Good morning, and welcome to the SB Financial Fourth Quarter 2024 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 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 presentations 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 also 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..

As we discussed, total mortgage volume was 21% higher compared to 2023 and $261 million. And equally important to the success of our business model, we sold 83% of the volume in the secondary market.

The purchase market was the dominant player again this year, like 2023, as we saw purchase and construction volume encompass 88% of our total, down slightly from 92% in 2023. In addition, our internal refinance volume was just 3.4% of our 2024 production. Finally, asset quality.

Charge-offs spiked a bit in the quarter to 7 basis points, but we're still quite low for the year at just 2 basis points overall. We also expect that the three commercial credits that increased our non-performing loan levels beginning in the third quarter will resolve themselves in the first half of 2025.

Our current expectations are for those credits to be unwound with minimal financial impact. We also continue to see a significant improvement in our criticized and classified loans, which were down to $6.4 million from $9 million in the prior year or a reduction of $2.6 million or 29%.

I'll now ask Tony Cosentino, our CFO, to give us a little more information on our quarterly performance and annual performance.

Tony?.

Deposit growth followed suit and grew to $1.15 billion. On a granular basis, low-cost transactional deposits accounted for 100% of this growth as higher cost time deposits were level to the prior year. Even with that deposit growth, we managed to increase our loan-to-deposit ratio to nearly 91%.

And as a result of our growth, our overall cost of deposits of 1.86% was well maintained. Going forward, I would expect that the liquidity coming from the Marblehead acquisition and the scheduled amortization of our bond portfolio will fund the majority of our 2025 loan growth.

On capital management, during the quarter, as Mark indicated, we repurchased 130,000 shares at an average price of $21, just slightly above the adjusted tangible book value. For the full year, we repurchased over 250,000 shares, which was on par with what we have done over the last three years.

Tangible book value per share increased to $16, up 6.8% year-over-year, reflecting the strength of our capital position and our strategic capital deployment. On asset quality and taking a little future look, non-performing loans remained low at 53 basis points of total loans, with net charge-offs at just 7 basis points for the quarter.

The allowance for credit losses provided coverage of 274% of non-performing loans, underscoring the robustness of our risk management framework. And as we look forward, net interest margin improved in the fourth quarter to 3.35%, up 18 basis points from the linked quarter.

With a substantial portion of loans repricing in 2025 and funding costs continuing to moderate, we anticipate gradual margin expansion throughout the year, even with some anticipated Fed rate decreases at the short end of the curve. I'll now turn the call back over to Mark..

Thank you, Tony. This has been a bit of a challenging year, but in many ways, very satisfying as we've expanded our asset and client base in a number of our regions, leading to our organic balance sheet growth, made the acquisition we discussed with significant liquidity, increased book value and delivered market appreciation to our shareholders.

We announced a dividend this past week of $0.145 per share, equating to a 2.83% approximate yield. Our total shareholder dividend in 2024 was $0.56 or 33% of our earnings. In closing, I want to again welcome the Marblehead clients, community stockholders and staff to our company.

We remain quite pleased with the potential to grow our new region and a largely untapped market. We intend to leverage our higher performance business model into organic balance sheet growth for Marblehead in 2025 and beyond. And now, we'll open the call up for investor questions.

Sarah?.

Thank you. We are now ready for questions..

[Operator Instructions] The first question comes from Brian Martin with Janney Montgomery. Please go ahead..

Hey. Good morning, guys..

Hey, Brian..

Hey, Brian..

Hey. Just -- thanks for the commentary.

Just a couple of areas, just to touch on, just to get some clarification on the -- Mark, it sounds like just higher level, or Tony, on the mortgage, the investments in both Indiana and Cincinnati sound like they should pay some pretty nice dividends here as you look into '25 with new talents and obviously the new markets.

But just -- if we don't see any change in rates, can you just kind of talk about what you think you can add in terms of production just with bringing on new talents in these markets just to kind of get a floor of what we think is potential on the mortgage this year? And then, if we do get some benefit elsewhere, even better performance? But just kind of how you're thinking about a floor in terms of origins for '25?.

Yeah, thanks, Brian. As you know, we've grounded out in '24 with $260 million, $270 million, which really, again, we think is at the trough of the conversation. Certainly, as I'm sure we've indicated somewhere, we're looking for something near the $400-million mark in '25.

So, we have two producers in Cincinnati, and we're looking to build that team down there with two to four additional. We now have nine in Cincinnati. And if each of those individuals do $10 million to $11 million on average, which is kind of about the watermark today for MLOs given our traditional portfolio products as well as salable products.

So, I would say, Brian, that $400-million mark is kind of what we're shooting for. We certainly know and we all know about how tied that is to the 10-year treasury and where rates are, but we've been able to compete. We've been nicely competitive in the construction phase, and those roll into potentially portfolio deals and sold deals.

But we're trying to make sure that not only are we competitive on putting loans on our books, but more importantly, to move those out of construction and the like and move to a salable product. So that is the emphasis for 2025, but a $400 million number would be a nice place for us to be in 2025..

Got you.

And the people you're going to hire, Mark, what you said primarily that it's going to be in the Cincinnati market, that's where you're adding staff, or is there any other markets you're adding folks in?.

Well, we're adding some up in Northwest Ohio here, some high producers that we're very familiar with, so right on the cusp of that. But going from two to six or so in Cincinnati, certainly is plausible. And as I mentioned, we've gone from like five and six to nine in that Indy market. And they're high producers and they got a great team.

And we're expecting, as I mentioned, that $100 million kind of thing out of Indy, they almost ramped up to #2 behind Columbus this year. And we're pretty optimistic about where they're at, and we're pretty optimistic about the two individuals that we have as the nucleus for Cincinnati..

Got you. Okay. That's helpful. And then just in terms of loan growth, it sounds as though you're -- the shift maybe a little bit -- that continues in terms of -- if we think about '25, the residential portfolio likely continues to still come down a bit and the commercial -- traditional organic commercial growth is going to be what drives growth.

So, just kind of how are we thinking about pipelines today and then just organic growth throughout '25? Does that seem right the -- still a little bit more reduction in mortgage and then growth elsewhere and kind of what -- where that nets out to as you think about big picture for the year?.

Yeah, the residential real estate arena on PCG still exists and survives, knowingly that when we do those, there's a high probability that they may get refinanced or something else happens to them. We are getting some amortization in that portfolio as we speak. But clearly, what I'm optimistic about, Brian, is our current run rate and trajectory.

The second half of '24, if you look at what we've done in Columbus, the second half '24, virtually all of our growth came in the second half of 2024. And as I mentioned, nearly net all from the Columbus market.

And right now, Steve can give us some numbers, but we booked a fair amount of volume of which has been drawn, but yet, we're probably talking -- half of it remains yet to be drawn, which would give us really, quite honestly, a full half a year of growth, just what's already been closed and on the books.

And Steve's probably got some additional data for us..

Sure. Yeah, Brian, to piggyback on what Mark is saying there, we are certainly encouraged on -- in what we see in the Central Ohio region. To Mark's point, we have a bit of a tailwind on approved and closed loans with about $30 million yet to draw that we, obviously, expect to see in the first half to three quarters of the year.

That doesn't include some loans we have already approved here in January that will add to that. So certainly, Central Ohio, we remained very bullish on our prospects there. And we're seeing -- we'd like to see broader participation out of all our markets. We have seen a couple participating already in January.

So, we are certainly encouraged by the momentum we're seeing to this early start to the year..

Yeah, I would like to think, Brian, we're going to get back to that high-single-digit, 8%. As Steve mentioned, we've got 4%, 5% currently in the bag, absent others paying off, which always happens. But certainly, the run rate gives us a pause for optimism in the first half of '25 and beyond..

Got you. And I guess, in terms of, Tony, just on the margin and kind of layering in Marblehead. I think you talked about, I mean, the combination of this loan growth, some stability or further reduction in funding, maybe we're kind of at a floor at the margin here and it's upwards from here.

And then maybe just remind us the benefit from Marblehead here and how to think about that as we go into '25 now that the deal is closed..

Right. Yeah. I think 3.35% was our margin number here in the fourth quarter. And I think I would say that was more positive than I had anticipated. Our ability to reduce funding costs was a little bit better than I anticipated. We really didn't lose clients when we were pretty aggressive on moving down rates when the Fed moved.

So, I thought that was a positive. I compete with you. I think the 3.35% is probably our baseline, and it's certainly not going to go up kind of double-digit percentage per quarter. I would suspect it's going to go up a few basis points here in Q1, and then kind of move up a little bit more through that.

So, I would anticipate by the time we finish '25, we're probably at a 3.50% to 3.55% range in Q4 of '25. On Marblehead, they're going to bring $22 million of loans at loan pricing higher than what we have on our books today, probably in the high 6%s, low 7%s on average of their portfolio, which is a pretty strong portfolio.

We've successfully executed on liquidating their bond portfolio. Their average cost of funds on the deposit side, is, call it, 1.85%, 1.90%. And so, we're going to immediately move that into, overnight, at a minimum. And as Steve said, we have a pretty strong loan pipeline that we think is going to drive, call it, 350 basis points to 400 basis points.

We're still extremely confident in the model and the metrics that we put forward that we're going to be able to have pretty strong EPS accretion from the transaction, $0.15 to $0.20 a share here in '25, especially since we were able to close it, call it, two months earlier than we had originally anticipated.

So, I hope that kind of cleans up some data..

Yeah.

And how much liquidity, Tony? I mean, what's the size of that bond portfolio that you redeploy is -- kind of what's the size of that today?.

Yeah. So, total assets for them, $60 million, but net-net, their deposit base is, call it, $52 million. So, after we kind of clean up everything, that's really going to be the liquidity that comes over. And they got $22 million of loans on the books that are going to come over.

We don't anticipate doing anything with them, no liquidation or movement of those. So, we're going to have, call it, $30 million -- $31 million to $32 million of fresh liquidity to redeploy. I think we'll be patient here given our loan pipeline and just anticipate that -- because as Steve said, most of these have been booked and are going to fund.

And at Fed funds of 4.60% to 5.50% on the short end, we're going to be just fine on at least being above our current 3.35% margin at a minimum out of the gate, but we want to accelerate that EPS recapture as quickly as we can..

Yeah. Got you. Okay. And then, in terms of credit quality, I think I heard the comment that the -- I guess there's some potential resolution here of the credit. So, I guess, was the commentary on the call, maybe I missed it, that this was a high watermark kind of on that front, and we have to see a little movement down the next couple of quarters.

Is that with pretty minimal, I guess, loss content?.

Yeah, Brian, I think the credits, as referenced earlier that increased that non-performing number in '24, they weren't a surprise to us necessarily. These are credits we've been monitoring. We have a very robust internal loan review process, so not particularly surprised.

We do expect, as noted, resolution of at least a couple of those, certainly by midyear, had been hopeful, frankly, of resolution of at least one prior to year-end, but the court dockets didn't precisely play along. But that said, we expect, absent again unforeseen shocks, improvement in those numbers going forward.

We think we've got a pretty good handle on what's out there and where we are..

And as we said, to add on, we feel our collateral is very strong, and we don't think we're going to have any further deterioration. We took some charge-offs here in Q4, as we talked about, but 2 basis points for the entire year is kind of the high watermark we've had for the last three or four years.

So, we don't anticipate any further declination out of those couple of credits..

Got you. I got you.

And then, in terms of, I guess, the funding of the loan growth, Tony, it sounds like not much in the way of deposit growth to expect this year, I guess, given the liquidity and like some potential cash flow from the bond portfolio, is that fair how to think about the balance sheet on the deposit growth?.

Yeah. I mean I think we have, call it, $55 million of funding kind of locked in between the bond amortization and the Marblehead net liquidity. I think I'd be disappointed if we don't grow loans, call it, $80 million to $85 million to $90 million this year on a year-over-year basis.

That includes the $22 million of Marblehead, so call it $70 million or so from where we are. So that means we're still going to have to come up with, call it, a $30 million deposit raise throughout our network, which I think is eminently doable.

And we do have a -- we're a little cautious on the Homebuyer in year two that some of that is going to kind of matriculate its way out of us, not the full pool, but a portion of that $50 million will decline by the time we sit here a year from now..

And Brian, just to tag on to that, obviously, we don't want to go generate deposits above the current margin, but if we can do C&I loans that we have now a greater emphasis on across the board, including incentive plan, we need to generate more of those lower-cost transactional accounts, as we all know. We'll take all those we can get.

And certainly, Marblehead gives us some greater opportunity because they've been in a defensive mode as we speak. But we're going to go on offense there, just like the other markets. But clearly, if the deposits are below the margin, we're going to go find it.

But I agree with Tony, if we don't need it, we're certainly not going to pay 4.5% and 5% for it..

Got you. Okay. And then, this is the last one for me, which is on the expense outlook. Just kind of if we layer in Marblehead, can you just talk about kind of the run rate in expenses kind of starting 1Q? And then just how that -- the expense discipline you guys have had has been great.

So just trying to understand kind of how that run rate may trend as you kind of go through 2025..

Yeah. So, we did $43 million for the full year. And if we extrapolate fourth quarter, we're kind of on a $44 million run rate. I think we've spent a fair amount on resources, technology and those kinds of things. I think a lot of that is in our rearview mirror. We do have some projects we're still contemplating.

Obviously, Marblehead is going to bring on an expense base, but it's relatively inexpensive for the size of their structure. They don't have a great amount of expenses that's going to cause us outside of our conversions and all those kinds of things, which we'll take care of.

But I would think we're kind of on that 2.5% to 3.5% growth rate over kind of where we were here in Q4. But we have made it extremely plain to all of our teams that the growth and revenue part of the equation is the first thing we're going to talk about in 2025. We kind of got behind the 8 ball in the first part of '24.

Expenses rose faster than revenue, and we have got to get back to positive operating leverage of 1.2% to 1.5% -- 1.5 times, sorry, because I think that clearly is the structure we should be in given our past reliance on revenue growth..

Got you. Okay. Perfect. That's helpful, and congrats on a nice quarter here and nice end of the year and the Marblehead deal closing..

Yeah, thanks, Brian. We're looking forward to a really good 2025 on a number of fronts, not the least of which is a more positive sloping yield curve, which should drive margins a little bit wider than what we have now, all things being equal. So, thanks for joining..

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

Once again, thanks for joining us. We certainly look forward to chatting with you again in April and delivering results for first quarter of 2025. Optimism remains high and looking forward to reporting results in April. Thanks for joining, and goodbye..

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