SB Financial Group (NASDAQ:SBFG) Q3 2026 Earnings Call

0:00 Good afternoon and welcome to the SB Financial third quarter 2026 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 Sara Mikas with SB Financial. Please go ahead, Sara.

0:30 Good afternoon, 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 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 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.

1:30 I will now turn the call over to Mr. Klein.

1:37 Thank you, Sarah, and good afternoon, everyone. Welcome to our third quarter 2026 conference call and webcast. This quarter represented another period of discipline, execution and sustained momentum across our franchise. As we navigate the current interest rate environment, our diversified operating revenue model continued to deliver the structural resilience required to gather scale, expand our top line revenue, and protect core profitability. We experienced balanced performance across our commercial lending operations and fee-based business lines anchored by proactive margin management and sound credit administration. While planned investments in core systems and commercial services temporarily increased expenses this quarter, are strong fee generation and measured margin expansion provided a constructive offset.

2:32 We are pleased with our quarterly performance, always with a keen eye on prudent capital management and deployment, organic scale, and long-term shareholder value creation. Highlights for this quarter include net income at 3.9 million with diluted earnings per share of 63 cents compared to $4 million or $0.64 per diluted share last quarter, marking now our 63rd consecutive quarter profitability. Total operating revenue reached $18.1 million, an increase of 9% from $16.6 million for the year-ago quarter driven by net interest income that advanced 8.8% to $13.4 million. Loan balances reached $1.22 billion, reflecting an increase of 108 million or 9.8% from the prior year quarter and an increase of 29 million or 2.5% from the linked quarter.

3:30 This performance extends our trend of sequential loan growth now to 10 consecutive quarters. Total deposits finished at 1.38 billion, up 120 million or 9.5% year over year. Our core relationship model continues to provide positive momentum. However, total balances contracted modestly by $8.3 million from the link quarter due to the anticipated runoff of a rather large wholesale relationship that Tony discussed on our call last quarter. Non-interest income finished at $4.7 million, up 9.6% year-over-year, and accounted for nearly 26% of our total operating revenue, demonstrating the ongoing value of our diversified fee-based business lines.

4:19 tangible book value per share end of the quarter at $18.65, up $1.44, or 8.3% year over year, with our adjusted tangible book value per share, when excluding AOCI, expanding now to $23.03. Asset quality remains a key benchmark in our quarterly performance. As such, total non-performing assets finished at 4.3 million, representing just 0.27% of total assets, and down five basis points from the linked quarter. We continue our journey to deliver on our five key strategic initiatives we discussed in many prior quarters. Revenue growth and diversity for improved performance, greater scale for efficiency improvement, expanded scope for additional services in each household, operational excellence for a stronger brand and always top tier asset quality.

5:17 Taking a little closer look at our revenue diversity, our first initiative focuses on revenue diversity that serves as our structural defense across all economic cycles. Our fee-based teams, driven primarily by our 25 mortgage lending officers, execute with precision throughout the quarter. However, with mortgage interest rates at or above the 7% mark for much of the quarter, industry-wide refinance activity has certainly been limited. Given this headwind, we were are pleased to deliver mortgage originations for the quarter of nearly $78 million, noting an improvement of nearly 15% over the prior year period. Entering the fourth quarter, our residential pipeline remains consistent at $20 to $25 million level.

6:04 Complementing our constrained origination momentum was our steady annual income from our sold residential servicing portfolio that reached now $1.52 billion this quarter delivering nearly $1 million in servicing fees with $2.8 million earned year to date. When combined with our proactive servicing rights heads, they provide a vital buffer to earnings momentum. Beyond mortgage banking, Pete Title delivered $514,000 in revenue supported by internal commercial lending referrals and our wealth management team delivered solid top line support that helped offset mounting margin pressure.

6:50 Our second key initiative is greater scale to improve efficiency. A broader market presence identifies opportunities to scale up. In the interim, core deposit retention and expansion remain a priority as the industry broadly deals with funding pressures and mounting competition. Our teams delivered exceptional execution this quarter, highlighted by our non-interfering checking accounts that expanded by $11.5 million from the linked quarter to reach $270 million, representing nearly 20% of our total deposit base. All of this core deposit activity has provided a very stable deposit cost of funds coming in for the quarter at 1.81%, up just two basis points from the prior year.

7:39 This level of high quality core deposit growth reflects our strong community bank brand and proactive approach to client care. Ongoing consolidation and market disruption across our footprint continue to create significant organic and market balance sheet growth opportunities. Our commercial lending and treasure management teams have been on the street and engaging with clients and prospects that seek a more responsive relationship-based banking partner amid all the disruption. Campaign to date, we have obtained approximately 586 new relationships, including balances at nearly 30% of our longer-term goal of securing organic growth of $500 million in new loans, deposits, mortgages, and wealth assets.

8:30 Furthermore, our targeted de novo office expansions are demonstrating constructive, measured progress. Both our Angola, Indiana, and Napoleon, Ohio offices continue to exceed expectations and have combined to deliver now over $25 million in local, lower-cost core deposits and $21 million in market-yielding loan balances. Our third initiative centers on deepening existing client relationships for greater scope. Of course, by scope, we mean capturing a larger share of the client's wallet through the identification of comprehensive multi-product solutions. In fact, our hybrid office strategy is specifically designed to facilitate this approach, driving cross-functional internal referrals between our commercial and retail lending teams, mortgage originators, and wealth management advisors.

9:28 Within this framework, our wealth management division continues to provide a robust array of advisory services, with total wealth and brokerage assets under management finishing the quarter at $578 million. Our alliance with Advisory Alpha, we discussed in prior quarters, is progressing exactly as planned, allowing for a methodical transition of client portfolios to an enhanced platform and one that provides our clients with direct access to institutional grade investment solutions. Finally, as we continue to seek a higher level of engagement with our client base to provide a greater level of services per household, This strategy includes more robust data analytics that enables our sales staff to work smarter and more intentionally with their client base and their unique book of loans and deposits.

10:24 Measuring growth initiatives per producer is a continuous function at their fingertips and provides immediate feedback on productivity and their level of goal attainment. Our level of engagement has enabled us to expand our number of households now to over 33,000, inclusive of our wealth relationships, our credit card portfolio, and our 9,000 households sold mortgage portfolio. Fourth initiative is excellence in operational activity. Achieving scale requires not just top line growth, but discipline and alignment with our operational activity. The robust $29 million linked quarter loan expansion we achieved This quarter was driven by commercial lending production capacity.

11:11 We have intentionally built over the past several years across greater Columbus, northern Ohio, and eastern Indiana markets. Entering the fourth quarter, our production capacity is apparent, as we now have an active commercial pipeline of over $53 million. When we include our commercial construction pipeline, we will have another $15 to $25 million of growth and a net of projects that we funded in prior years that will be seeking long-term permanent agency financing. Our operating expenses were slightly elevated this quarter at $13 million, reflecting deliberate investments to support our expanding operational footprint. They are tied to three operational drivers, adding talented commercial and TM leadership in growth markets, seasonal performance incentive accruals aligned loan portfolio expansion, and front-loaded implementation and consulting expenditures required to support our credit card and core platform outsourcing conversions.

12:19 These technology expenditures are clearly project-driven, non-recurring, and lay the groundwork for greater operating efficiency as we continue to scale up. Despite these elevated transition costs, our underlying financial foundation remains exceptionally solid. balance sheet capital strength is robust, providing the necessary support for our growth initiatives. Total shareholders' equity end of the quarter at over 144 million, representing a 5.4% increase from the 137 million reported a year ago. When we exclude the temporary AOCI adjustment, capital is up 11.1 million, or 6.9%.

13:05 And finally, I ask that quality. Our fifth and final strategic initiative is maintaining top tier asset quality. Our non-performing assets remain near historic lows at just 27 basis points of total assets. Our discipline credit oversight is further reflected in the level of our core criticized and classified loan portfolios. Criticized loans dropped sharply year over year to 331,000, while our classified loans year over year declined by over 24% to just 3.6 million. We also continue to see measured progress in our specialized lending sectors. Our agricultural lending portfolio reached nearly 84 million at quarter end, expanding 28% year over year. While slightly below our original 12-month timeline identified last year, we remain firmly committed to growing this key sector and expect to cross our $100 million portfolio goal and others within the next several quarters.

14:10 Likewise, SBA lending production has escalated to now this year $5.2 million or a 24% increase over the prior year. While production is below our expectations, we have added $3.1 million to our balance sheet growth while gain on sale revenue has now risen to $235,000 and 124% over the same period last year. With that, I will turn the call over to Tony Cosentino, our CFO, to expand on the quarter's financial performance. Tony?

14:44 Thanks, Mark, and again, good afternoon, everyone. Let me outline some highlights and important details regarding the third quarter. On the income statement, as Mark indicated, total operating revenue expanded to 18.1 million, or 9%, over the year-ago quarter, and up 5% annualized from the $17.9 million recorded in the linked quarter. With a strong loan pipeline mark, as mentioned, we expect continued growth in interest income. Net interest income was driven primarily by our growth of top-line revenue, with total interest income advancing to $20.5 million, an increase of 9.1% from $18.8 million recorded in the prior year, This easily outpaced our interest expense growth of $627,000, which reached $7.1 million, allowing net interest income to advance 8.8% year-over-year to $13.4 million.

15:43 Our net interest margin ratio rebounded this quarter, expanding by two basis points year-over-year to 3.5% and up seven basis points sequentially from 3.43% in the linked quarter. This margin recovery was driven by our earning asset yields expanding by 15 basis points from the linked quarter. We continue to see the benefits of our expanded balance sheet that includes ongoing upward repricing across our interest earning assets. Non-interest income finished the quarter at $4.7 million, up 9.6% from the prior year quarter. Our core mortgage banking contribution reached $1.8 million, up nearly 20%, compared to the third quarter of 2025.

16:34 Mortgage banking was supported by core loan servicing fees contributing $946,000, while gain on sale of mortgages finished at $1.26 million, generating a gain on sale margin of 1.9%. This quarter, Our hedging program was instrumental in managing our market's interest rate volatility, generating $319,000 in revenue with over $500,000 produced year-to-date. And lastly, we had an OMSR valuation recapture of $43,000 compared to a negative $301,000 impairment in the prior year. Operating expenses totaled $13.2 million for the quarter, up 14.4% from $11.5 million in the prior year. This change reflects the impact of adding talented producers across our footprint alongside higher employee medical expenses and seasonal performance incentive accruals.

17:36 Collectively, salaries and employee benefits rose to $7.3 million. Additionally, our year-over-year expense comparison was impacted by higher data processing fees rising to $1.12 million from $723,000 in the prior year and $693,000 in the linked quarter. These line items absorb the necessary consulting and implementation costs for our upcoming credit card and core outsourcing conversions. The efficiency ratio for the quarter was above our recent range, which has averaged 68% over the last four quarters. The efficiency aberration is reflective of these conversion and personnel investments. However, when we look at operating leverage for the nine-month period, revenue has expanded 8.8% compared to operating expense growth of 4.1% for an operating leverage of 2.1 times.

18:33 Turning again to the balance sheet, loan growth continued to outpace our peer banks and ended the quarter at $1.22 billion, pushing our loans to asset ratio up to a healthy 75.5% compared to 73.4% from the linked quarter. Commercial real estate outstandings continue to drive our loan portfolio balance at $643 million, but we maintain strict granular credit management protocols. Specifically, our exposure to office space remains under 5.5% of our total loan portfolio and excluding residential mortgage portfolio balance. No other segment is higher than 10% of our current loan book. The loan-to-deposit ratio at quarter end was 88.1%.

19:22 This included total deposits rising to $1.38 billion. As we highlighted on our last call, we finally realized the migration of a large rate-sensitive institutional deposit into the wholesale market sector. Overall balance sheet liquidity stayed at a healthy level, and we can comfortably fund our anticipated loan closings well into the fourth quarter and beyond without reliance on wholesale markets for funding. On capital management during the quarter, we continued to adjust our share buyback to just 6,700 shares at an average cost of $2,671. Our approach conserved capital flexibility and avoided shareholder dilution due to our recent market appreciation that exceeded tangible book value of $1,865 at month end by $9.96.

20:15 As we discussed on our last call, our stock is now trading at over 1.5 times tangible book, up from 1.3 times in the second quarter and just 1.1 times over the same quarter last year. Moderating our buyback pace from the 28,000 shares repurchased last quarter is a deliberate strategy that preserves the balance sheet flexibility required to support our organic loan growth while continuing to provide a firm floor for our market price. and lastly to asset quality. Our allowance for credit losses was 1.34% compared to 1.38% in the linked quarter and 1.44% in the prior year. Coverage of non-performing loans now exceeds 500%, consistent with the linked quarter and well above the 345% reported in the prior year period.

21:08 Net charge-offs as a percentage of average loans returned to historical lows at less than one basis point. down from six basis points in the linked quarter and comparable to the prior year. Total loan delinquency ended the period under 34 basis points, and when we exclude those loans on non-accrual, our delinquency rate is effectively zero. I will now turn the call back over to Mark.

21:36 Thank you, Tony. We enter the final quarter of 2026 encouraged by the sustained momentum across our commercial lending operations and core deposit gathering. With total assets under our care now exceeding 3.7 billion, our diversified business model continues to provide the resilient foundation necessary to navigate shifting rate cycles as we scale our bank toward the $2 billion plus balance sheet objective. This quarter, we're also pleased to announce the increase of our quarterly dividend to 16.5 cents per share and in line with our longer-term goal to elevate our payout as scheduled every other quarter. This dividend represents an annualized yield of approximately 2.2% and a conservative 26% payout ratio.

22:27 This keeps us firmly on track for our 14th consecutive year of increased annual dividend payouts. Now, sir, let's open the call up to questions from our investment community. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using your speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Brian Martin with Breen Capital.

23:15 Please go ahead.

23:18 Hey, good afternoon, guys. Hi, Brian. Hey, Brian. Nice to have you with us.

23:23 Yeah, thanks. It's a nice quarter. Just maybe a couple items for me. The loan growth You guys talked about it's obviously been a nice track record here in recent quarters and just wondering how you're thinking about that, you know, where the pipeline sits today heading into fourth quarter and, you know, kind of next year and any impact you'd expect, you know, given the rate environment or any thoughts on that would be helpful.

23:53 Yeah, we're looking, of course, we're in the throes of budgeting as we speak. As we've done in prior years, we've averaged around 8%, 8.5%, I think, percent, high single digit. Generally, Brian, I think that's where we're looking at in 2027. Clearly, Columbus has been the all-star, providing 70% roughly of our growth. Other markets, hopefully, are going to kick in here this fourth quarter as well as on in the next year. but we have a solid, Steve can speak to the pipeline, but we have a solid commercial pipeline and also a construction C&D pipeline that could be in the 20 to 30, 40 million net after a few credits exit that have been generally poised for institution kind of financing as they stabilize.

24:48 So we've got a really strong pipeline when you include both facets. Any comments, Steve?

24:53 Yeah, sure. Just piggyback on that, Brian. I think we feel very good about the pipeline referenced in the earlier comments, those pulling through the interest rate environment going forward into the year ahead. Obviously, you know, many folks expect that those longer term rates will will moderate or at least not continue to grow too aggressively. As we referenced earlier, Columbus is a big deal, a big part of our growth. One of the reasons that market remains robust. and not impervious to rates, but perhaps less influenced by rates. A big piece of the puzzle down there is medical as well as educational. And those expenditures tend to support that local economy in a way that interest rates don't necessarily impact greatest. We feel good about the following year as well.

25:41 So good pipeline.

25:43 Yeah. Okay. And more on the commercial side, CNI and CRE is that I know you also mentioned the AG mark, but you know, CRE and CNI is kind of the are the primary drivers of the growth?

25:56 Yes, certainly. CRE primarily. Look at our balance sheet, you can see that. But we continue to explore C&I opportunities and the associated deposits that come with those four relationships.

26:07 Gotcha. Okay. Perfect. And then just on the funding side, Tony, you talked about the liquidity. So I guess just in terms of deposit growth, how are you, given the competition out there today and your current balance sheet structure. I mean, how are you thinking about deposits in the next quarter or next couple quarters just in terms of funding the growth?

26:29 Yeah, as I've stated probably every quarter on this call this year, I've been surprised by our level of deposit growth. You know, clearly we've had disruption in our markets through acquisition and other things that have inured to our benefit. I do think we've been able to grow substantially without being a market leader on rate. So I think at any time we probably could, you know, kick it up 25 to 30 basis points if needed to fund where we are. So we have about 65 million of excess liquidity as we sit today. I think that covers most of our current pipeline plus.

27:15 and if we have normalized deposit growth on into 27, I feel pretty good about funding anything else.

27:21 And Brian, just one follow-up comment. It's not like we've been attracting high-cost deposits well above the margin. It's a general direct reflection of our TM talent that we've hired. We have a new gentleman showing down in Columbus and individuals across Ohio and Northeast Indiana. So that kind of strategy to bring on TM talent is paying dividends.

27:45 Yeah, no, that's a good point, Mark. So, okay. How about just last two for me is just the on the margin, Tony, I guess, in terms of just kind of big picture, if we expect a few potential rate hikes here, just broadly how you'd expect the margin to kind of to absorb those hikes or just how to think about them in the coming quarters here.

28:11 Yeah, so, you know, relative to what our current portfolio is, you know, call it, you know, every 25 basis points is probably, you know, call it a six, $700,000 annualized impact to the good for us, given where we are in terms of prime rate financing, assuming nothing else happens. Obviously, there's going to be a reaction on the deposit side there. So, you know, how well we manage that delivers that going forward. Our base model is kind of two rate increases from now until the end of 27, which I think is fairly conservative and in line with our expectation that still our margin ratio is going to be probably a couple basis points ticked down in Q4, as it traditionally does, kind of stay flat in Q1 and then accelerate in the midpoints next year, kind of our typical model. But I would think, I still believe 350 to 351 is kind of at the upper end of where we're going to achieve going forward.

29:21 Gotcha. Okay. That's helpful. And how about last two, just on maybe just touch on the mortgage outlook. I mean, obviously with rates where they are, it's a tough market out there, but in terms of how you're thinking about, you know, kind of production and yields in that business, you know, what would you kind of what's your, you know, big picture outlook there and how we think about, you know, fourth quarter and then really more heading into 27.

29:51 Well, clearly, Brian, you know, the 7-7 half has put a major, you know, constraint on that business line. That said, we still continue to see some nice activity in the 3-1-5-1 construction lending that we put in our books that eventually goes Freddie Fannie. And, of course, we continue to to field some requests on the higher-end private client mortgages that we put on our books on a variable basis. But Tony's got one number. I always have a more optimistic number because I think we're going to get a play on the 10-year, which hasn't come yet. But looking in the next year from this year, we're clearly looking for a 10% to 15% increase of where we've found ourselves in 2026 on into 2027.

30:38 But as you know, that's going to be dictated by where the tenure goes and where rates go. But it's definitely taken the pressure off the business line because a bigger balance sheet, more operating revenue, more NIM is paying dividends because it's the gift that keeps on giving versus doing mortgages of 500 million every year, every time to generate that fee based revenue.

31:04 I would just add, Brian, you know, I think We're probably looking at a $50 to $60 million quarter in Q4, which lends the year, call it 280. We call 10% to 15%. That tells us we're in the low threes for 2027, I think, on a base model. I still think if we had full disclosure, I think most of the people out there would be shocked at some of our MLOs and the volume they're doing. We have some real stars that even in very tough markets can do significant mortgage volume. And unfortunately, it's just not, you know, the depth of all of our MLOs is not to that level, but it is an impressive performance by a number of our people.

31:54 And Brian, the old adage, and we certainly are reflective of this, 80% of our volume comes from 20% of our producers. And so, like Tony said, we've got some people that do 30% 20 and 30, 35 million every year, whether rates are 12% or 6% or 5%. We certainly want to find more of those kind of people, but in the interim, we like our positioning and we're looking for a better 2027.

32:22 Gotcha.

32:23 Okay. And last one for me was just on expenses. You know, obviously a little noise. You talked about it, Mark, or just If we think into 27, given the current run rate or just how to think about a decent run rate heading into 4Q in the next year, how are you thinking about that in terms of other additional spends you may have or any thoughts there would be helpful?

32:48 Before Tony fields that question, Brian, at a high level, people, technology, and benefits are taking an inordinate and a bigger bite of the margin revenue. So much like all banks, scale continues to be a big deal for us, but they're increasing at an increasing pace.

33:12 Yeah, I think, you know, add on to Mark's comments, you know, I've been relatively, you know, positive that our expense levels can be, you know, kind of under control as we look at Q4 and into 27. I'm turning a bit. I mean, we're seeing more and more on the ground of people costs and medical that is rising at a pretty alarming rate. I do think we're still going to have, you know, call it a normalized 4% to 5% base level of expense growth in 2027. But that's certainly higher than where I was, call it six months ago. And, you know, we do have some expanded technology costs that are going to take a little bit of a bite. and you know we've improved our people IQ out there with some of the staff we've hired and with that comes a little bit higher level of pay to compensate them but that's kind of the game we're in.

34:13 And Tony the bet is we'll get higher levels of production from a broader talent base.

34:18 Yeah and you know I hate to say this out loud Brian but I'll take a double-digit expense growth if we can grow operating leverage two to two and a half times, and that's kind of the game we've played for a number of years, and it seemed to have worked out more or less.

34:32 Yeah, and just to your point about the expenses, Tony, kind of the run rate that we saw in the third quarter here, just kind of framing it, maybe if it's a little bit higher growth rate than you have in the past going into 27, it's Thank you for having me.

35:18 This concludes our question and answer session. I would like to turn the conference back over to Mark Klein for any closing remarks.

35:48 Once again, thanks for joining us this afternoon. Appreciate your participation in our growth of our franchise. We look forward to speaking with you in January to update you on our full 2026 operation performance. Thanks and have a good day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.