SB Financial Group Inc (SBFG) 2024 Q3 法說會逐字稿

Good morning and welcome to the SB Financial Group Inc third quarter, 2024 conference call and webcast. I would like to inform you that this call, 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 Carol Robbins with SB Financial. Please go ahead, Carol.

Thanks Dave. Good morning, everyone. I would 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. your statebank.com.

Joining me today are Mark Klein, Chairman, President and CEO Tony Cosentino, Chief Financial Officer and Steve Walls, 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 earning 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 fully looking statements. These statements speak only as of the date made and the financial undertakes no obligation to update them.

I will now turn the call over to Mr. Klein.

Thank you, Carol and good morning, everyone. Welcome to our third quarter conference call and webcast highlights for the quarter include net income of $2.7 million. And when adjusted for the servicing rights impairment, net income was $2.4 million loaded earnings per share as adjusted increased to $0.41 a 3.3% increase from the adjusted $0.40 that we delivered in the prior year quarter hands will book value per share of the quarter at $16.49. Up from the $13.9 last year or a 26% increase net interest income totaled $10.2 million. An increase of 6.8% from the $9.5 million in the third quarter of 2023.

From the linked quarter, margin revenue was up 527,000 or a 22% increase on an annualized basis.

Total loans increased to $1.03 billion up by nearly $41 million or 4.1% from the prior year quarter and higher compared to the linked quarter by nearly $25 million.

The linked quarter growth would equate to an approximate 9.8% annualized increase.

Our year-to-date return on tangible equity was down slightly from the prior year but still a solid 10.4% mortgage originations for the quarter were $71 million and year-to-date we've now originated$ 188 million.

The annual origination level is up 12% from the prior year-to-date.

The servicing portfolio improved to $1.41 billion, which was up from both the prior year by 2.9%. And from the linked quarter by approximately 4.7% annualized operating expenses for the first 9 months were up approximately 1% compared to the prior year, same period. And finally, asset quality metrics remain stable compared to the linked quarter.

Our strategic path forward remains hinged on our five key strategic initiatives we've discussed in many quarters first revenue diversity, we remain focused on growing both our traditional margin revenue and fee based revenue.

A larger balance sheet is delivering the former and the real estate mortgage business line continues to contribute to the latter while the mortgage market remains challenging and persistent high rates, constraining our momentum. We have fortunately seen continued growth in other fee based areas such as wealth management and our title insurance business.

Our growth remains our goal remains to consistently drive our fee based revenue to the 35% level. All else remaining constant current levels at approximately 30% still places well into the top quartile of our peer group of 65 publicly traded US banks between 500million and 2.6 billion organic growth for greater scale. We achieved a double digit annualized growth rate in our loan portfolio this quarter and we continue to have a very strong pipeline in a number of our markets.

In fact, our Fort Wayne and Columbus markets were up 18% and 12% respectively from the prior year.

But our fractional market growth is not good enough for a model to not have all of our reasons contributing to our growth.

We expect to have more of our reasons with a positive year over year loan portfolio growth in 2025 deepening existing client relationships or more scope.

Our deposit base grew by $74.2 million to $1.16 billion and was up over $44 million from the linked quarter.

Revisiting the home buyer plus program that we've discussed extensively. We have met our internal goal of $50 million and acquiring low cost deposits and we are always pleased to assist pros prospective home buyers with a state of Ohio subsidized initiative that for us included over 100 new client relationships and of course, always operational excellence.

We continue to add additional talent throughout the organization as we remain focused on using technology market consolidations and disruptions to acquire new client relationships, drive greater services per household in existing ones and leverage customized communication channels to identify more diverse client opportunities in the digital space.

And finally, asset quality was certainly stable to the link quarter compared to the prior year, our level of criticized loans declined 41% and our classified loans were reduced by 11%.

Taking a little closer look at revenue diversity. Our mortgage business line originated $71 million volume. An increase of nearly 16% from the $61 million over the prior year quarter, mortgage sales of $61 million represented 87% of our total originations.

Our capacity remains nearly double the level of our current trailing 12 months of origination volume, but we remain bullish on the business line and expect that our 2025 volume level will be at least 20% to 30% higher than the 2024 forecasted level of approximately $265 million.

No income was down slightly at $4.1 million as the impact of several non-core items including the impairment of our mortgage servicing rights halted the quarter over quarter growth that we had experienced during 2024.

Our title business and wealth management services have steadily improved all year and we remain positive about their continued contribution to our revenue and bottom line net income.

Regarding the wealth management business line, new sales this year have actually exceeded our expectations and we've added new sales talent that we expect to be fully integrated and delivering new clients and new assets under our care. In 2025 on the scale, front deposit growth has accelerated again as I indicated earlier. This quarter. We were up by $44.3 million compared to the linked quarter and up 6.8% from the prior year quarter.

Our deposit cost of funds was 1.94% this quarter, up from 1.86% in the June quarter and 1.53% in the third quarter of 2023.

The trend line continues to move higher but certainly at a much slower pace.

Given our neutral to slightly liability sensitive balance sheet. We anticipate that a measured gradual decline and overall market rates will strengthen our net interest margin in the coming quarters, loan growth continues to gain traction. In fact, this quarter, we had our strongest level of length quarter growth in over 2 years.

The pipelines are much stronger today and Columbus is on pace to deliver over 50 million in growth for the full year of 2024.

We've not touched on the quality of our egg portfolio much in the last several years, but our $65 million portfolio continues to perform very well with virtually zero loan losses. Representing the prudent approach, we take to provide liquidity to our ag producers.

Farmers in our region continue to experience high yields with over 80% of our clients now carrying some form of crop insurance to supplement our net interest margin. We have aggressively pursued the State of Ohio Egg L program which has bolstered our deposit base by $14 million and improved margins on these funds by well over 200 basis points.

A strong equity foundation remains a prerequisite to our growth and this quarter, it continued to improve.

We are very comfortable with our capital strategy and feel we have a significant level of capital to continue to take advantage of multiple strategic options in terms of deepening existing relationships. In other words, more scope, we continue to embrace technology to enhance client engagement. This quarter, we expanded the services of our contact center to 7 a.m. to 7 p.m. This move has made a positive contribution to our level of client care and bolsters our quest for greater brand loyalty. Although slightly more costly, we feel this will be a strong differentiator for a company as we capitalize on market disruptions.

Organic expansion continues to be a focus.

We have selectively added to our talent pool this year with expansions in Columbus and Cincinnati, new sales emphasis and capacity and wealth management and recommitting to the Northern Indiana market.

We believe that these selective growth strategies will deliver positive results through the fourth quarter this year and well on into 2025 speaking to operational excellence, the mortgage business line remains a key driver, our levels of client care and the residential real estate business line or even as we have maintained a stable portfolio of nearly 9,000 households that we service and one that now generates over $3.5 million in fees annually.

The headwinds that we have experienced this year continue to reflect both the lack of available inventory and the continued pressure of higher mortgage rates.

That said our pipeline has improved of late exceeding $30 million up 30% from the run rate as slight movement down in rates has moved some clients from the sidelines.

Although refinance volume is still well below our historical levels, it now represents 10% of our current pipeline as we discussed in prior quarters. we have expanded our presence in a new market. Specifically, we are focusing on the Cincinnati market is one that is similar characteristics to the Columbus and Indianapolis markets.

We're now up and running with (two MIOs) in that market and we closed our first deal in September with a solid pipeline scheduled for the fourth quarter.

We think once fully integrated that Cincinnati initiative will match and potentially exceed the production of our other urban markets.

Finally, asset quality always a hallmark of our company from origination to our expansive review process.

We had minimal charge offs in the quarter with delinquencies slightly higher at just 65 basis points.

Clearly, our commitment to growing our balance sheet and loan portfolio in Columbus and other markets will require us to remain steadfast in our credit underwriting and ensure that our loan review, early warning signs are in tune with the ever changing economic cycles and I'll turn it over to Tony Costantino our CFO for additional comments on the quarter, Tony,

Thanks, Mark and good morning everyone. Net income for the year $7.8 million delivering a full year EPS of a $17.

And when we adjust for the non-core servicing rights impairment, the year-to-date EPS is slightly higher than the prior year. First nine months total operating revenue was higher this quarter improving by 4.4% year over year and by 81.8% from the linked quarter, loan growth and the improvement in our asset mix with securities. Now, a less material portion of our earning asset base were the major factors in the improvement.

As Mark touched on, we had an impairment of our mortgage servicing rights revenue this quarter as the significant volatility in rates and especially prepayment speeds reduce the valuation of our servicing portfolio.

At quarter end, the servicing portfolio was valued at $1.41 billion up from both prior year and the linked quarter.

In addition, we completed the sale of the vacant lot in the quarter that resulted in a game of 205,000 a net interest margin.

The net margin improved end of the quarter at 3.19% on a tax equivalent basis, reflecting a10 basis point increase from the prior quarter and higher by 8basis points from the linked quarter.

And from that link quarter, the yield on earning assets was up 14 basis points and the rate on interest bearing liabilities was up 6 basis points as we indicated last quarter, we felt that the second quarter was the low point of our margin compression.

And we feel that the remainder of 2024 and 2025 will show gradual improvement in the NIM as rates decline. And our asset mix adjust the efficiency of our balance sheet has always been a focus with an emphasis on maintaining a healthy loan to deposit ratio which was stable at 89%. And it has improved our asset mix while driving margin revenue, higher loans as a percentage of assets now stands at 73.9% stable to the prior year.

Our investment portfolio is calibrated to support projected loan growth and provide a base level of liquidity.

We continue to utilize the contractual runoff of the portfolio approximately 25 million annually to reinvest either at the Federal Reserve daily or longer term in our growing loan book.

Every incremental dollar of maturity adds at least 300 basis points in margin currently on expense management.

Given the commission driven nature of several of our business lines, expense growth was in line with or just slightly below revenue growth and played a key role in stabilizing our profitability this quarter. When we adjust our non-core revenue and expense items, revenue grew 3.3 times faster than expenses when we compare to the link order.

Now, as we turn to the balance sheet wholesale funding management.

Due to our deposit growth, we have no overnight wholesale funding.

We do have a small level of fixed term wholesale funding that gives us a bit of stable funding.

We've held back on any new bond commitments and are comfortable with excess funding invested at the fed until we see a few more quarters of our loan pipeline.

We also know that Marblehead will provide another boost to liquidity in the first quarter of 2025 with approximately $35 million in lower cost liquidity on our investment portfolio strategy. Again, we've not added any bonds since early 2022 and have seen the portfolio declined by $57 million since that peak and the portfolio has now declined to under 16% of total assets.

Our AOCI improved by $9 million in the quarter and E has responded favorably to the yield curve on credit losses. We took provision this quarter of 200,000 as our (cecil) model coupled with funding for a number of commercial loan commitments in the Columbus market required a small increase in provision expense.

Given the quality of our portfolio, we are comfortable with a slight reduction in our reserve ratio that stood at 1.48% at quarter end.

And we still have non performing loan coverage of nearly 300% as we indicated. Last quarter, the three credits that were added to non performing are all well secured and we anticipate resolving these credits relatively quickly and without material write down our capital strength and shareholder value, the rate reductions obviously had a positive impact on our AOCI in the quarter with total capital ending the quarter at $132.8 million or 9.5% of assets.

When we exclude all of the remaining AOCI impact the equity to asset ratio improved to 11.3%.

The stock buyback continued in the quarter at a much higher pace as we repurchased over 66,000 shares at a level that was at or near tangible book value.

This is the highest level of shares repurchased in some five quarters even with our capital needs for growth. And for the cap Marblehead acquisition, we have modeled share repurchases to continue without a material declination in our capital ratios.

I will now turn the call back over to mark.

Thank you, Tony and certainly at a high level, our progress this quarter has positioned us nicely to finish the year strong as our asset mix changes the yield curve Steens potentially and margins expand marginally and profitability improves.

We announced a dividend increase this week to 14.50 per share which is nearly 35% payout ratio with a yield of approximately 2.95%.

We have been making solid progress on the Marble head acquisition that we announced previously we're very excited to add their client base to our portfolio in early 2025. And we continue to believe it will be solidly accretive to our earnings and to our franchise value in closing. While the current economic environment presents some challenges, we remain optimistic about our prospects for continued growth.

Our diversified business model, strong client relationships and conservative risk management, we think will allow us to continue delivering solid results for our shareholders on into 2025.

Now, I'll turn the call back over to Carol for questions and answers. Carol Dave. We're ready for

Questions now.

Okay. We will now begin the question-and-answer session to ask a question. (Operator Instructions)

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

Hey, good morning, guys.

Yeah, thanks for having me. So the just maybe just mark, you mentioned some new hires on some kind of new talent and I guess I'm not sure if I was more referring to the on the mortgage side or on the lending side or both or maybe just can give a quick update on, you know, kind of changes recently.

Yes, we've added again a two Mlos in the Cincinnati market and they're up and running and producing. we have added some additional talent in the back room in the quality control department. We have added a new leader, so to speak, for the Wealth Management division to take a little bigger bite and presence out of the (401k) market. That individuals on board. we have actually brought in some additional talent in the commercial arena. Of course, with Adam Russell that we talked about some time ago, I think probably last quarter. Again, he is doing very well and bringing on roughly 50 million this year and also an additional administrative assistant for him who's now leading the charge and leading our commercial loan processors in, in our market. So that pretty much comprises the additional talent, but some back room to make sure that we have the compliance piece covered nicely as well as the impending volume.

Got you. And with that, the, the commercial producer is that, was that the Columbus market or just in, you know, for all markets, I guess, kind of somewhat overseeing that.

Yeah, predominantly the Columbus market that we, we know we can really, we've demonstrated Brian, we can really grow at will. And so, we're curbing our enthusiasm a bit because there's a lot of projects there. We just want to make sure we're remaining prudent and diligent to our responsible underwriting process. And as I mentioned, 50 million, we're pretty optimistic for Fort Wayne has been nice for us, but clearly our other markets have to pick it up because they can't just be growth in one market that we got to have some additional balance in 2025.

Got you. Okay. that is super helpful. And then just on the loan growth outlook, I think you seem pretty optimistic heading into four Q and then kind of carrying that momentum into 2025. Is that, is that pretty accurate where it's, you know, loan growth ought to be in the mid upper single digits in terms of how you're thinking about the, how that translates to growth.

Well, sure, as you know, we've historically been in that high single digit and that's where we love to be. We don't want to be the market leader. We don't want to, you know, take everything. But, single high digit is where we like to be. We've exceeded that a little bit, you know, this past quarter at the, the nine plus percent kind of thing annualized. But, we've had a really good pipeline. We've got, certainly loans that are on a construction basis or a little bit of a development that's yet to draw up. But we remain optimistic about all of our markets, but clearly, expanding into the Columbus market with the new leader has certainly put a bit of a charge in our commercial production.

Got you. Okay. That's perfect. And then, on the, just on the mortgage side, you also sound pretty optimistic in terms of, I thought you said it was maybe 20% growth outlook for 2025. And I guess it, I guess that seems to account for the, you know, the new entrance into Cincinnati and, and then just kind of the current rate environment is that kind of what the drivers of that are? And is that kind of consistent with how you're thinking about, you know, that the 20% is really in terms of production, you know, pretty achievable.

Absolutely. As, as you know, we've communicated extensively that our sweet spot is the 500 million. That's what the back room is built for. And so, working hard yet maintaining the margins that we've been used to on a sale basis, clearly drives our appetite for Freddie Fanny deals, but also doing some private clients that kind of kind of loans. But getting at least back into Brian that $350 million to $400 million number next year, certainly would be, in order for us, of course, we can't predict the payoffs and we can't predict the rate environment. And of course, November fifth will, you know, certainly give us a little bit of an insight as to what that might look like in 2025. But mortgage business line remains a key element of our company. We like the households that we acquire. But more importantly, you know, we like the opportunity to cross sell into those households. And, again, over the last decade, we've gone from a few (100 a few 1,000 to 9,000). So we like our positioning

Got you. Okay. Yeah. And then let's see, the other one was just on for Tony on the margin.

It sounds as though the, the, the base was built last quarter or in the second quarter. And, you know, the outlook is pretty favorable here. Can you just talk about some of the dynamics of, you know, how if we do see a steady easing cycle here, you know, kind of how you think the margin plays out and then, you know, just kind of layering in how, you know, Marblehead, you know, contributes to that. You know, kind of baseline if you will would be helpful.

Yeah. You know, I, I think Brian, the, you know, margin expanded in my sense a little bit wider this quarter than I really thought. I mean, I thought we'd be maybe 56 basis points up, kind of you know, eight basis points over the linked quarter was, was a pleasant surprise. You know, I think the mix is moving a little bit faster in our favor. And you know, I think we'll add another '25 (ish) million of, of loan growth here in Q4 kind of similar to what we had in Q3.

And on and on the funding side, I think we're, you know, as Mark said, you know, it's been gradually increasing but certainly at a slower pace. And, you know, most of our rollovers, most of the market, you know, other than a few kind of outsiders have kind of settled in where we are today. So, as the CD book kind of rolls over, there's not as much of a significant increase. So, I think that the key in 2025 is contractual maturities getting to a high single digit growth rate on the loans which will improve our mix and really kind of stable funding, which I think will get our merge into the 330 range by the time we're sitting here 335 by the end of, you know, 2025.

Okay. And that kind of contemplates marble head in there with the, with that as well.

Yeah, and, and you know, interestingly enough, I mean, their loan book is, is significantly higher than ours on a, you know, on, on call it the loan pricing model. Their deposit base is similar to ours. And actually the funding is a little less than what ours is. So the key is, you know, we're going to reposition that portfolio and take their $35 million of kind of 2.5% bonds and figure out what we can do if we can rapidly get that in the loan book. You know, it's going to be significant if it's just a kind of a of fed funds and we kind of stay roughly in this range, you know, you're going to add 250 to 300 basis points of margin improvement for them out of the gate

On $35 million. Yes.

Okay. And the, and the transaction right now, you know, time wise as far as how you're thinking of when that, when that closes, what's the, what's the timeline there, you know, late first quarter? Is that how you're thinking?

Yeah, I mean, I think, you know, we're, we're deep in the, in the application process, they obviously need their shareholder approval which, you know, all senses, you know, kind of full steam ahead. I, you know, we'll get our approval hopefully here prior to the end of the year, you know, we'll close it, call it late January first part of February. And we'll have it on our books for, you know, 11 months here in, in 2025. You know, I don't think we'll do the actual conversion of the clients still obviously later in the year based upon, you know, the system constraints we have with our provider. But I think out of the gate, we'll be able to get them on board and have that accretive to our earnings base.

And Brian, their shareholder meeting is the 30th and they've already received roughly about 85% of their proxy positive. So, you know, we're steaming ahead nicely. We just have to get the fed on board here.

Okay. That sounds, sounds good and maybe just one or two others just on the on the expense side. You guys have done a great job in managing and controlling expenses just how to think about, you know, the next couple of quarters or just in the 2025 kind of how we're, you know, looking at the run rate kind of inclusive of, you know, marble head, kind of how that, you know what that adds and just how you're thinking about, you know, the, the, the, the expense capabilities.

Yeah, I think, you know, we have $11 million of expense, you know, this quarter, you know, I think that's a pretty good baseline against 70 we're going to do 70 to call it $90 million a quarter of mortgage. So that's going to, you know, move up slightly one way or the other relative to that number. I don't anticipate significantly more talent acquisitions above where we are. And, but we will have some kind of year over year comparative. That'll be moderately higher. I do think we continue to have like all banks our size, we continue to have technology needs and constraints that we have to spend on to get better. And the key is can we drive revenue growth, offset those? But, you know, we're committed to keeping expenses in line with our expense growth slightly less and that's our expectation.

And Brian, just to comment, we are trying to balance that expense increased conversation with some tactical organic expansion opportunities in some adjacent markets. You know, PNCS are pulling out of some of our markets and, Huntington has pulled out of some of the markets and there's a lot of disruption going on that we intend to take advantage of which most likely is going to be a little bit of expense before the the revenue comes in. But we try to keep that in perspective.

Got you. No, that's helpful and Tony just want one back for the margin just so I kind of think about it, the margin expansion, you know, next quarter, next year, just kind of rolling forward inclusive of the the rate outlook. I mean, I guess is really predicated on, you know, getting the loan growth because right now it sounds like you could any pick up, you're getting, you know, absent any more competitive loan pricing is kind of in that, you know, 300 basis point range. So really the way to think about the margin is the, you know, the funding costs are flat to down and, you know, that really, it's just, you know, putting the liquidity from Marblehead and, you know, to work at, in, in higher yielding loans and just kind of remixing, I guess we're just, you know, that's kind of what drives the margin expansion here.

Yeah, absolutely. I, you know, I think, you know, my base model is, you know, kind of stable funding costs and then you look at, you know, kind of $25 million of, of bond amortization at a 275 to 3% range, you know, at a minimum, you get 5.5, which doesn't get you a whole lot of margin improvement. But if we can get, you know, $85 million of loan growth, call it that 8.5 to percent next year. That'll take up not only that liquidity but the $35 million from, from Marblehead. And then we're not as stressed on the funding side, Brian to have to, you know, go to higher pricing in order to fund that we should be able to remain, you know, fairly stable with our current base and not have to get in kind of the funding chase to, to fund our growth. And, you know, I think '25 is an excellent kind of window for us to really improve margin with loan growth and that's the critical, that's the critical factor for us next year.

Got you. Okay. Well, it sounds, sounds pretty positive on, you know, on the momentum I'm loan side heading in the four Q and you know, the rate environment and the new market in the mortgage. Certainly, you know, give you some tailwind there in time in terms of the outlook heading into 2025. So can grasp on a nice quarter and thanks for taking the questions.

Thanks. Thanks for joining Brian.

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

Once again, thank you all for joining us this morning and we certainly look forward to having you with us in January for the update on the final quarter of the year and for the full year of 2024. Thanks for joining and goodbye.

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