Q3 2023 SB Financial Group Inc Earnings Call
Good morning, and welcome to the SB financial third quarter plenty twenty-three conference call and webcast.
I would like to inform you that this conference call is being recorded and that all participants are in a listen only mode.
We will begin with remarks by management and then open the conference up to the investment community for questions and answers.
I will now turn the conference over to Sarah Amicus with SB financial. Please go ahead Sir.
Thank you and good morning, everyone I'd like to remind you that this conference call being broadcast live over the Internet and will be archived and available on our website at IR Dot North state Dot com joining.
Joining me today are Mark Klein, Chairman, President and CEO, Tony Cosentino, Chief Financial Officer, and Steve Boyle, Chief lending Officer.
Today's presentation may contain forward looking information cautionary statements about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our S E SEC filings.
These materials are available on our website and we encourage participants to refer to them for a complete discussion of risk factors and forward looking statements.
These statements speak only as of the June of <unk>.
As of the date made and FB financial undertakes no obligation to update them.
I'll now turn the call over to Mr. Klein.
Thank you Sarah and good morning, everyone welcome to our third quarter conference call and webcast highlights for the quarter include net income of $2 7 million.
Down from both the linked and prior quarters as funding costs and lower mortgage volume has impacted profitability.
Pre tax pre provision return on average assets was 96 basis points with return on tangible common equity of 10, 8%.
So, let's just kind of a $14 8 million was up $3 million or 25, 8% from the prior year and up 390000 or 10, 8% annualized from the linked quarter.
Loan balances were higher from the linked quarter by just $4 2 million.
No there isn't another 64 million or 7% over the prior year quarter.
Our expansion markets in Fort Wayne and Columbus, where the catalyst growing 29, and 15% respectively.
Deposits were higher by $14 1 million or five 2% annualized compared to the linked quarter and remained steady to the prior quarter, albeit with higher funding costs that rose from 46 basis points to 176 basis points.
Loved the deposit ratio of 91, 1%, our second consecutive quarter above 91%.
It is higher by nearly six basis points from the prior year.
Operational liquidity up nearly 500 million that is 35% of total assets are sufficient to meet all of our growth needs and noticed slate.
We have not needed at any time to access the federal reserve term funding program.
Expenses were slightly higher than the run rate this quarter that Tony will touch on shortly.
As we had some nonrecurring items that impacted results.
Mortgage origination volume, while lower than the linked and prior year quarter did show a very high and a more traditional level of sold volume at 88%.
Capital levels remained strong with tier one leverage of 11% common equity tier one and $13 six and total capital total risk based capital of 14, 8%.
Customer deposits for the company that are below the.
The FDIC insured threshold.
We're nearly 84% of total deposits and when we exclude any collateralized deposits.
Kris 289%.
And probably like asset quality metrics remained strong with delinquency levels at 33 basis points and year to date net charge offs of only one basis point.
We continue to concentrate on our five key initiatives, that's revenue diversity and it's all about net interest income and fee based revenue.
More scale in our current households are more scope.
And operational excellence and asset quality.
First revenue diversity.
The mortgage business line has been under significant pressure this year from not only higher rates, but also the lack of inventory in most of our markets.
This quarter was reflective of not only the new lower level of activity, but also the ongoing size of our pipeline.
The expectation is that the 15 to 20 million per month level of volume will continue for the majority of the next six months, we have as previously indicated.
I actively moving away from residential portfolio grow by changes to pricing with an emphasis on shorter duration products.
It was encouraging that we sold 80, 888% of our production in the quarter and the yields on those sales were in line with what we achieved in the last four quarters.
Yeah.
Despite the headwinds that all banks have encountered this year, including us quarterly non interest income has remained fairly stable.
$4 2 million in this quarter was up slightly to the prior quarter prior year.
Slightly from the linked quarter, we have settled into a 30% level of fee income to total revenue.
Which while down from our very high historical levels of high 30 to low forty's.
We're still places us well into the top quartile of our peer group.
As we look at our year to date results the negative impact from the mortgage business line.
With $1 2 million of servicing rights impairment and an additional 900000 due to lower gain on sale.
That's totally overshadowed a dish here and our other fee based business lines.
As such we remain committed to our title insurance business and despite the obvious headwinds from the residential sector. We are pleased with the product with the progress. We have made this year in making peak title the number one choice for our clients in our markets.
For the current year, our state Bank commercial team has delivered over 145000 of revenue.
Our 11% up takes total revenue for the year.
Which is over double the commercial revenue from the prior year.
This commercial contribution is nearly as high as our internal residential level of contribution for the year.
We continue to emphasize the quality and capacity of our peak business line to all of our clients.
As I indicated in our second quarter webcast. Our goal continues to be to generate 50%.
Peaks revenue all else remaining constant.
This quarter State bank delivered 34% of <unk> revenue.
And now claimed 30% of their revenue year to date.
We spent the majority of the quarter integrating our new wealth management later mitigating the loss of a prior wealth adviser remaining connected with our current wealth management clients and developing new context as well.
However revenue growth has been challenged by the downward pressure in the equity markets and our need to identify more wealth advisors.
Regardless of this business line continues to deliver stable three $7 million to $4 million in annual revenue and continues to provide us a competitive advantage over our community bank peers.
It remains a great complement to our private banking and commercial customer.
Customer basis and helps ensure that we are providing our clients a comprehensive solution to all of their financial needs.
Secondly, more scale.
Loan growth from our linked quarter rose slightly as I previously stated consecutive year or quarter over quarter growth dating back several quarters has been a noticeable change in our overall balance sheet growth.
We understand that growth will become more difficult as we look out to a potentially further slowing in the economy.
Faced with that scenario, our response will be to work twice as hard to deliver the same or better results.
By doubling our calling efforts to our clients as well as our prospects that are tied to our competitors a number of whom have stepped away from lending.
We expect that when the economy does turn we'll be better positioned to achieve pre pandemic levels of longer.
Growing deposits from the linked quarter was a key achievement as we have worked extremely hard this past year to maintain our deposit levels on par with the prior year.
We have given our bankers the flexibility to elevate every deposit conversation with clients to ensure we are keeping and growing those valued relationships.
Obviously, maintaining that deposit level has come as a reduction of our net interest margin with our year to date deposit cost of funds of 101 basis points from the prior year.
Keeping that rise less than the increase in our earning asset yields that have risen to 119 basis points does feel like an accomplishment in this rather challenging environment.
Third more scope.
We closed just under $1 million in SBA loans this quarter and thus far for 2023, we have originated $7 4 million.
That production, which we anticipate will approximate $10 million for this year is certainly less of our capacity and well below the goals. We have set for this very profitable sector.
With the increases in prime lending rate, we intend to adjust our traditional pricing model to drive portfolio balances and revenue higher.
Fortunately, we are often able to attract the entire deposit relationship with each new SBA credits.
Also when coupled with our strong credit culture, and the added safety net of the government guarantee.
Asset quality elevates and revenue stabilizes.
We expect to expand our fourth quarter successes that provides ample this to a stronger 2024 in the SBA arena.
As we have discussed in prior quarters, our investment in technology to help us better identify and target clients for business expansion continues.
We are in the midst of our Salesforce integration project and we are confident that both our corporate sales champion and consultative sales approach with each client will bring us closer to a bigger bank process, but with a community bank feel.
As a result.
We have accelerated sales training for each of our staff members for their focus to retain 100% of our current clients and deliver a strong community bank brand for all prospects like.
Operational excellence, our fourth key thing.
Operating expenses were up just slightly in the linked quarter as we had some check fraud another portfolio of non reoccurring items.
This portion of our expense base is variable and tied to the number of units produced in our SBA and mortgage business lines.
As those volumes have declined associated compensation levels have also declined.
We've also taken steps to reduce the fixed cost in both of these areas.
By reducing support staff and shifting responsibilities to departments with excess capacity.
In fact.
From the prior year total FTE is down 17 or 6%.
Reflecting those impacts.
Beginning in the fourth quarter, we will identify initiatives to further improve our efficiency ratio.
That said, we expect that our fourth quarter expense level will reflect a more efficient run rate near the $10 million per quarter range.
Got it.
So it's a little bit more value to our commercial client base. We recently launched a comprehensive calling strategy across our entire footprint to deliver and potential implement positive pay risk mitigation software to protect our 1700 client accounts from fraud, as well as constrained or operational risk.
And finally asset quality charge offs were again low this quarter just 5000 for the year. We've had just 88000, which equates to just one basis point of total loans.
In fact, we have to go back 13 quarters to identify a period with net charge offs exceeding just 65000.
In addition, our reserve coverage of nonperforming loans at 474% gives us great comfort moving forward.
Our asset quality is strong stable and prepared to confront any additional weaknesses in the economy.
All the underwriting and dynamic mode of administration are clearly the common threads here.
We had a slight uptick in delinquencies from the linked quarter.
Which were all in the under 60 day category.
The clients involved an increase on our current and we wouldn't expect that when we report our 2023 year in delinquency that'd be back in the mid 20 basis point range.
We also do not anticipate having any material level of delinquencies in the near term in the portfolio outside of identified nonperforming credits.
Tony Cosentino, our CFO will give you a few more details on the quarter Tony.
Thanks, Mark and good morning, everyone.
Again for the quarter, we had GAAP net income of $2 7 million with EPS of <unk> 39 cents a share.
It is notable that our pretax pre provision earnings adjusted for the MSR recapture for the nine months period or up 550000 or nearly 6% in the prior year nine months period.
Highlights of the income statement this quarter.
Total margin income has declined for the quarter from both the linked and prior year, despite very strong growth in interest income.
In excess of 25%.
It's a significant accumulation of funding costs impacted the margin.
Margin ended the quarter down seven basis points from the June quarter.
It was down 37 from the prior year. However.
However, we have seen some stabilization in our margin with declines in the past three quarters of 'twenty, five 'twenty and now seven basis points.
We anticipate that the fourth quarter will likely be the low point in our margin with the expectation that in 2024, we will start to see some slow improvement.
In addition to the shift in the mix of assets away from securities to loans increases in asset pricing, driven earning asset yields higher in every quarter. This year and they are higher by 89 basis points when compared to the third quarter of 2022.
Loan yields have increased by the same levels as new volume and contractual repricing have stayed consistent to market movements in the rate curve.
This quarter our margin betas have followed the pattern of the last two quarters and that are in that are funding betas are exceeding the repricing betas on our earning assets.
Specifically the deposit and total cost of funding betas were 88% 87, respectively.
These are approximately one five times higher than the loan and earning asset betas for $16 58.
Since the federal reserve began the rate increasing cycle the betas for both sides of the balance sheet of nearly neutral.
The earning asset beta at 31, and the cost of funds beta at 28.
Our level of fee income to average assets remained EBIT to both the linked and prior year quarter at one 2% and as Mark pointed out has stabilized at the 30% level relative to total revenue.
We track our coverage of noninterest expense to asset by noninterest income to assets every quarter.
In a perfect world driving that coverage to zero is ideal, but we understand extremely difficult.
This quarter at negative one nine as part of an improving trend in this metric for this calendar year as we have adjusted operating expense to reflect lower levels of fee income.
Especially in the mortgage business line.
Although.
This quarter did show some positives in residential mortgage, especially our level of sold loans and that our gain on sale percentage a two 2% is in line with the linked and prior year quarters.
Our ability to hedge the pipeline coupled with our historically high pull through rate mortgage clients nearly 90%.
That's allowed us to command very good loan sale yields despite the tough secondary mark.
We do however expect the next six months in the mortgage business to be difficult.
With total origination levels of roughly $100 million.
This would mark our lowest origination level in a number of years, but it is reflective of the near 8% rate mortgage market.
As rates potentially stabilize into 2024, our consistency in the market should allow us to quickly return to higher origination levels.
Despite the slight uptick in total expenses this quarter, our trend line to drive annual operating expense below the $41 million level remains on track.
We have reduced operating costs and consultants that are adjusting operating hours at our retail locations.
Which will contribute to the expense reduction that Mark just mentioned.
Compensation and benefits as a percentage of total expense was 52, 4% this quarter down from 56, 4% in the third quarter of 2022.
With compensation per employee rising to 9% annually, reflecting lower commission levels and our concerted efforts to manage employment cost effective.
Now, let me turn to the balance sheet.
The total size of our balance sheet experienced a slight decline from the linked quarter due to marginal loan growth with our levels of cash and securities declining.
Securities as a percentage of total assets continued to a reduction in the quarter as they are now just 16% up to laugh at.
This compares to 17 and 18, 7% for the linked and prior year quarters.
Amortization of some small pay downs in the investment portfolio brought the balance down to near the 200 million level.
Encouragingly this quarter the deposit growth enabled us to pay down more high priced repos and if they shall be borrowings by over $26 million.
We're 25% compared to the linked quarter.
We did maintain a stable valuation of our mortgage servicing rights, which stood at 118 basis points.
The servicing rights balance increased to $13 9 million with the servicing portfolio now at 137 billion up just slightly to the prior year.
We continue to have very strong capital levels as Mark had heart has highlighted our common equity tier one ratio stands at 13, 6% and even with adjusting for Aoc I the level remains robust 10%.
Tangible book value per share is higher slightly compared to the prior year and when we adjust for the U C. I impairment, our tangible book value per share would be $18 92 per share.
Which is up three 5% from year end 2022.
Our share buyback continued in the quarter, although volume was down compared to our historical buyback run rate per quarter.
Specifically this quarter, we purchased 44000 shares at an average price of 14 O two or.
We're less than 85% of book, just slightly higher than our tangible book value.
As we stated our loan loss allowance was stable in the quarter reflective of both minimal provision and charge offs.
It is a small increase in loan balances our reserve to loans remained flat to the linked quarter.
At a healthy one 6%.
Impaired to the prior year, we've increased our reserve percentage by 11 basis points.
Our criticized and classified loans were relatively stable compared to the linked quarter now stand at $9 7 million.
A decrease of $3 1 million or 24, 2% from the prior year.
I'll now turn the call back over to Mark for closing comments.
Thank you Tony we continued our consistent pattern of raising our common dividend and with our announcement. This week of a 13 and a half cent per share common shareholder dividend and for the year. We've now declared cash dividends of 52 cents per share or nearly $3 6 million.
What would a dividend payout ratio for this year will be approximately 30%.
With a current dividend yield of around four 2%.
And we continue to buyback our shares to return earned on capital to our owners.
The only with 11 rate hikes since early 2022, and putting 425 basis point hikes this year.
That's impacted our rate sensitive business lines of mortgage and SBA significantly.
We have worked to adjust resources, where appropriate and we'll continue to do so moving into the fourth quarter our.
Our budgeted our budgeting process for 2024 is revealing what markets and products, we feel will have strength and how our operation will emerge with greater emphasis on margin expansion and a stabilization balance sheet growth and mix change and noninterest expense containment to preserve and grow E. P. S.
Now I'll turn the call back over to Sarah for questions Sir.
Mike We're now ready for our first question.
We will now begin the question and answer session. If you would like to ask a question. Please press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then two.
Once again that was star then one to ask a question at this time, we will pause momentarily to assemble the roster.
And our first question comes from Brian Martin of Janney Montgomery. Please go ahead.
Hey, good morning, guys.
Alright, Brian right.
Just thought maybe you could talk a little bit about the kind of the loan pipelines are you just kind of how you're how you're seeing those just given kind of the current market conditions and.
And then kind of just how your markets are performing so.
Good morning, Brian Steve we are.
Come to see 2023 is a bit of a year of acceptance for borrowers as they've gotten used to the new rate reality. So some things we thought we would see come through before earlier in this year have been delayed.
That said, we do have some optimism for the fourth quarter and some of those projects will come online anecdotally.
We're hearing from lenders that we're getting more calls.
So pipeline seems to be accelerating again as supposed to adjust to the new reality on the rate side. We're also seeing an economy that seems to be stabilizing and still showing some resilience is encourage them to proceed with projects, where they've had some trepidation about.
Okay, and as far as just kind of your outlook, whether it be fourth quarter and just kind of the next several quarters I mean, what type of growth rate you know I guess appears.
I guess kind of a near term bogie as far as what you might be able to see.
Hum.
We're going to end this year, probably you know six ish type percent when we when we fully finish I think as we looked at expectations were that's probably the low end of the range that we're looking at in 2024.
You know a lot depends on really the commercial side because as you know we would step back from the residential as much on portfolio.
SBA has seem to show some strength a little bit here in the in the fourth quarter and we've seen some more looks.
So I'm hopeful that you know that number gets to call. It the 7% to 8% range as we as we get out which would be kind of a 70 ish million type total number for the for the year and we'll see a lot more as we finished Q4 I think as Steve said, that's going to be pretty instructive in terms of what clients are looking at.
Sure Okay. No I appreciate it thanks, and then how about just I think you've touched a little bit on the mortgage production, maybe being a little bit lower here over the next couple of quarters just.
Big Picture, you know I guess as we think about full year 'twenty for you I guess can you give any thoughts or just you know how you're thinking about you know where that may shake out as far as what you're based on kind of extrapolating current trends, what you're seeing today.
Well, it's both at both on both volume I guess and kind of your like you had the benefit this quarter, telling you that you know more more production. So just kind of what you're thinking on both fronts.
Right right. So you know.
I think you know Q4 is probably going to be you know $50 million type range of origination I think we're seeing a little bit.
You know, our our pipeline seems to be in that $18 million to $20 million level, you know December looks to be dropping off a bit from that so call that 50 million for Q4.
I would think that's probably still going to be the level as we look at Q1 based upon.
You know the forward rate curves and the things that we're looking at I do think.
You know our level of sales are going to be at a minimum of 85% to 90%, we're not seeing the level of portfolio either by the client or or anywhere else. I mean, I think the clients that are doing mortgage and are interested are focused on fixed fixed rate Freddie Mac saleable product.
And we've had a certain certainly at a back off in our P. C. G market, which had been incredibly successful for us in 2021 and into 2022 that certainly has seem to come off the table quite a bit yeah, just a follow up comment Brian.
Clearly expect that volume to rise again, maybe in the latter part of 'twenty 'twenty four of them maybe see some improve.
Improvement in the rate environment, and the rate curve, but.
Unknown Executive: Good morning and welcome to the SB Financial 3rd quarter 2023 conference call and webcast. I would like to inform you that this conference call is being recorded and then 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.
We clearly have cut some expenses in that back end of that process and positioned.
[noise] ourselves with.
Same number of hours, we've had from Columbus to Indianapolis to lower Michigan to do that 500 million with no additional cost. So we're prepared to move ahead when the markets are.
Sarah Mekus: I will now turn the conference over to Sarah Mekus with SB Financial. Please go ahead Sarah.
Right sizes, so to speak, but it's still going to be constraints with the potential.
Potential higher rates and lower inventory, but.
Sarah Mekus: Thank you and good morning everyone. I'd like to remind you that this conference calls being broadcast live over the internet and will be archived and available on our website at ir.yourstafeg.com.
We're prepared and that's the variable rate on compensation, we're willing to kind of stand Pat.
Got you no that's helpful.
How about just flipping over to the margin for a minute I think Tony you said or kind of indicated that it might reach a bottom here in four Q and maybe see some stabilization or improvement next year I guess it sounds like the funding cost pressures beginning to abate.
Sarah Mekus: Joining me today are Mark Klein, Chairman's President and CEO Tony Cosentino, Chief Financial Officer and Steve Walz Chief Lending Officer. Today's presentation may contain forward-looking information, cautionary statements about this information as well as reconciliation of non-gap financial measures are included in today's earnings release materials as well as our SEC files. These materials are available on our website and we encourage participants to refer to them for a complete discussion of risk factors and forward-looking statements.
Kind of wondering how you're thinking about you know the.
The benefits on the opposite side with asset repricing, maybe just how much in the way of loans reprice and kind of what trends you're seeing there to kind of give you some stability and or yeah, I guess expansion next year.
Yeah I need it.
We all talk about for all of us.
Question, I mean, certainly the the variability this year between how fast funding costs have risen relative to the asset side has slowed down you know we were two times that early in the year were one five times, we will get closer to kind of a one to one I think in Q4 of deposit.
Sarah Mekus: These statements speak only as of the date made and as speak financial undertakes new obligation to update them.
Mark Klein: I will now turn the call over to Mr. Klein. Thank you Sarah and good morning everyone. Welcome to our third quarter conference call on webcast highlights for the quarter include net income of 2.7 million.
And funding cost rising relative towards the earning asset side.
I'm hopeful that you know our discipline will allow the majority of the repricing that we have to to flow through you know I think it's going to be a big factor in terms of of what caused all of those clients are getting as their loans are coming up to reprice.
Mark Klein: Down from both of these linked man prior quarters it's funding cost and lower mortgage volume has impacted profitability. Free tax, free provision, return on average access of 96 basis points with return on tangible common equity of 10.8%. Total interest income of 14.8 million was up 3 million or 25.8% from the prior year and up 390,000 or 10.8% annualized from the linked quarter. Low balance where higher from the linked quarter by just 4.2 million.
And what that's going to do on a relative basis, but certainly if you look at the just the numbers of our portfolio and how it's repricing it should maneuver its way to be at or slightly above what I anticipate funding costs to be as we move forward. So that's why I'm a bit hopeful for that too.
Mark Klein: But of now risen nearly 64 million or 7% over the prior year quarter. Our expansion markets in Fort Wayne and Columbus were the catalyst growing 29 and 15% respectively. The positive were higher by 14.1 million or 5.2% annualized compared to the linked quarter and remained steady to the prior quarter albeit with higher funding cost that rose from 46 basis points to 170 basis points. Longer deposit ratio of 91.1% are second consecutive quarter above 91% and higher by nearly 6 basis points from the prior year.
Look proof.
I'll call it into 2024.
Got you and just the new production, what what yields as I, you know I guess, how you're kind of getting new production at and just do you have any sense for or I can follow up just on what repricing occurs maybe over the next 12 months or if you are at the six months I guess, what you should think about that loan book.
Hey, Brian.
Margin were saying now is that 225 to 250 over the relevant index.
We're certainly looking to hold that as loans reprice and there are no banks step back that we think are combined with our level of service, we should be able to retain those loans.
Got you, Okay, and then just the total repricing I guess, how much pricing do you have kind of here in the short term or longer term.
Mark Klein: Operational liquidity of nearly 500 million that is 35% of total assets and sufficient to meet all of our growth needs and noticeably we have not needed at any time to access the Federal Reserve term funding program.
Okay.
We're probably going to have you know, we're traditionally about a 15% to 20% on an annualized basis all of the entire portfolio.
Mark Klein: Expenses were slightly higher than the run rate discord that Tony will touch on shortly, as we have some non-reoccurring items that impacted the results. Morgan's origination value, while lower than the length and prior quarters, did show a very high and a more traditional level of sold volume at 88%. Capital levels remain strong with tier 1 leverage of 11%, company equity tier 1 of 13.6, and total capital or full of risk-based capital of 14.8%.
Jewelry or our portfolio re prices in that three to five year window right Herb duration. So you know every every year, we're probably in that 15% to 20% of total repricing I think it'll be a little bit.
Better than that number percentage wise in 2024, just because the majority of the things we put on a relatively short term over the past.
Three years, that's kind of where the client has been in anticipation of rates coming down.
Gotcha, Okay, and then last one for me is just on credit just it sounds like things are.
Mark Klein: Customer deposits for the company that are below the FDIC insured threshold were nearly 84% of total deposits, and when we exclude any collateralized deposits, that will increase to 89%. And finally, asset quality metrics remain strong with delinquency levels at 33 base points, and near-to-date net charge of only one base point.
No.
Still remaining very strong I mean anything that you know I guess you are seeing as you come through this quarter. It sounded like the trends in criticized and classified were pretty stable. So you know leading indicators or at least the criticized are or continue to remain strong.
Anything that you are more mindful of or are you seeing any stress in within <unk>.
Certain areas of the portfolio.
No Brian we've been very satisfied with the performance of our portfolio. We did a deep dive into our CRE portfolio, particularly the investment real estate things that were coming up for repricing and we were very happy with what we saw as far as leases that were in place as well as the ability of those cash flows to a stay.
Mark Klein: We continue to concentrate on our five key initiatives. That's revenue diversities, all about net interest income and fee-based revenue, more scale in our current households, more scope, and operational excellence and asset quality. First revenue diversity. The market business line has been under significant pressure this year from not only higher rates, but also the lack of inventory in most of our markets. This quarter was reflective of not only the lower level of activity, but also the ongoing size of our pipeline.
The pressure of a interest rates, so we feel pretty good about where the portfolio is right now.
Okay.
I think that's all my questions. So thank you for taking the questions guys I appreciate it.
Thanks, Brett Thanks, Brian.
Okay.
Once again, if you would like to ask a question. Please press Star then one.
Mark Klein: The expectation is that the 15 to 20 million per month level of volume will continue for the majority of the next six months. We have, as previously indicated, been actively moving away from residential portfolio growth by changes to pricing with an emphasis on shorter duration products. It was encouraging that we sold 88% of our production in the quarter, and the yields on those sales were in line with what we achieved in the last four quarters.
There are no further questions I would now like to turn the call back to Mr. Mark Klein.
Once again, thanks for joining us. This morning, we certainly look forward to speaking with you in January to give you our fourth quarter and a full 28 23 at year end results Goodbye.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Mark Klein: Despite the headwinds that all banks have encountered this year, including us, quarterly non-interesting income has remained fairly stable. Our 4.2 million this quarter was up slightly to the prior quarter, prior year, but down slightly from the length quarter. We have settled into a 30% level of fee income to total revenue, which well down from our very high historical levels of high 30 to low 40s, which still places well into the top quarter title of our peer group.
[music].
Mark Klein: As we look at our year-to-date results, the negative impact from the mortgage business line, with 1.2 million of servicing right impairment and an additional 900,000 due to lower gain on sale, has clearly overshadowed a decent year in our other fee-based business lines. As that's, we remain committed to our title insurance business, and despite the obvious headwinds from the residential sector, we are pleased with the product. With the progress we have made this year in making peak title, the number one choice for our clients in our markets.
Mark Klein: For the current year, our state bank commercial team has delivered over 145,000 of revenue, or 11% of peak total revenue for the year, which is over double the commercial revenue from the prior year. This commercial contribution is nearly as high as our internal residential level of contribution for the year. We continue to emphasize the quality and capacity of our peak business line to all of our clients. As I indicated in our second quarter webcasts, our goal continued to be to generate 50% of peak revenue all else remaining constant.
Mark Klein: This quarter state bank delivered 34% of peak revenue and now claims 30% of their revenue year today. We spent the majority of the quarter integrating our new wealth management leader mitigating the loss of a prior wealth advisor remaining connected with our current wealth management client and developing new context as well. However, revenue growth has been challenged by the downward pressure in the equity markets and our need to identify more wealth advisors.
Mark Klein: Regardless, this business line continues to deliver a stable $3.7 to $4 million in annual revenue and continues to provide us a competitive advantage over our community bank peers. It remains a great complement to our private banking and commercial customer basis and helps ensure that we are providing our clients a comprehensive solution to all their financial needs.
Mark Klein: Secondly, more scale. Long growth from our linked quarter rose slightly as I previously stated. Conceptivity of your quarter over quarter rose dating back seven quarters has been a noticeable achievement in our overall balance sheet growth. We understand that growth will become more difficult as we look out to a potentially further slowing in the economy. Based on that scenario, our response will be to work twice as hard to deliver the same or better results.
Mark Klein: By doubling our calling efforts to our clients as well as our prospects that are tight to our competitors, a number of home has stepped away from lending. We expect that when the economy does turn, we'll be better positioned to achieve pre-pandemic levels of long growth. Growing deposits from the linked quarter was a key achievement as we have worked extremely hard this past year to maintain our deposit levels on par with the prior year.
Mark Klein: We have given our bankers the flexibility to elevate every deposit conversation with clients to ensure we are keeping and growing those valued relationships. Obviously, maintaining that deposit level has come as at a reduction of our net average margin with our year-to-day deposit cost of funds of a 101-based points from the prior year. Keeping that rise less than the increase in our earning asset yields that have risen to 119 in basis points does feel like an accomplishment in this rather challenging environment.
Mark Klein: Third, more scope. We closed just under one million dollars in SBA along this quarter, and thus far for 2023, we have originated 7.4 million dollars. That production, which we anticipate, will approximate 10 million for this year, is certainly less in our capacity and well below the goals we have set for this very profitable sector. With the increases in prime lending rate, we intend to adjust our traditional pricing model to drive portfolio balances and revenue higher.
Mark Klein: Fortunately, we are often able to attract the entire deposit relationship with each new SBA credit. Also, when coupled with our strong credit culture and the added safety net of the government guarantee, asset quality elevates and revenue stabilizes. We expect to expand our fourth quarter successes and provide the emphasis to a stronger 2024 in the SBA arena.
Mark Klein: As we have discussed in prior quarters, our investment in technology to help us better identify and target clients for business expansion continues. We are in the midst of our Salesforce integration project, and we are confident that both our corporate sales champion and consulting sales approach with each client will bring us closer to a bigger bank process, but with a community bank feel. As a result, we have accelerated sales trainings for each of our staff members with a focus to retain 100% of our current clients and deliver a strong community bank brand for all prospects alike.
Mark Klein: Operation Elections are our fourth key thing. Operating expenses were up just slightly in the length quarter as we had some check fraud and other portfolio non-reoccurring items. However, a large portion of our expense base is very well and tied to the number of units produced in our SBA and more business lines. As those volumes have declined, the associated compensation levels have also declined. We have also taken steps to reduce the fixed costs of both of these areas by reducing support staff and shifting responsibilities to departments with excess capacity. In fact, from the prior year, total FTE is down 17 or 6%, reflecting those impacts.
Mark Klein: Beginning in the fourth quarter, we will identify an issue to further improve our efficiency ratio. That said, we expect that our fourth quarter expense level will reflect a more efficient run rate near the $10 million per quarter range. And finally, to deliver more value to our commercial client base, we recently launched a comprehensive calling strategy across our entire footprint to deliver and potential implement positive pay risk mitigation software to protect our 1700 client accounts from fraud as well as constrain our operational risk.
Mark Klein: And finally, asset quality. Charge costs were, again, low this quarter, just $5,000, and for the year, we've had just $88,000, which equates to just one basis point of total loans. In fact, we have to go back 13 quarters to a down five period with net charge costs exceeding just $65,000. In addition, our reserve coverage of non-performing loans at 474% gives us great comfort moving forward. That our asset quality is strong and stable and prepared to confront any additional weaknesses All the underwriting and dynamic loan administration are clearly the common threats here.
Mark Klein: We had a slight uptick in delinquencies from the link quarter, which were all in the under 60 day category. The clients involved in the increase are now current, and we would expect that when we report our 2023 year in delinquencies, they'll be back in the mid-20 basis point range. We also denied anticipate having any material level of delinquencies in the current term in the portfolio outside of identified non-performing credits.
Anthony Cosentino: And Tony Cosentino or CFO will give you a few more details on the quarter. Tony? Thanks, Mark. Good morning, everyone. Again, for the quarter, we had gas net income of 2.7 million with EPS of 39 cents a share. It is notable that our free tax free version earnings adjusted for the OMS Army capture for the nine month period or up 550,000 or nearly 6% from the prior year nine month period.
Anthony Cosentino: Highlights of the income statement this quarter. Total margin income is declined from the quarter from both the length and prior years despite very strong growth and interest income. In excess of 25%, as a significant accumulation of funding costs impacted total margin. Margin ended the quarter down seven basis points from the June quarter and was down 37th from the prior year. However, we have seen some stabilization in our margin with declines in the past three quarters of 25, 20, and now seven basis points.
Anthony Cosentino: We anticipate that the fourth quarter will likely be the low point in our margin with the expectation that in 2024 we will start to cease of slow improvement. In addition to the shift in the mix of assets away from securities to loans, increases in asset pricing of driven earning asset yield higher in every quarter this year, and they are higher by 89 basis points would compare to the third quarter of 2022.
Anthony Cosentino: Low yield to the increase by the same level as new volume and contractual repricing have stayed consistent to market movements and raker. This quarter of margin betas have followed the pattern of the last two quarters and that our funding betas are exceeding the repricing betas on our earning assets. Specifically, the deposit and total cost of funding betas were 88 and 87 respectively. These are approximately 1.5 times higher than the loan and earning asset betas which are 60 and 58.
Anthony Cosentino: Since the Federal Reserve began the rate increasing cycle, the betas were both sides of the balance sheet are nearly neutral, with the earning asset betas 31 and the cost of funds betas at 28. Our level of fee income to average assets remained even to both the length and prior year quarter at 1.2%, and as Mark pointed out, has stabilized at the 30% level relative to total revenue. We track our coverage of non-interest expense to assets by non-interest income to assets every quarter.
Anthony Cosentino: In a perfect world, driving that coverage to zero is ideal, but we understand extremely difficult. This quarter at negative 1.9 is part of an improving trend in this metric for this calendar year as we have adjusted operating expense to reflect lower levels of feeing, comes, especially in the mortgage business line. Although this quarter did show some pauses in residential mortgage, especially our level of sold loans, and that our gain on sale percentage of 2.2 percent is in line with the linked and priority recorders.
Anthony Cosentino: Our ability to hedge the pipeline coupled with our historically high pull-through rate mortgage clients of nearly 90 percent has allowed us to demand very good loan sale yields despite the tough secondary market. We do, however, expect the next six months in the mortgage business to be difficult with total origination levels of roughly a hundred million. This would mark our lowest origination level in a number of years, but it's reflective of the near 8 percent rate mortgage market.
Anthony Cosentino: As rates potentially stabilized in the 2024 are consistency, in the market should allow us to quickly return to higher origination levels. Despite the slight uptick in total expense this quarter, our trend line to drive annual operating expense below the 41 million dollar level remains on track. We have reduced operating costs on consultants and are adjusting operating hours and our retail locations, which will contribute to the expense reduction that Mark just mentioned.
Anthony Cosentino: Oppensation and benefits as a percentage of total expense with 52.4 percent this quarter down from 56.4 percent in the third quarter of 2022. With compensation per employee rising 2.9 percent annually reflecting lower commission levels and our concerted efforts to manage employment costs effectively. Now as we turn to the balance sheet, the total size of our balance sheet experience is slightly declined from the link quarter due to marginal loan growth with our levels of cash and securities declining.
Anthony Cosentino: Securities as a percentage of total assets continued the reduction in the quarter as they are now just 16 percent of total assets. This compares to 17 and 18.7 percent for the linked and prior year quarters. Regular amortization and some small paydowns in the investment portfolio brought the balance down to near the 200 million levels. Encouragingly this quarter, the deposit growth, enabled us to pay down more high price repos and FHLB borrowings by over 26 million or 25 percent compared to the link quarter.
Anthony Cosentino: We did maintain the stable evaluation of our mortgage servicing rights which stood at 118 basis points. The servicing rights balance increased to 13.9 million with the servicing portfolio now at 1.37 billion up to slightly to the prior years. We continue to have very strong capital levels as Mark has highlighted. Our Common Equity Tier 1 ratio stands at 13.6 percent and even with adjusting for AOCI the level remains robust at 10 percent.
Anthony Cosentino: Tanger will look value for share as higher slightly compared to the prior year and when we adjust for the AOCI impairment our tangible book value for share would be 18.92 per share which is up 3.5 percent from the year end 2022. Our share buyback continued in the quarter although volume was down compared to our historical buyback run rate for quarter. Specifically this quarter we purchased 44,000 shares and an average price of 14.02 or less than 85 percent of the book and just slightly higher than our tangible book value.
Anthony Cosentino: As we stated, our own office allowance was stable in the quarter reflective of both minimal provision and charge us. Due to the small increase in loan balances, our reserve to loans remained flat to the link quarter, and it helped you 1.6 percent. Compared to the prior year, we have increased our reserve percentage by 11 basis points.
Anthony Cosentino: Our criticized and classified loans were relatively stable compared to the link quarter, and now standard 9.7 million, a decrease of 3.1 million of 24.2 percent from the prior year.
Mark Klein: I'll now turn the call back over more for closing comments. Thank you, Tony. We continued our Pacific pattern of raising our common dividend with our announced this week of a 13.5 cent per share common shareholder dividend, and for the year we've allowed you for cash dividends of 52 cents per share or nearly 3.6 million. Total dividend payoff ratio for this year will be approximately 30 percent with the current dividend yield of around the 4.2 percent, and we continue to buy back our shares to return earned capital to our owners.
Mark Klein: Dealing with 11 rate hikes since early 2022, including 4.25 basis point hikes this year, have impacted our reach sensitive business lines of mortgage and SBA significantly. We have worked to adjust resources where appropriate, and we'll continue to do so moving into the fourth quarter.
Mark Klein: Our budgeting process for 2024 is revealing in what markets and products we feel will have strength, and how our operation will emerge with greater emphasis on margin expansion and stabilization, balance sheet growth, and mixed change, and non-interested expense containment to preserve and grow EPS.
Sarah Mekus: And I'll turn the call back over to Sarah because for questions, Sarah. Thank you, Mark.
Sarah Mekus: We're now ready for our first question. We will now begin the question and answer session. If you would like to ask a question, please press star then one on your telephone key pad. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Once again, that was star then one to ask a question, and at this time, we will pause momentarily to assemble the roster.
Brian Martin: And our first question comes from Brian Martin of Janima Gummary. Please go ahead. Hey, good morning, guys. Hi, Brian. Hey, just thought maybe you could talk a little bit about the kind of the loan pipelines, just kind of how you're seeing those just given kind of the current market conditions, and then kind of just how your markets are performing. Hey, good morning, Brian.
Mark Klein: We come to the C-2023 as a bit of a year of acceptance for borrowers as they've got used to the new rate realities and some things. We thought we would see come to the fore earlier in this year have been delayed. That said, we do have some optimism for the fourth quarter of some of those projects that come online, anecdotally, we're hearing from letters that we're getting more calls folks, so pipeline seems to be accelerating again as opposed to just to the new reality on the rate side, but also seeing an economy that seems to be stabilizing and still showing some resilience has encouraged them to proceed with projects before they had had some preputation.
Mark Klein: Okay, and as far as just kind of your outlook, whether it be fourth quarter or just kind of next several quarters, I mean what type of growth rate, you know, I guess appears, you know, I guess kind of a near term bogie as far as what you might be able to see. You know, Brian, we're going to end this year, probably, you know, six-ish type percent when we fully finish, I think as we looked at expectations, that's probably the low end of the range that we're looking at in 2024.
Mark Klein: You know, a lot depends on really the commercial side because as you know, we would step back from the residential as much on portfolio. SBA has seemed to show some strength a little bit here in the fourth quarter and we've seen some more looks. So I'm hopeful that, you know, that number gets to call it the 7-8% range as we get out, which would be kind of a 70-ish million type total number for the year. And we'll see a lot more as we finish Q4. I think as Steve said, that's going to be pretty instructive in terms of what clients are looking at. Sure. Okay. No, I appreciate it. Thanks.
Mark Klein: And then how about just I think you talked a little bit on the mortgage production, maybe being a little bit lower here over the next couple quarters, just, you know, big picture, you know, I guess as we think about, you know, full year 24, you know, I guess can you give any thoughts or just, you know, how you're thinking about, you know, where that may shake out as far as what you're based on kind of extrapolating current trends what you're seeing today. Both that both that both value in my guess and kind of, you know, you're like you had the benefit this quarter's only, you know, more production.
Mark Klein: So just kind of what you're thinking of both front. Right. So, you know, I think you know, Q4 is probably going to be, you know, a $50 million type range of origination. I think we're seeing a little bit, you know, our pipeline seems to be in that 18 to $20 million level, you know, December looks to be dropping off a bit from that, so call that $50 million for Q4. I would think that's probably still going to be the level as we look at Q1 based upon, you know, the forward rate curves and the things that we're looking at.
Mark Klein: I do think, you know, our level of sales are going to be at a minimum 85 to 90%. We're not seeing the level of portfolio either by the client or anywhere else. I mean, I think the clients that are doing mortgage and are interested are focused on fixed fixed rate, Freddie Mac sale product. And we've had a certain certainly a back off in our PCG market, which had been incredibly successful for us in, you know, 2021 and into 2022.
Mark Klein: That certainly has seemed to come off the table quite a bit. You just follow up comment, Brian. You know, we do clearly expect that volume to rise again, maybe in the latter part of 2024. They may foresee some improvement in the rate environment and the rate curve. But we clearly have cut some expenses in that back into that process and positioned ourselves with the same number of MLAs we've had from Columbus to Indianapolis to Lower Michigan to do that $500 million.
Mark Klein: And with no additional cost. So we're prepared to move ahead and win the market right size of service fee. But it's still going to be constrained with potential higher rates and lower inventory. But we're prepared and since there were variable rate on compensation, we're willing to kind of stand. Gotcha. No, that's helpful.
Anthony Cosentino: And how about just flipping over to the margin for a minute? I think Tony, you said you're kind of indicated that it might reach a bottom here in 4Q and you may be see some stabilization or improvement next year. I guess just the funding cost pressure is beginning to bait. Just kind of wondering how you're thinking about, you know, the benefits on the opposite side with asset repricing maybe just how much in the way of loans repriced and kind of, you know, what trends you're seeing there to kind of give you some stability and or I guess expansion next year.
Anthony Cosentino: Yeah, I mean, you know, as we all talk about for all of us, it's the million dollar question. I mean, certainly the variability this year between how fast funding costs of risen relative to the asset side has slowed down. You know, we were two times that early in the year, we were, you know, one and a half times. We'll get closer to kind of a one to one, I think in 2, 4 of capacity.
Anthony Cosentino: [inaudible] You know, still remaining very strong. I mean, anything that, you know, I guess you're seeing as you come through this quarter, it sounds like the trends in criticizing classified were pretty stable. So, you know, eating indicators or at least the criticize are, are continuing to remain strong, just anything that you're more mindful of or you're seeing any stress in within certain areas of the portfolio. Now, Brian, we've been very satisfied with the performance of our portfolio.
Anthony Cosentino: We did a deep dive into our CRE portfolio, particularly the investment real estate, things that were coming up for repricing. And we were very happy with what we saw as far as leases that were in place, as well as the ability of those cash flows to withstand the pressure of an increased rate. So we feel pretty good about where the portfolio is right now.
Brian Martin: Okay, I think that's all my questions. So thank you for taking the question guys. I appreciate it. Thanks for having me. Once again, if you would like to ask a question, please press star, then one. There are no further questions.
Mark Klein: I would now like to turn the call back to Mr. Mark Klein. I'd like to get thanks for joining us this morning. We certainly look forward to speaking with you in January to give you our fourth quarter and full 2020-23 year end results.
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