Sb Financial Group, Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to the SB Financial Second Quarter 2025 Conference Call and Webcast. I would like to inform you that this conference call is being recorded. Please follow the operator's instructions. I will now turn the conference over to Sarah Mekus 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 Walz, 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 will now turn the call over to Mr. Klein.

Thank you, Sarah, and good morning, everyone. Welcome to our second quarter 2025 conference call and webcast. We clearly approached this year with a fair bit of optimism, including favorable funding costs associated with our Marblehead acquisition, a much larger balance sheet from an expanded market presence, and a stable team of seasoned lenders, all bound by an improving economic environment. Well, six months in, we have met and exceeded our expectations. On a go-forward basis, we have positioned ourselves quite nicely to continue our trends and to outperform our peers in the second half of this year. For this quarter, net income was $3.9 million with diluted earnings per share of $0.60, up $0.13 or nearly 28% compared to the prior year quarter. When considering the servicing rights recapture, adjusted EPS was $0.58 for the quarter. Tangible book value per share ended the quarter at $16.44, up from $15.26 last year, or a 7.7% increase. Net interest income totaled $12.1 million, an increase of over 25% from the $9.7 million in the second quarter of last year. From the linked quarter, net interest income accelerated at a 30% annualized pace. Loan growth for the quarter was approximately $90 million, up 8.9% from the prior year, marking the fifth consecutive quarter of sequential loan growth. Deposits grew by over 12%, including Marblehead deposits of $51 million. Excluding Marblehead deposits, deposit growth would have been approximately 7.5%. Importantly, the deposits from Marblehead have remained nearly 100% intact just six months after the acquisition. Collectively, this quarter, assets under our care now exceed $3.5 billion. This includes our bank assets of $1.5 billion, our residential servicing portfolio of approximately $1.5 billion, and wealth assets under our care of $537 million. It is this scale and revenue diversity that have driven our performance to a higher level. Mortgage originations for the quarter were just short of $98 million, up from both the prior year and linked quarters. Our pipeline remains strong at nearly $34 million, reflecting continued momentum from our recent investments in more high-producing MLOs. Operating expenses decreased approximately 4.5% from the linked quarter, as the first quarter was elevated due to one-time conversion costs we discussed in prior quarters. Charge-off levels returned to more historic levels in the quarter at less than two basis points, and our remaining asset quality metrics were consistent with the linked quarter. Finally, we were pleased to be added to the Russell 2000 Index again during the recent rebalancing. This milestone reflects the market's recognition of our strong financial performance, our commitment to organic growth, and overall brand value. We continue our relentless focus on our strategic five key initiatives, as we've discussed in many quarters before: revenue diversity with balance between NIM and fee-based revenue; organic growth, more households, and more services to gather greater scale and efficiency improvements; deepening client relationships; operational excellence; and top-tier asset quality. Revenue diversity: as noted earlier, our mortgage group delivered a strong rebound in the second quarter with mortgage origination volume of approximately $98 million. Despite a slow start to the year, we believe borrowers have become more accustomed to the current rate environment, leading to increased purchases, as well as a bit of refinancing activities. We've also benefited from our expanded team of mortgage professionals in Cincinnati and Indianapolis. I want to highlight our Indianapolis team, which delivered its most successful quarter of production since inception in the first quarter of 2019. They have an experienced team, and we continue to be not only very confident in that staff but also in that market. We remain committed to the residential real estate business line, as it continues to provide us with entry points into a variety of growth markets within Central and Southern Ohio, even as we work to strengthen our core markets in Northwest Ohio and Northeast Indiana. As with prior quarters, we have evaluated our efficiency and capacity utilization, and we have paused on adding any additional support staff until volume levels approach at least that $400 million annual production mark. Overall, we still have ample room to grow within our current infrastructure. As I mentioned, our pipeline currently stands at $34 million, which indicates that our third quarter production will be well in line with the $98 million delivered this quarter. Clearly, the quarter continued the pace of being a dominant purchase market. In fact, our $98 million in volume had just $4 million resulting from internal refinances. Consequently, 82% of our volume this quarter was purchase transactions and consistent with year-to-date purchase transaction volume. Interestingly, now with over 8,900 mortgage households we service across our 16-county footprint, and with just approximately two services per mortgage household, our potential to drive organic expansion with more products and services remains front and center. Noninterest income was up 15.1% from the prior year quarter at $5 million and up 22.9% from the linked quarter. The increase from the second quarter of 2024 was driven by increased gain on sale of mortgage loans and mortgage servicing rights, as well as increased title service fees and other related revenue. Again, this quarter, our title affiliate outperformed the mortgage market in general and delivered revenue growth from every region. Year-to-date, they have now closed 564 transactions, which is over 34% from the first six months of 2024. They have exceeded our budget expectations by 27% and continue to be a valued part of our product suite. We have not discussed our wealth management division in a few quarters, but the level of market volatility and some unexpected annuitizations and amortizations of several relationships have affected their ability to add net asset growth this year. However, we believe this business line is additive to our brand and a true differentiator for a $1.5 billion community bank. Overall, clients have remained very loyal, and our pursuit of our holistic client care model allows us to add one more service to our approximately 39,000 households. In addition, we are poised to announce a new strategic partnership in the coming quarter that will deliver more managerial and operational resources to the business line, benefiting our current client base and potentially adding more depth to our financial adviser skill set. On the scale front, as we completed our first full quarter of operations following the Marblehead acquisition, we were pleased with the overall integration of their staff with State Bank's team and their ability to retain legacy relationships with their loyal client base and deep community connections. This acquisition underscores our ability to balance relationship-driven organic growth with targeted M&A opportunities. Deposits were up year-over-year but down slightly from the linked quarter. Compared to the second quarter of 2024, total deposits were up $135 million or 12%, reflecting our ability to drive deposit relationships in parallel with extensions of credit. Excluding the $51 million in deposits from the acquisition, deposits grew by $84 million or 7.5%. For the linked quarter, we saw balances decline by $21 million as a portion of the seasonal public fund balances were distributed as we mentioned in the prior quarter. That said, we continue to have very positive conversations with clients and prospects alike on the treasury side as the current disruptions in our markets create opportunities to attract new commercial deposit relationships. Overall loan growth continues to be strong. When compared to the second quarter of 2024, our loan book grew $89 million or approximately 9%, and $6.4 million, nearly 1% from the linked quarter. Adjusting for Marblehead, loan growth would have been $71 million or up 7.1% from the prior year. Our loan growth, coupled with stable funding costs that Tony will detail in a bit in our webcast, drove our net interest margin this quarter up 36 basis points to nearly 3.5%, the highest level we've experienced since the fourth quarter of 2022. Columbus has continued to provide positive momentum, driving the bulk of our loan growth. That market is still very competitive, but our four commercial lenders have ramped up their calling efforts significantly to counter the competitive landscape. Our work to adjust our sales approach has led our Columbus team to add new high-end relationships, which will continue to drive growth beyond the $400 million loan book that we currently serve in that market. In terms of deepening existing relationships, providing more scope and services in each household, we take pride in the strength of our client relationships and remain focused on delivering the products and services our prospects want while deepening relationships through innovative solutions that existing clients need. A key element of that commitment is expanding our hybrid office model, designed to provide connectivity with clients through multiple communication channels while improving operational efficiency. This model will allow us to capture market share in newer expansion markets of Angola, Indiana, and soon in Napoleon, Ohio. Additionally, we have heightened our pursuit of organic growth within our legacy markets experiencing significant disruption, including acquisitions, office closures, or consolidations. As these local market dynamics shift, we believe that customers will seek stability and care from an established partner like State Bank. To capitalize on this disruption and ensure regional and business line execution of our growth plans, we've identified specific corporate initiatives and regional growth goals. These measurable plans are designed to deliver us a greater percentage of the market that may become available over the next 12 to 18 months as the landscape shifts. Regarding operational excellence. Compared to the prior year, commercial real estate loans grew by approximately $91 million, consumer loans increased by over $12 million, C&I loans decreased by $3.4 million, and agricultural loans also decreased by $3.4 million. In reviewing our total production, both on and off balance sheet, we delivered $166 million in loan volume across all business lines, which was up nearly 41% from the second quarter of 2024. Despite some short-term softness in agricultural production, we remain positive about our ability to bolster long-term growth. Client loyalty remains high, as does our ability to customize solutions for our agricultural producers. Finally, we maintain significant depository relationships with our client base that will undoubtedly open up more lending opportunities as capital needs arise. Asset quality: we continue to observe high levels of asset quality metrics. Charge-offs fell to less than 2 basis points from a slightly elevated level in the first quarter. Nonperforming assets totaled $6.2 million, and we remain focused on maintaining strong asset quality, as demonstrated by our continued management of our criticized and classified loans, which stood at $7.2 million, up just slightly from $7.1 million in the linked quarter. Our credit losses remain robust at 1.43% of total loans, providing 265% coverage of nonperforming assets. We feel strongly that the credits that deteriorated in early 2024 will be resolved in the short run with minimal financial impact. Resolving these credits will not only improve our asset quality metrics but also be accretive to our earnings with recaptured interest and fees. Now, I'd like to turn the call over to Tony for a few more comments on our quarterly performance.

Thanks, Mark, and good morning, everyone. Let me outline some additional highlights and details of our second quarter results. First, an income statement review, starting with net interest income. Interest income has been the central post of our revenue expansion thus far in 2025, and our results this quarter reflect that growth. Specifically, our revenue from earning assets was $18.5 million, up $2.8 million or 18% higher than the prior year. From the linked quarter, the growth was $1.1 million, which is a 25% annual growth rate and bodes well for our results in the second half of this year. Interest expense is also higher, but at a much lower level than the top line. For the quarter, interest expense was $6.3 million, up $344,000 from the prior year, or less than 6%. The yield on our interest-bearing liabilities is actually down from the prior year at 2.33% compared to 2.48% a year prior. As we look at noninterest income, it rose from both the prior year and the linked quarters, with the percentage of noninterest income to total revenue moving more in line with historical averages at 29.4%. We saw the gain on sale of mortgage loans, title insurance, and other revenue contributing meaningfully to the year-over-year improvement, illustrating the value of a diversified revenue stream. Our total mortgage banking contribution this quarter of nearly $2.2 million was the highest since the first quarter of 2022. We continue to utilize the hedging program, which allows us to not only maximize gain potential but also to minimize our rate exposure as the pipeline expands. The gain on sale yield thus far in 2025 is 2.13%, which is up from 2024 and just slightly below the historical average. Our sale percentage of originations of nearly 83% is ideal for the profitability model we need in this business line. Operating expenses decreased compared to the linked quarter, as the $725,000 of merger costs were accrued last quarter. As we compare operating expenses to the prior year, higher volume and inflation have resulted in the quarterly expense level of $11.9 million to be higher by $1.2 million or 11%. However, in concert with revenue growth from the prior year quarter of $3.1 million or 22%, our operating leverage was a strong positive at 2x. Turning now to the balance sheet, beginning with loans. Loan growth continues on a positive trend line quarter-over-quarter. In addition to CRE, which has provided the bulk of our growth, we have been pleased that traditional consumer loan balances have grown over 18% compared to the prior year. We have seen success with not only HELOCs but also with selective targeted growth in used autos and marine lending. Our loan-to-deposit ratio moved up slightly in the quarter to 88%, up from 86% in the linked quarter. We are very comfortable with our liquidity position, and we can easily move to the mid-90s with our on-hand liquidity of over $75 million without driving funding costs higher. As we discussed in our webcast last month, our 3/31 deposit base had approximately $60 million of transitory deposits, primarily from the public entities we service. We expected that a large proportion of these funds would move back into these communities, and our deposit levels would slightly decline to just above $1.2 billion. All of our deposit categories have moved higher since a year ago. As Mark indicated, we are extremely pleased with the retention we have seen from the Marblehead deposits. Finally, a comment on our balance sheet betas as we are hopefully approaching the beginning of a downward rate cycle. Since the third quarter of '24, our loan beta is 16 basis points, nearly equal to our cost of funds beta of 19 basis points. Concerning capital management, during the quarter, we repurchased 124,000 shares at an average price of just under $19, roughly 113% intangible book and 91% of tangible book adjusted for AOCI. As Mark mentioned, our tangible book value per share was up 7.7% year-over-year and was up from the linked quarter by $0.65, driven by a $1.4 million benefit on AOCI, higher earnings, and a slight reduction in share count. On asset quality, total delinquencies were slightly lower than the linked quarter at 51 basis points, with the bulk of that reduction in the 90-day-plus category. Total provision expense for the quarter was $597,000, driven by a higher level of unfunded commitments and a slight weakening in the CECL economic factors, which drove our provision level higher. Optimistically, the second half of the year may result in lower provisions if the nonperforming credits that Mark referenced are resolved in our favor as we anticipate and the economic metrics improve. Our allowance increased this quarter to $15.6 million, and we feel it is more than adequate based on our underwriting strength and the anticipated level of growth in our loan portfolio. I'll now turn the call back over to Mark.

Thank you, Tony. We certainly remain very encouraged by our potential to deliver a strong performance in the second half of 2025. We anticipate positive resolutions to several nonperforming credits in Q3, and our expense base has stabilized. With continued solid loan growth and the expectation that funding costs will be stable to slightly lower, margin expansion should continue. We believe the likelihood of rate reductions in the near term has the potential to further expand our residential mortgage volume. We announced a dividend this past week of $0.15 per share, equating to approximately 3.16% yield and 25% of our earnings, which, as Tony mentioned, is in line with our long-term average of approximately 30%. We have consistently raised our payouts annually since we restarted the common dividend over 12 years ago. In closing, we remain quite pleased with the potential to grow our expanded region with the addition of Marblehead, and we're aggressively pursuing growth in markets where our competition presents us with more opportunities. We intend to focus on driving organic balance sheet growth while maintaining discipline on operating efficiency, cost management, and potentially, opportunistic acquisitions. Now, let's open the call for questions.

Thank you. We are now ready for your questions.

Today's first question comes from Brian Martin at Janney Montgomery.

Good morning, everyone. Mark, could you start with a brief comment on the mortgage outlook? It seems quite optimistic, especially with what you've mentioned about Indy. Looking ahead to the full year, hitting around $300 million or even above that seems quite feasible. Given the possibility of lower rates and the momentum in Indy, I'd appreciate your thoughts on that.

Yes, absolutely. We have approximately, I think, 28 or 29 MLOs. They're high producers. We've got the backroom to support them. Really, two of our higher potential markets of Cincinnati and Indianapolis are just gaining traction. Their potential is, as you might expect, quite high, and we're very bullish not only on the teams but also the markets. I continue to remain very optimistic. If we get a little play on the 10-year, we could see that magical 400 number and beyond because, as Tony and I have discussed before, bottoming at $216 million a year ago, we believe it's going to be the impetus for getting back to more of that $500 million that we've always contended we're built for. So we remain optimistic with the number of producers, and we certainly have the backroom to pull it off. I think Tony has done a really nice job on the hedging position that we take, which allows us to forward contract and make commitments with a high pull-through from all of our lenders in all of our markets.

Got you. Okay. That's helpful. And just, Tony, the gain on sale margin pretty consistent with where it's kind of been, nothing, no big movement one way or the other on how we think about that?

Yes. I think we were down just slightly, maybe from historical levels. I do think pricing has been a little tighter this year. I anticipate it's going to be in that 2.15% to 2.25% range for the rest of '25 and into '26. That seems to be where the market has settled at this point.

Got you. Okay. And then maybe just a little bit on the optimism regarding loan growth. It was about, I think, $6 million for the quarter. I guess just in thinking about the back half, it sounds like you're pretty optimistic. So just kind of the run rate picking up, it sounds like it could be, I don't know if there were maybe payoffs in the quarter or just maybe slowed this quarter down a little bit. But just what's the pipeline look like and how you're thinking about the next 12 to 18 months on the loan growth side?

Yes, Steve can certainly chime in here. But as you know, Brian, Columbus remains the shining star. We continue to find great traction in CRE in that market. C&I is a little harder to come by. But again, we've got a number of seasoned commercial lenders. We just announced a plan to take market share from the disruption, as I mentioned in the webcast, and we're optimistic that not just Columbus, but other regions like Toledo, Finley, and Fort Wayne will add to that number. We remain quite optimistic. I know Steve works directly with all of our lenders, and we’re seeing some opportunities, but also a bit more competitiveness.

Yes. No question, Mark. I think we remain optimistic about the run rate, certainly, Brian, that we've enjoyed here. As Mark pointed out, we do have a strong seasoned lending team that we aggressively call. There isn't necessarily a secret to how we're doing this. We remain confident that we will continue to deliver those results. As Mark pointed out, competition is definitely stiff, but it's not something we shy away from. We're confident when we walk in the door. So I think the run rate we're on right now remains sustainable.

Okay. And the pipeline today, where does that stand? I mean, relative like if you look at last quarter, this quarter? And were there any payoffs in the quarter that kind of clipped this quarter a little bit slower than maybe I thought it would be? Or is it just, like you say, more competition-related?

There were some modest sales, Brian. Nothing I would say is out of the ordinary. We had a couple of things we expected to draw a little more in this quarter that were somewhat delayed by borrowers’ cash, but I think we remain very comfortable with our pipeline.

And Brian, just to comment, we certainly have a number of sizable credits that we continue to identify as disruption in the market. We're well prepared to take advantage of the opportunities that are out there.

And I'll just add on, Brian. I think as we've said in the past, we probably have around $40 million of undrawn construction projects that are closed. We have no issues with those funding between now and, call it, the first or second quarter of '26. So we think that's a baseline of around $10 to $15 million a quarter of volume that’s going to fund, in addition to regular calling and new activity we have on the street.

The nice thing, Brian, last comment. As rates adjust on credits rolling to maturity, they’re rolling to a higher rate. The good part is they’re going to have to pay the same number somewhere else. So they're staying put, which has allowed us to achieve our NIM expansion.

It seems that the margin has benefitted from favorable conditions, as the cost of deposits and funding remain stable, barring any actions from the Fed. This indicates some level of stabilization, with potential for slight improvement; however, the ongoing repricing of the loan book and adjustments in the bond mix suggest that the margin continues to have supportive factors. Looking ahead to the next few quarters, how do you anticipate the margin will stabilize as you continue to reap benefits from the current rate environment?

Yes. I think, rightly or wrongly, I've underestimated how much the margin has improved for us in the last 3 to 4 quarters. It has outpaced expectations. Our ability to retain deposits without having to chase yield has been effective. We’ve retained, I would say about 90% of everything that’s rolled over because our pricing on 3- and 5-year FHLB repricing is not demonstrably far from what the market is. Those customers are naturally rolling up the curve. We continue to maintain a short-term focus on our loan book. We have about $100 million to $150 million out every 12 months that are scheduled to reprice at least for the next 1.5 to 2 years. That’s going to increase by around 150 to 200 basis points. So if we can retain those and keep funding costs stable, you're right; the margin will have forward momentum.

Okay. And just longer-term, Tony, where do you think the margin can stabilize, given that the environment today is obviously much better than it has been? Where do you see it flatlining once you’ve worked through some of the potential benefit we get from the rate environment?

Yes. I think we're probably up another 10 basis points in Q3 and probably peaks at around that 3.70% number. If we can hold a 3.70% margin on our balance sheet, that would be a great outcome. I do know that funding pressure will come. There’s going to be some movement in competitors to tighten that up.

Yes. Okay. And you talked about some improvement on the credit side, those credits that came on early last year. I guess that’s the potential to maybe see a little bit of lift or benefit on the provision side if you get some recoveries. Is that kind of how you're thinking about it, at least in the short term?

Yes. I believe by even a fairly conservative estimate, we feel we’re going to drop nonperforming by around $1.5 million in Q3. Additionally, recapture of interest and fees will significantly improve our overall asset quality metrics. I don’t know that we’ll need to take back reserves, but we are likely to put aside $1 million in provisions through the first six months. I just don’t see that pace continuing in the second half of the year.

Yes, if credit holds and you get some of these benefits, there will be continued lift. But what about the reserve?

Any losses of any consequence from now until the end of the year.

Got you. And that reserve coverage, Tony, can we maintain the current pace at the reserve coverage level, assuming no macroeconomic changes?

Well, it’s going to naturally go up. I mean, it’s probably going to be in the mid-3s by the time we finish, just because the denominator is going to change in our favor. But I would guess the allowance stays in that range of $15.6 million to $15.9 million through the end of the year and probably in the first half of '26, depending on how things look.

Got you. Okay. And then last, maybe just on the capital optionality, I guess, as far as repurchasing shares, looking at M&A, I know the industry is seeing more pick-up in M&A of late. Just wondering how you're thinking about M&A versus buyback versus just organic deployment into loans?

Yes. Just one comment. Tony can certainly weigh in on that one, Brian. On the M&A front, we keep our ear to the ground for opportunities. We're considering potentials as we speak. We love organic growth, but that doesn’t mean there won't be some opportunities out there. We know that growth isn’t the solution to the scale issue that everyone is facing. However, we continue to explore all avenues. With our capital structure, we certainly have opportunities for additional growth. But Tony, do you have any comments?

Yes. I'd say we had an oversized amount of the buyback in the second quarter given the pricing on the stock and what we felt was the opportunity. Mark and I have considered it, and we're likely to slow that down in Q3 because we believe there are some alternative opportunities. Not that we have any capital deficiency; I think our capital is just fine. However, we see some opportunity for not only organic expansion but also some conversations that may require us to keep capital at or above its current levels.

I understand. Lastly, regarding expenses, it seems you've managed well in that area. Are there any significant changes anticipated for the current run rates? I know you mentioned not expanding the mortgage staff unless we achieve more scale, but what about investments in other areas? Is this level sustainable, or do you expect slight growth from where we are now? I'd appreciate your thoughts on this.

Clearly, Brian, as we've communicated in many quarters, we have a variable-based compensation plan across the board. We do well, our staff does well. That includes non-mortgage producers, but clearly, as mortgage production rises, expenses will increase. The moral of the story is the scale we’ve realized recently is certainly helping us deliver a better return on assets, approaching that nearly 1% level and higher, which is always our long-term goal. That said, we continue to address the situation because expenses won’t decrease and technology will keep pushing our expense levels up. However, we know the job to be done is driving organic growth at the lowest possible cost. We are optimistic about our current position and believe we can drive performance higher.

Got you. Okay. I think that's all I had, guys. Thanks for taking the questions, and congrats on a nice quarter.

And that concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Klein for closing remarks.

Thank you, sir. Thanks for joining us this morning. It's nice to have you with us. We certainly look forward to speaking with you on our third quarter 2025 results soon in October. Take care.

Thank you, sir. This concludes our conference call today, everybody. We thank you for attending today's presentation. You may now disconnect your lines, and have a wonderful day.