SB Financial Group, Inc. (SBFG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us. On behalf of our Board of Directors, management and staff, welcome to our 2020 Annual Meeting of the Shareholders of SB Financial Group, Inc. My name is Mark Klein, Chairman, President and CEO. Before we begin, I want to provide an update regarding the current environment we're operating in. The health and well-being of our employees, customers and communities remain one of our highest priorities. Our clients and communities continue to rely on us, our services and our financial resources. Those that will enable all our stakeholders to partner with us and identify the path forward together. As we have all witnessed, we are experiencing unprecedented times in our world as a result of the effects of the COVID-19 virus. Rest assured, we are aligned with our nation's mission to continue to make provisions and adjustments to deal with these threats to our communities and our economies. Our plan is to confront these risks head-on and become stronger as a result. Clearly, the entire country has been challenged, and we want your confidence in our relationship to grow with us in this difficult time. We continue to monitor the situation closely, and we're prepared to take additional measures to be there for each of our stakeholders as the needs arise. Once again, this year, we are doing our annual meeting live over the Internet. This allows us to not only connect with all of our investors across the globe but to do so as a responsible corporate citizen as we practice social distancing. I'd like to remind you that questions regarding the 3 shareholder proposals before you today may be placed in the queue through our webcast portal until approximately 10:45. At that time, we will address any questions or comments, the polls will close and we'll report the results of our voting. Pursuant to my designation once again by our Board, I will serve as Chairman of the Annual Meeting and Keeta Diller, the Secretary. Carol Robbins and Sean Gorman will serve as our Inspectors of Election. Notice of Annual Meeting was mailed along with the proxy materials on March 6 to shareholders of record February 21. We will dispense with the reading of the minutes of last year's annual meeting as they are available, once again, on our website under Investor Relations. And finally, this presentation will be available for review on our website following today's presentation. Our first order of business today is the consideration of 3 shareholder proposals. I'll then provide you a brief high-level overview of our 2019 performance results, and finally, adjournment. Will the Inspectors of Election please report as to the number of shares represented at this meeting. Ms. Robbins?

Mr. Chairman, 5,786,160 common shares of the corporation are represented by proxy. 0 share -- common shares are represented in person, combined. 5,786,160 shares are represented at this annual meeting, either in proxy or by person.

Thank you, Ms. Robbins. Ladies and gentlemen, with a quorum represented, this meeting is duly convened. There are 3 proposals before us today. Proposal 1: To elect 3 directors to serve for a term of 3 years each: Mr. Robert A. Fawcett, Jr.; Mr. Gaylyn J. Finn; and Ms. Rita A. Kissner. Proposal 2: To ratify the appointment of BKD, LLP as the independent registered public accounting firm of SB Financial Group, Inc. for the fiscal year ending December 31, 2020. Proposal 3: To vote on a nonbinding advisory resolution to approve the compensation of SB Financial's named executive officers. May I have a motion with regard to these 3 proposals? [Voting]

Let the records reflect that a motion has been made by shareholder [ Meterakas May ] to adopt all 3 proposals as presented. Is there a second? [Voting]

Let the records reflect additional support for the motion was made by shareholder, Mr. Tony Cosentino. At this time, I would ask Secretary Diller to retrieve any questions or comments from our shareholders on our 3 proposals. While she's doing that and our Inspectors of Election are tabulating the votes, I would like to briefly recognize, once again, our Board Leadership this past year. Mr. Richard Hardgrove continue his leadership role as our Lead Independent Director. Our full Board met 13 times this past year and all directors met required attendance levels. Mr. Gaylyn Finn, once again served as our Chair of our Audit Committee and also was our audit financial expert. Our Audit Committee met 4 times in 2019. Ms. Rita Kissner led our compensation committee, they met 2 times in 2019. Our governance and nominated committee was led by Mr. Tim Stolly and met 4 times last year. Our Director Loan Review Committee was chaired by Mr. George Carter, and they met 4 times last year as well. Our Trust Investment Review Committee was chaired by Mr. Bill Martin. This committee met 4 times last year. And finally, our Executive Loan Committee was directed by Mr. Bill Martin. The executive loan committee due to strong loan demand met 29x in 2019. Each of our Board committees also met required attendance levels last year. On behalf of our shareholders, management and staff, I'd like to once again thank our directors and our committee chairs for their leadership and guidance this past year. Secretary Diller, any questions or comments from our shareholders? There being none, with regard to the 3 proposals or otherwise, we will conclude the business portion of our meeting and ask our Inspectors of Election to please report on the results of the voting. Ms. Robbins?

Proposal 1: To elect 3 directors to serve for a term of 3 years each, Mr. Robert A. Fawcett Jr; Mr. Gaylyn J. Finn; and Ms. Rita A. Kissner has been adopted. Proposal 2: To ratify the appointment of BKD, LLP as the independent registered public accounting firm of SB Financial Group, Inc. for the fiscal year ending December 31, 2020, has been adopted. Proposal 3: To vote on a nonbinding advisory resolution to approve the compensation of SB Financial's named executive officers has been adopted.

Thank you, Ms. Robbins. Finally, thank you to all of our shareholders for your support and continued vote of confidence, particularly in these rather challenging times. Now I'd like to review our results from this past year. But first, our safe harbor statement that requires all potential investors in SB Financial to perform appropriate due diligence. We made meaningful strides in our performance this past year. Our adjusted net income grew to $12.8 million, representing a 9.85% increase over the prior year on our way to the $1 billion milestone, reflecting year-over-year growth of $52 million or 5%, while our return on average assets of 1.25% landed as 15th place or at the 77th percentile in our peer group of publicly traded banks in the U.S. between $500 million and $1.3 billion. Along the way, we also achieved a ranking of 94th out of 200 publicly traded banks in the U.S. less than $2 billion in size, according to American Banker, based on our prior 3-year average return on equity, moved up 1 slot from the fifth largest residential mortgage lender in the greater Columbus market to become the fourth largest in 2019, ranked at 360th out of over 1,700 banks in the U.S. that have done an SBA loan or a 79th percentile. And finally, we continue to brand our company as an organization that cares about the communities we serve through our State Bank GIVES program, a community development and philanthropic initiative that has enabled us to invest in our communities with the involvement of our staff and commitment of our financial resources. Clearly, it was a year of good progress. Our corporate vision continue to reflect our desire to operate as an integrated yet diversified financial services conglomerate, leading to a market cap that includes participation in the Russell 2000 Index. Last year, we surpassed that $1 billion mark, and our growth of $52 million moved us a bit closer to our new vision of growing our balance sheet to the $2 billion mark. In doing so, we intend to remain a high-performing company that balances the unique needs of each of our stakeholders. Our vision for our banking affiliate State Bank includes organic growth coupled with prudent acquisitions in select markets to become that $2 billion high-performing bank. The organization we've built and the staff we've attracted and the brand that we've delivered are all driven by this vision. One that includes innovative products and services, delivered by a passionate and caring staff, bound by an attitude of gratitude in the communities that we serve through that State Bank GIVES program, gathering individuals to voluntary, empower and serve. Return on average assets remains a key performance metric in our industry. As you can see here, we have improved over the last 5 years from just over 1% in 2015 to 1.25% this year. We've also bettered our 65 bank peer group over the past decade from the bottom quartile way back in 2010 to the top quartile today at the 77th percentile. Industry consolidation and operational efficiencies as they present have now required us to compete with a much higher-performing peer group. As of year-end, we had 20 full-service offices, 25 ATMs and 7 loan production offices across Ohio, Indiana and Michigan. Our profitability and expanded footprint enabled us to deliver a market capitalization of $153 million at year-end. Our flat organizational structure, you see here, enabled us to make financial decisions with our clients where they matter the most right in front of them, as 7 regional leaders gathered greater market share of deploying best practices from our multiple business lines. This structure remains our secret sauce, leading to aligned yet differentiated regional brands bound by strong corporate values. The first quarter of 2019, Peak Title, joined our holding company to help us deepen fee-based revenue. At year-end, we had over $2.7 billion in total assets under our care. This included that $1 billion I just spoke of, a $1.2 billion mortgage servicing portfolio and over $500 million in wealth assets. The pie chart on the bottom right represents the scope of the contribution of each fully allocated business line to our $12.8 million in net income. Retail banking 27%; private client group 4% or a total of 31%; SBA 4%; commercial 46%; residential real estate 14%; and finally, wealth management at 5%. All this highlights good diversity and balance. We've been relentless in our pursuit of our 5 key strategic initiatives, ones that have provided the road map to our top quartile performance today, growing and diversifying the revenue stream, adding scale to the organization, again, a broader market footprint, driving greater scope, which is all about more products and services in each household, delivering seamless client-defined levels of communication and service, and finally, building a loan portfolio to withstand market corrections. The first key initiative, revenue diversity. Organic balance sheet growth delivered higher operating revenue, and pricing discipline enabled us to match the duration of our assets and liabilities. Combining these with a peer-leading mix of noninterest income to total revenue and to get higher performance. Our peer-leading mix is reflected here in total revenue and net income. On the left, millions of dollars of revenue represented by the bar graph and on the right, millions of dollars of net income, the line graph. The revenue segment shown here for 2019 were net interest margin of $35 million at the bottom in green and $19 million of noninterest income on top. Collectively, our growth strategy has enabled us to drive our total revenue up to nearly $54 million in 2019 or 8% over 2018. It was this ongoing commitment to diversity and balance that helped us to improve our net income this year to $12.8 million. This slide reveals our levels of revenue and net income for our company by business line. Note, so while contributions to net income for each business line are apparent, retail and commercial segments on the right accounted for over 71% of our net income. Interestingly, our retail and private client segments, reflected here in orange, are particularly efficient as their contribution to our net income exceeded the scope of their revenue. Taken together, the diversification of revenue streams offers us a unique balance. Said a bit differently, Peak Title contributed 3 basis points of our 125 basis point ROA, SBA contributed 5 basis points, wealth management contributed 6, mortgage 22, retail and private client 37 and commercial over half at 52 basis points. This slide represents the levels of noninterest income for our company, represented by the blue line and our 65 bank peer median, the green line and the 75th percentile to yellow. As you can see here, our 5-year average of fee-based revenue to total revenue or 37% remains one of our strengths. This graph reveals the growth and success of our mortgage business line, gain on sale on the left represented by the bar graph and mortgage volume by the line graph. This year, we delivered nearly $8.4 million in gains on volume of $445 million, despite a fairly challenging first half of 2019. We now have 23 mortgage lenders across our 3-state footprint. Pursuing our vision for this business line, that includes generating $500 million in annual volume by 2021. As I mentioned earlier, our servicing portfolio now stands at $1.2 billion and represents over 8,100 households as a result of originating over $3.4 billion in loan volume in the last 14 years. Our goal is to add another complementary segment to this business line in 2020. This slide reflects the success of our SBA business line strategy. On the left, loan sale gains, by the bar graph, and on the right, volume of sold loans. Our 2019 total volume came in at $11.8 million. We sold $8.1 million and recognized loan sale gains of $1 million. Our vision remains to originate $40 million annually and become one of the top 100 lenders in the U.S. that does SBA loans. Coincidentally, as an SBA preferred lender, we are fully participating in the paycheck protection program recently enacted by Congress. And to date, we have approved 436 loans for over $75 million for our small businesses in all of our markets. Managing wealth assets is another one of our areas of expertise and provides us a competitive advantage over other community banks. This slide reflects the growth of this business line. On the left is our level of assets under management, and on the right, the level of revenue by the line graph. At year-end, our total assets under care were in an all-time high of $508 million and generated revenue from servicing of over $3.1 million. This graph represents the diversity of our noninterest income. We generated $19 million in fee-based revenue to supplement our $35 million in traditional margin revenue. These diversified sources, you see here, provided the balance in revenue required for high performance in this compressed lower margin environment. We generated 35% of our revenue from fee-based business lines or at the 92nd percentile among our peer banks. Our revenue also included results from our title insurance company that began with us the first quarter of 2019. The second key initiative, strengthen penetration in all markets served and add more scale. However, scale in and of itself does not guarantee relevance but surely without the probability of staying relevant and independent diminishes. As such, as I mentioned, we acquired Peak Title to diversify our revenue stream. And once again, we also grew our balance sheet organically to continue to improve performance. In 2020, we expect to expand our footprint through our recently announced acquisition of Edon State Bank. Clearly, in a consolidating industry, growth remains one of our key focus. By the numbers, here's a snapshot of the company that we've built. Over 30,000 households up this year, 815 or 3%, with 252 staff members, 52 locations, 15 counties and 3 states, 8 distinct business lines; and in the aggregate, $2.7 billion in assets under management, including our $1 billion high-performing commercial bank. To deliver a stable net interest margin and improve operating revenue, it is imperative to grow the transactional deposit base. So when you consider total balance sheet growth that included $316 million in loans and funded with over $290 million and core deposits over the last 5 years, 81% or $500 million came from these 5 markets: Toledo, Findlay, Columbus, Fort Wayne and our home, Defiance. Our success as a top quartile performer remains a bit overshadowed by the fact that we still only claim less than 1% of the total deposit base in our entire 15 county footprint. Great potential for growth within all our existing markets. The pie chart on the left represents our total assets of $1.04 billion at year-end that included over $52 million in total growth. As a result, higher-yielding loans now comprise 80% of our balance sheet or $826 million and reflect a peer group leading loan-to-deposit ratio now of 98%. Our loan balance is detailed on the right and remains well balanced. In fact, our $54 million in loan growth over 2018 or 7% placed us near the median of our peer group. With a mature credit cycle upon us, median performance here was clearly prudent. As I mentioned earlier, loan growth is certainly best when funded with lower-cost deposits. On the left, notice that 81% of our balance sheet was funded by client deposits that included our growth this year of $38 million. On the right, 70% of the $840 million deposit base rested in transactional accounts, with a total weighted rate of just 104 basis points for 2019. With the acquisition of Edon State Bank we announced earlier this year, we will add $48 million of low-cost and diverse deposits to our company. This all-cash acquisition represents consideration to Edon stockholders of 135% of tangible book and dilution of less than 4% to our stockholders, leading to a tangible book value payback of approximately 3.8 years. This transaction will be accretive to our 2020 earnings per share. Our third key initiative, add more scope. While our overall brand is a derivative of our corporate values, the regional brands we are building are a function of our market executives leadership with support of our 8 business line leaders. This interdependent-team approach delivered our balance sheet growth and household growth. And to ensure it continues, we made a pledge to remain innovative for our clients through strategic partnerships with fintech companies. These regional executives further enhance and define our strong community bank brand. And with an average banking experience of 24 years, they remain the secret sauce of our growth. Our decentralized business model also embraces strong business line leadership and one that builds upon our market executives regional brands. And as I mentioned, new to this group last year was our title insurance business line, that included our new leader, Abby Waters. Detailed business and operational plans for each were the catalyst for meaningful contributions to our net income. This combination of regional leadership and business line expertise delivered our organic growth. This bar graph reflects the growth in the total products and services as well as growth in total households by the line graph. Each has grown in excess of 16% over the past 5 years. Electronic transactions and 24/7 access for our clients continue to grow, up 92% over the last 10 years, while walk-in traffic continued to decline. As a result, we now have over 17,000 digital banking users. To capitalize on this trend, we will embrace technology to expand our reach and attract nontraditional banking clients, seeking products and services with lower costs and less furls. We continue to work in the best interest of our clients by referring them to our business partners when the needs arise. This graph represents the number of referrals made annually, and the line graph the millions of dollars of new business from those referrals. This year, we identified over 1,700 potential client needs and solved nearly 1,000 of those needs for an incremental additional $71 million in new business. We continue our brand of delivering 100% of what the client needs and nothing more. Fourth initiative, operational excellence. Our Chief Technology Innovation Officer, coupled with new talent and the department to embrace technology to work smarter, was the strategy to deliver a more intimate client experience. As a result, we now have a redefined organizational structure with a much deeper bench to drive process improvement and resource optimization. This conscious approach to embrace innovation will provide a clearer path to the $2 billion mark. Our 2020 Reboot will include the deployment of smart technologies, such as Precision Lender, nCino, Sales Force and Consumer Connect, all in the spirit of utilizing technology to deliver a more consistent, seamless client experience. In other words, working smarter with new technology from best-in-class providers. 12 years ago, we embarked on a journey to grow our mortgage business line. That portfolio now stands at, as I mentioned, $1.2 billion, on the left, millions of dollars in loans, and on the right, number of sold loans serviced. We now, as I mentioned, claim over 8,100 households, generating $3 million annually in servicing revenue. This slide reveals the annual loan production that was required in the last 5 years to grow our loan balances on average, $62 million per year. This past year, our staff of total of 64 lenders originated production of $691 million. These results you see here reflect a team effort that includes each of our business lines. And finally, the fifth metric, maintaining a high-quality loan portfolio, as I've contended, the foundation of all higher-performing banks. We've maintained a well-defined loan review schedule and dynamic approval process in preparation for this new credit cycle we find ourselves in. With this 10-year bull market apparently coming to a rather abrupt halt, we will rely on our underwriting skills to keep the quality of our portfolio high. Part of the process to deliver a quality loan portfolio rests with the level of credit administration that includes commercial loan reviews. We have remained diligent in our assessment of risk. Over the last 5 years, we've reviewed annually 77% of our commercial loan portfolio. Our dynamic process involves the lender, the credit department, loan operations and independent loan reviewers, all with oversight by our Boards of Director Loan Review Committee. Strong credit administration precludes a strong loan portfolio. The results of our strategies are reflected here as a percent of nonperforming assets to total assets and mirror our peer group of top quartile performers. This graph reflects very low loan losses as a result of our low level of nonperforming loans. These peer-leading numbers were reflective of an expanding economy and the diligent credit administration process I just mentioned. A key asset quality metric is our coverage of nonperforming loans by our loan loss reserve. As the chart shows, we have steadily improved that coverage, and our reserve was over 2x our level of nonperforming loan balances at year-end. So in summary, our commitment has been to diversify and grow the revenue stream, add scale to improve performance, leverage our business lines' expertise deeper into each of our 30,000 households, provide that holistic client care to all and manage credit risk, all in the spirit of delivering not just a high-performing organization or rather an elite one. Elite for our stockholders means top-tier returns for communities that's the commitment of resources for community development. For our clients, it's the customized products and services they require, and for our staff, it's a meaningful and rewarding career. Over the last 5 years, we have delivered shareholder value represented here as our share price rose from $11.14 to $19.69 at 2019 year-end. Earnings per share represented by the yellow line have also grown steadily over the last 5 years. And finally, dividends per share, represented by the green line, have increased annually as well. Total shareholder return for the last 5 years, year-over-year, has been driven by the increases you see here in our stock price. Including dividends, total stockholder return over the past 5 years has been 124% compared to the S&P Index of just 62%. In 2014, the dividend was $0.16 per share and ended 2019 at $0.36 per share or 125% increase. We are clearly proud of the work we have done and the returns we provided to our stockholders. We leave you today with a strong sense of optimism that better days for our country lie ahead and a keen sense of gratitude for the good fortune that we've experienced in 2019. I again want to reiterate that the health and well-being of our State Bank customers, employees and communities is our highest priority. As we monitor ongoing developments and safety information related to the coronavirus, we have implemented our own operational preparedness plan to ensure business continuity, while working to protect the overall health of our customers and colleagues. Finally, in the spirit of social distancing, we have elected to forgo our scheduled regional shareholder meetings. In closing, we're proud of our accomplishments and eager to achieve even more key milestones as we return to a more normal economy and financial markets real soon. Thank you for joining us today and on our journey together as we continue to build one of America's great community banks. We look forward to reporting to you our first quarter operating results next week, April 23. At this time, with no other business to be conducted, I declare the 2020 Annual Meeting of SB Financial adjourned. Again, thank you for joining us, and goodbye.