SB Financial Group Inc (SBFG) 2014 Q3 法說會逐字稿

Good morning and welcome to the SB Financial Group third-quarter 2014 conference call and webcast. At this time, I would like to inform you that the conference call is being recorded and that all participants are in listen-only mode.

We will begin with remarks by management and then open the conference up to the investment community for question and answers. We are expecting the call to last about an hour.

I will now turn the conference over to Linda Sickmiller with SB Financial. Please go ahead, Linda.

Good morning, everyone. I would like to remind you that this conference call is being broadcast live over the Internet and will also be archived and available on our website at www.yoursbfinancial.com under investor relations.

Joining me today are Mark Klein, President and Chief Executive Officer; Tony Cosentino, Chief Financial Officer; and Jon Gathman, Senior Lending Officer.

Before I turn the call over to Mr. Klein, please 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 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, Linda, and good morning, everyone. Thank you all for joining us on our third-quarter conference call. We issued our earnings release yesterday and of course, those details can be accessed on our website as well as the Form 8-K we filed with the SEC.

As with prior quarters, I would like to make a few comments on our overall performance this past quarter and then our CFO, Tony Cosentino, will give us more details on that financial performance.

Highlights this quarter include net income for the quarter $1.5 million, or $0.31 per diluted share, or 22% increase over the linked quarter of $0.25 and 13% over the year-ago quarter. This includes a $425,000 pre-tax trust preferred prepayment expense. Excluding this prepayment expense, earnings were $0.37 per diluted share.

Mortgage volume was sound, at $67.5 million, and in line with linked quarter and an increase of $12.3 million from the same quarter last year. SBA gains improved to $71,000 this quarter compared to $19,000 year-to-date second quarter.

Asset quality remains strong on a number of measures that Tony and I will touch on shortly and our loan portfolio has increased more than $28 million from year-end 2013, representing 6% annualized increase and up $30 million, or 6.5% annualized growth, over the year-ago quarter.

As I mentioned, net income for the quarter, $1.5 million, an improvement of 22% or $268,000 over the linked quarter, including the TRUP prepayment penalty. Continued robust mortgage production and the resulting gain on mortgage sales, coupled with long anticipated SBA loan share gains, and continued expense control provided the much improvement that we realized in the bottom line results this quarter.

We continue to combine solid loan production and administration with improving market conditions and achieved one of the best quarterly performances of our Company in the past 10 years.

Our decentralized business model provides for strong local leadership, leading to market share growth, with efficient funding sources to improve our overall performance. By balancing our low-cost funding sources with loan demand from higher growth markets, we began to reap the benefits of marginally greater scale, a strategy we intend to continue to promote as we inch closer to becoming that top quartile-performing financial services company.

As we have discussed all year, key initiatives we focus on to potentially deliver that aspired top-quartile performance are continue to diversify our revenue streams, strengthen that penetration in all of our markets we serve, expand product service utilization by new and existing clients, deliver gains and operational excellence as we maintain that worked-hard-for asset quality. Now I would like to comment a bit on each.

With regard to revenue diversity, our strategy to maintain our balance of noninterest income with margin revenue is working. Over the past several years, noninterest income has comprised nearly 40% of total revenue.

This quarter, our percentage of noninterest income to total revenue was higher, at 41.6%, and remains strong at 38.5% year to date. To ensure we continue to deliver on this strategy, we are expanding our production within our existing markets as well as analyzing strategic opportunities to expand in adjacent markets.

This includes our residential lending growth initiative in the greater Columbus, Ohio, market we announced last quarter. This new 11,000 square foot facility will enable us to continue to grow our mortgage production and resulting fee income as well as small business and SBA lending, retail and private client products, and assets under management in our wealth management division.

Mortgage banking volume continues to provide stable loan sale gains. This quarter, we generated mortgage revenue of $1.7 million, in line with the year-ago quarter and $361,000 over the same quarter last year.

Likewise, as with the prevailing trend that emerged from the last quarter, our refinanced mortgages this quarter as well as the $167 million we have generated year to date accounted for just 6% of our total production. This volume reflects gains of $1.4 million or $231,000 over the linked quarter and $86,000 over the same quarter last year.

This origination shift continues to provide meaningful expansion for the number of services to our existing clients and more importantly, drives the expansion of new households we service.

Wealth management continues to be a key segment of our strategy to provide holistic financial advice to our client base. Last quarter, we announced the addition of a seasoned leader to rebuild and drive growth in this division.

I am pleased to report today that the addition of seasoned talent in this division as well as a restructured department and new reporting lines have positioned us to leverage this new model and talent into our higher growth markets of Toledo, Ft. Wayne, and Columbus.

We announced last quarter that we realigned our checking retail products. Our goal continues to be to either improve our efficiency by eliminating high-volume, low margin accounts or by enabling the client to utilize multiple channels to increase revenue contribution to offset maintenance costs.

Preliminary indications are that our strategy is sound. To date, we have increased our service fee revenue by $33,000 per month over our prior more fragmented structure. Potential secondary benefits of this new account structure are to reduce existing in-store servicing costs.

Finally this quarter, we began to realize the fruits of our labor in identifying SBA credits. In fact, we closed $648,000 in SBA loans this quarter, generating over $71,000 in loan share gains. These gains represent 200%-plus improvement over the linked quarter and 139% over the quarter last year.

With the limited need for liquidity and capital due to the sale of the guaranteed portion of these credits, this strategy fits quite well into our mission to improve our efficiency as we expand and diversify our revenue stream.

Our second initiative continues to be growing our market share by increasing our presence in the lower share, higher growth markets. Last month, we announced the appointment of a new market leader in Ft. Wayne, Kent Maggard.

I am pleased to report that his leadership is expanding our presence in this relatively new market for our Company. In just a few short months, loans have increased $3.3 million and deposit accounts are growing again. Under Kent's leadership, we certainly intend to deepen our reach into this growing contiguous market.

This quarter, our calling efforts revealed more opportunities to build client relationships. Our growth in loan balances was encouraging and came in all business lines.

In fact, year over year, commercial loans grew 10.8%, commercial real estates grew 1.5%, agricultural loans grew 11.4%, residential loans grew 11.6%, and consumer loans, 6%. Clearly, leadership of our seasoned, in-market executives coupled with our approach to holistic client care remain our competitive advantage.

Another strategic priority continues to be to increase product service utilization by our clients. Growing our franchise with existing household as well as new households in our metropolitan markets remains a key element in our performance improvement initiatives. Cross-selling additional services to existing clients remain a key element expanding our franchise. This quarter, we achieved a cross sell ratio of 3.78 as we identified and booked an additional 1,500 services to new clients.

Additionally, we also expanded our number of households from over 27,000 at December 2013 to nearly 28,000 at quarter end, a 3.3% annualized improvement. With over 78% of our households currently utilizing three services or less, we continue to have significant upside to grow our services per household.

Proactively identifying client needs remain a key ingredient of our value proposition. This quarter, 53% of our staff referred business to another business line, generating 483 referrals, with 221 closing or 45% for over $18 million in additional business.

This approach to client care continues to be the initiative that identifies products and services to assist our clients with appropriate, comprehensive solutions.

We continue to develop initiatives to expand our consumer loan balances and deepen client relationships. One service we introduced earlier this year was our proprietary awards-based credit card.

We envision delivering 2,000 accounts and $2 million in balances in 2014 and we continue to keep our sights set on delivering both. As of today, we have delivered over 1,600 accounts with balances of $1.1 million.

Not only do they add loan balances, provide interchange income, and entrench us in the household of one more service, but they also help us build a brand that seeks to address 100% of client needs.

The next key theme required for us to deliver on our performance improvement is operational excellence. Our commitment to client care has enabled us to continue to expand our reach into new households. This quarter, we grew our sold loan portfolio by 137 loans or from 4,710 loans to nearly 4,900 loans. Up to 400 -- $649 million, up $52 million or 8.8% from the year-ago quarter.

This quarter, our commercial calling efforts revealed opportunities to build new client relationships. Loan balances now stand at $505.9 million, up $30.7 million or 6.5% from the year-ago quarter.

Funding of our loan growth came primarily from expanding our deposit base to $535.3 million, up $13.7 million from the year-ago quarter. We expect to continue these trends as our market leaders and commercial lenders continue to have relatively smaller books of business and have significant potential to add additional balances with minimal costs.

For mortgage lending, we are solidly entrenched in the purchase market, as shown by our low numbers of refinance loans. Even as we reduced operating expenses year to date by 5.3% or $1.1 million, we continue to improve the scale of operations and deliver seamless service to our nearly 28,000 households.

And finally, many measures of our asset quality remain market-leading. Total past due loans this quarter stood at an acceptable 1.2%. Non-performing assets have declined by $3.4 million or nearly 39% over the year ago quarter and now stand at just 0.81% of total assets and the lowest level since 2007.

And our reserve to total nonperforming loans has improved to 139%. Our asset quality remains the center post of our performance improvement. Collectively, these measures are a direct reflection of our rigorous underwriting and proactive credit review process.

Overall, it was a great quarter for our Company. The best since 2003. Fee income was strong, loan balances in every category expanded, a number of households grew, asset quality improved, and our balance sheet grew as total assets expanded 4.9% over the year-ago quarter and equity followed suit, with an 8.5% improvement over the same period. By all measures, a great quarter.

At this time, I would like to turn the call over to our CFO, Tony Cosentino, for some additional comments. Tony?

Thanks, Mark. And good morning, everyone. Let's start with a few high-level comments on some of the factors that affected our results.

First, we completed the early redemption of our fixed-rate trust preferred securities this quarter with cash and correspondent bank debt. That redemption did trigger a $425,000 prepayment penalty.

Second, total revenue adjusted for the prepayment is up 4.1% from the prior year and up 8.3% from the linked quarter. Third, loan growth, while even with the linked quarter, is up $31 million over the prior year. And fourth, asset quality continued its improvement, with non-performing assets down $3.4 million to 81 basis points.

Let's look at those results in the context of Mark's comments on our strategic initiatives and overall industry conditions. Starting with the income statement, please note that all these revenue figures are adjusted for the $94,000 of the $425,000 prepayment total taken through margin in the quarter.

On the revenue front, net interest income on a fully taxable equivalent basis was up from the linked quarter by 8.6% and up 5% from the prior year. End-of-period loan balances were up $30.7 million, an increase of 6.5%. This loan growth allowed our earning asset yield to compress by only 11 basis points from the linked quarter.

On the funding side, we continue to reduce our cost of interest-bearing liabilities, which came in at 68 basis points for the quarter. This was down 11 basis points from the 79 basis points in the third quarter of 2013.

We recognize that the positive impact of lower funding costs is declining, as we were down just 4 basis points from the linked quarter. Net interest margin, at 3.7%, while down 2 basis points from the prior year, was up 10 basis points from the linked quarter.

As we said, we retired our 10.6% TRUP in the third quarter and in the fourth quarter, that will allow us to realize roughly $190,000 in savings on lower interest costs through the refinancing.

Turning to fee income, mortgage discussion remains the main headline. For the quarter, originations of $68 million were up 22% from the prior year and level with the linked quarter.

Total gains on sale came in at a strong $1.4 million, well in excess of 2% on our sold volume of $61 million. Our $150 million servicing portfolio provided revenue for the quarter of $400,000 and this portfolio is up $53 million from the prior year, a 9% increase.

Our servicing rights on that portfolio continue to gain in value. At September 30, these rights were $5.72 million, a 13% improvement over the third quarter of 2013. We still have a slight impairment remaining of $220,000, which we reduced this quarter with a small $62,000 impairment recapture.

Other fee income for the quarter, at $2.1 million, was up 7.9% from the linked quarter and up 6.9% from the prior year. This growth was driven by SBA gains, increases in service fees on our new relationship rewards deposit products, and a small benefit from a Bank-owned life insurance policy.

On the expense side, adjusting again for the $331,000 TRUP prepayment, this quarter, we are flat to the prior year and compared to the linked quarter, expenses were down 1%.

As we look at our year-to-date expense level, we are down $1.1 million for the first nine months of 2014 compared to the prior year. The 5.2% decline was related to lower compensation expenses due to benefit adjustments and costs related to our rebranding from the prior year.

We realized the reduction in state tax due to Ohio's new financial institution tax. An intangible amortization from a prior acquisition was completed at the end of June, resulting in a $76,000 quarterly improvement in operating expense this quarter.

Our efficiency ratio for the quarter came in at 71%, reflecting the higher revenue for the quarter and the slightly elevated expense level. Again, adjusting for the prepayment penalty the trust preferred, our year-to-date efficiency level has reduced from 76.8% on a GAAP basis to 75.2%. This quarter, we completed the closure of a Defiance branch location, our seventh office closure since 2006.

In addition, our technology subsidiary, RDSI, continues to balance expense with revenue growth. The former main office for RDSI will come off lease in the fourth quarter, which will reduce expenses by approximately $180,000 on an annualized basis.

Turning now to the balance sheet and asset quality, our loan growth this quarter slowed in comparison to what we have experienced over the last year. We had several anticipated payoffs and fundings to take place, which were delayed. Our expectation, based upon the pipeline, is that the fourth-quarter growth will return to the higher quarterly growth levels as seen earlier this year.

Compared to the prior year, as Mark talked about, our loan growth was diverse. Residential real estate led the way with $11.2 million, followed by commercial of $8.8 million and commercial real estate of $3.2 million.

On the deposit side, we are up from the prior year by $13.7 million, a 2% growth rate -- a 2.6% growth rate. Including in that growth is an improvement in our non-interest-bearing balances as a percentage of total deposits, which grew to 16.9% from 15% one year prior.

Nonperforming loans and assets continued to decline in the third quarter of 2014. Total MPAs now stand at $5.4 million, with 90% in nonperforming loans and 10%, or $540,000, in OREO properties. The total level of MPAs is down $3.4 million from the year-ago third quarter and down $825,000 from the linked quarter.

Included in our nonperforming asset total is $1.6 million in accruing restructured credits. These restructured loans, which were nearly all maturity extensions, add 24 basis points to our nonperforming level. Absent these accruing restructured credits, our total MPA ratio would be just 57 basis points.

We have one large credit that comprises 23% of our total problem assets. We continue to expect to deal with this credit in 2014 as it continues to wind its way through bankruptcy proceedings.

Our OREO balances of $540,000 are predominantly residential real estate properties and their stated value should match closely to proceeds upon disposition. Coverage of our NPLs with our allowance stayed above the one-to-one level at 139%.

Our allowance to total loans this quarter did increase to 1.33%, as our $150,000 in provision expense was well above the $4,000 in net charge-offs for the quarter.

Charge-offs for the quarter had no impact on results on an annualized basis, with the year-to-date level at 15 basis points. Included in the year-to-date charge off level is $600,000 related to the large problem credit discussed earlier. Absent that charge-off, which was part of our reserve allocation, we would have had a negative year-to-date charge-off ratio.

Delinquency levels for the Company did rise this quarter. We ended the third quarter with a delinquency level of 1.2%, well above our linked-quarter level of 0.6% and the prior-year third-quarter level of 0.5%. The increase this quarter is driven by one commercial real estate credit that is in the process of restructure.

As I finish my comments, I would like to discuss a quick summary of our year-to-date results. For the first nine months of 2014 on a GAAP basis, net income was $3.7 million, or $0.76 per diluted share, versus $4 million or $.82 per diluted share for the same period of 2013, with a current year return on average assets of 75 basis points.

Adjusting our year-to-date earnings for the trust preferred prepayment penalties, net income would be $4.0 million or $0.82 per diluted share and a year-to-date return on assets of 92 basis points.

I will now turn the call back over to Mark.

Thank you, Tony. In closing, we continue our pursuit of top quartile performance by concentrating on areas we've discussed all year -- improving profitability and capital position, expanding noninterest income, growing and expanding that client base, maintaining top-tier asset quality coupled with above market peer group organic loan growth, and positioning our Company for strategic acquisitions. Our results for the quarter were encouraging and position us quite well for a strong finish to 2014.

It is gratifying when plans come to fruition. We have keyed on the above areas of performance and we have shown meaningful improvement. These include improving profitability with a balance of net interest income and noninterest income; growing our services with existing households and entering new ones; building a stronger, larger earning asset base; and strengthening our currency and resulting market capitalization.

Collectively, these metrics position us quite well to continue to take market share, as the economy and resulting economic activity give way to business and personal balance sheet expansions.

Now I'll turn the call back to Linda Sickmiller for any questions we might have.

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

(Operator Instructions) John Evans, SJ West LLC.

Can you just talk a little bit about -- you did a good job on the mortgage side, originating, etc. Since rates have come down, can you talk -- is the refi business starting to pick up at all and can you talk about what you see in the loan pipeline on the mortgage side?

Make a couple comments and then Jon Gathman is here, as obviously as well as Tony. But as I mentioned, our refinancing world that we had several years ago has somewhat dissipated.

We are down to 6% of total production of $167 million, 94% either new households we are taking on in our Company or refinancing other people's loans, building that portfolio up to that $600 million and $700 million mark.

Pipeline remains good. Production wise, I would estimate that probably 60% of our production, 60% to 70% maybe, is coming from that greater Columbus market and the other 30% to 40% from the Northwest Ohio market. But generally, we are very encouraged by the opportunities to bring in new households.

And as I mentioned last quarter, that client experience officer, John, is the individual that's going to be responsible for deepening that relationship with those newly acquired households. And as I mentioned, with 78% of our household now at three services or less, we get pretty excited about the opportunity to grow our franchise by expanding our depth in that household.

Got it. So when you think about the potential for mortgage originations, do you think it grows sequentially or should it be down sequentially?

Well, as the economy continues to expand, we have noticed a precipitous increase in the volume in our Columbus, Ohio, market. That market is expanding, growing number of households. And while we do refinance some in our Northwest Ohio market, we have found certainly more opportunities in those more robust growing markets.

We still have yet to tap the potential in that Fort Wayne market and we are now gaining ground in the Toledo market. So I would say that we would want to continue to experience the $200 million to $250 million-plus. And as we build our new building there in Columbus, we expect more originators to come on board as well as those traditional retail products that we will be pursuing once that office opened in second quarter of 2015.

Okay. Got it. Can you talk a little bit about the pipeline on the loan side? And it was pretty good this quarter. Do you think you guys will have linked growth sequentially or how does the pipeline look for the loan portfolio?

Yeah, John, this is Jon Gathman. No, we feel very good about the pipeline here in the fourth quarter. As Tony mentioned earlier, some of the third-quarter results were confused by some large payoffs that, again, we fully expected to take. They were transactions that we knew had limited time frame as well as some things not funding quite as quickly as we might have liked.

Most of those delayed credits will flow over into the fourth quarter by virtue of that pipeline and then the new loan generated -- new pipeline generated, that is, for the fourth quarter remains very, very strong. I am very optimistic that we're going to continue to see some strong growth in the fourth quarter that mirrors the first two.

Okay. And then just the last question, when you have that long growth, Tony, what do you expect for NIM? Should NIM stay relatively flat or --

,

Yes, John, when we look at margin, obviously for the quarter after we adjust for the TRUP, we came in at [3.70%], basically flat to the prior year, up from the linked quarter by 10 basis points. We have really offset earning asset yield with the growth in the loan portfolio.

And candidly, we are concerned about funding costs. We have started to see competitors in all of our markets begin to rise in deposit capture on deposit pricing. We have been very -- pretty aggressive on our deposit pricing and we anticipate we're going to need to increase our pricing to fund some of our loan growth.

We will have, as we talked about, $190,000 on the trust preferred refinance per quarter going forward, which obviously will help the margin number in total. But on a straight core basis, we think loan growth will offset earning asset yield and any declination we will have in margin will be driven by the expectation of higher funding costs on the deposit side.

Okay. And I'm sorry -- one last question. Just relative to acquisitions, can you talk about the pipeline and trying to grow?

As our currency has improved in value, John, here recently, closing at a 52-week high here, I think, yesterday, we continue to be optimistic about the ability to be an acquirer. We've begun discussions on a number of fronts, including adjacent markets and developing a deeper presence potentially in the markets that we already have a presence.

So as our profitability has improved, as our currency is improved, and as the economy has improved, we look forward to continue to having those discussions with some strategic partners in existing markets.

Okay. Hey, thanks so much.

(Operator Instructions)

While we are waiting for any additional questions, I would like to remind you that today's call will be accessible on our website at www.yoursbfinancial.com under investor relations.

If there are no further questions, I will now turn the call back over to Mark Klein.

Thank you. Once again, thanks for joining us this morning. We continue to deliver our unique brand with a staff that has a passion for service, clients, and communities who trust our advice and knowledge, and stockholders who believe in our vision of high-performance.

We look forward to speaking with you in January for review of our fourth-quarter and full-year results. Goodbye. Have a good day.

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