SB Financial Group, Inc. Q2 FY2025 earnings call

• Revenue Diversity: Mortgage origination volume was $98 million, noninterest income up 15.1% year-over-year. Wealth Management division poised for a strategic partnership.
• Organic Growth: Loan growth continued, deposits increased with strong retention of Marblehead deposits.
• Deepening Client Relationships: Expanding hybrid office model and pursuing organic growth in legacy markets.
• Operational Excellence: Operating expenses decreased, loan-to-deposit ratio at 88%, comfortable liquidity position.
• Asset Quality: Charge-offs low, nonperforming assets $6.2 million, credit losses robust.

For the second quarter of 2025, SB Financial reported net income of $3.9 million with diluted earnings per share of $0.60, up $0.13 or nearly 28% compared to the prior year quarter. Adjusted EPS was $0.58 when considering servicing rights recapture. Tangible book value per share ended at $16.44, up from $15.26 the prior year. Net interest income totaled $12.1 million, an increase of over 25% from the second quarter of last year. Loan growth for the quarter was approximately $90 million, up 8.9% from the prior year and marking the fifth consecutive quarter of sequential loan growth. Deposits grew by over 12%, including $51 million from the Marblehead acquisition. Assets under care exceed $3.5 billion, including bank assets of $1.5 billion, residential servicing portfolio of approximately $1.5 billion, and wealth assets under care of $537 million. Mortgage originations for the quarter were nearly $98 million, with a pipeline at $34 million. Operating expenses decreased approximately 4.5% from the linked quarter. Charge-off levels were less than 2 basis points, and asset quality metrics were consistent with the linked quarter.

• Net income $3.9M, EPS $0.60, adjusted EPS $0.58.
• Anticipate margin expansion to continue, optimistic on loan growth and mortgage volume.
• Expect positive resolutions to nonperforming credits in Q3.
• Plan to announce strategic partnership in coming quarter for Wealth Management.

• Market disruptions in legacy markets impacting growth.
• Competition affecting loan growth and deposit retention.
• Potential funding cost pressures as rate cycle changes.

Q: Good morning, guys. Mark, maybe you could just start with just a short comment on just on the mortgage outlook. It seems pretty optimistic, given you called out Indy. But just kind of getting back to the -- for the full year, kind of getting back to around $300 million or $300 million plus, that seems pretty achievable. As you sit today, given the potential for lower rates and kind of the momentum in Indy and -- so maybe just a little comment on that, if you could.

A: Yes, absolutely. We have approximately, I think, 28 or 29 MLOs. They're high producers. We've got the backroom to support them. Really, 2 of our higher potential markets of Cincinnati and Indianapolis are just gaining traction. Their potential is, as you might expect, it's quite high. And we're very bullish, not only as I mentioned, on the teams, but also the markets. So I continue to remain very optimistic. And if we get a little play, Brian, on the 10-year, we could see that magical 400 number and beyond because, as Tony and I have talked before, bottoming at $216 million a year ago, we think it's just going to be the impetus to 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. And I think Tony has done a really nice job on the hedging position that we take, which really allows us to forward contract and make commitments with a pretty high pull-through from all of our lenders in all of our markets.

Q: 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?

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

Q: Got you. Okay. And then maybe just a little bit whomever on just the optimism on the loan growth. It was about what, 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 from here, 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 like -- and kind of how you're thinking about the next 12 to 18 months on the loan growth side?

A: 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 sauce 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.

Q: 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?

A: There were some modest sales, Brian. Nothing I would say is...

Q: Out of the ordinary?

A: Yes, nothing too 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.

Q: And just one question just on the outlook. It sounds like the margin has got a nice tailwind, Tony, or just the cost of deposits and the cost of funding is pretty stable here, absent some Fed actions. So that feels like it's stabilized, and maybe there's a little room for incremental improvement, but the continued repricing within the loan book and remix of the bonds still seems like that the margin has got a bit of a tailwind. And just kind of thinking over the next couple of quarters, kind of where you see the margin kind of more stabilizing once you get -- continue to get a little bit of benefit here?

A: Yes. I think -- rightly or wrongly, I've underestimated how much the margin has improved for us in the last, call it, 3, 4 quarters. It has outpaced us. I think our ability to retain deposits and not having to chase yield on the funding cost has been effective. And we've retained, I don't know, Steve, probably 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. So those customers are naturally rolling up the curve. We continue to have -- we're fairly short term on our loan book. So we continue to have, call it, $100 million to $150 million out every 12 months that's going to reprice at least for the next 1.5 years to 2 years. That's going to move up, call it, 150 to 200 basis points. So if we're able to retain those and keep funding costs where they are, you're right, margin has to have forward momentum.

Q: And just longer term, like Tony, where you think the margin can stabilize given kind of the environment we're in today is obviously much better than it has been? Where do you see it kind of flatlining once you kind of continue to get through some of the potential benefit we get from kind of the rate environment we're in?

A: Yes. I think we're probably up another 10-ish basis points here in Q3 and probably -- it probably peaks out at, call it, that 3.70% number. And if we can hold a 3.70% margin on our balance sheet, that's going to be a great day. I do know funding pressure is going to come. There's no question in my mind. The disruption in the market, as Mark talked about, I think there's some easy movement our way, but there's going to be movement from competitors to tighten that up.

Q: And you guys talked about some improvement on the credit side, those credits that came on early last year. So I guess the -- that's the potential to maybe see a little bit of lift in -- 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?

A: Yes. I think by even a fairly conservative estimate, we feel we're going to drop nonperforming by $1.5 million or so here in Q3. And in addition to kind of recapture as we talked about interest and fees, we think that dynamic is going to give our overall asset quality significant opportunities that -- I don't know that we'll be taking reserve back, but we certainly, in all likelihood -- we put $1 million aside thus far in provision through the first 6 months. I just don't see that pace in the second half of the year.

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

A: Yes. I think -- I would say we had an oversized amount of the buyback in the second quarter given where the pricing was on the stock and what we felt was the opportunity. I think collectively, Mark and I have looked at it, and we're probably going to slow that down here in the third quarter because I do think we have some alternative opportunities. Not that we have any capital deficiency, I think our capital is just fine. But I think we do have some opportunity, not only for organic expansion, as we've discussed, but I think there's some conversations that we need to maybe keep capital at or above where it is today.

Q: And then last one for me, just on the expenses. It sounds like a really nice job on that front. Just -- any big changes to the kind of the run rates where we're at today in terms of -- I know you talked about not adding some staff to the mortgage, obviously, if you don't get a little bit more scale, but elsewhere, kind of investments? This level is reasonably good, maybe a little bit of growth from today's level? Just any thoughts there?

A: Well, clearly, Brian, as we've communicated in many quarters, we got a variable-based compensation plan across the board. We do well, our staff does well. That's including nonmortgage producers, but clearly, as mortgage production rises, expenses will go up. But moral of the story is the scale that we've realized of recent is certainly helping us to deliver a better ROA at that -- nearly that 1% level and higher, which is certainly the long-term goal always. But that said, we continue to fight that battle because expenses aren't going to go down and certainly, technology continues to drive our expense level up. But that said, we know what the job to be done is and that's organic growth at most cost. So we're optimistic about where we're at today, and we think we can continue to drive performance higher.