Smartfinancial Inc. Q4 FY2025 Earnings Call

Hello, everyone, and thank you for joining the SmartFinancial Fourth Quarter 2025 Earnings Release and Conference Call. My name is Claire and I will be coordinating your call today. I will now hand over to Nate Strall, Director of Strategy and Corporate Development of SmartFinancial to begin. Please go ahead.

Thanks, Claire. Good morning, everyone, and thank you for joining us for SmartFinancial's Fourth Quarter 2025 Earnings Conference Call. During today's call, we will reference the slides and press release which are available in our 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 the factors that might cause these 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 January 20, 2026, with the SEC. And now I'll turn it over to Billy Carroll to open our call. Billy?

Thanks, Nate, and good morning, everyone. Great to be with you, and thank you for joining us today and for your interest in SMBK. I'll open our call today with some commentary, then 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. It's been another very busy quarter for us as we continue to execute on our strategy of leveraging the great foundation we've built at SmartFinancial. Our team's focus on execution has been outstanding as we wrap the best year in our company's history. The fourth quarter was yet another example of that. So let's jump right in and discuss some of the highlights. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company, which is now up to $26.85 per share. That's growth of over 13% annualized quarter-over-quarter and 17% for the year. For the quarter, we posted operating earnings of $13.7 million or $0.81 per diluted share. This is our seventh consecutive quarter of positive operating leverage. And for the year, we had record earnings of over $51 million. We again had outstanding growth on both sides of the balance sheet, posting 13% annualized growth in loans and 8% annualized growth in deposits. Our history of strong credit continues with only 22 basis points of nonperforming assets. You'll see we added a little more in the allowance to cover our strong loan growth and to address a small handful of fountain equipment loans, but I'm pleased to see these nonperforming numbers continue at exceptionally low levels. On the revenue side, for the quarter, total operating revenue came in at $53.3 million, but I also want to draw your attention to our pre-provision net revenue number, PPNR has grown from $14.5 million in the fourth quarter of '24 to a record $20.9 million in the final quarter of '25 million. That's a 44% increase year-over-year. Our revenue expansion has been outstanding. And operating noninterest expenses also came in on target and flat to Q3 at $32.5 million, another great example of our expense discipline. Looking at the first few pages in our deck, you'll see a continuation of some very nice trends. We're building our return metrics and most importantly, growing total revenue, EPS and as I mentioned earlier, tangible book value. All of those charts are great graphics to illustrate our execution, and I'm looking forward to and expecting these trends to continue. So just a couple of additional high-level comments for me on growth. Our balance sheet expansion is a direct result of the focus of our sales teams. Our continued evolution of an outstanding organic growth company is one of the things I've been most proud of over the last several years. As we've hired well, we've also built an outstanding foundational process that includes aggressively going after new client relationships, growing existing ones along with a diligent prospecting process. I would argue that we were in a small top-of-class group when it comes to pure organic growth. As I stated, we grew our loan book 13% annualized quarter-over-quarter as sales momentum stayed strong and balanced across all of our regions. Our average portfolio yield, including fees and accretion held up well at 6.08% and our new loan production continues to come on to the books accretive to our total portfolio yields. Regarding deposits. Again, deposits were up 8% annualized and that's inclusive of reducing some of our brokered CD positions. It's important to recognize how we're building this bank with core relationships as we have intense focus on both sides of the balance sheet. Looking at the full year for 2025, we grew net loan balances $457 million or 12% and grew core deposit balances $626 million or 14%, excluding that brokered CD activity, just a phenomenal year from our sales and support teams. Our pipelines continue to feel very good as we start 2025, and I will discuss this a little bit more in my closing comments. But we also had some very nice highlight bullets that I want to focus on, on our earnings release this quarter. All tied to building the foundation of a bank that's on track to becoming one of the Southeast's strongest regional community banks. One key highlight in addition to the numbers is our announcement of our planned expansion into the Columbus, Georgia market. Columbus is a natural move for us as we've been doing business in that market over the last few years out of our Auburn office. The timing was excellent to open an office in the second largest city in the state of Georgia given the opportunity to bring on some outstanding Columbus bankers and the current market disruption. Over the last couple of weeks, we started the process to expand this region of our footprint. Our style of banking is going to play exceptionally well in Columbus, and we look forward to getting ramped up in 2026. So all in all, a very nice fourth quarter and a very nice way to wrap 2025. And I'm going to stop there and hand it over to Ron to dive into some of the details. Ron?

Thanks, Billy, and good morning, everyone. I'll start by highlighting some key deposit results. We experienced great momentum this quarter with non-broker deposits growing by $214 million, nearly 18% annualized from both new deposit production at a cost of 2.60% which was down 87 basis points from the prior quarter and from seasonal inflows. Overall, interest-bearing deposit costs declined by 19 basis points to 2.79% and were 2.74% in December. We also experienced an uptick in noninterest-bearing deposits due to some temporary balance increases at year-end. Looking ahead, we anticipate the ratio of noninterest-bearing deposits to total deposits to stabilize near 19%. Our team's ability to grow and retain core deposits continues to reduce our need for expensive wholesale funding. Accordingly, we paid down $112 million in broker deposits during the quarter with an average rate of 4.27% and we anticipate paying down an additional $44 million during Q1 with an average rate of 4.05%, leaving a remaining broker deposit balance of only $8 million. Despite these paydowns, we anticipate maintaining a strong liquidity position as demonstrated by our quarter-end loan-to-deposit ratio of 85%. During the quarter, our net interest margin increased by 13 basis points to 3.38%. This growth was primarily attributable to a 17 basis point reduction in funding costs which outweighed the 3 basis point decrease in interest-earning asset yields. The decline in funding costs was driven by our deposit portfolio which is approximately 45% variable, benefiting from the federal rate reductions and slight mix shift changes. The payoff of our previously issued $40 million of subordinate debt and the reduction in high-cost brokered funding. The lower yield on interest-earning assets stemmed from a 6 basis point decrease in loan yields, partially offset by a full quarter impact of securities repositioning completed at the end of the prior quarter. During the quarter, the weighted average yield on new loan production was 6.58%. Looking ahead, we are projecting our first quarter 2026 margin in the 3.4% to 3.45% range. Our provision expense totaled $4.1 million, which included an unfunded commitment provision of $408,000. Approximately $2.4 million of the provision was allocated to our fountain equipment subsidiary, with the remainder of the provision supporting the bank's strong continued growth. Despite the challenges in the small isolated segment of our overall loan portfolio, our asset quality ratios continue to remain very low with nonperforming assets comprising 0.22% of total assets and 2025 net charge-offs to average loans of only 8 basis points. At the end of the quarter, the allowance for credit losses was 0.94% of total loans. Looking forward to the first quarter, we expect this ratio to increase slightly by a few basis points as we transition to a new allowance model. This updated model will provide expanded capabilities, including loan segment-specific economic forecasting and more robust qualitative factor adjustments. Implementation is scheduled for the end of the first quarter. Operating noninterest income reached $8.2 million, surpassing our expectations due to elevated mortgage banking revenue and customer swap fees generated by our Capital Markets Group. All other sources of income were in line with or modestly exceeded our expectations. Operating noninterest expenses held steady at $32.5 million. Salary and benefit costs were slightly higher driven by increased variable compensation due to stronger-than-forecasted year-end performance. Our fourth quarter operating efficiency ratio improved to 60%, down from 64% last quarter, primarily as a result of continued margin improvement and a continued company-wide commitment to expense management. For the first quarter, noninterest income is projected to be approximately $7.6 million and noninterest expense is expected to be in the range of $33.5 million to $34 million. Salary and benefit expenses are anticipated to range from $20.5 million to $21 million, slightly elevated from the prior quarter due to the seasonality of our associate merit increases, corresponding employee tax resets, and some new hires. Our bank and consolidated capital ratios experienced minor quarter-over-quarter fluctuations primarily due to timing differences between the issuance of new subordinate debt during Q3 and the repayment of the existing issuance on October 2. Both the bank and company remain well capitalized with the company's total consolidated risk-based capital at 12.67% and the tangible common equity ratio improving by 15 basis points to 7.9%. Looking ahead, we are confident that our capital levels are appropriately balanced and well positioned to support continued growth while optimizing returns on equity. 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. And drawing your attention back to Page 8 of our deck, we are successfully executing on the leveraging phase of growth for our company. On our return metrics, we feel very confident in our ability to move through to 1% and 12% ROA and ROE targets we achieved in '25 as we look into 2026. We're building a great franchise and arguably some of the most attractive markets in the country and have put together a team that is rapidly moving us forward. We continue to be one of the Southeast's brightest stories, outstanding markets, strong experienced bankers coupled with a great operational and support team, plus very nice complementary business lines. As we put a bow on '25, we did exactly what we said we were going to do, generate more operating leverage and hit some key revenue and return metric targets. As we look into 2026, expect more of the same. Our focus will be doubling down on our current strategy and getting deeper into our markets. As I mentioned, pipelines are good, and I still think we can continue growing at this high-single-digit plus pace. On talent acquisition, this continues to be a focus. As I mentioned, we recently added a couple of great bankers to lead our Columbus, Georgia expansion and also added some great bankers in a few of our other markets during Q4. We continue to actively recruit and identify revenue producers that fit our culture in all of our regions. 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. So to summarize, as we enter 2026, we are well positioned. We are executing, growing revenue, 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 from the rate resets in our loan portfolio over the next couple of years. Credit continues to be very sound. And on goal setting, setting our $50 million revenue target for the team several quarters ago led to some great success this past year. So we've set a new internal goal challenging our team to take the next step on our financial metrics. We set a challenge goal to hit a $4 EPS run rate by the end of '26, so basically hitting $1 in earnings per share by Q4. That's not going to be easy, but I know we're up for the challenge. There's a great energy around our company, and we're excited to tackle 2026. I appreciate the work of our SmartFinancial SmartBank team and the efforts of all of our associates. I'm very proud of what we have going on here at SMB. So I'm going to stop there and Claire will open it up for questions.

Our first question comes from Russell Gunther from Stephens.

I wanted to start on the loan growth side of things, another very strong double-digit organic growth year for you. It would be helpful to get a sense for whether or not you think that type of growth rate is sustainable in '26. And perhaps as a part of that question, maybe just comment on where that recruitment pipeline does stand today outside of Columbus, where else might you look to hire?

Yes. I'll start, and then the others can chime in. Regarding our growth expectations for '26, we had an excellent year with double-digit growth in every quarter. As we move into '26, we're not necessarily pulling back, but with a larger balance sheet, it's challenging to maintain those high growth percentages. We are aiming for high-single-digit growth, which may occasionally exceed 10%. If we can stay around 8% to 9%, that will help us achieve our goals for '26. We'll continue to guide towards high-singles. On the recruitment front, we have been actively engaging with many different bankers. Over the last couple of years, we've developed a culture that many talented bankers enjoy being part of. We will keep sharing our story and look for individuals who align with our company culture and vision. We're not focused on any specific market; instead, we're committed to deepening our presence in all our key areas and adding talent wherever we can find it. Our priority is to find exceptional bankers who can help us reach our growth objectives.

Okay. Excellent, Billy. And then last one for me would be on the expense side of things. I appreciate the guide for the coming quarter. I think you guys have posted 7 consecutive quarters of positive operating leverage. So it would be helpful to just get a sense for how you're thinking about the overall core expense growth rate for the year as you contemplate things like franchise investment in technology or the hiring plans you just referenced.

Ron, do you want to dive into that? I think in our comment, Russell, we're going to try to stay pretty prudent, but we want to continue to invest in people and tech where appropriate. But Ron, you've got any thoughts on kind of just overall year guidance.

Yes. In the last few earnings calls, we've mentioned that we expect to remain within the $34.5 million to $35 million range. Therefore, we are targeting an overall expense growth of around 5% year-over-year.

It was really nice to see the NIM expansion this quarter, and then it looks like we've got more coming in the first quarter. Was just kind of thinking about it from a full-year perspective and maybe how much that plays into hitting that dollar run rate in the fourth quarter of '26. Do you feel like as long as rates are stable that we can continue to see NIM expansion in the back half of the year just given where the back book loan repricing is coming from? You have a nice chart in your deck that kind of highlights that. Or are we more just kind of stable after we see this pop in the first quarter?

Ron, would you like to address that? Yes, I understand. I'll let Ron explain further. We believe that as long as rates remain relatively stable, that’s what we're banking on. Ron, could you share your thoughts on what you anticipate for NIM in the near future?

Yes. After the first quarter, 3.40%, 3.45% range, we're probably seeing some slower incremental growth quarter-over-quarter. We're now looking probably to stay at 3.45%. I would see it probably getting to the 3.50%, plus or minus range by year-end. At this point, I think right now, we're really targeting staying around 11%, 12%. We don't see our bond book getting that much greater than that. We still have some liquidity that we can deploy for loan growth. But again, the investments we should stay around that 12% range of total assets.

I wanted to follow up on the margin. Ron, it was great to see the expansion this quarter. I thought your funding costs might come in a bit lower due to the number of Fed cuts we've experienced in the last few months. I'm curious if you could share any insights about spot funding costs at the end of the quarter or your perspective on the liability side of the business.

I believe for Q1, we will fully realize the impact of the rate cuts that occurred in the fourth quarter. We expect to see a decrease of around 17 to 18 basis points in Q1, but this will largely depend on market conditions. We're benefiting from the reduction of some brokered deposits, particularly callable ones, which has provided some support. Nevertheless, I anticipate that growth will slow if we don't see any additional rate cuts as the year progresses.

Yes, I think it depends on finding the right people that fit our needs. We're excited about the initial group that helped start the market, and we will continue to recruit. When we expand, we traditionally ensure we balance expense growth with production, so I don’t expect to see a significant impact on expense run rates even as we hire. Over the next several quarters and possibly the next couple of years, we may see some disruption in that market, but there will be opportunities to add strong team members. Even though Columbus is only 45 minutes from Auburn, we've built solid relationships in that area and currently serve many clients there from Auburn. This gives us a strong presence and allows us to deepen our connections, aligning with our goals. I believe we can leverage our presence in Columbus to attract good talent in the near future, but I don’t anticipate it significantly affecting expenses.

Okay. Appreciate that. And maybe just following up, Billy, I mean, obviously, you've been doing a lot of organic growth here and quite successful on that side. Just curious, any updated thoughts on M&A here?

Not really. We've consistently stated that it would take something unique and special for us to consider a shift in strategy. Last year, we managed to grow by $0.5 billion on both sides of our balance sheet, which is nearly 10% of our total. If we can maintain that growth without issuing new shares, that's a major achievement. This success reflects the strength of our sales teams and leaders, who are generating significant momentum. As I mentioned earlier, we've developed a solid process that many banks have struggled to replicate. There are only a few that do it exceptionally well, and I believe we are positioning ourselves among them as strong organic growth contenders. If we continue executing this effectively, you can expect to see more of this from us.

Billy has convinced me over the last 2 years looking at how our metrics have improved over the last 2 years, we can really grow organically and improve this bank and improve the efficiency and the profitability and manage risks easier on our team to build it organically.

What's risk. We're kind of boring, Steve. We laugh around our table. We're kind of a boring story. But...

Except our shareholders.

We continue to focus on improving our EPS and efficiency metrics, and we believe those improvements will come. We are committed to executing our strategy without the need to take on the risks associated with integrating another bank or culture. While some might favor that approach, we've experienced success with it in the past. However, I want to emphasize that any decision to pivot in that direction would have to be exceptionally compelling.

Our next question comes from Stephen Scouten from Piper Same.

So Billy, I know you said you're kind of agnostic around potentially where to hire as you think about talent. But are there any other markets that you see similar to Columbus that could be kind of a natural extension to where you guys are doing business today, whether that's I don't know if it could be making or if it could be anywhere else kind of throughout the footprint that might make sense in the future?

Yes, Stephen. It is possible. When considering our position, we have some operations in North Georgia from Chattanooga. If we were to identify opportunities in that market that could support Macon, or perhaps look into some options in South Georgia as we expand, that may not be part of our current plans, but it's a market we could explore in the future. We are generally open to various markets. There are significant opportunities in places like Nashville and Birmingham, and we aim to focus more on those areas. Last quarter, we opened another loan production office in the Nashville Metro area to accommodate our growth and attract talent. We intend to deepen our presence in Birmingham and Nashville. While there’s nothing resembling Columbus on our agenda right now, we might consider a few other Georgia markets down the line.

Got it. That's helpful. And I like that you noted your kind of internal challenge goal here to kind of hit this $1 a quarter, maybe EPS run rate by year-end '26. Is there anything more significant that needs to occur or any kind of segment of the earnings power of the bank that needs to improve to get you there? Or is it more just a continuation of the same things you've been doing? Drive operating leverage, organic growth and the like.

Yes. We just need to stay focused and committed to our process and keep pushing forward. As we've mentioned, our approach is simply to keep executing. We expect to see some operating leverage in the coming quarters, though it may be a bit flatter in the short term, particularly in Q1 due to the shorter quarter. However, we anticipate an uptick as we move into Q2, Q3, and Q4, especially as we reprice our loan back book and aim for the growth we believe is possible for our balance sheet throughout the year. We need to maintain discipline with our expenses, which we have managed to do. I don't foresee anything that would divert us from this strategy. In line with what Steve mentioned, we are taking a steady approach and focusing on execution. I'm quite optimistic about our team's ability to deliver on this. So, it's just about working hard and sticking to our plan.

We currently have no further questions. So I'll hand back to Miller Welborn for any closing remarks.

Thank you, Claire. We appreciate everybody being on the call today. Thank you for your continued support of the bank and for all that each of you do every day. Look forward to jumping into '26. And thank you very much. Have a great day.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.