管理層發言
Good morning, and welcome to SB Financial's Second Quarter 26 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 would 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 A. Klein, chairman, president, and chief executive officer; Anthony V. Cosentino, chief financial officer; and Steven 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 26 conference call and webcast. The second quarter of 26 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 recurring net interest income, expanded noninterest fee revenue, and disciplined expense management. This quarter also marked the 18-month milestone of the Marblehead transaction, 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 of $4.5 million with diluted earnings per share of $0.07 compared to $0.60 diluted EPS 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 $16.44 in the prior year quarter. Excluding AOCI, adjusted tangible book is $22.57. Net interest income expanded to $13 million, up 6.8% from $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 nine consecutive quarters. Total deposits climbed to $1.39 billion, an increase of $141 million or just over 11% from the prior year quarter and up $19.3 million or 1.4% sequentially from the linked quarter. Noninterest income finished at $5 million, accounting for approximately 28% of our total operating revenue as we continue to maintain stable fee-based revenue streams.
Noninterest expense run rate remained well controlled, finishing the quarter at $12.1 million compared to $11.9 million for the prior year quarter. Asset quality remains a key characteristic of our company and a clear competitive advantage. Total nonperforming 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 nonaccruing balances. We remain focused on our five key strategic initiatives as we have indicated in many prior quarters: growing and diversifying revenue, adding more scale to the organization, improving efficiency, expanding the number of households and services in those households, operational excellence, and, of course, asset quality. Let's look a little closer at revenue diversity.
Mortgage originations for the quarter rebounded strongly from the first quarter, reaching $79.3 million, representing an increase of approximately 21% from the linked quarter, although production was down compared to $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 to 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. Specifically, our newest region, Cincinnati, has delivered nearly $20 million in volume during the first half of this year, higher by more than 50% from the same period in 2025. Individually, we have four MLOs that have eclipsed $10 million in volume, and an additional six originators are at 50% of their 2026 goal commitments.
This quarter's volume growth represents a positive pivot from the volume constraints we witnessed throughout 2025 and the slow seasonal start we experienced in 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 capture expanded market volume and add income 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 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, ending at $1.5 billion.
Because we have maintained 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 in the second quarter 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%, specifically at 181 basis points. Our core relationship model delivered an annual increase of $17.3 million in noninterest-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 among regional players and regional markets. Similar to our first quarter 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 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.
In the strong first-quarter performance, these offices recorded $19.3 million in loans and $22.5 million in deposits and continue 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 Alpha is now operational, and we have begun to methodically transition our client relationships. This will 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.
Pretax 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 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 prior quarters where Columbus provided the bulk of that lift, this quarter we had growth in three of our traditional markets that offset generally flattish production elsewhere. Specifically, the Lima region was higher by $4.2 million; Fort Wayne, Indiana by $3 million; and Bowling Green had growth of $1.4 million. Our capital position remains strong with total equity climbing to nearly $147 million, up 9.8% from $133 million a year ago.
Our capital levels remain robust, providing top-tier tangible common equity and regulatory capital support that ensures balance sheet flexibility moving forward. And finally, asset quality. Credit quality remained a key component in our ongoing high performance this quarter. Our allowance for credit losses rose to $16.4 million, representing 1.38% of our total loans and generating nearly five times coverage of our nonperforming 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 contained at $4.08 million. Through the positive and proactive efforts of our lending and collections teams, 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; our targeted efforts have successfully expanded total agricultural balances past the $81 million mark, reflecting an increase of over $20 million from last year as we continue to track toward our long-term goal of a $100 million portfolio. With that, I will turn it over to Anthony V. Cosentino, our chief financial officer, for some expanded comments on our core financial performance. Tony?
Thanks, Mark, and good morning again, everyone. Let me 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 2025 and expanding 3% from $17.4 million recorded in the linked quarter. As Mark noted, the quarter reflected a balanced revenue performance, 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 our MSR valuation adjustments, adjusted diluted earnings per share advanced to $0.73 for the current period compared to $0.58 in the second quarter of 2025, an increase of nearly 26% on an adjusted basis. Net interest income was driven higher by the growth of the top line, with interest income up $1.35 million from the prior year, easily outpacing interest expense growth of $527,000.
Despite the slight slowdown in loan growth, our low-cost deposit growth coupled with higher overnight funding rates has boosted margins. As we indicated last quarter, that period 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 the 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. Noninterest income finished the quarter at $5 million and our core mortgage banking contribution reached $1.9 million, down slightly from $2.2 million reported in the second quarter of 2025 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 mortgages finished at $1.5 million. Our hedging program successfully offset some of the rate market volatility, leaving the net MSR 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 mitigated by lower data processing fees, dropping to $693,000 from $888,000, reflecting system efficiencies as our one-time merger integration costs cleared our run rate. The efficiency ratio for the quarter improved to 67.3%, and notably, operating leverage for the quarter was a positive 1.9 times, 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, reflecting 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 portfolio balances at $611 million, but specifically, exposure to office space is under 5.5% of our total loan portfolio excluding mortgage portfolio balances; no other segment is higher than 10% of current loan outstanding. 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 not to be material to earnings given their marginal rates compared to what we can acquire from retail and treasury management calling efforts. On capital management, during the second quarter we continued 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 we preserve 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, nonperforming assets totaled $4.4 million, representing 0.27% of total assets compared to $4.7 million in the linked quarter and $6.2 million in the prior year quarter. While NPAs declined sequentially and remain well controlled, overall credit performance 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% in the prior year. Coverage of nonperforming loans rose to 470% compared to 443% in the linked quarter and 266% in the prior year period.
Net charge-offs, while slightly higher compared to historical averages, remained 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 is working slowly toward resolution. Total gross delinquency rate ended the period under 35 basis points, and when we exclude those loans on nonaccrual, that delinquency rate is effectively zero. I will now turn the call back over to Mark for some closing remarks.
Thank you, Tony. We enter the second quarter and second half of 26 with strong and steady momentum across our entire franchise. This quarter's performance demonstrates that our diversified business model can deliver solid results even when broader market conditions compress our historical fee income volume. With total loans under our care and total assets under our care at the $3.7 billion mark, 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 in our expansion markets of Angola and Napoleon; supporting our lending teams to build on sequential loan growth; 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 nonperforming assets at 0.27%, reflecting our consistent earning power.
Reflecting our ongoing commitment to shareholder returns, we are pleased to announce and pay a quarterly dividend payable in August of $0.16 per share, which represents an annualized yield of approximately 2.4% and a conservative 22% payout ratio. This keeps us firmly on track for the 14th consecutive year of increasing annual dividend payouts to our shareholders. Now we will open the call up to any questions. Sarah?
Thank you. Operator, we are now ready for questions.
分析師問答
We will now begin the question-and-answer session. To ask a question, you may press star 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brian Martin with Brean. Please go ahead.
Hey. Good morning, guys.
Morning, Brian.
Maybe I can start with Tony on your comments about the margin and more broadly how you are thinking about it. There has been a lot of commentary this quarter from other banks about competition on both sides of the balance sheet and I know you commented last quarter that your margin peaked. How do you think the margin plays out from where we are today over the next couple of quarters? There was some excess liquidity this quarter which impacted the margin with the deposit growth, but trying to understand dynamically where you expect the margin to trend over the next couple quarters and whether funding costs are bottoming and if you are still seeing asset-side repricing.
As we talked about last quarter, we thought margin percentage had peaked in Q1 and would trend a bit lower or stabilize. It did come down, but I think it was more structural related to the higher liquidity level in the quarter and deposit pricing. I am now more positive that the margin percentage may move up slightly because we expect meaningful loan growth in the second half of the year, more than I thought going into the quarter. We have looked at a number of very good credits with good pricing, so I think we will use up a fair amount of that liquidity, which should drive margins higher. I expect margins to be no lower than where they are today and slightly higher moving forward due to loan deployment.
One of the key metrics is our growth in the agricultural sector. With those loans have come low-cost deposits. We have been doing very well finding low-cost deposits that help the margin when we add loans at attractive yields.
Yes. Our deposit cost of funds is at 181 basis points year over year, which is very favorable and supports lending at the 6.5% to 6.75% level.
Bringing in low-cost, no-cost transactional accounts is a boost to margin. Tony has the numbers, but this remains a positive.
So you think it maybe gets back to where it was last quarter? If you get some loan growth, maybe you get back to that last quarter's level, call it around 3.50%. Or might you not get back that high and then just stabilize after loans are added? Is that what you are thinking?
I think the $3.45 to $3.55 range is where we will probably be in Q3 and likely for some time. I feel we have enough momentum on the loan side and deposit growth that we have not had to be aggressive on pricing to get there. Market disruption in our footprint has been better than anticipated on the deposit side, which should sustain us for a while.
I will be surprised if we do not move higher from where we were this quarter. The mix of loans has helped from a C&I perspective as well as market disruption from a large regional player.
That is helpful. On deposit growth, it has been really strong; should we expect more normalized, slower growth going forward, or do you expect to continue to capitalize on it? And for the loan pipeline, Tony, you said it sounds stronger than expected. Can you expand on that?
We are excited about the opportunities in the two new de novo markets, Angola and Napoleon. Angola is doing well and Napoleon is doing well. There is a billion dollars in deposits in a new market that has had major disruptions, and we are taking a share of that. I would be somewhat bullish on expanding our deposit base at low cost. On the pipeline, we see strong potential for significant growth in all markets in the second half of the year.
To supplement Mark's comment, we will lose about $40 million of wholesale deposits from a long-time client, likely in Q3. We are $140 million up year over year, which is outsized relative to normalized growth. Normalizing for that likely loss, call it $100 million net of that deposit, I think we can still grow deposits 3% to 5% per quarter over the linked period based on what we see. On the loan pipeline, it is much stronger than when we entered the quarter. We have had a few paydowns but production was the main softness in Q2, and that is ramping back up in Q3.
The paydowns have been more strategic than anything. We decided to walk away from a couple of credits rather than being forced out; it was not pruning. Steven, the pipeline looks strong and we are pretty bullish on the second half of the year.
Columbus remains a core driver of our growth, but what is encouraging is that the breadth of our growth has expanded. That was a goal going into the year, and we are seeing it come to fruition. The market disruption Mark referenced has caused legacy markets to play a larger role in our growth than they have over the past several years. Columbus will still play a role, as will growth markets like Fort Wayne, but the breadth of expansion is welcome as we look to the second half of the year.
Our model has been to gather very low-cost deposits from our traditional markets and expand into markets with capital needs. Now, as Steven said, legacy markets are starting to provide low-cost transaction deposits and loans, so we are getting a double benefit.
Regarding the pickup in loans, where is the growth coming from? Is Columbus still leading or will growth be more balanced across the footprint in the second half?
At a high level, I expect $50 million to $70 million in balance-sheet loan growth between now and the end of the year, without considering paydowns. Normalizing for paydowns, a $50 million to $60 million net increase would be reasonable. Based on the pipeline today, I would estimate roughly 50% from Columbus and 50% from everywhere else. That geographic mix would be an improvement relative to last year, when it was roughly 90% Columbus and 10% elsewhere.
Columbus is still in the game and contributing, but we are balancing it with growth in Northwest Ohio and Northeast Indiana.
On mortgage, given the rate environment, what is your outlook? You said you are built for a much bigger mortgage volume. For the full year, what do you expect for originations and activity? How do you see pace for the rest of the year?
The rate environment has made it difficult for MLOs because many customers are unwilling to refinance with rates around 6.75%, which presents a challenge. That said, we have hired several high-producing MLOs that will move the needle. We have a strong team in Columbus and a growing presence in Cincinnati and Indianapolis. We also continue to originate private client variable-rate mortgages to hold on our books, which delivers margin revenue even though it does not deliver noninterest income. I remain optimistic about getting near a $300 million annual origination level, but it will be a tough place to land this year.
I think we are probably looking at an $80 million quarter similar to Q2, and perhaps $50 million to $60 million in Q4. If rates remain around the current 6.875% range, full-year volume might be around $130 million for those two periods combined, which is a normal level of activity. An additional $50 million in volume would depend on seeing rates down to around 6% or below, which I do not expect until maybe Q4.
We have high producers who are highly incented and more originators in newer markets. We can optimize back-end processing to handle more volume. I will go on record that we can do $400 million to $500 million in originations without adding staff; the fixed costs are already in place, so additional volume would be highly accretive if rates move favorably.
How many MLOs did you add this quarter that are not yet reflected in numbers?
We added one in Columbus and one in Cincinnati, and we replaced one in Indianapolis. So net additions were two or three new originators, and we remain around the 27 MLO level overall.
Yes. Two or three net additions, and our headcount is generally around 27 originators where we have been before.
Recently, the FHLB 4.5% fixed-rate product for households below 80% of median income has gained traction in our markets and has no obvious cap. Our teams are trying to deploy that across the footprint.
Yes.
Is the gain-on-sale margin in the similar range where it has been, or has pricing changed materially? On the expense front, given some pickup in volume and associated incentives, how should we think about expenses in the back half of the year relative to revenue? You have done a great job managing expenses, but you are balancing that with expected growth. What do expenses look like in the back half?
I expect expenses to trend slightly higher than Q2. Q2 is a low-end run rate because we filled a couple of roles during the quarter. Compensation will move slightly higher given company performance and incentive accruals across the team. We will have higher expense levels due to incentives tied to deposit and other performance metrics, but not dramatically so. I would estimate Q3 expenses around $12.3 million to $12.4 million and Q4 around $12.0 million as mortgage volume typically ramps down. So Q3 may be roughly $300,000 higher than Q2, and then Q4 moderates.
Mortgage lending compensation is highly variable. We pay competitive base salaries and also highly incent commercial lending to generate loans across the footprint. While some costs are more fixed, we prefer variable compensation to reward high producers and align pay with performance.
On the deposit dynamics, you expect to potentially lose that $40 million wholesale deposit, but you still expect good growth. Regarding funding loan growth in the second half, can you walk through how you plan to manage that if the deposit walk happens and growth continues? How will you fund the loan growth?
We have an excess level of liquidity today. Assuming the worst-case scenario where the $40 million deposit walks without replacement, we can still fund the medium to higher-end range of our loan pipeline from now to year end. Anything we continue to build on the deposit side will be funding 2027 loan growth. That remains our push.
We will continue to pursue deposit gathering, and the market disruption opportunity continues to be larger than we expected. We remain excited about capturing those balances and redeploying cash into loans and securities.
Absolutely. That is all woven in, including payoffs and paydowns and good cash flow.
In terms of liquidity today, what is your excess liquidity on the balance sheet relative to what you would need to fund loan growth for the rest of the year? How much additional is excess beyond what you consider normal?
Probably about $70 million of excess liquidity today, which is high relative to historical levels. We deliberately stayed at that level because we were hoping for a loan pipeline turnaround, which I feel is happening for the second half.
Very liquid and very flexible.
Okay. That was my expectation; I just wanted to confirm the dynamics. It sounds like if that deposit walked away, you still have good growth and sufficient liquidity. Everything else on credit looks sound; legacy issues are being worked through but not material. Thanks, guys. I appreciate it.
Thanks, Brian.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark A. Klein for any closing remarks.
Thank you. Once again, thanks for joining us this morning. We look forward to speaking with you in October and giving you an update on our third quarter 26 results. Thanks for joining. Have a great day. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.