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Edited Transcript of SBFG earnings conference call or presentation 29-Oct-19 1:30pm GMT

Q3 2019 SB Financial Group Inc Earnings Call

Defiance Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of SB Financial Group Inc earnings conference call or presentation Tuesday, October 29, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony V. Cosentino

SB Financial Group, Inc. - Executive VP & CFO

* Carol M. Robbins

The State Bank and Trust Company - Senior VP & Controller

* Jonathan R. Gathman

SB Financial Group, Inc. - Executive VP & Senior Lending Officer

* Mark A. Klein

SB Financial Group, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Brian Joseph Martin

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

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Presentation

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Operator [1]

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Good morning and welcome to the SB Financial Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Carol Robbins, please go ahead.

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Carol M. Robbins, The State Bank and Trust Company - Senior VP & Controller [2]

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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 www.yoursbfinancial.com, under Investor Relations. Joining me today are Mark Klein, Chairman, President and CEO; Tony Cosentino, Chief Financial Officer; and Jon Gathman, Senior Lending Officer. This call may contain forward-looking statements regarding SB Financial's performance, anticipated plans, operational results and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today.

We have identified a number of different factors within the forward-looking statements at the end of our earnings release, which you are encouraged to review. SB Financial undertakes no obligation to update any forward-looking statement except as required by law after the date of this call.

In addition to the financial results presented in accordance with GAAP, this call will also contain certain non-GAAP financial measures.

I will now turn the call over to Mark Klein.

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [3]

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Thank you, Carol, and good morning, everyone. And welcome to our third quarter 2019 conference call and webcast. Our comments today are supplemented by our earnings release that we filed last evening.

To recap, highlights for the quarter, include net income of $3.8 million, up $700,000 or 21% increase over the prior year quarter. And for the full year, excluding the $1.4 million OMSR impairment taken in the first half 2019, the adjusted net income was $9.7 million, up $1 million or 12% over the prior year.

Consider our results from the year-ago quarter. We did deliver earnings per share to $0.48 for an all-time record for core earnings for our company, presenting a 23% improvement; expanded total assets, $63 million to $1.04 billion; achieved a return on average assets of 1.44%, up 14 basis points; produced mortgage origination volume of robust $158 million and set a new record for quarterly production; delivered new loan balance of $8.9 million, growing our balances to now $823 million; increased deposits, $8.6 million to $848 million; and continued to maintain our strong asset quality metrics.

As we've discussed in prior quarters, 5 key initiatives that continue drive our quest for high performance are the diversity and growth of revenue; more scale through organic growth and potentially, M&A; more products and services for and among our existing client base; excellence in our operations and intimacy with our client communications; and lastly, the foundation of a well-built company from asset quality.

Let's discuss revenue diversity briefly. Net interest income for the balance sheet of $9.1 million provided the bulk of our revenue of $14.4 million or 63%. Our fee-based residential mortgage engine was clearly fully engaged this quarter as we achieved record originations with $158 million in volume from nearly 700 clients. The dollar volume was up 66% from the prior year quarter of $95 million and over 60% from the linked quarter of $98 million. We have now originated $308 million this year, and we're confident that we will achieve our first $400 million year in total production in 2019.

Noninterest income, the total revenue was 37.2% for the third quarter and 31.5% for the full year. The exclusion of the servicing rights impairment from the first half of 2019 would increase our year-to-date fee to revenue percentage to 33.9%.

Our noninterest income of $5.4 million is up $1.2 million or 27.7% from the prior year due to mortgage volume, higher SBA gains and revenue from our Title Agency. Our Indianapolis mortgage team contributed to our success in the quarter as they now have 3 originators engaged in that very affluent market. Columbus continues to lead our company in the residential arena, as they alone eclipsed nearly $100 million in total volume for the quarter.

Our Title Agency realized a good fortune of a very dynamic mortgage market and the growing Columbus, Ohio region. For the quarter Peak Title had revenue of over $400,000, and we've begun to successfully integrate their services with and into our commercial business line and throughout our entire geographic footprint. The leadership team with Peak Title is quickly becoming a key part of our company, and we anticipate continued record volumes in the coming months.

Our SBA production for the quarter came in at $1.8 million; however, as we indicated last month, we have some credits on draw schedules as allowed total SBA's sales to come to the $2.8 million mark for the quarter. Those higher sales generated gains of $328,000, which is up over 200% from the prior year quarter. A residential portfolio -- a residual portfolio, the unguaranteed part, now stands at $12.3 million with a nicely weighted yield of 7.5%.

Wealth management assets under our care of $481 million represented an increase over the prior year quarter of $72.1 million or 17.5%. Revenue from this business line is up to nearly $800,000 per quarter and is growing nicely at 10% from the prior year. Including all business lines, we now oversee nearly $2.7 billion in total assets, up over $220 million from the prior year quarter. Our second key initiative, more scale, improving efficiency. Loan growth for the third quarter was $8.9 million, and compared to the prior year, we have grown $51.7 million or 6.7%.

We've had some pressures to match rates in our commercial real estate portfolio, as the regional banks have certainly gotten more aggressive within this segment. We've elected to remain disciplined on our pricing and determined that some of the transactions would not be priced appropriately. As a result, we have exited some relationships that have put a bit of pressure on our organic growth. That said, our loan interest income continued its growth in the quarter to $10.7 million, which is up $1.2 million or 12% from the prior year.

Positive growth continued to be positive for the quarter and year-to-date. As I mentioned, this quarter we grew deposits to 400 -- $848 million, up $58.5 million or 7.4%.

Third is our strategy to develop deeper relationships. Growth and household and services continued its upward trajectory in the quarter, expanding nearly 900 households from a year ago and, with these, over 3,300 products and services. We continue to expand all aspects of our client and product-delivery systems with key groups working on our ATM strategies, our new courier service, digital banking and community outreach.

We expect to implement a dynamic loan profitability solution in the fourth quarter that will further refine our approach to identify newly coveted relationships and remaining relevant to existing ones.

In the third quarter, we've continued our commitment to identify needs for each of our clients and to refer those needs to our business partners. Following up on the $30 million we referred in the first half of 2019, we uncovered an additional $17 million in opportunities in this quarter.

Operational excellence remains the fourth theme this quarter, refinance volumes accelerated as of our $158 million originated $35 million or 22% with internal refinances. This refinance volume impacted our expense and amortization; however, the commission structure on these transactions is such that we will realize higher profitability in the coming fourth quarter. The number of actual mortgage closings in the quarter was nearly 700, which is up 27% from the prior year and up 44% from the linked quarter. We were able to achieve that closing rate while maintaining our operational teams at historical staffing and general expense levels.

Expense levels of $9.5 million are up $700,000 from the prior year due to the impact of the Title Agency, mirrored increases and higher commission levels due to the mortgage volume.

Noninterest expense to average assets of 3.6% was down slightly from the third quarter of 2018, and our net noninterest expense to average assets improved to a negative 1.6% compared to the prior year of a negative 1.9%.

And finally, asset quality. Nonperforming assets flat to the linked quarter of 0.44%. Total past-due loans were normalized this quarter at 0.25%. Net charge-offs for the quarter were $113,000 as we had a few SBA credits that did weaken, and our reserve to nonperforming coverage remains in the top quartile of our peer group at a robust 207%. Our asset quality and regimented approach to credit analysis and loan review continued to remain a strength of our company.

I'll ask Tony to provide a little more insight on our performance this quarter. Tony?

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [4]

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Thanks, Mark, and good morning, everyone. As Mark mentioned, we had a net income of $3.8 million or $0.40 per diluted share. Adjusted diluted earnings per share for the year is also up at $1.22 compared to $1.14 for the prior year or a 7% increase. Earnings per share were impacted by a couple of things: the capital raise we completed in the first quarter of 2018 as well as the share buyback plan that we initiated in July of this year.

Total operating revenue for the quarter was up 13.3% from the prior year and up 15.2% from the linked quarter. We had positive operating leverage for the quarter of 1.6x as revenue rose 13% and expenses were higher by 8%.

For the year, when we adjust for the impairment, operating leverage comes in at 1.4x. Loan sales delivered gains of $3 million from mortgage, small business and agriculture in the quarter. Our mortgage banking revenue increased from the prior year despite a significant refinance amortization. And lastly, as Mark indicated we continue to hold our nonperforming assets steady with the NPA ratio at quarter end of 44 basis points.

As we break down our third quarter income statement, net interest income was up from the prior year by 6.2% and up 2.6% to the linked quarter. Our average loan yield for the quarter of 5.15% increased by 20 basis points from the prior year, and overall, earning asset yield was up 23 basis points to the prior year at 4.98%.

In addition to the balance sheet and rate impact, mortgage volume via fees has added 28 basis points for the quarterly yield as compared to adding 23 basis points from the prior year quarter. Funding costs, however, have continued to rise, but we have reduced depository and borrowing rates in response to the recent fed rate reductions. The rate on interest-bearing liabilities came in at 1.33% for the quarter, which was up 33 basis points from the prior year but up just 5 basis points for the linked quarter. Net interest margin at 3.93% was down 3 basis points from the prior year. For the full year, our margin was 3.87%, down 9 basis points from the first 9 months of 2018.

Total interest expense costs have risen by 44% from the prior year due to higher borrowing costs, loan growth and the increased competitive nature of deposit rates. Total noninterest income of $5.4 million was up from the prior year by 27.7% due to the higher mortgage volume, SBA gains, Title Agency revenue and the higher returns we have achieved in wealth management.

As Mark indicated, we had a strong contribution from our newly acquired Title Agency with revenue for the quarter of $400,000 and was reflective of our efforts to integrate the business line into the rest of our company.

Total mortgage sales were $125.4 million for the quarter, which was also up from the prior year and the linked quarter. For the quarter, our sold percentage was nearly 80%, which is trending closer to our historic average. Total gains on sale came in at $2.5 million, which was 2.0% on our sold volume.

Our servicing portfolio now stands at $1.15 billion, providing revenue for the quarter of $710,000 and is on pace to deliver $2.8 million in total revenue in 2019. This servicing portfolio was increased by $87 million or 8.1% from the prior year.

Market value of those mortgage servicing rights declined just slightly this quarter as the calculated fair value of 95 basis points was down 22 and 3 basis points from the prior year and linked quarters, respectively, but did not result in a servicing rights impairment. However, substantially high -- higher level of refinancing did increase our normal servicing amortization by over 123% as amortization costs were $700,000 for the quarter.

At September 30, our mortgage servicing rights were $10.4 million, which were down $700,000 or 6.1% from the third quarter of 2018. Our total impairment remaining now stands at $1.6 million. Operating expenses for the quarter were $9.5 million, up $700,000 or 8.1% from the prior year and were also up $400,000 or 4.3% from the linked quarter. The quarter included our Title Agency expense of $300,000 and the higher mortgage commissions from the additional $45 million in mortgage volume. Total headcount adjusted for the Title Agency was down slightly from the prior year due to higher vacancy levels. Efficiency ratio for the quarter was well improved from the prior year, reflective of our 13% revenue increase.

As we turn to the balance sheet, loan outstandings at September 30th stood at $823.4 million, which was 79% of the total assets of the company. We had loan growth of $51.7 million and asset growth of $63.6 million from the prior year, and we're up $8.9 million and $13.6 million, respectively, from the linked quarter. Compared to the prior year, our loan book grew in all but one segment led by commercial with $25.3 million followed by residential real estate with $21 million.

On the deposit side, we're up from the prior year by $63.6 million, a 6.5% growth rate and up from the linked quarter by $13.6 million. We continue to utilize our balance sheet very efficiently, as our loan-to-deposit ratio improved slightly from the linked quarter to 97.1%. We have lower deposit rates in response to the recent Fed rate decreases and thus far our balances holding relatively flat.

Looking at our capital position, we finished the quarter at $134.2 million, which is up $7.1 million or 5.6% from the prior year. We continued our share buyback in the quarter with 173,000 shares repurchased, and we have approximately 225,000 remaining on our current share buyback authorization.

Regarding asset quality, total nonperforming assets now stand at $4.6 million or 44 basis points. The total level of these nonperforming assets is up $0.1 million from the linked quarter, included in our nonperforming asset level is $800,000 in accruing restructured credits. These restructured loans elevate our nonperforming level by 8 basis points. And absent those, total nonperforming asset ratio would be just 36 basis points.

Provision expense for the quarter was $300,000 -- up $300,000 for the prior year and up just slightly from the linked quarter. We did have loan losses in the quarter of $113,000 or 5 basis points due to a few SBA credits. Our absolute level of loan loss allowance of $8.5 million is up slightly from the prior year. And due to loan growth, our allowance-to-total loans percentage has declined from 1.1% in the prior year to 1.03% currently. This allowance level still places us above the median of our peer group, and our coverage ratio to nonperforming is in the top quartile of that peer group. We now have NPL coverage with our allowance of 207% compared to 256% at September 2018.

I'll now turn the call back over to Mark.

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [5]

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Thanks, Tony. Clearly, this quarter was aided by the substantial increase in our volume in the mortgage business line as we reported. However, given the weakness in mortgage activity in the first part of 2019, we're actually right on our 2019 budget expectations through 9 months. I am extremely proud of our sales and support teams as they have worked diligently to handle this excess capacity and to drive our services deeper into our clients throughout the footprint.

Abby Waters and her team at Peak Title achieved record volumes in the quarter, and we're quite pleased with the integration of this complementary business line. We continue to seek partners like Peak that will enable us to grow our organization, both inside and outside our market areas.

As we have begun to plan for 2020, we acknowledge the headwinds that are facing the financial services industry; however, we continue to remain optimistic about our future and growth potential as our pipelines are strong and the consumer is healthy with higher disposable income and a fairly constrained debt load. Organic balance sheet growth and potential M&A opportunities coupled with industry disruption in our current market should in order to our benefit in the coming months and quarters.

And I'll now turn the call back over to Carol for potential questions and answers. Carol?

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Carol M. Robbins, The State Bank and Trust Company - Senior VP & Controller [6]

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Thank you. Sarrah, we're now ready for any questions if there are any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brian Martin with Janney Montgomery.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [2]

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Mark and Tony, could you talk a little bit about, I think, you mentioned, just starting out on loan growth, maybe just being a bit more competitive in your market and letting a few credits walk, just how you're thinking about the coming quarters and just kind of pay-off activities, just your outlook. It sounds like the pipelines are good. So just kind of sustaining the current level of loan growth, or just how do you view that?

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [3]

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Yes. Just from a high level, Brian, we continue to be optimistic about our ability to grow. We've certainly got some great individuals that are leading those markets with boots on the ground. We've just kind of from a pricing perspective, we realized that actually remaining disciplined in our pricing might continue to benefit us in the coming months and quarters, as opposed to just fielding all request at face value. That said, we don't mind median level growth in that arena, but again, we want to continue to grow and continue to improve our efficiency, albeit with the margin that we can incrementally expand versus contract.

So Jon Gathman's with us, and I know Jon sees a lot of credits that we opt out of, not only we do not do, but maybe do not modify our rates maybe as robustly as we did a year ago.

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Jonathan R. Gathman, SB Financial Group, Inc. - Executive VP & Senior Lending Officer [4]

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Yes. I would just add to that, what Mark said, we're talking about 2 or 3 particular relationships. Two of the 3, in particular, were highly price sensitive. And frankly, that's how we got those relationships. That said, the competition we're seeing is not just lower rates, but it's longer durations. With the rate curve flat, pricing exclusively off of a treasury curve or something like that is going to lead you to some -- what we feel are bad conclusions as we look out 3, 5, 7, 10 years. So again, as Mark said, we're maintaining that discipline in those couple of cases that we were willing to redeploy that money elsewhere where we thought we could get better duration and better rate.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [5]

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Okay. The pipeline today, is it pretty similar to where it was at the end of last quarter? Or it was just how are things standing there? It sounds like they're pretty good.

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Jonathan R. Gathman, SB Financial Group, Inc. - Executive VP & Senior Lending Officer [6]

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Yes. I would say that -- I would say it's pretty similar to last quarter. It's still very strongly. We feel very good about it. So again, these rates that we're talking about haven't had an adverse impact into our pipeline.

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [7]

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And Brian, this is Tony, I would just say -- add on to Jon's comment while we do have, I think, a very good pipeline, I think we are still going to see some downward pressure in CRE in the fourth quarter, things we know about today. So I think we'll grind our way through to a little bit of growth, but I wouldn't expect it to be historical in the fourth quarter.

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [8]

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Yes. And Brian just to follow up on Tony's comment. Clearly, we've recognized the job to be done that we need to continue to make more calls and, particularly, on C&I, just because the competitive nature that we've seen on the CRE. So we understand that CRE is the place that you can move the needle on the balance sheet, but C&I is what we continue to focus on in the spirit of generating more deposit to fund incrementally higher loans.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [9]

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Okay. And how is the SBA trends are pretty positive at this point?

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [10]

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Yes. Just a couple of comments. We've got into that business line in a very robust way 4, 5 years ago. And again, our posture on that has been to make good credits better, but recently, we've had a couple of that Jon can speak to that just didn't perform as expected.

But generally speaking, we like the business line. We're going deeper into it because there clearly are other opportunities out there, albeit in an environment where many competitors have begun to do longer duration, lower rate loans without SBA. So that takes more work and more prospecting. Jon?

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Jonathan R. Gathman, SB Financial Group, Inc. - Executive VP & Senior Lending Officer [11]

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No. That's absolutely correct. I think we have some work to do here in the fourth quarter and as we prepare for the first quarter, which we're really working for at this point anyway. But as Mark said, we have a little bit of weakness into some very small credits that we have already primarily worked through here quickly. But overall, the portfolio continues to perform well. And as Mark said, we need to continue to push that business line forward and we have high expectations for it.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [12]

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Okay. And then how about just jump into mortgage for a minute. I mean obviously a really strong quarter, and it sounds as though fourth quarter is shaping up to be pretty similar, as strong. But when you think about 2020, Mark, I guess, maybe just -- maybe you -- I guess is your expectation to kind of best your '19 numbers or is that pretty difficult? I guess just kind of trying to gauge with it. It's going to be more of a headwind? Or maybe if it could be down next year, given the strong performance particularly in 3Q and then maybe going into fourth quarter?

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [13]

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Yes. Well, clearly, Brian, as you know and we all know, the market is clearly, for us, is going to be driven by the level of long-term industry. But that said, we're built for the $400 million to $500 million at the strategic level that we've talked about for a number of years has been at $500 million level, and now with the addition of Indianapolis and 3 producers there and incrementally continuing to work to build out our existing footprint with a team or 2, and potentially a strategy to expand organically at the holding company level to take a bigger bite out of that mortgage business line, albeit maybe with some more nontraditional-salable kind of products, we continue to be optimistic about that.

We've done it fairly well. We think we know what we're doing. We've been built for it. We have the back room that's established for us. And I think we're going to continue to move that business line along and with it continue to expand households and move those service for household to a higher level because the number of new rooftops and our traditional markets as we've discussed, Brian with you for some time, is limited albeit without Columbus, Indianapolis, and Fort Wayne and Findlay, those kinds of robust markets.

So we need to go deeper into households to continue to grow the franchise, and we continue to work on that, and we continue to come up with strategies to make that process more robust but continuing on the current trends and continue to push it higher, continue to be the focus.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [14]

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Okay. So I mean you wouldn't rule out mortgage being greater number next year, Mark? I guess at this point it sounds as though. I mean I'm not saying you're calling for that, but you not definitively saying it should be lower based on strength in the second half of '19 here?

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [15]

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Yes. No. I -- again, looking at the overall trends in the Midwest and the other fact that builders have begun to identify more opportunities for expansion in single-family households. We see some of those as we speak. This is the first quarter that we can go on record, and saying that, we have financed a small development, which hasn't been, Brian, in the course of the conversation for, I don't know, 5 to 7 years. And it's in a very robust market with great potential and on the fringes of our existing footprint.

So we're excited about the opportunities. We got great people and a great staff and coursing a 3.5% unemployment market, you know that the challenges continue to arise with regards to developing staff and retaining staff and talent on all fronts, but we're committed to that business line. And again, our intent is to push it on up to the strategic level of $500 million plus.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [16]

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Got you. Okay. That's great color, Mark. You mentioned in your prepared remarks something about -- or maybe I missed it, just refinance activity and maybe that being a benefit to 4Q. I guess maybe I missed what you said there, just if you could clarify that?

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [17]

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I'm sorry, Brian. I missed your question. You cut out with me there for a minute.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [18]

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I think you said in your prepared remarks about -- you were talking about refinance activity and then we have it being bit -- adding a bit to profitability in 4Q. I guess just I missed kind of what you said there.

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [19]

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Yes. Go ahead, Tony.

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [20]

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Yes. Brian, just to clean that up. Our commission structure is such that internal refinances are paid at a lower commission rate than what would be a normal, mortgage origination volume. And we saw the bulk of our internal refinances happen in the September timeframe.

And we're going to see that continue into the fourth quarter. So I'm just saying, our level of volume will be such, but our commission structure because of how its structure will be lower. Cost will be lower, so profitably will be higher in that business line.

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [21]

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And that said Tony, to add on to that, we do have, Brian, a fairly robust pipeline of construction projects. And in the same token, those expenses are recognized upfront and then the revenue comes later when they're sold. So I think that it'll add some fuel to the fire as well in the fourth quarter.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [22]

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Got you. Okay. Perfect. And then maybe just jump into the margin for a minute. Tony, just kind of your thought on that if we get some rate decreases here, just kind of how, big picture, you see the margin unfolding. I guess maybe, under this scenario, if we were able to get -- if we did get 3 cuts in the next 3 Fed meetings, just kind of how do you view the margin under a scenario like that if that does come to pass?

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [23]

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Well, I think 3 cuts is in the net as what we're anticipating in budgeting for. We'll have downward pressure on the margin. There's no question about that. It starts to accelerate on the interest income side obviously as we get below those floors that we have had established, and we just don't have a lot of room on the funding side.

I think as we look at interest expense costs: in Q1, we were up 87%; Q2, we were up 77%; this quarter, we're up 44% on a year-over-year basis. By Q4, we're going to be up, call it, 10% on an annualized basis. So funding costs I think will stabilize, but we're just not going to be able to pick up enough to offset 3 rate cuts on the interest income side. And I don't think we're going to be able to grow fast enough to outpace that margin pressure. So I would anticipate the same kind of level of year-over-year margin decline that we had in Q3 probably in Q4 and Q1.

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [24]

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Which I think, Tony, that's really the impetus for the diligent loan pricing is that we want to remain steadfast in our approach to the maintenance of our margin and how we're pricing and the incremental cost of funding, which continues to ratchet up a bit.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [25]

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Okay. And so just to clarify, Tony, just the -- for each rate cut you would get, I guess, can you give us some quantification on what you think that does to the margin. I mean how much of a haircut to the margin is each 25 basis point as you kind of look at it today?

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [26]

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Yes. It's about $350,000 or $400,000 on the interest income side. Thus far, we've been able to successfully offset about half of that on funding cost side. I would expect to continue that pace going forward about a 50% offset on the funding side, but that'll get a little tougher as we get into the third rate cut.

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [27]

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It's operational efficiencies, which, Brian, we're looking at as we speak on a number of fronts to be able to again continue to drive the bottom line north.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [28]

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Got you. And it sounds like, you think, in your comments, Tony, the deposit costs, your funding costs peak in fourth quarter here. Is that may be stabilized thereafter? Is that kind of how you're thinking about it?

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [29]

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Yes, based upon our projections we have today.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [30]

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Okay, perfect. And then just the last couple, just on the buyback. Tony, I guess, or Mark, just your some good progress so far, I guess, the expectation is that you would complete that. I guess I just don't want to recall the time. Was it by year-end? Or I guess could it bleed into next year? Or is that how we're you thinking about it?

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [31]

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Yes. We got $225,000 remaining on our current authorization. Given our valuations, I wouldn't see us not extending or re-upping authorization after we finish the current authorization. We're doing between on 60 -- 50,000 to 75,000 shares buyback a month. So best-case scenario, we achieve it all by the end of the year. It might bleed a bit into Q1, but I would think certainly by February, we're fully completed by the current authorization.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [32]

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Perfect. Okay. And just your -- any comments on just M&A discussions or how -- what's happening in your marketplace on that front?

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [33]

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Yes just real high level, Brian, we continued to look at the several options. We keep those open and on the table, and we're confident that as we've discussed with our investors who were good enough to provide us with $30 million of capital. We're optimistic that we're going to be able to deploy that at least marginally and prudently soon.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [34]

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Okay. In the primary focus, I knew you mentioned in your remarks, Mark, just kind of bulk traditional bank M&A and then other kinds of fee income and their sources, both are still kind of on the table as you look at it today?

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [35]

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Yes. So it would be and versus nor.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [36]

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Yes. Okay. All right. And then maybe just -- remind me just on the conversion of the preferred the timing of that and how that's going to unfold maybe it's -- maybe more, Tony?

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Anthony V. Cosentino, SB Financial Group, Inc. - Executive VP & CFO [37]

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Sure. We're going to have an announcement here shortly that we'll get to the marketplace. We're going to convert those right around the Christmas holiday per the agreement. And those will convert to common prior to year-end of this year. So we've had about 70,000 shares early convert, and I suspect we'll have a bit more of those in between now and the actual full call date, which we're still getting the exact date here in the next week or so.

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Operator [38]

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

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Mark A. Klein, SB Financial Group, Inc. - Chairman, President & CEO [39]

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Yes. Once again, thanks, everyone, for joining. We look forward to reporting on our results for the full year in January, and that will be forthcoming. And we appreciate you joining in our conference call and webcast today. Thank you and goodbye.

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Operator [40]

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