Acquisition Will Add $50 Million In Deposits, Expanding Market Presence

Key Takeaways

• Successful Marblehead Bank acquisition expands growth in new markets, enhancing future revenue through increased deposits.
  
• Strategic loan growth and improved asset quality bolster revenue and earnings potential, with a focus on high-margin commercial lending and mortgage origination.
  
• Rising costs, declining noninterest income, and shifts in loan strategy may pressure margins and impact SB Financial Group's revenue growth and asset quality.

Catalysts

Operates as the financial holding company for the State Bank and Trust Company that provides a range of commercial banking and wealth management services to individual and corporate customers primarily in Ohio, Indiana, and Michigan.

• The successful acquisition of Marblehead Bank expands SB Financial Group’s presence in a higher growth area and includes $50+ million in new deposits, which could stimulate future revenue growth and enhance earnings.
  
• Plans to increase mortgage loan originations significantly in 2025, especially in the Indiana and Cincinnati markets, suggest potential for higher revenue generation. Targeting $400 million in mortgage originations, significantly up from 2024’s levels, will likely boost net interest income.
  
• The company expects loan growth, particularly commercial loans, to improve by approximately 8% on an annualized basis, driven mainly by the Columbus market. This growth indicates potential revenue and earnings enhancement by capitalizing on higher-margin commercial lending.
  
• Anticipated resolution of nonperforming loans, which could result in improved asset quality, may slightly enhance net margins by reducing the need for loan loss provisions.
  
• There is an expectation of net interest margin improvement due to a repricing of a substantial portion of loans in 2025, coupled with funding cost stabilization. This margin expansion should bolster net interest income and earnings.

SB Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SB Financial Group's revenue will decrease by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.2% today to 35.9% in 3 years time.
• Analysts expect earnings to reach $16.0 million (and earnings per share of $2.43) by about February 2028, up from $11.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Banks industry at 12.1x.
• Analysts expect the number of shares outstanding to decline by 3.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

SB Financial Group Future Earnings Per Share Growth

Risks

• Charge-offs slightly elevated in the quarter at 7 basis points could indicate some underlying credit risk, which may impact future asset quality and loan loss provisions.
  
• The company's noninterest income declined by 4% for the full year, potentially limiting growth in overall earnings if reliance on interest income remains unsupported by diversified revenue streams.
  
• The reduction in residential real estate portfolio loans and emphasis on a higher salable strategy may risk losing stable revenue from traditionally lower-risk residential loans, affecting net interest income stability.
  
• The increase in operating expenses by 6.1% compared to the fourth quarter of 2023 without corresponding revenue growth might pressure net margins if future expense management does not align with revenue growth.
  
• The rising funding costs and market dynamics pose a threat to achieving desired revenue growth and margin expansion, especially in a competitive rate environment impacting deposits and net interest income.

Valuation

• The analysts have a consensus price target of $26.0 for SB Financial Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $44.7 million, earnings will come to $16.0 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $23.42, the analyst price target of $26.0 is 9.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.