SB Financial Group, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights:

• The integration of the Marblehead clients was successfully completed, and the company is preparing to enter the Napoleon, Ohio market with $800 million in deposits.
• Maintained focus on disciplined lending, core deposit growth, and careful expense management.
• Net income of $4 million, diluted EPS $0.64 (up 83% y-o-y), adjusted EPS $0.68. 59th consecutive quarter of profitability.
• Tangible book value per share ended at $17.21, up 4.4% y-o-y.
• Net interest income up 21% y-o-y, loan growth for sixth consecutive quarter, deposits up 9%.
• Wealth group transitioning to strategic partnership with Advisory Alpha to expand marketing materials and add CFP professionals.
• Continued progress integrating Marblehead team, including completing integration of Marblehead's customers into core system on October 24.

Segment Performance:

• Net income for the third quarter was $4 million, with diluted earnings per share of $0.64, up $0.29 or approximately 83% compared to the prior year quarter. Adjusted EPS was $0.68. This was the 59th consecutive quarter of profitability.
• Tangible book value per share ended the quarter at $17.21, up from $16.49 last year, a 4.4% increase. Excluding the acquisition payment for Marblehead, tangible book value per share is up 8.9%.
• Net interest income totaled $12.3 million, an increase of over 21% from the third quarter of 2024. From the linked quarter, net interest income accelerated at a 30% annualized pace.
• Loan growth over the prior year quarter was approximately $80.6 million, or 7.8%, marking the sixth consecutive quarter of sequential loan growth.
• Deposits grew by nearly $103 million, or 9% inclusive of the $51 million in deposits related to Marblehead. Excluding Marblehead deposits, overall deposit growth was still healthy at 4.5%.
• Assets under our care continued to grow and now exceed $3.5 billion, consisting of bank assets of $1.5 billion, residential servicing portfolio of $1.5 billion and wealth assets of over $563 million.
• Mortgage originations for the quarter were $67.6 million, down from prior year and linked quarters, but the pipeline has strengthened.
• Noninterest income was $4.2 million, up 2.9% from the prior year quarter but down 15.9% from the linked quarter.

Guidance:

• Expect another high single-digit level of loan growth in 2026, funded by bond portfolio runoff, 4%-5% deposit growth, and targeted wholesale borrowings.
• Anticipate the margin to peak in Q3 2025, with potential downward drift due to competitive funding costs but offset by asset repricing.
• Expect mortgage volume to increase as rates decline, targeting sub-6% 30-year rates to drive higher volume.

Risks:

• Competitive pressure on deposits leading to potential margin squeeze.
• Uncertainty in credit quality improvement pace, though expecting some reduction in nonperforming loans.
• Volatility in mortgage production affecting expense outlook.

Q: About loan growth and ag lending hires A: Mark Klein and Steve Walz discuss ag lending hires and growth in various markets, including the addition of seasoned lenders in ag and northern markets, and continued traction in the Columbus, Ohio market.

Q: About margin outlook A: Tony Cosentino talks about margin peaking in Q3 2025, competitive funding costs, and asset repricing, expecting a potential downward drift but offset by asset repricing.

Q: About credit quality and reserve coverage A: Anthony Cosentino and Steven Walz discuss nonperforming loans, expecting $500,000-$1 million of nonperforming loans to be upgraded or paid off in 6 months, and reserve coverage potentially moving to 1.25%-1.30% range.

Q: About mortgage volume and rates A: Mark Klein and Tony Cosentino talk about mortgage volume expectations, targeting sub-6% 30-year rates and expecting volume to increase as rates decline.

Q: About capital and M&A A: Anthony Cosentino discusses capital management, noting plans to slow share buybacks to retain capital for potential transactions while maintaining a dividend above $4 million next year.