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spk04: Good morning and welcome to the SB Financial second quarter 2022 conference call webcast. I would like to inform you that this 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 questions and answers. I will now turn the conference over to Sarah Mekas with SB Financial. Please go ahead, Sarah.
spk03: Thank you and 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 and President, then CEO, Tony Cosentino, Chief Financial Officer, and Steve Wall, Chief Funding 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, 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, as to 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.
spk00: Thank you, Sarah, and good morning, everyone. Welcome to our second quarter conference call and webcast. Highlights for the quarter, including a small mortgage servicing rights recapture of $239,000, include the following. Net income, as we've disclosed in earnings release, $2.8 million, down $1 million, or 25% from the prior year quarter. On a year-to-date basis, net income was $5.6 million. The year-to-date impact from the PPP initiative on our results compared to the prior year is a reduction in revenue of 2.1 million and net income of 1.6 million. Return on average assets of 0.87% up from prior quarter of 0.83, diluted EPS of 40 cents. Net interest income of 9.6 million was up 4.8% from the prior year as loan growth and rate increases were supplemented by the 12.4% reduction in interest expense. Loan balances from the linked quarter rose 45 million, and when we adjust for PPP balances, loans were up nearly 80 million, four strong 9.7% compared to the prior year. Annualized, our first half loan growth was 17.7%. And that drove our loan-to-deposit ratio up from 75% to 84%. Deposits declined from the linked quarter by 66 million, and we're down 19 million from the prior year. Expenses were down 274,000, or 2.5%, primarily due to lower mortgage commissions. Mortgage origination volume for the quarter was 95 million, down 69 million, or 42% year over year, The mortgage business line contributed $4.7 million in total revenue for the first six months of the year, compared to $12.3 million for the same period in 2021. Asset quality metrics improved from both the prior year and the linked quarter, and our consistent level of 42 base points of non-performing assets remained strong, while tangible book value when adjusted for OCCI is $17.53. As a prior course, we continue to believe that our focus on our five key strategic initiatives will drive our future success. They are revenue diversity and expansion, organic growth, scale, more products and services in that household for scope, excellence in operation, and more intimacy with client communications, and of course asset quality. Revenue diversity. Peak title continued to bolster revenue this quarter by nearly $700,000 in net income by $168,000 or $0.09 EPS annualized. We made a strategic shift last quarter to generally follow legal protocol and require title insurance on nearly all real estate transactions while driving operational revenue higher with a more intentional focus on a commercial real estate segment. These initiatives are responsible for the 23% increase we delivered in revenue and 12% of net income. This quarter, mortgage volume and loan sale gains were down from the prior year, 42% on volume, 72% on gains. For the prior 12 months, we have delivered nearly $500 million in total mortgage arraignment volume. That's down 24% from 2020 and 32% from 2021. Our initiatives to drive our volume of private client originations higher are clearly working. This quarter, 27%, or 25.5 million of our total residential real estate volume originated from our PCG business line. Of that production, 41% came from our Columbus market, 22% from Northwest Ohio, Northeast Indiana, and over a third from our newer Indianapolis market. Outside of our PCG initiatives, higher rates and compressed inventories continue to constrain our level of production. Non-interest income decreased to 4.7 million from the prior year quarter of 6.5 million. The current quarter includes a mortgage servicing recapture, as I mentioned, of 239,000 compared to an impairment of 99,000 in the second quarter of last year. Non-interest income to total revenue remained relatively strong at 33%, but well below our expectations on historical levels of near 40%. Our wealth management team contributed $936,000 in revenue, and we're on pace to achieve total revenue in 2022 of nearly $4 million. Despite the volatility in the markets that we've all witnessed, we have retained balances in excess of $500 million, and that includes $38 million in our brokerage platform. Secondly, more scale. Loan growth in the quarter was very good as we were up $45 million from the link quarter and up $79 million net of PPP from the prior year. All of our regional markets have very strong pipelines, including a number of client proposals currently in and under credit analysis. With this quarterly growth noted, we have now grown our book over the last five quarters. This border saw evidence of consumer and our small business clients drawing down their liquidity, and deposit declined from the linked border. Funding needs to support our loan pipelines are clearly much more important today, and as a result of our current deposit runoff, we have begun to selectively increase deposit rates to not only hit higher future interest rates, but also protect existing balances and grow newer relationships. Third, more scope. The traditional SBA market has become loose in a bit, as we've witnessed, and its PPP focus is totally all but gone. Thus far this year, we've originated nearly 5.5 million in qualified SBA products. We continue to execute on strategies in each of our markets that include more calls on clients and prospects that are in either a growth mode or a business acquisition mode who have identified a strong need for capital. We remain committed to this true complement to our commercial home production machine and intend to return to the production levels we experienced prior to the pandemic, and that'd be in 2015 through 2019 when we averaged approximately $12.3 million production each year in that five-year period. Operational excellence, fourth theme, The mortgage business plan has certainly been a key contributor to our success for the entire past decade. However, rate increases, operational challenges of construction lending, limited housing inventory, and a rapid increase in inflation have compressed our volume. That said, we have focused on flexibility, and our products and structure remain to improve our market share. fixed rate pricing now at or above 5%, our portfolio arm products have become certainly more relevant. These portfolio loans have increased our balance sheet outstanding and added the potential for expanding margins as rates rise. Expense levels for the quarter we're down for both the length and prior year quarters driven by the variable nature of our mortgage production. As we discussed last quarter, we are evaluating the resources allocated to both our mortgage and retail business line. Our goal is and has been for the residential business line the past six months to elevate our number of producers in order to keep our ecosystem in balance and optimized. I am pleased to report that in the last 30 days we have made offers to over a handful of MLOs and we have landed three of those producers one in the greater west central Ohio market, Lima, and two additional producers in the Columbus market. And that's five over the same quarter last year in number of producers and brings our MLO number to 25, an increase over the prior year in of three, or 22. Additionally, we intend to selectively utilize some of our traditional retail staff who do non-saleable consumer loans to originate some saleable residential loans to more broaden our production capacity, as we discussed in the prior report. Likewise, with walk-in visits moderating in our retail offices, due in part by our commitment to leverage our digital platform to enable access to our clients' data 24-7, we continue to reevaluate our hours we staff and operate our offices. This strategy hinges on the deployment of our new contact center that we delivered in early July that seeks to provide seamless service to clients using multiple communication channels. Rebalancing our resources here with market requirements will improve efficiency. Our fifth and final initiative, asset quality. This quarter saw, again, a strong result of key asset quality metrics. Despite the significant loan growth in the quarter, we remained quite pleased with our current allowance of nearly $14 million. During 2020 and 2021, when PPP and Mortgage Refinancing was adding to our revenue, we chose to add $5.5 million to our allowance. We do not intend to release reserves anytime soon. Currently, our level of total allowance is 1.54% and our non-performing coverage ratio is now 295%. Both metrics are well above the median level of our peer group. And now I'd like to ask CFO Tony Costantino to provide a few more details on our quarter. Tony?
spk01: Thanks, Mark. Good morning, everyone. Again, as Mark indicated, for the quarter, we had a gas net income of $2.8 million, or $0.40 per diluted share. So our highlights this quarter, operating revenue, down 1.4 million, or 9.1%, as mortgage gains from lower volume and reduced sales percentage were down nearly 3.1 million, or 72%. We were able to offset a portion of the mortgage variance with higher title agency revenue and deposit fees. Loan sales delivered gains of 1.4 million for mortgage, small business, and ag loans. And margin revenue, which was up 436,000, or 4.8%, due to slightly lower funding costs and higher securities revenue. Adjusted for PPT, loan interest income was higher by 468,000, or 5.5%. Looking further into our income statement, on the margin side, our average loan yield for the quarter, 4.11%, decreased by 22 basis points from the prior year, but it did increase 21 basis points from the linked quarter. As Mark discussed earlier, PPP impact on loan yields for 2021 was significant. In absence of that impact, our average loan yield would have decreased by just nine basis points for the prior year. Overall earning asset yield grew up 20 basis points for the prior year and 49 from the linked quarter due to the change in mix of the balance sheet and higher loan growth. Loan yields were impacted by the fees of the PPP portfolio, which were $2.15 million for the first six months of 2021 compared to $98,000 for the 2022 six-month period. As we've indicated, funding needs and costs will begin to accelerate as customer liquidity draws down and our loan pipelines are closed. As we look at funding costs in the current quarter, our deposit costs of funds came in at 21 basis points with the cost for interest-bearing liabilities at 36 basis points. This compares to 22 and 39 basis points respectively for the linked quarter. Given the rise in funding rates, we were pleased with the negative data on funding costs in the quarter. However, we recognize that our liquidity was a bit high by our standards coming into the quarter, and we expect deposit and overall funding costs to rise in the coming quarter. The net interest margin at 3.16% was up 22 basis points in the prior year and up 34 basis points when PPP is excluded. Compared to the link quarter, NIM was up 48 basis points. That significant NIM improvement from the link quarter was driven by a positive change in mix on the asset side of the balance sheet, as interest-bearing cash was allocated to loans, and deposit levels declined. Total interest expense costs were down from both the prior year and linked quarters. Total non-interest income was down 1.9 million or 28.5% from the prior year, reflecting lower mortgage origination and sales volume, which offset the $336,000 positive swing in servicing rights recapture. As I discussed last quarter, gain-of-sale yields have seemed to stabilize at the mid-2% level. Gain on sale yield for mortgage sales this quarter was 2.4%, which is still strong historically, but well off from the 3.6% yield from the second quarter of 21. This quarter, our sale percentage was just 52% and 63% for the year, as we have done much more portfolio and private client loan originations. These levels are well off from our traditional 85% sale percentage. Our servicing portfolio, however, does continue to grow and is now at $1.37 billion and provided revenue for the quarter of $863,000. Market value of our mortgage servicing rights improved slightly this quarter with a calculated fair value of 111 basis points. This fair value was up 27 basis points from the prior year and up 6 basis points from the late quarter. We now have a servicing rights balance of $13.4 million and remaining temporary impairment of just $327,000. We have held expenses relatively flat for the last five quarters, and for the year-to-date total, expenses are down 1.5%. We expect to trend down in the coming quarters as we adjust resources in our retail and mortgage business lines, as Mark has discussed. The impact of the mortgage business line on our efficiency ratio is significant, as our 25% decline in efficiency from 2021 would be reduced to an 11% decline when the results of that business line are excluded. Now as we finish up turning to the balance sheet, loan outstanding at June 30 stood at $895 million, which was 69.2% of the total assets of the company. As we said, the quarter saw a significant mixed shift Within our earning assets, as we saw, cash and securities declined by nearly 100 million from the late quarter due to loan growth and deposit runoff. Our loan-to-deposit ratio ended the quarter at 83.6%, up nearly six percentage points, and to our highest level since third quarter 2020. Looking at capital, we finished the quarter at 124.6 million, down 19.5 million, or 13.5% from June 30, with our equity to asset ratio standing at 9.6%. However, when we exclude the OCCI at $22 million, equity has grown from the prior year, despite nearly $7 million in stock buybacks and $3.3 million in common dividends. The buyback continued in the quarter, with 94,000 shares repurchased at an average price just above book value. We did also take advantage of our on-balance sheet liquidity and purchased some additional bowling policies in the quarter. Been some time since we've added to this portfolio, and it is a nice benefit for both the company and those participating employees. And finally, as Mark commented, all of our asset quality metrics are improved and charged off to a minimal for both the quarter and for the year to date. Our reserves to loans was just two basis points down from the prior year. Total delinquency levels are 32 basis points in the quarter, down 27 basis points for the late quarter, and down nine basis points for the prior year.
spk02: And I'll turn the call back over to Mark. Thank you, Tony.
spk00: I want to conclude, again, with acknowledging the dividend announcement that we made yesterday of $0.12 per share, which equates to approximately a 30% payout ratio and a dividend yield approximately 2.8%. Clearly, while mortgage volume and resulting gains are off considerably, marginally higher rates and a steepening yield curve with our asset-sensitive balance sheet provides some lift to our total operating revenue. With continued organic loan growth with strong pipelines, stable deposit costs, and more intentional expense control, we certainly expect to continue our earnings and growth momentum well into the second half of the year. And I'll turn it back to Sarah for questions. Sarah?
spk03: Thank you. Now we're ready for our first question.
spk04: 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. To withdraw from the question queue, please press star then 2. At this time, we will pause momentarily to assemble our roster.
spk03: And while we're waiting for any additional questions, I'd like to remind you that today's call will be accessible on our website at ir.yourstatebank.com.
spk02: Again, if you have a question, please press star then 1. There are no questions at this time.
spk04: I would like to turn the conference back over to Mark Klein for closing remarks.
spk00: Once again, thanks for joining us on our conference call and webcast. We look forward to speaking with you again in October to discuss the third quarter 2022 results. Thanks again for joining. Goodbye. Take care.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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