SmartFinancial, Inc. (SMBK) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the SmartFinancial Second Quarter 2026 Earnings Release and Conference Call. [Operator Instructions] I will now hand over to Nate Strall, Director of Investor Relations to begin. Please go ahead.

Thanks, Eric. Good morning, everyone, and thank you for joining us for SmartFinancial's Second Quarter 2026 Earnings Webcast and Conference Call. During today's call, we will reference the slides and earnings release available in the Investor Relations section of our website at smartbank.com. Billy Carroll, our President and Chief Executive Officer, will begin the call, followed by Ron Gorczynski, our Chief Financial Officer, who will provide additional commentary. We will be available after the call to answer your questions. Our comments today include forward-looking statements these statements are subject to risks and uncertainties, and actual results may differ materially. Factors that could cause these actual results to differ materially are described in our earnings release and SEC filings, which are available on our website. We undertake no obligation to update any forward-looking statements as a result of new information, future developments or otherwise, except as required by law. During today's call, we may reference non-GAAP financial measures related to the company's performance. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendices to the earnings release and investor presentation filed with the SEC on July 20, 2026. And now I'll turn it over to Billy Carroll.

Thanks, Nate, and good morning, everyone. Great to be with you, and thank you for joining us today and for your interest in SMB. As usual, I'll open up our call with some commentary and hand it over to Ron to walk through the numbers in some greater detail. After our prepared comments, we'll open it up with Ron, Nate, Rhett, Miller and myself available for Q&A. We followed a strong first quarter with an even better second quarter as our team continued to build outstanding organic momentum. The foundation we have worked so hard to build over the past several years is clearly demonstrating its strength as we continue to grow operating leverage. Our team's focus on this execution remains outstanding, and the second quarter of 2026 was yet another clear example of that. So let me jump right into some of our highlights. First, and as I always say, 1 of the most important metrics to me, we continue to increase the tangible book value of our company, which is now at $28.22 per share up from $26.86 at year-end. For the quarter, we posted operating earnings of $16.3 million or $0.96 per diluted share with total revenue coming in at $55.9 million. We continue to execute with outstanding growth on both sides of the balance sheet posting 15% annualized growth in loans and 6% annualized growth in core deposits. Our history of strong credit continues with only 23 basis points in nonperforming assets down 2 basis points from the prior quarter. I'm very pleased with our credit performance and our extremely low level of NPAs. And operating noninterest expenses also came in on target at just under $34 million as we continue to exhibit our expense discipline. Looking at the first few pages in the deck you'll see our continuation of some very nice trends. We're building on our return metrics and most importantly, growing total revenue, EPS and TBD. All of those charts are great graphics to illustrate our execution. So a couple of additional high-level comments for me. On growth, our balance sheet expansion continues. We are building a strong foundational sales culture led by our divisional and regional presidents, along with our collaborative credit leadership. The work of these teams has been outstanding and the energy and hustle they exhibit as they focus on new client acquisition is exciting to see. I continue to believe we are among a select top-of-class group of top-performing banks when it comes to pure organic growth. As I stated, we grew our loan book 15% annualized quarter-over-quarter as sales momentum stays strong and balanced across all of our regions. Our average portfolio yield, including fees and accretion held up well at 6.07%. Regarding deposits. Again, core deposits were up 6% annualized. Even with some expected second quarter seasonality, we continue to drive nice core deposit growth. It's important to note how we're building this bank with core relationships as we have a keen focus on both sides of the balance sheet. A couple of other key highlights noted in the release bullets include crossing the $6 billion in asset mark, another nice milestone for our team as we grow strategically and profitably. And as I mentioned, our tangible book value per share grew at 13% annualized for the quarter. But in addition to great numbers, I'm also very proud of our Great Place to Work for certification. It is great to be recognized for the outstanding culture we are building and the tireless work of our associates in these efforts. As you can see, we are gaining operating leverage but also gaining momentum and we're balancing that with appropriate investment in our franchise. We will keep investing in people, technology and strategically in facilities, but do so while maintaining positive leverage. We are seeing some nice opportunities right now with the disruption taking place in the Southeast, and we want to take advantage of that. The franchise we've built is positioned to effectively compete for business against larger regional players, but also nimble enough to flex down when we need to. It's a pretty nice position to be in. Gaining share and getting deeper in these great markets continues to be our primary focus. So all in all, a very nice way to wrap the first half of 2026. So I'm going to stop there and hand it over to Ron to dive into some details for us. Ron?

Thanks, Billy, and good morning, everyone. I'll start by highlighting some key deposit results. During the quarter, we continued our momentum in client relationship expansion and new account growth. Non-broker deposits grew $83 million while new deposit reduction costs increased 8 basis points to 2.90%. While our deposit growth was strong, loan growth of $165 million exceeded deposit production resulting in the use of $106 million of short-term brokered deposits. Seasonal activity reduced noninterest-bearing deposits to 17% of total deposits, reflecting normal second quarter activity, including cash use for tax payments. We also experienced some portfolio mix shift as clients continue to optimize balances between interest-bearing and noninterest-bearing accounts. Even with these dynamics, interest-bearing deposit cost rose just 2 basis points to 2.62% and liquidity remains strong with a loan-to-deposit ratio of 87%. Looking ahead, we expect competition for deposits to remain elevated, which may continue to pressure funding costs in the near term. Turning to our margin. Net interest income was $48.1 million, up $2.2 million from the first quarter, our net interest margin expanded to 3.52% compared with 3.48% last quarter. The margin improvement was driven by asset yields outpacing the modest increase in funding costs. Loan yields increased 5 basis points, assisted by new production coming on above the portfolio yield, continued loan portfolio repricing activity and higher loan fees from certain loan prepayments. Excluding the loan prepayment fees, our normalized net interest margin was 3.58% for the quarter, in line with our expectations. New loan production remained steady with a weighted average yield of 6.40% for the quarter. Overall, our margin story continues to be about disciplined pricing, good balance sheet management and the benefit of loan pricing in this rate environment. Looking ahead, we expect continued improvement in asset yields to support modest margin expansion over time. However, near-term deposit cost pressure may reduce third quarter margin by a few basis points, which would result in a forecasted margin in the 3.45% range. Turning to credit. Our provision for credit losses was $1.9 million, down from $3.2 million last quarter. After a $392,000 reduction in the liability for unfunded commitments, total provision expense was $1.5 million, primarily from loan growth. As a reminder, the higher provision last quarter was driven by CECL modeling changes that we discussed on our prior earnings call. Our allowance to loans ratio remained stable at 97 basis points, which we believe is appropriate for the portfolio and current environment. As Billy had mentioned, our asset quality metrics remained strong with nonperforming assets of just 0.23% of total assets while net charge-offs were limited to 5 basis points. We remain confident in the quality of our loan portfolio and in the discipline, our bankers and credit team continue to demonstrate as we grow. Operating noninterest income was stable at $7.9 million for the quarter, Higher mortgage banking income and stronger interchange and debit card fees helped offset lower capital markets revenue. On expenses, operating noninterest expenses increased slightly at $34 million, the low end of our guidance. This increase was primarily driven by salary and benefit expenses, reflecting stronger production-related variable compensation and a full quarter's expense from our annual merit increases. FDIC insurance expense also returned to its normalized run rate. Our operating efficiency ratio remained in the low 60% range. We do expect some expense growth as we invest in our expanding markets, including some branch facility expansion, but we will continue to manage the broader expense base carefully and remain focused on improving efficiency over time. For the third quarter, we expect noninterest income to be approximately $8 million and noninterest expense is expected to be in the range of $34.5 million to $35 million. Salary and benefit expenses are expected to range from $21 million to $21.5 million, reflecting both stronger production levels and related to incentive compensation and additional new hires. As always, incentive-based compensation accruals will move with performance and may vary throughout the year. I'll wrap up with capital. Our capital position remains strong for the consolidated TCE ratio of 8% and total risk-based capital ratio of 12.7% well above well-capitalized standards. This position provides flexibility to support growth, maintain balance sheet strength and continued building long-term shareholder value. With that said, I'll turn it back over to Billy.

Thanks, Ron. As you can tell from Ron's comments, our trends continue to have a nice trajectory. We are successfully executing on the leveraging phase of growth for our company. And on return metrics, we've moved through the 1% ROA target and feel good about seeing that 13% plus number on ROE. You've heard me discuss on our last couple of calls, our internal 4x4 talent of ending a $4 EPS run rate by the fourth quarter of 2026, so basically hitting $1 per share EPS by Q4 of this year. This quarter has been an excellent step towards reaching this target. We've still got a little bit of work to do as higher funding might pressure margin a bit more than expected, but I really like our chances of accomplishing this goal. The second half of 2026 will probably look a lot like the first half with focus on organic growth and increasing share in our markets. Pipelines are very solid, and I think we can continue growing at a high single-digit plus pace or possibly a little better. Talent acquisition continues to be a high priority for our company. The current market disruption is opening the door and over the last few months, we've added some great bank talent in Nashville, Tennessee; Huntsville, Alabama, Tallahassee, Florida and Columbus, Georgia. We're seeing this opportunity throughout our footprint. And speaking of specifically on Columbus, we're thrilled with what that team is doing right out of the gate, and we're not even in our permanent facility yet. We're very bullish on this new market. So we will continue to look for these organic growth opportunities and remain very focused on recruiting. I believe we have a lot to offer talented bankers as we continue to be one of the brightest banking stories in the Southeast, outstanding markets that grow paired with strong experienced bankers and a very focused team. To summarize, we've had a very solid first half of 2026, and we're very well positioned. We are executing, growing revenue, EPS and book value while staying improved nonexpense growth. We remain optimistic about our ability to add balance sheet growth and still have a nice tailwind coming from rate resets in our loan portfolio over the coming quarters. Credit continues to be very sound. And on goal setting, we are executing on this year's 4x4 initiative as we have clear line of sight to a $4-plus earnings per share target. Our future is bright, and I appreciate the work of our SmartFinancial SmartBank team and all the efforts of our associates. I'm very proud of what we have going on here at SMBK. We'll stop there and open it up for questions.

[Operator Instructions] Your first question comes from the line of Brett Rabin from StoneX Group.

I wanted to start off -- I want to start on just obviously really strong balance sheet growth this quarter. I wanted to start on the deposit side. And just if I heard you correctly, Ron, I think you said 2.9% cost of new deposits. Was that the right number? And then just wanted to get a little more color around the narrative that everyone's talking about with deposit costs possibly increasing from here. Just how you guys see that affecting possibly your growth and what you're seeing in terms of new funding?

Ron, do you want to start with the spot yield question.

Yes. Yes, it, our production for Q2 was 2.90% less broker, we were always modeling a 1 to 2 basis point increase in our cost going forward. I think the lower guidance, possibly lower guidance this quarter is we did lay in some brokered funding support our strong loan growth. While broker funding does carry a higher cost, we view it as a discipline and temporary tool for our funding. So for the most part, we're still looking -- going forward, we're looking about 1.5 to 2 basis points per month, at least and then we think we'll back that up as we can increase our deposit reduction and wean off the broker side of it.

I'll also add, Brett, we -- like I said, we -- I'll tell you the deposit -- just pure per deposit production has really been pretty solid for us. A little bit of a gap. I alluded to it too, we get a little bit of seasonality in Q2. We do think when you look at our trends historically, we make up a lot of that gap in the second half of the year. So yes, I think we're optimistically hoping we can come in at a pretty good clip as some of that seasonality then that balance growth picks back up. But yes, and I think you alluded to other comments that you've heard on growth. I think it is. I mean, obviously, with rates staying a little bit higher, deposit growth pressure has been probably a little more prevalent than we had originally thought. But it's not anything that we don't feel like we can manage. We may just -- margins, as Ron said, margin might just be a little flatter as you look out for the next quarter. But still feel good about our ability to expand that going forward.

Okay. That's helpful. And then just Billy, you've kind of talked about feeling pretty comfortable being a high single-digit grower and possibly better. But obviously, the last 2 quarters, in particular, have been a lot stronger than that. Does the pipeline suggest you could continue to have that and maybe you're just being a little cautious with payoffs or lending competition on rate possibly being a factor. Maybe if you could just give any thoughts on double versus a notes.

Miller as a stand back a little bit, but I really -- we do build -- we try to build in some payoffs and paydowns into those modeling assumptions. And one of the things we've we have been really good at is especially a lot of this back book repricing. I think we've built in a little less -- a little lower percentage of that retention, we're getting a lot of retention in that back book reprice. And so teams are doing a really nice job elevating those yields at renewal, and we're keeping most of that business. Yes. I mean rate competition is still tough right now. We're just looking at pipelines before the call, just to kind of refresh our numbers. And we feel good about the pipelines. I'll tell you, or -- and I alluded to it, I mean the sales teams and credit teams, I said that too. I think a lot of the credit of this goes to our credit team, the collaboration that we're working together and trying to get these deals in and through the pipeline, feel really good about our ability to keep doing that. And -- but yes, I still think we could be at that plus/minus 10% number, just depending on payoffs and pay downs.

It's all across the markets, too...

Yes, it's pretty equally balanced across our zones. I'll tell you all of our markets, all of our teams are executing really well right now.

Your next question comes from the line of Russell Gunther with Stephens.

I want to follow up on the margin discussion, maybe the flip side to the Brett's question, just get some help for where directionally you'd expect loan yields to head from here level set us in terms of where new production came on in 2Q, kind of where that pipeline yield sits today would be helpful.

Yes. Ron, do you want to take that?

Yes. We've been -- good question. We've been consistently in the 6 new production, bringing on about the 640 range. We think -- we believe that will continue basically due to the portfolio of churn, we think we should be able to increase our portfolio yields probably 3 to 4 basis points quarterly from here on for the next few quarters that's -- even though Q3 may be flat, we see further expansion as we look into the future. So we're in a good spot with our loan book.

That's helpful, Ron. And then for my follow-up, guys, I appreciate the near-term expense outlook, but perhaps kind of more intermediate term as you guys think about balancing franchise investment and talent, which it sounds like you've made some great strides in as well as potentially tech -- how should we think about a normalized core expense growth rate for SmartBank with that goal of delivering positive operating leverage?

Brian, do you want to talk a little bit about just kind of the expense growth forecast or thoughts over the next few quarters, and I'll add some color to it.

Yes. For Q3, we did see an uptick, variable compensation due to our production is always there. We do have layered in some new hires and support growth. And we see that incrementally throughout Q3. We do have some seasonality in our expenses primarily occupancy going through the hot summer months here down in our footprint. And then normal forecasting ebbs and flows due to franchise growth. We're looking to keep our expenses within a $35 million plus or minus range over the next quarter or 2. But again, that's all subject to our production-related comp. But we watch expenses pretty tightly here.

Yes. And I'll just add, Russell, this is something I know, Ron and I spend a lot of time talking about it, and we communicate with our team. I think the key to it now is to kind of keep a fairly tight band on that while continuing to make the appropriate investments like we said. I think we can do that over the next several quarters as we get a new branch or 2 in the system and then add a couple of revenue-producing hires in some of our zones. So feel really good about our ability to do that. We also have, again, like Nate put a nice slide in the deck or repricing. I do think we still got some -- we've still got some nice tailwind coming second half, especially as you look into Q4 with rate reset, some of the back book and then into the first part of '27. So we think the revenue side is going to continue to keep pace and allow us to keep that positive leverage going.

Your next question comes from the line of Catherine Miller with KBW PAUSE Kate.

I wanted to -- could you -- I know you speak to this, but the loan fees that were in loan yields this quarter. Can you repeat what that impact was?

Yes. We had a specific relationship that it was an acquired loan that we had a credit mark embedded in the amount. So when it paid off, we accreted that through the income, isolated but a decent amount. It equated to about $500,000 or $400,000 to $500,000. I'm sorry, 4 basis points...

Four basis points. And that's the NIM or 4 bps to loan yields?

It was the loan yield.

Okay. Perfect. The way to think about that is you strip that out, but then you've got kind of core expansion next quarter, you're kind of stable at this level into next quarter. Is that kind of a fair way to think about it?

Yes.

Okay. Perfect. And this is a bigger picture question. I mean you're well on your way to your $1 EPS target in the fourth quarter. You've hit a 1/1 ROA and you're at the 13% ROE. Is the way to think about -- you've been such a great story of profitability improvement over the past 1.5 year and you've hit all these targets. Is the path from here that we're just kind of stable at these profitability levels but with really strong 10% balance sheet growth? Or do you see other ways to improve profitability levels over the course of the year?

I think we continue to improve, especially as you look out, especially Catherine, as you look out into '27. So as we look -- obviously, tougher to forecast, not know exactly what rates are going to do. But from our standpoint, over the next 4 quarters or so, we think we can continue to expand that ROA number up. I think we're going to continue to pick up some EPS growth, continue to move those ROA targets a little bit higher. And so we feel like as we look ahead and think about already starting to think a little bit about '27, we've still got some room to move up and as long as a team, we continue to -- as we talked about hold expenses within a reasonable range and pick up this -- the repricing plus the new growth, we can expand these return targets a little bit here in the near term.

The next question comes from the line of Stephen Scouten PAUSE with Piper Sandler.

Kind of following up a little bit on Catherine's question there. The positive momentum over the last couple of years has been tremendous. And I think you said earlier, but you feel like you're even gaining momentum today. So I mean, is there anything out there that would give you pause about something that would maybe derail that momentum? Or just are you getting to a point where capacity become strained at any point? Or what would kind of this positive momentum, if anything?