Executive Summary / Key Takeaways

• Strategic Expansion Fuels Growth: SB Financial Group (NASDAQ: SBFG) is executing a disciplined growth strategy, evidenced by its successful Marblehead acquisition in Q1 2025, which expanded its footprint into Ottawa County, Ohio, adding significant low-cost deposits and a strong loan book. This M&A complements robust organic loan growth, particularly in key markets like Columbus, Indianapolis, and Cincinnati.
• Diversified Revenue Model Delivering: The company's diversified revenue streams across commercial and consumer lending, mortgage banking, wealth management, and title insurance are driving strong performance. Q2 2025 saw net income rise 23.7% year-over-year to $3.9 million, with diluted EPS of $0.60, underpinned by a 22.3% increase in operating revenue.
• Margin Expansion and Funding Advantage: SBFG achieved a Net Interest Margin (NIM) of 3.48% in Q2 2025, up 36 basis points year-over-year, its highest since Q4 2022. This expansion is driven by effective deposit retention, stable to lower funding costs (2.33% in Q2 2025), and the repricing of its short-term loan book, with management projecting NIM to reach 3.55% to 3.60% by Q4 2025.
• Digital Strategy Enhances Client Engagement: SBFG is leveraging technology through initiatives like its hybrid office model, expanded contact center (7 a.m. to 7 p.m.), and a new Digital Banking Officer. These efforts enhance operational efficiency, client care, and cybersecurity, serving as key differentiators in competitive markets and bolstering brand loyalty.
• Strong Outlook with Managed Risks: Management anticipates continued strong performance in H2 2025, with loan growth budgeted at 8-10% for the full year and mortgage originations targeted at $350-$400 million. Positive resolutions to nonperforming credits and disciplined expense management further support this outlook, while a robust Allowance for Credit Losses (1.43% of total loans, 265% coverage of nonperforming assets) mitigates credit risk.

Setting the Scene: A Resilient Regional Bank's Strategic Evolution

SB Financial Group, Inc., founded in 1902 and based in Defiance, Ohio, has evolved from a traditional Ohio-chartered bank into a diversified financial services company. Operating through its primary subsidiary, The State Bank and Trust Company, alongside SBFG Title, SB Captive, and State Bank Insurance, the company offers a comprehensive suite of community banking, mortgage banking, wealth management, private client, and title insurance services across Ohio, Indiana, and Michigan. This diversified model, balancing traditional margin revenue with fee-based services, forms the bedrock of its strategic resilience.

The company's history reflects a continuous adaptation to market dynamics. A significant rebranding in 2013 from Rurban Financial Corp. to SB Financial Group, Inc. marked a strategic pivot towards broader financial services. Subsequent investments in mortgage loan originators (MLOs) in growth regions like Indianapolis and Cincinnati, coupled with the formation of specialized subsidiaries, underscore a deliberate strategy to expand its footprint and deepen client relationships. The recent inclusion in the Russell 2000 Index in Q2 2025 further validates its strong financial performance and commitment to organic growth.

Competitive Landscape and Strategic Positioning

SBFG operates in a competitive regional banking environment, vying for market share against larger regional players like Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), and KeyCorp (KEY), as well as agile fintech companies. While these larger rivals often boast broader geographic reach and greater technological investment, SBFG carves out its niche through a community-focused, relationship-driven approach.

Compared to Fifth Third Bancorp, SBFG emphasizes personalized services, particularly in agricultural and residential lending, offering a localized touch that can foster stronger customer loyalty in rural and smaller urban markets. Fifth Third, with its larger scale, typically focuses on broader digital integration and mid-sized businesses. SBFG's Gross Profit Margin (TTM) of 51.27% and Net Profit Margin (TTM) of 13.78% demonstrate solid profitability, though Fifth Third's 2024 annual Gross Profit Margin of 59% and Net Profit Margin of 18% suggest a scale advantage in overall efficiency.

Against Huntington Bancshares, SBFG differentiates through specialized services like its robust agricultural portfolio and personalized wealth management. Huntington often prioritizes extensive branch networks and broader product offerings. SBFG's ability to retain deposits without aggressively chasing yield, even as rates adjust upwards, indicates a competitive advantage in customer loyalty. Huntington's 2024 annual Gross Profit Margin of 58% and Net Profit Margin of 16% reflect a strong operational base, which SBFG counters with its focused regional expertise.

KeyCorp, with its emphasis on corporate finance and advanced investment products, presents a different competitive challenge. SBFG's community-based lending and trust services offer more accessible options for small businesses. KeyCorp's 2024 annual Gross Profit Margin of 45% and negative Net Profit Margin (-2%) highlight potential vulnerabilities in its diversified model, which SBFG avoids with its more conservative, relationship-centric approach. SBFG's competitive moat is built on its strong community presence, personalized customer relationships, and regulatory licenses, which collectively enhance customer loyalty and provide stable funding sources.

Technological Differentiators and Digital Strategy

SBFG's technological differentiation lies not in proprietary, cutting-edge inventions, but in its strategic adoption and integration of digital tools to enhance operational efficiency and client experience. This approach is foundational to its strategy, enabling it to compete effectively against larger, more technologically advanced rivals.

A key initiative is the expansion of its hybrid office model, designed to provide seamless client connectivity through multiple communication channels. This model is crucial for improving operational efficiency and is being strategically deployed in new expansion markets like Angola, Indiana, and Napoleon, Ohio, allowing SBFG to capture market share effectively. The company also significantly enhanced its contact center services, extending hours from 7 a.m. to 7 p.m. This move contributed positively to client care, bolstering brand loyalty and serving as a strong differentiator, with over 105,000 client interactions recorded in 2024.

Furthermore, SBFG has invested in its core digital infrastructure. It recently appointed a Digital Banking Officer to drive digital innovation, identify new clients, expand cybersecurity practices, and forge a more intentional path forward. This role is critical to customizing client care initiatives and accelerating growth across client segments 24/7. The company's recommitment to its core provider, Fiserv (FI), is part of a broader strategy to heighten data security measures, reduce client friction, and deliver a more intentional palette of banking services, including an enhanced online banking experience and a broader offering of credit cards. These digital advancements are vital for SBFG to maintain relevance and competitiveness against larger regional banks and fintechs, contributing directly to its operational excellence and long-term growth strategy by improving efficiency and client retention.

Financial Momentum: Driving Growth and Margin Expansion

SBFG's financial performance in the first half of 2025 demonstrates strong momentum, building on a resilient 2024. Net income for Q2 2025 surged to $3.9 million, a 23.7% increase year-over-year, resulting in diluted earnings per share of $0.60. This robust growth was primarily fueled by a significant increase in interest income on loans, which rose 15.5% in Q2 2025 and 13.9% in H1 2025 compared to the prior year periods.

Operating revenue for Q2 2025 climbed 22.3% year-over-year to $17.2 million, driven by a 25% increase in Net Interest Income (NII) and a healthy rise in noninterest income. The Net Interest Margin (NIM) expanded to 3.48% in Q2 2025, up from 3.12% in Q2 2024, marking its highest level since Q4 2022. This expansion was supported by a 24 basis point increase in the average yield on earning assets, while funding costs decreased from 2.48% to 2.33% year-over-year.

Noninterest income also played a crucial role, rising 15.1% year-over-year in Q2 2025 to $5.0 million. Mortgage banking revenue, including gains on sale of mortgage loans and mortgage servicing rights, contributed $2.16 million in Q2 2025, its highest since Q1 2022. The title affiliate, SBFG Title, significantly outperformed, with revenue up 43.3% in Q2 2025 and 45.7% in H1 2025 year-over-year, closing 564 transactions year-to-date and exceeding budget by 27%. This diversification provides a crucial buffer against market volatility.

Expense management remains disciplined. While operating expenses increased 11% year-over-year in Q2 2025 due to higher volume and inflation, SBFG achieved a strong positive operating leverage of 2x against a 22% revenue growth. This efficiency, combined with strategic investments in technology and talent, positions the company for continued profitability.

Strategic Growth Pillars: M&A, Organic Expansion, and Client Deepening

SBFG's growth narrative is a blend of strategic acquisitions and robust organic expansion, underpinned by a commitment to deepening client relationships. The Marblehead Bancorp acquisition, completed on January 17, 2025, for $5 million in cash, was a pivotal move. It expanded SBFG's presence into Ottawa County, Ohio, adding $53.1 million in deposits and $18.7 million in loans. Importantly, these acquired deposits have remained nearly 100% intact, with an attractive average cost of 1.53%. This acquisition is projected to be accretive to EPS by $0.15 to $0.20 per share in 2025, demonstrating the company's ability to execute value-accretive M&A.

Organic loan growth has been consistently strong, marking its fifth consecutive quarter of sequential growth in Q2 2025. Total loans, net of unearned income, reached $1.09 billion by June 30, 2025, up 4.6% from year-end 2024. The Columbus market remains a "shining star," driving the bulk of this growth, with the lending team adding new high-end relationships and aiming for growth beyond its current $400 million loan book. The Indianapolis mortgage team delivered its most successful quarter of production since Q1 2019, reflecting strategic investments in high-producing MLOs. SBFG is also actively pursuing growth in legacy markets experiencing disruption from competitors' acquisitions or office closures, leveraging its stability and client-centric approach.

Deepening client relationships is central to SBFG's strategy. With over 8,900 mortgage households across its 16-county footprint, and an average of only two services per household, significant potential exists for cross-selling and organic expansion. The company's pursuit of a holistic client care model aims to add more services to its approximately 39,000 households. Initiatives like the State of Ohio Ag Link program have bolstered the deposit base by $14 million and improved margins on these funds by over 200 basis points, showcasing innovative approaches to client engagement and funding.

Asset Quality and Capital Strength: A Foundation for the Future

SBFG maintains a strong foundation of asset quality and robust capital, essential for supporting its growth initiatives and weathering economic uncertainties. Charge-off levels returned to less than 2 basis points in Q2 2025, following a slightly elevated Q1. Total delinquent loans stood at a manageable 0.51% of total loans, and nonperforming assets totaled $6.2 million.

The Allowance for Credit Losses (ACL) was $15.6 million at June 30, 2025, representing 1.43% of total loans and providing a robust 265% coverage of nonperforming assets. Management anticipates positive resolutions to several nonperforming commercial credits in Q3 2025, expecting minimal financial impact and accretion to earnings. These credits are considered well-secured, reflecting the company's prudent underwriting and robust loan review process.

Capital levels remain strong, with total shareholders' equity at $133.6 million, or 9.0% of total assets. Adjusting for the temporary impairment of Accumulated Other Comprehensive Loss (AOCI), total equity would be $159.1 million, or 10.7% of total assets. State Bank is classified as "well capitalized" under regulatory frameworks. The company's liquidity position is comfortable, with liquid assets totaling $289.8 million in Q2 2025 and an additional $157 million in FHLB borrowing capacity. SBFG also maintains a consistent shareholder return policy, having increased its dividend annually for over 12 years, with the Q2 2025 dividend of $0.15 per share representing a 25% payout ratio, in line with its long-term average. Share repurchases, including 124,000 shares in Q2 2025 at an average price of just under $19, further underscore its commitment to shareholder value.

Outlook: Poised for Continued Performance

SBFG approaches the second half of 2025 with considerable optimism, expecting to continue its positive trends and outperform peers. Management projects continued margin expansion, with the Net Interest Margin (NIM) potentially reaching 3.55% to 3.60% by Q4 2025. This outlook is underpinned by stable to slightly lower funding costs and the ongoing repricing of approximately $90 million in loans during 2025, expected to yield 140 basis points higher.

Loan growth is budgeted at 8-10% for 2025, including the contribution from the Marblehead acquisition. The company's strong pipeline, particularly in Columbus, and the funding of existing undrawn construction projects provide a solid foundation for this growth. Mortgage originations are targeted at $350-$400 million for the full year 2025, a significant increase from 2024's $265 million, with the potential for further expansion if interest rates decline.

Provision for Credit Losses (PCL) may move lower in H2 2025, contingent on the resolution of nonperforming credits and improving economic metrics. Operating expenses are expected to grow at a controlled rate of 2.5-3.5% over Q4 2024 levels, with a focus on achieving positive operating leverage. The Marblehead acquisition is anticipated to be solidly accretive to earnings and franchise value in 2025, with an estimated EPS accretion of $0.15 to $0.20 per share.

Conclusion

SB Financial Group is demonstrating a compelling investment narrative, characterized by strategic foresight and disciplined execution. Its diversified business model, strengthened by the Marblehead acquisition and robust organic growth in key markets, is driving significant financial momentum, particularly in net interest margin expansion. The company's proactive digital strategy, focused on enhancing client engagement and operational efficiency, provides a crucial competitive edge against larger rivals.

With a strong foundation of asset quality and capital, SBFG is well-positioned to capitalize on market opportunities and navigate potential economic shifts. The clear guidance for continued loan and mortgage growth, coupled with anticipated margin expansion and EPS accretion from strategic initiatives, underscores a positive outlook. For investors seeking a resilient regional bank with a clear growth trajectory and a commitment to shareholder returns, SBFG presents a compelling opportunity.