SBFG – A Boring Bank with Buybacks

I bought two banks earlier this year, SBFG and CKFC. CKFC is smaller and operates in Michigan near the Detroit area and I should probably disclose that I added to my position after they reported earnings last month. CKFC was written up not too long ago on Seeking Alpha, so I will focus on SBFG here. I originally read about SBFG here.

As interest rates creep up, loan rates tend to lead deposit rates upward, so banks become more profitable on the spread between the cost of their loans in a rising rate environment. About 6 months ago I looked for undervalued banks with high net interest income margins, solid returns on equity and assets, and conservative loan to deposit ratios. Over time these banks should deploy more deposits at significantly higher loan rates, netting the growing spread.

SBFG is a small community bank headquartered in Defiance, Ohio on the border with Indiana. Like most banks, SBFG (formerly known as Rurban) was hit hard by the financial crisis, became unprofitable for a time, wrote-down a lot of loans/mortgages. Eventually insiders bought shares, the bank recovered, and the stock has rallied from $3 to $17 over the past 5 years. SBFG remains cheap on a P/B basis, is highly rated among the thousands of community banks across the country, and most banking metrics point to a continued slow grind upwards.

Book value per common share for the bank is $14.21 per the most recent quarterly report, so SBFG trades at 1.2x book value as of 7/31. Peers are trading between 1.5-2x. Setting aside share price appreciation, returned capital to investors has been 3% over the past year, split evenly between share buybacks and a quarterly dividend. Pretty good for a small bank. Ignoring the dividend and buybacks, should SBFG trade-up to peer levels, it would be a 25-65% gain for shareholders.

ROA consistently over 1% and ROE > 10% are my rules of thumb for bank operating metrics and SBFG does just fine on both counts as well. Net Interest margin of 3.5-4% is solid and loans/deposits is around 90-92% implying some potential to offer loans at higher rates. Operating efficiency is probably the one metric which can be dinged here at a somewhat high 68-70%. This is likely due to branch additions which will take time to contribute to the bottom line.

Small community banks are not sexy, and they almost never go to the moon, but given the improving rate environment, it looks like they could have room to run.


Regional focus is a double-edged sword. Should the local communities which SBFG operates in experience problems, SBFG could be in trouble. Looking at the auto industry, it seems clear that this stock could have headwinds in its future, but so far they haven’t showed up within the financials or management commentary. Banks still appear to benefit from lending rigors imposed by the financial crisis.

Much of this thesis depends on rising interest rates, but should the economy turn south, the company’s loan loss reserves should help protect it.

Have you heard about this new guy, Donald Trump? It’s possible that all of the bank stocks could take a hit if investors stop believing in things like tax reform. Given the low valuations I don’t see a lot of downside from here.

But have you heard about this new guy, Donald Trump?


Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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