SB Financial Group(SBFG) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a net income of $2.7 million, a decrease from both the linked and prior quarters, attributed to increased funding costs and lower mortgage volume impacting profitability [3] - Total interest income increased to $14.8 million, up $3 million or 25.8% from the prior year, and up $390,000 or 10.8% annualized from the linked quarter [21] - The pretax pre-provision return on average assets was 96 basis points, with a return on tangible common equity of 10.8% [3] Business Line Data and Key Metrics Changes - The mortgage business line faced significant pressure due to higher rates and lack of inventory, reflecting a new lower level of activity [5] - Noninterest income was stable at $4.2 million, slightly up from the prior year but down from the linked quarter, with fee income stabilizing at 30% of total revenue [6] - The commercial team contributed over $145,000 in revenue, accounting for 11% of total revenue for the year, more than double the prior year's commercial revenue [7] Market Data and Key Metrics Changes - Deposits increased by $14.1 million or 5.2% annualized compared to the linked quarter, maintaining stability with prior quarters despite rising funding costs [4] - The loan-to-deposit ratio was 91.1%, marking the second consecutive quarter above 91% and an increase of nearly 6 basis points from the prior year [4] - The company maintained strong asset quality metrics, with delinquency levels at 33 basis points and year-to-date net charge-offs at only 1 basis point [5] Company Strategy and Development Direction - The company is focusing on five key initiatives: revenue diversity, scale, scope, operational excellence, and asset quality [5] - There is an emphasis on margin expansion, balance sheet growth, and noninterest expense containment to preserve and grow earnings per share [16] - The company is actively moving away from residential portfolio growth and adjusting pricing strategies to enhance profitability in the SBA sector [27] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by 11 rate hikes since early 2022, impacting ratesensitive business lines significantly [16] - The expectation for the mortgage business is a difficult six months ahead, with origination levels projected to be around $100 million, the lowest in several years [51] - There is optimism for a potential rise in volume in late 2024 as the rate environment stabilizes [40] Other Important Information - The company’s tangible book value per share increased to $18.92, up 3.5% from year-end 2022, with share buybacks continuing [32] - The common equity Tier 1 ratio stands at 13.6%, indicating strong capital levels [52] - The company declared a cash dividend of $0.52 per share for the year, with a total dividend payout ratio of approximately 30% [33] Q&A Session Summary Question: Loan pipeline and market conditions - Management expressed hope for the loan pipeline to reach a $70 million total for the year, with Q4 origination expected around $50 million [35][39] Question: Mortgage production outlook - Management indicated that mortgage production may be lower in the next couple of quarters, with expectations for stabilization in 2024 [38][51] Question: Margin stabilization - Management noted that funding cost pressures are beginning to abate, with expectations for margin improvement into 2024 [41][42] Question: Credit quality trends - Management confirmed that credit quality remains strong, with stable criticized and classified loans [66]