SB Financial Group Inc (SBFG) 2018 Q2 法說會逐字稿

Good day, and welcome to the SB Financial Second 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. Please go ahead.

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.

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 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. Nice to have you all with us. Welcome to our second quarter 2018 webcast. Our comments this morning are supplemented by the earnings release that we filed yesterday.

Briefly, highlights for the quarter include net income, $3.1 million, a 34% improvement over the prior year quarter, representing a return on average assets of 1.35% or a 23.9% increase. Diluted EPS for the quarter, $0.40 per share, representing an 8% improvement over the prior year quarter. Trailing 12-months EPS now stands at $1.82, a 26% improvement over the prior year of $1.44. Operating revenue expanded over $1.2 million or 11%. Loan balances expanded over $46 million or 6.4% from the linked quarter and nearly $102 million or 15.6% from the year ago quarter. Deposits likewise grew just slightly from the linked quarter but nearly $46 million or 6.5% from the year ago quarter. Expenses in support were down from the linked quarter but up 9.9% from the prior year. Mortgage origination volume was up $51 million or 87% from the linked quarter to $109.5 million and up nearly $12 million or 12% from the year ago quarter. Asset quality, a common theme with our company, continued to be one of our competitive strengths. SBA loan volume, finally, slowed a bit from our strong first quarter, but we still originated nearly $1 million in our activity, reflects strength in each of our higher-growth markets.

We continue on our steady course to deliver our 5 key strategic initiatives. We discuss them every quarter. It's all about the revenue diversity, organic growth to deliver scale and efficiency, a broader product set in not only new households but existing ones as well, world-class operational excellence and, of course, the top-tier asset quality that we've mentioned quarter-after-quarter.

And now a bit of expansion and color on each. First, revenue diversity. This quarter, we delivered over 34% of our revenue from fee-based business line and were down slightly from the linked quarter and a bit lower from our historical 40% level. Our results were also down 5% from the year ago quarter. Adjusting for the sale of DCM, which we completed on January 1 of this year and discussed earlier, fee income would be up 11% from the linked quarter and flat to the year ago quarter.

This quarter saw a marked improvement in mortgage volume, as I mentioned, albeit a bit more of our variable rate portfolio product. SBA lending was a bit slower this quarter, as I mentioned, although our year-to-date results of nearly $12 million in volume is clearly in line with our expectations through the 6 months. Pipelines in both mortgage and SBA remain solid.

Despite limited housing inventory for sale in nearly all markets, a constraint we've discussed for several quarters now, coupled with marginally higher rates, our net mortgage banking revenue of $2.3 million was level with the year ago quarter. We managed to expand our servicing portfolio now to $1.03 billion, representing a growth over the prior year quarter of nearly $80 million.

This past quarter, we generated $109 million in production, as I mentioned. Columbus generated the bulk of that volume at $62 million; Defiance, Northwest Ohio, and Northeast Indiana, $28 million; and West Central Ohio and Findlay produced another $19 million. We are using this business line as the key gateway to the household and then deploying our retail staff to begin developing a much deeper relationship.

We have recently hired an additional mortgage lender in the Northeast Indiana market in addition to the 2 MLOs we added in the first quarter in our Columbus, Ohio, market. We now have a total of 22 MLOs across our footprint, with a near-term goal of 29 as we keep our sights set on our longer-term vision of $500 million in production per year in new and adjacent markets by 2020.

Our SBA strategy continues to gain traction in an expanding economy. This quarter, we sold nearly 1 million of our production for over 117,000 in loan sale gains. We now have business development officers in Columbus, Westlake, Greater Cleveland and Toledo, and soon to be announced an additional BDO in Fort Wayne, Indiana. Our incentive-based, production-driven model continues to move us closer to our strategic production-level goal of $40 million in loan volume and a top 100 ranking in the U.S. by 2020 among banks that do SBA lending. With nearly $12 million in volume thus far this year, we are making meaningful progress and clearly executing on our plan. As of June 2018, we improved our ranking to 207 out of the 1,692 banks in the U.S. that have closed an SBA loan, or the 88th percentile. We will continue to refine our plan and the markets we serve to become that top 100 producer in the U.S. by 2020.

As of June 30, 2018, we had total assets under our care in our Wealth Management division now of $408 million: $360 million traditional assets and $47 million on the brokerage platform.

As we expand our presence into new and existing markets, we have developed more opportunities as our pipeline has strengthened to over $54 million. This progress now includes a wealth management presence in our newer Fort Wayne market with a seasoned investment advisor, Mr. [Cameron Helma].

Our second initiative remains to add scale and improve efficiency. This quarter, we expended organic balance sheet growth and the operating revenue that accompanies it. In fact, all 9 markets delivered net increases in loan growth this past quarter. Setting the pace for our company was the Columbus region that added $21.1 million; Defiance, nearly $11 million; Toledo, $6.5 million; and Fort Wayne, $2.3 million. Decentralized market-specific business models delivered by each of our strong regional leaders provides the inertia.

Deposits also expanded this quarter by $4.1 million from the linked quarter and up from the prior year by $45.6 million or 6.4%. We now have treasury management professionals working with our commercial and small business lenders in each of our newer, low-share growth markets to attract deposits. In addition, we have redeployed a number of our retail staff into every market now focused on small business lending and deposit gathering from our commercial and small business clients.

Third is our strategy to deliver greater scope. As we've discussed in prior quarters, onboarding and reboarding efforts by our retail staff continue to provide lift in not only our number of households but our products and services as well. Household is now over 29,000, increasing slightly from the linked quarter and 2.9% from the prior year. We also grew our products and services now to over 85,000, increasing 1.3% from the linked quarter and 3.8% from the prior year.

We continued to improve and supplement our digital platform, which, this quarter, was highlighted by the revitalization of our bank website. Additionally, we saw a 23% improvement year-over-year increase in our number of mobile banking users, a trend that continues.

Operational excellence, the fourth key theme. At quarter-end, we reported a mortgage servicing portfolio of $1.03 billion, representing 7,300 households. As we have discussed for many quarters, not only does this business line provide the entryway to the household but also delivers that $2.5 million in reoccurring revenue annually along the way. We fully intend to leverage our presence and expertise in this space.

In November of last year, we hired a Chief Technology Innovation Officer, Ernesto Gaitan, who had spent the majority of his career at GE Capital. Under his leadership as a Six Sigma Expert, we have begun now, under his leadership, to realign our processes and improve key operational metrics to ensure we deliver a seamless, unique client experience at every touch.

Working interdependently to serve our clients and identify referral opportunities enable us to add value to our relationships. It's part of our culture. As a result, this quarter, our staff identified another 591 client needs that we referred to another business line. These referrals led to 352 solutions for nearly $26.5 million. Of those 352 referrals we closed, 175 resulted in home equity loans for over $5.1 million, and 105 referrals resulted in residential mortgage loans for $11.8 million. We are making every attempt to provide 100% of what the client needs and nothing of what they do not.

Our fifth key initiative, asset quality. Nonperforming assets declined by $700,000 to just 0.34%; total past-due loans now at 0.23%; and net charge-offs, just $25,000 or 1 basis point. Our reserve to nonperforming now stands at a robust 264%.

Before I turn the call over to Tony for additional comments and color, I'd like to comment on the capital raise that we completed in February, which added 1.6 million shares and $30 million in Tier 1 equity capital. Clearly, this capital, along with strong earnings, has provided us a solid foundation of tangible common equity to both fund and support the robust organic balance sheet growth I just mentioned. The additional liquidity and sponsorship of our stock is evident in our increased stock price.

And now I'd like to ask Tony Cosentino to provide Tony -- some more details on the performance this past quarter.

Thanks, Mark, and good morning, everyone. As Mark has previously highlighted, we had net income of $3.1 million or $0.40 per diluted EPS for the quarter. That EPS of $0.40 was up $0.03 or 8% from the prior year and up $0.05 or 14% from the linked quarter. Of course, any comparative is impacted by the addition of the 1.67 million new common shares from February as well as a reduction in our federal tax rate, coming down from 32.1% in 2017 to 18.4% currently.

So some highlights for the quarter. Operating revenue, up 10.9% from the prior year and up 6.1% from the linked quarter. Loan growth was up $101.7 million from June 2017 or 15.6%. Loan sales delivered gains of $2.2 million from mortgage, small business and agriculture. Our mortgage volume of $109.5 million was 11.9% higher than in the second quarter of 2017. And lastly, as Mark indicated, we continue to reduce our nonperforming ratio, which is now down to 34 basis points.

As we break down further this second quarter income statement, beginning with our margin, and despite the headwinds of a flattening yield curve, net interest income was up from the prior year by 21% and up 9.4% from the linked quarter. End-of-period loan balances from the prior year were up $102 million, an increase of 15.6%. Our average loan yield for the quarter of 4.97% increased by 46 basis points from the prior year. Overall, our earning asset yield was up 54 basis points from the prior year.

In addition to the balance sheet impact, the 3 rate increases have driven yields certainly higher. With 70% of our loans of a variable nature, we will continue to see higher loan yields on average but not necessarily at the same pace that we are seeing an increase to our funding costs.

On that funding side, we continue to experience an increase in the cost of our interest-bearing liabilities, which came in at 80 basis points for the quarter, which was up 16 basis points from the prior year and up 9 basis points from the linked quarter. Net interest margin at 4.14% was up 41 basis points from the prior year and up from the linked quarter by 28 basis points. These variances were all due to the combination of somewhat higher deposit costs, significant loan growth and fees from higher mortgage origination.

Total interest expense costs have risen by nearly 30% from the prior year, with that variance tied almost exclusively to increased volume, and slightly rates us in the second half of the quarter.

Loan activity has influenced margin income from the prior year, with total loan interest income of $9 million, up 24%. And clearly, $102 million of increased loan balance is a key driver. It is a -- we have a strong pipeline, but it is unlikely that we will repeat the $46 million of loan growth we realized this quarter going forward.

Total noninterest income of $4.2 million was down from the prior year, which reflects somewhat lower SBA gains and, certainly, the sale of our DCM business that occurred in the first quarter of this year. Fee income as a percentage of total revenue, still healthy at nearly 34%.

For the quarter, as we indicated, mortgage originations of $109.5 million were up from the prior year by $11.7 million or 11.9% and were up $51 million or 87% from the linked quarter. This quarter's new purchase volume remained high at 95%. And in the quarter, we saw a measurable shift by our clients into variable rate mortgages, which drove higher on-balance-sheet residential outstandings.

Total gains on sale did come in at $2.1 million, which was 2.6% on our sold volume of $79 million. Our servicing portfolio of $1.03 billion provided revenue for the quarter of $636,000 and is on pace to deliver $2.5 million in total revenue in 2018. That servicing portfolio has increased by $80 million or 8.2% from the prior year.

The market value of our mortgage servicing rights remained level this past quarter. Our calculated fair value of 121 basis points was up 15 basis points from the prior year and did result in a very slight $22,000 impairment. At June 30, those mortgage servicing rights were $10.6 million, up 15% from the second quarter of 2017 and up 4% from the linked quarter. Our total temporary impairment remaining is $81,000.

Operating expenses this quarter of $8.6 million were up $0.8 million or 9.9% from the prior year. But compared to the linked quarter, expenses were down $50,000.

On a year-to-date basis, operating expenses were up 13%, reflecting the sale of DCM and the tax initiatives we discussed and distributed in the first quarter of 2018. However, operating leverage for both the quarter and year-to-date are positive.

Now as we turn to the balance sheet, total loan outstandings at June 30, 2018, stood at $753 million, which was 79.7% of the total assets of the company. We had growth of $101.7 million from the prior year and were up $46.1 million from the linked quarter. Compared to the prior year, our loan book grew in every category, led by commercial real estate with $54.2 million, followed by residential real estate of $35.6 million.

On the deposit side, we were up from the prior year by $45.5 million, a 6.4% growth rate, and up slightly from the linked quarter by $4.1 million or 0.6%.

Deposit and funding costs continued their rise this past quarter. The rate on interest-bearing liabilities of 80 basis points is up 16 basis points or 25% from the prior year. Adding the impact of noninterest-bearing demand drops our total cost to 66 basis points but also up 25%. We've offset these higher costs by moving our loan-to-deposit ratio up 6% to 100% as of June 30, 2018. But it is critical that we continue to match deposit growth with loan growth for profitability and liquidity requirements.

Looking at our capital position, we finished the quarter at $125.9 million, up $36.1 million or 40.6% from June 30, 2017. We continue to be pleased with the added liquidity and sponsorship of our shares after the completion of our capital raise in February. The equity-to-asset ratio of 13.3% was also up significantly from the prior year.

Regarding asset quality, total nonperforming assets now stand at $3.2 million or 0.34% of total assets. The total level of nonperforming assets is down $700,000 from the prior year and down $300,000 to the linked quarter. Included in our nonperforming asset total is $1.1 million in accruing restructured credits. These restructured loans, nearly all maturity extensions, elevate our nonperforming level by 12 basis points, and absent those restructured credits, our total nonperforming asset ratio would be just 22 basis points.

Provision expense for the quarter was $300,000 compared to $200,000 for the second quarter of 2017 and flat from the linked quarter. We did have loan losses in the quarter of just $25,000. Our absolute level of loan loss allowance at $8.5 million is up from the prior year by $700,000 or 8.6%. Due to loan growth, that allowance to total loans percentage has declined from 1.2% at June 30, 2017, to 1.13% currently. This allowance level still places us at the median of our peer group, which certainly bodes well given our top-quartile peer NPA ratio. And because of the reduction in nonperforming loans this quarter, we now have NPL coverage with our allowance of 264%, well above our prior year number.

In summary, a great quarter, and our year-to-date performance has been strong, with net income of $5.6 million, up 29%. And when we look at our pretax, preprovision income number, on a year-to-date basis, we are still up a strong 13% from the prior year-to-date.

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

Thank you, Tony. It was a great quarter for our company. A strong win for our company on many fronts, double-digit profit improvement driven by top line revenue expansion of nearly 11%, representing, as Tony had mentioned and I certainly mentioned, $100 million in organic balance sheet growth year-over-year, year-over-quarter, a more normalized level of residential real estate production at $109 million, and of course, that market-leading asset quality. Clearly, together, the results reflect our deliberate commitment to grow and diversify our revenue as we add scale to improve our efficiency.

As we move into the second half of the year, we remain optimistic that the earnings momentum we have seen in the first half will continue. That said, it will surely not come without added pressure, as Tony indicated, on the liability side of the balance sheet that will most certainly affect our overall cost of funding. With our nearly 100% loan-to-deposit ratio, we will be selective on our lending opportunities to optimize revenue and margin.

Finally, we remain steadfast on our focus to continue to deliver our stakeholders a high-performing company. We have strong regional leadership, insightful business line leaders serving geographically diverse markets, and an economy that remains fairly resilient, albeit one that is entering one of the longest expansions of all time.

I'll now turn the call back to Melissa for any questions from our investment community. Melissa?

Thank you, Mark. Operator, we're 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.

The first question comes from -- we have Brian Martin with FIG Partners.

Say, maybe I just wanted to start with if -- maybe if Tony or Mark, I guess maybe Tony on the margin, if maybe you could just reconcile, Tony, just kind of the gap up in margins from first quarter to second quarter. I guess -- I mean, I certainly -- you kind of outlined some of it. It seems like mortgage fees were part of it, but just trying to understand that. And then just in the context of your commentary about funding costs and kind of how you're expecting them to continue to rise, just how to think about margin prospectively, given Mark's comments about trying to maximize profitability. But just reconciling the margin and just kind of your outlook on how you're thinking about it prospectively.

Sure, happy to. This is Tony. Thanks, Brian, for the question. I would say it certainly was a bit of a unique quarter that we had, an oversized level of loan growth, $46 million, kind of 2 to 2.5x normal-sized quarterly level of loan growth. And I would also say the fact that we've not yet realized all of the funding increases that I think will be evident when we get to next quarter's margin levels, I think these 2 factors certainly allowed our balance sheet to move to the 100% loan-to-deposit level, which we've traditionally been kind of mid- to low 90s. I think that oversized, a bit, the impact on margin. And certainly, we can't discount going up $51 million in mortgage loan originations from Q1 to Q2 had a significant impact on, certainly, loan fees that has a -- somewhat impact on our margin level. So I would say, those are the 3 factors that got us to the higher level above 4 margin for Q2. And I think we would come back to maybe a more normalized, that 3.85 type level as we look forward because funding costs, certainly, in the latter half of the quarter, we began to see those evident throughout our markets.

Yes, Brian, this is Mark. Just one comment. You know marginal cost of funding, as we have seen, is well into the 1 to 1.5, and so we've certainly been cognizant of that as we price loan demand. So we're going to be very prudent on the loan funding side to keep that net interest income expanding, albeit with a larger bottom line. Maybe a bit of leakage on the ROA, but clearly, improvement in net income as well as ROE. But it's clearly moving up, and we're on the forefront with 100% loan-to-deposit. So we're right in the line of sight.

Right. Okay. And just kind of the strategy on funding going forward, I guess, are there -- as far as how you fund this, given the loan-to-deposit ratio and the critical nature to kind of match the loan growth with deposits, I mean, what specifically -- I guess, maybe you mentioned a couple of things in the call, but what are you doing on the deposit side to accommodate that loan growth?

Right, great question. And clearly, our conversations on funding loans is certainly more robust when it comes to the deposit side. Requiring those deposit accounts with loan funding is certainly the beginning. We also have restructured, as I mentioned, our entire retail network, which would place another 8 individuals that would have been generally managing or overseeing those retail offices that now have been relegated to the next layer of management in those retail offices, which has allowed us to put those 8 individuals literally every day on the street, talking with existing commercial clients and existing small business clients as well as prospective ones. So we've clearly changed the game. We've clearly put the shoe on the other foot relative to the balance sheet. And we think we're going to be able to move the needle and continue to expand the balance sheet and improve efficiency and scale. So that's how we're doing it, albeit, again, with some key products that right now we're reaching out to our private client base and advising them of our new products that are currently at about the [1 85] level and bringing a larger portion of their deposits into that relationship with us. So we're using it not only to expand current relationships but also establish some new ones.

Got you. Okay, that's helpful. And maybe just if one you could just talk a little about the loan growth and, kind of -- and I think you gave a little bit of color and maybe I missed it, where geographically it came from, but I guess -- and then just have -- based on what you saw this quarter but cognizant of the profitability you're going to maximize or at least look to in the next couple of quarters, I mean, how we think about loan growth, the balance of the year? Just kind of longer-term, however are you guys -- however you can frame it a little bit, just what the pipeline looks like.

Okay. Thanks, Brian. Again, structurally, we're built for growth, as I mentioned a number of times, with our -- John can make some comments here. But with our, Brian, 17 high-level individuals and very diverse geographic markets, we expect that growth. And we're going to have to look at alternative funding should the deposit machine slow down. But John, I know you field literally 90% of all those requests, the rest are loan committee, and I think we're feeling pretty good about not only where we've come from and what we've done, but where we're going.

I do. We began the year with a bit of a pivot and changed some of our weightings and incentives and different things more to C&I growth mile. Not that we're still not growing CRE, as Tony went through in the call, but we've seen some very nice CI -- C&I projects come on board here in '18 and in the pipeline here for the remainder of the year. The pipeline remains strong. We have a number of projects that are drawing up here in the second and third quarter. So again, it's all about pivoting and looking at that loan growth a little more strategically. We have the benefit, as Mark said, of being structured for growth, being a little bit more strategic about where we deploy our capital and our funding to get those deposits and those C&I credits that are going to tend to come more concentrated in the deposit world.

You know what, Brian, one follow-up comment is that as you well know, 3 years ago, we developed a specific focused SBA strategy. And the $40 million or so that we've done in SBA and sold off 75%, much like Freddie Mac loans, has certainly given us the ability to garner additional relationships and, marginally, some higher-yielding variable rate balances on our balance sheet. So that's been a great addition to our product set and delivery channels throughout all of our market. And we intend to remain significantly relevant in that space.

I got you. And the loan growth, at least on the residential side, which kind of led the quarter, I mean, I guess, is that -- it sounds like some of the variable rate loans that -- on the mortgage side were kind of kept, retained as opposed to being sold. I guess, is that a trend, I guess, you guys would expect to continue as you kind of cap out that kind of talking about how strategically what you want to grow? I mean, does that change going forward? Or just how to think about that component of the loan book relative to the others, which, clearly, you're focused on?

Thanks, Brian. Well, clearly, we like the net interest margin that comes with putting those loans on the book, albeit them being variable. Tony and I talked about this earlier that the mortgage machine that we have going, given the flatness of the yield curve, has driven some of those to the variable end of the curve. And we'll be talking about how much we have in us relative to booking more of those, given our 100% loan-to-deposit ratio. So our private client group is very robust on that end, those $0.5 million to $1 million mortgage loans in some of our low-share, high-growth metropolitan markets. So it's pulling us by inertia into that field, and we need to continue to consciously determine how it is we price that to make sure we get what we want. But we've enjoyed it so far. We like the relationship we gather as a result of that private client relationship. And so far, we've been able to fund it, but we're going to get more selectively, as I mentioned. Tony might have additional comments.

Yes, I would just say to add on to that, we had historically been kind of a mid-80s to high 80s percentage of sale of our mortgage origination product, given the type of product we have and the relative slope of the yield curve. And really, this quarter and a little bit in Q1, we've seen a real dramatic shift of our clientele into the variable rate product. And the profile of that client, certainly in this quarter, was much more private client-oriented, medical professionals, very high profile, the client that we like, and we don't mind having that on our portfolio. Still -- residential real estate is still only mid-20s right now in terms of a percentage. So we're not overly concerned, but certainly, we don't want to be 100% residential real estate bank.

Right. Okay. So you're comfortable having it go a bit higher? Or maybe you cap that at some point, but, I mean, at least from where it's at right now, there's still room to take it higher.

Yes, it's certainly on the agenda to continue to discuss, Brian. And we've liked it, as I mentioned, so far. But I think a bit of conversation internally about that would certainly pay dividends and give us a more conscious approach to that particular delivery channel.

Okay, perfect. And then maybe if you can just give a little thought on just on the mortgage business. And just kind of -- if anything has changed with your outlook. I mean, I get the -- Tony, if we think about that, how we think about what the production is versus kind of what we're -- what you guys are selling into the secondary market? If it's kind of shifted to that lower range, how we think about that going forward? And just any commentary if there is -- it looked like the gain on sale margin was down a touch in the quarter from first to second quarter? Just -- are we thinking differently about that as you go forward?

Brian, just one comment. Yes, as I've mentioned for 10 years, mortgage banking is something that we really like. We, obviously, have to get it right in the midst of regulatory reform. So we know that, that can give the best of banks angst at times. And it's certainly something that we continue to have to deal with on an ongoing basis. But we love the opportunity to not only gather some noninterest income, but clearly, that 7,300 households that have like 1.5 to 1.6 service per household. We have a great opportunity to continue to expand our reach in all of our markets via that household with 1, 2, 3, 4 services. So from my perspective where I sit, it's a great business line that we're going to lever through the retail network to gather more scale. As far as the gains, Tony has done a great job with a couple of other professionals in the organizations to widen that margin and then hedge. And I think, Tony, that's evident in our take on each mortgage loan.

Yes, I think that's right. And I think, Brian, as we look forward in the mortgage business, I think the end of '17 and Q1 was really an anomaly. It really was inventory-driven, and some people just taking a breather on the market. Our pipeline is extremely strong as we sit here today. I would expect a similar result in Q3 that we've had in Q2, both in terms of level of origination, roughly as well as the level of sale volume. We're seeing that portfolio product be very strong in -- with the type of clientele that we're getting be very strong in that private client arena.

Okay. So I mean, you think the 72%, I guess, the sale versus the origination this quarter, Tony, I mean, keep it at a lower level? Or you think it would -- it kind of just gravitate back up towards that, you talked about historically, that 80% type of range? Just so I understand kind of what you're -- at least, how you're thinking about it.

Yes, I'd be surprised if we get back in the 80% level, certainly in the next couple of quarters, based upon the pipeline I'm seeing.

Yes, Tony, and the yield curve is driving people to the short end, Brian, as you well know. But if we're going to continue to price consciously and make sure that we get what we want in light of the challenges we have on the other side of the balance sheet.

Yes, okay. So this level we're at today is kind of more realistic, give or take a little fluctuation. And then just kind of the gain on sale margin, Tony, I guess any -- it's kind of decreased -- it's similar to what it was a year ago, it's down on linked quarter, just kind of in this broad range. Is this kind of a -- I guess, do you feel like that's at least going to hold in there or that's holding in there pretty good? No big change is what I'm trying to say.

No, I would not say that we'll have significant change from where we are. And that kind of mid-2.5 to 2.75 type range would be that level.

Fair enough, okay. And the -- and I guess just from an SBA standpoint, I guess like you said, a little bit of a down tick this quarter. Just how are you thinking? How does that pipeline look? And I mean, I've heard from at least one other bank that we're seeing more customers do that in the traditional market as opposed to taking the guarantee on this. Are you guys seeing any change, I guess, in competition in that market? Or just how does your pipeline look? Or any commentary you can offer on that.

No. This is John. No, our pipeline remains very, very strong. I think the second quarter to first quarter comparison is more a function of the outstanding first quarter we had. The second quarter was down a bit, but the pipeline there is very, very strong. We have a couple of large SBA. We have one USDA loan in there that falls into that same category. So I'm optimistic about the third quarter and the pipeline moving forward. We have not changed our strategy. We continue -- to answer your question, we don't see any pressure necessarily to change those loans to the portfolio. I mean, we've targeted a specific market in that SBA, and it tends to be business acquisition, development, doctors, professionals, and that market remains as it was. We have key business development officers. In fact, we continue to deploy, as Mark said earlier, new in Toledo and soon to be in Fort Wayne that we really think will drive that towards a higher level here in -- remainder of 2018 and 2019.

Yes, Brian, just one comment. All thing being constant, given all the calls we make with our 17-plus individuals that are making probably 200 calls a month, where we would have -- again, certainly not a new approach, but where we might have walked away from a credit that needed some help, such as an SBA guaranty, now we have that opportunity to keep that client with us, expand that relationship and make some great fee-based income that, as we've always said, is going to supplement the mortgage business line as rates increase marginally. So we feel we've got both ends of the curve covered. And we really like our prospects in that SBA space, particularly with our deployed BDOs, who do nothing but SBA lending. We think we have the model right. We think we got the markets, and we certainly are supportive of a 3-plus GDP that is expanding our opportunities.

Right. And did you guys -- did I miss it? Or did you guys say that you also added someone or that you're looking at someone this quarter? Or I guess -- did I miss that?

We added somebody in Toledo in the second quarter, and we're tentatively adding somebody that's accepted that hasn't yet joined us here in the third quarter in Fort Wayne.

Fort Wayne, okay. And then just one question back to the margin. The -- just the variable rate component of the loan portfolio, I mean, what amount of the loan book is repricing today with rate increases, or pretty closely thereafter with the rate increases?

Well, yes, I'd say a couple of things there. We're about 70-30 variable to fixed in terms of the entire portfolio. And now again, that doesn't necessarily mean that's going to reprice every time. We're about $0.25 million to $300,000 on every fed rate rise on 25 basis points roughly right now. That gets wider as you get further away because we certainly do have floors that people get away from. So I would say we're -- probably 40% of our portfolio is probably an immediate reaction to any kind of rate rise, whether that be LIBOR-based or prime-based.

Yes, okay. That's what I heard. I thought you said 75%, but I know, like you said, not all of it moves right away. So okay. Maybe just the last one or 2 for me. Was -- just on the expenses, it looked like things were pretty clean this quarter. Anything unusual in the expense line? I mean, outside of the volatility that goes with the mortgage unit, a pretty clean quarter on the expense side, would you guys characterize? And just how you're thinking about that -- the outlook there? Are you still making investments in the franchise that keep that rate -- or that expense run rate kind of tending to trickle up a bit?

Well, again, from our newfound -- as we reported, the first quarter of the year with our newfound tax initiative incentives, we have borne some additional expenses from some of our staff. As everyone would certainly contend, the market -- the employment market has continued to tighten. That has begged some additional increases and some incentive components that we've continued to realize. Be that as it may, our expenses are clearly up, but we keep a keen eye on that operating leverage that was still positive this last quarter. And we clearly have a lot of room to run, as I mentioned the last quarter, Brian. When you look at our $30 million to $35 million average portfolio of our commercial person, with the number of people we have on staff, we are clearly poised for continued rise and improvement in our efficiency as those portfolios expand. Now again, we sell off those SBA, but those are real time gains that we like. And when we build the balance sheet we've got, certainly, a lot more room to run on that net interest income. So they're up, but all those trades we have made in the last 5-plus years have been good trades. And we contend that through those fee-based business lines, they're continuing to provide us initial profitability and initial inertia that's going to take us to a higher level.

Yes, okay. No, that's helpful. And maybe just any update, if there is any, on just the -- you talked about the capital and the benefit as far as M&A goes and just how you're thinking about that as you go forward. I guess it seems like there's opportunities in your market, you got the capital and now a better currency. And I guess just kind of wondering how things are trending there? Are there other discussions? Or -- it just seems like they've -- just, I guess, some color on that.

Well, as we've certainly seen, certainly, a strengthening in our currency, which is giving us opportunities to have those discussions. That said, we need to close our 2018 compliance examination. We have some issues that we're currently discussing with our regulators that we certainly expect a timely resolution to. But that said, we don't have anything on the platter that is imminent. But we have had those conversations, and we continue to rank opportunities that would fit not only geographically for us but fit nicely from a balance sheet perspective. That would certainly help our 100% loan-to-deposit. So those deposit-rich entities that have their own challenges because, obviously, they're deposit-rich because they haven't grown the other side of the balance sheet, would fit nicely with our company. So we continue to have those conversations. We continue to use our capital judiciously. Organic growth, we think, is very wise for all of our stakeholders. But certainly, we keep a keen eye on the opportunities that are out there on the M&A side.

Yes, okay. And the tax rate, I guess, no change to kind of -- it looks like it's been a bit lower than kind of at least I was thinking -- I mean is that a -- you expect that to kind of trend a bit higher from kind of the current level? I think it was around 18% this quarter kind of blended rate for the year of, let's call it, 18.5%. Just as you think about that going forward, does it trend a bit higher from the current level? Or is this level pretty sustainable?

Yes, it's Tony again. We had a couple of some stock-compensation items as well as some tax free investments that were a bit higher this quarter. I would tend to be more comfortable with the tax rate going forward, the high 19s type level.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Klein for any closing remarks. Please go ahead.

Once again, thank you all for joining. We're proud of the results we delivered. We thank you for your confidence in what we're attempting to accomplish here at SB Financial. And we certainly look forward to chatting with you again in October for the third quarter results of 2018. Thanks for joining, and have a great day.

Thank you.

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