SB Financial Group Q3 Earnings Call Highlights

Key Points

• Third-quarter performance remained profitable: Net income was $3.9 million, or $0.63 per diluted share, while operating revenue rose 9% year over year to $18.1 million. Net interest margin improved to 3.50%, although expenses increased 14.4% due to hiring, technology investments and higher medical costs.
• Loan growth continued to drive expansion: Loans increased 9.8% year over year to $1.22 billion, marking the 10th consecutive quarter of sequential growth, supported primarily by commercial real estate lending in Columbus. Deposits grew 9.5% year over year, despite a modest sequential decline tied to the runoff of a rate-sensitive institutional relationship.
• Credit quality and shareholder returns remained strong: Nonperforming assets fell to 0.27% of total assets, net charge-offs were below 1 basis point, and allowance coverage of nonperforming loans exceeded 500%. SB Financial raised its quarterly dividend to $0.165 per share, targeting its 14th consecutive year of annual dividend increases.

SB Financial Group NASDAQ: SBFG reported third-quarter net income of $3.9 million, or $0.63 per diluted share, compared with $4 million, or $0.64 per diluted share, in the preceding quarter. Chairman, President and CEO Mark Klein said the company’s latest results marked its 63rd consecutive profitable quarter, supported by commercial lending growth, fee-based businesses and margin management.

Total operating revenue rose 9% year over year to $18.1 million. Net interest income increased 8.8% to $13.4 million, while non-interest income grew 9.6% to $4.7 million and represented nearly 26% of operating revenue.

Loans Grow as Deposits Shift Modestly

Total loans ended the quarter at $1.22 billion, up $108 million, or 9.8%, from a year earlier and $29 million, or 2.5%, from the prior quarter. Klein said this was the company’s 10th consecutive quarter of sequential loan growth. Commercial real estate loans totaled $643 million, according to CFO Tony Cosentino.

The company entered the fourth quarter with an active commercial loan pipeline exceeding $53 million, along with a commercial construction pipeline that could provide another $15 million to $25 million of growth after expected exits of projects seeking permanent agency financing.

During the question-and-answer session, Klein said the company was targeting high-single-digit loan growth in 2027, generally in the range of 8% to 8.5%. He identified Columbus as the primary contributor to recent expansion, accounting for roughly 70% of loan growth. Chief Lending Officer Steve Walz said commercial real estate remains the principal driver, although the company continues to pursue commercial-and-industrial lending opportunities and their associated deposit relationships.

Total deposits were $1.38 billion, up $120 million, or 9.5%, from the prior-year period. Deposits declined $8.3 million sequentially, which management attributed to the anticipated runoff of a large rate-sensitive institutional relationship into the wholesale market.

Non-interest-bearing checking balances rose $11.5 million from the preceding quarter to $270 million, representing nearly 20% of total deposits. The cost of deposits was 1.81%, up 2 basis points from a year earlier. Cosentino said the company had about $65 million of excess liquidity and expected to fund anticipated loan closings without relying on wholesale funding.

Margin Improves, While Expenses Rise on Investments

Net interest margin was 3.50%, up 2 basis points from a year earlier and 7 basis points sequentially. Cosentino said earning-asset yields expanded 15 basis points from the prior quarter, benefiting from balance-sheet growth and higher repricing across interest-earning assets.

Management expects margin to decline by a few basis points in the fourth quarter, remain relatively flat in the first quarter, and improve by the middle of 2027. Cosentino said that, based on the company’s current portfolio, each 25-basis-point increase in rates could provide an annualized benefit of approximately $600,000 to $700,000 before considering any changes in deposit pricing.

Operating expenses increased 14.4% year over year to $13.2 million. Salaries and employee benefits rose to $7.3 million, while data processing expenses increased to $1.12 million from $723,000 a year earlier. Management cited hiring in commercial and treasury-management markets, higher employee medical costs, seasonal incentive accruals, and consulting and implementation costs related to credit-card and core-platform outsourcing conversions.

Cosentino said the third-quarter expense level was an “aberration” due to hiring activity and technology spending that should level out over the next two quarters. For 2027, he projected a normalized base expense-growth rate of roughly 4% to 5%, while noting continued pressure from personnel and medical costs. For the first nine months, operating revenue increased 8.8% versus 4.1% growth in operating expenses, producing operating leverage of 2.1 times.

Mortgage and Fee Businesses Support Revenue Diversity

Mortgage originations totaled nearly $78 million, up nearly 15% from the prior-year period despite mortgage rates remaining at or above 7% for much of the quarter. The residential mortgage pipeline entering the fourth quarter was between $20 million and $25 million.

Core mortgage banking revenue was $1.8 million, up nearly 20% year over year. Mortgage servicing fees contributed $946,000, while gains on sale of mortgages totaled $1.26 million, for a gain-on-sale margin of 1.9%. The company’s sold residential servicing portfolio reached $1.52 billion and generated nearly $1 million in servicing fees during the quarter.

Cosentino said SB Financial expects fourth-quarter mortgage production of approximately $50 million to $60 million, which would place full-year volume near $280 million. Management is targeting a 10% to 15% increase in mortgage production during 2027, though Klein said results will depend on movements in longer-term rates.

Other fee businesses included Peak Title, which generated $514,000 in revenue, and wealth management. Wealth and brokerage assets under management ended the quarter at $578 million.

Credit Metrics Remain Low; Dividend Increased

Asset quality remained strong, with nonperforming assets of $4.3 million, or 0.27% of total assets, down 5 basis points sequentially. Criticized loans declined year over year to $331,000, while classified loans fell more than 24% to $3.6 million.

The allowance for credit losses was 1.34% of loans, compared with 1.38% in the prior quarter and 1.44% a year earlier. Allowance coverage of nonperforming loans exceeded 500%, while net charge-offs were less than 1 basis point of average loans. Total loan delinquency was below 34 basis points, and Cosentino said delinquency excluding nonaccrual loans was effectively zero.

Total shareholders’ equity exceeded $144 million, up 5.4% from a year earlier. Tangible book value per share was $18.65, up 8.3% year over year. The company repurchased 6,700 shares during the quarter at an average cost of $26.71, reducing its buyback pace from 28,000 shares in the prior quarter to preserve capital for organic growth.

SB Financial also raised its quarterly dividend to $0.165 per share. Klein said the dividend equates to an annualized yield of approximately 2.2% and a payout ratio of 26%, keeping the company on track for its 14th consecutive year of annual dividend increases.

About SB Financial Group (NASDAQ:SBFG)

SB Financial Group, Inc is a bank holding company headquartered in Defiance, Ohio. Through its principal subsidiary, The State Bank and Trust Company, the company provides community banking services to individuals, families, farmers, professionals and businesses.

The bank offers a range of financial products, including checking and savings accounts, certificates of deposit, commercial and residential real estate lending, consumer loans, agricultural financing and business loans. Its services also include mortgage banking, treasury management, online and mobile banking, wealth management and trust services.

SB Financial Group's banking operations primarily serve communities in northwest Ohio and northeast Indiana through a local branch network and digital channels.

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