SB Financial Group, Inc. (NASDAQ:SBFG) Q3 2022 Earnings Conference Call November 2, 2022 11:00 AM ET
Company Participants
Mark Klein – Chairman, President and CEO
Tony Cosentino – CFO
Sarah Mekus – Executive Assistant, Corporate Secretary
Conference Call Participants
Brian Martin – Janney Montgomery Scott
Operator
Good morning, and welcome to the SB Financial third quarter 2022 conference call and webcast. I’d like to inform you that this conference call is being recorded, and all participants are in listen-only mode. We will begin with remarks by management, then open the conference to the investment community for questions and answers.
I’ll now turn the conference over to Sarah Mekus with SB Financial. Please go ahead, Sarah.
Sarah Mekus
Good morning, everyone. I’d 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; and Tony Cosentino, Chief Financial 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. Thanks for joining Tony Cosentino with me for our third quarter 2022 conference call and webcast. At a high level, highlights for the quarter include, net income $3.3 million, down $761 and 19% off from the prior year quarter, but would be up 9% when you exclude the PPP program and small OMSR recapture. On a year-to-date base, net income $9 million, diluted EPS $1.27, down from $2.08 EPS last year, or a decline of $0.81 per share. Excluding the effects of mortgage lending in both this year and last, EPS would have been up $0.14 per share year-over-year. Return on average assets 1.03%. Return on equity nearly 11%. Net interest income $10.4 million, was up 8.7% from a linked quarter, and 4.1% from the prior year. Loan growth and interest rate increases have offset our higher funding costs. Loan balances from the linked quarter rose $30 million. When we adjust for PPP balances, loans were up $81.5 million, ordinarily 10% compared to the prior year. Annualized, our loan growth for the first nine months of the year was a healthy 16.6%. Deposits grew from the linked quarter by $14.1 million, but were down nearly $26 million from the prior year. Expenses were down from both the linked quarter by 3.9% and prior year by 7.7%. Mortgage origination buying for the quarter was nearly $69 million, and for the trailing 12 months, they’ve now originated $388 million, despite the effects of the headwinds of this rapidly rising rate environment. The mortgage business line contributed $6.1 million in total revenue for the first nine months of this year, compared to 16.4 same period last year, a reduction of 63%. Asset quality metrics remain strong, with non-performing assets at just four 40 basis points. And net loan losses for the year now stand at a net recovery of 19,000.
We continue to attribute our success to our continued commitment to our five key strategic initiatives that we’ve talked about for a number of quarters, and that’s continuing to diversify our revenue, balancing net interest income with fee-based business lines, more scale, which for us is organic growth, more products and services, more scope, which is more households and more services and cross-sales and products in those households. And of course, excellence in our operations through better deployment of technology. And course, lastly, asset quality. First, revenue diversity. This quarter, mortgage volume and loan sale gains were down from the prior year 55% on volume to nearly $69 million, and 78% on gains to $876,000. The impact of higher rates is evidence of the percentage of mix of volume for the quarter with refinance at just 11%, and purchasing construction of 89%. This compares to the third quarter of last year when the split between refinance volume was 52%, and purchase business 48%, and obviously significantly more balanced. The relationships we have built with realtors over the past decade plus are paying dividends in this pivot to the purchase market. Non-interest income decreased to $4 million from the prior year quarter of $6.6 million. The current quarter includes a mortgage servicing recapture of $65,000 compared to a recapture of $248,000 in the third quarter of last year. Non-interest income to total revenue for the year still remains strong at 33%, but well below our traditional level of near 40%. Our wealth management team continued to provide stable and consistent revenue in the quarter of $930,000, and continues on pace to deliver annual revenue of $4 million. Despite our wealth assets under management now down $80 million year-to-date, we have still performed better than the NASDAG Index, and in line with the S&P 500 index. Clearly, different risk profiles, but our baseline and our decline was 15.4%, and the S&P 500 index down 15.3, NASDAQ index down nearly 29%.
Second initiative, more scale. Loan growth in the quarter was quite strong, as we were up 30 million from the linked quarter, and up $81 million net of PPP from the prior year quarter. All of our regional markets have solid pipelines, and we continue to prospect and call aggressively. With this quarterly growth noted, we have now grown five of our last six quarters, up over $100 million from 815 million in balances, to over $925 million or 13.4%. We intend to continue to drive organic growth as we enter the commercial arena of one of our newer markets in Indianapolis, Indiana. We feel confident this market is going to be complementary to our higher touch relationship-based model, and has been similar potential to that of our growth markets like Columbus, Fort Wayne, and Finley. The linked quarter growth and our deposit portfolio was welcome and reflective of the hard work our bankers have executed in reaching out to our current client and prospects proactive with. We continue to see strong competition for funding in each of our markets, both bank and non-bank competition, but we clearly intend to remain relevant in this retail-driven space as we continue to seek lower cost funding to grow our loan book. Our loan to deposit ratio was up again this quarter to 85%, and as we enter a bit closer to our historical levels, which would be somewhere in the 90s. The increase of 1.6 percentage points was a result of the increased deposits and loans I just mentioned.
Third is our strategy to develop deeper relationships, more scope, more services in those households. As we discussed in prior quarters, the success we garnered in the PPP program enabled us to capture over 200 new relationships, and expand on 920 existing ones, each driving more scope. And our SBA strategy post-pandemic has accelerated. This quarter, our SBA business line contributed $125,000 revenue as we have begun to witness more traction in the demand for 7(a) enhancements. We continue to have high expectations for SBA originations this year and beyond, and ones that will drive us to the top quartile of nationwide producers of SBA loans. Although our transition from PPP program to 7(a) program originated this year, it’s been lower than – slower than we expected. We have originated over $6 million this year-to-date in total volume. After the quarter, our pipeline stands at $15 million, and is strong as we’ve ever seen since the onset of the pandemic. All business lines benefited this quarter from continuing to work interdependently by making proactive referrals to one another and different business lines. In fact, today, our bankers have now made over 1,100 referrals to another teammate, leading to nearly 600 closure goals for an incremental additional $57 million in new business. To ensure our culture remains a collaborative one, we recently hired a corporate sales champion to expand key sales initiatives and drive best practices to complement impending sales strategies associated with our new CRN platform, Salesforce.
Operational excellence, our fourth theme. Our mortgage business line has enabled us to drive non-interest income to peer-leading, metrics with an average of 40% of total revenue over the last seven years. This success is also reflected in the growth of our servicing portfolio that now stands at nearly 9,000 households and approximately $1.4 billion, and generates $3.4 million in servicing revenue annually. With a reduction in originated residential saleable products and lower gain on sale, we continue to supplement our non-interest income with net interest margin on portfolio products, albeit with some mild duration risk, as we’ve mentioned in prior quarters. However, as the market eventually normalizes, we feel we are well positioned to capitalize on potentially the next wave of refinancing opportunities, should they appear. As such, we are expanding our pay-for-performance variable-based pay MLO stack to deliver something annually near that $460 million average production per year. With individual MLO production declining from an average of approximately $30 million to $15 million today, we continue on our path to identifying more producers to deliver that $500 million, from 22 producers at the end of ‘21 to 25 last quarter to 27 today. Our retail staff will continue to complement our first mortgage producer by delivering consumer second mortgages and home equity lines to continue to improve scale. Once again, as I mentioned, the expense levels year-over-year, as compared to the linked quarter, declined principally from lower mortgage loan volume and expenses related to that production. With reduced operational expenses in the business line we discussed last quarter, we continue to have the processing capacity to deliver something near our historical average. Plus, when we consider the cross-selling opportunities associated with those 9,000 households through our new CRM platform, we identify a clearer path to potentially greater organic balance sheet grow.
Retail office walk-in activity continues to moderate in the face of a very strong commitment to a more efficient digital delivery channel. As we reported last quarter, we are consolidating much of our daily digital and telephonic client transaction into our new contact center. When we deliver greater clarity on our service level commitments by optimizing our new CRM Salesforce, as I mentioned, we stand to improve both client intimacy and organic growth potential. And finally, asset quality. We understand there are a number of uncertainties associated with the economy. However, we have yet to identify any deterioration in our customers’ finance position. While we have not set aside any provision thus far in this year, despite our over $100 million in loan growth, we’ve remained comfortable with our current reserve level, due in part to that $5.5 million that we set aside the last couple of years. Coverage of non-performing loans, which we feel is a key metric that demonstrates the strength of our portfolio, stood at 313% at the end of the quarter. Our strong underwriting process should continue to pay dividends as we prepare to pivot as the credit cycle matures.
And now Tony will give us a little more detail on our quarterly performance. Tony?
Tony Cosentino
Thanks, Mark, and good morning, everyone. Again, for the quarter we had GAAP net income of $3.3 million, and then $9 million for the first nine months. And some highlights for the quarter. Total operating revenue was up 1.5% on a linked quarter, but was down 13.2 for the third quarter of ’21, as headwinds in the mortgage business have been offset by loan growth and improved margins. Loan sales delivered gains of $1 million for mortgage to small business. And for the nine months, total loan sale gains have been $4.2 million. Margin revenue was up $837,000 or 8.7% for the linked quarter, and when we adjust for PPP, loan interest income was higher by $1.3 million from the prior year or 14.7%. In addition, if we adjust operating revenue, remove the impact of PPP, and the entire mortgage business line, we have positive revenue growth of 19.2% and 16.1% from the linked and prior year quarter, respectively. As we break down further the third quarter income statement, looking at margin first, the impact of the PPP initiative was minimal in the quarter, as we are down to just one remaining credit. However, the year-over-year comparison is still material to our results, while adding just 114,000 to margin in the 2022 first nine months. PPP added $3.3 million for the prior year similar period. Adjusting average loan yields for both periods would result in a 21-basis point improvement from the prior year, and up 36 basis points from the linked quarter. The improvement in the loan yields and the shifted mixed out of cash and securities, drove a similar improvement in earning asset yields.
With our loan growth of low double digits, funding needs have accelerated in 2022. We have needed to fund that growth with retail deposit offerings at the margin and selective wholesale funding options. While we plan to allow our investment portfolio to decline over time with scheduled amortization, our expected loan growth will continue to require higher deposits and borrowing for funding. As we look at that funding cost in the third quarter, our deposit cost of funds came in a 31 basis points, with the cost of interest-bearing liabilities at 58. This compares to 21 and 39 basis points, respectively, for the linked quarter. From the linked quarter, the beta on our earning asset yields was 32 basis points, and the interest-bearing liability beta was 13. Clearly, competition has intensified for funding, and we expect that deposit and overall funding costs will continue to rise in the coming quarter.
Net interest margin at 3.46, expanded 30 basis points for the linked quarter, and compared to the prior year, was up 25 basis points, and would be up 55 basis points when PPP is excluded. The 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-bearing cash was allocated loans, and deposit levels would have declined. Year-over-year comparisons for total non-interest income, which was down to 39%, are compromised by the expected declines in mortgage revenue and the impact of the servicing rights for cash. If we look at the quarter and exclude the mortgage gain on sale on the OMSR we captured, non-interest income was up over 26% from the prior year, with the adjusted growth driven by better customer service fees, higher servicing income, and better swap activity. Our fee income to average assets was still a strong 1.2% for the quarter, and 1.5% for the first nine months of 2022. While down from both the prior year and our historical average, we are still above the 75th percentile of our 65-bank peer group, which as Mark had indicated earlier, revenue diversity is one of our strengths and a key initiative with not only mortgage, but wealth swaps and net service fee income we discussed.
As I discussed last quarter, residential gain on sale yield continued to stabilize, and came at 2.24% in the quarter, and for the year are at 2.32%/ This quarter, our sale percentage of originated loans was just 57%, and 62% for the year, as we’ve done much more portfolio and private client loan origination. These levels continue to be well off from our traditional 85% sale percentage. Market value of our mortgage servicing rights improved slightly this quarter, with a calculated fair value of 114 basis points. This fair value was up three basis points for the linked quarter, and up 30 basis points from the prior year. We now have a servicing rights balance of $13.5 million and a small remaining temporary impairment of $262,000.
Expenses of $10.4 million were down for both the linked quarter and the prior year, as our volume business declined. Expense levels moved in concert. However, our revenue reduction of 13.2% from the prior year was nearly double our expense tick line at 7.7%. But if we compare that to linked quarter, revenue growth was 1.5%, while expenses declined 3.9%. We expect that revenue growth will continue to improve a quarter-over-quarter, with better margins, while expenses will be up or slightly lower than the $10.4 million level from this quarter. The return on the balance sheet, loan outstandings at September 30th stood at $925 million, or 71% of total assets, which compares to 63% at the prior year. The third quarter saw another significant mix shift within our earning assets, as cash and securities declined by over $24 million from the linked quarter, while loans grew $30 million, and deposits grew $14 million. Our loan to deposit ratio ended the quarter up over 90 percentage points from the prior year. Historically, we have limited our investment portfolio to allow for higher loan growth, but we have moved from less than 10% of our assets in bond in December of 2019, to the current 19%, as our excess cash was invested. We were cognizant to remain shorter duration and focus on cash flow instead of yield, but that has subjected us to higher market value deterioration. We are comfortable now with the portfolio, with an average duration of just over five years, and should provide ample cash flow to expend to fund expected loan growth.
Looking at our capital position, we finished the quarter at $114.6 million, down 29.7 or 20.6% from the per year, with our equity and asset ratio staying at 8.8%. However, when we exclude the OCCI temporary valuation adjustment of $33.4 million, our equity grew 2.1% from the prior year, and would be 11.4% on an equity asset basis, even after over $6 million in stock buyback and $3.3 million in dividends. We continued to buy back shares in the quarter, with 77,326 repurchased. And year-to-date, we have repurchased over 300,000 shares or 4.4% of total shares outstanding. We expect to continue our buyback of our shares at these current prices funded with organic net income. Finally, all of our asset quality metrics are stable and positive and charge-offs continue to be well controlled for both the quarter and year-to-date. Total delinquency levels are just 31 basis points in the quarter, and were down from both the linked quarter and the prior year. Currently, our level of allowance to total loans is 1.49%, which is better than the major exchange rate from one to 100 billion buy 30 spheres.
I will now turn the call back over to Mark.
Mark Klein
Thank you, Tony. I want to conclude, as we’ve done in prior quarters, acknowledging the dividend announcement we made last week of $0.1250 per share, which represents a 27% payout ratio, and a dividend yield of 2.94%. Through nine months, our loan growth and higher rates have helped to offset the expected decline that we’ve certainly realized in the residential mortgage arena. Additionally, we continue to feel good about our markets, the pipelines we generated, the product lineup we have, and the prospects for continued balance sheet growth. Consumer households are strong, with lower cost leverage, resulting in lower overall debt to income ratios, and robust disposable income fueled by a 3.5% unemployment market. We continue to see positive economic growth absent much stronger Fed resistance should inflation persist.
Now I’ll turn the call back over to Sarah for any questions. Sarah?
Sarah Mekus
Thank you, and we’re now ready for our first question.
Question-and-Answer Session
Operator
[Operator instructions] First question comes from Brian Martin with Janney Montgomery. Please go ahead.
Brian Martin
Hey, good morning, guys. Hey, just a couple on for me just high level. Just on the mortgage, and I don’t – I guess whomever, maybe Mark, just on – or Tony, just on just your outlook here. I know you talked about kind of the dynamics and some of the lenders you’re looking – the MLOs you’re looking to bring on. But just as far as how to think about kind of the shift we’ve seen with rates and just the general outlook as far as kind of the volume outlook you’re thinking about here over the next couple of quarters and the gain on sale margins and just kind of sale percentages, any commentary that you can offer on the forward look here as far as just how to think about mortgage, given the changes we’ve seen?
Mark Klein
Yes, just a couple of comments, Brian. Obviously, remain bullish on it. We like the 9,000 households. We probably have 1.5 to maybe 1.6 services per household. So, we’re pretty excited about utilizing Salesforce and deepen that relationship. That said, as Tony and I both have indicated, the stateable market at seven, is substantially higher than where we were. So, we’re doing some of that 5.5 to six, 6.25 kind of mortgage portfolio product, which is keeping it on our books and positioning us for potential refinancing. But as I’ve gone on record a number of quarters that the variable is not the number. It’s the number of producers, and we just hired two high-level producers in the Indianapolis market, which is going to support our efforts down there. And that 500 is the number that we’ve concentrated on, albeit substantially less sold in the secondary market because of the product. But that’s where we’ve landed. Again, dropping to $15 million per producer would – you do the math, that would have us near probably 30 producers plus or minus. So, that’s where we’re headed, and we seem to be finding some of those people because other ones have begun to exit the business line. And Tony, I don’t know like what numbers we have in there for the quarter.
Tony Cosentino
Yes. So, Brian, we’ve got about $260 million through the nine months of originations. We’re going to end up somewhere between 300 to 320 for the full year, depending on how things roll out here in Q4. I would say our 2.25 being on sale yield is going to be pretty static here in Q4, maybe slightly up in ‘23. And certainly, looking in ‘23 to improve on that 325 total number by some 6% to 10%. We’ll see how that goes. We think we picked that up from competition falling away, as opposed to the overall market improving. We just think we’re going to get a bigger share of what is going to be a kind of flat to slightly down market. Clearly, refinance is going to remain in about that 10% to 15% of total volume, we think, through the end of ’23 until we maybe see some moderation in rate.
Brian Martin
Okay. And I guess your sale percentage, Tony, I guess, are you still comfortable – I guess you’re continuing to put it on the books for now? Or I guess I don’t know where that kind of peaks out as far as how much appetite you have to continue to do that just with the ARM products versus the fixed rate. But is that just generally how to think about we should continue to see that grow?
Tony Cosentino
Yes, I think that’s really the one unopen question. I think we’re still getting quality clients. I think the ARM product is attractive now because of, I think the shock impact of a 7% Freddie Mac fixed rate. I do think those rates will come down a bit, and I think people will get more used to it. So, do I think we’re going to get back to an 85% to 90% sale percentage? No, I wouldn’t think so. In ’23, we’re probably going to inch towards that 70% to 75% because we’re currently kind of in that 60% range, which I think is an anomaly that would be that low long-term.
Brian Martin
Yes. Okay, that’s perfect. That’s helpful. And so, it sounds like there’s plans to hire – do a fair amount of hiring potentially in ‘23, is how to think about that mortgage number. You’ve hired a couple recently, but this is – seems like there’s good opportunity to continue to add those folks.
Mark Klein
Well, when I read about Quicken and what’s going on in some of these places that have capitalized on the refinance market, we’re really happy that we’ve got the relationships we have, Brian, with the realtors we have, because as we pivot to this purchase market, I think that’s going to play well into our cards at what we’ve done with the strong lenders that we have. We’re just going to go after the perfect market, and we’re going to hire good producers in good markets, and again, we’re going to get back to the average that we’re built for. Healthwise, we continue to cut expenses and potential FTEs.
Brian Martin
Yes. Okay, perfect. And then just two – I guess kind of two others. So, just on the loan growth outlook, I mean, it’s been really good as you guys have outlined, particularly year-to-date. Just how should we think about that? With just rates being up, seems like concerns in the market. Is it – is the outlook kind of the pipeline for loan growth, are you seeing kind of leading indicators suggest that flowing? Is it still pretty active and your outlook is still very positive? Just kind of curious how the Fed actions are impacting your outlook there.
Mark Klein
Yes, I think some of it, Brian, is the fact that we have taken some duration risk in the last year, year and a half, and those lower rates have kept people in the deals, albeit with lower cap rates, which some people have begun to take a little profit off the table with lower cap rates. But that said, that seems to have stabilized, and we continue to make a lot of calls, as I mentioned, aggressively. As I mentioned, we just hired a corporate sales champion that’s going to get in the weeds for with all of our salespeople and all of our business lines, and just get a little more intentional with the digital platform we have and the new CRM platform we have, so we can take those 9,000 households and take them from 1.6 service per household because they largely came because of the mortgage business line, and hopefully expand them into two and three. That’s where we’re going to build organically. But I’m bullish on what we’ve done. again, we’re now in the Indianapolis market. We’ve started to gain some traction in the commercial arena down there, albeit slow, again, with the slowdown in the economy and the Fed stepping on the brakes a number of times including today. But generally speaking, we’re still seeing good opportunities. And the nice thing is that we’ve got some nice diverse markets that we’re in. I think it’s all playing well into our overall model.
Brian Martin
Okay. And the pipelines today, so it sounds like you’re still pretty optimistic about growth for 2023. I mean, maybe not at the pace obviously you’ve put up this year, but still pretty positive on the potential there.
Mark Klein
Yes. I think generally, again, I think the Fed’s moves are going to be data-dependent, and if they can ease off of the brakes here going into ‘23, I think that’ll be positive. I think it really depends on how the economy reacts. Car sales are down still. We’ve still got 3.5% unemployment. I don’t know where the people are going to come from to work, but they’ve got some work to do. And if the economy responds well, I think we’re going to continue to find clients that want to lever up a little bit, albeit with a little duration risk on our side.
Brian Martin
Yes, okay. That’s helpful. And maybe just – I don’t know, maybe for Tony on the margin. Tony, just in the margin expansion, just can you just talk about if – I guess maybe how the margin reacts over the next quarter or so, and just if we do see a pause by the Fed, does it – do the betas continue to kind of catch – the deposit betas continue to kind of catch up where maybe you’ve got a couple more quarters of expansion and then you start to see maybe a little bit of a decline in the margin just as those betas deposit, betas catch up and kind of overtake the loan beta. But just trying to think about how the margin trends here over the next two to four quarters.
Tony Cosentino
Yes, I think that’s spot on. I think we’re – loan betas kind of improved by three times what other betas did in the quarter. I would expect we’ll be kind of one to one in Q4. We fully expect there to be 75 basis points here this afternoon, and maybe one more here of some number, and then somewhat of a pause. I think it really – most of our margin expansion is driven obviously by the loan growth expectations. I would think in Q4, loans – we’re going to have a few payoffs that are going to kind of keep us maybe level to slightly up here in Q4. We did call it 100 million on a year-over-year basis, with maybe half of that on residential mortgage. I certainly expect as we go forward, residential mortgage as a percentage of our growth, is going to drop to call it 25%, 30%. I don’t think we’ll do as much on portfolios we have. But the pipelines are good. So, I think margin’s going to continue to improve in Q4 and in Q1, and then it’s going to be, I think, relatively stable as deposit costs catch up and funding costs cut into that asset margin improvement.
Brian Martin
Okay. And most of the improvement, Tony, it’s a combination of just the assets repricing upward and then just the remix you’re talking about, if you’re funding – sounds like you’re funding most of the growth from the cash flows on the securities portfolio. That’s the plan at this point?
Tony Cosentino
Yes. I mean, we’re going to have call it 10 million, 12 million of cash flow in Q4 from the bond portfolio, which we won’t roll over. We’ll just have that to fund loan growth. I still feel fairly good we can be stable to slightly up on the deposit side, be it maybe a little bit higher obviously, than what we’re currently paying. But I think that mix and the overall growth is a big function in driving margins.
Brian Martin
Got you. Okay. perfect. And maybe just one last one, just on the expense side. I mean, the trends were very favorable this quarter. Just, if you – just given the actions you took on – just comes from the efficiency standpoint and just being a little bit less production on mortgage. But just, sounds like this – the rate of expenses this quarter, level of expenses this quarter, appears like kind of a baseline level where you’re not expecting a lot of growth off that. Is that fair? Or just, when you think about next year, the inflationary pressures, if we just – what’s the best way to think about how to capture some of those drags, if you will, from the inflationary standpoint into the expense base as we look at next year?
Mark Klein
Brian, from the personnel side, we’ve seen a bit of a change in narrative. We’ve filled some open slots, but as you might expect, we’re going to be fairly deliberate as we have eliminated all overtime. We’re going to be looking hard at all positions that open up as to whether we refill them, which obviously is the biggest expense on our expense side, which is personnel. So, we’re looking at everything as we speak. We know we need to be more efficient. Our efficiency ratio is not where it needs to be. We try to improve it by improving our scale, which we’re okay with growing medium to the upper quartile on growth, which I think we’ve done a nice job on growing the balance sheet. We certainly need to continue to have a concentration on not only the commercial loans, but the C&I and the deposits that come with it through our treasury management side. That’s going to be a critical piece of our growth because that’s how we’re going to make the margins we need to incrementally expand. The average is adding the incremental higher, which is what we’re going to concentrate on. But that said, we continue to remain fairly bullish on where we find ourself.
Brian Martin
Got you. Okay. No, that’s helpful. And I guess just the last one really was just on – just the provision line or just reserving going forward with the growth, I guess is it – has it had a handful of quarters here with no provision, given the strength of the credit quality and kind of growing into the reserve. As we think about going forward, I guess should we start to expect some – I guess, is the reserve level now at a level you feel like is sustainable and we’re just provisioning for growth at this point? Is that kind of how to think about it, or is there still a little bit more recapture on that – on the reserve?
Mark Klein
Well, again, we’re pretty bullish on our underwriting process. We’ve had great results. Of course, everybody has in this market. Depending on what the Fed does and how the economy reacts, I think we’ll dictate a little bit of the path forward. That said, I think we need to continue to consider intimately what we intend to do in 2023, which is probably going to be some increase. We’re pretty content at the 1.40, 1.5, down from a 1.6 or so where we were before. But I would say in ’23, it’s going to be a little bit of a contribution to the reserve. We’ve never released any, but I’m really pleased that we took 5.5 million from the goodwill that we realized on the PPP program and stuck it into reserve that’s paying dividends as we speak today. But I do think there will need to be some addressing of the reserve size going into 2023 because we intend to continue to grow.
Brian Martin
Yes, Okay. That makes sense. And just you, Mark, you mentioned just your outlook on SBA. It seems a bit more bullish maybe than it has been. Is that I guess going to – I guess that’s your expectation, we should see a little bit more revenue growth next year out of that business, given kind of the trends you’re seeing now. It sounds like the pipeline was as strong as it’s been, and maybe I misunderstood your comments, but seem like you’re pretty optimistic there.
Mark Klein
Well, again, we had great traction. As you know, Brian, six years ago, seven years ago, we developed a strategy in SBA. We wanted to be in the top 100 in the US. We did probably $50 million in five years, and in PPP, we hit the pause button and did $112 million in PPP. Now we’re back at 7(a). We love the 7(a) program, as I mentioned, that we’ve got a decent year of $6 million so far this year, but we want to get back to the top quartile of banks that do produce SBA in the country. And we think we’ve got the right people out in the market. We think we’re in the right market. And again, in this environment where the economy is teetering a little bit, as I mentioned before, we love replacing equity with debt and we love the enhancements they can give us. The yields are marginally higher. We’re kind of in the driver’s seat on gathering those deposits. We’re on project-based financing. We don’t get deposits. This is project financing CRE, which doesn’t do anything for the liability side of the balance sheet. So, yes, we’re bullish on SBA. We can make great things happen on that, and we take good care of our producers that do them. So, I’d like to get us back to, in 2023, more of that $15 million to $20 million at least in our markets, because we’ve got great markets and now Indy gives us even more potential.
Brian Martin
Right. Okay. Perfect. Thank you, guys, for taking the questions and nice quarter.
Operator
Thank you. [Operator instructions]. At this time, we have no further questions. We’ll turn the call back over to Mr. Mark Klein for closing remarks. Please go ahead.
Mark Klein
Thank you. Again, thanks for joining us. We look forward to joining you all again in January with our fourth quarter of 2022 results. Thanks again for joining. Have a good day. Take care.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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