SB Financial Group, Inc. (NASDAQ:SBFG) Q2 2022 Earnings Conference Call July 26, 2022 11:00 AM ET
Company Participants
Sarah Mekus – Executive Assistant, Corporate Secretary
Mark Klein – Chairman, President and CEO
Tony Cosentino – CFO
Steve Walz – Chief Lending Officer
Conference Call Participants
Operator
Good morning, and welcome to the SB Financial Second Quarter 2022 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 Mekus with SB Financial. Please go ahead, Sarah.
Sarah Mekus
Thank you and good morning, everyone. I would like to remind you that this conference call is being broadcast live over the Internet and will be archived and available on our website at ir.yourstatebank.com. Joining me today are Mark Klein, Chairman, President and CEO; Tony Cosentino, Chief Financial Officer; and Steve Walz, Chief Lending Officer.
This call may contain forward-looking statements regarding SB Financial’s performance, anticipated plans, operational results and objectives. Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today. We have identified a number of different factors within the forward-looking statements at the end of our earnings release, which you are encouraged to review.
SB Financial undertakes no obligation to update any forward-looking statements except as required by law after the date of this call. In addition to the financial results presented in accordance with GAAP, this call will also contain certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release.
I will now turn the call over to Mr. Klein.
Mark Klein
Thank you, Sarah and good morning, everyone. Welcome to our second quarter conference call and webcast. Highlights for the quarter including a small mortgage servicing right recapture of $239,000 including the following; net income as we disclosed in our earnings release of $2.8 million down $1 million or 25% from the prior year quarter. On a year-to-date basis, net income was $5.6 million.
The year-to-date impact from the PPP initiative on our results compared to the prior year. It’s a reduction in revenue of $2.1 million and net income of $1.6 million. Return on average assets of 0.87% up from prior quarter of 0.83%, diluted EPS of $0.40, net interest income of $9.6 million was up 4.8% from the prior year as loan growth and rate increases were supplemented by the 12.4% reduction in interest expense.
Loan balances from the link quarter rose $45 million and when we adjust for PPP balances, loans were up nearly $80 million, strong 9.7% compared to the prior year. Annualized, our first half loan growth was 17.7% and that drove our loan-to-deposit ratio up from 75% to 84%. Deposit declined from the link quarter by $66 million and were down $19 million from the prior year.
Expenses were down $274,000 or 2.5%, primarily due to lower mortgage commissions. Mortgage origination volume for the quarter was $95 million down $69 million or 42% year-over-year. The mortgage business line attributed $4.7 million in total revenue for the first six months of the year, compared to $12.3 million for the same period in 2021.
Asset quality metrics improved from both the prior year end link quarter and our consistent level of 42 base points of non-performing assets remained strong while tangible book value when adjusted for OCCI [ph] is $10.53 [ph].
As of prior quarters, we continue to believe that our focus on our five key strategic initiatives will drive our future success. They are revenue diversity and expansion, organic growth, scale, more prior services and household for scope, excellence and operation and more intimacy with client communications and of course, asset quality.
Revenue for Peak Title continued to revenues forward by nearly $700,000 and net income by $168,000 or $0.09 EPS annualized. We made a strategic shift last quarter to generally follow legal protocol and reported Title terms on nearly all real estate transactions, while driving operational revenue higher with a more intentional focus on a commercial real estate segment. These initiatives are responsible for the 23% increase we delivered in revenue and 12% of net income.
This quarter, mortgage volume and loan sale gains were down from the prior year, 42% on volume, 72% on gains. For the trailing 12 months, we have delivered nearly $500 million in total mortgage origination volume that’s down 24% from 2020 and 32% from 2021.
Our initiatives to drive our volume of private client originations higher are clearly working. This quarter, 27% or $25.5 million of our total residential real estate volume originated from our PCG business line. Of that production, 41% came from our Columbus market, 22% from Northwest, Ohio; Northeast, Indiana and over a third from our newer Indianapolis market. Outside of our PCG initiatives, higher rate and compressed inventory continue to constrain our level of production.
Noninterest income decreased to $4.7 million from the primary quarter of $6.5 million. The current quarter includes a mortgage servicing recapture as I mentioned of $239,000 compared to an impairment of $99,000 in the second quarter of last year. Non-interest income to total revenue remained relatively strong at 33%, but well below our expectations on historical levels of near 40%.
Our wealth management team contributed $936,000 in revenue and are on pace to achieve total revenue in 2022 of nearly $4 million. Despite the volatility in the markets that we’ve all witnessed, we have retained balances in excess of $500 million, and that includes $38 million in our brokerage platform.
Secondly, more scale, loan growth in the quarter was very good as we were up $45 million from the link quarter of $79 million net of PPP from the prior year. All of our regional markets have very strong pipelines, including a number of client proposals currently in an under credit analysis. With this quarterly gross noted, we have now grown our book over the last five quarters.
This quarter saw evidence of consumer and our small business clients drawing down their liquidity and deposit declined from the linked quarter. Funding needs to support our loan pipelines are much more important today and as a result of our current deposit runoff, we have begun this selectively increased deposit rate to not only has higher future in industries [ph], but also protect existing balances and grow newer relationships.
Third more scope; the traditional SBA market has become to loosen a bit as we’ve witnessed and the PPP focus is clearly all but gone. Thus far this year, we’ve originated nearly $5.5 million in qualified SBA products. We continue to execute on strategies in each of our markets that include more calls on client’s prospects that are in either rate growth mode or a business acquisition mode who have identified a strong need for capital.
We remain committed to this true complement to our commercial loan production machine and intend to return to the production levels we experienced prior to the pandemic, that’d be in 2015 through 2019 when we averaged approximately $12.3 million production each year in that five-year period.
Operational excellence, the fourth theme, the mortgage business line has certainly been a key contributed to our success for the entire past decade. However, rate increases, operational challenges of construction lending, limited housing inventory, and a rapid increase in inflation have compressed our volume.
That said, we have focused on flexibility on our products and structure remain to improve our market share. With free fixed grade pricing now at or above 5%, our portfolio products have become certainly more relevant. These portfolio loans have increased our balance sheet outstanding and added the potential for expanding margins as rates drops.
Expense levels for the quarter were down from both the length and prior year quarters, driven by the variable nature of our mortgage production. As we discussed last quarter, we are evaluating the resources allocated to both our mortgage and retail business line.
Our goal is and has been for the residential business line the past six months to elevate our number of producers in order to keep our ecosystem in balance and optimized. I am pleased to report that in the last 30 days, we have made offers to over a handful of MLOs and we have landed three of those producers, one in the greater West Central Ohio market Lima, and two additional producers in the Columbus market and that’s five over the same quarter last year in number of producers and brings our MLO number to 25 an increase over the prior end of ’22.
Additionally, we intend to selectively utilize some of our traditional retail staff who do non-saleable consumer loans to originate some saleable residential loans to more broaden our production capacity as we discussed in the prior quarter.
Likewise, with walk-in visits moderating in our retail officer to due in part by our commitment to leverage our digital platform to enable access to our client’s data 24X7, we continue to re-evaluate our hours we staff and operate our offices.
This strategy hinges on the deployment of our new contact center that we delivered early July that ceases to provide seamless service to clients using multiple communication challenge. Rebalancing our resources here with market requirements will improve efficiency.
Our fifth and final initiative asset quality; this quarter saw again, a strong result of key asset quality metrics. Despite the significant loan growth in the quarter, we remained quite pleased with our current allowance of nearly $14 million during 2021. When PPP and mortgage refinance volume was adding to our revenue, we chose to add $5.5 million to our loans. We do not intend to release reserves anytime soon.
Currently our level of allowance, total loans is 1.54% and our non-performing coverage ratio is now 295%. Both metrics are well above the median level of our peer group.
And now, I’d like to ask CFO, Tony Cosentino to provide a few more details on our quarter, Tony?
Tony Cosentino
Thanks, Mark. Good morning, everyone. Again, as Mark indicated for the quarter, we had GAAP net income of $2.8 million or $0.40 per diluted share. So we’re highlighting this quarter, operating revenue down $1.4 million or 9.1% as mortgage gains from lower volume and reduced sales percentage were down nearly $3.1 million or 72%. We were able to offset portion of the mortgage variance with higher title agency revenue and deposit fees.
Loan sales delivered gains of $1.4 million for mortgage, small business and ag loans and margin revenue, which was up $436,000 or 4.8% due to a slightly lower funding costs and higher security revenue. Adjusted for PPP, loan interest income was higher by $468,000 or 5.5%.
Looking further into our income statement; on the margin side, our average loan yield for the quarter was 4.11% decreased by 22 basis points from the prior year, but it did increase 21 basis points from the linked quarter. As Mark discussed earlier, PPP impact on loan yields for 2021 was significant. In essence, that impact our average loan yield would’ve decreased by just nine basis points for the prior year.
Overall earning asset yield were up 20 basis points for the prior year and 49 basis points from the linked quarter due to the change in mix of the balance sheet and higher loan growth. Loan yields were impacted by the fees of the PPP portfolio, which were $2.15 million for the first six months of ’21 compared to $98,000 for the 2022 six-month period.
As we have indicated, funding needs and costs will begin to accelerate and as customer liquidity draws down and our loan pipelines are closed. As we look at funding costs for the current quarter, our deposit costs of funds came in at 21 basis points with the cost for interest bearing liabilities at 36 basis points. This compares to 22 basis points and 39 basis points respectively for the linked quarter.
Given the rise in funding rates, we were pleased with a negative beta on funding costs in the quarter. However, we recognized that our liquidity was a bit higher by our standards coming into the quarter and we expect deposit and overall funding costs to rise in the coming quarter.
Interest margin at 3.16% was up 22 basis points for the prior year and up 34 basis points when PPP is excluded. Compared to linked quarter, NIM was up 48 basis points. That significant NIM improvement from the linked quarter was driven by a positive change in mix on the asset side of the balance sheet as interest-baring cash with allocated loans and deposit levels declined. Total interest expense costs were down from both the prior year and linked quarters.
Total non-interest income was down $1.9 million or 28.5% from the prior year, reflecting lower mortgage origination and sales volume, which offset the $336,000 positive swing and servicing rights recapture.
As I discussed last quarter, gain on sale on yields have seemed to stabilize at the mid 2% level. Gain on sale yield for mortgage sales this quarter was 2.4%, which is still strong historically, but well off from the 3.6% yield from the second quarter of ’21. This quarter, our sale percentage was just 52% and 63% for the year as we have done much more portfolio and private client loan originations. These levels are well off from our traditional 85% sale percentage. Our servicing portfolio however, does continue to grow and is now $1.37 billion and provided revenue for the quarter of $863,000.
Market value of our market servicing rights improved slightly this quarter with a calculated fair value of 111 basis points. This fair value was up 27 basis points from the prior year and up six basis points from the linked quarter. We now have a servicing right balance of $13.4 million and remaining temporary impairment of just $327,000.
We’ve held expenses relatively flat for the last five quarters and for the year-to-date, total expenses are down 1.5%. We expect to trend down in the coming quarters, which we just resources in our retail mortgage business lines as Mark has discussed. The impact of the mortgage business line on our efficiency ratio is significant as our 25% decline in efficiency from 2021 would be reduced to an 11% decline when the results of that business line are excluded.
Now, as we finish up turning to the balance sheet, loan outstanding at June 30, still at $895 million, which was 69.2% of the total assets of the company. As we said, the quarter saw a significant mix shift within our earning assets as we saw cash and security declined by nearly $100 million from the linked quarter due to loan growth and deposit runoff. Our loan to deposit ratio ends the quarter at 83.6% up nearly six percentage points into our highest level since third quarter of 2020.
Looking at capital, we finished the quarter of $124.6 million down $19.5 million or 13.5% from June 30 with our equity asset ratio standing at 9.6%. However, when we exclude the OCC at $22 million, equity has grown from the prior year, despite nearly $7 million in stock buybacks at $3.3 million in common dividends. The payback continued — the buyback, excuse me, continued in the quarter with 94,000 shares repurchased at an average price just above book value.
We did also take advantage of our on balance sheet liquidity and purchase some additional policies in the quarter. Sometime since we’ve added to this portfolio and there is nice benefit for both the company and those participating employees.
And finally, as Mark commented, all of our asset quality metrics are improved and charge-off were minimal for both the quarter for the year to date. Our reserves to loans was just two basis points down from the prior year. Total delinquency levels are 32 basis points in the quarter down 27 basis points for the linked quarter and down nine basis points from the prior year.
I’ll turn the call back over Mark.
Mark Klein
Thank you, Tony. I want to conclude again with acknowledging the dividend announcement we made yesterday of $0.12 per share, which equates to approximately a 30% pay-out ratio and a dividend yield approximately 2.8%. Clearly, while mortgage volume and resulting gains are off considerably, marginally higher rates and a steeping yield curve with our asset essentially balance sheet, provide some lift to our total operating revenue, with continued organic loan growth with strong pipelines, stable deposit costs and more intentional expense control, we certainly expect to continue our earnings and growth amount well into the second half of the year.
And I’ll turn it back to Sarah for questions, Sarah?
Sarah Mekus
Thank you. Now, we’re ready for our first question.
Question-and-Answer Session
Operator
[Operator instructions]
Sarah Mekus
While we’re waiting for any additional questions, I’d like to remind you that today’s call will be accessible on our website @YourStateBank.com.
Operator
[Operator instructions] There are no questions at this time. I would like to turn the conference back over to Mark Klein for closing remarks.
Mark Klein
Once again, thanks for joining us on our conference call and webcast. We look forward to speaking with you again in October to discuss the third quarter 2022 results. Thanks again for joining goodbye. Take care.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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