Executive Summary / Key Takeaways

• Accelerated Profitability and Tangible Book Value Growth: SmartFinancial, Inc. (SMBK) is demonstrating a strong "leveraging phase" of growth, achieving six consecutive quarters of positive operating leverage and an impressive 26% annualized increase in tangible book value per share to $26.63 (excluding AOCI impacts) in Q3 2025. The company hit its $50 million quarterly revenue target ahead of schedule, signaling robust operational execution.
• Robust Organic Loan and Deposit Expansion: The company's focused sales strategy is driving significant organic growth, with loans and leases increasing 10% annualized and deposits up 15% annualized in Q3 2025. Management anticipates sustaining a "high single digits plus pace" for loan growth, organically funded by deposits, into 2026.
• Expanding Net Interest Margin (NIM) Outlook: Despite a temporarily compressed NIM in Q3 2025, SmartFinancial projects a Q4 2025 margin of 3.3% to 3.35% and is "pretty bullish" on 2026, forecasting 5 to 7 basis points of NIM expansion quarter-over-quarter, driven by higher-yielding new loan production and the re-pricing of its loan portfolio.
• Strategic Capital and Efficiency Initiatives: SmartFinancial is actively managing its balance sheet, including a $100 million subordinated debt issuance in Q3 2025 (partially for existing debt retirement and a $45 million equity contribution to the bank) and a strategic repositioning of $85 million in available-for-sale securities. The company is also leveraging technology, including AI and bots, to enhance efficiency and control expense growth, projecting full-year 2026 non-interest expenses in the $34 million to $35 million range.
• Strong Asset Quality and Talent-Driven Competitive Edge: Asset quality remains exceptionally sound, with non-performing assets at just 0.22% of total assets. SmartFinancial's ability to attract and retain "outstanding regional bankers" and its recognition as a "great place to work" are key competitive differentiators, fueling its organic growth engine in attractive Southeastern markets.

SmartFinancial's Strategic Ascent in the Southeast Banking Landscape

SmartFinancial, Inc. (NYSE: SMBK), through its wholly-owned subsidiary SmartBank, has established itself as a dynamic regional bank, providing a comprehensive suite of financial services to individuals and corporate clients across East and Middle Tennessee, Alabama, and Florida. The company's core business revolves around primary deposit products, including noninterest-bearing and interest-bearing demand, savings, money market, and time deposits, alongside a robust lending portfolio encompassing commercial, residential, and consumer loans. SmartFinancial's overarching strategy is to capitalize on its presence in some of the nation's most attractive markets by focusing on aggressive organic growth, deepening its market penetration, and continuously investing in top-tier talent.

The company's journey has been marked by strategic expansion, particularly from 2020 through 2022, which saw significant business acquisitions and the rapid establishment of flagship offices in high-growth Alabama markets like Birmingham, Auburn, and Montgomery. This deliberate "mile wide inch deep" approach initially aimed to build out a broad regional footprint, which is now transitioning into a "leveraging phase" focused on extracting greater profitability from its established infrastructure. A notable acquisition "a couple of years ago" (prior to Q4 2024) of an equipment finance business has proven highly successful, growing its portfolio from mid-$50 million to approximately $140 million by Q1 2025, contributing positively to both growth and yields.

The broader banking industry operates within a complex macroeconomic environment, influenced by fluctuating interest rates, inflationary pressures, and geopolitical uncertainties. SmartFinancial acknowledges these external factors, noting that while they create volatility, they have not deterred the company from its strategic objectives. The company's performance is intrinsically linked to the economic vitality of its primary markets, which management consistently describes as "really strong," fostering an optimistic client sentiment despite broader market concerns.

Technological Edge and Operational Efficiency

SmartFinancial is strategically embracing technology to enhance its competitive position and drive operational efficiency. The company is actively exploring and implementing new tech-focused initiatives, including the use of Copilot, AI, and bots. These tools are designed to increase overall efficiency, streamline processes, and enable the company to scale its operations without a proportional increase in staffing levels. Management views these technological investments as a means to reallocate resources and reinvest in areas that directly benefit client experience and operational effectiveness. For instance, the company is focusing on platform enhancements and developing consumer-facing digital solutions, aiming to make it "easier to do business with." This commitment to technological advancement is a critical component of SmartFinancial's strategy to maintain a lean operating model and achieve its long-term efficiency goals, thereby strengthening its competitive moat and contributing to improved financial performance through cost control and enhanced service delivery.

Competitive Dynamics and Strategic Positioning

SmartFinancial operates in a highly competitive landscape, vying with larger regional players such as Regions Financial Corporation (RF), First Horizon Corporation (FHN), Synovus Financial Corp. (SNV), and Pinnacle Financial Partners (PNFP), as well as indirect competitors like fintech companies and online banks. SmartFinancial's competitive advantage lies in its strong local brand, community-focused approach, and the ability to attract and retain "outstanding regional bankers." This localized expertise and relationship-driven model allow SMBK to be more agile and responsive in its markets, particularly in niche segments like construction and land development loans, where it offers tailored solutions.

While larger competitors like RF and FHN benefit from greater scale and broader product diversity, SmartFinancial differentiates itself through personalized service and a deep understanding of local market dynamics. For example, in shared markets, SMBK's community-oriented strategy can foster stronger customer loyalty compared to RF's more generalized approach. Against FHN's digital focus, SMBK emphasizes relationship-based advantages, though it acknowledges the need to enhance its own technological capabilities to remain competitive. SmartFinancial's "branch-light model" contributes to cost management, offering an advantage over rivals with more extensive physical infrastructures. Management asserts that its team "will outwork out hustle and out close" any competitor in its markets, underscoring a strong performance-driven culture. However, the company faces competitive pricing pressure, particularly from aggressive rivals, but has maintained discipline on pricing and structure without sacrificing growth.

Financial Performance and Operational Momentum

SmartFinancial's financial performance in the third quarter of 2025 and the first nine months of the year underscores its successful execution. Net income for Q3 2025 rose to $13.69 million, or $0.81 per diluted common share, a significant increase from $9.14 million, or $0.54 per diluted common share, in Q3 2024. For the nine months ended September 30, 2025, net income reached $36.64 million, or $2.17 per diluted common share, up from $26.50 million, or $1.57 per diluted common share, in the prior year period. This growth was primarily fueled by a substantial increase in net interest income after the provision for loan and lease losses, which surged by $9.70 million in Q3 2025 compared to Q3 2024.

The company's tangible book value per share saw robust growth, increasing to $26.00 (including AOCI) and $26.63 (excluding AOCI) in Q3 2025, representing an annualized growth of over 26% quarter-over-quarter. SmartFinancial also achieved its $50 million quarterly revenue target in Q3 2025, ahead of schedule.

Net interest income (NII) for Q3 2025 was $42.43 million, up from $35.03 million in Q3 2024, driven by higher loan and lease balances, improved asset yields, and lower interest-bearing liability costs. The tax-equivalent net interest margin (NIM) was 3.25% in Q3 2025, an improvement from 3.11% in Q3 2024. Loan and lease balances, net, grew to $4.18 billion by September 30, 2025, from $3.87 billion at December 31, 2024, representing a 10% annualized growth rate in Q3 2025. New loan production in Q3 2025 carried an average yield of 7.11%, which is accretive to the overall portfolio yield.

Deposit growth was equally impressive, with total deposits reaching $5.05 billion at September 30, 2025, an increase of $364.40 million from December 31, 2024. This was driven by strong non-brokered deposit growth, allowing the company to reduce brokered deposits by $104 million in Q3 2025, with plans for an additional $111 million reduction in Q4 2025. The loan-to-deposit ratio stood at a healthy 84% in Q3 2025, providing ample liquidity.

Noninterest income in Q3 2025 was $8.64 million, impacted by a $3.90 million loss on the sale of securities, but partially offset by a $3.96 million gain from the sale of SBK Insurance (SBKI). The sale of SBKI on September 5, 2025, for $11.5 million, marked the cessation of the company's insurance-related activities, with proceeds strategically used to offset the securities loss. The repositioned securities, yielding 4.95%, are expected to generate an additional $2.6 million in annual interest income. Mortgage banking revenue and investment services also contributed positively to noninterest income.

Noninterest expense increased to $33.87 million in Q3 2025, primarily due to higher salaries and employee benefits from franchise growth and restructuring expenses. However, management's focus on expense containment has allowed for a relatively stable expense base over the past four quarters, contributing to an improved operating efficiency ratio of 64% in Q3 2025, down from 66% in the prior quarter.

Asset quality remains robust, with nonperforming assets at a low 0.22% of total assets and nonperforming loans and leases at 0.24% of total gross loans and leases as of September 30, 2025. The allowance for credit losses (ACL) was $39.07 million, representing 0.93% of total loans and leases. Capital ratios are strong, with a consolidated risk-based capital ratio of 13.3% and a TCE ratio of 7.8% at September 30, 2025, well above regulatory minimums. The company's $45 million equity capital contribution to the bank from subordinated debt proceeds helped reduce its CRE concentration ratio from 301% to 271%.

Outlook and Strategic Initiatives

SmartFinancial's outlook is characterized by continued optimism and a clear strategic roadmap. Management projects a Q4 2025 net interest margin in the range of 3.3% to 3.35%. Looking further ahead, the company is "pretty bullish" on NIM expansion in 2026, anticipating 5 to 7 basis points of expansion quarter-over-quarter. This is supported by the expectation that approximately 45% of its deposit portfolio costs are variable and will adjust with Federal Reserve rate actions.

For Q4 2025, non-interest income is projected to be approximately $7 million (reflecting the absence of insurance operations), while non-interest expense is expected to be in the range of $32.5 million to $33 million. Salary and employee benefits are anticipated to be between $19 million and $19.5 million. For the full year 2026, non-interest expenses are projected to be in the $34 million to $35 million range, reflecting a continued focus on expense containment even with growth.

The company's primary strategic initiative is to "double down on this current strategy" by "getting deeper into our markets and our business lines." This involves aggressive client acquisition and diligent prospecting, aiming for a "high single digits plus pace" of loan growth, which management believes can be organically funded by deposits. Talent acquisition remains a critical focus, with the company continuously recruiting "outstanding regional bankers" across its footprint, including recent additions in Alabama, Tennessee, and Florida. SmartFinancial's recognition as a "great place to work" for eight consecutive years underscores its strong culture, which is a key factor in attracting and retaining talent.

Risks and Challenges

Despite the positive outlook, SmartFinancial faces several inherent risks. Economic and market conditions, including inflationary pressures, interest rate fluctuations, and potential economic slowdowns, could impact loan demand, deposit costs, and asset quality. The company's loan portfolio, particularly commercial real estate and construction and land development loans, carries a "relatively greater credit risk." While current asset quality is strong, unanticipated credit deterioration or higher-than-expected loan losses remain a concern.

Competition from both traditional banks and fintechs poses a continuous challenge, potentially affecting pricing power and market share. Regulatory changes, cybersecurity threats, and geopolitical events also represent ongoing risks that could impact financial performance. Furthermore, the company's ability to pay dividends is subject to future earnings, capital position, and regulatory restrictions.

Conclusion

SmartFinancial, Inc. is executing a compelling growth story, leveraging its established regional footprint and a robust organic growth engine to drive sustained profitability. The company's consistent achievement of positive operating leverage, impressive tangible book value growth, and expanding net interest margin underscore the effectiveness of its strategy. By "doubling down" on its core markets, strategically investing in technology for efficiency, and continuously attracting top talent, SmartFinancial is solidifying its competitive position in the dynamic Southeastern banking landscape. While macroeconomic uncertainties and competitive pressures persist, the company's strong asset quality, disciplined expense management, and clear forward guidance suggest a continued trajectory of enhanced shareholder value. Investors should watch for sustained organic growth, continued NIM expansion, and the successful integration of technological advancements as key indicators of SmartFinancial's ongoing success.