SB Financial Group, Inc.
Q2 2016 Earnings Call Transcript

Published: 22 Jul 2016

[Operator:]

Good morning, and welcome to the SB Financial Group's Second Quarter 2016 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 the conference up to the investment community for questions and answers. I will now turn the conference over to Melissa Martin with SB Financial. Please go ahead, Melissa.

[Melissa Martin:]

Good morning, everyone. I would like to remind you this conference call is being broadcast live over the Internet and will also be archived and available on our Web site 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. Before I turn the call over to Mr. Klein, let me add that this call may contain certain 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.

[Mark Klein:]

Thank you, Melissa, and good morning everyone, nice to have you all with us. Welcome to our second quarter webcast for 2016. The momentum that we established in 2015 and on into the first quarter of 2016, I'm happy to report, continued this quarter. Once again we delivered double-digit growth in revenue, net income, including earnings per share and net interest income, loan balances, and deposit growth, while maintaining top tier asset quality. Collectively, our efforts through the first six months of the year have enabled us to improve our overall performance once again and deliver a return on asset of over 1.1%. Highlights, this quarter include, GAAP net income for the quarter was 2.27 million, a 13.8% improvement over the prior year, and a 37% improvement over the year ago period. Likewise, our performance reflected a return on average assets of 1.15% for the quarter and 1.01% year-to-date. Net income available to common shares for the quarter was $2 million or $0.35 a share, representing approximately a 13% improvement over the prior year quarter and 35% over the linked quarter. Loan balances grew another $27 million or 4.8% to complement last quarter's growth of over $19 [ph] million. Collectively, year-to-date, we had over $47 million in growth or 17% annualized. Loan growth over the last year second quarter reflects an expansion of over $82 million or 15.8%. Top line revenue grew by 1.2 million or 12% to complement last quarter's growth of 4.6%. Aggregately, year-over-year revenues expanded by nearly $1 million or 4.7%. Likewise, expenses increased 7.4% from a linked quarter, and represented an acceleration over the prior year-to-date level of 4.8%, due to some of our strategic expansion. Assets under management and our wealth management division grew by 2.7% and 1.6% over the prior year quarter. Due to the timing of our growth, revenue remained relatively flat from the linked quarter and down slightly from the prior year quarter. Mortgage origination volume for the quarter was $110 million, or 53% over the linked quarter of $72 million and approximately $17 million over the year ago quarter, or a 17% improvement. This volume represented over 90% of new money to State Bank and provided over $39 million in growth in our sold loan portfolio. Asset quality and loan portfolio metrics continued to reflect top-quartile performance. And finally, the SBA strategy we've talked about for several quarters, continued to reveal that same positive trend that we reported on the first quarter. Each of the metrics that I have touched on strategically links to one of our five strategic themes to become and remain a high-performing institution. As you recall, those five themes driving our assent are

[Tony Cosentino:]

Thanks, Mark, and good morning everyone. For the quarter, we had net income of $2.3 million or $0.35 per diluted earnings per share. Our EPS was up $0.04 and $0.09 from the prior year and linked quarter was 13% and 35% respectively. Through six months, our diluted EPS of $0.61 was up 13% from the prior year. Now let's look at some highlights for the quarter. First, total operating revenue on a fully tax equivalent basis for the quarter was up 5% from the prior year, and up 12.5% from the linked quarter. We had loan growth, up $82 million from the prior year or 15.8%; loans sales delivered gains of $2.4 million from mortgage, small business and agriculture up 16% for the prior year. And lastly as Mark said we had a negative valuation adjustment to our mortgage servicing rights of just under $500,000. Now as we break down the second quarter income statement further, let's begin with net interest margin. Net interest income on a FTE basis was up from the prior year by 11.2% and up 5.1% from the linked quarter. End of period loan balances from the prior year were up $82.4 million, an increase of 13.8% and were up $27.6 million or 19% annualized from the linked quarter. This quarter's loan growth surpassed the very strong first quarter 2016 when we added $19.5 million of balance sheet loan growth. We continue to grow our loan book without sacrificing quality or price. Delinquencies when we net out identified non-performing loans or zero. And our average loan yield decreased by just one basis point from the prior year. In addition, our overall earning asset yield was up 2 basis points from the prior year as our mix trended slightly away from the bond portfolio. On the funding side, we experienced an increase in the cost of our interest-bearing liabilities coming in at 55 basis points for the quarter, up six basis points from the prior year. Our need for retail funding to facilitate loan growth is driving deposit costs higher. Net interest margin at 3.75% was down just one basis points from the prior year and flat to the linked quarter. Loan activity has had a major impact on margin income from the prior year, with total loan interest income of $6.7 million, up 14%. Clearly the key driver was the $82 million of increased loan balance which was the net result of $256 million in loan production over the last four quarters. We remain pleased as pricing has not been comprised with our average loan yield down just one basis point for the current quarter versus the prior year and on a year-to-date basis actually loan yields are higher by 3 basis points. Total non-interest income of $4.3 million was down 3% from the prior year, but up 25% from the linked quarter. However, adjusting for the servicing rights and securities gains we took, we would be up 12% and 14% respectively. Likewise, when we adjust fee income as a percentage of revenue it rises from the reported 40% to 42%. For the quarter, mortgage originations of $110 million were up from the prior year by $16.6 million or 18% and we are up $38 million or 53% from the linked quarter. The rapid decline in the tenure treasury has been challenging as our servicing gains and rights have declined, but also we are seeing significantly higher application volumes than we anticipated in our plans given the expanded disclosure requirements and how much new purchase volume we are seeing. We have tweaked pricing recently on refinance business to manage volume. As we have noted this quarter's new purchase volume was 90% and we expect to maintain that level into the third quarter. Little gains on sale in residential came in at $2.3 million which was in excess of 2.4% on our sold volume at $95 million. Our servicing portfolio of $832 million provided revenue for the quarter of $505,000 and the servicing portfolios increased by $109 million or 15% from the prior year sold volume of $281 million. The impact of the declining tenure yield and accelerated prepayment speeds reduced the market value of our mortgage servicing rights this quarter. Our calculated fair value of 78 basis points was down 13 basis points from the prior year and resulted in $469,000 write down in the quarter. This is a swing of $737,000 from the prior year. Through the first six months the impairment has negatively impacted our mortgage business by $1.2 million. At June 30, 2016 the servicing rights were $6.5 million flat to the second quarter of 2015 and declined 2% from the linked quarter. As at the end of the quarter our total temporary impairment remaining for recapture is $1.5 million. Other fee income for the quarter was at $2.3 million up from the prior year by 7%. This growth was driven by non-residential loan sale gains, increases in deposit fees and securities gains taken offset the MSR impairment discussed earlier. We had SBA loan sale gains that exceeded $0.1 million in the quarter. This quarter also included a gain on the sale of commercial OREO property of $0.2 million. Total operating expenses were up $0.6 million or 8.6% from the prior year and compared to the linked quarter expenses were up $0.5 million or 7.4%. Total headcount for our company is up by 16 since the prior year, reflecting staffing levels in our new locations in addition to added resources and compliance, loan review and mortgage administration. The higher staffing levels in addition to merit adjustments and higher commission and incentive costs make up the bulk of our year-over-year total expense increase. Operating leverage for the quarter was a negative 0.6 times, but if we adjusted for the one time revenue items it would improve to a positive 1.4. Our non-interest expense to average assets for the quarter was 3.78%, which was improved from the 3.81% achieved in the second quarter of 2015. When we calculate our net number which includes non-interest income to average assets of 2.2%, we are at 1.58%. This net income interest metric has declined from the prior year, but when adjusted for the one-time items the change is positive. Now, as we turn to our balance sheet, loan outstandings at June 30 stood at $605 million, 76.2% of the total assets of the company. We had growth of $82 million from the prior year and $27.6 million for the linked quarter. These growth levels were 15.8% and 19.2% annualized. Compared to the prior year, our loan growth was diverse with commercial real estate leading the way with $37.9 million, followed by residential real estate of $18.6 and CNI of $16.4. On the deposit side we are up from the prior year by $85 million which is 15.2% growth rate and up from the linked quarter by 10.3. Due to the strength of our loan pipeline, we continue to be more aggressive on the project pricing and marketing in order to meet our funding needs. Matching our loan growth for last 12 months with lower cost retail funding is a key accomplishment. Our loan to deposit ratio exceeded 93% on June 30th in line with our goals. Our balance sheet continues to be in an asset sensitive position with the trend line over the last five quarters being more asset sensitive. We feel that this strategy is prudent as we maintain short term cash flow and flexibility. With a structure we are prepared to move resources into higher yielding products and to take advantage of potential rate increases. Looking at our capital position we finished the quarter at 85 million up 6.8%, up 6.8 million or 8.7% from June 30 of last year. The equity to asset ratio of 10.7% was down slightly from the prior year but our tangible equity level was up 13 basis points. We announced the share we purchased late in the second quarter and the impact on our share account was minimal in this release. We expect to accelerate our buying in the coming two quarters given the market discount that SBFG shares currently maintain. These acquired shares should provide the necessary supply to meet the needs of our compensation programs in the near term without issuing new shares that are future higher priced. Regarding asset quality total non-performing assets now stand at 8.2 million or 1.04% of total assets with 98% and in non-performing loans in 2% or 150,000 in OREO property. Total level of non-performing assets is up 2.8 million from the prior year but flat to the link quarter. Brooding in the non-performing asset total is 1.4 million and accruing restructured credits which are nearly all maturity extensions in which elevator non-performing level by 17 basis points. Absentees accruing restructure credits total non-performing asset ratio would be just 87 basis points. We continue to manage two large credits that comprise 56% of our total problem assets. Both of these credits are commercial real estate properties and we expect these credits to be resolved this year at or near our current carrying value. Our OREO balance of 157,000, our residential real estate and our stated values should match closely to proceeds upon disposition. Provision expense of the second quarter 16 was zero down from 0.5 million in the prior year and 0.3 million from the linked quarter. Our absolute level of low loss allowance is up from the prior year and linked quarter by 6.4% and 3.4%. This is due to our low losses for the quarter and year to date being net recoveries of 245,000 and 210,000 respectively. Due to loan growth our allowance total owned percentage has declined from 1.34% at June 30 of last year to 1.23% currently. This allowance of level places it at the median of our peer group which bodes well given our top quartile peer and PA ratio. So as we summarize the quarter despite the impairment to our servicing rights we reported diluted EPS of 35 cents a share, up 13% with a trailing-12 month TPS of a $1.25 per share. In addition we have grown total assets under our care from the prior year by over 11% to 2 billion. I will now turn the call back over to Mark.

[Mark Klein:]

Thank you, Tony. It literally was a good quarter on all fronts for SB Financial. We are delivering on our commitments. We expanded our loan and deposit base, provided top line revenue growth, delivered record quarterly mortgage originations and expanded that income as Tony indicated by more than 13%. These improvements are a direct reflection of our robust markets we've entered, diversified product line and regional sales leadership all bound by our commitment to execute on the strategies we've identified. We remain committed to our vision up top-decile performance. Now I'd like to turn back over to Melissa for some questions from our investor community. Melissa?

[Melissa Martin:]

Thank you, Mark. Operator, we're ready for questions now.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]

[Melissa Martin:]

While we are waiting for questions to come in, I'd like to remind you that today's call will be accessible on our Web site at www.yoursbfinancial.com under Investor Relation.

[Operator:]

Our first question comes from Chas Craig with Meliora Capital. Please go ahead.

[Chas Craig:]

Hi, guys, thanks for taking my question. Firstly, I want to congratulate you on really couple good years now of organic growth. My question though is, as we are continuing to build out the infrastructure, have been and continue to, pretty clear -- I recognize that it's hard to get your expenses fully under control, under that more of a growth orientation, but it seems to me that a fairly low-hanging fruit to increase EPS by a pretty significant amount would be shaving 5% to 10% off your efficiency ratio, and I'm curious if you have line of sight on your ability to do that while you are continuing to grow. Thank you.

[Mark Klein:]

Sure. Thanks Chas for the question. We are always looking hard at all of our expense line items. We continue to deploy strategies, and what we caught up a bit with ourselves [ph] here in 2015 by delivering top line revenue with our bets and expanding on expenses and personnel in new markets. We've now ramped that up again. And as Tony indicated, we are up 15 to 17 individuals from the prior year or so. We are kind of in the midst of a growth phase. We've certainly gathered some inertia and momentum in our new markets, and we fully expected those bets to play out like we have in the past and continuing to improve our efficiency ratio with organic balance sheet growth, but it's going to take a few quarters to digest some of the bets that we've made.

[Chas Craig:]

Okay, great.

[Operator:]

[Operator Instructions] We have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mark Klein for any closing remarks.

[Mark Klein:]

Once again, thank you all for joining us. We are proud of the quarter that we produced. We have high expectations for the last half of the year, and we certainly look forward to getting back together with you all in October for reporting our third quarter. Thank you all for joining us, and we'll talk soon. Good-bye.

[Operator:]

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