Smartfinancial Inc. Q2 FY2025 Earnings Call

Hello, everyone, and welcome to the SmartFinancial Second Quarter 2025 Earnings Release and Conference Call. My name is Ezra, and I will be your coordinator today. I will now hand you over to the host, Nate Strall, Director of Investor Relations, to begin. Please go ahead.

Thanks, Ezra. Good morning, everyone, and thank you for joining us for SmartFinancial's Second Quarter 2025 Earnings Conference Call. During today's call, we will reference the slides and press release that are available in the Investor Relations section on our website, smartbank.com. Billy Carroll, our President and Chief Executive Officer, will begin our call, followed by Ron Gorczynski, our Chief Financial Officer, who will provide some additional commentary. We will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause the results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendices of the earnings release and investor presentation filed on July 21, 2025, with the SEC. And now I'll turn it over to Billy Carroll to open our call.

Thanks, Nate, and good morning, everyone. It's great to be with you, and I appreciate your interest in SMBK. I'll start the call with some comments and then hand it over to Ron for more detailed information on the numbers. After our prepared remarks, we'll have a Q&A session with Ron, Nate, Rhett, Miller, and myself. Let's get started. We had another strong quarter as we adhere to our messaging. We've been emphasizing execution over the past several quarters, and that’s exactly what we're doing. Our team is focused on achieving the targets set for this year regarding revenue, returns, and responsible expense growth. As you will hear during this call, our company is performing very well, and we remain optimistic about our direction. For the quarter, we reported net income of $11.7 million or $0.69 per diluted share. I’m proud of our performance and excited to see us gain operating leverage, marking five consecutive quarters of positive leverage. I'll highlight a few key metrics found in the early pages of our deck. First, one of the most crucial metrics, we have continued to increase the tangible book value of our company, reaching $24.42 per share, including the impact of AOCI and $25.43 including that impact. This reflects over 13% annualized growth quarter-over-quarter. Our balance sheet grew strongly, with loans increasing at a 13% annualized rate for Q2, slightly above our expectations, thanks to our market teams developing new valuable relationships. On the deposits side, we experienced solid growth of 5% annualized quarter-over-quarter. I'm very satisfied with our deposit growth as we also forge excellent new relationships in that area. We maintained our noninterest-bearing percentage, despite the second quarter often being a little softer due to seasonality. Ron will explain more about this shortly. Our strong credit record continues, with NPAs at just 19 basis points. Credit is always a priority for us, and I’m pleased to see these numbers maintain such low levels. Total revenue reached $49.2 million, with net interest income expanding as expected. We also delivered another strong noninterest income quarter, while noninterest expenses were in line at $32.6 million. Looking at the charts on Pages 4 and 5, you’ll notice positive trends. We’re enhancing our return metrics and, most importantly, growing total revenue, EPS, and tangible book value. These charts effectively illustrate our execution, and I expect these trends to continue. Regarding growth, it directly results from our sales teams' focus. We’ve hired extensively over the past few years and built a robust foundational process that actively pursues new client relationships and nurtures existing ones, along with diligent prospecting. As I mentioned, our loan book grew at 13% annualized for the quarter, with strong sales momentum across all regions. Our average portfolio yield, including fees and accretion, increased to 6.07%, and our new loan production is positively affecting our total portfolio yield. On the deposit front, I’m proud of our achievements. Our loan-to-deposit ratio stands at 85%, which remains a favorable position for us, offering continued flexibility to utilize our strong balance sheet. Our balance sheet pipelines feel good, and I’ll discuss that further in my closing remarks. Overall, it’s been a great way to conclude the first half of 2025. I'll stop here and hand it over to Ron for further details. Ron?

Well, thanks, Billy, and good morning, everyone. I'll start by highlighting some key deposit results. Our deposit growth during the quarter was affected by typical seasonal outflows, including tax payments and the utilization of public funds. As a result, net balance non-brokered deposit growth was $14 million. Offsetting these outflows was $116 million of new nonbrokered production generated at a weighted average cost of 3.24%. Total interest-bearing costs rose by 3 basis points to 2.95% and were 2.96% for the month of June. Our loan-to-deposit ratio ticked up to approximately 85% with our deposit composition remaining stable and having noninterest-bearing deposits at 90% of total deposits. Importantly, we saw very little account attrition or client loss throughout the quarter. Rather, we saw a continuation of last quarter's trend, whereby clients continue to utilize excess deposit funding for projects and working capital. While deposit balance drawdowns are impactful, we expect to recoup balances as project investments slow and those seasonal outflows return. Our net interest margin increased to 3.29%, representing an improvement of 8 basis points over the previous quarter as higher loan yields more than offset the 3 basis point increase in deposit costs. The average rate on new loan production was 7.11%, resulting in a quarterly portfolio yield of 6.07%. As a result, net interest income expanded by $2.1 million, totaling $40.3 million for the current quarter. Looking forward, we are maintaining our previous quarter's guidance of 2 to 3 basis points of margin expansion per quarter for the second half of 2025. Although we anticipate an increase in overall deposit portfolio costs, primarily due to higher cost of new production, our new loan originations along with the amortization maturities of lower-yielding loans are expected to have a positive contribution in our margin expansion. Taking these into account and considering current market conditions, we are forecasting a third quarter margin in the 3.3% to 3.35% range. Our quarterly provision expense for credit losses reached $2.4 million, mainly from higher loan growth. Net charge-offs to average loans stayed at 0.01% annualized. Asset quality remains solid with nonperforming assets at 0.19% of total assets and the allowance for credit losses remained steady at 0.96% of total loans. Operating noninterest income rose by $300,000 to $8.9 million, exceeding our projections. Consistent with the previous quarter, this positive variance was largely attributable to higher-than-expected insurance and mortgage banking revenues as well as sustained robust performance from our capital markets group. Moving on to operating expenses. We maintained our focus on expense containment, recording operating expenses of $32.6 million, the low end of our guided range and a modest increase from the prior quarter. The majority of this increase was attributable to the recognition of the first full quarter of merit increases and additional accruals for incentive-based compensation related to strong associate performance. Overall, we are satisfied that expenses remained at the lower end of our projected guidance range. For the third quarter, noninterest income is projected to be approximately $9 million and noninterest expense is expected to be in the range of $33.8 million and $34 million. Salary and benefit expenses are anticipated to range from $20.5 million to $21 million, reflecting an increase from the previous quarter due to higher levels of variable compensation and anticipated costs associated with new hires. I'll conclude with capital. The company's consolidated TCE ratio increased to 7.7%, and our total risk-based capital ratio remained well above regulatory well-capitalized standards at 11.1%. Overall, we believe our capital levels remain optimally balanced to continue to support growth while maximizing returns on equity. With that said, I'll turn it back over to Billy.

Thanks, Ron. I want to reiterate again the value proposition with our company, drawing your attention back to Page 7 of our deck. We are successfully moving into the leveraging phase of growth for our company. We are seeing the inflection in the movement of our numbers and now as we have clear vision of our return targets. We're building a great franchise. We're in arguably some of the most attractive markets in the country and have put together a team that is rapidly moving us forward. You've heard me say before, I believe we are one of the Southeast's brightest stories, outstanding markets, strong experienced bankers, coupled with just as experienced and strong operational and support teams, along with some great complementary business lines. We expect the second half of 2025 to have a similar look to the first half as we focus on continued growth in our EPS line and hitting our near-term revenue and return targets that are clearly in sight. As I mentioned, pipelines are solid, and I think we can continue growing at that mid- to high single-digit pace. A couple of comments on talent acquisition. One of the areas where we are focusing and one that I continue to be very excited about is our ability to recruit outstanding new team members. The majority of the expense growth looking forward should be primarily talent related, along with some appropriate investment in our platform. We've either added or are in the process of adding ten new revenue-producing team members during the first half of the year, primarily in commercial banking, private banking and treasury management. I believe we are included in a very small handful of banks that have built a culture where outstanding regional bankers want to work. We will continue to look for these organic growth opportunities and remain very focused on recruiting. On the culture front, we've been recertified as a great place to work this year, and our associates have created an outstanding positive energy around this company. So to summarize, I love where we are setting. We are executing, growing our revenue line, EPS and book value while staying prudent on expense growth. We remain optimistic around our margin as new production stays strong and as we see the tailwind coming with rate resets in our loan portfolio over the next couple of years. Credit continues to be very sound, and we're seeing great new client acquisitions, coupled with a great sales energy. I appreciate the work of our SmartFinancial SmartBank team and the efforts of our 600-plus associates, and I'm very proud of what we've got going on here at SNBK. So I'm going to stop there, and we'll open it up for questions.

Our first question comes from Stephen Scouten with Piper Sandler.

Great quarter, guys. So Billy, talking about the loan growth and it sounds like pipelines are still solid, kind of talking about mid-single digits. What do you think keeps you at a level like in this kind of low double-digit range we've been seemingly operating at lately? Do you think that upside potential is still there, especially if these new hires come to fruition?

Yes, I do. In the past few quarters, we've managed to maintain a lower double-digit growth level, which I believe is still achievable. I want to be cautious, however, as we've experienced various payoffs and paydowns in our market. We've been fortunate not to encounter unexpected payoffs or paydowns. So, I remain a little cautious, anticipating that if we encounter more of these than expected, it could bring us down to the high single digits. Nevertheless, I still think we're operating around the high single digits, with the possibility of low doubles if everything aligns. Regarding the new production team members, we're continuing to expand. I believe we have the capacity to grow both sides of our balance sheet at a good pace. However, I lean slightly more towards expecting high singles, though low doubles could also be possible.

Got it. And with the new hires, is there any sort of geographic bent towards where those folks are coming from or any verticals that you're targeting more so than others? Or just give us a feel for where those people are coming, where they're going to be producing...

We are seeing great opportunities across our entire platform, especially with some bankers we have recruited over time, as well as new opportunities that have recently emerged. This growth is not limited to any specific region; we have expanded in Tennessee, Alabama, and along the Gulf Coast in recent months. Additionally, we are in the process of bringing on more talented team members. Overall, we have been successful in attracting and incorporating great talent throughout the company.

Got it. And then from a forward financial perspective, I mean, you guys have basically hit the guidance and kind of the bogey of operating revenue that you had laid out a number of quarters back, which is truly impressive. And not to like say you hit it and move right past it. But in a way, like what's the next bogey for you guys? What's the next target? And how do you get there? Is it more just like, hey, we're in great markets. We got really good people. Let's just deepen ourselves in the markets we're in? Or do you start thinking about de novo expansion through team lift-outs? Or what's kind of the path to the next leg up from here after reaching this important milestone?

Great question. Yes, we are very close to the targets we aim to achieve by 2025. We clearly see these targets in our sights and believe we can surpass them in the near future. The next step for us is to deepen our presence in the regions we’ve developed, which are from Tennessee through Alabama and along the Gulf Coast. We have a strong footprint but need to strengthen it further. We initially designed our company to be broad but not deeply entrenched, allowing us to enter these markets and take advantage of the opportunities there. Now, our focus needs to shift to getting deeper rather than expanding into new markets; any market expansion would be secondary and contingent upon making strategic sense. We are already in the process of planning for 2026 with our team and determining our next set of goals. We’ll share these goals in the coming quarters as we finalize our 2026 forecast. I am pleased with where we are positioned, as we can significantly increase revenue, EPS, and tangible book value, which are critical for our stock price and what we want our investors to recognize. Our focus will remain on these metrics moving forward. We operate a branch-light model, and while we have made considerable progress with our single-office locations in most markets, we see significant potential to double or triple our presence in the near future.

I wanted to inquire about the margin. You mentioned that deposit costs are likely to increase as growth continues. Can you provide information on the average new deposit costs? Additionally, could you discuss where new loan yields are coming from and how that contributes to the current incremental margin?

Ron, do you want to jump in and dive into those details?

Sure. For the second quarter, our total deposits cost came in at 2.39%, that includes noninterest-bearing. Overall, our new production for June was a little escalated. It came in at 3.62%, but we did have a larger relationship that we paid a little bit higher interest rates to. So I think new production overall should be in that 3.50%, 3.60% range. As far as the loans for the quarter, we're at 7.11% and for June, just slightly north of 7%, 7.02%. So we're still maintaining the higher level above 7% for our loan side.

Okay. That's great. And then in your guidance where you still think we'll have 2 to 3 bps of NIM expansion every quarter. What are you assuming for rate cuts within that? And I assume if we get rate cuts, that's going to make that number better.

Yes, that's correct. At this stage, we are anticipating a 25 basis point increase in September and another one in December, which will not significantly impact our guidance since it is late in the year. Given our liability sensitivity, we expect to gain approximately 1 to 2 basis points from the rate cuts. Our margin is in a strong position now and will naturally expand going forward, regardless of the rate cuts.

Great. Okay. Very helpful. And then you may have mentioned it earlier, but I might have missed it. Can you remind us your expectations for expense growth in the back half of the year?

Yes. We are looking to increase it to about $33.8 million to $34 million for Q3 and we have pretty much the same guidance for Q4. The larger adjustment is in the salary range moving forward, but we are still maintaining a tight outlook for Q3 and Q4.

Okay. Great. And maybe one more just on that. You talked Billy, about how you had five quarters of positive operating leverage. Is that still a focus as we go into '26? As we look at '26, is it fair to continue to look at revenue growth being faster than your expense growth?

Yes, absolutely. As mentioned earlier in the call, our balance sheet is well-positioned for ongoing organic growth in these markets. We have significant opportunities in areas where our market share is currently low, as well as in markets where we have strong growth potential. Our main focus will be on deepening our presence in these markets, which we believe will drive substantial growth. Additionally, as Ron mentioned regarding the repricing of the loan book, we expect to maintain reasonable expense levels. Much of this will be related to talent acquisition, and we anticipate seeing continued operating leverage over the next few quarters.

Just to quickly circle back to the loan growth discussion. You really do have to go back to the first quarter of '24 to see a mid-single-digit result out of you guys. So hear you loud and clear on that kind of high single digit, maybe low double. And to that end, could you just give us a sense for where commercial pipelines stand today versus the linked quarter and what, if any, sentiment shift you're getting from your commercial borrowers?

Yes. I'll share a few thoughts and then I’ll have Rhett provide some insights on what he's observing in the pipeline. The pipelines remain quite strong, likely at levels similar to what we’ve seen in recent quarters. This reflects the strong emphasis we’ve placed on sales, which I believe is the best it has ever been within our company. Our team is committed, and the new leadership structure we implemented this year has proven effective. We have excellent team members and a strong focus on acquiring new clients. With that, our pipelines are robust. Rhett, could you add some details about what you’re noticing and how those pipelines appear?

Yes, in response to Billy's point, our pipeline is currently as strong as it has been throughout the year. At this midpoint, we have approximately the same amount of opportunity in our pipeline as we did at the start of the year, which you can see reflected in our growth so far. Regarding the structure of our pipeline, the best way to describe it is that we are closely monitoring the mix of opportunities by geography and product type. It is tracking very closely to our current portfolio mix. The types of deals and their locations do not suggest any changes in concentration within our portfolio. We continue to see a diverse mix across all markets and product types where we conduct business.

Yes, I believe we are focused on various markets. Our company has experienced growth both through our legacy operations and by acquiring strong banks with extensive legacy footprints. We have identified several expansion markets that show significant potential for increasing our market share. As a result, we plan to concentrate more on recruitment in these areas. For instance, markets like Nashville and Birmingham, along with coastal regions such as Mobile, Alabama, present great growth opportunities. There are other promising markets as well. We have already added some excellent bankers and are looking to bring in more talent to strengthen our team in these locations. The potential for market share growth in these specific areas alone could drive considerable growth for us. Therefore, this is likely where we will concentrate our efforts, while also being open to adding talent where it aligns with our needs.

Yes. This is Miller. And I would add that we are ABR, always be recruiting, and we are consistently own it with the executive team spends a ton of time in the markets, recruiting bankers. Our division presidents are all over at recruiting. That's as big a focus as new clients and new relationships. It's great bankers we want on our team.

Excellent. All right. And then last one for me would just be back to the revenue target. I appreciate kind of waiting a quarter or two to get the '26 outlook, but you did get where you needed to go perhaps a quarter earlier than you otherwise might have. We're still shy of the 1% ROA target. So it would be helpful to get your sense as to whether that's something you still think you will be able to achieve in the back half of this year.

Yes, I believe we will be close to meeting the target. Looking at the numbers, expenses are slightly higher, and we have increased reserves due to this year's growth. As growth normalizes a bit, I expect that number to rise into the mid-90s fairly easily in the next quarter. We are approaching the target we've discussed regarding the one in twelve for ROA and ROE. We are nearly at the target for ROE, while ROA is just a few basis points behind. I think as we continue our efforts, we will surpass that target quickly in the upcoming quarters.

This is Thomas speaking for Steve. Most of my questions have already been addressed. However, I want to ask about credit. The credit metrics remain very strong. Are you observing any signs of weakness? It appears you have some lower-yielding fixed-rate loans maturing in the fourth quarter, about 440 according to the slide deck. Have you stress-tested those for rate shock? Broadly speaking about credit, what are your thoughts?

Yes. Rhett can share his insights now. Credit is solid, but I’ll let him discuss his observations regarding that area, including any signs of weakness. I believe there isn't much to report there. Rhett, please also address the team’s efforts in stress testing the loans as we approach the renewals with varying rates.

Sure, Thomas. Regarding the book itself, we haven't observed any signs of weakness in specific sectors based on the information we've gathered from our clients, both from the previous year-end and year-to-date. Performance remains consistent across nearly all areas of our existing book. Currently, we aren't forecasting or identifying any particular areas of concern. In relation to the lower-yielding assets approaching maturity, we initiated a project about 18 months to 2 years ago to conduct forward-looking performance stress testing on that book. We've been actively monitoring those maturities within a 6- to 12-month horizon. So far, while a few assets may show tighter coverage numbers compared to their origination, there's no indication that they won't be able to manage a modified transaction. We remain optimistic and believe the book is well-positioned to handle any rate increases for borrowers, which is advantageous for the bank.

Our next question comes from Christopher Marinac with Janney Montgomery Scott.

I wanted to ask about recruiting across state lines and pushing this geography, whether it's in the Carolinas or other states. I know you've got a lot to do in your existing footprint, as you've talked about a few times today. Just curious on recruiting people or dislocations that you see in other markets that could be an opportunity as time passes.

Yes, we've seen some changes lately, and mergers and acquisitions are part of that. We've shown our capability to successfully execute lift outs during market disruptions. For us, it’s mainly about observing and being patient. We've shifted towards a stronger organic growth model in recent years, and recruiting has become increasingly important for us. My division presidents and I are actively engaging with potential talent that aligns with our company culture. In the markets we operate in, I don't foresee us making any significant moves like we did a few years ago when we had a unique opportunity in Alabama that helped us enhance our presence there. That was a significant boost for us, allowing us to quickly expand into new markets. Moving forward, our focus will be on deepening our presence in our current locations. We're always open to opportunities, but we have a lot to manage right now, so our recruiting efforts will remain focused on the areas where we currently operate.

Yes. If you think about it, Chris, the markets we're in these college towns with the school season starting back in the third quarter and football season beginning again, the businesses in these areas are very optimistic about the third and fourth quarters ahead. People are excited about being in business, and I believe they want to be in our markets. If we have bankers interested in moving here, we welcome them. However, we are very happy with our current position and we are committed to expanding and strengthening our presence in these areas.

Sounds good. And just one curiosity. Do you see the average loan size in the portfolio kind of pushing higher as the next several quarters develop? It's not just a near-term question. kind of curious kind of where that's going to go over time.

Yes. And I'll ask Rhett. I don't have the stat in front of me on loan size. I think just as we've gotten bigger, our loan size has moved up and some, but I don't think it's really moved up materially, Rhett, would you comment on that?

I don't think the average loan size will change significantly. As we've grown, we have had the opportunity to engage in larger transactions, but I don't foresee a considerable increase in that number.

We continue to focus on achieving solid results, emphasizing small gains. In many of the strong Tier 2 markets we're involved in, we're experiencing significant growth in some of the larger ones. However, in many excellent tertiary markets, we're still mainly achieving modest progress. I appreciate this approach as it fosters a more sustainable growth model, minimizing the risks associated with market fluctuations. To address Rhett's point, we are occasionally engaging in larger transactions, which could lead to some increases, but I don’t expect the average to rise significantly over time.

Thank you very much. We currently have no further questions. So I will hand back over to Miller for any closing remarks.

Thank you, Ezra, and thank you all for being on the call today and for supporting SmartBank as we work hard every day to grow this bank for our shareholders. Have a great day.

Thank you very much, Miller, and thank you to all our speakers on today's call. We appreciate everyone for joining. That concludes our call. You may now disconnect your lines.