Robust Loans And Credit Quality Will Secure Future Banking Success

Key Takeaways

• Robust loan and deposit growth is expected to boost revenue and support further loan production, enhancing net interest margins.
  
• Strategic recruitment and investments in private banking and treasury management will enhance revenue growth while keeping expenses in check.
  
• Economic and competitive pressures, along with sector-specific risks, threaten SmartFinancial's revenue, profitability, and credit quality amid 2025's uncertainty.

Catalysts

Operates as the bank holding company for SmartBank that provides various financial services to individuals and corporate customers in Tennessee, Alabama, and Florida.

• The company is experiencing robust loan growth, with a 9% annualized pace in Q1 2025 and the ability to maintain this strong pipeline, which could lead to increased net interest income and overall revenue growth.
  
• SmartFinancial has achieved significant non-brokered deposit growth of over 10% on an annualized basis, maintaining a favorable loan-to-deposit ratio at 83%. This solid deposit base supports future loan production, aiding in margin expansion and revenue growth.
  
• The company anticipates margin expansion by 2-3 basis points quarterly through 2025, driven by new loan production and the replacement of lower-yielding loans. This should positively affect net interest margins and earnings.
  
• SmartFinancial is maintaining strong credit quality with very low nonperforming assets (0.19% of total assets), which reduces the risk of significant credit losses and supports sustainable earnings growth.
  
• The recruitment of revenue-producing team members and strategic investments in business lines like private banking and treasury management are expected to enhance the company's ability to grow its revenue line while managing expenses effectively.

SmartFinancial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SmartFinancial's revenue will grow by 14.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.2% today to 25.0% in 3 years time.
• Analysts expect earnings to reach $63.9 million (and earnings per share of $3.7) by about April 2028, up from $38.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 13.5x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

SmartFinancial Future Earnings Per Share Growth

Risks

• Economic uncertainty and volatility at the start of 2025 may make it difficult for SmartFinancial to plan long-term, potentially impacting revenue growth and profitability.
  
• The company is experiencing slightly decreased net interest margins, reflecting some pressure on earnings due to changes in loan and deposit pricing.
  
• Competitive pressures in loan pricing might necessitate rate and structure adjustments, which could compress future net interest margins and reduce income.
  
• There is a risk of further credit issues within specific loan segments, such as the transportation sector, which could lead to increased charge-offs and provisions, negatively affecting net income.
  
• Exposure to macroeconomic factors such as tariffs and potential supply chain disruptions could adversely affect the credit quality and loan growth prospects, impacting overall revenue and earnings.

Valuation

• The analysts have a consensus price target of $36.625 for SmartFinancial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $31.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $255.8 million, earnings will come to $63.9 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $30.24, the analyst price target of $36.62 is 17.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.