SB Financial Group Inc (SBFG) 2018 Q1 法說會逐字稿

Good morning. Welcome to the SB Financial First Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Melissa Martin, Executive Assistant. Please go ahead.

Good morning, everyone. I would like to remind you that this 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. 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, which you are encouraged to review. SB Financial Group undertakes no obligation to update any forward-looking statement, 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 first quarter 2018 webcast. Our comments today on our first quarter performance are a supplement to the earnings release that we filed yesterday.

Briefly, highlights for the quarter include: GAAP net income was $2.5 million, a 23% improvement over the prior year quarter, representing a return on average assets of 1.08% or a 12.5% increase; net income available to common shares for the quarter was $2.2 million or $0.35 per share, representing a 13% improvement over the prior year quarter; trailing 12 months EPS now stands at $1.79, a 25% improvement over the prior year of $1.43; operating revenue expanded over $1.6 million to -- or 16%. Loan balances expanded nearly $11 million or 1.5%, while deposits grew over $19 million this quarter or 2.6%, and over 5% from the year-ago quarter.

Expenses expanded from the linked quarter by over 6%, reflecting the tax incentive initiatives that benefited our staff, clients and our communities that we announced earlier this year.

Assets under management in our Wealth Management division contracted this quarter to $412 million, a 5.8% decline from the linked quarter but were up 1.8% over the year-ago quarter, and I'll talk about that more in just a moment.

Mortgage origination volume was down nearly 19% from the linked quarter to $58 million, but up over 3% from the year-ago quarter.

Our production continues to be constrained by marginally higher rates and limited housing inventory for sale.

Asset quality metrics continue to be one of our core competencies and strengths.

SBA loan volume for the quarter was over $10.6 million, representing a 300% increase over the linked quarter and 130% over the year-ago quarter.

And finally, we finalized our divestiture of our item processing and statement production shop, known as Diverse Computer Marketers or DCM, the first of this year.

We continue our steady course to deliver on those 5 key strategic initiatives that we've discussed for a number of quarters. They are: revenue diversity; all-important organic balance sheet growth for scale and efficiency; broader product set, all about scope for more products in each household, customized service levels to achieve operational excellence; and of course, continued top-tier asset quality. And I'd just like to expand a bit on each.

First, revenue diversity. This quarter, we delivered over 35% of our revenue from fee-based business lines, down marginally from that historical number for us of 40%. Our results represented a 3.7% improvement over the linked quarter and 11.6% expansion over the year-ago quarter. While our mortgage business line volume declined nearly 19%, our SBA lending division closed the gap. Our strategy from the start has been to augment our strong mortgage lending presence with a newer SBA lending strategy. As the Federal Reserve increases interest rates reflecting that stronger economy, our 2 business lines responsible for nearly 55% of our noninterest income were counter to each other. Our mortgage business volume declined with marginal higher rates, as our SBA line expands in response to those higher rates and a stronger economy. Thus far, in 2018, this theory has held quite well and has certainly prevailed.

With limited housing inventory, as I mentioned for sale in nearly all of our markets, coupled with a bit higher rates, our net mortgage banking revenue was down by over 24%. Even with this decline, we managed to expand our servicing portfolio to over $1 billion for the first time to over $1.004 billion, representing growth over the prior year-end of approximately $100 million.

This past quarter, our $58 million of production came from each of our 3 distinct regions: Columbus generated $33 million; Defiance region, $14 million; and Findlay, $11 million. We intend to continue to use this business line as a gateway to the household, especially, in our lower-share, higher-growth markets. To augment our declining production levels, we recently hired 2 additional mortgage lenders in the Columbus market. The variable here is not the production volume but rather the number of mortgage-lending professionals producing the volume. And that's bear, we continue to keep our sight set on generating $500 million per year in this business line by 2020.

Our SBA strategy continues to mature and gain momentum in an expanding economy. This quarter, we sold nearly $8 million of our production for over $600,000 in loan sale gains.

As I mentioned in our year-end webcast, we continued to leverage our Business Development Officer or BDO model, to drive us closer to our annual strategic production goal of $40 million, with nearly $11 million in volume this quarter. We are making meaningful progress and executing on our detailed strategic plan.

We ended 2017 with total assets under our care in our Wealth Management division of $437 million, $363 million in Traditional Wealth assets and $74 million in the brokerage platform.

As of March 2018, traditional assets under our care stood at $366 million and our brokerage assets, $46 million. The decline in brokerage assets was a result of a large loan payoff that was collateralized by securities held by our brokerage division.

With new talent in our Findlay market, and soon to have additional new talent in our Fort Wayne market, we continue to have strong prospects to expand assets under our care.

Our second initiative remains to add scale and improve efficiency.

This quarter, we continued to drive organic balance sheet growth. As I mentioned, we grew total loans by nearly $11 million, absent held for sale. Including held for sale, our loan growth was over $15 million. Lima region grew $3.9 million; Defiance, $3.4 million; Columbus region, $4.2 million; Toledo, $1.3 million; and Findlay, $5.5 million. 6 of our 9 regions delivered organic loan growth this past quarter.

Our strong regional leaders and decentralized business model certainly contributed to our balance level of production.

Third is our strategy to deliver greater scope. Our onboarding and reboarding efforts are contributing to our lift in our households and products and services. This quarter, we grew our households by another 177 to over 28,700 or less than 1%. We also grew our products and services from 83,300 at year-end to over 84,378 at quarter end.

Our Chief Technology Innovation Officer, that we hired recently, continues to drive the development of our digital platform to ensure we remain relevant, timely and intimate with all of our clients, as we leverage all potential communication channels with our clients.

Operational excellence is our fourth key theme. At year-end, we reported a mortgage-servicing portfolio of $995 million, representing over 7,000 households. I'm pleased to report that as of this quarter, we've achieved one of our strategic goals: To deliver a $1 billion sold-mortgage portfolio. Of course, not only does this business line provide the entryway to the household that we've spoken of a number of quarters, but also delivers $2.5 million in reoccurring revenue annually along the way.

Back this quarter, our staff identified another 451 client needs that were referred to another business line. These opportunities, in turn, enabled us to develop customized strategies to address those needs with appropriate solutions. As a result, we delivered 144 solutions to our clients that led to additional business to our company of over $11 million.

Our fifth key initiative is asset quality, one of our core competencies. Nonperforming assets declined by $1.2 million to 0.38%. Past due loans now stand at 0.32% and net charge-offs of just $10,000 or 1 basis point.

Our reserve to nonperforming loans now stands at 239%.

I'll turn the call over to Tony Cosentino, our CFO shortly, but let me touch on 2 major events we accomplished this quarter.

First, as all of our listeners know from prior webcasts, we had a small technology company that provided item processing and statement processing to small community banks in our tristate region. In order to focus on our core banking franchise, we divested of DCM on January 1. The buyer is a well-known provider of these services, and we think it's certainly a great opportunity for not only the new owner but our 20 clients and our loyal employees as well. This transaction had a small impact on our financials in the quarter, and we wish certainly everyone involved a continued future success. Tony Cosentino will touch on this in more detail shortly.

Also this quarter, we completed common share capital raise that added 1.6 million shares and $30 million in Tier 1 equity capital. It was certainly exciting for Tony and me to tell our story not only to a number of institutional investors but also to our long-standing retail shareholder base. These results were certainly at the top end of our expectations, as we were well oversubscribed, and we were very, very pleased to add 15 new institutional investors to our shareholder base. These added shares and sponsorship has driven up our daily trading volume to 3x our previous levels, and our institutional percentage of ownership now stands at 40%. We are confident of our ability to leverage this growth capital and to expand our presence appropriately in our markets and adjacent markets. Now, I'd like to ask Tony Cosentino to give us a few more details, Tony, on our performance.

Thanks, Mark. Good morning, everyone. For the quarter, as Mark indicated, net income of $2.5 million or $0.35 per share. That EPS of $0.35 was up $0.04 or 13% from the prior year. And when we adjust for the $1.7 million tax credit in the linked quarter, EPS was down just slightly $0.02 per share.

Highlights for the quarter include operating revenue up 15.9% from the prior year and up 1.7% from the linked quarter. Loan growth was up $80.5 million from the prior year or 13%. Loan sales delivered gains of $1.8 million from mortgage, small business and agriculture. The reduction in our income tax rate year-over-year from 32% to 19% added $4 million in -- $0.4 million to net income or $0.05 per share.

As Mark indicated, we did complete the sale of our processing company, DCM, which resulted in $0.4 million in revenue and $0.2 million in expense for the quarter, netting about $200,000 roughly after tax.

The common capital raise we completed in February added 715,000 shares to our average share count for the quarter.

And lastly, as we've indicated, we continue to reduce our nonperforming ratio, which is now down to 38 basis points.

Our year-over-year comparison, as you can imagine, has some noise in it. I thought I'd just take a few minutes to reconcile our EPS growth. This quarter, we had provision expense of $0.3 million, which reduced EPS by $0.03 per share, as we had no provision in Q1 of 2017. This was offset, this $0.03, by our 10% earnings growth for the quarter. The sale of DCM, as we indicated, added $0.02. The decrease in the tax rate added $0.05. And finally, our new shares reduced EPS by $0.03 from the prior year, netting our $0.04 year-over-year calculation.

As we break down further the first quarter income statement, starting with our margin, net interest income was up from the prior year by 18.4% and up slightly to the linked quarter. End-of-period loan balances were up $80.5 million, an increase of 12.9%. The average loan yield of 4.59% increased by 31 basis point from the prior year and overall earning asset yield was up 37 basis points.

In addition to the balance sheet impact, the Fed rate increases have driven yields higher. We are starting to see some general market rise in loan rates, and we expect the remainder of 2018 will reveal a gradual increase in loan pricing.

On the funding side, we continue to experience an increase in the cost of our interest-bearing liabilities, coming in at 71 basis point for the quarter, up 11 basis points from the prior year and 2 basis points from the linked quarter.

Net interest margin, at 3.86% on a taxable equivalent, was up 17 basis points from the prior year but down from the linked quarter by 10 basis points. These variances were all due to the combination of higher deposit costs, loan growth and reduced fees from softer mortgage loan origination volume. Total interest expense costs have risen by nearly 27% from the prior year, with the variance tied almost exclusively to increased volume.

Loan activity has increased -- has influenced margin income from the prior year, with total loan interest income of $8.2 million, up 20%. Clearly, $80 million of increased loan balance is a key driver. We are confident that our pipeline will continue to provide loan growth in the same growth range throughout the remaining quarters this year.

Total noninterest income of $4.2 million was up 12% from the prior year, with fee income as a percentage of total revenue nearly 36%, as SBA loan sale gains of $0.6 million offset the softer mortgage origination market.

As we said, we finalized the sale of our processing company in the quarter, which had a net income impact for the quarter, of $0.2 million or $0.02 per share and included in fee income from the sale was roughly $400,000 of revenue.

During the quarter, mortgage originations of $58.5 million were up from the prior year by $1.8 million or 3% but were down $13.6 million or 19% from the linked quarter. This quarter's new purchase volume was 96%, as the refinance market has effectively gone away.

Total gains on sale came in at $1.1 million, which is over 2.7% on our sold volume of $41 million.

The servicing portfolio, as Mark indicated, above $1 billion, provided revenue for the quarter of $625,000 and is on pace to deliver between $2.5 million and $2.6 million in total revenue in 2018. This servicing portfolio is increased by $0.09 billion or 9.5% from the prior year.

The market value of our Mortgage Servicing Rights increased this past quarter, reflecting the rise in rates. The calculated fair value is now 20 -- 122 basis points, which was up 16 basis point from the prior year and up 8 basis points from the linked quarter. And we did have a slight recapture of impairment of $92,000 in the quarter. At March 31, 2018, our Mortgage Servicing Rights were $10.2 million, up 17% from the first quarter of '17 and up 3% from the linked quarter, with the remaining temporary impairment of $59,000.

Total operating expense this quarter of $8.6 million were up $1.2 million or 16.9% from the prior year and compared to the linked quarter, expenses were also up $0.5 million or 6.4%. Expense levels were elevated as we had higher SBA commissions.

We allocated some of our tax savings to our staff, and the prior year had some significant credits from our Freddie Mac activity. The sale of the DCM facility added $0.2 million to expense, and for the quarter, total operating expense was up slightly more than our 15.9% revenue growth.

As we turn finally to the balance sheet, loan outstandings at 3/31 stood at $707.2 million, 76.4% of the total assets of the company. We had growth of $80.5 million from the prior year and were up $10.6 million from the linked quarter. Compared to the prior year, our loan book grew in every -- in nearly every category, led by commercial real estate with $55.6 million, followed by residential real estate of $15.1 million.

On the deposit side, we were up from the prior year by $35.9 million, a 5% growth rate, and up from the linked quarter by $19.2 million or 2.6%. It is clear that deposit pricing is rising in all of our markets. The competition for new and existing deposit relationships has been elevated. We have restructured or retail group to emphasize more outside sales, especially in treasury management, and we expect our deposit cost to grow, as we fund our ongoing loan pipeline.

As we look at capital, obviously, we finished the quarter at $122.9 million, up nearly 35% -- up, sorry, $35 million or 39.6% from the prior year.

Capital levels for the company were supplemented with our common capital raise of 1.67 million shares, resulting in a net increase in capital of $28 million. The equity-to-asset ratio of 13.3% was up significantly from the prior year.

And finally, regarding asset quality, total nonperforming assets now stand at $3.5 million or 0.38% of total assets, with 98% in nonperforming loans. The total level of nonperforming assets is down $1.2 million from the prior year and down $0.3 million to the linked quarter. Included in our nonperforming asset total was $1.1 million in accruing restructured credits. These restructured loans, which are nearly all maturity extensions, elevated our nonperforming level by 12 basis points. And absent these credits, our total nonperforming asset ratio would be just 26 basis points.

We did have provision expense for the quarter of $0.3 million compared to no provision in the first quarter of 2017 and also up slightly $0.1 million from the linked quarter. We had loan losses in the quarter of $10,000, and our absolute level of loan loss allowance at $8.2 million is up from the prior year by $0.5 million or 7%. Due to loan growth, our allowance to total loans percentage has been declined from 1.23% at 3/31/17 to 1.16% currently. This allowance levels still places us at the median of our peer group, which bodes well given our top quartile peer NPA ratio. Because of the reduction in nonperforming loans this quarter, we now have NPL coverage with our allowance of 239%, slightly higher than the prior year.

A great start to the year, net income growth of 23%, 13% loan growth and a quarterly ROAA of 108 basis points. Mark, I'll now turn the call back over to you.

Thanks, Tony. Great job. Overall, as Tony indicated, it was a great start to a new year. Certainly, with an expanding economy, stable margins, strong asset quality and certainly, much stronger capital position, we're poised to deliver another strong performance in 2018. Our marginal revenue and marginal cost structure remains favorable to deliver higher operating revenue, since our average commercial lending portfolio is just $32 million; a lot of opportunity, clearly. More organic balance sheet growth is optimal in building shareholder value, but it certainly doesn't temper our desire to expand our reach in the new markets and leverage our expertise in business lines. I'll now turn the call back to Melissa for questions and comments. Melissa?

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

(Operator Instructions)

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

Our first question comes from Brian Martin with FIG Partners.

Just a couple of things from me, just more big picture kind of questions for you guys. Just, I don't know how you want to take them, but maybe just a little bit of commentary, if you can, about the margin. I know, Tony, you talked about deposit cost going up. Just kind of looking at the rate environment, a couple of more rate increases and just kind of how you expect the margin to, kind of, unfold here, kind of the puts and the takes over the next couple of quarters in kind of from the current level. So if you can give a little color on that, that would be helpful.

Yes, Brian. Thanks for the question. Thanks for joining us today. Certainly, we know that our betas on deposits are going to certainly increase. We're the 96-plus-probably percent loan to deposit. So we are out on the streets, and as Tony indicated, we've got some great strategies on the treasury management side to keep pace with the lending side. But there's no question about it, we certainly received the Fed increases quite enthusiastically, but clearly, our betas are going to increase. And I know, Tony, if you've got some additional comment on that.

Sure. Thanks, Brian, for the question. Q4, we had a little bit of a one-time event. We recaptured some nonperforming interest and added about 7 basis points to margin, relative to this quarter. I would say, as we look out going forward, we have about $100 million of our loans that are directly impacted by immediate rate increases that have passed those floors. So that's kind of a $250,000 impact to any normal Fed rate increases. Deposits, really, we don't have a lot of rate sensitivity. But that's going to be driven by competition, which we are already seeing is moving fairly swiftly in some of our markets. Columbus is very competitive, Toledo is very competitive, and candidly, we've probably utilized all we can out of some of our legacy markets in terms of that low-cost funding.

Just one last comment, Brian. You know the good part about our diverse broad market footprint is that we have an opportunity to go to various markets to obtain the best marginal cost of funding. And so we plan that strongly, and we certainly have a renewed focused on C&I lending, which is hopefully, going to bolster that -- those lower costs core transactional deposits.

Right. Okay. So I guess, the bias -- if you do get a couple of more rate increases, if you get another one this year, and then maybe another one late, the general bias would be kind of an upward bias on the margin, is how you would think about it from the current level? I mean, it sounds like there is more -- it seems like you are leaning more towards the pressure on the funding side as opposed to benefit on the loan side, which may be suggested it's kind of downward bias. I guess, just trying to understand, which were the biases given the environment and with rates going higher here.

Well. Yes, I would say on paper, the bias certainly would be that rate increases are good for us. I would say, we've seen reaction in the marketplace quicker on the deposit front than we've seen on the loan side. I think the loan pricing will get there, it might be a little bit delayed. We're starting to see some inklings that something with a 4-handle on it is becoming rarer and rarer for us on the loan side and that had not been the case most of the last 12 to 18 months.

Okay. So maybe it's flattish to down a little bit in the near term until the loan pricing catches up with what you're going to have to do on the funding side.

I think that's accurate.

I would say, Brian, that's exactly what we're seeing. And as Tony mentioned, we're still seeing certainly, a lot of pressure on the lending side because everyone certainly knows the advantages of greater scale. So that's very competitive, and we are going to see probably a bit tighter margin before we see a widening one.

Yes. Okay, that makes sense. I appreciate that. I also appreciate the comment on the loan outlook. I mean, I guess, as far as geographically, it sounds like most of the markets are doing pretty well this quarter. And I guess just kind of your thoughts on loan growth for the year. I guess maybe can you put a little color on how you're thinking about it? I mean this quarter was a good start to the year, kind of seems like it's a seasonally soft quarter for a lot of people. So kind of that high single-digit, low double-digit type of growth is that kind of how you guys are thinking about the balance of the year?

I'll make a couple comments and then I'll have Jon add some color to this. But certainly, as I mentioned, Brian, with a $30 million average portfolio balance, if you look at our structure and our marginal revenue and marginal cost structure, we've got a lot of upside potential. We're poised for growth, and I think you can see from the past several years growing a couple of hundred million. Our expectations are equally high, and that double digit, I think, is certainly in our real house. And we kind of referenced in the past a number of times that we have like 8 cylinders in our vehicle and from time to time, we hit on 4 or 5 of them. And certainly, with the economy, the way it's going, I think, and Jon would probably agree that maybe 6 or 7 of them have begun to fire. So all is good, I think. But Jon, what are your thoughts?

No, just quickly, I agree, we're off to a good start, and we're optimistic about the pipeline here in the second quarter. We've got our staff. I think it's the first full year where we're fully staffed everywhere with right people in the right places and have the time to build the pipelines. Some newer markets obviously are doing well as Mark alluded to earlier in Findlay, Toledo, Fort Wayne, and so forth. It's worth note, we also had a fair amount of notes that we closed toward the tail end of the fourth quarter that are draw notes. There's significant level of those that again, we intend to see draw-up here through the second and third quarters of 2018.

Perfect, no, that's very helpful. So thanks, guys. In the markets, it sounds like there's -- that some of the more metro markets are maybe a little bit bigger drivers of the growth this year. Is that how you guys would kind of see things unfolding?

Well, Brian, that's certainly an idea. We've talked about low-share, high-growth markets for a long, long time and clearly, when -- in the markets that we play in, in the specific counties in Ohio and Indiana, lower Michigan, it's about $72 billion worth of deposits, and we have less than 1% of that total. So our opportunity for organic loan and deposit growth is quite high. And as I've mentioned in our annual meeting webcast, we expect to certainly gather our fair share of that larger market deposit base. So a lot of opportunity. And as Jon mentioned, we are well staffed and certainly, well poised to ride this economic expansion to a much higher level of asset.

Perfect. Okay. That's helpful. And then just on the fee income side, just kind of talking about both the, I guess your lead businesses, your SBA and the mortgage, maybe can you just give a little bit of color on the SBA business and kind of your goal of where you're going over time? I think you said, what, $11 million right now, and your goal was $40 million. And, I guess, do you expect that business to be pretty consistent? Is it going to be lumpy? I know you had a nice increase this quarter, but I know you've hired some folks as well. But just how we think about that, that business and kind of your goal as it -- and should we expect it to be a little volatile?

Jon?

Well, I think we expect as we continue to -- on SBA specifically?

Yes.

Yes, we can -- we expect that level out a bit by virtue of adding BDOs. We continue to add BDOs. We're currently in process, we believe, of hiring 2. We have some offers out to a couple. So we think that will smooth it out a bit. But as you saw in the first quarter, we had 2 very large SBA loans close. So those large numbers are going to continue to create some variability. But our direction and our plan is to continue to smooth those numbers out.

Brian, just one comment. We're very bullish on SBA lending. We kind of have an idea of knowing what we're doing. As of the third quarter of 2017, given the fiscal year of the government at year-end, we were 283rd out of 2,000 banks that are active in U.S. in SBA lending. So we have the expertise. We're expanding out on the fringes of our current market. And it's a space that we never played in before. It was a product that if we didn't have SBA, we would've walked away from the past $30 million or $40 million that we would've done. So we like the space, we like the incremental benefit of building balance sheet with the nonguaranteed portion. And it gives us, certainly, someplace to go when it comes to C&I in some of our faster-growing markets. So we like it a lot, and we intend to achieve our 2020 vision and goal of generating $40 million per year in annual volume.

Okay. And how big is that nonguaranteed portion on the balance sheet today?

We've done about $42 million or so in total volume, really, since we've ramped up, and we've got about $11.5 million on our books as we sit here today. So right about that kind of 25% on average loan.

And Tony, a nice incremental New York and probably 2 generally on the balance sheet ramp. So it's a win-win all the way around on that front.

Yes. Okay, perfect. And then just same thing on the mortgage, I guess, there's been a lot of angst, I guess, in the market about higher rates, and you guys had a nice quarter here and up year-over-year. And just trying to understand what your expectations are? Or just -- it sounds like you're also hiring a couple of folks to maybe offset some of that -- that rate increase is challenging environment. I guess, maybe just kind of big picture thoughts on how mortgage unfolds over the balance of the year?

Right. Well, again, I've said a number of times in various webcasts, but the variable isn't the production number, the variable is the number of people, and we have an offer out to a very high producer in Northeast Indiana. We just brought in 2 more in Columbus. And our goal is to get that $500 million annually. Last year, we had a budget of $475 million and only brought $316 million in. So the constrained inventory and higher rates certainly dampen that. But now we're back up to an expectation of $375 million to $400 million, and we've just again, brought on 3 high producers and if they get $15 million, $20 million each, we have high expectations of delivering our budget of $375 million. But 94% of our clients this past year were all new to our company. So you can bet that we are leveraging our retail presence and social media channels to reach out to those people and increase our services per household to something certainly greater than 3 per household. We have -- and as I mentioned, in our annual meeting, Brian, if we could just get one more service per house, we could increase the size of our bank by nearly 35%. So a lot of opportunity and new markets certainly are poised for more opportunity for SB Financial all the way around.

Okay. And how many people have you hired, Mark? I guess recently -- and then I know you said you've got an offer out. But has there been a lot of recent hires? Was it 2 you said? I guess, I missed what you said on that front.

Yes, we have an offer currently out to a high-producing individual in Northeast Indiana, which is going to expand us by 1, and we just brought on 2 additional high producers in the Columbus market, and we are -- of course, we're looking for more producers in each of our existing footprint. So again, if we take on an average of $12 million to $15 million per producer, we know we have to gather at least several more in this upcoming couple of quarters. So again, we're intent on delivering, we're structured to deliver a $400 million-plus and again, the variable is the number of producers, not the dollars.

Right, okay. That's helpful. And just the -- kind of the gain on sale margin. I guess that was down, looked like a little bit on a linked-quarter basis and -- but up year-over-year. Just around where it's at today, does it feel like it's a sustainable level? Or how do you see that unfolding?

Yes, I think that 2.7% range is -- if you look back a couple of years, we're clearly 50 basis points to 60 basis points better than we were in the past. We've made some efficiencies on the backend with some hedging and with our pricing structure. And I think as rates move, as you know, higher, pricing gets a little bit tighter. But I would be confident we're going to be in that 2.7% to 2.8% range for most of this year.

Okay. Thanks, Tony. And maybe just the last couple of things for me. Just on the -- you talked about the expenses, Tony, and you kind of gave some pretty good color on pulling out the divestiture in the quarter. I guess, does the current run rate or I guess -- how do we think about expenses? I mean, if you back out kind of the noise in the quarter that you talked about with this sale, is this a pretty good benchmark to, I guess, what $8.4 million or so a quarter? And how do you see that kind of unfolding in the next couple of quarters based on kind of what you guys are anticipating from a budgeting standpoint?

Yes, if we take out the impact of DCM, we call it an $8.4 million. We had some one-time events related to some of the tax initiatives we shared with our people, which is probably net-net a couple hundred-thousand dollar number. So based upon volume on the mortgage side, which is really a variable, that $8.2 million to $8.3 million level per quarter, I think would be a good baseline. And then it will drive up or down, based upon mortgage origination and significant SBA origination.

Okay. So at least that's a pretty decent level to think about it, like you say, as a baseline. So all right. And then just the last 2, just the tax rate. I think, I guess, where it's at today, now that we've kind of made the change with the -- with Trump here, I guess, is this a pretty good level to use as an effective tax rate, going forward? Or does it modify much from where it's at today.

The -- we had a little noise in the first quarter, not much. But we do most of our stock incentives in Q1, and with the new FASB, we got a little bit of a pickup. So we're going to be between 19% to probably high 19s percent to 20%, based upon municipal volume and some of that kind of stuff. So I'd certainly think 19% would be the absolute floor we would have. We're going to trend probably closer to 20% tax rate by the end of the year.

Okay, perfect. That's helpful. And then, I guess, just the last thing. As far as leveraging the new capital, obviously, I guess, you guys sound like there's plenty of organic opportunity to put that to work. Maybe just you guys haven't been overly active on the M&A side in a number of years. So I guess just wondering what -- how are you thinking about the external, the M&A part of it? And just kind of opportunities that are out there that -- I guess are -- does there seem to be more opportunities today than they have in the past? I guess just any color or commentary you can offer on the M&A side. I think, just how to think about, it would be helpful.

A couple of comments, Brian, and certainly, Tony will have some comments, I'm sure. But now with little bit of strength in our currency that we've found in the last several years at 150% of tangible book in that arena, it's kind of put us in the game. And we've had some -- certainly some great meaningful conversations with some potential strategic partnerships here. So now that we have the capital, we know where the value is going to come from and the incremental effect of being able to leverage that capital 10x is going to be better than just lending the money out. We know how that works. But given our organic balance sheet growth, which we've really concentrated on so that we could maintain 80% of our sustainable growth rate by our own generated profits, is what we've keyed on. Keep our capital, hand out a few dividends but primarily, keep that capital to grow organically. Now that we've got a performance, something towards the top decile of our 65-bank peer group, now we're getting a little more bullish and certainly, having more meaningful conversations with some strategic partnerships that could really put us at that next level and well above that $1 billion mark that we're looking for and $160 million on our full market capitalization, which quite possibly, will get us a ticket to the Russell 2000. That's the overarching goal and that's what we want to do with our new-found capital.

No, it's fine. We have fairly consistently been able to grow with the level of our earnings. So we think this is why the capital raise was so critical to us. It gives us a bigger checkbook, and we're looking at a number of deals, and we feel very confident that the marketplace is going to be very positive towards our company expanding in an M&A front some way and somehow based upon the right price and the right transaction.

Okay. And just geographically, it sounds like from the comments, it's more kind of in-market or contiguous. Is that kind of or how -- or I guess could we expect maybe potentially see a leap to a different area? I guess, how you're thinking geographically? What are kind of the parameters, if you will? And what you guys would entertain looking?

Well again, organically has certainly been the focus in-market. We certainly wouldn't shy away from in-market. We think there's some key opportunities there. And quite honestly, Brian, we just think we have the bench strength and the products and services and talent to grow the $1.5 billion, $2 billion, $3 billion. So with, certainly, an increased emphasis on the fringes, which would be contiguous and on the borders of our current footprint, would certainly be a focus. And we think, there's a number of opportunities out there today. And we're certainly pursuing each.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mark Klein for any closing remarks.

Once again, thank you all for joining us, and we certainly look forward to delivering on our second quarter results, July of this year. Goodbye.

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