Earnings Call Transcript - SBFG Q4 2024

Operator, Operator

Good morning, and welcome to the SB Financial Fourth 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 Mekus with SB Financial. Please go ahead, Sarah.

Sarah Mekus, Investor Relations

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 presentations 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.

Mark Klein, CEO

Thank you, Sarah, and good morning, everyone. Welcome to our fourth quarter 2024 conference call and webcast. 2024 was definitely a year of expansion, marked by some resilience and disciplined 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 the 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 $0.55, 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%. Tangible book value per share ended 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 linked quarter, margin revenue accelerated at a 28% annualized pace. Loan growth for the fourth 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 new regional President, Adam Russell, delivered the bulk of that growth or $57 million, achieving 113% of our net growth. Deposits remained stable compared to the prior quarter and increased by over $82 million to $1.15 billion. Growth in our deposit base was consistent, with 80% of our offices reporting higher deposit levels 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. 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 linked quarter by 6%. Operating expenses remained flat compared to the linked quarter and increased by 6.1% compared to the fourth quarter of 2023. And finally, while charge-off levels were slightly elevated in the quarter at 7 basis points, our remaining asset quality metrics were consistent with the prior quarter. Our strategic path forward remains hinged on those five key strategic initiatives we mentioned in prior quarters: growing and diversifying revenue, achieving more scale for efficiency, expanding our scope to serve more households, providing more services to those households, and enhancing operational activity while ensuring asset quality. Looking closer at income diversity, the mortgage business line ended 2024 on a relatively high note, delivering volume, as I mentioned, of $73 million, higher than the linked quarter and up substantially from the prior year. Most importantly, we were able to deliver 21% higher volume than 2023, in what was still a fairly tough year for this business line. I am proud of our team as we were able to close on this transaction very quickly, given the execution of the merger agreement in August. Again, as I indicated earlier, deposits from the linked quarter were stable and up substantially from the prior year by over $82 million. 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% annualized basis. We are seeing significant improvement in our criticized and classified loans, which were down to $6.4 million from $9 million in the prior year, reflecting a reduction of $2.6 million or 29%. I will now ask Tony Cosentino, our CFO, to give us a little more information on our quarterly performance and annual performance.

Tony Cosentino, CFO

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% 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, a 1.7% increase over 2023. The stabilization of funding costs, along with loan growth, has driven that margin improvement. For the quarter, the cost of interest-bearing liabilities was 2.36%, up just 3 basis points from the prior year and down 17 basis points from the linked quarter. Our deposit cost of funds has improved to 1.78%, down 16 basis points from the linked quarter, however, up 16 basis points from the prior year. For the quarter, noninterest income was $4.6 million, down from $5.5 million in the prior year, but up 10.5% from the linked quarter. The 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 stream. 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 rising funding costs. However, operating expenses remained well controlled, totaling $42.9 million for the year, just slightly higher than the '23 levels. On capital management, during the quarter, as Mark indicated, we repurchased 130,000 shares at an average price of $21, just slightly above the adjusted tangible book value.

Mark Klein, CEO

Thank you, Tony. This 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 our organic balance sheet growth, made the acquisition we discussed with significant liquidity, increased book value and delivered market appreciation to our shareholders. We announced a dividend this past week of $0.145 per share, equating to a 2.83% approximate yield. Our total shareholder dividend in 2024 was $0.56 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?

Sarah Mekus, Investor Relations

Thank you. We are now ready for questions.

Operator, Operator

The first question comes from Brian Martin with Janney Montgomery. Please go ahead.

Brian Martin, Analyst

Hey. Good morning, guys.

Mark Klein, CEO

Hey, Brian.

Tony Cosentino, CFO

Hey, Brian.

Brian Martin, Analyst

Thanks for the commentary. Just a couple of areas to get some clarification on. Mark, it sounds like just a higher level, or Tony, on the mortgage, the investments in both Indiana and Cincinnati sound like they should yield some pretty nice dividends here as you look into '25 with new talent and obviously the new markets. But 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 bringing on new talent in these markets, just to kind of establish a floor for what we think is potential on the mortgage this year?

Mark Klein, CEO

Thanks, Brian. As you know, we've grounded out in '24 with $260 million, $270 million, which we believe is at the trough of the conversation. Certainly, we're looking for something near the $400-million mark in '25. We have two producers in Cincinnati, and we're looking to build that team down there with two to four additional hires. We have gone from five to six to nine in that Indy market, and we'll see growth from those changes. That $400-million mark is kind of what we're shooting for. We certainly know and we all know about how tied that is to the 10-year treasury and where rates are, but we've been able to compete effectively. We are trying to ensure that we are competitive on putting loans on our books while efficiently selling those loans as well. Our focus is firmly on that $400 million target.

Brian Martin, Analyst

Got you. And the people you're going to hire, Mark, are those primarily in the Cincinnati market, or are there other markets you're adding staff in?

Mark Klein, CEO

We're adding some up in Northwest Ohio and some high producers that we're already familiar with. We're looking to go from two to six in Cincinnati, which is certainly plausible. We've expanded from five to six to nine in the Indy market, and they are high producers with a great team. We're optimistic about where they are at and our expectations for both Indianapolis and Cincinnati.

Brian Martin, Analyst

Got you. Okay. That's helpful. And then just in terms of loan growth, it sounds as though you're continuing to shift. If we think about '25, the residential portfolio likely continues to come down a bit, and the traditional organic commercial growth is what will drive overall growth. Can you share how you're thinking about pipelines today and then organic growth throughout '25? Does that seem right: still a bit more reduction in mortgage and then growth elsewhere?

Mark Klein, CEO

The residential real estate arena still exists and survives. We are experiencing some amortization in that portfolio. However, what I am optimistic about is our current run rate and trajectory. The second half of '24 saw nearly all our growth come from the Columbus market, which is promising for the future.

Steve Walz, Chief Lending Officer

Sure. Yeah, Brian, to reiterate what Mark is saying, we are encouraged by what we see in the Central Ohio region. We have a fair amount of approved and closed loans that are expected to reach around $30 million, and we anticipate seeing this in the first half of the year. We are optimistic about the momentum we are experiencing at the beginning of the year.

Mark Klein, CEO

I believe we can get back to that high-single-digit, 8% growth. As Steve mentioned, we have 4% to 5% currently in the bag, absent others paying off. The run rate gives us a pause for optimism in the first half of '25 and beyond.

Brian Martin, Analyst

Got you. And in terms of Tony, just on the margin and layering in Marblehead, I think you indicated that the combination of this loan growth and stable to reduced funding may keep us at a margin floor here. Can you remind us about the benefits of Marblehead as we head into '25 now that the deal is closed?

Tony Cosentino, CFO

I think we achieved a margin number of 3.35% in the fourth quarter, which was more positive than I had anticipated. Our ability to reduce funding costs was better than I had expected. The 3.35% is likely our baseline for now. We expect it to increase a few basis points in Q1, potentially reaching a range of 3.50% to 3.55% by Q4 of '25. Additionally, Marblehead is bringing in $22 million of loans at pricing higher than what we currently have on our books, which should positively affect margin expansion moving forward.

Brian Martin, Analyst

Got you. And how much liquidity are we talking about here?

Tony Cosentino, CFO

Total assets for Marblehead are $60 million, with a net deposit base of around $52 million. This gives us approximately $30 million to $32 million in fresh liquidity to redeploy, which places us in a strong position to execute on new loans and optimize our margins as we move forward.

Brian Martin, Analyst

In terms of credit quality, I heard the commentary regarding resolution prospects. Was the expectation that we are at a high watermark in our credit quality, and can we expect to see improvement in the subsequent quarters?

Steve Walz, Chief Lending Officer

Yeah, Brian, the credits that increased our non-performing numbers were not surprises for us. These are credits we have been closely monitoring. We do expect improvement as these credits resolve shortly. We are confident in our ability to manage and improve our credit quality going forward.

Tony Cosentino, CFO

As we mentioned, we believe our collateral is very strong, and we do not anticipate any further deterioration from the credits discussed earlier. We do expect improvements in our non-performing loans.

Brian Martin, Analyst

Last question is about the funding of loan growth. Am I fair to assume that there won't be much deposit growth this year due to the liquidity we have and cash flow from the bond portfolio?

Tony Cosentino, CFO

Yes, we anticipate considerable cash flow from the bond amortization and liquidity from Marblehead, which will support our loan growth forecasts. We expect to see an increase in loans and manage deposits effectively to meet our targets for 2025.

Mark Klein, CEO

We need to continue generating deposits, especially lower-cost transactional accounts, but we won't drive deposits above current margins. If the deposits are below our margin targets, we will pursue opportunities accordingly. I'm optimistic about our potential and what we're achieving.

Brian Martin, Analyst

Thanks for the detailed commentary. Congrats on a nice quarter and closing the Marblehead deal.

Mark Klein, CEO

Thanks, Brian. We have high expectations for a strong 2025, especially with a more positive yield curve that should drive margins wider. Thank you for joining us today.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Klein for any closing remarks.

Mark Klein, CEO

Once again, thanks for joining us. We look forward to chatting with you again in April when we deliver results for the first quarter of 2025. Optimism remains high, and we are looking forward to reporting results in April. Thank you for joining, and goodbye.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.