SB Financial Group Inc (SBFG) 2017 Q2 法說會逐字稿

Good morning, and welcome to the SB Financial Group Second Quarter 2017 Conference Call and Webcast. I would like to inform you that this conference call is being recorded. (Operator Instructions) I will now turn the conference over to Melissa Martin with SB Financial. Please go ahead, Melissa.

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 www.yoursbfinancial.com, under Investor Relations. Joining me today are Mark Klein, Chairman, President and CEO; Tony Cosentino, Chief Financial Officer; and Jon Gathman, Senior Lending Officer. Before I turn the call over to Mr. Klein, let me add that this call may contain forward-looking statements regarding SB Financial Group's financial 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 and you are encouraged to review those factors. SB Financial Group 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.

I will now turn the call over to Mr. Klein.

Thank you, Melissa, and good morning everyone. Welcome to our second quarter webcast. As you know, we filed our earnings release yesterday and of course that will provide additional depth and details on the comments that myself and Tony will make today regarding our second quarter result. I'll make a few high-level comments, I'll talk about some of our initiatives and then Tony will dive into some of the details. For the quarter, GAAP net income was $2.3 million, a 2.3% improvement over the prior year quarter, representing a return on average assets of 1.09%, and a 16% improvement over the linked quarter. Net income available to common shares for the quarter was $2.07 million or $0.37 per share, representing a 5.7% improvement over the prior year quarter. Trailing 12 months EPS now stands at $1.45, a 16% improvement over prior year. Loan balances expanded $47 million or 7.7%. Top line revenue for the quarter expanded approximately 6.5% from the year-ago quarter and 10.8% from the linked quarter. Expenses increased 5.4% from the year-ago quarter, reflecting a positive operating leverage of 1.2x as a result of some of our expansion initiatives.

Expenses increased 5.7% from the linked quarter. Assets under management expanded to $407 million, a $40 million increase over the prior year quarter and a slight increase from the linked quarter. Mortgage origination volume for the quarter was $98 million, an improvement of $41 million over the linked quarter and 94% coming from new clients to State Bank. Asset quality metrics strengthened and finally SBA loan volume for the quarter came in at $4.2 million. Our results continue to reflect, as we've discussed in prior webcast, our 5 key strategic initiatives. They continue to be: revenue diversity; achieving scale with an expanded footprint and greater scope with deeper relationships in each household; high touch, seamless work class service; and market-leading asset quality. A little more detail on each. This quarter our noninterest income as a percent of revenue improved to 39.1% primarily from improved residential real estate lending and an expanded portfolio of wealth assets under our care. Our residential real estate volume increased over 72% from the linked quarter, but still short of the second quarter 2016 loan volume of $110 million. Mortgage banking continues to provide the majority of our non-interest income or $2.3 million for the quarter and 48% or $3.9 million year-to-date. We recently, as we've discussed I think in the prior quarter, hired a professional recruiter to develop bench strength in this business line by expanding our number producers to 30, or by 50%, while potentially entering new markets here in the Midwest. We have the processing platform, the product lineup, and our intent is to expand the staff to leverage these resources. SBA lending continues to make meaningful contributions to our quarterly performance. This quarter we produced $4.2 million in volume that resulted in over $369,000 in loan sale gains. These numbers were in line with the linked quarter and significantly better than the year-ago quarter. Our plans are to deliver total SBA loan volume of $17 million this year, and we are on track to meet these expectations.

As the economy continues to gain momentum, which is certainly evidenced by recent increases in Fed funds rates, we anticipate gathering momentum in small business lending. This strategy will potentially mitigate the effects of higher long-term interest rates, which could hamper residential loan sale gains.

Our vision for this relatively new business line is to be a top 100 producer in the U.S. by 2020. Under the direction of our new wealth leader, Chris Jakyma, we are gaining traction and expanding our assets under management, as well as our reach. As of quarter end, our year-to-date net asset growth is 7.7%. This number includes our brokerage assets, which have expanded by over $11 million from prior year end to nearly $64 million. New management and more bench strength, process improvements and business line referrals will drive future growth in this business line.

Our second initiative remains to expand market share and improve scale. Our newest office in Finley, that we've discussed in prior quarters, continues to provide organic balance sheet growth and strong SBA loan sale gains. Through this quarter, loan balances expanded to nearly $30 million, while SBA volume was $3.3 million with loan sale gains of $287,000. Our diverse team is providing holistic care and driving organic balance sheet growth. This expansion was a timely initiative that will continue to play a key role in delivering organic balance sheet growth.

Our Columbus operation continues to claim more market share. At quarter-end, our loan balances expanded to nearly $168 million, or an increase of over $10 million from year-end. Other balances have expanded to $32 million since we began offering deposit products in late 2015. The market is strong, our team is growing and the expectations remain high for this robust market. We recently completed our compliance examination, but have yet to receive the regulatory approval to open our 20th full-service office in Bowling Green, Ohio, although we have been calling up prospects, booking allowance and identifying talent to staff the office. As we stated last year, we're going to this college town because we like the regional demographics, and they continue to complement this region of our growing presence in Toledo and Finley regions. Third, our strategy remains to expand product service utilization by new and existing clients, in other words, greater scope. We continue to add more households and more products and services in those households by onboarding and cross-selling. Year-to-date, we have expanded our households now to over 28,000 or an increase of 3%. Likewise, our number of products increased over 1,100 to 57,000 and our number of services expanded nearly 1,600 to over 45,000. Delivering on our value proposition is enabling us to drive more scope in each household. Leveraging our presence in each household continues to be the path to organic balance sheet growth and especially our slower, more mature markets. Growth in a number of households and services in those households continue to hinge on each of our business lines working interdependently to identify client needs. It is through this relentless and intimate relationship-based process that we proactively identify opportunities to address client needs, while at the same time improving market share and our financial performance. In fact, this quarter we identified over 424 referrals, otherwise known as clients needs, and closed 275 of those for $17.6 million in new business for our company. Operational excellence is the fourth theme required for us to deliver our service levels as a sustainable competitive advantage. We continue to deliver on our value proposition and the notion that we never intend to lose a client from a gap in service levels.

Our engaged servicing staff plays a key role in our quest to create a brand known for high service standards. It is this world-class servicing attitude that has enabled us to not only grow our off balance sheet, but our on balance sheet as well. Mortgage servicing book improved to over $952 million in balances this quarter. All high-performing institutions continue to understand the importance of maintaining that quality in a loan portfolio, and clearly we are no exception. This remains the fifth initiative required to deliver our high-performance goal, and we continue to deliver on this commitment. Nonperforming assets improved by over $805,000 to 0.46%. Total past-due loans remain 0.34%, charge-offs for the quarter $54,000 or 1 basis point, and our allowance now, through nonperforming assets, has exceeded 200%.

Now I'd like to ask Tony Cosentino, our CFO, to weigh in and give us a little more detail, Tony, on our quarterly performance.

Thanks, Mark, and good morning everyone. For the quarter, as Mark indicated, we had net income of $2.3 million, $0.37 per diluted EPS, which was up $0.02 or 5.7% from the prior year, and up $0.06 or 19.4% from the linked quarter. As we look at some of the quarterly highlights, operating revenue was up 6.5% from the prior year and up 10.8% from the linked quarter. Loan sale gains delivered $2.7 million from mortgage, small business and agriculture. And lastly, as Mark said, we continue to reduce our nonperforming ratio, now down to 46 basis points. As we start with margin within the income statement, net interest income was up from the prior year by 8.4% and up from the linked quarter by 7%. End-of-period loan balances from the prior year were up $46.8 million, a 7.7% increase. And in this quarter specifically, we increased our loan balances by $24.9 million. Our average loan yield of 4.51% increased by 3 basis points from the prior year, reflecting the recent rise in rates and overall earning asset yield was up 6 basis points compared to the prior year. Both of these variances were impacted by some nonperforming interest recapture late in 2016.

On the funding side, we continue to experience an increase in the cost of our interest-bearing liabilities, coming in at 64 basis points for the quarter, up 9 basis points from the prior year and up 4 basis points from the linked quarter. We were more aggressive on deposit pricing this quarter in order to fund anticipated loan volume. Net interest margin at 3.73% was down just 2 basis points from the prior year, but was up from the linked quarter by 14 basis points. The second quarter reflected high loan fees compared to both the prior year and the linked quarter. Total interest costs -- expense costs have risen by nearly 27% from the prior year with the variance tied almost exclusively to increased volume. Loan activity has obviously influenced margin income from the prior year with total loan interest income of $7.3 million were up 8.9% from the prior year.

Over the last 4 quarters, we have produced $216 million in gross loan volume. As we discussed last quarter, net loan volume returned to a more acceptable level this quarter with balances up $25 million from March 31, which equates to a 16% annualized growth rate.

Total noninterest income of $4.5 million was up 3.6% from the prior year and up 17.4% from the linked quarter. Fee income as a percentage of total revenue was over 39%, as our SBA loan sale gains were supplemented by mortgage loan sale pricing. SBA loan production of $4.2 million, with gains of $369,000 as Mark indicated, was substantially in excess as the prior year and in line with the linked quarter.

On mortgage for the quarter, we had originations of $97.8 million, down from the prior year by $12 million or 11.3%, but were up $41 million or 73% from the linked quarter. This quarter's new purchase volume was 95% as the refinance market has slowed considerably with the rise in interest rates. Total gains on sale came in at $2.1 million in the quarter, which was nearly 2.7% on our sold volume of $80 million. For a comparison, we achieved 2.4% and 2.5% gain on sale percentage for the prior year and linked quarter respectively. Though although our volume is down 11%, better pricing and efficiency have kept our mortgage banking revenue decline to only 5.5% when we adjust for the valuation impairment.

Mortgage banking revenue for the second quarter was $2.3 million, up $300,000 from the prior year and up $671,000 from the linked quarter. The quarter included a negative valuation adjustment to our servicing rights of $39,000, compared to a positive adjustment last quarter of $35,000 and a negative adjustment of $469,000 in the second quarter of 2016.

At June 30, 2017, State Bank had $952 million in the servicing portfolio, which provided revenue for the quarter of $583,000. The servicing portfolio has increased by $121 million, or 14.5%, from the prior year, on sold volume for that period of $313 million. The market value of our mortgage servicing rights at $9.2 million increased this past quarter, reflecting the rise in rates. Our calculated fair value of 97 basis points was up 19 basis points from the prior year and flat from the linked quarter. Impairment reserves that were available for recapture in future periods totaled $240,000 at quarter-end.

On the expense side, total operating expenses this quarter of $7.8 million were up $0.4 million or 5.4% from the prior year, and compared to the linked quarter, expenses were also up $0.4 million or 5.7%. Net count for the company is up 13 since the prior year, reflecting staffing levels at new locations in addition to added resources in compliance, loan review and mortgage administration.

For the quarter, total operating expense was up slightly less than our 6.5% total revenue growth.

As we turn to the balance sheet, total loans outstanding stood at $652 million, which was 77% of the total assets of the company. We had growth of as we said $47 million from the prior year and were up $25 million from the linked quarter. Compared to the prior year our loan book grew in nearly every category, led by commercial real estate with $34 million, followed by C&I loans of close to $7 million.

On the deposit side, we were up from the prior year by $59 million, which is a 9.1% growth rate even though we were down slightly from the linked quarter by $5.6 million. Due to the anticipated closings from our loan pipeline, we continue to be more aggressive on deposit pricing and marketing in order to meet our expected funding needs. Matching loan growth with lower costs retail funding is a key managerial target. As we look at capital, we finished the quarter at $89 million, up $4.1 million or 4.8% from the prior year. Equity-to-asset ratio of 10.5%, down slightly, reflecting the growth in our loan book, and our tangible equity remains at the 7% level for the company.

Regarding asset quality, total nonperforming assets now stand at $3.9 million or 0.46% of total assets, with 98% of those in nonperforming loans. Total level of nonperforming assets is down $4.3 million from the prior year and down $0.8 million to the linked quarter. The large OREO property we referenced last quarter was sold in June, which explains the reduction from the linked quarter. Included in our nonperforming asset total is $1.4 million in accrued and accruing restructured credits. These restructured loans, which are nearly all maturity extensions, elevate our nonperforming level by 16 basis points. Absentees accruing restructured credits, our total nonperforming asset ratio would be just 30 basis points. Provision expense for the quarter was $0.2 million, up from 0 in the second quarter of '16, and 0 from the linked quarter. We did have loan losses in the quarter of $54,000. Our absolute level of loan loss allowance at $7.8 million is up from the prior year by $0.4 million or 5%.

And due to loan growth, our allowance to total loans percentage has declined from 1.23% at June 30, 2016, to 1.2% currently. Because of the reduction in nonperforming loans this quarter, we now have NPL coverage with our allowance of 205%, nearly 2.2x higher than the prior year. As we finish here, looking at year-to-date results, diluted EPS of $0.68 is up $0.07 per share or 11.5%. And total assets under our care, including mortgaging serviced and wealth assets, is now $2.2 billion as of June 30, 2017.

I'll now turn the call back over to Mark.

Thank you, Tony. We continue our strong performance trend with another solid quarter and ROAA of 1.09%, loan growth of nearly 4%, $98 million in residential real estate loans, excellent loan quality metrics and robust SBA loan sale gains. With more scale in our newer higher growth markets that we discussed coupled and with greater scope of services and existing households, our prospects for that top decile performance remained clearly in sight. We are pleased with our second quarter performance, which for us and all of our investors certainly sets the stage for a strong second half of the year.

And now I'll turn the call back over to Melissa if there are any questions from our investment community. Melissa?

Thank you, Mark. Operator, we are now ready for our first question.

(Operator Instructions)

While we're waiting for questions, I would like to remind you that today's call will be accessible on our website at www.yoursbfinancial.com under Investor Relations.

(Operator Instructions) The question queue is empty. This includes the question-and-answer session. I would like to turn the conference back over to Mr. Klein for any closing remarks.

Once again, thank you for joining us this morning. We certainly look forward to speaking with you in October for our third quarter results. Have a great weekend. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.