2018 annual report · earnings for 1. st . state financial, ltd. improved in 2018 to $2,505,000...

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FINANCIAL 2018 ANNUAL REPORT

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Page 1: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

FINANCIAL

2018 ANNUALREPORT

Page 2: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

RUBYAWARD

Just one year after 1st State Bank was founded, Rick Goedert acted on his desire to honor the area’s most successful young people and to highlight available careers in our community by creating the RUBY Award (Recognizing the Upward Bright and Young). Each year, the recipients of the award are invited to a celebration dinner at Apple Mountain, where friends, family, and colleagues celebrate their success. Attendees enjoy a cocktail hour, dinner, and guest speaker, and they also hear from the award recipients, who discuss the path that helped them achieve success.

Nominations for the RUBY Award are collected each fall, and a committee of 1st State Bank employees, past award honorees, and representatives from different industries select the recipients who have demonstrated the greatest professional accomplishments. To date, the 160 RUBY Award recipients have come from all sectors of our community, including health care, education at all levels, manufacturing and corporate, nonprofit, and entrepreneurial ventures.

Alongside 1st State Bank, Great Lakes Bay Business Magazine and WNEM TV-5 have sponsored the recognition program since its inception. Additionally, Saginaw County Chamber of Commerce, Bay Area Chamber of Commerce, and Midland Area Chamber of Commerce have supported the RUBY Award. Their publications and promotions have helped raise the RUBY Award to its current popularity and status. In fact, this year’s nominees included 86 outstanding professionals, which is quite a testament to the region’s world-class workforce.

Rick Goedert’s 2005 vision to recognize the area’s young professionals, keep young people in the Great Lakes Bay Region, and highlight the many rewarding local careers has become reality.

Who will you nominate next?

Premier Event

Page 3: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

In 2018 a number of things came together allowing the Bank to achieve record earnings while making investments in our future growth. Driven by the new tax rates, earnings available to shareholders grew by over 35% to $2.5 million. This was an over 10% return on shareholders’ equity. Our balance sheet grew by 8.5%.

Our operating expenses also increased about 18% from 2017. This was primarily due to our investment in our new Midland Office. While we didn’t open officially until October 1st, we were fully staffed the entire year. We added a business lender, an office manager, a mortgage loan officer, and two personal bankers to be prepared for our opening. Other non-personnel expenses related to Midland also added to the overall increase in expenses. We were able to hit the ground running in October. With a number of significant changes in the banking environment in the region, we feel the opportunities will be tremendous.

While there was a large focus on the Midland investment we also continued improving and upgrading the Bank’s technology. We increased our efficiency on wire transfers by allowing customers to initiate wires through Online Banking. We added Positive Pay for Automated Clearing House (ACH) transactions to increase fraud protection for customers and, for the convenience of our customers, added an online mortgage application to our website.

There was significant activity with 1st State Financial stock during 2018. We added 35 new shareholders with our $2.9 million capital raise. We paid off the holding company debt used to retire the shares of a large shareholder and added over $1 million to our capital for future growth. Excluding that offering, 26,979 shares traded during 2018, with the last sale at $17.45 per share. Book value at year-end was $15.63 per share, while earnings per share ended the year at $1.54. The third party valuation at December 31, 2018, was $18.25 up from $14.50 at December 31, 2017, a 26% increase. The dividend was increased in January 2019, by 25% to $0.05 per quarter from $0.04 per quarter. It was a good year for our shareholders.

We have invested significantly to build a great foundation for future growth of the Bank while having record earnings, a substantial increase in our share value and increasing dividends.

The future is bright for 1st State Bank

Sincerely,

Rick GoedertPresident & CEO

To Our Shareholders,

Premier Event

Page 4: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

Earnings for 1st State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income combined with a reduction in federal income taxes as a result of the passage of the Tax Cuts and Jobs Act of 2017. The Act decreased corporate tax rates from 35% to 21%. These items were partially offset by higher operating expenses related to the expansion into the Midland market and the completion of our Midland branch which opened on October 1st. The Company’s return on average assets ratio increased to 0.94% in 2018.

Year-to-date total average assets were $266 million in 2018. This represents an increase of 10.8% over 2017’s total average assets of $240 million. Growth in the balance sheet combined with the increase in the prime rate contributed to the $1,422,000 increase in net interest income this year. Growth in the funding side of the balance sheet was dominated by lower costing transaction deposit balances versus higher costing certificates of deposits or other borrowed funds. Combined, the changes in the balance sheet help to produce an overall increase in net interest income of 15.8% year-over-year. Please review the Consolidated Selected Financial Data for additional information regarding 1st State Financial’s financial performance.

$216 $218 $227

$261 $283

$0

$50

$100

$150

$200

$250

$300

2014 2015 2016 2017 2018

Total Assets(Millions)

$1,110 $1,272

$1,709 $1,825

$2,505

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2014 2015 2016 2017 2018

Net Income Available to Shareholders(000's)

0.57% 0.60%

0.76% 0.76%

0.94%

0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%1.00%

2014 2015 2016 2017 2018

Return on Average Assets

CONSOLIDATED BALANCE SHEET12/31/2018 12/31/2017

AssetsCash and cash equivalents $ 62,861,826 $ 57,460,096Investments 6,714,881 8,478,478Loans, net of reserve for loan losses 195,794,609 180,140,893Premises and equipment, net 15,056,397 11,890,114Repossessed assets 296,676 703,466Other assets 2,483,448 2,170,153

Total Assets $283,207,837 $260,843,200

Liabilities and Shareholders’ EquityInterest bearing deposits $130,791,742 $131,247,820Non-interest bearing deposits 107,082,481 86,275,190Borrowed funds 16,500,000 20,450,000Other liabilities 2,255,252 1,377,874

Total Liabilities 256,629,475 239,350,884Total Shareholders’ Equity 26,578,362 21,492,316

Total Liabilities and Shareholders’ Equity $283,207,837 $260,843,200

CONSOLIDATED STATEMENTS OF INCOMEYear ended December 31

2018 2017Interest Income $ 11,382,874 $ 9,606,085Interest Expense 979,654 625,041

Net Interest Income 10,403,220 8,981,044Provision for loan losses 450,000 430,000

Net Interest Income After Provision for Loan Losses 9,953,220 8,551,044

Other Income 1,322,327 1,339,987Other Expense 8,100,654 6,774,158

Income Before Federal Income Tax 3,174,893 3,116,873Federal Income Tax Expense 670,100 1,292,000

Net Income $ 2,504,793 $ 1,824,873

2018 FINANCIAL REPORT

Page 5: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

SELECTED FINANCIAL DATAThis unaudited table sets forth selected historical consolidated financial information derived from our audited consolidated financial statements for the five years ended December 31, 2018.

Dollars in thousands, except per share data 2018 2017 2016 2015 2014

Net Income Available to Common Shareholders 2,505 1,825 1,709 1,272 1,110

BALANCE SHEET DATA (DECEMBER 31)

Total Assets $ 283,208 $ 260,843 $ 226,562 $ 218,377 $ 215,848Total Loans 198,659 183,087 171,067 159,465 145,685Total Deposits 237,874 217,523 192,516 187,396 186,180Total Shareholders’ Equity 26,578 21,492 21,109 19,476 19,205Tier I Capital to Average Assets (Bank Only) 9.42% 8.97% 9.34% 8.96% 9.04%Net Book Value per Common Share $ 15.63 $ 14.27 $ 13.22 $ 12.23 $ 11.48Independent Valuation Stock Price $ 18.25 $ 14.50 $ 12.90 $ 11.50 $ 11.00

PERFORMANCE RATIOS

Return on Average Assets 0.94% 0.76% 0.76% 0.60% 0.57%Return on Average Common Equity 10.30% 8.38% 8.41% 6.79% 6.41%Net Interest Margin 4.08% 3.93% 3.66% 3.55% 3.56%Net Income per Average Common Share $ 1.54 $ 1.16 $ 1.07 $ 0.80 $ 0.71

ASSET QUALITY MEASURES

Net Loan Charge-offs (Recoveries) $ 531 $ 83 $ (88) $ 224 $ 303Net Loan Charge-offs to Average Total Loans 0.28% 0.05% (0.05%) 0.15% 0.21%Allowance for Loan Losses to Total Loans 1.44% 1.61% 1.52% 1.35% 1.40%Non-performing Assets to Total Assets 1.08% 1.31% 1.84% 1.86% 2.10%

$11.48 $12.23 $13.22

$14.27 $15.63

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

2014 2015 2016 2017 2018

Net Book Value Per Share

9.0% 9.0%

9.3%

9.0%

9.4%

8.8%

8.9%

9.0%

9.1%

9.2%

9.3%

9.4%

9.5%

2014 2015 2016 2017 2018

Tier I Capital to Average Assets(Bank Only)

2.10%1.86% 1.84%

1.31%1.08%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2014 2015 2016 2017 2018

Nonperforming Assets to Total Assets

Page 6: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

1ST STATE BANK BOARD OF DIRECTORS

Phillip ListChairman of the Board

Terry Niederstadt Rick Goedert Jake Shinners

Mike Bierlein Lynn Wolgast Scott Holman Mitzi Dimitroff

Joe Fabiano Mike Hanisko Jim Milroy

Page 7: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

LOCATIONS

4800 Fashion Square BoulevardSaginaw, MI 48604

989.799.7500

5425 State StreetSaginaw, MI 48603

989.596.7500

601 N. Madison AvenueBay City, MI 48708

989.322.7500

3907 Wilder RoadBay City, MI 48706

989.439.7500

400 Ashman StreetMidland, MI 48640

989.492.7500

Page 8: 2018 ANNUAL REPORT · Earnings for 1. st . State Financial, Ltd. improved in 2018 to $2,505,000 from $1,825,000, a 37% increase over 2017. Earnings were driven by net interest income

989.799.75001stStateBk.com