Executive Summary / Key Takeaways

• SmartFinancial is successfully entering a "leveraging phase," translating prior strategic investments in de novo markets and talent into tangible profitability and operating leverage gains.
• Recent performance, particularly in Q1 2025, demonstrates strong execution with robust loan and deposit growth, expanding net interest margin, and improving efficiency.
• The company's strategic focus on organic growth, driven by invigorated sales teams and supported by technology platforms, is expected to continue delivering mid- to high single-digit loan growth funded by organic deposit generation.
• Management forecasts continued margin expansion throughout 2025 and is targeting a $50 million quarterly operating revenue run rate by late 2025, aiming for return on assets above 1% and return on equity above 12%.
• Key factors to watch include the pace of margin expansion, sustained organic growth momentum, effective expense control, and the ability to navigate competitive pressures and potential economic volatility while maintaining strong credit quality.

Setting the Stage: A Regional Bank's Strategic Evolution

SmartFinancial, Inc., through its wholly owned subsidiary SmartBank, operates as a regional bank holding company providing a comprehensive suite of financial services to individuals and businesses across East and Middle Tennessee, Alabama, and Florida. The company's core business revolves around traditional banking activities: gathering deposits, primarily noninterest-bearing and interest-bearing demand, savings, money market, and time deposits, and deploying these funds into a diversified loan portfolio spanning commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, and consumer loans.

The current chapter of SmartFinancial's story is defined by a strategic shift into a "leveraging phase." This follows significant foundational investments made in recent years, notably the expansion into seven de novo markets described as comparable to an acquisition without issuing stock, and the acquisition of the Fountain equipment finance subsidiary. These moves, while initially impacting return metrics, were designed to build a larger, more robust franchise in attractive, high-growth markets across the Southeast. The company is now focused on capitalizing on this expanded footprint and enhanced team to drive profitability and operating leverage.

Within the competitive landscape of Southeastern regional banking, SmartFinancial operates alongside larger players like First Horizon (FHN) and Regions Financial (RF), as well as similarly sized regional banks such as Synovus Financial (SNV) and Pinnacle Financial Partners (PNFP). While these competitors often possess greater scale and potentially more advanced technological infrastructure, SmartFinancial differentiates itself through a community-oriented approach, localized expertise, and a focus on building deep client relationships. The company's strategic emphasis on talent acquisition, particularly experienced regional bankers who understand both lending and deposit generation, is a key component of its competitive response, aiming to capture market share organically in its target zones.

SmartFinancial leverages technology platforms like nCino and Salesforce to support its strategic objectives. These systems are utilized to enhance the sales and prospecting process, providing a more consistent and structured approach for sales teams. Furthermore, the company employs pricing and profitability systems to guide bankers in understanding and maximizing the value of full client relationships, moving beyond transactional interactions. In operations, the adoption of KPI-driven workflows aims to refine back-office efficiency. While specific quantitative metrics on the performance improvements or comparative advantages of these technologies over alternatives are not detailed, the strategic intent is clear: to build a more effective sales organization and a more efficient operational backbone that supports the company's organic growth ambitions and contributes to achieving operating leverage. This technological support is viewed by management as foundational to executing their strategy and enhancing the value proposition for both clients and shareholders.

Recent Performance Reflecting Strategic Momentum

SmartFinancial's financial performance in the first quarter of 2025 provided clear evidence of the anticipated profitability inflection. Net income totaled $11.3 million, or $0.67 per diluted common share, a notable increase from $9.4 million, or $0.55 per diluted common share, in the first quarter of 2024. This improvement was primarily driven by a $5.1 million increase in net interest income after the provision for credit losses and a $217 thousand rise in noninterest income, partially offset by higher noninterest expenses.

The core engine of this performance was net interest income, which rose to $38.2 million in Q1 2025 from $31.7 million in the prior year quarter. The tax-equivalent net interest margin expanded significantly to 3.21% from 2.85%, benefiting from higher yields on interest-earning assets and a lower cost of interest-bearing liabilities. The yield on earning assets increased to 5.56% in Q1 2025, up from 5.36% in Q1 2024, as the company strategically deployed excess cash into higher-yielding loans and securities. Simultaneously, the cost of average interest-bearing deposits decreased to 2.92% from 3.16%, reflecting the impact of prior Federal Reserve rate decreases and strategic deposit management.

Balance sheet growth remained robust. Total assets reached $5.41 billion at March 31, 2025, up from $5.28 billion at December 31, 2024. This growth was fueled by strong loan and deposit generation. Total loans and leases increased by $85 million to $3.99 billion, representing a 9% annualized growth rate in Q1 2025, building on the outsized 20% annualized growth seen in Q4 2024. Deposit growth was equally impressive, increasing by $122.2 million to $4.81 billion, a 10% annualized pace. This growth was diversified across money market, time, and interest-bearing demand deposits, although noninterest-bearing deposits saw a decline. The loan-to-deposit ratio remained stable at a comfortable 83%, providing ample liquidity.

Noninterest income contributed $8.6 million in Q1 2025, showing a modest increase from the prior year. Growth in investment services and insurance commissions was partially offset by lower "other" income compared to a quarter that included a gain on property sale. Noninterest expense rose by $3.7 million to $32.3 million, primarily due to increased salaries and employee benefits associated with franchise growth and higher professional services fees. Despite this increase, management emphasizes that expense growth is being held to reasonable levels, allowing operating leverage to materialize as revenue expands.

Credit quality metrics remained exceptionally strong, underscoring the company's "credit-first" culture. Nonperforming assets stood at just 0.19% of total assets, and nonperforming loans were 0.20% of total loans at March 31, 2025. The allowance for credit losses remained steady at 0.96% of total loans, deemed adequate by management. While the provision for credit losses increased in Q1 2025 compared to the prior year, this was primarily attributed to the strong loan growth rather than asset deterioration. Net charge-offs were minimal at 0.01% on an annualized basis. Management acknowledged working through some lingering, isolated trucking credits within the equipment finance portfolio but expects these to slow. Capital ratios remained robust, with the company and its subsidiary bank exceeding well-capitalized thresholds, providing a solid foundation for continued growth.

Strategic Execution and Competitive Positioning

SmartFinancial's strategic execution is centered on leveraging its expanded footprint and team to drive organic growth and enhance profitability. The investments made in de novo markets like Birmingham, Auburn, and Montgomery are now yielding results, with flagship offices established and market share growing. This organic momentum is a direct outcome of the company's focus on building a strong sales organization and implementing disciplined prospecting processes. The addition of new revenue-producing team members, particularly in commercial banking, private banking, and treasury management, is a key driver of this growth and is expected to contribute significantly to future performance. Management views its ability to attract and retain top talent as a significant competitive advantage, positioning SmartBank as a desirable workplace for experienced regional bankers.

In the competitive arena, SmartFinancial faces rivals with varying strengths. Larger banks like RF and FHN benefit from scale, potentially achieving greater operational efficiencies and possessing more extensive technological capabilities. Synovus (SNV) also demonstrates strengths in digital innovation. However, SmartFinancial's competitive strategy emphasizes its deep local market knowledge, strong community ties, and a relationship-based banking model. The company's focus on specific niches, such as construction and land development lending and the specialized equipment finance business through its Fountain subsidiary, allows it to leverage expertise and potentially achieve better margins in these areas. The Fountain acquisition, in particular, has proven to be a profitable complementary business line, growing significantly since its integration.

While competitors may have advantages in broad technological scale or cost structures, SmartFinancial's investment in platforms like nCino and Salesforce is aimed at enhancing its specific sales and operational processes to support its relationship-focused model and drive efficiency gains relevant to its size and strategy. The company's ability to attract deposits organically, even in a competitive rate environment, is another testament to its relationship strength and market positioning. Management is keenly aware of competitive pressures, particularly regarding loan pricing and deposit costs, but has demonstrated an ability to maintain pricing discipline while still achieving strong growth. The strategic decision to exit a large, costly public fund relationship in 2024, while temporarily increasing reliance on brokered deposits, highlights a proactive approach to managing funding costs and prioritizing core relationship growth.

Looking ahead, SmartFinancial remains focused on executing its organic growth strategy. While M&A is not the primary focus, the company is open to opportunistic, deposit-based acquisitions that could strategically enhance its funding profile. The emphasis remains on leveraging the existing infrastructure and talent to drive operating leverage, allowing revenue growth to outpace expense increases.

Outlook and Risk Considerations

Management's outlook for SmartFinancial is one of continued optimism, grounded in the momentum observed in recent quarters. The company maintains its guidance for mid- to high single-digit loan growth throughout 2025, expecting this to be funded organically by deposit growth. This forecast is supported by solid pipelines and the continued productivity of the sales teams across all regions.

A key component of the forward-looking narrative is the expectation for continued net interest margin expansion. Management anticipates quarterly margin increases of 2 to 3 basis points throughout 2025, forecasting a Q2 2025 margin in the 3.25% range. This expansion is expected to be driven by the yield on new loan production, which continues to come on at rates accretive to the existing portfolio, and the favorable impact of lower-yielding fixed and adjustable-rate loans repricing or maturing. While the potential for future Federal Reserve rate cuts introduces some uncertainty, management believes the company is slightly liability-sensitive and could see a modest benefit from such moves.

Noninterest income is projected to be in the low to mid $8 million range for Q2 2025, with noninterest expense in the $32.5 million to $33 million range. Management remains committed to controlling expense growth, forecasting an annualized increase of 2.5% to 3% from the Q4 2024 run rate. This disciplined approach is central to achieving operating leverage and driving profitability towards stated targets. The effective corporate tax rate is expected to stabilize between 18% and 19% going forward, benefiting from the recently established REIT subsidiary.

The overarching financial targets remain clear: achieving a $50 million quarterly operating revenue run rate by the second half of 2025 and returning to profitability metrics of over 1% Return on Assets and over 12% Return on Equity. Management expresses confidence in reaching these goals based on the current trajectory and strategic focus.

However, the outlook is not without risks. The banking industry remains susceptible to fluctuations in interest rates, which could impact net interest margin, deposit costs, and the value of the securities portfolio. Credit risk, while currently low, could be affected by changes in economic conditions, particularly within segments like commercial real estate, construction, and the equipment finance portfolio, including potential impacts from tariff volatility on industries like trucking and auto suppliers. Liquidity risk requires careful management to ensure sufficient funds are available to meet obligations and loan demand, although the company's current loan-to-deposit ratio and available borrowing capacity provide a strong position. Competition for both loans and deposits remains intense, potentially pressuring pricing and growth. While legal proceedings are not currently anticipated to have a material impact, they represent an inherent risk in the normal course of business.

Conclusion

SmartFinancial is executing a well-defined strategy to capitalize on its expanded franchise and drive enhanced profitability. The company's recent performance, particularly the strong Q1 2025 results, signals a clear inflection point as it moves into a leveraging phase. Robust organic loan and deposit growth, coupled with expanding net interest margin and disciplined expense control, are key indicators that the strategic investments made in prior years are beginning to yield significant returns.

The core investment thesis for SMBK rests on its ability to continue this trajectory. Supported by a strong credit culture, a revitalized sales organization leveraging technology platforms, and a strategic focus on attractive markets, SmartFinancial is well-positioned to achieve its near-term profitability targets. While competitive dynamics and potential economic headwinds present challenges, the company's demonstrated execution, strong capital position, and ample liquidity provide a solid foundation. Investors should monitor the pace of margin expansion, the consistency of organic growth, and the effectiveness of expense management as key indicators of the company's progress towards realizing its full potential and delivering enhanced shareholder value.