assuming a 70% sale factors roughly $350 million of annual originations.
At this point, we are below that level of factoring in our current pipeline and the latest mortgage forecast the upcoming quarter will be very important to us and settling the future direction.
As regards to the business line.
The market value of our mortgage servicing rights continue to move higher with the decline in refinance volume and ended the quarter with a calculated fair value of 126 basis points.
This fair value was up nine basis points, the linked quarter and up 21 basis points for the prior year.
Our servicing rights balance remained level in the linked quarter at $13 5 million in remaining temporary apparel was down to just 121000 with the recapture of 56000 in the quarter.
It is likely we will recapture the remaining impairment sometime this year.
Yeah.
Our expenses in Q1 about a $10 8 million, which was expected to be higher than the linked quarter on a run rate basis, well, we had some nonrecurring expenses of around 120000.
We anticipate that the expense review mentioned by Mark earlier will result in lower annual expenses in 2023 compared to 2022.
Our focus on technology spend which was a significant factor in closing the digital gap in advancing our company further alone the technology path is largely completed.
Now as we turn to the balance sheet wholesale funding levels declined in the quarter by nearly 14% because we were able to not only fund higher loan growth, but also reduced borrowings with our deposit gathering activity.
These deposits did come at the higher end of the scale and we did see a larger than normal movement of deposit funding in term certificates in the quarter.
Time deposits now comprise over 21% of our deposit book up from approximately 13% in the prior year as clients sought to move liquid funds into predominantly the one year term window.
Most of our new growth also came in at one year bucket.
One of our strategies was price a bit aggressive at the margin, but that came with a stipulation that new funds from competitors where required.
We were pleased with our results as total deposits at quarter end were up 23 million over 2022 of the year end.
Pay downs in the investment portfolio continued as scheduled with the portfolio on pace to decline by roughly $25 million this year through normal amortization.
Should rate declines accelerate cash flow from a predominantly mortgage backed portfolio will provide the liquidity or anticipated logo.
The Aoc Guy negative mark improved in the quarter as anticipated.
Tangible common equity ex including the Aoc impairment improved in the quarter to $7 two 9% with a tangible book value per share up to 13 93.
Total equity net.
Of the $149 4 million was up from the prior year represented 11, 1% of the lettuce.
Regulatory capital continues to be strong with common equity tier one and total risk based capital estimated to be $13, five and 14, 8% respectively at the end of the quarter.
We did buy back a small number of shares in the quarter at an average price of 14 34 had lower current adjusted TCE per share of 18 23.
As Mark mentioned, our loan reserve improved significantly quarter, ending at 1.58% of total loans during the quarter, we adopt the seesaw, which added $1 4 million to reserve, an additional $1 $3 million or unfunded commitment liability.
Even with the limited charge offs in the quarter up just three basis points. So we decided to add to our already peer leading reserve with a net provision of 250000.
In addition, we had positive momentum in our classified loans for the quarter criticized and classified loans now stand at just $9 4 million and are down 25% versus the linked quarter at 53% from the prior year quarter.
I will now turn the call back over tomorrow.
Thank you Tony I want to conclude with acknowledging once again the dividend announcement, we made then.
The earnings release last for this week 13 cents per share a recent high at 36% of our earnings in the quarter.
We expect to maintain our current common dividend methodology in 2023, even though it represents a greater percentage of our engine commerce liquidity asset quality and capital are all well positioned no doubt a tough quarter for the overall industry with the economic and operational headwinds.
Conversely for SB financial given our high level of FDIC insured deposits at over 86% of total deposits.
Hello average balance per deposit kind of just 25000, and our diversified end market balanced client base. We do remain confident that overall direction will deliver meaningful returns for each of our stakeholders.
Now I'll turn it back over to sort of make us for questions and comments and answers Sir.
Thank you Mark we're now ready for our first question.
Thank you 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.
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At this time, we will pause momentarily to assemble our roster. Thank you.
While we're waiting for this.
Any questions I would like to remind you that today's call will be accessible on our website and I are not your state Bank Uh huh.
Again, if you need to pose the question. Please.
Please press Star then one.
Yeah.
Our first question comes.
From Nina Burns from Jenny.
Nina.
Please go ahead.
Hi, This is Matt.
Filling in for Brian Martin This morning.
Maybe that's a weird.
He had another call constrained this morning, but we do want to know more about what your NIM outlook is and what your margin was for the month of March.
Yeah, Hi, thanks.
Yeah, We did 337 I'm you know fully taxable equivalent in March in.
In the first quarter excuse me that March number was approximately $3 25 is it obviously got lower as the quarter moved out.
As we look going forward.
You know April is probably going to be in that $3 20 range and it would probably stay in that 320 ish range in Q2.
Obviously loan growth, we feel good about our pipeline.
We feel like the latter half of the year, we're going to start to accelerate margin again.
We are hopeful that you know rate increases that the fed has kind of stay.
Stabilized and we have a number of clients that will be coming off what we might call.
Premium pricing in some of our transactional products in the latter half of the year and we think we're going to be able to retain those clients at a slightly lower level than what we're paying them today.
The bulk of our terms certificates were probably going to be in the first quarter of 2024, but we do think deposit cost will move up in the second quarter, but then moderate to slowly move down latter half of the year and loan growth will provide some bonus in our margin going forward. So we do think slight moved.
Down in Q2 on margin and then from there acceleration higher.
Okay. Thank you.
Yeah.
If there are no further questions I will now turn the call back to Mark Klein.
Thank you and I once again, thank you all for joining US. This morning, we look forward to speaking with you in July with our second quarter 2023 results have a good day goodbye. Thank you.
The call has ended you may now disconnect.