Yahoo Finance SB Financial Group, Inc. (NASDAQ:SBFG) Q1 2024 Earnings Call Transcript
SB Financial Group, Inc. (NASDAQ:SBFG) Q1 2024 Earnings Call Transcript April 19, 2024
SB Financial Group, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the SB Financial First Quarter 2024 Conference Call and Webcast. I’d like to inform you that this conference call is being recorded and that all participants are in listen-only mode. We will begin with remarks by management and then open the conference up to the investment community for questions and answers. [Operator Instructions] Please note this event is being recorded. I will now turn the conference over to Carol Robbins with SB Financial. Please go ahead, Carol.
Carol Robbins: Thank you, Cindy. 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 material, as well as in 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.
Mark Klein : Thank you, Carol, and good morning, everyone. Welcome to our first quarter 2024 conference call and webcast. Highlights for this quarter over the prior year quarter include net income of $2.4 million, down just $82,000 or 3.3% from $2.5 million. Return on average assets was 71 basis points, a marginal decrease of 2 basis points. Return on average tangible equity was 9.48%, a 79 basis point decrease. Net interest income reached $9.2 million, influenced by the – obviously by the challenging rate environment. Loan balances saw an increase of $15.2 million or 1.6%. Deposits display stability ending the quarter of $1.11 billion reflecting a marginal increase of 2 basis points. Our efficiency in operations led to a 4.6% reduction in expenses over the prior year.
Mortgage origination volume reflects our strategic adjustment to market conditions with a strong quarter sales noted a fairly challenging rate environment. Asset quality showed strong performance metrics and continued stability. Our path forward remains hinged on our five key strategic initiatives, revenue diversity, balancing net interest income with fee-based revenue, remains a focus as we adapt to market shifts and seek to bolster non-interest income. Organic growth, we've experienced loan growth in a tightened market, demonstrating our competitive edge and commitment to prudent underwriting. Deepening relationships, our client relationships have been strengthened and evident in our stable deposit-base and loan portfolio expansion. Operations, we've honed our operational efficiencies as demonstrated by our proactive management of our expense base.
And finally, asset quality. We've maintained strong asset quality, as highlighted by our low non-performing asset ratio, and robust loan loss reserve coverage. Looking at our revenue diversity, our mortgage business originated $42.9 million in volume, while this represents a market downturn reflecting the cooling in the housing market, we've successfully navigated these waters with strategic mortgage sales and a focus on expansions into newer markets and more originators in those markets. In addition, we've made changes to the senior leadership of the business line that will certainly ensure that all opportunities to grow in both new and existing markets remain the focus. Non-interested income stood at $3.95 million, benefiting from increased mortgage servicing rights and a strong performance in customer service fees.
Our title business and wealth management services, though faced with market challenges, continue to be areas of focus for future growth. We feel that the growth trajectory in both of these divisions will be positively impacted by a holistic approach of joint calling and client referrals across all 10 of our regions and seven business lines. On the scale front, we've managed deposit costs effectively despite an aggressive market that is reflected in the modest growth of our deposit base. The growth this quarter came from our public entities, a testament to our calling and relationship building efforts. We've also embraced the Ohio Homebuyer Plus program, which we feel has great potential to drive deposits higher at a much lower weighted average cost than what we've experienced that's available on the retail deposit arena.
Loan growth was below our historical levels as we have begun to see some softness in several of our markets. We were also impacted by a large relationship payoff in the quarter, which had grown beyond our financial capacity to service. Given our diverse markets and capacity, growing our loan portfolio was certainly job one, as we move on into the three quarters of 2024. Pipelines continue to grow, but I would still expect that our second quarter growth will challenge our expectations, as clients take a more methodical approach to their leverage position. We've reassured our clients of our strong capital position, reflecting our preparedness to meet liquidity needs without over-reliance on external funding sources. In terms of deepening relationships, post-PPP, our focus has shifted back to organic growth and capitalizing on opportunities and SBA lending, now with a pipeline in excess of $10 million and set to contribute meaningfully to future revenues.
We continue to believe in this product that can assist our clients to properly structure the company's balance sheet for growth and can make a good credit better. We have never, nor do we expect to use SBA to ever make an unbankable client bankable. As we discussed at length in our Annual Meeting and Annual Report, we are embracing technology to further our goals of providing relationship banking to all of our clients, whatever that might look like to each client. The integration of our corporate sales champion, our new contact center and more FinTech platforms are poised to further our penetration across households and businesses alike. We continue to look at expansion opportunities, especially in the high-growth cities and counties within our footprint.
We've added significant resources to our management team in the greater Columbus market, and we expect the growth from that region in 2024 to surpass any of the previous 15 years that we have been calling in this dynamic growing market. Speaking of operational excellence, the mortgage business line remains a key driver despite the slowdown from higher rates. As our numbers reflect, we sold in excess of 85% of our originated volume in the quarter. Given the continued pressure on liquidity and margins, this is clearly the correct strategy to not only help our clients, but to ensure that we maintain a profitable residential mortgage business line. Ongoing expense review and leveraging our technology spend are expected to deliver a more robust tangible book value and as always, ensure a higher probability that we remain on track to deliver positive operating leverage.
And finally, asset quality. We again had a strong quarter in this arena with net charge-offs annualized at just 2 basis points and improvements in the key metrics of non-performing and criticized loans. Coverage of our non-performing loans reached an all-time high that now stands in excess of 640% at quarter end. Our internal loan review program continues to be robust and proactive to ensure early identification of any impending client stress. I'd like to now turn the call over to our CFO, Tony Cosentino, for a little more detail on our financials. Tony?
Anthony Cosentino : Thanks, Mark. And good morning again, everyone. For the first quarter of 2024, we recorded net income of $2.4 million with a consistent EPS of $0.35. Our disciplined approach towards long-term strategic investments has positioned us well for sustainable growth. In the quarter, operating revenue experienced a downturn due to pressures from the competitive interest rate environment, as well as alternative and money market fluctuations. However, excluding certain non-core items, our revenue trajectory remains aligned with our growth objectives while we continue to manage costs effectively. We did recapture mortgage servicing rights revenue in the quarter, as the uptick in rates improved the valuation of our servicing portfolio.
At quarter end, that portfolio was $14.2 million, up from the linked quarter and higher by 4.7% from the prior year. And interest margin has been managed prudently, ending the quarter at 2.99% on a tax equivalent basis, reflecting the asset mix shift and market conditions. We believe that this is the low point for our margin, as funding costs appear to be stabilizing and we have contractual loan repricing over the next six months to nine months that will drive asset yields higher. Again, the efficiency of our balance sheet has been a focus with a keen eye on maintaining a healthy loan to deposit ratio and cost-effective capital management. With the homebuyer program that Mark outlined earlier, we think that the potential for $25 million to $50 million and below-market weighted average cost for funding could be deployed effectively into the Columbus market.
We've optimized our investment portfolio, preparing for anticipated loan growth and maintaining a strong liquidity profile. We continue to anticipate the portfolio to amortize by approximately $25 million this year. Currently, it's 16% of total assets, with the trend line towards 12%, where we expect to maintain. With a current weighted yield of 2.76%, every dollar of amortization increases yield by a minimum of 300 basis points with allocation into loans or [Fed funds] (ph). Our capital strength continues to be evident with a tangible common equity of 7.63% and common equity tier 1 ratio of 13.6%, underscoring our robust financial health. Expense management reflects our strategic focus. Non-interest expenses down by 4.6% year -over-year, improving operational efficiency.
Total expense in the quarter of $10.28 million is the lowest of the last fourth quarters, and we remain focused on continuing to reduce our expense base. Now as we turn to the balance sheet, we've managed our wholesale funding effectively, which has allowed us to support loan growth and manage deposit inflows. We are especially pleased that cycle-to-date, the betas on our earning asset and cost of funds are nearly identical at 34 and 33 respectively. Cycle-to-date loan and deposit betas are also closely linked at 31 and 24. Although cost of funds increased compared to the linked quarter, the March monthly 2024 run rate was 3 basis points below the January and February cost of funds calculation. And as we've said, we've also seen a slowdown in clients asking for interest increases, which we interpret potentially that cost of funds are beginning to stabilize.
Investment portfolio adjustments are in-line with our liquidity strategies, as we discussed, ensuring support for anticipated loan growth. Our loan loss allowance percentage remained level to both the linked and prior year quarters at 1.58%. Criticized and classified loans remained under 1% of our loan portfolio at just $8.7 million. Capital levels are strong, as Mark indicated, with tangible book value ending the quarter at $14.93 a share, up over 7% from the prior year. We did continue with our buyback in the quarter, repurchasing over 30,000 shares at an average price of $14.36. Overall, I believe our financial position remains strong, and we're focused on sustaining this performance throughout the remainder of this year. I will now turn the call back over to Mark.
Mark Klein : Thank you, Tony. In closing, I want to acknowledge our dividend announcement this quarter of $0.135 per share, which remains consistent with prior quarters and our strategy to return capital to our stock orders. Certainly demonstrates our commitment to shareholder returns. Despite economic headwinds, our performance this quarter speaks to prudent oversight of our operations and ongoing commitment to remain resilient in this challenging rate environment. We remain focused on our strategic initiatives, committed to delivering greater shareholder value, and certainly fixated on opportunities that lie ahead. I will now open the call up for questions and answers. Carol?
Carol Robbins : Thank you. Cindy, we're ready for our first question now.
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brian Martin of Janney Montgomery. Go ahead, please.
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