SB Financial Group, Inc. (SBFG) Earnings Call Transcript & Summary

Good morning, and welcome to the SB Financial second quarter 2026 conference call and webcast. I would like to inform you that this conference call is being recorded. [Operator Instructions] I will now turn the conference over to Sarah Mekus with SB Financial. Please go ahead, Sarah.

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

Thank you, Sarah, and good morning, everyone. Welcome to our second quarter 2026 conference call and webcast. The second quarter of 2026 represented a period of strong execution across our franchise, reflecting the consistency and resilience of our diversified revenue operating model. Our results reflected balanced performance across all business lines, supported by high-quality organic loan growth, stable reoccurring net interest income, expanded non-interest fee revenue, and disciplined expense management. The quarter also marked the 18-month milestone of the Marblehead acquisition, and we now view that transaction as a significant contributor to our funding base, expanding our presence in Northern Ohio and driving overall franchise stability. Highlights for this quarter include net income at $4.5 million with diluted earnings per share of $0.72 compared to $0.60 reported in the prior year quarter. This now marks our 62nd consecutive quarter of operational profitability. Tangible book value per share ended at $19.04, an increase of approximately 16% from the $16.44 in the prior year quarter. When we exclude AOCI and adjusted tangible book, we're at $22.57. Net interest income expanded to $13 million, up 6.8% from the $12.1 million in the prior year quarter, driven by stable funding dynamics and expanding asset yields. Loan balances reached $1.19 billion, reflecting an increase of approximately $95 million or 8.7% from the prior year quarter, a slight increase of $8.4 million from the linked quarter. This extends our trend of sequential loan growth to 9 consecutive quarters. Total deposits climbed to $1.39 billion and increased to $141 million, or just over 11% from the prior year quarter, and up $19.3 million, or 1.4% sequentially from the linked quarter. Non-interest income finished at $5 million, accounting for approximately 28% of our total operating revenue as we continue to maintain stable fee-based revenue streams. Non-interest expense run rate remained well controlled, finishing the quarter at $12.1 million compared to $11.9 million for the prior year quarter. And asset quality remains a key characteristic of our company and a clear competitive advantage. Total non-performing assets declined to $4.4 million, representing just 0.27% of our total assets, a reduction of over 28% compared to the prior year. Our proactive approach to managing problem assets combined with our robust internal loan reviews has successfully driven down our overall non-accruing balances. We continue to remain focused on our 5 key strategic initiatives as we have indicated in many prior quarters. That's growing and diversifying revenue, adding more scale to the organization to improve the number of households and services in those households, operational excellence, and of course, asset quality. Let's look a little closer at the revenue diversity. Mortgage originations for the quarter rebounded strongly from the first quarter to $79.3 million, representing an increase of approximately 21% from the linked quarter, although production was down compared to the $97.9 million in the prior year period. The current residential pipeline has continued to stabilize at the $25 million to $30 million level. Our teams continue to struggle with mortgage rates remaining well above the 6% mark, which we feel is critical in moving into a more balanced split between purchase and refinance. Although our mortgage volume has been below expectations, we have had a number of success stories from individual MLOs and from our regions. Our newest region, Cincinnati, has delivered nearly $20 million in volume during our first half of this year, up by more than 50% from the same period in 2025. Individually, we have 4 MLOs that have eclipsed $10 million in volume, and additionally, 6 more originators are at the 50% level of their 2026 goal commitment. This quarter's volume growth represents a positive pivot from the volume constraints we witnessed throughout 2025 and the slow seasonal start we experienced from the first quarter of the year. Throughout that lower volume cycle, we made the deliberate strategic decision to keep our core processing infrastructure and originator teams fully intact. That operational discipline continues to yield results today, providing us with the capacity to eventually capture expanded market volume without adding incremental overhead. Our execution in the secondary market remains highly effective and allows us to manage a larger pipeline of fixed-rate commitments. We successfully sold 88.5% of our production in this period to maximize immediate fee income while keeping the balance sheet liquid. Furthermore, our total mortgage servicing portfolio crossed a major milestone this quarter, at $1.5 billion. Because we have maintained this operational readiness, we have ample capacity to continue scaling up toward more historical production levels. Peak Title recorded a strong quarter, generating revenue of $577,000, up nearly 20% from the linked quarter and flat compared to the prior year, supported by strong collaboration and steady internal referrals across our lending teams. This business remains an important part of our product suite and a valuable contributor to our fee income diversification. Now pivoting to scale, our deposit growth has vastly exceeded expectations since the second quarter of 2025. We have grown deposits in every quarter over the past year while keeping the increase in our deposit cost of funds at less than 2.5% level to just 181 basis points. Our core relationship model delivered an annual increase of $17.3 million in non-interest-bearing checking accounts, which ended the quarter at nearly $260 million. We continue to see excellent traction growing these core balances organically by leveraging our treasury management capabilities and capturing new commercial relationships stemming from ongoing disruption in regional players and regional markets. Similar to our Q1 momentum, this disruption strategy has now captured and delivered $130 million in cumulative balances as we track toward our long-term goal of $500 million from the ongoing market disruption. As we have highlighted in previous discussions, our targeted commitment to our two nearby de novo markets this year, Angola, Indiana, and Napoleon, Ohio, continues to yield results that exceed our original targets and expectations. Capitalizing on branch consolidation and disruption by larger regional players has allowed us to successfully transition these low-cost core accounts back to a local relationship-driven banking model at State Bank. Following our strong 1Q performance, these offices recorded $19.3 million in loans and $22.5 million in deposits, and it continues to expand their structural footprint well ahead of schedule. Now for more scope. We continue to prioritize referrals as an effective way to deepen long-term client relationships across the entire franchise. Concurrently, our Wealth Management Division finished the period with fees improving to $955,000 and assets to nearly $557 million. Our alliance and alignment with [ advisory health ] is now operational, and we've begun to methodically transition our client relationships to not only allow our current client base, but also any future clients, an extended array of products, advice, and investment vehicles. Moving to operational excellence, we remain focused on matching growth with disciplined execution. The second quarter reflected that mindset with expense levels remaining controlled relative to revenue. Pre-tax pre-provision income increased 9% year-over-year to $5.8 million, reflecting our expanded balance sheet and ongoing focus on positive operating leverage. To effectively support this expanded balance sheet scale, we have successfully added talented lenders to fill open positions across our footprint, ensuring our teams have the necessary production capacity to sustain our current growth trajectory. As highlighted earlier, linked-quarter loan growth, while positive, was below our expectations for the second quarter. The details reveal that unlike in prior quarters where Columbus was providing the bulk of that lift, this quarter we had growth in 3 of our traditional markets that offset that generally flattish production elsewhere. Specifically, Lima production was higher by $4.2 million, Fort Wayne, Indiana by $3 million, and Bowling Green had a growth of $1.4 million. Our capital position remains strong with total shareholder equity climbing to nearly $147 million, up 9.8% from $133 million a year ago. Capital levels remain robust, providing top-tier, tangible common equity and regulatory capital support that ensure balance sheet flexibility moving forward. And finally, asset quality. Credit quality remained a key component in our ongoing and high performance this quarter. Our allowance for credit losses rose to $16.4 million, representing 1.38% of our total loans and generating nearly 5x coverage ratio of our non-performing loans. Our ongoing commitment to rigorous credit administration is evident across our portfolios. Notably, our core criticized assets dropped sharply this quarter to just $344,000, while our classified loans stood well contained at $4.08 million. Through the positive and proactive efforts of our lending and collections team, we successfully managed our gross total delinquency rate down to just 32 basis points from 51 basis points at this time last year. We continue to emphasize disciplined underwriting, proactive management of problem assets, and prudent growth across all markets. This commitment to disciplined execution is also evident in our agricultural sector where our targeted efforts have successfully expanded total agricultural balances past the $81 million mark, reflecting an increase of over $20 million from last year to continue to track toward our long-term goal of a $100 million portfolio. With that, I'll turn it over to Tony Cosentino, our CFO, for some expanded comments on our quarter financial performance. Tony?

Thanks, Mark, and good morning again, everyone. Let me just outline some highlights and important details of our second quarter results. This quarter, total operating revenue expanded to $17.9 million, an increase of 4.5% from $17.2 million in the second quarter of '25 and expanding 3% from the $17.4 million recorded in the linked quarter. As Mark noted, the quarter reflected a balanced revenue performance with stable net interest income and a stronger contribution from our fee-based businesses. Mark detailed our GAAP net income earlier, and when we adjust both years for OMSR valuation adjustments, adjusted diluted earnings per share advanced to $0.73 for the current period compared to $0.58 in the second quarter of '25, an increase of nearly 26% on an adjusted basis. Net interest income was driven higher by our reliance on the growth of the top line. Interest income was up $1.35 million from the prior year, easily outpacing the interest expense growth of $527,000. Despite the slight slowdown in loan growth, our low-cost deposit growth coupled with higher overnight funding rates have boosted margins. As we indicated, last quarter reflected the peak of our margin percentage level, with this quarter's margin down slightly at 3.43% compared to 3.48% in the prior year and linked quarter. We continue to benefit from a larger balance sheet and the ongoing repricing of interest-earning assets, although at a slower pace than prior quarters. Non-interest income finished the quarter at $5 million. And our core mortgage banking contribution reached $1.9 million, down slightly from the $2.2 million reported in the second quarter of '25, but expanding from $1.8 million in the linked quarter. Mortgage banking was supported by core loan servicing fees contributing $934,000, while gain on sale of mortgages finished at $1.5 million. Our hedging program successfully offset some of the rate market volatility, leaving the net OMSR valuation at a minor negative $54,000 for the period. Volume this quarter moved decidedly in favor of purchase activity, as 81% of our volume was purchase or construction. Notably, our total mortgage gain on sale percentage improved to 2.19%, which was the highest level we have achieved since the second quarter of 2024. Operating expenses totaled $12.1 million for the quarter, up 2.4% from $11.9 million in the prior year. This change reflects the impact of adding talented lenders to fill open positions across our footprint. Salaries and benefits totaled $7 million. Our year-over-year expense comparison was heavily mitigated by lower data processing fees, dropping to $693,000 from $888,000, reflecting the system efficiencies as our one-time merger integration costs cleared our run rate. Efficiency ratio for the quarter improved to 67.3%. And notably, operating leverage for the quarter was a positive 1.9x with revenue expanding by 4.5% compared to expense growth of 2.4%. Turning back to the balance sheet, loan balances ended the quarter at approximately $1.19 billion, as Mark indicated, reflecting the continued year-over-year growth and a modest increase from year-end. Loans to assets were a healthy 73.6%. Commercial real estate outstandings continue to drive our loan portfolio balances at $611 million, but specifically, exposure to office space is under 5.5% of our total loan portfolio, and excluding mortgage portfolio balances, no other segment is higher than 10% of our current loan outstandings. Loan to deposit ratio at quarter-end was 85.5%. We have significant liquidity currently, but are aware of several large institutional deposit relationships that are moving to the wholesale market sector later this year. We expect these losses to not be material to earnings given their marginal rates compared to what we can acquire from retail and TM calling efforts. On capital management during the second quarter, we continue to adjust our share buyback posture to preserve absolute capital flexibility, repurchasing a little over 28,000 shares at an average price of $22.06. As we discussed during our first quarter call, we have guided lower on buybacks for 2026 as our market price is now trading at 1.4x tangible book. This disciplined stance ensures and preserves balance sheet flexibility and remains fully aligned with our broader capital priorities and most importantly, does provide a floor for our market price. Turning lastly to asset quality, non-performing assets totaled $4.4 million, representing 0.27% of total assets, compared to $4.7 million in linked quarter and $6.2 million in the prior year quarter. While NPAs declined sequentially and remain well-controlled, overall credit performance again remains sound. Allowance for credit losses as a percentage of total loans is 1.38% compared to 1.39% in the linked quarter and 1.43% the prior year. Coverage of non-performing loans rose to 470% compared to 443% in the linked and 266% in the prior year period. Net charge-offs, while slightly higher compared to historical averages, remain modest at 6 basis points compared to just 1 basis point in the linked quarter and 2 basis points in the prior year quarter. We dealt with a long-standing credit problem in the quarter, which was fully allocated in our model, and that is working slowly towards resolution. Total gross delinquency rate ended the period under 35 basis points, and when we exclude those loans on non-accrual, that delinquency rate is effectively 0.

I'll now turn the call back over to Mark for some closing remarks. Thank you, Tony. We enter the second quarter and second half of 2026 with strong and steady momentum across our entire franchise. This quarter's performance demonstrates that our diversified business model can deliver solid profitability even when broader market conditions prevail. Comprise our total loans under our care now and total assets under our care at $3.7 billion. Our growing scale is providing the positive operating leverage we need to drive consistent long-term value. Our focus for the remainder of the year remains straightforward, executing on our strategies and our expansion markets of Angola and Napoleon, supporting our lending teams to build on sequential loan growth, and continuing to leverage our core relationship model to capture low-cost deposits amid regional market disruptions. At the same time, we remain deeply committed to our disciplined credit underwriting standards, and this proactive approach to risk management has successfully kept our non-performing assets as successful as we've mentioned, at a solid 0.27%. Reflecting our consistent earning power and our ongoing commitment to shareholder returns, we're pleased to announce and pay a quarterly dividend payable in August of $0.16 per share. This represents an annualized yield of approximately 2.4% and a conservative 22% payout ratio, keeping us firmly on track for 14th consecutive year increasing annual dividends payouts to our shareholders. Now we'll open the call up to any questions. Sarah?

Thank you. Operator, we're now ready for questions. We will now begin the question and answer session.

[Operator Instructions] Our first question comes from Brian Martin with [ Breen ]. Please go ahead.

Hey, good morning, guys.

Good morning, Brian.

Hey, maybe I just, Tony, we could just start for a minute on your comments about the margin and just kind of more broadly kind of how you're thinking about it. You know, there's been a lot of comments this quarter from other banks just about competition and both on both sides of the balance sheet. And just I know you commented last quarter, you said your margin peaked and kind of just how you think the margin plays out from where we are here today and just kind of the puts and takes on kind of where that's trending. I know there was some excess liquidity this quarter, so it kind of impacted that back to the margin as well with the deposit growth, but just try and understand, you know, what dynamically where we're going to be, you know, trending here the next couple quarters and, you know, both on the margin and just kind of maybe if funding costs are bottoming and you're still seeing some repricing on the asset side.

Yes, sure. You know, as we talked about last quarter, we thought, you know, margin percentage was peaked in Q1 and was going to trend to kind of stabilize to down, but I think it was more structural than it was anything else. I mean, we had a lot of liquidity in the quarter as we talked about, deposit growth at pretty good pricing. I'm much more, you know, positive now that, you know, we might move that percentage up slightly because we do have a fair amount of loan growth that I think we're going to have here in the second half of the year, more than I thought going into the quarter. We've looked at a number of very good credits with some good pricing. So I think we're going to use up quite a bit of that liquidity and that's going to drive margins, certainly no less than where they are and slightly higher moving forward, because I do think that's going to be a bit of a positive for us moving forward. You know, Brian, one of the key metrics, you know, we continue to...

Take a larger bite out of the ag sector as we've talked for a number of quarters. And with those loans have come low-cost deposits. So we've been doing very well on finding low-cost deposits that keep that average. When you add to the margin at the average, it's been pretty good. And what do we say, Tony? 181 basis points.

Yes. Yes. Very good. Very good pricing year over year.

So I view that as a large positive when it comes to adding loans at the 6.5%, 6.75% level, but bringing in those low-cost deposits, really no-cost transactional accounts. So I see that, Brian, as a boost to that margin, but I know Tony's got his handle on the number.

Yes, and it sounds, Tony, like it maybe gets back to where it was last quarter. I mean, if you get some of this loan growth, maybe you get back to that, you know, I guess last quarter's level, which is almost 3.50%, so call it around 3.50%, or can you maybe not get back that high, and then it's just more stability after that, after you kind of bring on the loans and kind of stabilize it? Is that what you're thinking?

Yes, I think that 3.45% to 3.55% range is I think where we're going to be probably in Q3 and probably on for some time. I think we've got, I feel like we've got enough momentum on the loan side, and we've had enough kind of deposit growth that we haven't really had to be crazy on pricing to get there. I think the disruption in the markets that we're in has been much better than we really anticipated in terms of, especially on the deposit side. And so I think that's going to sustain us for a while.

I mean, I'll be surprised if we don't move higher from where we were in this quarter. Certainly, Tony, the mix of loans has helped from a C&I perspective, as well as the market disruption of a $28 billion player.

Yes, yes.

Thank you. Yes, OK, that's super helpful Tony and Mark. And then maybe just on, if you think about where the deposit growth has been, like you said, really strong. That maybe more normalized. I guess it sounds like you still continue to capitalize on that, but maybe the growth in the deposits is a little bit slower going forward.

The loan pipeline, Tony, it sounds like that's a bit stronger than expected. Well, first on deposit, Brian, you know, we're pretty, pretty excited about the opportunities in the two new markets that we descended upon de novo, you know, Angola is doing well and Napoleon is doing well. And as I mentioned before, there's a billion dollars in deposits in the new market that has had major disruptions and we're taking our share plus some. So I would be a little more bullish on the opportunity to expand our deposit base well below the margin. As far as the pipeline, I know there's some strong potential for significant growth in all markets coming up here for the second half of the year.

Yes, I would just, I just would supplement Mark's comments. I mean, you know, as we've indicated, we're going to lose about $40 million that I kind of call it wholesale deposits of a client we've had for a number of times here in probably Q3. So again, you know, we're $140 million up year-over-year to me, which is, you know, way outside what you would think would be kind of a normalized deposit growth area. So if you normalize that to call it, you know, $100 million net of this deposit we think we're going to lose, I do think we're still going to be growing going 3% to 5% per quarter over the linked period based on everything we see. And, you know, I do think, you know, flipping to your question about the loan pipeline, it is much stronger and kind of steep fill-in than what it was when we kind of got into the middle of this. We've had a few paydowns, but it hasn't been, you know, kind of in prior years, kind of the dominant story we talk about. It's been more about the production side, which was a little...

In Q2, and I think that's ramping back up here in Q3. And the paydowns, Tony, were more strategic than anything.

Yes, yes.

So it wasn't like we got pruned. We decided to walk away on a couple of credits, but I know Steve, the pipeline looks strong and we're pretty bullish on the second half.

For the year, I would hope. No, certainly. I would just add, Brian, Columbus remains a core driver of our growth. But what's been encouraging and Mark touched on a little earlier was the breadth has expanded, which is something going into the year we had talked about as a goal. But we're seeing that come to fruition here. Certainly welcome. And that is a function to not insignificant degree of that market disruption that Mark had referenced earlier. Our legacy markets are participating in our growth story in a way that they had not over the last, really call it several years. So I think we are encouraged, certainly Columbus and our growth markets like Fort Wayne, for example, will play along. But the breadth of that expansion is welcome as we look to the second half of the year.

Because you know if we've talked, our model has been gather low-cost, really low-cost deposit from our traditional markets and expand where there's capital need, which is our growth markets. But as Steve said, that's starting to flip around a little bit. We're getting the low-cost transaction deposits in our legacy markets, and now we're identifying some...

From those markets as well. So we're kind of getting a double bump. Got you. And just in terms of the, you know, the pickup in loans, kind of where it's coming from. I mean, I know a lot of it's been from Columbus, but this other markets, if you think about the second half of the year, does the growth stay? Is it more balanced across the footprint? Is Columbus still leading it? And then there's, you know, these other markets are just contributing in that building?

Well, I would say at a high level, I'm thinking we're probably going to do between $50 million to $70 million in kind of balance sheet increase on the loan side between now and the end of the year. You know, without talking about any paydown, so you know, kind of a normalized group of paydowns that might be a $50 million or $60 million number. I would guess it's probably 50% Columbus and 50% everywhere else as I look at the pipeline as it lays out today. So to me that's a victory because you know last year we were 90% Columbus and we're...