With interest rates set to rise in 2022, small regional banks could see big gains in profitability, explains Doug Gerlach, editor of SmallCap Informer.

Banks that have been able to maintain operational efficiency and profitability in low-interest environments are poised to benefit from higher rates they can charge to borrowers.

Unlike national banks that rely on extensive fees paid by customers to boost earnings, community banks must focus on the business of banking — in effect, buying and selling money. Their reputation and connection to the communities they serve are invaluable assets.

Summit Financial Group (SMMF) is one of a handful of banks that we have been following that have the right combination of very good operational efficiencies and quality of loans. It serves commercial and individual clients throughout West Virginia, the Washington, D.C. metropolitan area, Virginia, and Kentucky through 45 full-service branch locations.

Summit opened or acquired 13 banks, branches, and drive-ups in 2020 and 2021. As it expands its geographic reach, it will find new opportunities, while simultaneously increasing its footprint in its core markets.

The bank has made five acquisitions since 2016, and management is looking to expand its presence via mergers or acquisitions in Metro DC and Lexington, Ky. Though we are not banking on the possibility, Summit Financial — with its solid balance sheet and deposit base — could be an acquisition target of a larger regional bank.

Since 2012, Summit Financial’s revenues have grown very consistently at an annualized 11.7% rate. EPS have grown in the period at an annual rate of 19.7%. We project future earnings and revenues growth of 9.0% a year. This modest expectation should be readily achievable.

The current P/E is 7.4. Though Summit Financial is performing better than its peer group on average, its current P/E ratios is well below the peer group average. This mismatch is not likely to last.

We believe that Summit can support a P/E as high as 11. If the company earns $5.34 by 2026, the high price could reach $59. On the downside, if the stock were to fall to a low P/E of 6, a future low price of $21 would be indicated. The upside/downside ratio to our future high and low prices is 6.9-to-1. Overall, a 20.2% annual return is possible.

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