10-Q: SmartFinancial Reports Strong Q3 2025 Earnings Growth

SmartFinancial Inc. announced a significant increase in net income and diluted EPS for Q3 and YTD 2025, driven by higher net interest income and strategic asset management.

Summary

• Net income for the third quarter of 2025 increased to $13.7 million, or $0.81 per diluted common share, up from $9.1 million, or $0.54 per diluted common share, in Q3 2024.
• Year-to-date net income reached $36.6 million, or $2.17 per diluted common share, compared to $26.5 million, or $1.57 per diluted common share, for the first nine months of 2024.
• Annualized return on average assets improved to 0.96% for Q3 2025 and 0.90% for YTD 2025.
• Net organic loans and leases grew by $314.4 million from December 31, 2024, to September 30, 2025.
• Total deposits increased by $364.4 million from December 31, 2024, reaching $5.05 billion.
• The company sold its SBK Insurance subsidiary on September 5, 2025, for $11.5 million, realizing a pre-tax gain of $3.955 million.
• Repositioned $85 million of available-for-sale securities during Q3 2025, resulting in a pre-tax loss of $3.9 million.
• Issued $100 million of 7.25% fixed-to-floating rate subordinated notes on August 20, 2025, to fund growth and retire existing debt.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant increases in net income, EPS, and profitability ratios. Robust loan and deposit growth, coupled with strategic divestiture and successful capital raising, indicate a positive operational trajectory and sound financial health, despite some increases in noninterest expense and a loss on securities repositioning.

Positives

• Net income increased by $4.5 million for Q3 2025 compared to Q3 2024, and by $10.1 million for YTD 2025 compared to YTD 2024.
• Diluted earnings per common share rose by $0.27 for Q3 2025 and $0.60 for YTD 2025.
• Return on average assets improved to 0.96% for Q3 2025 and 0.90% for YTD 2025, indicating increased efficiency.
• Net interest income increased significantly by $7.4 million for Q3 2025 and $21.4 million for YTD 2025, driven by higher loan balances and yields.
• Provision for credit losses decreased by $2.348 million in Q3 2025 compared to Q3 2024, suggesting improved credit quality or lower expected losses.
• Strong organic loan and lease growth of $314.4 million year-to-date 2025.
• Robust deposit growth of $364.4 million from December 31, 2024, to September 30, 2025.
• Successful divestiture of SBK Insurance generated a pre-tax gain of $3.955 million.
• Capital ratios for both SmartFinancial and SmartBank exceeded minimum regulatory requirements and the 'well capitalized' threshold at September 30, 2025.

Negatives

• Noninterest income decreased by $502 thousand in Q3 2025 compared to Q3 2024, primarily due to a loss on sale of securities and decreased insurance commissions.
• Noninterest expense increased by $3.0 million in Q3 2025 and $10.1 million for YTD 2025, mainly due to higher salaries, employee benefits, and restructuring expenses.
• Repositioning of $85 million of available-for-sale securities resulted in a pre-tax loss of $3.9 million.
• Nonperforming loans and leases as a percentage of total gross loans increased to 0.24% at September 30, 2025, from 0.20% at December 31, 2024.
• Nonperforming assets as a percentage of total assets increased to 0.22% at September 30, 2025, from 0.19% at December 31, 2024.

Risks

• Impact of current and future economic and market conditions, including inflationary pressures, changes in interest rates, tariffs, trade wars, economic slowdowns or recession, and potential for high unemployment rates.
• Changes in interest rates affecting the level and composition of deposits, loan demand, liquidity, and the values of loan collateral, securities, and market fluctuations.
• Adverse developments in the banking industry impacting customer confidence, liquidity, regulatory responses, and deposit insurance assessments.
• Potential for asset quality decline or greater loan and lease losses than anticipated.
• Impact of liquidity needs on results of operations and financial condition.
• Competition from financial institutions and other financial service providers.
• Negative developments in the financial industry and U.S. and global capital and credit markets.
• Impact of recently enacted and future legislation and regulation on the business.
• Weakness in the real estate market, affecting collateral value, loan originations, delinquencies, and mortgage servicing rights.
• Risks associated with growth strategy, including failure to implement or inability to manage growth effectively.
• Claims and litigation arising from business activities and acquisitions.
• Risks of mergers, acquisitions, and divestitures, including identifying targets, successful integration, and realizing expected synergies.
• Cyber-attacks, computer viruses, or other malware breaching security, obtaining unauthorized access to confidential information, destroying data, or disabling systems.
• Results of examinations by primary regulators (TDFI, Federal Reserve, FDIC) potentially requiring increased allowance for credit losses, asset write-downs, customer reimbursement, or business changes.
• Government intervention in the U.S. financial system and effects of changes in trade, monetary, and fiscal policies and laws, including Federal Reserve interest rate policies.
• Uncertainties surrounding geopolitical events, trade policy, taxation policy, and monetary policy impacting future economic growth.
• Inability to pay dividends at current levels or at all due to inadequate future earnings, goodwill impairments, or regulatory restrictions.
• Relatively greater credit risk of commercial real estate loans and construction and land development loans in the portfolio.
• Unanticipated credit deterioration or higher than expected loan and lease losses within one or more segments of the portfolio.
• Unexpected significant declines in the loan and lease portfolio due to lack of economic expansion, increased competition, large prepayments, or changes in regulatory lending guidance.
• Unanticipated loan and lease delinquencies, loss of collateral, or decreased service revenues caused by severe weather, natural disasters, acts of war or terrorism, and other external events.
• Changes in expected income tax expense or tax rates.
• Inability to retain the services of key personnel.
• Changes in accounting principles, policies, or guidelines.
• Political instability, acts of God, war or terrorism, natural disasters, health emergencies, epidemics or pandemics, or other catastrophic events affecting general economic conditions.
• Risks related to corporate responsibility strategies and initiatives.
• Deterioration of the credit rating for U.S. long-term sovereign debt, actions to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and federal budget.
• Regulatory environment potentially hindering future mergers and/or business combinations.
• Impact of Tennessee's anti-takeover statutes and certain charter provisions on potential acquisitions of the company.

Future Outlook

The company anticipates adequate liquidity to meet expected customer obligations, supported by its capital raising techniques. Management expects to continue funding additional growth, leveraging the recent subordinated debt issuance. The company is also assessing the impact of new accounting pronouncements (ASU 2023-09 and ASU 2024-03) for future financial reporting.

Management Comments

• Net interest income increased due to higher loan and lease balances, higher yields on these assets, and lower cost of interest-bearing liabilities.
• The increase in net income for the first nine months of 2025 was primarily from the increases in net interest income after provision for loan and lease losses and noninterest income, offset by increases in noninterest expense and income tax expense.
• The yield on earning assets increased primarily due to the deployment of excess cash and cash equivalents into loans and leases.
• The cost of average interest-bearing deposits decreased primarily due to the decrease in rates by the Federal Reserve.
• The company believes its deposit product offerings are properly structured to attract and retain core deposit relationships.
• Management does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company will be material to the Company’s consolidated financial position.

Industry Context

The company's strong performance, particularly in net interest income and loan growth, indicates effective navigation of the current interest rate environment. The reported decrease in the cost of average interest-bearing deposits, attributed to Federal Reserve rate decreases, is a notable point that may reflect specific deposit mix management or local market conditions, potentially contrasting with broader industry trends of rising deposit costs. The strategic divestiture of SBKI aligns with a focus on core banking operations amidst competitive pressures in the financial services sector.

Corporate Governance

Legal Proceedings

• The company and its subsidiary, SmartBank, are periodically involved in various legal actions in the ordinary course of business.
• Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising from pending or threatened litigation will be material to the company's consolidated financial position.

Stakeholder Impact

• Shareholders: Benefited from increased net income, diluted EPS, and improved profitability ratios (ROAA, ROAE). Continued quarterly common stock dividends of $0.08 per share. Potential for future stock repurchases.
• Employees: Experienced increased salaries and employee benefits due to franchise growth. Participation in 401(k) plan with company matching contributions. New Omnibus Incentive Plan provides future equity award opportunities.
• Customers: Continue to receive a broad range of financial services, including deposit products and various loan types. The company offers a loan hedging program to certain loan customers.
• Creditors: The issuance of $100 million in subordinated debt and the subsequent retirement of $40 million in existing subordinated debt impact the company's debt structure and capital base.
• Regulators: The company maintains capital levels exceeding minimum regulatory requirements and the 'well capitalized' classification, demonstrating compliance and financial stability.

Next Steps

• Amortization of debt issuance costs for the 2025 Notes through September 1, 2030.
• Retirement of the $40 million 2018 Notes on October 2, 2025 (post-period event).
• Assessment of ASU 2023-09 (Income Taxes) for its adoption in the first annual period beginning after December 15, 2024.
• Assessment of ASU 2024-03 (Expense Disaggregation Disclosures) for its adoption in fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027.
• Ongoing monitoring and management of interest rate risk by the Asset Liability Management Committee (ALCO).
• Potential future repurchases of up to an additional $1.5 million in common stock under the authorized stock repurchase plan.
• Future dividend payments by the Company are subject to the discretion of the board of directors and will depend on earnings, capital position, financial condition, and regulatory requirements.

Key Dates

Recommendation

The company demonstrates strong financial performance with significant year-over-year growth in net income, EPS, and key profitability ratios (ROAA, ROAE). Net interest income is robust, and the provision for credit losses decreased in the quarter. Strategic actions like the sale of SBKI and the successful subordinated debt issuance strengthen the balance sheet and provide capital for future growth. While noninterest income saw a slight quarterly decrease and noninterest expense increased, the overall financial trajectory is positive, indicating effective management and a healthy banking operation. The capital ratios exceed regulatory minimums, and the company is well-capitalized, making it an attractive investment.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Net Income, EPS, Loan Growth, Deposit Growth, Net Interest Income, Subordinated Debt, Capital Ratios, Asset Quality, Risk Management, SMBK