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

Good morning, and welcome to the SB Financial Group Meeting of Shareholders. I would now like to introduce the presenter, Mr. Klein.

Good morning, and welcome to our Annual Meeting for 2021. My name is Mark Klein, Chairman, President and CEO. My overarching message to you today coming out of an unprecedented year is one of unity for our corporation and balance for our performance. Taken together, they represent the teamwork and the hard work required this past year to meet the unique needs of each of our stakeholders. In doing so, we achieved great success in the midst of total market disruption. We embraced the challenges of the pandemic and faced them head on, discovering new ways to care for our staff, our clients, our communities and our stockholders. During the height of the pandemic, we encouraged our staff to be smart, stay safe and, if possible, work from home, placing their safety and health as well as that of our clients as our primary focus. Needless to say, we are extremely proud of our team and the care they continuously provided to our clients and our communities. We believe you will sense our level of commitment in my message today to do whatever it takes to thrive in the face of adversity. This is the fourth year hosting our Annual Meeting virtually live over the Internet, which gives us the unique opportunity to reach out and connect with our over 1,200 stockholders across the country. Questions regarding the 3 shareholder proposals before you today may be placed in the queue electronically through the portal until approximately 10:45. At that time, we will address any questions or comments, close the polls and report the results of our voting. I will serve as Chairman of our Annual Meeting, and Keeta J. Diller will serve as Secretary for our Board resolution. Carol Robbins and Sean Gorman are our inspectors of elections today. Notice of this annual meeting was mailed along with the proxy materials on March 8, 2021, to shareholders of record on February 26. We will dispense of the reading of the minutes of last year's annual meeting but remind you that they remain available on our website under Investor Relations. Finally, this presentation will also be available for review on our website following today's meeting. On the agenda today are the consideration of 3 shareholder proposals, and then I'd like to provide you a high-level overview of our 2020 financial results. Ms. Robbins, please report as to the number of shares represented at this meeting today.

Mr. Chairman, 5,401,015 common shares of the corporation are represented by proxy. There were no common shares represented in person. Combined, 5,401,015 common shares are represented at this Annual Meeting, either in person or by proxy.

Thank you, ladies and gentlemen, with a quorum represented, this meeting is duly convened. The first of 3 proposals before us today is the election of 3 directors to serve for a term of 3 years each: Mr. George W. Carter, Mr. Tom R. Helberg; and Mr. Timothy J. Stolly. Second, 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, '21. And third, to vote upon a nonbinding advisory resolution to approve the compensation of SB Financial's named executive officers. May I have a motion with respect to one or more of these proposals? [Voting]

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

Let the records reflect that an additional support for the motion was made by shareholder, Mr. [ Sean O' Thawne ]. At this time, I'd like to ask Ms. Diller to begin retrieving questions and comments from our shareholders on the 3 proposals. And while she's doing that, our Inspectors of Election are tabulating the votes. I'd like to pause briefly to recognize our Board leadership once again this year. Mr. Richard Hardgrove continued as our lead Independent Director. Our full Board met 13 times this past year, and all directors met required attendance levels. Mr. Gaylyn Finn served as the Chairman of our Audit Committee and also our audit financial expert and they've met 4 times at 2020. Ms. Rita Kissner led our compensation committee and met 4 times; our Governance and Nominating Committee was led by Mr. Tim Stolly, meeting 2 times; our Director of Loan Review Committee was chaired by Mr. George Carter and met 5 times; our Trust Investment Review Committee was chaired by Mr. Bill Martin, meeting 4 times; and finally, our Executive Loan Committee, which is also directed by Mr. Martin, met 26 times throughout the year. Each of our Board committees met required attendance levels. We believe good Boards are required to produce great companies, and we have an excellent Board. On behalf of our shareholders, management and staff, I want to thank our Directors and Committee Chair for their leadership and guidance this past year. Ms. Diller, any questions or comments from our shareholders? Since there are no questions or comments in the queue regarding the 3 proposals or otherwise, we will conclude the business portion of our meeting. I would now ask our Inspectors of Election to please report the results of the voting. Ms. Robbins?

Proposal 1, to elect 3 directors to serve for a term of 3 years each, Mr. George W. Carter, Mr. Tom R. Helberg and Mr. Timothy J. Stolly, 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, 2021, has been adopted. Proposal 3, to vote upon 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 as we work together to identify a clearer path forward. In a nutshell, well, what a year to remember or, in many ways, certainly, maybe one to forget. Together, we experienced our first pandemic in over 100 years, record unemployment, businesses closed, unprecedented government stimulus programs, record low interest rates and social unrest, just to name a few. Clearly, a number of challenges this year that, strangely enough, allowed us to shine in the face of immense adversity. First, we must remind you that appropriate due diligence is always required of anyone considering an investment in SB Financial Group. When we established our business plan in late 2019, we had no idea of what we were to encounter just a few short months. All of our plans were severely disrupted, but our aspiration of high performance remained constant. We unified as a team, as a community, remain balanced on what was important and delivered one of our best years ever. Our adjusted net income grew to $18.8 million, representing a 46% increase over the prior year, with balance sheet growth and assets of $219 million or 21%. Our return on average assets of 1.61% landed us 12th place or at the 83rd percentile of our peer group. Our recent performance was also recognized on a national level by American Banker Magazine, ranking us in the top 200 publicly traded banks in the U.S. less than $2 billion, as measured by our 3-year return on average equity. For the sixth straight year, we've been recognized for this performance. We improved to the third largest residential mortgage producer in the greater Columbus, Ohio market and participated in the SBA's PPP initiative that provided $84 million in funding to our small businesses in need during the pandemic. Our vision of high performance at SB Financial remains intact as we remain fixated on profitable growth that includes complementary business lines with a keen eye on balancing the needs of each of our stakeholders. Return on average assets remains a key performance metric for SB Financial and our industry. As you can see here, we've improved over the past 5 years from just over 1% in 2015 to 1.61% this year. We've also vetted our 65 bank peer group over the past decade, from the bottom quartile way back in 2010 to the top quartile today at the 83rd percentile. This year marked our 19th year as a publicly traded company listed on the NASDAQ exchange. Additional scale always helps us to improve our efficiency. This year, we grew our balance sheet over $200 million or 21%, as I mentioned, whereas our full-time equivalent staff declined 3% from 252 to 244. Our average daily trading volume in 2017 prior to the $30 million capital raise in 2018 was just 6,900 shares. This year, our trading volume grew to 16,900 shares per day or an increase of 145%. As of year-end, we had 2 additional full service offices that included expansions in Downtown Findlay and also already in that position. In this challenging compressed rate environment, efficiency and the resulting scale are really not optional, requiring us to do more with less. To this end, we remain flat in our structure for efficiency and decentralized in our delivery of our services for greater client intimacy. This combination remains literally our secret sauce and aligns our differentiated regional brands with strong corporate values. Peak Title joined our holding company in 2019 and is our only other active affiliate today. Our passion for efficiency and scale is reflected here in the level of total assets under our care. At year-end, $3.1 billion under our care, a $1.3 billion bank, $1.3 billion mortgage servicing portfolio and a $558 million wealth division. The chart on the right represents the scope of the contribution of each business line of our $18.8 million net income. Residential real estate delivered over 1/2 or 51%; retail banking, 22%; commercial, 16% and the balance between Wealth Management and Peak Title are captive and are apparent. Our efforts to diversify our revenue stream continue, albeit with residential real estate leading the charge with a $700 million year of volume. The pursuit of our 5 key strategic initiatives continues to consume us. These include growing and diversifying that revenue stream, adding scale to the organization with not only a broader physical footprint but one that also includes more electronic delivery, driving scope through cross sales and referrals to each of our business lines, operating with excellence defined by high levels of client-defined communication channels and, finally, the administration of a loan portfolio that remains high quality in literally all economies. First key initiative, revenue diversity. Organic balance sheet growth of over $200 million, preservation of our net interest margin and robust fee-based business lines delivered higher operating revenues that led to greater revenue diversity. Our unique balance of total operating revenue that rose to over $66 million this year drove our net income to a record level of $18.8 million, as I just mentioned. The net interest margin portion grew to nearly $36 million, an increase of 39%, while our fee-based revenue grew to a record $30 million or 68%. Here, good balance, great diversity and strong performance. Not only do we have a great balance in our revenue stream per business line, we also have great balance in our net income per business line. Volume and scale allowed the residential real estate business line to make an outsized contribution to net income while overhead costs reduced retail's efficiency and contribution margin. To mitigate the retail net income compression, we intend to fully optimize our electronic initiatives to stabilize margins reflected here. With virtually no overlap in our full-service office footprint, retail and commercial banking improvements will have to come from organic growth and potentially M&A, much as we achieved with our recent Edon acquisition. Our peer-leading mix of fee-based revenue to total revenue is noted here. Over the last 5 years, we've averaged over 38% and have consistently exceeded our high-performing peer group. This competitive advantage has enabled us to outperform our peer group every year now over the last 7 years, and what's particularly significant, in delivering our return on assets this year at the 83rd percentile in a year that was defined by all-time low interest rate environment. Unprecedented low mortgage rates shined a bright light on the strong brand that we've developed over the last decade in residential and mortgage business line. Our gain on sale this year was just over the $25 million mark and reflected an average gain on sale of over 3.5% on a nearly $700 million in volume. As you can see here in 2020, our Columbus region delivered approximately $14.5 million of these gains; Northwest Ohio and Northeast Indiana, $6.1 million; Findlay, $3.2 million; and our newest office in Indianapolis, Indiana, $1.5 million and gaining more traction. Our servicing portfolio now includes over 8,500 households as a result of originating over $4.7 billion in total volume in the last 16 years. The SBA business line strategy we launched in 2015 provides greater revenue diversity. As a preferred lender, we've now produced over $4 million in loan sale gains since inception. It was also the knowledge we garnered in this business line over the last 6 years that enabled us to pivot and fund 690 small businesses in a few short months recently with nearly $84 million in PPP funding. Changing gears with our staff this year, to help our clients, prospects and our communities with PPP loans amid the pandemic had a significant effect on our production of traditional SBA loans. In fact, traditional SBA lending declined this year to just $4.7 million with minimal loan sale gains as we diverted significant resources in order to assist our small business clients through the pandemic. The detour to the PPP funding program has certainly not dampened our long-term vision to become one of the top 100 lenders in the U.S. for SBA lending. As you can see, our participation in the PPP initiative allowed us to not only help our existing clients but also help and add new clients. In both phases, our assistance to new prospects has now expanded to fuller banking relationships. In the first round, 20% of our lending went to new clients and, thus far in the second round, 18% has gone to new clients. We anticipate that the PPP work that we have done in Phase 1 and 2 will produce in excess of $5 million in fees for our company. Wealth Management continues to be one of our core fee-based business lines. At year-end, our total assets under care were at an all-time high of $558 million, up over 47% over 2016 and generated revenue of over $3 million, an increase of 23% over the same period. Overall, we realized significant success in our fee-based business lines this year. Residential real estate lending represented the largest portion at 67% or over $20 million. In this near 0 rate environment, it provided the inertia that propelled us to the highest level ever and helped deliver total fee-based revenue of over $30 million that was 58% higher than the prior year. Our strategies to supplement our net interest margin with fee-based revenue have been quite successful and enabled us to achieve the eighth place this year among our 65 bank publicly traded peer group or the 88th percentile. These numbers also reflect Peak Title that generated nearly $2 million of additional fee income. Second initiative, strict penetration in all markets served in order to add more scale and drive efficiency and performance. Balance sheet growth complemented with strong fee-based business lines provided the unique balance that we seek as an organization, and we also supplemented organic growth this year with the all-cash bank acquisition, Edon. Growth was one of our key initiatives as competition strengthens and as the industry continues to consolidate. Over the last 5 years, loan balances increased by $315 million or 57%, while our deposit base has increased by $463 million or 79%. Lower cost core deposits continue to be the dominant funding source for loan growth. 2020 was an especially productive year for deposit-gathering due to the high level of government support of our consumers and our small businesses. The growth of our loans and deposits over the last 5 years now total $778 million or 68%. 70% of that growth represents the Edon acquisition, and the markets highlighted here, 62% is accounted for by these regions of Toledo, $134 million; Findlay, $52 million; Columbus, $153 million; Lima, $49 million; Defiance, $130 million; and finally, Williams County, $42 million. With over 32,500 households serviced by us today, great potential exists as we claim just a small fraction of our total market potential. Organic growth and M&A opportunities for our company remain quite high. The chart on the left represents our total assets of $1.26 billion at year-end that included over $219 million in total growth partially driven by PPP balances of $71 million at year-end, due in part to the government stimulus programs that have fueled the client liquidity and has a portion of our balance sheet growth. Our total percentage of higher-yielding loans now represents just 69% of our assets of $873 million. However, we continue to place in the top quartile with a peer group leading loan-to-deposit ratio of 83%. The mix of our loan portfolio depicted on the right remains fairly well balanced. Higher performance remains directly correlated with our ability to generate those lower-cost deposits. This year, we achieved significant growth in our core deposits of over $209 million or 25% and drove our total funding sources, represented here on the left, to $1.3 billion. Notice that 83% of our total sources, or $1 billion reflected on the right, was classified as lower-cost transactional deposits. This largely organic growth was pivotal in lowering our overall weighted cost of deposits to just 64 basis points, down 99 -- from 99 basis points in 2019. Our third initiative, expand our scope of more services in each household. We continue to build a brand that reflects customized levels of client intimacy, the very same ones that enable us to potentially keep each of our clients literally for lifetime. Critical elements of this client-centric journey are strong business line leaders with support from our regional market executives who embrace a decentralized decision-making model. When our commitments to claim market share are blended with digital innovation, we stand to grow and prosper. These 7 market executives are responsible for regional growth that includes the delivery of each business line's products and services. They offer continuity in helping us to deliver one unified corporate brand, and we provide them the autonomy to develop it with a unique regional flair. Our model is scalable and attracts leadership with an entrepreneurial spirit. As with prior years, our decentralized decision-making model also embraces strong business line leadership and one that complements our regional market leaders. Detailed business plans for each, including well-defined measurable initiatives and goals, give us the potential to register a sustainable competitive advantage. When business line visions cross with deliberate regional execution, growth emerges. The complements of the 2 revealed here reflects both household growth and the level of products and services in each of those households. Notice each has grown approximately 25% over the past 6 years, up from 16% last year. So we're increasing at an increasing pace. 24/7 access to our clients' data was always important but coming out of this unprecedented pandemic, it was absolutely critical to embrace customized communication channels. With the intermittent closure of our retail offices, our clients pivoted to more electronic services like mobility, remote check depositing and e-banking. The level of disruption we encountered is apparent here as remote access continue to escalate during the pandemic. Over the last decade, our clients' electronic access has grown by 92%. Our walk-in traffic, understandably, has declined by nearly 50%. However, our unique combination of bricks and clicks positions us to better customize our communication channels with each of our clients. In other words, your bank, your way. Referring our clients to another one of our business lines when there is a need identified is part of our DNA. When we focus on what is important to our clients, we find more opportunities. Over the past 5 years, we have referred approximately $432 million in new business to each of our other business lines. In this arena, clearly everyone wins. Fourth initiative, operational excellence. Remaining relevant in these unprecedented times requires a conscious and deliberate integration of new technologies. Our intent this year was and will continue to be to work smarter through the continued deployment of technology we've been implementing the last several years to improve operational efficiency. This includes household and client profitability, online loan applications that include electronic approval, processing and closing and just overall better understanding of our clients' needs. Our vision back in 2006 to expand our residential real estate business line was really very timely, expanding from a portfolio of just $26 million then, now well on our way to that $2 billion mark. Our technology platform, Encompass, has allowed our lenders to do more with less resources and literally from a new location. As a result of our growth, our portfolio now generates over $3 million annually in operating revenue. Traditionally, the mortgage loan was the only primary need of the client, but today, we continue to prospect diligently for more opportunities within each. Aggregate loan production for our company, as revealed here, notice that some of our commercial loan production this year gave way to residential real estate lending as well as PPP government stimulus loans. It has been the integration of our digital resources that has enabled us to increase loan production this year to an all-time high of nearly $1 billion while we're growing our balances by approximately $47 million. And finally, the fifth metric, building a solid loan portfolio. All quality loan portfolios require a well-documented life cycle process that includes several layers of administration that work in harmony with each other to constrain risk. This cycle includes prospecting diligently, underwriting meaningfully and selecting opportunities wisely and then, of course, inspecting what we expect. A key component of the CARES Act passed in light of the pandemic was to allow banks to work with their clients on payment deferrals in a more customer-friendly fashion. As you can see, we responded to our clients' needs with over $150 million in deferrals in just the first quarter of the pandemic. I'm happy to report that, as the economy has recovered, our clients have returned now to full payment status. In fact, only 2 commercial clients are still in payment deferral as of March 31 of 2021. These charges do not include any of the sold mortgage loans that took advantage of the government's residential deferral program that, at its peak, reflected approximately $42 million in deferrals on sold mortgages. As we would all expect, given the apparent health of the household, this number is now down to just $6 million. This year, we did note mild stress on our portfolio during the pandemic. Our nonperforming loans at year-end decreased to 58 basis points from a year earlier of 64 basis points but was marginally in excess of both high-performing peer group and medium-level performers. Contributing to our higher level were several credits that showed weaknesses both prior to and during the pandemic. As a result of our escalated level of nonperformers, we experienced loan losses that were also marginally higher than peer median and the high performers. Our net charge-offs this year, while a bit higher than our traditional levels, were just 8 basis points or $680,000. Overall, however, our loan portfolio performed quite well. Even with our escalated levels of nonperforming assets I just mentioned, our level of coverage for future loan losses remained a healthy 173% of nonperforming loans and, as you can see, well above the median level of our peer group. As this slide indicates, not only have we increased our dollar level of our loan loss reserve from $7.7 million to $12.6 million or an increase of 63%, we've also increased the percentage of loan loss reserve to 1.44% at the end of 2020. This compares to a reserve level of 1.2 at the end of 2016. In summary, we've delivered some of our best financial results in recent times, albeit in unanticipated and unprecedented ways required of us during the pandemic. We've remained focused on diversifying and growing our revenue stream, adding scale to improve our performance, leveraging more products and services deeper into each household, providing that customized care that every client desires and wants and managing credit risk, all in the spirit of delivering a high-performing elite-aspiring organization. Our performance has also improved shareholder value. This year, we increased our tangible book value by $1.06 per share or 7% to $16.30 and up $5.17 or 46% since 2016. Our dividend payout has also steadily increased from $0.24 per share in 2016 to $0.40 this year or an increase of 67% and tracks our earnings per share improvement over the same period from $1.38 to $1.96 or 42%. We firmly embraced disruption this year and delivered meaningful results for each of our stakeholders, and we never lost sight of the level of care required for each, closing offices to protect our staff, remaining available 100% of the time for our clients, delivering nearly $2 per share for our stockholders and remaining a source of strength and liquidity for our communities. We remain optimistic about our potential and steadfast in our pursuit of high performance. With your continued support, we intend to deliver. Thank you, again, for joining us today. We certainly look forward to reporting on our first quarter operating results, Friday, April 30. At this time, with no other business to be conducted, I declare the 2021 Annual Meeting of SB Financial adjourned. Thank you for joining us. Best wishes for continued good health and prosperity. Thank you.

Thank you. The SB Financial Group, Inc. Annual Meeting of Shareholders has now come to an end. Thank you for attending. You may now leave the virtual meeting.