SB Financial Group, Inc. (SBFG) Q3 2026 Earnings Report, Transcript and Summary

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. [Operator Instructions] I will now turn the conference over to Sarah Mekus with SB Financial. Please go ahead, Sarah.

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 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 afternoon, everyone. Welcome to our third quarter 2026 conference call and webcast. This quarter represented another period of disciplined 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, our strong fee generation and measured margin expansion provided a constructive offset. 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 $0.63 compared to $4 million or $0.64 per diluted share last quarter (sic) [ prior-year quarter ], marking now our 63rd consecutive quarter of 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% (sic) [ 9.7% ] from the prior year quarter and an increase of $29 million or 2.5% from the linked quarter. 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 linked quarter due to the anticipated runoff of a rather large wholesale relationship that Tony discussed on our call last quarter. Noninterest 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. Tangible book value per share ended 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 nonperforming assets finished at $4.3 million, representing just 0.27% of total assets, and down 5 basis points from the linked quarter. We continue our journey to deliver on our 5 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. 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 executed 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 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 million to $25 million level. 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 hedge, they provide a vital buffer to earnings momentum. Beyond mortgage banking, Peak 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. 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 noninterest-bearing 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 2 basis points from the prior year. 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 in-market balance sheet growth opportunities. Our commercial lending and treasury 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. 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 multiproduct 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 advisers. 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. 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 household sold mortgage portfolio. Fourth initiative is excellence in operational activity. Achieving scale requires not just top line growth, but disciplined alignment with our operational activity. The robust $29 million linked quarter loan expansion we achieved this quarter was driven by commercial lending production capacity 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 million to $25 million of growth 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 3 operational drivers: adding talented commercial and TM leadership in growth markets, seasonal performance incentive accruals aligned with our loan portfolio expansion and front-loaded implementation and consulting expenditures required to support our credit card and core platform outsourcing conversions. These technology expenditures are clearly project-driven, nonrecurring 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 ended 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%. And finally, asset quality. Our fifth and final strategic initiative is maintaining top-tier asset quality. Our nonperforming assets remain near historic lows at just 27 basis points of total assets. Our disciplined 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 time line identified last year, we remain firmly committed to growing this key sector and expect to cross our $100 million portfolio goal within the next several quarters. 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 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?

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 has 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. Our net interest margin ratio rebounded this quarter, expanding by 2 basis points year over year to 3.5%, and up 7 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. Noninterest 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. 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 in-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. 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 absorbed 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 4 quarters. The efficiency aberration is reflective of these conversion and personnel investments. However, when we look at operating leverage for the 9-month period, revenue has expanded 8.8% compared to operating expense growth of 4.1% for an operating leverage of 2.1x. 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%. 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 $26.71. Our approach conserved capital flexibility and avoided shareholder dilution due to our recent market appreciation that exceeded tangible book value of $18.65 at month end by $9.96. As we discussed on our last call, our stock is now trading at over 1.5x tangible book, up from 1.3x in the second quarter and just 1.1x 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 nonperforming loans now exceeds 500%, consistent with the linked quarter and well above the 345% reported in the prior year period. Net charge-offs as a percentage of average loans returned to historical lows at less than 1 basis point, down from 6 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 nonaccrual, our delinquency rate is effectively zero. I will now turn the call back over to Mark.

Thank you, Tony. We entered 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 $0.165 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. This keeps us firmly on track for our 14th consecutive year of increased annual dividend payouts. Now Sarah, let's open the call up to questions from our investment community.

[Operator Instructions] And the first question comes from Brian Martin with Brean Capital. Please go ahead.

Nice quarter. Just maybe a couple items for me. The loan growth you guys talked about has obviously been a nice track record here in recent quarters. And just wondering how you're thinking about that where the pipeline sits today heading into fourth quarter and kind of next year and any impact you'd expect given the rate environment. Any thoughts on that would be helpful.

Yes, 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, 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 million to $30 million, $40 million net after a few credits exit that have been generally poised for institution kind of financing as they stabilize. So we've got a really strong pipeline when you include both facets. Any comments, Steve?

Yes, sure. Just to 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, many folks expect that those longer term rates 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 and 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.

So good pipeline.

Yes. Okay. And more on the commercial side. C&I and CRE is that -- I know you also mentioned the Ag, Mark, but CRE and C&I is kind of the primary drivers of the growth?

Yes, certainly. CRE primarily. If you 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 core relationships.

Got you. Okay. Perfect. And then just on the funding side, just -- 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 of quarters just in terms of funding the growth?

Yes. As I've stated probably every quarter on this call this year, I've been surprised by our level of deposit growth. 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 tick 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. And if we have normalized deposit growth on into '27, I feel pretty good about funding anything else.

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, Sean, down in Columbus, and individuals across Ohio and Northeast Indiana. So that conscious strategy to bring on TM talent is paying dividends.

Yes. No, that's a good point, Mark. So -- okay. How about just last 2 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?

Yes. So relative to what our current portfolio is, call it, every 25 basis points is probably, call it, a $600,000, $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 how well we manage that delivers that going forward. Our base model is kind of 2 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 tick 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 3.50% to 3.51% is kind of at the upper end of where we're going to achieve going forward.

Got you. Okay. That's helpful. And how about last 2, 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 kind of production and yields in that business, what would you -- kind of what's your big picture outlook there and how we think about fourth quarter and then really more heading into '27?

Well, clearly, Brian, the 7%, 7.5% has put a major 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 on our books that eventually goes Freddie Fannie. And of course, we continue 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 into next year from this year, we're clearly looking for a 10% to 15% increase of where we found ourselves in 2026 and into 2027. But as you know, that's going to be dictated by where the 10-year 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.

I would just add, Brian, I think, we're probably looking at a $50 million 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 3s 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 -- the depth of all of our MLOs is not to that level, but it is an impressive performance by a number of our people.

And Brian, the old adage, and we certainly are reflective of this, 80% of our volume comes from 20% of our producers. So like Tony said, we've got some people that do $20 million and $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.

Got you. Okay. And last one for me was just on expenses. Obviously, a little noise. You talked about it Mark. Just as we think into '27 given the current run rate or just how to think about a decent run rate heading into 4Q and then next year, what -- how are you thinking about that in terms of other additional spends you may have? Or any thoughts there would be helpful.

Before Tony fields that question, Brian, at a high level, people, technology and benefits are taking an inordinate 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.

Yes. I think to add on to Mark's comments, I've been relatively positive that our expense levels can be 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, 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, 6 months ago. And we do have some expanded technology costs that are going to take a little bit of a bite. And 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.

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

Yes. And I hate to say this out loud, Brian, but I'll take a double-digit expense growth if we can grow operating leverage 2 to 2.5x, and that's kind of the game we played for a number of years, and it seemed to have worked out more or less.

Yes. 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 with maybe if it's a little bit higher growth rate than you have in the past going into '27, it's best to look at it kind of maybe more year-over-year. So full year '26 to '27 being a higher growth rate or just use something more along the lines of the current run rate is a better given you had some of that impact in there. Just what's the best way to think about it in terms of kind of building going forward?

Yes, Q3 was clearly an aberration. We hired a number of people. We had some open spots. We had some technology spend that kind of will level out as we get through the next 2 quarters. So I think it is really more about a year-over-year expense level, and then kind of maybe add a point or two as we see what we look at.

Conversion, Tony, is taking a big bite.

Yes.

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

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 has now concluded. Thank you for attending today's presentation. You may now disconnect.