Operator
Good morning, and welcome to the SB Financial 4th Quarter 2024 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 Sarah Mekas with SB Financial. Please go ahead, Sarah.
Thank you, and good morning, everyone. I'd 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, President, and CEO, Tony Cosentino, Chief Financial Officer, and Steve Wall, Chief Lending Officer. 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. These materials are also available on our website and we encourage participants to refer to them for a complete discussion of risk factors and forward-looking statements. These statements speak only as of the date made and SB Financial undertakes no obligation to update them. I will now turn the call over to Mr. Klein.
Thank you, Sarah, and good morning, everyone. Welcome to our fourth quarter 2024 conference call and webcast. 2024 was definitely a year of expansion, one of some resilience and discipline execution of our company. Despite a challenging economic environment marked by rising funding costs and evolving market dynamics, we delivered solid results underscoring the strength of our diversified revenue business model and our commitment to our key strategic initiatives let me begin by highlighting some of our key achievements for the quarter and for the full year however before i begin i would like to congratulate the sb financial and marblehead teams on successfully closing on the acquisition of the marblehead bank that was achieved this past friday we look forward to a very productive 2025 where we can provide the marblehead clients and employees with all that state bank team and our business lines have to offer highlights for the quarter include net income of 3.6 million with diluted eps of 55 cents which is down slightly compared to the prior year however when we adjust for the servicing rights impairment and the Visa B share sale in 2023, EPS would be up $0.07 over the prior quarter or 16.7%. Tams would book value per share into the quarter at $16 up from $14.98 or a 7% increase. Net interest income totaled $10.9 million, an increase of 13.7% from the $9.6 million in the fourth quarter of 2023. From the link quarter, margin revenue accelerated at a 28% annualized pace. Loan growth for the full quarter was $46.5 million, up 4.7%, and this quarter marked the third consecutive quarter of sequential loan growth. Our Columbus region, led by our newer regional president, Adam Gressel, delivered the bulk of that growth, or $57 million, and ironically, 113% of our net growth. Deposits were stable to the linked quarter and were up over 82 million to 1.15 billion. Growth in our deposit base was consistent with 80% of our offices reporting higher deposit levels as compared to the prior year. This growth demonstrates the benefit of our relationship-driven approach and our ability to attract and retain clients in a highly competitive rate environment. Mortgage originations for the quarter were $73 million, and for the year, we originated $261 million. Northwest Ohio area, $74 million. Our Indiana market, $70 million. Columbus, $114 million. And our new Cincinnati market, $3 million. The $261 million growth, while still arguably well below our capacity, was an increase over 2023 by $45 million or 21% as the second half of 2024 delivered over 55% of our total 2024 volume. The servicing portfolio improved to $1.43 billion, which was up from both the prior year by 4.4% and the length quarter by 6%. Operating expenses were flat to the length quarter and up 6.1% compared to the fourth quarter of 2023. And finally, while charge-offs levels were slightly elevated in the quarter of seven base points, our remaining asset quality metrics were consistent with prior quarter. Our strategic path forward remains hinged on those five key strategic initiatives we mentioned in prior quarters. That's growing and diversifying revenue, more scale for efficiency, more scope for more households, more services in those households, certainly operational activity, and finally, asset quality. Looking a little closer at revenue diversity, the mortgage business line into 2024 on a relatively high note, delivering volume, as I mentioned, to $73 million higher than the link quarter and up substantially from the prior year. Most importantly, as I mentioned, we were able to deliver 21% higher volume than 2023 in what was still a fairly tough year for this business line strategically in 2024 we achieved several milestones with our indiana team nearly becoming our second highest volume region in just five years and are well on their way to delivering a 100 million dollar year in 2025 and our newest region of cincinnati was able to generate 12 loans or 2.6 million in volume in just a very few short months we expect to add originators in that market and generate substantial volume in 2025. Non-interest income was up slightly from the link order at $4.6 million. And when we adjust the prior year for the sale of our Visa B shares, year-over-year increased with $479,000 or 11.8%. The wealth and title businesses have improved throughout 2024 as they've been the beneficiary of our internal referral process. We've seen commercial title revenues supplant the reduced residential volume and allow peak title to remain flat to the prior year as residential volume reflected stress. Likewise, positive results from our brokerage business, which relies a great deal on client and internal referrals, delivered an increase in brokerage revenue of over 73% compared to the prior year. Let's go to scale. A key highlight for the year was the successful acquisition as I mentioned of the Marblehead Bank Corp that we completed January 17th. This all-cash acquisition expands our presence into Ottawa County, Ohio, strengthening our market positioning in a higher growth area while creating new opportunities to deepen Marblehead's existing client relationships and deliver a more diverse palette of tailored financial solutions for their existing and new clients this milestone reflects our deep commitment to serving our growing customer base and driving long-term shareholder value i'm proud of our team as we were able to close in this transaction very quickly given the execution of the merger agreement in just august again as i indicated earlier deposits from the link quarter were stable and were up substantially from the prior year by over 82 million our ability this past year to quickly pivot and expand our client deposit relationships via the state of ohio homebuyer plus program was certainly meaningful to our results we anticipate 2025 to be another solid year of deposit growth as we add the 50 plus million from marblehead and return to more intentional cni based growth in both our legacy markets as well as our new growth markets. Overall, loan growth for 2024 was below our pre-COVID traditional levels of approximately 8%, but we saw the second half of the year improve dramatically, especially in our newer Columbus market. Since June of 2024, total loans have improved by $41 million, or an 8.2% on an annualized basis. Also to note, we have consciously placed less emphasis on growing residential real estate portfolio loans, instead concentrating on a higher saleable strategy and allow portfolio amortization to better mature. In fact, for the year, the residential portfolio was down nearly $10 million. Normalizing our portfolio to exclude residential real estate would result in our loan growth rising from $47 million to over $57 million, again, an adjusted 8.3% growth rate. We continue to balance capital needs for growth and the return of capital via dividends and share buybacks to our stockholders. This quarter, we were fairly aggressive in our buyback with over 130,000 shares being repurchased. For all of 2024, we returned nearly $8.5 million to our shareholders via buyback and dividends, or approximately 74% of our net income. In terms of deeper relationships, more scope. As we have discussed in our prior quarters, our expanded contact center is up and fully operational. For all of 2024, we had more than 105,000 client interactions. Long term, we think this strategy will build both brand awareness and greater brand loyalty. Organic expansion was a key part of the conversation for us in 2024. We added MLOs in several of our legacy marks to take advantage of competitors leaving the business line. And we also added six MLOs in our growth regions of Indianapolis and Cincinnati. We expect that the addition of the two offices of Marblehead this year will provide additional opportunities to deliver even greater organic balance sheet growth and saleable mortgage originations. Operational excellence. As we discussed, total of mortgage volume was 21% higher compared to 2023 and $261 million. And equally important to the success of our business model, we sold 83% of the volume in the secondary market. The purchase market was the dominant player again this year, like 2023, as we saw purchase and construction volume encompass 88% of our total, down slightly from 92% in 2023. In addition, our internal refinance volume was just 3.4% of our 2024 production. Finally, asset quality. Charge-off spiked a bit in the quarter to seven basis points, but were still quite low for the year at just two basis points overall. We also expect that the three commercial credits that increased our non-performing amount levels beginning in the third quarter will resolve themselves in the first half of 2025. Our current expectations are for those credits to be unwound with minimal financial impact. We continued also to see significant improvement in our criticized and classified loans, which were down to $6.4 million from $9 million the prior year, or a reduction of $2.6 million or 29%. I now ask Tony Costantino, our CFO, to give us a little more information on our quarterly performance and annual performance. Thanks, Mark.
And again, good morning, everyone. Let me outline some additional highlights of our fourth quarter and full year results. First, let's take a look at the income statement and net interest income. In the fourth quarter, net interest income was $10.9 million, up $1.3 million, or 13.7 percent compared to the same quarter last year. This growth reflects the higher loan balances and improved asset yields, even as funding costs rose slightly. For the full year, net interest income totaled $39.9 million at 1.7% increase over 2023. The stabilization of funding costs and to a lesser extent loan growth has driven that margin improvement. For the quarter, cost of interest-bearing liabilities was 2.36%, up just three basis points in the prior year, and from the linked quarter was down 17 basis points. And our deposit cost of funds has likewise improved to 1.78%, down 16 basis points from the linked quarter, however up 16 basis points from the prior year. As we look at non-interest income, for the quarter, it was $4.6 million, down from $5.5 million in the prior year, but up 10.5% from the linked quarter. I would note that results for the fourth quarter last year included $1.5 million in gains on the sale of securities, which did not occur in the fourth quarter of 2024. Gains on mortgage loan servicing rights and wealth management fees contributed to the sequential improvement, reinforcing the value of our diversified revenue streams. For the full year, non-interest income declined by 4% compared to the prior year, but still accounted for 29.5% of total revenue. This performance was supported by wealth management and other fee-based business lines, despite challenges in the mortgage, SBA, and title insurance sectors. As we look at the provision for credit losses, we recorded an actual credit of $76,000 in the fourth quarter due to the reduction in our unfunded commitments. Our CECL model is reflective of the improvement in the economic factors, which drove no increase in our allowance level this quarter. And our non-performing levels continue to include no OREO or OAO, and as Mark indicated, we believe this level is the high watermark we will experience for the coming three to six quarters. On efficiency, the efficiency ratio for the quarter was 71.1%, slightly up from 68.4% last year due to the rising funding costs. However, operating expenses remain well-controlled, totaling $42.9 million for the year, just slightly higher than the 23 levels. This reflects our commitment to balancing growth investments with disciplined expense management. As we turn to the balance sheet, on loans, as Mark mentioned, total loans ended the year at $1.05 billion. And with 20% of our portfolio set to reprice over the next 12 months, we anticipate that our yield and earning assets will improve, along with the higher anticipated new loan volume and pricing. Deposits. Deposit growth followed sooth and grew to $1.15 billion. On a granular basis, low-cost transactional deposits accounted for 100% of this growth, as higher cost time deposits were level to the prior year. Even with that deposit growth, we managed to increase our loan to deposit ratio to nearly 91 percent and as a result of our growth our overall cost of deposits of 1.86 percent was well maintained going forward i would expect that the liquidity coming from the marblehead acquisition and the scheduled amortization of our bond portfolio will fund the majority of our 2025 loan growth on capital management during the quarter as Mark indicated, we repurchased 130,000 shares, an average price of 21, just slightly above the adjusted tangible book value. For the full year, we repurchased over 250,000 shares, which was on par with what we have done over the last three years. Tangible book value per share increased to $16, up 6.8% year over year, reflecting the strength of our capital position in our strategic capital deployments. On asset quality and taking a little future look, non-performing loans remained low at 53 basis points of total loans with net charge-offs at just seven basis points for the quarter. The allowance for credit losses provided coverage of 274 percent of non-performing loans, underscoring the robustness of our risk management framework. And as we look forward, you know net interest margin improved in the fourth quarter to 3.35 percent up 18 basis points from the link quarter with a substantial portion of loans repricing in 2025 and funding costs continuing to moderate we anticipate gradual margin expansion throughout the year even with some anticipated fed rate decreases at the short end of the curve i'll now turn the call back over to mark thank you tony this uh has been a bit of a challenging year but in many ways very satisfying as we've expanded our asset and client base in a number of our regions leading to organic
balance sheet growth made the acquisition we discussed with significant liquidity increased book value and delivered market appreciation to our shareholders we announced the dividend this past week of 14 and a half cents per share equating to a 2.83 percent approximate yield our total shareholder dividend in 2024 was 56 cents or 33 of our earnings in closing i want to again welcome the marblehead clients community stockholders and staff to our company we remain quite pleased with the potential to grow our new region and a largely untapped market we intend to leverage our higher performance business model into organic balance sheet growth for Marblehead in 2025 and beyond. And now we'll open the call up for investor questions. Sarah?
Thank you. We are now ready for questions.
Operator
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Brian Martin with Janie Montgomery. Please go ahead.
Brian. Hey, good morning, guys. Hey, Brian. Hey, just thanks for the commentary. You know, just a couple areas just to touch on, just get some clarification on on the market sounds like just higher level or tony on the mortgage um you know the the investments in both indiana and cincinnati sound like they you know pay some pretty nice dividends here as you look into 25 with new talent and obviously the new markets but just um if we don't see any change in rates can you just kind of talk about what you think you can add in terms of production just with you know bringing on new talent in these markets just to kind of get a floor of what we think is potential on the mortgage this year. And then if we do get some benefit elsewhere, even better performance. But just kind of how are you thinking about a floor in terms of originations for 25?
Yeah, thanks, Brian. As you know, we've grounded out in 24 with 260, 70 million, which really, again, we think is at the trough of the conversation. Certainly, as I'm sure we've indicated somewhere, we're looking for something near the $400 million mark in 2025. So we have two producers in Cincinnati, and we're looking to build that team down there with two to four additional. We now have nine in Cincinnati. And if each of those individuals do 10 to 11 million on average, which is kind of about the watermark today for mlos given our traditional portfolio products as well as saleable products uh so i would say brian that that 400 mark is kind of what we're shooting for we certainly know and we all know about how tied that is to the you know the 10-year treasury and you know where rates are but we've been able to compete we've been nicely competitive in the construction phase, and those roll into potentially portfolio deals and sold deals. But we're trying to make sure that now that aren't we competitive on putting loans on our books, but more importantly, to move those out of construction and the like and move to a saleable product. So that is the emphasis for 2025, but a 400 number would be a nice place for us to be in 2025.
Gotcha. And the people you're going to hire, Mark, what you said primarily, that's kind of going to be in the Cincinnati market, that's where you're adding staff, or is there any other markets you're adding folks in?
Well, we're adding some up in Northwest Ohio here, some high producers that we're very familiar with, so right on the cusp of that, but going from two to six or so in Cincinnati certainly is plausible, and as I mentioned, we've gone from like five and six to nine uh in that indie market and uh they're they're high producers and they got a great team and we're expecting uh you know that as i mentioned that 100 million kind of thing out of india they almost uh ramped up the number two behind columbus this year and uh we're pretty optimistic about where they're at and we're pretty optimistic about the two uh individuals that we have as the nucleus for cincinnati gotcha okay that's helpful and then um just in terms of loan
growth uh it sounds as though your the shift maybe a little bit that continues in terms of you know if we think about 25 the residential portfolio likely continues to still come down a bit um and the commercial you know traditional organic commercial growth is going to be what drives growth so just kind of how are we thinking about you know pipelines today and then just organic growth throughout 25 does that seem right the still a little bit more you know reduction in mortgage and then growth elsewhere and kind of what that nets out to as you think about big picture for the year?
Yeah, the residential real estate arena on PCG still exists and survives, knowingly that when we do those, there's a high probability that, you know, they may get refinanced or something else happens to them. We are getting some amortization in that portfolio as we speak. But clearly, what I'm optimistic about, Brian, is our current run rate and trajectory the second half of 24 if you look at what we've done in Columbus the second half 24 virtually all of our growth came the second half of 2024 and as I mentioned nearly net all from the Columbus market and right now Steve can give us some numbers but we've booked a fair amount of volume of which has been has been drawn but yet we're probably talking you know half of it remains yet to be drawn which would give us really quite honestly a full half of year of growth just what's already been closing on the books and steve's probably got some additional data for us
sure yeah brian to piggyback on what mark's saying there we are uh certainly encouraged on in what we see in the central ohio region to mark's point we have a bit of a tailwind on approved and closed loans with about 30 million dollars yet to draw that we obviously expect to see in the first half to three quarters of the year. That doesn't include some loans we have already approved here in January that will add to that. So certainly Central Ohio, we remained very bullish on our prospects there, and we're seeing, you know, we'd like to see broader participation out of all our markets. We have seen a couple participating already in January, so we are certainly encouraged by the momentum we're seeing to this early start to the year.
Yeah, I would like to think, Brian, we're going to get back to that high single digit 8%. As Steve mentioned, we've got 4% or 5% currently in the bag absent others paying off, which always happens. But certainly the run rate gives us a pause for optimism in the first half of 25 and beyond. Gotcha.
And I guess in terms of, Tony, just on the margin you know and kind of you know layering in uh marblehead i think you talked about i mean the combination of this loan growth you know some stability or further reduction in funding um maybe we're kind of at a floor at the margin here and it's it's upward from here and then maybe just remind us the you know the benefits from from marblehead here how to think about uh that as we go into 25 now that deals close?
Right. Yeah, I think, you know, 335 was our margin number here in the fourth quarter. And I think, you know, I would say, you know, that was more positive than I had anticipated. You know, our ability to reduce funding costs was a little bit better than I anticipated. We really didn't lose clients when we were pretty aggressive on moving down rates when the Fed moved. So I thought that was a positive. I concur with you. I think the 335 is probably our baseline, and it's certainly not going to go up, you know, kind of double-digit percentage per quarter, I would suspect. It's, you know, going to go up a few basis points here in Q1 and then kind of, you know, move up a little bit more through that. So I would anticipate by the time we finish 25, we're probably at a 350 to 355 range in Q4 of 25. On Marblehead, they're going to bring 22 million of loans at loan pricing higher than what we have on our books today, probably in the high sixes, low sevens on average of their portfolio, which is a pretty strong portfolio. We've successfully executed on liquidating their bond portfolio. Their average cost of funds on the deposit side is, call it, 185-190. And so we're going to immediately move that into overnight at a minimum. And as Steve said, we have a pretty strong loan pipeline that we think is going to drive, you know, call it 300 to 50, 400 basis points. We're still extremely confident in the model and the metrics that we put forward that we're going to be able to have pretty strong EPS accretion from the transaction, you know, 15 to 20 cents a share here in 25, especially since we were able to close it, call it two months earlier than we originally anticipated. So I hope that kind of cleans up some data.
Yeah. And how much liquidity, Tony? I mean, what's the size of that bond portfolio that you redeployed? Is kind of what's the size of that today?
Yeah. So, you know, total assets for them, you know, 60 million, but, you know, net, net, their deposit basis, call it 52 million. So after we kind of clean up everything, that's really going to be the liquidity that comes over. And, you know, they got 22 million of loans on the books that are to come over we don't anticipate doing anything with them um you know no liquidation or movement of those so we're going to have call it 30 million 31 to 32 million of uh fresh liquidity uh to redeploy i i think we'll be patient here given our loan pipeline and and and just anticipate that because as steve said most of these have been booked and are going to fund and you know at a fed funds of you know 460 to five and a half on the short end we're going to be just fine on on at least being above our current 335 margin at a minimum out of the gate but we want to accelerate
that eps uh recapture as quickly as we can yeah gotcha okay and then in terms of uh credit quality i think i think i heard the comment that the uh you know i guess there's some potential resolution here of of the credit so i guess was the commentary on the call maybe i missed it that this was a high water mark kind of on that front and we have to see a little you know movement down the next couple quarters is that with pretty minimal you know i guess lost content yeah brian i think the the credits is referenced earlier that um you know increase that non-performing number in 24 they weren't a surprise to us necessarily these are credits we've been monitoring we have a very
robust internal loan review process. So not particularly surprised. We do expect as noted resolution of at least a couple of those certainly by mid-year had been hopeful frankly of resolution of at least one prior to year end but the court dockets didn't precisely play along. But that said we expect absent again unforeseen shocks improvement in those numbers going forward. We think we've got a pretty good handle on what's out there and where we are.
And as we said, to add on, we feel our collateral is very strong and we don't think we're going to have any further deterioration. We took some charge-offs here in Q4, as we talked about, but two basis points for the entire year is kind of the high watermark we've had for the last three or four years. So, we don't anticipate any further declination out of those couple of credits.
Gotcha. I gotcha. And And then in terms of, you know, I guess the funding of the loan growth, Tony, it sounds like not much in the way of deposit growth to expect this year, I guess, given the liquidity and, you know, some potential cash flow from the bond portfolio. Is that fair? How to think about the balance sheet?
Yeah, I mean, I think we have, you know, call it $55 million of funding kind of locked in between the bond amortization and the Marblehead net liquidity, you know, I think, you know, I'd be disappointed if we don't grow loans, call it 80 to 85 to 90 million this year on a year-over-year basis. That includes, you know, the 22 million of Marblehead, so call it 70 million or so from where we are. So that means we're still going to have to come up with, I'll call it a $30 million, you know, deposit raise throughout our network, which I think is eminently dual And we do have a – we're a little cautious on the homebuyer in year two that some of that is going to kind of matriculate its way out of us, not the full pool, but a portion of that $50 million will decline by the time we sit here a year from now.
Yeah, Brian, just to tag onto that, obviously we don't want to go generate deposits above the current margin, but if we can do C&I loans that we have now greater emphasis on across the board, including incentive plan, we need to generate more of those lower cost transactional accounts, as we all know. We'll take all those we can get. Certainly, Marblehead gives us some greater opportunity because they've been in the defensive mode as we speak. But we're going to go on offense there, just like the other markets. But clearly, if the deposits are below the margin, we're going to go find it. But I agree with Tony. If we don't need it, we're certainly not going to pay 4.5% and 5% for it. Got you.
And then the last one for me was just on the expense outlook. Just kind of if we layer in Marblehead, Can you just talk about kind of the run rate and expenses kind of starting 1Q and then just how that, you know, the expense discipline you guys have had has been great. So just trying to understand, you know, kind of how that run rate may, you know, trend as you kind of go through 2025.
So, you know, we did, you know, $43 million for the full year. And, you know, if we extrapolate fourth quarter, we're kind of on a $44 million run rate. You know, I think we've spent a fair amount on resources, technology, and those kinds of things. I think a lot of that is in our rearview mirror. We do have some projects we're still contemplating. Obviously, Marblehead's going to bring on an expense base, but it's relatively inexpensive, you know, for the size of their structure. You know, they don't have a great amount of expenses that's going to cause us, you know, outside of our conversions and all those kinds of things, which we'll take care of. But I would think we're, you know, we're kind of on that two and a half to three and a half percent growth rate over kind of where we were here in Q4. but we have made it extremely plain to all of our teams that the growth and revenue part of the equation is the first thing we're going to talk about in 2025. We kind of got behind the eight ball in the first part of 24, expenses rose faster than revenue, and we have got to get back to positive operating leverage of 1.2 to 1.5 percent, 1.5 times, sorry, because I think that That clearly is the structure we should be in, given our past reliance on revenue growth.
Okay, perfect. That's helpful. And congrats on a nice quarter here, a nice end of the year, and the Marblehead deal closing.
Yeah, thanks, Brian. We're looking forward to a really good 2025 on a number of fronts, not the least of which is a more positive sloping yield curve, which should drive margins a little bit wider than what we have now, all things being equal. So thanks for joining.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Mr. Klein for any closing remarks.
Once again, thanks for joining us. We certainly look forward to chatting with you again in April and delivering results for first quarter 2025. Optimism remains high and looking forward to reporting results in April. Thanks for joining and goodbye.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
