SB Financial Group. (NASDAQ:SBFG) Q3 2016 Results Earnings Conference Call October 21, 2016 11:00 AM ET
Melissa Martin - IR
Mark Klein - Chairman, President and CEO
Tony Cosentino - CFO
Jon Gathman - Senior Lending Officer
Good morning, and welcome to the SB Financial Group Third 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.
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, 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.
Thank you, Melissa, and good morning everyone. Welcome to our third quarter webcast for 2016. The positive trends and the earnings momentum that we reported in the first half of 2016 accelerated this quarter. Our strategies are sound and execution here is noteworthy.
Our double-digit growth and net income reflected similar size increases in loans, deposits and mortgage originations that enable us to deliver significant increases in non interest income and net interest income. Collectively, these drove operating revenue higher by over 16%.
Overall, the successful performance of our six distinct business lines delivered our quarterly ROA of 1.28%. Now a few highlights for the quarter. GAAP net income for the quarter 2.55 million, a 12.5% improvement over the linked quarter, and a 2.5% improvement over the year ago quarter.
Likewise, our performance reflected a return on average assets as I mentioned of 1.28% for the quarter and 1.1% year-to-date. Net income available to common shares for the quarter was $2.3 million or $0.40 per share, representing a 14% improvement over the linked year quarter and year ago quarters.
Loan balances grew another $15 million or 2.4%. Year-to-date, we have delivered over $60 million in loan growth or 14% annualized. Loan growth over last year’s third quarter reflects an expansion of over $78 million or 15%.
Top line revenue grew by 956,000 or 9% to complement last quarter's growth of over 12%. Aggregately, year-over-year revenue expanded by over $1.6 million or approximately 17%. Expenses increased 7% from a linked quarter, and represent the expansion of our fee based business lines and support staff as well as market expansions.
Assets under management and our wealth management division grew 2.3% and 11.4% over the prior year quarter with revenue up 8.1%.
Mortgage origination volume for the quarter was over 117 million, or 6% over the linked quarter and approximately 30 million or 35% improvement over the year ago quarter. Our loan volume continues to come from new households.
This quarter, approximately 88% of our 640 loan represent new household. 90% of our year-to-date volume of nearly 300 million represents new clients to State Bank.
Asset quality remains strong and resulted in even better metrics this quarter. And finally, our SBA volume and loan sale gains remained an integral portion of our overall strategy to grow and diversify our sources of non-interest income. Each of the above metric strategically links to one of our five strategic themes, to become and remain a high performing institution.
As we discussed before they are continue to diversify revenue through growth in net interest margin and fee based business lines, strength and penetration in all markets to add scale to our operation, expand product service utilization through cost selling while attracting new clients, provide that world class client experience to our client for life, and lastly deliver that top tier asset quality metrics that we know is so important to our franchise.
Now I would like to expand a bit on each revenue diversity. As of prior quarters we continued to drive our total revenue higher through organic balance sheet growth and the expansion of our fee based business lines. As a result, we were able to expand operating income over 13% to $3.7 million from a linked quarter and over 10% from the year ago quarter. This resulted in improvement in our non-interest income to total revenue of 43%.
The stabilization of a ten year treasury also enabled us to recover 70,000 of our aggregate impairment for the year which now stands at 1.5 million and Tony will touch on this momentarily again.
Mortgage lending remains a competitive advantage for our company. With diverse markets, high producers, robust product line, line up and sporting technology we continue to take market share. Our 117 million in loan volume produced record high in net mortgage banking revenue of over 2.7 million or on average 2.5% gain on loan sold.
As a result of our past successes, our servicing portfolio now stands at over 868 million. In order to continue to drive this key source of non-interest income we are identifying new expansion opportunities. This past quarter, we opened our sixth residential loan production office in Warsaw, Indiana.
In order to continue to diversify our sources of non-interest income we have developed specific strategy to leverage our expertise in both agricultural lending and small business administration sold loans.
This quarter, we sold nearly 1.3 million in guarantee credits for loan sale gains of 197,000. Year-to-date, we have produced 728,000 and SBA loan sale gains and 199,000 [ph] in FSA sold agricultural credits. The result of our strategy to build this SBA business line into a meaningful contributor to our bottom line we currently ranked 10th out of 59 banks in Ohio footprint or the 83% higher with over 9 million in loan originations year-to-date.
Our vision is to become a top five performer in this arena in Ohio. One of our key strategy is to accomplish this is to alter our production structure to accommodate seasoned business development officers in our lower share higher growth Metropolitan markets.
Assisting our clients with managing growing the wealth remains a focus for our company. We currently have over 375 million under our care representing growth of 38 million over the year ago quarter or an increase of 11%. To ensure we remain relevant in this core business line, we currently and recently named Chris Yakima [ph] as Head of our wealth management group at State Bank. Chris comes to us from Eastern Ohio with 25 years of experience and investment, advisory services, planning and management most recently at a Private Trust Company and First Merit.
Chris has an undergraduate from Baldwin Wallace and a JD from Marshall College of Law. The addition of Chris adds critical depth to our staff and business line and prepares us for more growth. Under his leadership we intend to continue to drive business line growth further in our newer largely untapped urban markets, The Fort Wayne Finley and Columbus. The final component of our fee based segment is deposit services. This quarter our overdraft income declined by 20% compared to the same quarter last year and by 11% year-to-date over the same period.
This trend represents the actions of a more prudent, healthier consumer as well as the availability of lower cost alternative funding sources. Conversely, our debit card fee income was up by 5.4% over the year ago quarter reflecting a consumer take ratio of over 73% for new DDA clients without debit cards.
In an effort to replace the lost overdraft revenue we intend to leverage our presence with the deployment of technology based initiatives in the treasury services arena that now include ACH manager and positive pay and in the first quarter of 2017 mobility for businesses.
Our over arching goal is to leverage new technology platforms with more defined treasury services sales initiatives in order to expand on our lower cost deposit base. Our second initiatives remains to strengthen penetration in all markets served and add more scale to our operation.
Our newest office in Finley Ohio is providing organic loan and deposit growth. At the end of the quarter our loan balance stood at $20 million and deposits at $8 million, clearly our expertise in the private client and commercial lending arena coupled with our mortgage lending leaders is providing results. With our diverse experienced team in place, we intend to continue to build on our successes and tap this potential of this desirable growing market.
Our Columbus full service operation continues to provide organic balance sheet growth. As of quarter end, loan balances stood at 155 million and deposits at 22 million. With each of our business lines calling in this coveted market, we are poised to continue to leverage our expertise and help drive bottom line contribution.
And finally, we have begun to identify and track talent to drive more organic loan growth in our newest expansion market of Bowling Green, Ohio. Mark Cassen [ph] a 30-year career banker with local ties has been named as our regional leader. Under his leadership we are developing a strategy to integrate our six business lines into this stable northwest Ohio college town. Organic loan growth remains the center post of our strategies to continue to improve financial performance.
The quarter as I mentioned we grew our loan book by another 15 million. This expansion includes all categories, commercial real estate, CNI, agriculture, residential and consumer. This increase was a result of progress in our newer higher growth markets of Fort Wayne, Columbus, Toledo, and Finley. Competition in all of our markets has increased throughout 2016, however our consistent calling efforts continues to allow us to build our loan pipeline.
Our third initiative is to expand the product service utilization. Our cost selling and on boarding initiatives have enabled us to add scale to our operation. As of quarter end, our number of products stood at over 55,000 up from 53,600 at year end or a 3.2% improvement.
This expansion also enabled us to expand our total product and service per household to now 2.77. We also continue to expand our credit card portfolio. As of quarter end, our higher yielding balances have increased to nearly 1.8 million up from 1.5 million a year ago or 18%.
Also, our number of account now stands at over 1,100, up from 977 a year ago or 14.2% improvement. Operational excellence remains that fourth key theme, to build franchise value. This quarter our number of households grew to over 27,000 from approximately 26,000 at year end, or 3.9% increase. One of the key drivers of the success is the growth in our residential real estate business line.
This quarter, we expanded our number of mortgage loans to 7,289, up from 6,714 at year end, representing an increase of 7.7%. Once we have established a relationship with a new mortgage client, our goal remains to grow and develop it more deeply with the intent to retain it for life.
Additionally, our on-boarding and re-boarding initiatives with new and existing clients have been the impetus to grow our referral book this quarter. We identified another 704 potential client needs that led to 260 closed referrals, for over $28 million in new business for our company. Our goal is always to work in our client’s best interest in mind, as we collaborate with our business partners to solve financial needs.
Fifth and final strategic initiative, to build a high-performance company remains to deliver that top tier asset quality, we’ve worked so hard to get. Loan quality, loan growth year-over-year of $78 million or 14.5%, has accompanied a corresponding improvement in all of our asset quality measures.
Year-over-year, non-performing assets have declined by over 50%. Net charge-offs have declined by 100%. Provision expense was down by 74%. Classified assets down by over 26% to $5.4 million and past due loans were down by 58%. As a result, our loan loss allowance coverage of our non-performing assets now stands at 163%.
And now, I’d like to ask Tony Cosentino, our CFO to provide a little more color on our quarterly performance. Tony?
Thanks Mark. Good morning, everyone. For the quarter, as Mark said we had net income of $2.5 million, or $0.40 per diluted earnings per share. That EPS was up $0.05 from both the prior year and the linked quarter or 14%. Through nine months, diluted EPS of $1.01 is also up 14% from the prior year.
So let’s look quickly review some highlights. Total operating revenue on a fully taxable equivalent basis for the quarter was up 9.6% from the prior year and up 3.8% from the linked quarter. Loan growth was up $79 million from the prior year or 14.5%.
Loan sales delivered gains of $2.8 million from mortgage, small business and agriculture, which is up 41% from the prior year quarter. And lastly, we had a large commercial real estate non-performing credit payoff in full, which reduced non-performing loans by $3.5 million and recaptured interest income of approximately $120,000.
As we breakdown the third quarter income statement, let’s begin with our margin. Net interest income on a fully taxable equivalent basis was up from the prior year by 9.6% and up 3.8% from the linked quarter. End of period loan balances from the prior year were up $78.5 million, an increase of 14.5% and we are up $14.6 million, or 9.6% annualized from the linked quarter.
This quarter’s loan growth continued the very strong momentum of the first two quarters of 2016 when we added $27.6 million and $19.5 million of balance sheet growth in each quarter. We grew our loan book without sacrificing quality or price. Our average loan yield adjusted for the non-performing recapture, we decreased by 7 basis points from the prior year.
Overall, earning asset yield was up 2 basis points from the prior year, reflecting the non-performing interest and our mix trending slightly away from bonds into loans. On the funding side, we did experience an increase in the cost of our interest-bearing liabilities, coming in at 56 basis points, up 7 basis points from the prior year.
Our need for retail funding to facilitate loan growth is driving deposit costs higher. Net interest margin at 3.82% was down 5 basis points from the prior year, but up from the linked quarter due to the interest recapture.
Total interest cost, interest expense costs have risen by nearly 30% from the prior year, however the variance is tied exclusively to the increase level of volume. Loan activity has had a major impact on margin income from the prior year, with total loan interest income of $7 million, up 13%.
Clearly $79 million of increased loan balance which was the net result of $243 million in loan production over the last four quarters is a key driver. We'll remained pleased that pricing has not been compromised with our average loan yield down just 3 basis points for the current and on the year to-date basis loan yields are flat to the prior year.
Total non-interest income of $5 million was up 27% from the prior year and up 16% from the linked quarter. The income as a percentage of total revenue was nearly 43% which is highest percentage we have seen since mid 2015.
Absent a slight impairment in recapture, this quarter's results are linked directly to the significant volume from our business lines. For the quarter mortgage originations of $117.2 million were up from the prior year by 30.2% or 35% and we're up $7 million or 6% from the linked quarter.
As we have noted this quarter's new purchased volume was 88% and we expect to maintain that level into the fourth quarter. Total gains on residential mortgage sales came in at $2.5 million which was nearly 2.5% on our sold volume of $101 million.
Servicing portfolio now at $869 million provided revenue for the quarter of $531,000, and this portfolios increased by $117.8 million or 16% from the prior year on sold volume for that period of $312 million.
The market value of our mortgage servicing rights increased slightly this quarter, calculated now fair value of 79 basis points was down 12 basis points from the prior year but up 1 basis point from the linked quarter and resulted in the $71,000 recapture.
Through the first nine months the impairment has negatively impacted our mortgage business by $1.2 million. At quarter end our mortgage servicing rights were $6.9 million, up slightly from the third quarter of 2015 and up 6% from the linked quarter with the total temporary impairment remaining of $1.5 million.
Other fee income for the quarter at $2.3 million was up from the prior year by 6%, the growth driven by non-residential loan sale gains, increases in deposit fees and securities gains. We had SBA loan sale gains at nearly $200,000 in the quarter and wealth management fees were up 8% from the prior year reflecting good performance from our brokerage business.
Operating expenses this quarter were up $1.3 million or 19.7% from the prior year in compared to the linked quarter expenses were up $25 million or 7.1%. Total headcount for the company is up by 15 from the prior year reflecting staffing levels for our two new locations in addition to the added resources and compliance loan review and mortgage administration. These higher staffing levels as well as merit adjustments and incentive costs make up the bulk of our year-over-year total expense increase.
This quarter obviously also included higher commission expenses, a result of our record mortgage volume. Now, as we turn to our balance sheet, loan outstanding at September 30 stood at $619.4 million, which was 77.3% of the total assets of the company. We had growth of $78.5 million from the prior year and $14.6 million from the linked quarter. These growth levels were 14.5% and 9.6% annualized respectively.
Compared to the prior year, our loan growth was diverse with commercial real estate leading the way at $37.2 million, C&I of $17.5 and residential real estate at $12.9 million.
On the deposit side we are up from the prior year by $88.6 million which is a 15.4% growth rate and up from the linked quarter by $13.8 million. Due to the strength of our loan pipeline, we continue to be more aggressive on deposit pricing and marketing in order to meet our funding needs.
Matching our loan growth for last 12 months with lower cost retail funding has been a key accomplishment. Our balance sheet continues to be in an asset sensitive position with the trend line over the last five quarters becoming more asset sensitive position with the trendline over last five quarters becoming more assets sensitive. We feel that this strategy is prudent as we’ve maintained short-term cash flow and flexibility. With this structure, we are prepared to move resources in the higher-yielding products and to take advantage of potential rate increases.
As we look at our capital position, we finished the quarter at $86.3 million, up $5.9 million or 7.4% from the prior year. The equity to asset ratio of 10.8% was down slightly from the prior year, which reflects the growth in our loan outstanding. As we announced prior, we have a share repurchase program that we announced late in the second quarter and thus far, we have reduced our share count by approximately 39,000.
We expect to continue to buy in the coming quarters in line with our approved buyback level. And these acquired shares will provide the treasury supply we need to meet the needs of our compensation programs in the near-term without issuing new shares at a future higher price.
Finally, regarding asset quality, total non-performing assets now stand at $4.6 million or 0.57% of total assets, 98% of which are in non-performing loans and just 2%, or 73,000 in one OREO property. The total level of non-performing assets is down $4 million from the prior year and down $3.7 million to linked quarter.
As we said, this quarter reflects the full principal and interest payoff of the large commercial real estate credit that became non-performing in the third quarter of 2015. At that time, we were confident that credit would be resolved without any loss to State Bank which has come to pass. Currently, we have only one non-performing item with the balance in excess of $1 million. Included in our non-performing asset, total is nearly $1.6 million in accruing restructured credits which are nearly all maturity extensions and which elevate our non-performing asset level by 20 basis points.
Absent these accruing restructured credits, total non-performing asset ratio would be just 37 basis points at the end of the quarter. Provision expense, also we have said for the quarter was zero, down from $100,000 in the third quarter of 2015 and the same as the linked quarter.
Our absolute level of loan loss allowance is up from the prior year by 3.5%, which is due to our loan losses for the quarter of $130,000 and for the year, net recoveries being $80,000. Due to loan growth, our allowance for the total loans percentage has declined from 1.31% in the prior year to 1.18% currently. This allowance level still places it at the median of our peer group, which bodes very well given our top quartile peer non-performing asset ratio.
So, as we summarize the quarter, mortgage volume and improve asset quality resulted in reported diluted EPS of $0.40 a share, up 14% with the trailing-12 month EPS of a $1.30 a share. In addition, we have grown total assets under our care from the prior year by more than 11% to $2.05 billion.
I'll now turn the call back over to Mark for some summary comments.
Thank you, Tony. Overall, it was the best quarterly performance for our company in over 13 years. It has been said that mediocre strategy executed with precision would trump a great strategy poorly executed every time. Our belief is that it takes both, a great strategy and precise execution to achieve our vision of a high-performance company.
At SB Financial, we think about how to capitalize on our opportunities with insight and innovation and then plan diligently to execute on each of those strategies. We look forward to reporting to you our full year performance in January.
And now for questions and answers, I would like to turn it back over to Melissa.
Thank you, Mark. Carrie, we are now ready for our first question.
Thanks, Melissa. We will now begin the question-and-answer session. [Operator Instructions]
While we are waiting for additional questions, I'd like to remind you that today's call will be accessible on our website at www.yoursbfinancial.com under Investor Relations.
[Operator Instructions] I’m seeing no questions at this time Melissa.
Thank you, Carey. As there are no further questions. I will now turn the call back over to Mr. Klein
Once again thank you all for joining us this morning. We look forward to speaking with you again in January to report our full year earnings. Good bye. Have a good week end.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.
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