SmartFinancial is the Tennessee consolidator that seems to be flying under the radar.

While First Horizon in Memphis and Pinnacle Financial Partners in Nashville announced large, headline-grabbing acquisitions in recent years, the $1.1 billion-asset SmartFinancial has been quietly stringing together a series of smaller deals to build scale.

Along the way, the Knoxville company is becoming a major player in a number of secondary markets such as Tuscaloosa, Ala., and Pensacola, Fla.

That focus makes sense for smaller banks, industry experts said. Secondary markets tend to be less competitive since they are not a priority for larger institutions, said Paula Johannsen, a managing director at Monroe Financial Partners. They are typically buoyed by small and midsize businesses that community banks can serve.

“You can have more of a presence” in smaller markets, Johannsen said. “Community banks have better pricing power outside of the central urban core.”

Though Smart won’t rule out eventually entering large Southeastern markets, it prefers to make a meaningful impact when it moves into a new locale, said W. Miller Welborn, Smart’s chairman.

Smart also likes the atmosphere of cities built around a college or university.

More banks are interested in “university towns” because of “the vibrancy of the community,” said Lee Burrows, CEO of Banks Street Partners, which advised Smart on the Southern Community deal. Those towns attract more residents with enhanced cultural experiences and amenities such as restaurants, he said.

“Many banks are also trying to tap into college-age students when they’re making some of their first financial decisions,” said Burrows, who declined to specifically discuss Smart. “That gives you early access.”

Though SmartFinancial is celebrating its 11th anniversary, management points to the 2015 merger with Cornerstone Bancshares in Chattanooga, Tenn., as the moment when things took off. Smart, formed just before the housing market imploded and the onset of the financial crisis, initially focused on organic growth, though it also bought a failed bank in Florida.

Smart’s purchase of Cornerstone, a similar-sized institution, provided executives with the necessary heft to expand faster.

The merger “created this $1 billion platform,” said Welborn, who was Cornerstone’s chairman. “SmartBank 2.0 is really when the growth engine kicked in and the next phase of where we’re going.”

Since then, Smart has bought Capstone Bank in Tuscaloosa and has agreed to buy the $244 million-asset Southern Community Bank in Tullahoma, Tenn. Management expects to announce more acquisitions as it looks to take advantage of increased consolidation in the Southeast.

In smaller acquisitions sellers usually are paid lower premiums, according to data compiled by Keefe, Bruyette & Woods. The average premium in 2017 for a seller with less than $500 million in assets was 147% of the seller's tangible book value. That compares with 178% for sellers with $500 million to $1 billion in assets and 210% for banks with more than $1 billion in assets.

Smart paid a premium of 162% of Capstone's tangible book value. Its agreement for Southern Community priced the seller at 153% of tangible book value.

“It’s an opportunistic management team,” said Joseph Fenech, an analyst at Hovde Group. “That seems to be in their bones.”

Mergers of similar-sized institutions are often touted as making financial sense and a quick way for small banks to add scale. But such deals, which typically have low premiums, often sputter due to social issues tied to bringing two banks together. Many fail to come together because executives and directors are hesitant to relinquish control unless they can get a significant premium.

“It is an easy strategy to articulate, but it’s actually difficult to buy another institution around the same size as you and not screw it up,” said Tony Plath, a financial professor at the University of North Carolina at Charlotte. “The industry is littered with stories where banks buy others about their size and the integration becomes difficult on the back end. It can be a dangerous strategy.”

Welborn and William Carroll, Smart’s president and CEO, took their time putting the merger together. A mutual friend introduced the executives, who then spent the next year discussing a shared culture, vision and passion for banking. Once they finally decided to merge their banks, they spent an afternoon sketching out the details.

The deal “created the catalyst for a really strong Southeastern bank,” Carroll said. “We knew it would take longer to do it independently. The culture aligned. The vision aligned. The bank boards aligned. That doesn’t happen easily. We were fortunate.”

It helps that Welborn and Carroll recognize each other’s strengths. Carroll, who has been in banking for roughly 25 years, focuses on the day-to-day operations, while Welborn, who runs a consulting firm that specializes in transportation logistics, uses his networks for initiatives such as M&A.

“We tease each other’s wives that we spend more time with each other than with them,” Welborn said. “I know what my responsibilities are and Billy’s responsible for running the bank — and he does a great job with it.”

Smart’s executives, who want to complete more acquisitions across the Southeast, are focused on fill-in deals for banks with $200 million to $500 million of assets, they said. Smart wants to snag smaller institutions that might be overlooked by the larger acquirers.

Smaller institutions have a number of reasons to sell.

Southern Community, for instance, decided to look into selling after its board took into account rising compliance requirements and a core processing contract that was up for renewal. A strengthening economy also played into the thinking, Bill Yoder, Southern Community’s president and CEO, said through a spokeswoman.

After meeting with representatives from a dozen banks, Southern Community opted to sell to Smart because of its growth-oriented strategy and history of putting customers first, Yoder said.

Smart, as a publicly traded institution, also provides an exit strategy for bank investors who might want a chance to cash out.

“There aren’t a lot of banks of our size with a public currency,” Carroll said. “Most sellers want liquidity, so having a Nasdaq-traded security is a big plus.”

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Jackie Stewart

Jackie Stewart covers community banks and mergers and acquisitions for American Banker.