Is Summit State Bank Undervalued?

Summit State Bank (NASDAQ:SSBI) is a small bank based in Sonoma County, California. Like most banks, Summit provides a range of personal financial services, as well as business loans, lines of credit and real estate financing.

In the last year, however, SSBI shares have lost nearly 40% of their value as it and many other small banks have struggled.

Has this selloff made Summit an undervalued buy, or do today’s lower share prices accurately reflect the company’s fundamentals and future earning power?

What’s Driving Down SSBI Shares?

A quick glance at Summit State Bank’s recent net income history quickly reveals the reason for its plummeting share prices.

Quarterly net income for the bank topped out in Q4 of 2022 at about $5 million. Since then, the company’s profits have fallen off dramatically. In Q1 of this year, the bank reported a net income of just $1.4 million, down from $4.1 million a year ago.

Until fairly recently, revenues weren’t following along with this downward trend. Summit was reporting healthy double-digit percentage revenue growth through Q3 of last year, when total revenues rose by 14.3% on a year-over-year basis.

In the last two quarters, though, revenues have begun to contract. In Q1, the bank’s total revenues fell 7.1% to $15.4 million.

These downward trends are primarily symptoms of higher interest rates and a sharp spike in loan delinquencies, both of which have affected many lenders over the past year.

In Summit’s case, the ratio of nonperforming loans to gross loans shot up from 1.1% a year ago to 4.5% in Q1. Over the same period, net interest margin, the spread between what a bank earns on credit products and what it pays to its depositors, fell from 3.7% to 2.8%.

Unsurprisingly, other key profitability metrics have also been negatively impacted. Summit’s annualized return on equity has fallen dramatically over the last year from 18.4% to 5.7%. Return on assets, following a similar trend, fell from 1.5% to just 0.5%.

A final piece of bad news for Summit State Bank has been a fairly significant decrease in total deposits. In Q1, total deposits amounted to $939.2 million. A year earlier, that number had been about 8% higher at $1.02 billion.

Where Are the Bright Spots for Summit?

While Summit State Bank’s recent performance has been fairly bleak, there are at least a few positives for investors to look at as well. Chief among these is continued growth in the bank’s loans. In Q1, net loans rose by over $10 million, reaching a total of $917.7 million.

Despite a large increase in nonperforming loans over the last year, Summit’s loan portfolio as a whole still appears to be fairly solid.

The majority of the bank’s loans are made on real estate projects, including both residential rental properties and commercial real estate. This portion of the portfolio, according to SSBI’s reporting, has a debt-service coverage ratio of about 2.0.

As such, the borrowers that account for the largest share of the bank’s outstanding loans have more than enough cash flow to cover their debt obligations. This fact could prevent Summit State Bank from experiencing a continued rise in loan delinquencies.

Is Summit State Bank Undervalued?

Summit State Bank is fairly valued on a price-to-book multiples analysis, which puts fair value at $9.90 per share, close to the present share price.

It’s interesting to note that SSBI shares have actually become more expensive when compared to earnings as their prices have fallen.

At the end of 2022, before net incomes began falling, Summit traded at a trailing 12-month price-to-earnings ratio of 5.9. Today, that number has risen to 7.6.

Despite this and Summit’s difficulties, there may still be some value in the bank’s stock. To begin with, SSBI shares trade at a steep discount to book value.

According to the last quarterly report, Summit shares had a book value of about $14.43, more than 55% higher than the most recent price of $9.20. While this book value is self-reported, it shows that the bank could be worth more than its current pricing.

Although Summit shares have become more expensive as a function of price, they have also become cheaper when compared to sales.

On a trailing 12-month basis, the stock’s price-to-sales ratio is currently just below 1.0, down from 1.8 at the end of 2022.

If the bank can eventually turn its earnings decline around and capitalize on the revenue growth it generated through much of 2023, the stock will be more attractive when eyed through a valuation lens.

Is Summit State Bank’s Dividend Worth It?

A final consideration about Summit State Bank is its fairly generous dividend. Each SSBI share pays $0.48 annually, which translates to a yield of 5.2% at current prices.

With the exception of a brief disruption in 2019 and 2020, this dividend has grown consistently since 2010.

Today, the bank’s payout ratio is just under 40%, giving management both the ability to sustain the current dividend and a decent amount of leeway left for future increases.

Investors, however, likely shouldn’t bank on explosive dividend growth from SSBI in light of its declining earnings and trailing 3-year dividend growth rate of just 3.2%.

Is SSBI A Buy?

Much of SSBI’s future will depend on how long interest rates remain elevated and whether credit delinquencies keep rising.

At this point, the Federal Reserve expects to cut interest rates just once this year, and even that cut could get pushed into next year if inflation remains as persistent as it has been.

Though rates will likely come down eventually and reduce the amount depositors expect to be paid, it’s unclear when this could happen.

Even though Summit’s loan portfolio seems fairly well-insulated, it’s also worth considering that the credit environment at the moment isn’t looking particularly healthy.

Business bankruptcies are on the rise, and various forms of personal credit are continuing to move above pre-pandemic rates of default.

Summit State Bank has done a good job of managing risk in its portfolio by focusing on real estate projects with ample debt service coverage, but the bank isn’t immune to the risks plaguing the broader credit markets.

Though there are some positives and an argument to be made for the stock’s valuation, SSBI looks a bit too risky at the moment.

With a challenging and uncertain operating environment for small banks, deposits falling, a rise in nonperforming loans and a significant deterioration of its fundamentals, Summit State Bank doesn’t look like a particularly good buy.

Current shareholders, however, may want to continue holding to take advantage of the bank’s dividend and the potential for future improvements in share prices.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.