Operator
Good morning and welcome to the SB Financial first quarter 2025 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 the management and then open the conference up to the investment community for questions and answers. I will now turn the conference over to Carol Robbins with SB Financial. Please go ahead.
Thank you. 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 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'll now turn the call over to Mr. Klein.
Thank you, Carol, and good morning, everyone. Welcome to our first quarter 2025 conference call webcast. We started the year with a continued focus on growth amid an economic environment with a fair amount of uncertainty. Despite current conditions, we executed on a growth plan, closed on the Marblehead acquisition while delivering solid results, underscoring the strength of our diversified revenue business model and solid efforts by our team. I'd like to begin by giving a few highlights and key achievements for our company this first quarter. NetEcom was $2.7 million with diluted earnings per share of $0.42, up $0.09 or approximately 27% compared to the prior year quarter. When considering the $726,000 in acquisition-related cost for marblehead and servicing rights recapture EPS was 33 cents on a gap basis tangible book value per share ended the quarter at 15.79 up from 14.93 last year or a 5.8 percent increase net interest income totaled 11.3 million an increase of approximately 23 percent from 9.2 million in the first quarter of 2024. From the link quarter, margin revenue accelerated at a healthy 14% annualized pace. Loan growth for the quarter was right at $97 million, up 9.8% from the prior year, and this marks the fourth consecutive quarter of sequential loan growth. Deposits grew over 10%, including Marblehead deposits, of $56 million, excluding Marblehead, 5.4%. This growth demonstrates the strategic benefits of the acquisition as well as our relationship-driven approach to attract and retain clients in a fairly highly competitive rate environment. Mortgage resignation for the quarter were $40 million down from the prior year and the linked quarters. However, the pipeline is currently sitting at approximately $50 million and we look for a more vigorous summer volume than in past years, particularly with our new expansion team of producers in the new Cincinnati market operating expenses increased approximately three and a half percent from the linked quarter and finally charge-off levels returned to more historical levels in the quarter at approximately three basis points and our remaining asset quality metrics were consistent with linked quarter our strategic path forward as we've reported on in a number of quarters remains our five key initiatives growing and diversifying revenue, a broader footprint for more scale, more households and more services in those households for more scope, operational excellence, and of course always asset quality. First revenue diversity, our mortgage group had a fairly slow start to the year as I mentioned closing this 40 million in volume. We were encouraged that we did see a bit of refinance volume and that current pipeline is now well in excess of that 40 million first quarter number. We remain committed to the residential real estate business line as it continues to provide us with a stronger foothold in the esteemed Columbus metropolitan market. In fact, we now service nearly one half of our 9,000 total mortgage households out of the central Ohio market. Over the past several years, we've reduced operating costs in this residential arena to better match resources with revenue. Also, we continue to assess departmental efficiency, and we intend to delay adding more support staff until volume puts us closer to at least the 400 million dollar production mark or approximately 80 percent of our processing capacity today non-nosed income was up 3.9 percent from the prior year quarter at 4.1 million but down slightly from the link quarter the increase from the first quarter of 2024 was driven by increased gains on sale of mortgage loans and significant commercial loan swap revenue. The title business had a very strong quarter, exceeding the prior year revenue by nearly 50%. We continued to expand PEAK's title revenue business beyond traditional mortgage title policies. In fact, this quarter we had several large commercial title policy referrals from the state bank commercial team that helped drive their contribution percentage of peak's total revenue this quarter to 31 percent the goal here is not only expand state bank's contribution level to peak but also expand their third-party global revenue base on scale a key highlight for the first quarter was the completion of the acquisition of marblehead bank corp on january 17th as we've discussed in our annual meeting this all case acquisition benefits both entities as it expands our presence in ottawa county ohio and strengthens our market position in a higher growth area while marblehead will benefit from a more diverse palette of tailored financial solutions allowing them to deepen their long standing relationship with their current client base as we discussed in our annual meeting this acquisition brought in an additional 56 million in low-cost deposits as well as a 19 million loan book. This expansion reflects our commitment to both serving and growing our client base and prospects to drive long-term shareholder value. Again, as I noted earlier, deposits were up from the link quarter and year over year. For the link quarter, we saw balances rise by over $119 million and for the prior year quarter, $159 million. Significant contributions were made and were accelerated by higher tax revenue from our public fund entities as well as more traditional seasonal growth as i mentioned we added 56 minutes marblehead and adjusting for the acquisition deposit growth would have been 103 million from the prior year and 63 million to the length quarter the marblehead staff and the current client base have been extremely loyal and we're excited to bring a full slate of products to their clients and that community when we break down our deposit base to get to the core state bank retail presence is clear that we've made some meaningful progress in growing our deposit relationships in the company thus far in 2025. specifically when we exclude public funds those home buyer plus funds and the marble head book the core deposit base has grown just under five percent this year for an annualized growth rate of 15 percent As I mentioned, overall loan growth for the quarter was strong with additional support from the Marblehead acquisition. Our loan portfolio grew 97 million or 9.8% from the first quarter of 2024 and 42 million or 4% from the linked quarter. Adjusted for that Marblehead growth of 19 million, loan growth would have been 78 million up 7.9% and up 23% or 2.2% from the length quarter, 23 million or 2.2% from the length quarter. The Columbus lending team continues to provide the bulk of our loan growth and we fully expect a strong full year performance from our team of now four seasons commercial lenders in that market. Closing from the second half of 2024 have yet to be fully funded and once complete will add nearly a third of our overall budget of growth for all of 2025. Although pricing has become certainly more competitive, we've seen neither a pullback in this growth market nor any of our other significant growth markets for our company. In terms of deepening existing relationships more scope, as we have commented on in prior webcasts, we understand that despite our size, our digital presence must keep us relevant to the offerings of the larger regional banks in our markets. In that vein, we recently identified a new position in our technology sector by naming a digital banking officer to drive our digital innovation to identify new clients, expand cybersecurity practices, and forge a more intentional path forward. Our overarching goal is to ensure we customize our client care initiatives while accelerating the growth of each of our unique client segments 24-7. In addition, we have recently recommitted to our current core provider, FISER. As part of that contract negotiation, we will be heightening our data security measures, working to reduce client rub, and delivering a more intentional pallet of banking services to include a broader offering of credit cards while enhancing the client's online banking experience, to name a few. On operational excellence, commercial real estate loans grew million, C&I balances 7 million, and consumer balances another 7 million. The efforts of our regional production teams in these areas helped to offset softness within the mortgage market. Despite the lower mortgage originations, total loan production for all categories in our company in the quarter was 107 million, which was up nearly 40 percent from the prior year quarters. finally asset quality charge offs fell to just three basis points from the fairly level number in the fourth quarter non-performing assets total 6.1 million representing 41 basis points of total assets an increase of 600 000 compared to 5.5 million over 40 basis points of total assets reported in the link quarter we remain focused on maintaining strong asset quality as demonstrated by the continued improvement and our criticized and classified loans which declined to 7.1 million from 8.7 million in the prior year a reduction of 1.5 million or 18 percent our allowance for credit losses remained robust at 1.41 percent of total loans not providing 254 coverage of non-performing loans also by restructuring our asset quality department in the first quarter we are now even better positioned in this arena to remain a high performer among our peer group. Now I'd like to ask Tony Costantino, our CFO, to give us a few more details, Tony, on our quarterly performance.
Thanks, Mark. Good morning, everyone. Let me just outline some additional highlights and details of our first quarter results. Starting with the income statement on net interest income, that was $11.3 million in quarter, up 2.1 million or 22.9% compared to the same quarter last year. This growth reflects higher loan balances and improved asset yields, while overall funding costs eased slightly as a result of the interest rate cuts that began in September of 2024. A moderation of funding costs combined with loan growth was the primary driver for our margin improvement. For the quarter, the cost of interest sparing liabilities was 2.32 percent down 23 basis points from the prior year and from the link quarter was down four basis points our deposit cost of funds has likewise improved to 1.74 percent down 12 basis points from the prior year and down four basis points from the late quarter regarding non-interest income although non-interest income rose from prior year in the linked quarters, the percentage of our non-interest income total revenue was below our historical average at 27% due to the expanded margin revenue. We did see the gain on sale of mortgage loans, OMSR, title insurance, and other revenue contributing to the year-over-year improvement, illustrating the value of our diversified revenue stream. Operating expenses increased compared to both the linked and prior year quarters, totaling $12.4 million in the quarter, as Mark has indicated. This includes $726,000 in merger-related expenses, as well as approximately $300,000 in ongoing operating expenses for Marblehead. Adjusting for these expenses would reduce the operating expense growth to 3.5 and 10.7 percent from the linked and prior year quarter, respectively. The efficiency ratio for the quarter would be 76 percent and down from the prior year when excluding those acquisition costs. Now let's do a balance sheet review, starting with loans. Total loans ended the quarter at $1.09 billion, including the $19 million in loans from the Marblehead acquisition. Net interest margin improved in the first quarter, so 3.4%, up five basis points from the linked quarter. For the remainder of 2025, we have approximately $90 million of loans that are contractually scheduled to reprice. On average, this scheduled repricing will drive loan yields higher by 140 basis points from their current level. And when we review our current pipeline of commercial credits, we are encouraged as balances scheduled to close in the next 30 days are approximately $90 million, while the 60-day window reflects additions of approximately $18 million, and at 90 days, $22 million. These additions will go a long way to expanding our NIM and NIM interest income while helping to deploy liquidity from Fed funds to higher yielding loans. We continue to believe that rates generally will be lower for the remainder of the year, which will further drive our funding costs lower. We also anticipate that the lower forward curve will not impair anticipated loan reprisals. On deposits, deposits ended the quarter at $1.27 billion, the highest level in our company's history. The Marblehead deposits are quite profitable, coming over with an average cost of 1.53%. With the acquisition, we saw a slight decrease in our loan-to-deposit ratio to nearly 86% from 89% a year ago. Given that growth, our overall cost of deposits decreased modestly to 1.77% from 1.87% in the year-ago quarter. With the added liquidity from the MarbleHat acquisition combined with the scheduled amortization of our bond portfolio, we are well positioned to fund the majority of our 2025 loan growth. Additionally, when we break down that deposit base, we continue to see lower-cost transactional deposits accelerate. In fact, this quarter, we saw demand deposits expand by $8 million, or 3%, for an annualized number of 12%. And likewise, deposits in our regular savings and money market grew by $27 million, or 7% for the quarter, and 28% annualized. We continue to witness growth in our deposit base in nearly every market. As to capital management, during the quarter, we repurchased 26,500 shares at an average price of just under $21. dollars, roughly 130% of tangible books. In keeping with our internal capital models, we pause the buyback later in the quarter and intend to reinstate it when we see an opportunity to repurchase shares at a lower price to tangible book value. As Mark mentioned, our tangible book value per share was up 5.8% year over year, but from the link quarter was down 21 cents as the merger impact offset our net income and the positive mark to our AOCI. Specifically, goodwill for the acquisition was $3.9 million with a deposit intangible of $1.7. This $5.6 million in dilution was right in line with our acquisition model and will be recaptured in line with our projections. When we combine the low-cost funding from the acquisition with our strong loan demand at market rates the recapture of that dilution will accelerate looking lastly at asset quality total delinquencies were lower from the link quarter and now stand at just 54 basis points our total provision expense for the quarter of 387 000 was comprised of a number of factors including 13 000 for unfunded commitments 224 000 related to the day one and day two marblehead transaction and 150 000 for growth related provision likewise the allowance reconciliation from year-end 2024 of 15.1 million to the current level of 15.4 million included the 150 000 of growth related provision above offset by 85 000 in net charge offs and in addition the merger related cecil impact was a net increase to the allowance of 224 000. i will now turn the call back over to mark thank you tony as we certainly look in the rear view mirror at the first quarter we are encouraged by our prospects for strong performance over the next three quarters from an expedited integration of marblehead bank to a very successful landing meeting it certainly
was a solid start to the year even with a merger that impacted tangible book value year over year tangible book value per share was still up by 5.8 percent. Recently, we announced a dividend this past week of 15 cents per share, equating to approximately 3.16 yield and 45 percent of our earnings. However, we do expect this payout ratio to normalize this year to something near our long-term average of approximately 30 percent. In closing, we remain quite pleased with the potential to grow in our new region in an untapped market resulting from the addition of Marblehead. We intend to leverage our higher performance business model into organic balance sheet growth while maintaining our focus on operating efficiency and cost containment. Now we'll open it up to questions from our audience. Carol?
Dorowen, we're ready for questions please.
Operator
Certainly. 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 two at this time we will pause momentarily to assemble our roster the first question comes from Brian Martin with Johnny Montgomery. Please go ahead.
Hey, good afternoon, guys. Hey, Brian. Morning, Brian. Hey, maybe just, Tony, maybe one for you just to start on the loan growth in the quarter and just more forward-looking on your pipelines. It sounds like the pipelines are still pretty healthy here, both with the 90-day and 60-day in terms of you know, fundings. Do you have any concerns on that with regard to the tariffs? Are you hearing any pushback from your clients that maybe they're, you know, going, you know, looking to take a pause here just until some of the dust settles on the, on the terrace? Or are you pretty comfortable that, you know, the, the loan growth is going to materialize is kind of what you're looking at the pipelines today?
Yeah. So I'll add a little bit of color, then Mark can kind of comment on, or Steve on the, on the client side. So the 60 million in the, in the 90 day pipeline, which is kind of you know about 20 million a month over the 30 60 90 uh we feel very confident on most of us have already closed and and the clients are funding uh you know either their money has now been used in the project and now they're they're coming to us for funding so i feel very confident out kind of 90 days on that um we we kind of meet on that pretty regularly and that feels pretty good um and i don't really have any concerns later out the curve i still think we have pretty strong calling efforts in pipeline going forward. So, Mark, kind of comment.
Yeah, just real quickly, Brian, as we mentioned, Columbus, you know, continues to be the shining star in the operation. You know, we try to keep a governor on that location because we can probably grow as fast as we want. But we're starting to see some additional growth in the Lima market that we've got some coming from Toledo. And Steve can certainly speak to a little more of the details of that but overall generally we've been encouraged with our level to compete and participate even at you know the 675 to 7 level which probably is a pretty normal rate in our markets now we do like some SBA lending which is marginally higher and those have ramped up dramatically so Steve any additional comments no certainly I don't think Brian to this point we have seen a lot of concern on the tariff front there's no doubt a lot of economic uncertainty from folks, but it hasn't driven any pullback yet.
Certainly, that's a potential cloud for the second half of the year. But to this point, borrowers remain generally optimistic about the economy in their own situations.
And just as far as your outlook for loan growth this year, kind of upper single digits is kind of a reasonable take today, given what you know? yeah i would you know we we budgeted kind of uh you know eight to not eight to ten percent um you know inclusive of the marblehead you know they're 20 million i would say we're still on board with that number um and uh you know i don't think we've wavered off that as we sit here today and brian as you know our our long-term average is about 75 to 100 million and of course you know COVID, it kind of backed off a little bit, but we like that 100 million to, you know, 10% number.
Gotcha. Okay, that makes sense. And maybe just on the mortgage side, you mentioned maybe a little slower start seasonally, but certainly, you know, in some of the actions you took on the staffing just till you get to your capacity, but how are you thinking about, you know, how does the pipeline look today and just you know if you think about you know full year you know what's uh how should we kind of be thinking about the mortgage uh the balance of the year well as you mentioned uh you know we're at that season the low 50s current pipeline and uh got good good demand and uh you know we have now three individuals in the since and addy market that now puts up to 28 producers
and so uh we're still probably pretty bullish on what we can do not only from a sold freddie Fannie perspective, but from a portfolio as well. Some marginally in that 1-1, 3-1, 5-1 arena kind of thing. But we're still pretty optimistic that the 380 plus or minus that we have budget for 2025 is going to be certainly an attainable number. And as I mentioned, getting up to that 400, we certainly have excess capacity. So we can take on much more value without adding fixed costs.
And the gain on sale margins are holding up pretty well at this point. No real change on how you're thinking about that?
No. You know, I think that's been in that, you know, kind of 220 to 225 range fairly consistently, and that seems to be holding up. You know, just to add a comment to Mark's comment on volume, you know, we did 33 million here in the month of April. I think we got a real shot at 100 million type quarter. You know, previously I'd been kind of maybe a 75-ish kind of quarter. So I think if we get, you know, 100 to 110 here in these next two quarters, you know, and if you kind of put the 40 million in the first quarter in the rearview mirror, you know, we could be above 300 to 350 type range by the time we finish, which I think would be a pretty spectacular year given we did, you know, the 260 type range in 2024. for.
And that's helpful. And then, Tony, just on the deposits were really strong this quarter, just, you know, certainly Marble had helped, but just organically and all your comments about the trends you're seeing there. I mean, do you expect some of the seasonality, if there was some this quarter, to kind of back off or just given the liquidity that you have and, you know, the loan pipeline, just trying to think about, you know, how we think about deposits here the next couple quarters, given the liquidity and the loan pipelines you have?
Yeah, it is, you know, it's kind of one of those, you know, perfect storms, as it were. I mean, we do have a lot of liquidity, and we have had a lot of seasonality. We've been successful with the public entities that we've called on. You know, those are generally maybe a little bit higher on the curve in terms of where we're paying, but we're hopeful that, you know, that long-term relationship is going to get us into their operating accounts. Some of those those monies are going to kind of move out of here over the next 60 to 90 days so I would anticipate that you know the second quarter is probably going to be a negative deposit level number on that. I think our core deposit range is still going to be up four to five percent because I do think we still have some pretty good kind of business growth and retail growth um but we'll see you know we haven't had to really compete very strongly to stay where we are we've been able to move rates down and customers have stayed with us so we'll see gotcha so the the loan growth should be funded you know i just think about that really primarily being funded by the liquidity you know in the short term here and kind of the pickup you're you're getting on that tony can just is it relates to kind of your outlook on the margin um just uh if you can tie some of that together just you know what what is the uh you know what the new rates on loans and then uh you know is is it fair to think that it's going to come from the current liquidity that's where you're going to fund it from at this point yeah i you know i i kind of look at it two ways i mean you know call it we've got 85 to 90 million of liquidity at you know call it four and a half i do think we're going to fund uh you know let's say 30 million of that kind of goes away with natural kind of movement out of of those public deposits um so we're going to have 60 million of of funding that pipeline you know call it adding you know 150 to 175 basis points on that 60 million uh and then that's not going to include the 140 basis points we're going to reprice on the 90 million between now and the end of the year which i don't think has an alternative source of funding anywhere in the marketplace given where they're what they're going to reprice at they're going to reprice and call it the high sixes um and i don't think they're going to be able to getting so it's going to be kind of two ways you're going to fund 60 million and call it 200 basis points higher and then we're going to reprice 90 million at 140 basis points higher. And I do think funding costs as a general rule are going to continue to come down as those reprice.
Okay. And directionally, the margin just up, you know, throughout the balance of the year, I guess, you know, I guess even, I guess, I don't know what your, what your assumptions are in terms of rate cuts, but if we get a couple cuts here in the, in the back half of the year, along with what you just outlined, you know, the margin is just trending higher throughout the year is how we should think about it.
Yeah, and, you know, I can let Mark kind of add some detail, but, you know, we had assumed two cuts. That's still our position as we sit here today. I know lots of indication are four, but I think two is probably the appropriate assumption. You know, we didn't think we'd get to a 340 margin until probably fourth quarter this year. So I think the acceleration and speed of the repricing and the funding come down, you know, was a very positive surprise for us. I do think it moves up four to five basis points a quarter, and we're probably at maybe a 355 to 360 on the best case scenario in Q4 this year. So we'll see.
Gotcha. Okay, that's helpful. And maybe just the last one for me was on the, you know, just in terms of credit quality and reserves, things seem to be pretty healthy today. You know, it doesn't sound like there's much concern, at least right now, until I guess maybe get more details on the tariffs. But in terms of the reserve level now with Marblehead, you know, I guess is your expectation, you know, all equal that you're going to kind of try and hold the reserve where it's at?
Could you see that drift a bit lower given the credit quality or just how how are we thinking about you know reserve levels today well as we've said before brian tony and i pulled different directions i think you know 20 million is a good number uh tony says 15 is an adequate number but uh more for me is always better but uh you know we're pretty bullish on how we've done things but uh it's all economic dependent and you know tariff is going to have some impact on it and liquidity of our clients still remains fairly strong and uh performance is good and uh we're pretty bullish on where we currently are at unless steve has some additional comments on yeah i'll just say brian before steve had some comment
on on some specifics i you know i would say you know 141 reserve level um you know we had kind of previously indicated that kind of 140 is where we're extremely comfortable i think we could move down a couple basis points from that and still feel very good but i don't see us going to a 120 reserve, you know, even with our level of loan growth. So I do think we're going to be provisioning every quarter to keep pace with our anticipated loan growth.
But clearly, Tony, a bigger balance sheet and a little bit of liability sensitivity where deposits are going to cost less and loans are rolling up. As you might expect, Brian, we're really bullish on not only the size of the balance sheet, but also the margin that we're putting it on and how we're going to increase by just holding course.
And then I'll make a comment on some of the non-performing that, you know, kind of spiked up there at the end of last year.
Yeah, Brian, I would describe our asset quality as stable to improving on that front, as we've talked about in the past. We have a very robust loan review process, and we'd like to think we don't get too many surprises. And right now, we feel like we've got a good handle on those that are outstanding and, I would argue, resolving in a relatively positive way to what I would have expected, you know, three months ago. So, continue to feel pretty good.
Got you. Thanks for that caller. And then maybe just, I'm sorry, one last one, if I could, just on the capital level, clearly you talked about the buyback, Tony, and obviously the deal this quarter. just what are the capital priorities here as we kind of look into the next couple quarters it's just kind of rebuilding at this point post deal and getting the deal integrated or are there you know more m a is there buyback just how are you thinking about you know higher level just kind of the capital levels here yeah i mean obviously capital levels move you know move down slightly um you know i think we still feel very good at that cd1 level uh you know 12 plus um so
I do think the buyback is still viable. I don't anticipate us doing anything different to our dividend policy, as Mark indicated. We'll continue to move that higher as the years go on. But I do think generally earnings, and I think the improvement in the AOCI generally in the forward curve is going to drive our capital levels stable to higher. Perfect.
Okay. Well, thank you for the caller. It seems like a good report and good outlook here. So best of luck the rest of the year, and we'll talk to you next quarter.
Operator
Thank you. Again, if you have a question, please press star, then one. We have no further questions at this time. I would like to turn the conference back over to Mark Klein for any closing remarks.
Thank you, sir. Once again, thanks for joining us this morning. We look forward to speaking with you in july and reporting on our second quarter of 2025 results thanks for joining goodbye the conference has now concluded thank you for attending today's presentation you may now disconnect
