Pason Systems Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 28, 2023

There are 7 speakers on the call.

Operator

Morning, everyone, and welcome to the SB Financial Second Quarter 2023 Conference Call and Webcast. I would like to inform you that this conference call is being recorded and that all participants are currently 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 would now like to turn the floor over to Sarah Mekas with SB Financial. Ma'am, please go ahead.

Speaker 1

Thank you, and good morning, everyone. I would like to remind you that this conference call is being broadcast live over the Internet conference call will be archived and available on our website at ir. Yourstatebank.com. Joining me today are Mark Klein, will be available on our Investor Relations website. I would

Speaker 2

like to inform

Speaker 1

you that this conference call is available on our website, and our

Speaker 2

website, our

Speaker 1

website and our website. Call today's presentation may contain forward looking information. Cautionary statements about this information as well as reconciliations of non GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investors' material. Call will be recorded. These materials are available on our website, and we encourage participants to refer to them conference call will be recorded for a complete discussion of risk factors and forward looking statements.

Speaker 1

These statements speak only as of the date made and FB Financial undertakes no will be available for the Q and A session to update them. I will now turn the call over to Mr. Klein.

Speaker 3

Thank you, Sarah, and good morning, everyone. Highlights of this quarter's results include net income of $3,100,000 recorded $241,000 or 8.5 percent from the prior year quarter, but would be up $443,000 or 16.7 percent, concludes the effects of the OMSR recapture for both years. Year to date, adjusted net income is up 738,000 We're approximately 15.5 percent return on average assets of 91 basis points with return on tangible common equity is 12.4%. Net interest income of $9,800,000 was up $200,000 or 2.5 percent from the prior year call as loan growth and better asset mix have offset higher funding costs. However, compared to the linked quarter, Margin income was down 4.8% as the betas on funding costs have begun to exceed those on the asset side.

Speaker 3

Call is being recorded. Loan balances were higher from the linked quarter by just $8,500,000 but have now risen over $89,000,000 or 10% over the prior year quarter. Call deposits were down from both the linked and prior year quarters as challenges to identify funding at or below the margin continued. Is now expected to be a record quarter. Mortgage origination volumes strengthened in the quarter, up 32% from the linked quarter.

Speaker 3

However, we're still down from the prior year and asset quality metrics continued to trend in the positive direction on NPAs and our coverage of NPLs. As with prior webcasts, we continue to concentrate on our 5 ks initiatives: call will be recorded in the Q1 of 2019. Revenue diversity, more net

Speaker 2

interest income and fee based

Speaker 3

revenue, more scale, more scope, seamless operations and of course, asset quality. 1st, revenue diversity. For the quarter, our mortgage business line originated $65,000,000 in volume, higher by is $16,000,000 or 32 percent from the linked quarter. We also increased our percentage sold in the quarter to 73%, call is in line with more traditional levels and is a critical metric as we continue to manage both the size and makeup of the funding side of our balance sheet. Will show positive growth for both the linked quarter measurement and the prior year.

Speaker 4

Call is being recorded.

Speaker 3

Overall non interest income was $4,400,000 which was up from the linked quarter and down just slightly compared to the prior year, is primarily due to declining residential real estate volume. However, the gain on sale nearly doubled from the linked quarter and is reflective of will be recorded in the Freddie Fannie arena, as well as our initiative to constrain portfolio volume. Call. That said, the residential business line fee income was down by over $1,900,000 for the 1st 6 months of the year versus the is the same period last year. Interestingly, this decline represents 79% of our year over year fee income variance.

Speaker 2

Concludes today's conference call.

Speaker 3

Our commitment to the title insurance business remains strong despite the headwinds in the residential lending space. As we discussed in prior webcast, we intended to bolster our volume and revenue with a will provide a more conscious commitment to escalate title policy revenue that Peak receives from State Bank. As a result of our initiatives, State Bank has generated transaction volume call for the 1st 6 months for Peak of $36,200,000 and revenue for Peak of 183,000. Call is being recorded. As such, over 34% of Peak's transactions, representing 21% of the revenue, was due to State Bank sponsored activity.

Speaker 3

Concludes our call to not only diversify our sources revenue from our other 20 plus clients, but to also escalate State Bank's will be subject to the timing of the company's earnings release. We will now begin the call to concludes today's conference call. The current environment of purchase transactions presents a greater challenge as the seller typically directs the title work. Is up 36% over the prior year period, whereas our residential lending volume is off 40%. Wealth Management continues to be a competitive advantage and a complement is to our more traditional commercial banking services.

Speaker 3

Not only does it potentially provide a broader range of products and services to our now 36,000 households, is also a unique source of non interest income and greater revenue diversity to which we aspire. Will be available on our website. While over 50 years of providing wealth management services in our market, we have the unique ability to manage much more of our clients' financial needs than most pure banks. Call. We recently added new executive leadership, who has a long history of advising wealth clients in the region.

Speaker 3

We believe she'd not will only be a complement to our other 6 business lines, but additive to our sales initiatives to expand our current level of assets under management. Additionally, the business line is on track to provide $3,800,000 in revenue for this year. Is a very important part of our strategy. In the current rate environment, loan growth must be accompanied by substantially higher rates in order to ensure margins remain stable. To our benefit, we have witnessed a number of our competitors pulling back on lending in our markets, which we clearly have not done.

Speaker 3

We continue to reach out to identify opportunities with new and existing clients, but we have also become much more selective will be available in providing financing to higher risk loan sectors and structures that we are willing to provide our customers. Until funding at the margin retreats from the current 5 plus percent mark, loan growth we feel will be is intentional and conscious, but yet selective. Loan growth in the quarter slowed as we were up just 8,500,000 is from the linked quarter, but as I mentioned, dollars 89,000,000 or 10% from the prior year quarter. Unfortunately, our commercial lending activity has been impacted by paydowns in the agricultural is subject to a number of business activity within our current book. We continue to call aggressively in all of our markets.

Speaker 3

Call is being recorded for the 1st

Speaker 2

2 quarters of the year, our commercial lenders

Speaker 3

have made over 1900 client and prospect calls and have enabled us is to log a current pipeline in excess of $60,000,000 As an organization, we have recommitted on our quest to will garner a deeper deposit relationship with all borrowing clients, absent which pricing

Speaker 2

will be

Speaker 3

adjusted. Liquidity was fairly stable during the quarter with deposits declining slightly, which required us to replace funding with slightly more costly wholesale borrowings. Is expected to be a very strong quarter. Overall, the size of the company remained fairly flat. However, we forecast a slightly larger balance sheet for the remainder of 2023 in light of the will be paid downs in the investment portfolio and limited borrowings to fund loan growth.

Speaker 3

3rd, more scope. SBA lending as a preferred lender continues to be another great complement to our core business model. Will begin to drive a more intentional model in 2015. Since inception, we have now closed is $64,000,000 that we would have missed absent this strategy. As we discussed last quarter, timing of our SBA loan closings has delayed our gain on sale to be recognized in this quarter.

Speaker 3

As such, we have now closed $7,500,000 in the first half of the year and sold $2,500,000 for again on sale year today at $242,000 while retaining $5,000,000 on our books will be recorded to drive both non interest income as well as net interest income higher. We continue to be bullish concludes on 2 of our growth markets: Columbus, Ohio and Indianapolis, Indiana. Our lower cost funding continues to be provided by call is projected to provide greater asset lift, particularly from these growth markets. The overarching goal here is to gain market share and expand relationships with clients that can provide not only lending opportunities, but also the expansion will be recorded in the future. Is our new corporate sales champion we referenced in prior quarters is singularly focused on expanding the number will be available on our website.

Speaker 3

We will now begin the

Speaker 2

presentation of services in each of

Speaker 3

our single service households. As we discussed in prior quarters, his focus remains on organic initiatives to drive

Speaker 2

will be available on both sides of the balance sheet.

Speaker 3

Given our expansion in the mortgage business line over the last decade In a number of markets where we're clearly underbrands, a number of these clients have a limited relationship beyond the initial mortgage product. Concludes our prepared remarks. With our expanded ability to service these clients digitally, we intend to continue to drive more scope by adding additional products and services to each household. Concludes our call. In fact, to date, we have logged a service per household now of 2.90.

Speaker 3

Our goal is to add 1 more service per household and our 36,000 households to drive the depth of our relationship near to 4, all else being equal. The need for us to provide seamless digital experience for our clients remains a key objective. Concludes the call. We have begun the process of testing a more robust online account opening process, and we continue to make strides to improve our internal CRM usage and utilize the Ncino platform to drive efficiency in our lending processes. Clearly, there remains more work to be done will fully realize the potential of our technology gains.

Speaker 3

Operating expenses have been on a general downward trend over the last 18 months is due to not only our lower volume driven commission levels that have led to a pullback in revenue, but also our targeted reduction in resources is in those business lines. Our total headcount is down over 5% compared to the prior year, even with the additions we

Speaker 2

is on slide 4, client contact

Speaker 3

center we launched this year and 5 new MLOs.

Speaker 4

Concludes

Speaker 3

today's conference call. As a result of our focus on cost containment, we have delivered positive operating leverage for both Q1 and Q2. Concludes today's conference call. We expect to continue this positive trend as the balance sheet expands, asset mix normalizes and expenses moderate. Our client contact center was introduced in Q1 and is now, as I mentioned, assisting with client care.

Speaker 3

In fact, this group is now fielding approximately 12,000 calls per month. More success on referrals and cross sells is in the queue as we begin to more effectively embrace the capabilities of our sales force platform. 5th and final, asset quality. Call is recorded. Asset quality continues to reflect strong credit underwriting.

Speaker 3

Charge offs were down from the linked quarter to just $22,000 and for the year our annualized charge off rate is just 2 basis points. Thus far, the resilience of our clients has been as anticipated call as they appear to have managed their exposure to higher interest rates quite well. Tony will discuss the favorable position that we continue to see with our allowance level that now includes coverage of our non performing loans above 500%. Is a direct reflection of our commitment to not only prudent lending practices, but also the measures we took during the pandemic will be recorded to build our reserve in order to provide greater earnings stability post COVID. Delinquencies ended the quarter at $2,400,000 or just 24 basis points with our less than 90 day delinquencies ending the quarter at just 10 basis points.

Speaker 3

With client credit bureau scores higher and household debt as a percentage of disposable income lower,

Speaker 2

call is being recorded.

Speaker 3

At this time, I'd like to ask Tony to give us a little more detail on the quarter. Tony?

Speaker 4

Thanks, Mark, and good morning again, everyone. Again, for the quarter, we had GAAP net income of 3,100,000 is up 10%. Excluding the servicing recapture from the prior year, call is recorded. Core diluted EPS are up 22% as compared to the similar core earnings achieved in the Q2 of 2022. Call is being recorded.

Speaker 4

Total operating revenue was up from the linked quarter, but down just slightly as compared to the prior year. And when we exclude the servicing rights recapture from both years, call is up 3.3%. Margin revenue was up 2.5% compared to the prior year and for the full year call is up 11.5%. The efficiency of our balance sheet continued to improve in the quarter as our loan to deposit ratio rose to 91.9% call and total loans to assets increasing to now 73.4%. Now let's take a look at the 2nd quarter income statement.

Speaker 2

Call is being recorded. On margin for the

Speaker 4

quarter, net interest margin came in at 3.16%, which is flat as compared to the prior year due to the shift in our earning asset mix is a net negative beta of earning asset yields versus funding. Compared to the linked quarter, the impact of much higher funding costs, as Mark mentioned, could not be overcome by our loan growth and the improvement in those earning asset yields. Cash and securities as a percentage of total assets continued the reduction in the quarter, but they are now just 19.2% of total assets. This compares to 19.9% 23.4% will be linked in prior

Speaker 2

year quarters.

Speaker 4

The shift in mix has benefited interest income as evidenced by the improvement in our earning asset yields. Call is being recorded. For the quarter, we

Speaker 5

had an earning asset

Speaker 4

yield of 4.61%, up 12 basis points from the linked quarter and up 116 basis points

Speaker 2

is expected

Speaker 4

to be recorded from the prior year. Interest income as a result of balance sheet growth and net yield improvement was 14,400,000 is up $582,000 or 4.2 percent for the linked quarter and up $3,900,000 or nearly 38% from the prior year. As we experienced last quarter, funding betas have exceeded earning asset betas from both the linked quarter and the prior year. Deposit costs rose to 1.29 percent from the quarter, up 35 basis points from the linked and up 109 basis points compared to the prior year. Conference call will be recorded.

Speaker 4

We forecast that these negative betas will continue for the remainder of 2023 based upon the current rate forecast and that we will begin to see stabilization is entering 2024. Fee income as a percentage of average assets improved from the linked quarter to a level of 1.3%. Call is being recorded.

Speaker 2

The positives that we have discussed in residential lending

Speaker 4

were supplemented by better SBA sales volume. As Mark mentioned, we feel that the SBA product is well positioned for the current economic environment. Additionally, we continue to see stable results in our other fee income categories as compared to both the linked is in prior year quarters. While GAAP operating revenue is down for the year, when we adjust for the servicing rights recapture, call is a total operating revenue growth on a core basis is actually a positive 2.6%. And when we add it to our operating expense reduction, is a $1,300,000 cumulative pre tax change compared to the prior year.

Speaker 4

Mortgage gain on sale yields came in right on the expectation for the quarter at 2.2%, which is still below historical levels. Call is being recorded, but we anticipate this to be the floor on yields in 2023 and into 2024. Stale volume improved this quarter nearly 75% and our pipelines are running in the high 70s of saleable product. We continue to forecast 2023 origination levels to be is slightly below our breakeven level of approximately $350,000,000 but we will continue to reduce resource allocation to will preserve profitability. Market value on our mortgage servicing rights stabilized in the quarter with a calculated fair value of 123 basis points, is up 12 basis points from the prior year.

Speaker 4

That servicing rights balance increased compared to the linked quarter at $13,700,000 and remaining temporary impairment was flat at just $137,000 As has been our focus in 2023, total operating expenses were down from the linked quarter by $434,000 and when we look at year to date expenses, we are down $549,000 or 2.5%. This compares to our operating revenue decline for the year of 1.3%.

Speaker 2

Now as we take a quick look at

Speaker 4

the balance sheet. Total assets of $1,340,000,000 were flat to the linked quarter and were up $47,500,000 or 3.7 percent compared to the prior year. Presentation and some prepayments over the next 18 months, when we would stabilize the size of the portfolio at that new level.

Speaker 2

Call is being recorded. On the funding side, the deposit decline from the linked

Speaker 4

quarter was replaced by higher borrowings from the Federal Home Loan Bank, albeit at a marginally higher cost. Deposits compared to the prior year were flat, which required a loan growth of 10% to be funded by the investment portfolio runoff and those higher FHLB borrowings. Prepayments as a source of funding have been constrained. Tangible common equity, including the AOCI impairment declined slightly in the quarter to 7.13%, while tangible book value was stable at $13.81 per share, concludes the call today, which includes AOCI. And when we exclude the temporary impairment, tangible common equity call rises to 9.63%.

Speaker 4

Regulatory capital continues to be strong with common equity Tier 1 and total risk based capital reported at 13.2% and 14.4% respectively at the end of the quarter. Concludes today's conference call. We continued an

Speaker 3

aggressive buyback of our shares in the

Speaker 4

quarter with 91,000 shares repurchased at an average price of $13.67 which is well below the adjusted tangible book value of our shares in the quarter that I just mentioned of 18.65.

Speaker 2

Call is being recorded. Our loan loss allowance improved in the

Speaker 4

quarter and ended at 1.6% of total loans. Due to the improvement in the economic factors and a reduction in our level of unfunded commitment, our total provision expense for the quarter was just $145,000 net. We were, however, is able to add $375,000 to the allowance and coupled with our low level of charge offs, the allowance level improved by 2 basis points compared to the linked quarter. And again, this quarter, we had positive momentum in our classified loans. Our criticized and classified loans now stands at just $8,900,000 and are down 5.8% compared to the linked quarter and are down $3,300,000 or 27% from the prior year.

Speaker 4

And quickly before I turn the call back to Mark, just a quick summary of our year to date earnings per share, which while flat to 2022 on a GAAP basis, would be up $0.12 or 18% when we exclude the impact of the temporary servicing rights recapture from both years. Mark, turn the call back over to you.

Speaker 3

Thanks, Tony. Once again, I want to conclude by acknowledging the dividend announcement that we made this week of will be recorded at $0.18 per share, which equates to approximately 3.8 percent dividend yield and a 30% payout ratio. We continue to believe that our strong dividend and continued buyback strategy will drive tangible book value improvement and maximize returns to our shareholders. Optimistically, we continue to expect higher performance, one that includes prudent organic balance sheet growth, will be recorded in the quarter. We will now begin the call to offers non interest income to total revenue at or near that traditional 40% mark, albeit on a marginally slowing economic front.

Speaker 3

Concludes. Now I'll turn it back over to Sarah for questions. Sarah?

Speaker 1

Thank you. We're now ready for our first question.

Operator

Concludes today's conference call. Our first question today comes from Brian Martin from Janney. Please go ahead with your question.

Speaker 5

Call is being recorded. Hey, good

Operator

morning, everyone. Good morning, Brian.

Speaker 2

Hi, Brian. Hey, just maybe a couple

Speaker 5

of things I just was going to touch on. It sounds like the loan outlook or growth sounds like it's pipeline is pretty healthy and maybe some people pulling back in the market. Just kind of want to confirm just kind of how you guys are thinking about loan growth, just I mean hearing that positive, there are a lot of people with rates being up seem like there's some activity is slowing a bit. So just trying to understand the loan growth. And then just Tony, you talked about funding the loan growth.

Speaker 5

Just trying to understand, in the past, you've been kind of relying on some of those securities portfolio runoff, you had some borrowings increase this quarter. Just want to understand if the loan growth you do have, how you're thinking about funding it here in the near term?

Speaker 3

Yes. Hey, Brian, just a quick comment. Steve Waltz is here, our Chief Lending Officer. But from my seat, as you heard, call. We're making tons of calls and we all agreed when we made the presentation of the 'twenty three budget to our Board that it's going to take twice as much work to get half as far.

Speaker 3

And I think our commitment to outwork competition is somewhat evident in that $60,000,000 pipeline. But Steve Waltz is here and he can kind of give us a little call is on where that's coming from, Steve, and what you'd see in the next 2 to 3 months?

Speaker 6

Sure. Thanks, Mark. Good morning, Brian. Yes, we saw definitely some acceleration of our pipeline from the first half, some of the looks we saw in the first half, a lot of some investment CRE that given our commitment to asset quality didn't appeal to us. We are seeing some improvement not only in the volume of our pipeline, but in the credit quality.

Speaker 6

And I think, Brian, some of that is due, well, a few factors, certainly recent economic indicators show some increasing confidence from borrowers, consumers as well as businesses that take care of them. So we're seeing more broad activity, but I think also as Mark mentioned earlier, Some of the competition is pulling back. I think they have probably liquidity concerns that aren't quite the concern they are for us and allow us to will perhaps pick up some new clients in the marketplace. So we're seeing some opportunities from competitors as well is driving that. And as Mark mentioned, we saw some softness in our rural ag markets due to the strong earnings of our farm community, which is great for asset quality, But hasn't resulted in as much borrowing from them.

Speaker 6

So that's kind of the picture.

Speaker 4

And then couple I think on that, Brian, you asked about funding. I think That still continues to be a challenge. And I do think, as Mark said, we're being a little bit more selective on what we're looking at. But I think we're willing to take a piece or 2 off of our margin that we've been accustomed to in the past for good quality credits, Because we know most of our funding is now coming kind of at that 4.25% to 5% range on the margin. We've done okay on relationships.

Speaker 4

We certainly could do better at any time, but that's certainly kind of the bottom line. I think you're still able to generate a fair amount of funding dollars, call it 100 basis points below the wholesale market. If you want to do that, the risk obviously is your current book of business and how you manage that, which thus far we feel like we've done a pretty good job.

Speaker 5

Okay. So not much in the way of securities. I guess the growth you do have in the back half of the year, there's not much opportunity to fund it from the bond book at this point or even in the next year or 2, we should think about it being more growth in the balance sheet going forward.

Speaker 4

Yes. I think we're going to have kind of our normal $2,000,000 to $3,000,000 of amortization of the portfolio, some slight prepayments as we get to some rate notches and some maturities, but it's going to be, like we said, dollars 30,000,000 to $40,000,000 that the portfolio is going to decline, but that's about it, not any kind of rapid prepayments.

Speaker 2

Yes.

Speaker 5

Okay. That's perfect. And then maybe just a couple others just on high level on the mortgage. I know you talked about, Tony, the gains, the margins sound like they're is at a bottom here a trough and are either stable or up from here that seems fair and the sale volume seems pretty definitely improved. Just as far as origination volume, how are you guys thinking about that just holistically over the next couple of quarters or just 18 months, just how do you think few things playing out there.

Speaker 4

Well, I think we've done $114,000,000 through the first half of the year, come up 32%. I would think we're comfortable that we're probably in a $70,000,000 to $80,000,000 3rd quarter. I guess I'd lean more to the upside on that at this point of what we're seeing. And then we'll see how Q4 lands. So that kind of lands us somewhere between $250,000,000 to $285,000,000 for the full year, which I think is still as we've talked about below that kind of $350,000,000 kind of Mendoza line for us, but I think that lends towards a nice 2024.

Speaker 3

And Brian, just to comment, we As I mentioned, we continue to be very bullish on this new Indianapolis market that we've descended upon. We now have 5 producers there. Last month, they were at the top of the list on production. Still like some limited PCG kind of mortgages kind of thing, but We're very bullish on that market. And as we've discussed before, we think it can be all of what Columbus has been in the past.

Speaker 3

But we got 5 high level producers that get the concept and we kind of like to classify them as self propelled lawnmowers. They want to do as much volume as we want to do. So, we're bullish on that and we think that's going to certainly help us going forward to get back to where we used to be, which is somewhere around at $500,000,000 north of $500,000,000 mark.

Speaker 5

Yes. Okay. That's helpful. And maybe just jump into the margin for a moment, As far as how you're seeing things play out here with the rate increase yesterday and then just the growth outlook going forward and just the funding cost, how should we think about the margin over the next couple of quarters? I mean, does it will begin to trough and then with the rate environment potentially being down next year, just trying to understand the dynamics near term and then how we should think about with the balance sheet being positioned with potentially seeing rates drop.

Speaker 4

Yes. I think that You're spot on there. And what we've seen is, I think the market has stabilized, if you can call it stabilization, call it that is 4.5% to 5.25% range, that's where marginal retail funding is. And I think most community banks can kind of survive there. We're seeing loan pricing in the high 6s to low 7s and that seems to be okay with our clients.

Speaker 4

I think our 3.16 margin is going to stay roughly in that range, I would think. I think we'll start to get some slight improvement As we get into 2024, we were very aggressive on being short term on our funding. So we're going to have a lot roll off. And If we do get rate declines, and if the market cooperates, I think we'll start to take some funding costs is off the table as we enter call it 2Q of 2024.

Speaker 3

Being a little more liability sensitive. Yes. Yes.

Speaker 5

But so really, this quarter, it could be a trough, Tony, as far as where the margin is and it's flat to up from here. Is that kind of what you're saying? Yes. There's a little has more pressure near term and

Speaker 4

then I do think Q3 will have some still have some downward pressure, just because, As you've seen probably in all your banks that the rapid acceleration of funding costs is just it's just not really stopping. And there's a lot of competition out there, which I tell there's which tells me on the funding side, there's real liquidity strain, Which is why as Mark talked about, we've seen some of our competitors pull back on the asset side because they just can't find the funding.

Speaker 5

Got you. Okay. That's helpful. And maybe just the last one, just on the expenses have been is really strong, management wise. Just understanding what how that looks for the back half of the year?

Speaker 5

Just kind of the run rate we're at today after the swings in mortgage volume up or down, I guess what is this a pretty good level? Are there more things and more initiatives you guys are undertaking or is this a pretty good level?

Speaker 4

Yes, I think the 10.3% to 10.5% as we've talked about is kind of what we consider to be our core level of expense range. I do think there's probably some bias to the downside from that just because we continue to be, I think very cognizant on the front line. We've had pretty detailed and instructive lessons with our teams about call, let's understand what we're doing and what we're getting to. We're on the back half of kind of our technological investments that we is put in place. I don't think that's going to be a headwind going forward.

Speaker 4

So it

Speaker 2

is going to be a bit of

Speaker 4

a volume game. I think We've rationalized some headcount resources as we've talked about. We've consolidated some positions. We've done some other things. We've got management all in place that we think.

Speaker 4

So I don't I really don't think other than producers that's going to be our only kind of FTE increases going forward. So Long answer to what I think is, this is kind of our core level with a slight bias downward going forward, is absent volume constraints.

Speaker 5

Got you. No, that's helpful. And one other thing you mentioned, the SBA business, I guess it sounds as though you expect the momentum there given current market conditions to continue to be pretty healthy. Is is that I don't know how to you talked about the Wi Fi, maybe I missed it, but just understanding is that, you know, similar whatever the level kind of earnings this quarter was, is that kind of how to think about that going forward? Or is that anything ramping up from here?

Speaker 5

Or is it pretty consistent?

Speaker 3

Well, I think Brian is kind of consistent, but it's also very bullish. As I mentioned, we think that SBA program as a preferred lender really fits quite well into finding some of the deals we're finding, which would be generally a replacement of equity with debt call for companies changing ownership because of aging management and so forth, it's playing really well into that arena of the SBA. And we not only gets good yielding residual portfolio. We sell off the parts that we want. We keep some of it for net interest margin in comparison.

Speaker 3

And obviously, Getting that C and I deposit account is really important, which they're willing to do. So very bullish on that in a market where The economy may be slowing a bit. And I think we've found what we've generally liked. We're trying to score a few more of them, so that we can will be more nimble with the process, but we expect that $15,000,000 to $20,000,000 in 2023 is kind of our bogey and it gets us back to Well, we pretty much landed before COVID.

Speaker 4

And I would just supplement there, Brian. Traditionally, we've seen SBA call it as a percentage of that commercial loan pipeline to be in the kind of mid to high single digits. That number is call it 20% to 25% now. So that $60,000,000 you've got a fairly strong pipeline out there. And again, those are a little bit more is risky because they take a little bit longer, but that's why you try to have a big pipeline in there to get that to the bottom line.

Speaker 3

And Tony, some of it is on client need. Yes. But Brian, half of it is on more pointed calling in those 1900 calls. We're doing more calling on the C and I kind of thing like we talked about over a year ago. Well, it's easier said than done because they're harder to find, they're more work and they're a little more elusive, but it's making some difference on the SBA platform.

Speaker 5

Right. And on that piece of the SBA portion, some of it's going to go, I guess, if that's part of that's has a good chunk of the pipeline, a good piece of that if it gets done, gets sold and you keep a limited piece of it. So the $60,000,000 pipeline per se is is somewhat diluted by some of that going sale market and coming on balance sheet, but getting the benefit both sides, on the fee income side and the piece you put on the balance sheet getting the revenue, is that fair

Speaker 2

to think about that? We'd

Speaker 4

like to

Speaker 3

have our cake and eat it too. We'd love to be able to get the gain as well as the balance growth. You're exactly right. Some of that is going to be SBA, but we're selectively deciding how they're priced, What is the market value if we sell versus the breakeven on the net interest margin? So, we're constantly deciding per deal.

Speaker 3

What do we do with it? We put it on our books and keep the gain longer term or do we sell it and take it upfront. And I know, Tony, we're kind of evaluating each one as we speak and There's probably a nice balance of each in there.

Speaker 2

Yes.

Speaker 5

Okay, perfect. I appreciate all. Thank you guys taking the questions and the update and nice quarters. Thank you. Yes.

Speaker 5

Thanks, Brian.

Operator

Talk to you later. Thanks, Brian. To withdraw your questions, you may press star and 2. While we're waiting for additional questions, I'd like to remind you that today's call will be accessible on our website at ir. Yourstatebank.com.

Operator

And ladies and gentlemen, I'm showing no questions at this time. I'd like to turn the floor back over to Mark Klein for any closing comments.

Speaker 3

Thank you, sir. Once again, thanks for joining us. I look forward to bringing you up to date on our is Q3 in October. Goodbye.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Pason Systems Q2 2023
00:00 / 00:00
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