SmartFinancial Hits 52-Week High. Is It a Smart Small-Cap Buy?

Scanning the list of 52-week highs from Tuesday's trading, I noticed that Tennessee-based SmartFinancial (SMBK), a small-cap bank holding company, hit its fourth 52-week high of the past year at $31.54.

Up 66% since hitting a 52-week low of $19 in mid-April, it also hit a 2-year, 3-year, 5-year, and 10-year high on Tuesday. Over the past five years, it’s hit $30 twice. The last time was November 2022. However, the stock failed to maintain momentum and fell back to $20s.  

Up over 2% as I write this, less than an hour into Wednesday trading, small-cap investors ought to wonder if this $550 million small-cap stock can challenge its all-time high of $68.00 set on Dec. 1, 2006.       

I’ll examine the pros and cons of this small-cap bank stock.

What to Like About SmartFinancial

Being Canadian, there are only so many bank stocks available to buy. There’s the Big Five and another handful of smaller banks, and that’s about it. In the U.S., however, there are oodles of bank stocks to buy, from massive “Too Big to Fail” JPMorgan & Chase (JPM) to micro-cap NSTS Bancorp (NSTS) with a $57 million market cap.

As a result, in the U.S., there are regional and community banks, which one might consider less-than-appealing relative to JPM but whose banking businesses would be considered decent-sized were they competing in the Canadian market.

So, by all means, SmartFinancial shouldn’t be overlooked merely because it only has a half-billion-dollar market cap. 

At first, when I saw the name SmartFinancial on the 52-week high list, my reaction was to think it had changed its name to SmartBank from something else. Who names their bank Smart? The folks in Tennessee. 

Founded with one branch in 2007 in Pigeon Forge, Tennessee, it now has 42 branches in Tennessee, Alabama, and Florida. It finished the third quarter with $3.7 billion in total loans and $4.3 billion in total deposits.

A quick look at its Q3 2024 presentation tells me three things about its banking operations:

1) It has a sound balance sheet. At the end of September, its ratio of nonperforming assets to total assets was 0.26%, which is excellent. 

2) Its loans and leases were $3.72 billion, 8.1% higher than in June.

3) The bank’s net interest margin, on a fully tax-equivalent basis, was 3.11% in Q3 2024, 14 basis points higher than in Q2 2024.

As a result of its healthy quarter, its tangible book value per share through the first nine months of 2024 was $22.67, 9.2% higher than at the end of 2023.

Now that it’s scaled the business appropriately, the bank intends to leverage its scale to boost profitability. 

One area where it’s done that is with its operating noninterest income, which was $9.1 million in Q3 2024, up from $7.5 million a year earlier. 

It is now generating fee income from four revenue streams: SmartBank Investment Services, SmartBank Mortgage Services, SBK Insurance, and Fountain Equipment Finance. 

More importantly, its operating efficiency ratio in the third quarter—defined as operating noninterest expense divided by revenue—was 69%, 300 basis points less than the second quarter and 500 basis points less than a year ago. Lower is better. 

As a result of running a reasonably efficient business, it’s grown its adjusted TBVPS (tangible book value per share) by 7.5% annually over the past five years from $16.80 at the end of 2019 to $23.69 at the end of September. 

What’s the Downside

The most obvious issue is momentum. While there is nothing on the horizon that suggests its business or the overall economy is about to take a nosedive, the election result will bring intended and unintended consequences no matter who wins. 

If you are concerned about the markets post-election, now may not be the best time to buy any bank stock, let alone one with a $550 million market cap.

As for the bank specifically, the only thing that could be concerning is that 81% of its $3.72 billion loan portfolio is commercial loans, both real estate-oriented and, to a lesser extent, for small businesses and their operations. 

Despite the portfolio’s overall credit quality, a significant economic slowdown would translate into higher writedowns and lower revenue and profits. I don’t think it will happen, but life is anything but a guarantee, so govern yourself accordingly.  

Should You Buy SMBK After Its 6-Month Run?

It trades at 1.35x its tangible book value per share, the exact multiple as in 2019 when it had half the amount of deposits and loans on its books. 

Despite the big run over the past six months, it appears fairly valued or undervalued. Analysts expect it to earn $1.97 a share in 2024 and $2.25 in 2025. Its shares trade at 16.3x and 14.2x these estimates, respectively. 

If you want a small-cap bank stock in your portfolio, I’d seriously consider SmartFinancial. Its management knows what they’re doing. 

Unfortunately, I can’t recommend an option play because it has a 30-day average volume of 2 and an open interest of 7. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.