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spk03: Good morning and welcome to the SB Financial second quarter 2021 conference call and webcast. I would like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. We will begin with remarks by management and then open up the conference to the investment community for questions and answers. I will now turn the conference over to Sarah Mikas with SB Financial. Please go ahead, Sarah.
spk02: Thank you. 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 ir.yourstatebank.com. Joining me today are Mark Klein, Chairman, President, CEO, Tony Cosentino, Chief Financial Officer, and John Gaffman, 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. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. I will now turn the call over to Mr. Klein.
spk04: Thank you, Sarah, and good morning, everyone. Welcome to our second quarter 2021 conference call and webcast. Briefly, reviewing some highlights for the quarter, which included a small mortgage servicing rights impairment of roughly $100,000. Would include net income of $3.8 million, up $100,000, or 3% over the prior year quarter. On a year-to-day basis, when adjusted for the non-GAAP impact in 21 and 20, net income was $8.8 million, up $860,000, or nearly 11%. Return on average assets, 1.13%, pre-tax, pre-provision ROA for the quarter 139. Net income, net interest income of 9.2 million was up 3.2% from the prior year. There's a slight decrease in interest income, was supplemented by a nearly 42% reduction in interest expense. Loan balances from the linked quarter rose 2.4 million, and when we adjust for PPP balances, were up 21.9 million or 11% on an annualized basis. Compared to the prior year net of PPP, loans were essentially flat. Deposits declined from the linked quarter by 29 million, but were up over 100 million from the prior year. Expenses were down 600,000 or 5% over the prior year quarter due to lower mortgage commissions and merger costs in the prior year. Mortgage origination volume for the quarter was $165 million, down over $58 million, or 26% year-over-year. Asset quality metrics remain strong, both from a prior year and the linked quarter, and our level of 46 basis points of non-performing assets remain strong. We achieved a significant milestone in the quarter, as all clients that were on COVID-related forbearances have now returned to full paying status. Tangible book value is now up to $17.26 per share. And finally, we had a successful subordinated debt raise that closed. The 20 million in debt capital certainly prepares us quite well for potential growth opportunities. We continue to believe that our laser focus on those five key strategic initiatives that we've discussed for a number of quarters will continue to lead to top quartile peer group performance. Revenue diversity and growth, of course, more scale in a larger footprint. Certainly more services in those households with our client base, which leads to more scope. Delivering technology and excellence in our operations and communications with our clients is a key. And, of course, a foundation of all high-performing banks' asset quality. First, revenue diversity a bit. This quarter, mortgage volume and loan sale gains were down from the prior year. 26% on volume and 48% on gains. For the last 12 months, we delivered nearly $700 million in total mortgage origination volume. Columbus region delivered 61%, Northwest Ohio approximately a third, and 6% from Northeast and Central Indiana. Our volume continues to be bolstered by our newer PCG fixed rate 15-year fixed then to a one-year variable product that we underwrite and book in-house. Closed to date in this new first quarter 2021 product is $33 million and the pipeline of another $24 million. Our metropolitan market of Columbus accounted for 64% of this PCG activity, which would include volume and, of course, the pipeline. Non-interest income decreased to $6.5 million from the prior year quarter of $8.6 million, but is up over $6.6 million for the year primarily due to a year-to-date variance of over $6 million in servicing rights impairment. The current quarter includes a mortgage servicing impairment, as I mentioned, of $100,000 compared to an impairment of $1.1 million last year. Non-interest income to total revenue remains strong at 42%, and 2% of our average assets. Our affiliates continue to take market share with another strong quarter. This business line is a great complement to our residential lending strategy as they will be clearly the impetus to leverage technology to deliver a fully integrated electronic closing soon. We continue to seek out growth opportunities for this fee-based division across our entire footprint. Our wealth management team achieved a significant milestone this quarter. Total assets under management now at over 600 million represents 106 million increase in assets under management or 21.4% improvement over the prior year while providing 950,000 revenue for the quarter, a 23% increase over the prior year. With regard to scale, loan growth certainly showed improvement in the quarter compared to the pandemic headwinds that nearly all banks encountered, including ours in the last 15 months. From the linked quarter, loan balances were up by 2.3 million, and when we adjust for the rapidly declining PPP balances, linked quarter growth was nearly 22 million. PPP activities are winding down for calling officers as they have witnessed a shift in the conversations with their clients to include expansion and opportunity from that of liquidity and safety. We join our clients optimism and feel the economy will continue to grow as demand expands, supply chains improve, and interest rates remain accommodated. Our pipelines reflect this optimism as we currently have over 216 loan requests for over 155 million. Our recent expansion into Edgerton, Ohio market that we've discussed somewhat in the past, our fifth office in Williams County has been well received. After just three months, we have over 100 transactional deposit accounts for over 1.5 million and loan balance is now 4.5 million with another 4 million in the pipeline. We're pleased with our de novo expansion. Our overall deposit base declined from the link quarter as both our retail and business clients began to open up their lives and businesses to reflect the change in pandemic status. Still have significant liquidity. which was supplemented by the debt raise that we closed in the quarter, as I mentioned earlier. Although we did not have an imminent need, we felt that the pricing and opportunity to build a stronger balance sheet was critical for our long-term growth initiatives. Third, more scope. We ended the quarter with 35 million PPP loans outstanding, with 7 million remaining from the 84 million we originated in the first phase, and $28 million from the recently initiated phase two. We now have just 30 of our original 692 phase one loans that have not yet applied for forgiveness, while only nine of our 451 round two loans have been forgiven. This quarter we expanded our number of households and we continue to have great potential to expand our balance sheet further as our services per household in this current footprint remain well below three, do impart to our rapid rise in single-service mortgage households. We fully intend to onboard these new households with multiple touches. Additional operational excellence remains the fourth theme. We encountered headwinds in our mortgage business line during this quarter. Refinance activity was down 65 million from the prior year, or 45%. and the reduced inventory available for sale continued to constrain most of our market production. The level of purchase and construction volume this quarter at 51% of our total volume was the highest percentage we've achieved since well before the pandemic. Expense levels for the quarter that Tony will touch more in greater detail were down from the prior year, although mainly as a result of a significant one-time merger cost that we realized second quarter of last year. We're continuing on the path of reinvestment in technology that we mentioned in prior quarters to improve our client experience and interaction. We're well aware of the need to improve our digital platform and allow our clients to reach us through multiple channels. We've also moved aggressively in a number of our rural markets to capture market share from the regional banks stepping away from their traditional in-market role using their digital platform as an in-market substitute where clearly we continue to use the digital dimension as a complement to our client-centric brand. Fifth and final, asset quality. At quarter end, as I indicated in my opening remarks, we had zero loans in COVID forbearance, which obviously could portend a different approach to reserve levels as we begin to see growth in our own portfolio now. Coverage of our non-performing loans, which is a metric that I continue to believe is a as a key measurement for a healthy banking environment, now eclipsed the 300% mark at the end of the quarter, even with an overall delinquency at an all-time low of 0.41%. We continue to believe that our disciplined approach to lending during the good times has helped our client base withstand the unknown effects of the imminent downturn. Our profitability the past four quarters has also enabled us to continue to build a healthy reserve level now to 1.56% of total loans for a year-over-year increase of 41%, just in case we witness a slowing economy. Now I'd like to turn it over to Tony Costantino, our CFO, for some detailed remarks on our performance.
spk06: Tony? Thanks, Mark. Good morning again, everyone. Again, for the quarter, We had gap net income, as Mark indicated, of 3.8 million or 52 cents for diluted share. Some of the highlights in the quarter, operating revenue was down 1.8 million or 10.3% as mortgage gains on the lower activity was off nearly 3.9 million or 48%. We were, however, able to offset that large mortgage variance with higher wealth and deposit fees, which were both up 23%. Loan sales delivered gains of 4.3 million mortgage, small business, and agriculture. Margin revenue was up 3.2 percent due to the decline continued decline in funding costs which were lower by over 700,000. The acceleration from PPP forgiveness offset a portion of the core decline in interest income. Now we want to break down further the second quarter income statement starting with margin. Average loan yield for the quarter of 4.61 percent decreased by seven basis points for the prior year. It was down just one basis point from the linked quarter. Overall earning asset yields were down 70 basis points to the prior year due to the change in mix of the balance sheet and down 31 basis points from the linked quarter. Loan yields were impacted by the fees from the PPP portfolio, which were 651,000 compared to 1.2 million from the linked quarter. We still have 1.6 million in unamortized fees of the original 4.9 million from both both phases of the PPP initiative. We continue to expect the large majority of these fees will be realized within this fiscal year. On the funding side, we again reduced the cost of our interest-bearing liabilities from the prior year. For the quarter, the rate on our interest-bearing liabilities was 44 basis points, which is down from the prior year by 44, and down from the link quarter by six basis points. Net interest margin at 2.94% was down 38 basis points from the prior year but remained flat to the linked quarter due to the negative impact of excess cash and restraints on our ability to increase loan growth. Total interest expense costs were down by 42% from the prior year and down again 7% from the linked quarter. When we exclude the impact of PPP fees from both years, the second quarter margin would decline 14 additional basis points to 2.80%. And on a year-to-date basis, our gap margin of 3.07% would be reduced for the PPP impact by 21 basis points to 2.86%. Total non-interest income was down 2.1 million or 24% for the prior year, reflecting lower mortgage origination volume and the 1.1 million negative swing in servicing rights. As I discussed last quarter, Gain on sale yields had reached the high end in the first quarter, and we will not see those levels, nor the levels we realized in 2020 again. Gain on sale yield for mortgage sales this quarter was 3.6%, which is a strong historical level, but well off the high 4% range that we took to the bottom line in 2020. Coupled with the lower level of sales due to the private client strategy we have discussed, has made annual comparisons of our mortgage operation challenging. Our servicing portfolio does continue to grow and is now at 1.32 billion and provided revenue for the quarter of 830,000. Market value of our mortgage servicing rights declined slightly this quarter with a calculated fair value of 84 basis points. This fair value was up 19 basis points from the prior year but down two basis points from the linked quarter. We now have a servicing rights balance of 10.7 million and remaining temporary impairment of 2.3 million. We are hopeful that a continued slight rise in the rate curve and a slowdown in prepayment speeds will allow us to recapture this remaining balance yet this year. As Mark indicated, total operating expenses this quarter were down $600,000 or 5% compared to the prior year and were flat to the linked quarter. The prior year quarter included $1.2 million in costs related to the Eden merger. And when we adjust the prior year for these merger expenses, operating costs would be up $655,000 or 6.3%. Now as we turn to look at the balance sheet, loan outstandings at June 30, 2021 stood at $850.5 million, which was 65% of the total assets of the company. As we have discussed, deposit levels continue to be above our expectations and have certainly impacted total asset growth. Absent what has been some loan growth, we have reallocated cash balances to supplement our investment portfolio. And that portfolio of $217 million is now up $108 million or nearly 100% from the prior year. Looking at our capital position, we finished the quarter at $144 million, up $6.1 million or 4.4% from June 30 of 2020. And our equity to asset ratio stands at 11%, or 11.3% when we exclude the remaining PPP balances. On a per share basis, tangible book value is up $2.25 per share from the prior year, or 15%. And the buyback that we had announced continued at a brisk pace in the quarter, with 215,000 shares repurchased at an average price slightly above tangible book value. With our market price at 107 of tangible book, Our shares are still well undervalued in our opinion and repurchasing aggressively at these prices is an effective strategy. The reduction in non-performing loans to 51 basis points reflects not only improved quality in our loan portfolio, but also the movement of a large credit into Oreo. We are in the process of marketing this property and hopeful as the economy reopens, we will realize the full appraised value. As we said, we decided to forego any additional provision for the quarters. We feel the significant increase in our reserve that we achieved in 2020 and in the first quarter of 2021 now puts us at the appropriate level. Classified loans are down over 21% and net charge-offs for the quarter were minimal at 20,000. Now I'm gonna turn the call back over to Mark.
spk04: Thank you, Tony. I want to conclude my remarks by acknowledging our recent dividend announcement we made last week of $0.11 per share, which is a 21% payout ratio and a dividend yield of approximately 2.4%. We continue to identify opportunities to enhance shareholder value, and certainly one that includes dividends and a conscious, deliberate return of capital to our shareholders in the form of stock buybacks, as Tony mentioned. And I'll turn the call back to Sarah for questions from our audience.
spk02: Thank you, Mark. Now we're ready for our first question. And while we're waiting for additional questions, I would like to remind you that today's call will be accessible on our website at ir.yourstatebank.com.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. As a reminder, if you have a question, please press star then 1 to be joined into the queue. And our first question today comes from Selena Jai with Janie Montgomery Scott. Please go ahead.
spk01: Hey, good morning.
spk04: Good morning.
spk01: I'm asking questions for Brian Martin. So the first one is, what's your outlook of mortgage production and its gain on sale margin?
spk04: Mortgage production for this year is certainly going to be low the prior year. Again, we discussed the trailing 12 months here at the $700 million pace. Tony can give us some additional color, but I would think that we would hopefully come into that 500 to 550 million number this year, given the pace that we're on. Absent any aberrations in the 10-year Treasury yield, yields are still very accommodative to our borrowers. As we've mentioned in prior quarters and certainly this quarter, the inventory levels have remained quite constrained, which is going to have an effect on our volume. And of course, we've had a very robust refinancing opportunity the last year or two, and that has begun to slow a bit. And further, and finally, as we mentioned, the 15-1 that we've begun to underwrite on a private client basis for our higher-end clientele and some of our urban markets have certainly shored up the balance, which again will not come to us in the form of loan sale gains, but rather in loan balance growth. So we're optimistic that we've begun to play literally on both sides of that equation, but I would say we ultimately this year will probably be off maybe 20% from that which we realized the prior year. Tony, any additional comments?
spk06: Yeah, I think, Mark, that's good color there. If you look at our mortgage business, we've done about $321 million thus far this year versus $325 million for the first half of 2020. Interestingly, we've done about 9.5% less actual mortgage units So our dollar item per ticket has gone up to about $236,000 average loan size. I would suspect our third quarter mortgage volume will be down, call it 10% to 12% from the second quarter of 2021. And I would think that that $525,000 to $525,000 75 type range for the full year as we look at 2021 is a pretty accurate number as we sit here today looking at our pipeline. On the yield side, you also asked about, Selena, I think we're going to continue to see gain on sale yields probably decline about 15 basis points over the prior quarter. I would guess through the first quarter of 2022 and then it'll start to stabilize. We'll probably end up at a stabilized range of probably 285 to 275 somewhere in the first quarter of 2022 and stay in that range going forward.
spk01: Thanks for the color. So next question is about the loan growth. So this quarter has been really nice. So what's your outlook for probably the loan growth in your pipeline going forward?
spk05: This is John. I think you're right. I think the second quarter began a nice trend for us. As we look at the third quarter, we're very optimistic. There's still a lot of cash out there providing headwinds that the government has supplied borrowers, but with the combination of low interest rates and an improving economy and hopefully a little bit of an improving supply chain, a lot of our clients are looking to borrow. They just can't get the materials they need to build or do a machine or whatever they're looking to do. So if we can get a combination of some of those, I feel really good about our prospects in the third quarter. If you look at our loan growth, commercial real estate all through the pandemic continued to grow and continued to grow and had a very nice second quarter. We would expect that trend to continue. We get some improvement back in the C&I through the supply chain and maybe people using up cash or paying down something else or, better yet, buying an investment. I think we're in good shape. And as Tony mentioned in the presentation, pipeline is as strong now as it's been in probably a year and a half, two years.
spk01: Okay, sounds great. So do you expect the net interest margin to increase? As you mentioned, the interest rate is, I think, pretty low.
spk06: Yeah, I think, you know, as we look at NIM going forward, I think Q3, we'll start to see a much larger acceleration of our Phase 2 PPP fees. I think that's going to provide a boost. You know, we had a big first quarter of PPP fees down fairly significantly here in Q2. Q3, it'll get back up. You know, we have $1.5 million remaining on the Phase 2 PPP fees, and I would suspect, John, we'll take a big portion of those there. You know, as John said, we've got a fairly large total pipeline, and I would think we're going to fund... 30-plus million of that in the next 60 days, which is a pretty strong level of funding growth for us in a 60-day period. You know, so I think that's going to be additive to margin. And we continue to be very aggressive on the funding side, and we've seen that clients have been, you know, not okay, but not moving large amounts of deposits out, even as we've moved rates down fairly aggressively, but we'll see how that potentially may turn going forward.
spk04: I think, Selene, this is Mark, and I think it's safe to say, and John can confirm this, but literally the conversations with our C&I clients, as well as maybe some CRE clients, have changed from, again, safety and restraint to optimism and potentially leverage, because once that liquidity gets levered two, three, four plus times, there's going to be more opportunities, and I think we're seeing that in our pipeline as we speak today.
spk01: Thanks. So, as you mentioned, liquidity, so do you expect the deposit inflow to slow down as, you know, so many deposits are remaining in the balance?
spk04: Just a high-level comment, and Tony can kind of clean this up, but again, we've taken another bite out of another rural market, and so we think there's a lot of opportunities not only just from a household growth, but a little more scope in every household, but we continue to see a lot of larger regionals assume that they can attract clients in rural markets with, again, the digital platform as a substitute, and and we're using that as a lever to get into the household as a complement. And we think they will continue, but as John mentioned, the real wild card here is the optimism that might emerge from the market and whether anyone's going to continue to want to constrain that loss of liquidity or whether they want to go to the other end of the spectrum and leverage that liquidity. I think that's the big key. But generally speaking, we've been mildly aggressive on – The CD side may be just mildly extending the maturities a bit just in case rates do go the other way in the midst of impending inflationary fears. So we've tried to hedge that a bit. But clearly on the asset side, we remain asset sensitive, but that world might be changing just a little bit as we change the mix in our balance sheet. comments?
spk06: Yeah, I think, you know, we saw a $30 million decline in total deposits this quarter, really the first decline we've had in, gosh, five, six quarters. I would suspect we'll probably see a similar decline here in Q3, and then it'll start to stabilize a bit. I just think the consumer's going to spend a little bit of the money that they have in their DDA accounts, and we've seen some of our businesses start to spend a little bit of their liquidity, and I think that's going to be reflective of our balance sheet as well.
spk01: Okay, I see. So are you going to use up all of these excess liquidity in the loan production, or what's your outlook for this?
spk04: I'm sorry, I didn't get the question there. Could you repeat the question?
spk01: Oh, sorry. So are you using up the most of the access liquidity on loan production, or what's your plan for that?
spk04: Well, right now, as Tony mentioned, the investment signs up dramatically, not where we would like it, but we're pretty disciplined, as I mentioned, and that's one of the reasons we have the asset quality and a total of $20,000 losses in loan losses today. So we really like our asset quality positioning, and we're pretty stingy with who we loan our money to. That liquidity is eventually going to be deployed prudently. And again, if you just take a 100 million growth plus or minus and you lever that three times by our clients, which is mild leverage in our estimation, that could yield a growth of 25% in our balance sheet. So as our clients remain optimistic and begin to deploy that liquidity to other opportunities, we think that's going to inorder our benefit and we will move that liquidity over to the to the asset side of the balance sheet. In loans, when higher yielding loans, albeit with an asset-sensitive balance sheet increasing with, we think, potential market increases in rates. Someday.
spk01: Okay, got it. Thanks for a call. So the last question is about the reserve. So for this quarter, there's no provision despite the loan growth. So What's your outlook of reserve ratio going forward?
spk06: Yeah, this is Tony. You know, as we look at this quarter net of PPP, you know, our allowance at 163 versus 122 a year ago, up 34%. You know, given our COVID deferrals and lack of actual losses, I think we're, as Mark said in the call, well prepared for any downside losses. I think we'll be prudent as we go forward with our loan growth and how we manage our allowance levels relative to loan growth. But I wouldn't think we'd be dramatically different from our current stance about where we are from a percentage standpoint, somewhere in that 1.4 to 1.5 type range.
spk01: Okay. I really appreciate that. Thanks.
spk06: Thank you. Thank you.
spk03: As a reminder, if you have a question, please press star then 1 to be joined into the queue. This concludes our question and answer session. I would like to turn the conference back over to Mark Klein for any closing remarks.
spk04: Once again, thanks everyone for joining. I'm excited about what's what the next quarter is going to bring. We have a lot of optimism, and we're looking forward to reporting on those results in October for third quarter. Thanks again, and have a great week. Take care.
spk03: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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