SMBK - NASDAQ

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. [Operator Instructions] 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. 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 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. So let's jump in. Another very nice quarter for us as we execute on what we've been messaging. You've heard us talk about execution over the last several quarters, and that's what we're doing. Our team has a keen focus on hitting the targets we've set out for our company this year in regard to revenue, returns and prudent expense growth. As you'll hear on this call, our company is performing very well, and we're remaining bullish on where we're headed. For the quarter, we posted net income GAAP and operating of $11.7 million or $0.69 per diluted share. I continue to be proud of our performance, and I'm excited to watch us gain operating leverage. This is 5 consecutive quarters of positive leverage. Jumping into the highlights, I'll be referring to the first few pages in our deck. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company, moving up to $24.42 per share, including the impacts of AOCI and $25.43, including that impact. That's growth of over 13% annualized quarter-over-quarter. Our balance sheet growth was strong. On the loan side, we grew at a 13% annualized pace for Q2, a little ahead of our expectations as our market teams are continuing to add outstanding new relationships. On the deposit side, growth was sound at 5% quarter-over-quarter annualized. I continue to be very pleased with the deposit side of our balance sheet as we add outstanding new relationships there as well. We also continue to hold our noninterest-bearing percentage. The second quarter is usually a little softer with some seasonality, but we held up well, and Ron will provide more details on that in a moment. Our history of strong credit continues with the metric at just 19 basis points in NPAs. Credit is always a focus for our company, and I'm pleased to see these numbers continue at exceptionally low levels. Total revenue came in at $49.2 million as net interest income continued to expand as we had anticipated. We also had another very nice noninterest income quarter. Noninterest expenses also came in on target again at $32.6 million. Looking at the charts on Pages 4 and 5, you'll see nice trends. We're building on 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 a couple of additional high-level comments for me on growth. Our growth was a direct result of the focus of our sales teams. We've hired well over the last several years, and 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. As I stated, we grew our loan book at 13% annualized for the quarter as sales momentum stayed strong and balanced across all of our regions. Our average portfolio yield, including fees and accretion, was up to 6.07% and our new loan production continues to come on to the books accretive to our total portfolio yield levels. In regard to deposits, I mentioned a moment ago, I'm very proud of where we've done -- what we've done on the deposit front. Our loan-to-deposit ratio is 85%, which is still a nice spot for us. This strong position gives us continued flexibility to leverage our strong balance sheet. Our balance sheet pipelines continue to feel good. I'll discuss this a little more in my closing comments. But all in all, a really nice way to wrap up the first half of 2025. I'm going to stop there and hand it over to Ron to let him dive into some details for us. 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 10 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.

[Operator Instructions] 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?

Stephen, yes, I do. We have -- the last few quarters, we've been able to kind of bring it in at that lower double-digit level. I still think that is very feasible. I hedge a little bit just because we've seen a lot of payoffs and paydowns around our space. We've been pretty fortunate that we have not been hit with kind of some of those unanticipated payoffs or paydowns. So I hedge a little bit just in the anticipation that you get a -- if you get a little bit more of that than we anticipate, that could drop us down into the high singles. But I still think we're at that kind of that high single, possibly low doubles if we get it. You mentioned the new production team members. We're continuing to add. So I like our ability to grow. I think we've got the ability to continue to grow both sides of this balance sheet at a nice level. But I still lean a little bit more toward high singles. But yes, we could potentially do low doubles as well.

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...

Spread out really throughout really our whole platform. We're just seeing some great opportunities with some bankers that we've been -- some that we've recruited for a while. Some opportunities have just kind of popped up. And -- but it's really not in any one specific region. We've added really throughout Tennessee, Alabama and our Gulf Coast region over the course of the last few months. As I mentioned in my commentary, we've also got -- we're in the process of adding some other really nice team members as well. So things have been good, and we've been able to continue to attract the opportunity to add some great talent to the team. But it's pretty well spread out throughout the whole 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. And yes, it has been. We're knocking on the door of the targets that we have set out to hit in '25. So as I've mentioned, those targets are clearly in our sight, and we feel like we can hit and get those surpassed here in the near term. I think the next thing for us, and you said it, and I've said this on calls in the past. I think for us, when you look at the way we built this company, and we built it from Tennessee through Alabama through this Gulf Coast region. We've got a phenomenal footprint. We just need to get deeper. And by design, we built the company kind of, as you all heard me say, kind of mile wide inch deep because we wanted to get into these regions. We had these opportunities that we wanted to take advantage of. Well, now we just need to get deeper. We're -- not that we wouldn't look at a market expansion, but that would be secondary. And if it would be, it would be something that would make some sense to us. I think we just need to double down, get deeper on what we're doing. To your point, we're already starting our 2026 planning. We're doing that now with our team and kind of looking at where we want to position that next set of goals for us. And so we'll be coming out with those over the next couple of quarters as we finalize our '26 forecast. But as I said, I love where we're sitting. We can really move the -- again, the revenue, the EPS, the tangible book, those pieces, those -- that's what's driving the stock price. And that's what we want our investors to understand. That's where our focus is. And I think everything you'll see us do is going to be focused around those metrics moving forward. Yes. I think you know we're a branch-light model. And I would say these single office locations that we have in most of our markets, we have made a lot of progress, but we've got the opportunity to double or triple the size of most all of those markets in the coming near future.

Our next question comes from Catherine Mealor with KBW.

I wanted to just dig into the margin a little bit. And I know you mentioned that deposit costs will probably come up a little bit moving forward just as growth picks up. Can you talk a little bit about where new deposit costs are coming on, on average? And then on the other side, where new deposit -- I mean, excuse me, where new loan yields are coming and just kind of where that incremental margin is coming on right now?

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, correct. We're -- at this point, we're assuming a 25 basis point in September and then 1 in December, which really doesn't affect the guidance. It's so late in the year. And yes, being liability sensitive, we do expect to get probably around this point, 1 to 2 basis points of additional lift from the rate cuts. So we're in a really good spot with our margin at this point going forward. We're going to -- our margin will expand naturally with or without 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 -- sorry about that. We're increasing it to about [ $33.8 million to $34 million ] band. That's for Q3 and pretty much the same guidance for Q4. Again, the heavier lift was in the salary range going forward, but still keeping it tight for Q3 and Q4.

Okay. Great. And maybe one more just on that. You talked Billy, about how you had 5 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. Yes, absolutely. As we said a little bit in the call, when you look at the way this balance sheet is positioned, our ability -- our continued ability to grow organically in these markets, Miller alluded to getting deeper. We're in so many just great markets where we've got relatively small share. We've got some really nice share in several markets. We've got some expansion markets where we've got phenomenal share growth opportunities. And so our whole focus is going to be getting deeper. So I think that in itself is going to generate, I think, outsized growth. layer in on top of that, Catherine, what Ron has alluded to with kind of the repricing of the loan book. So for us, we think we can hold these expense levels very reasonable. As we said, a lot of it is just going to be talent related from a hiring standpoint and then just continue to see that operating leverage continue over the next few quarters.

Our next question comes from Russell Gunther with Stephens Inc.

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 make a couple of comments, and I'll ask Rhett to jump in and talk a little bit about kind of what he's seeing kind of coming through the pipeline. But pipelines continue to be pretty solid. I would say they are probably at or as good as the levels that we've seen over the last couple of quarters. And again, it goes back -- I alluded to it in my comments, the focus that we have on the sales side of the house is -- I think it's as good as it's ever been in our company. Team members get it. Our division president leadership structure that we've moved to this year has really worked well. There's just -- number one, we've got great team members, but there's also just a real intensive focus on bringing in new clients. And so that said, our pipelines are as good. And then Rhett, maybe you can have some color on kind of what you're seeing, what those pipelines are looking like a little bit, maybe any other color that you've got on that side.

Yes. To Billy's point, I mean, our pipeline today really is positioned as strong as it has been pretty much throughout the course of the year. So it's -- here at the middle part of the year, we've still got basically a similar amount and opportunity sitting in our pipeline that we started the year with. You've seen the result in the growth we've seen thus far. As far as the format of that pipeline, the best way I know to put it is we look at the mix of what's in the pipeline, both geographically with product type, et cetera, and it is tracking extremely near the way our portfolio mix sets today. So the type of deals in the pipeline, the location of the deals in the pipeline, there's nothing in there that would give any indication that it would change any degree of concentration within our portfolio at all. So we are continuing to see a very broad mix across every market and every product type we generate business in.

Great. And then you spoke about continuing to leverage the current platform organically as well as continuing to recruit top talent. So could we get a sense for sort of where the recruitment pipeline stands today? And then as you work to get deeper versus that mile wide inch deep, are there any particular markets where you're more focused than others?

Yes. Yes. I think we're focused everywhere -- we said it a second ago. When you look at our company, we've got a number of markets where we've either grown from a legacy standpoint or where we've acquired really good banks with larger legacy footprints. And we've had a lot of these expansion markets that we've seen. So the expansion markets are where our market share numbers have really tremendous upside. So we're going to probably focus a little more of the recruitment in those markets. And then you take a look at whether it's Nashville MSA, Birmingham MSA, for example, you look down in our coastal region with markets like Mobile, Alabama, great growth opportunities that we see. There are others as well. But just those in itself, I mean, those markets, we've just got tremendous opportunity to bring in. We've already added some great bankers to look to bring in some additional bankers to our team in those markets. So when you look at just markets like those that I mentioned, my gosh, the market share upside and just those by themselves could fuel a lot of growth for us. So yes, I think that's probably where our focus is going to be, but we'll look to figure out where we'll add talent wherever it fits.

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 2 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. Yes, I think we'll be close, Russell. I think we'll be real close on the one. I think when you take a look at the numbers, again, a little more on the expense side. If you take a look at the PPNR numbers, a little more in reserve that we put in just because of growth this year. So I think as you normalize the growth a little bit, I think that we -- you should see that number kind of just move up into the mid-90s pretty easily over the next quarter or so. And then we'll be knocking on the door of that 1. We've kind of target, as you've heard us talk about kind of the 1 in 12 on the ROA and the ROE. We're pretty much there on the ROE. The ROA is maybe a couple of basis points behind that. But as we continue to execute, I think that the one -- we'll move through that pretty quickly over the next several quarters.

Our next question comes from Steve Moss with Raymond James.

This is Thomas on for Steve. Most of my questions have been asked and answered at this point. But I mean, maybe just on credit. Credit metrics remain really strong here. Are you seeing any signs of weakness whatsoever? It looks like you have some -- maybe some lower-yielding fixed rate loans maturing in the fourth quarter of this year at looks like 440 based on the slide deck. Have you stress tested those for the rate shock? And what do you -- just broadly speaking, credit front, what are you thinking?

Yes. And Rhett's like a Maytag repair man over here. So we'll give him an opportunity to talk a little bit. But now credit is good, but I'll let him talk a little bit about what he's seeing on that side, any potential weakness. I don't think we're seeing much there. But -- and then maybe also just talk about -- I know our team has done a lot of stress testing on the loans as these renewals are coming up with different rates. Comment on that, Rhett.

Sure, Thomas. We have -- first question, as far as the book itself, we really have not seen any signs of weakness in any particular sectors as we're getting information in from our clients, both prior year-end and year-to-date, still seeing consistent performance throughout our existing book in pretty much every area. So we are not forecasting or looking at anything specific right now that we have identified as, I would say, a primary area of concern. As it relates to those lower-yielding assets that are going to be maturing, we have -- we started a project to do some forward-looking stress testing, performance stress testing on that book. Really about 18 months, almost 2 years ago. And we have consistently done that sort of looking out in the 6- to 12-month window of those maturities. And thus far, with what we're looking at, obviously, in a few cases, we may have a few that will show some tighter coverage numbers than they were at origination, but nothing that is any indication of inability to service a modified transaction. And so we're very optimistic about that and still feel like the book is positioned well to absorb any -- absorb those rate increases for the borrower, which also benefits the bank.

[Operator Instructions] 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. Obviously, as you see a little bit of change going on, obviously, M&A comes into play in some of that. I think we've -- we've demonstrated our ability to really execute on some nice lift outs when we've seen a little bit of market disruption. So Chris, I think for us, a lot of it is just kind of waiting and watching. I think we're all -- and Miller alluded to this. I think the thing is we've really shifted to a stronger organic model over the last few years. Recruiting has really ramped up as far as kind of importance in our company. So as Miller said, he and myself, our division presidents, we're all out just continuing to drip on talent that we think would be good culture fits for our company. And so I think that is, first and foremost, in the markets where we are. I really don't -- I don't see us looking to do any, what I would call, major market moves from that standpoint, like we did several years back when we had the opportunity with all those Alabama -- that was such a unique opportunity that gave us the chance to really just fill in the density piece that was missing in our footprint. And so that was a big lift for us as we've talked about. That was a huge lift for us to all those de novo markets in a real, real short period of time. But for us, I think a lot of it -- and again, I said it earlier, is just getting deeper. I think we need to be focused on getting deeper in these great zones where we are. We're always going to take a look at opportunities, but we've got plenty on our plate, I think, in front of us now. And so the recruiting, I think you will see us probably just stay really close to the zones where we are today.

Yes. If you think about it, Chris, the markets we're in these college towns, school [ season ] start back third quarter, there's football season starting back. The businesses in these zones we're in are all very optimistic about the third and fourth quarters that they have ahead. And just people are excited about being in business. And I just think it's -- they want to be in our markets if we get some bankers that want to move here or we're glad to have them. But we love where we are, and we love doubling and tripling down on where we are.

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?

Yes, I would say not from an average perspective. I mean we certainly do -- as we continue to get larger, it has provided us the opportunity to look at and be engaged in some larger transactions. But I would say from an average perspective, I don't really see that number moving considerably.

We still focus, Chris, I think we still do a lot of really nice work focusing on singles and doubles. I think when you look at a lot of these really nice solid Tier 2 MSAs that we're in. We're growing a lot in some of our larger ones. But we're in a lot of these great tertiary MSAs where we're just -- we're still kind of just hitting singles and doubles. And it's nice. And I like building the company that way. I think it's more sustainable. It's less impact to swings and whipsaw effects. And so -- but to Rhett's point, yes, we're doing some larger credits. So it might move up a little bit, but I don't think the average is moving up in time.

Payoffs and paydowns are sting as much.

That's true.

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.