SmartFinancial, Inc. ($SMBK)

[Operator Instructions] Hello, everyone, and thank you for joining the SmartFinancial First Quarter 2026 Earnings Release and Conference Call. My name is Claire, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to Nate Strall, Director of Investor Relations, to begin. Please go ahead.

Thanks, Claire, and good morning, everyone, and thank you for joining us for SmartFinancial's First Quarter 2026 Earnings 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 Executive Officer, will begin our call, followed by Ron Gorczynski, our Chief Financial Officer; who'll provide some additional commentary. We will be available to answer your questions at the end of our call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and 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 April 20, 2026, 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 SMB. As usual, I'll open up our call with some commentary and hand it over to Ron to walk through some numbers in greater detail. After our prepared comments, we'll open it up with Ron, Nate, Rhett, Miller and myself available for Q&A. It was a great start to the year for our company with another very busy quarter as we continue to execute on our strategy of leveraging the great foundation we've built over the last several years. Our team's focus on this execution continues to be outstanding. And this first quarter of 2026 was yet another example of that. So let me jump right into some of our highlights. First, and in my opinion, 1 of the most important metrics, we continue to increase the tangible book value of our company. which is now up to $27.33 per share, up from $26.86 at year-end. For the quarter, we posted operating earnings of $13.7 million or $0.81 per diluted share, with total operating revenue coming in at $53.8 million, higher than the $53.3 million in the prior quarter, even with 2 fewer days. We continue to execute on outstanding growth on both sides of the balance sheet, posting 14% annualized growth in loans and 7% annualized growth in core deposits. Our history of strong credit continues with only 25 basis points in nonperforming assets. 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 $32.9 million as we continue to exhibit expense discipline. Looking at the first few pages in the deck, you'll see our continuation of some very nice trends. We're building our return metrics and most importantly, growing total revenue, EPS and tangible book value. All of those charts are great graphics to illustrate our execution. I'm looking forward to and expecting these trends to continue. So 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 is an outstanding organic growth company is one of the things I've been most proud of, and I believe something that sets us apart from many other banks. We have hired well, and we have built an outstanding process on prospecting and bringing in new client relationships. I would argue that we are in a top -- a small top-of-class roof when it comes to pure organic growth. As I stated, we grew our loan book 14% 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 6.02%. Regarding deposits, again, core deposits were up 7% annualized, excluding -- when excluding broker fee payoffs, plus, we absorbed the large seasonal withdrawal early in the year. So all in all, a very nice deposit quarter. 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. A couple of other highlights noted in our release bullets included an allowance for credit loss model change that [ back ] their provisioning during the quarter. So we accomplished these results while adding an outsized provision adjustment with the new ADL model that better suits our company. Ron is going to discuss this a little bit more in a moment. We also had a senior team addition with a new Director of Private Banking and Wealth Management from an end market regional bank that I believe is going to elevate this -- the work that we're doing in this area even further. We don't talk a lot about our Wealth and Investments platform, but this business line has steadily grown over the last several years as we've added some outstanding private bankers and new financial advisers. This focus on assisting high net worth clientele is becoming a great business driver for us. And with our strategy, we can go toe to toe with any regional or national player. So all in all, a very nice way to start 2026. I'm going to stop there and hand it over to Ron and let him dive into some details. Ron?

Thanks, Billy, and good morning, everyone. I'll start by highlighting some key deposit results. During the quarter, our momentum remains strong with nonbrokered deposits increasing by $95 million, driven by 2 factors: new deposit generation at a cost of 2.82% and which was 22 basis higher than the previous quarter and seasonal inflows. Given the strength in core funding, we took the opportunity to pay down the remaining $52 million in brokered deposits, which carried an average rate of 4.35%. And as we noted on the last call, our year-end totals included some transitory noninterest-bearing deposits. As those deposits rolled off and clients put some excess liquidity to work, noninterest-bearing deposits were over 18% of total deposits at quarter end. Overall, interest-bearing deposits declined by 19 basis points to 2.60 and were 2.58% in March. We continue to maintain a robust liquidity profile as demonstrated by our loan deposit ratio of 87%. The Net interest income for the quarter was $45.9 million, which was $782,000 higher than the previous quarter, even though this quarter had 2 fewer days. Our net interest margin also improved by 10 basis points to 3.48%. This increase was mainly driven by an 18 basis point reduction in funding costs, which more than offset a 3 basis point decline in asset yields. The reduction in funding costs resulted from the full quarter effects of the prior quarter's federal rate cuts. The previously mentioned paydowns of higher cost brokered funding and new deposit generation and CD renewals at lower rates. The decline in asset yields was caused by a 6 basis point reduction in loan yields, mainly due to the impact of the rate cuts mentioned above and the pay downs and payoffs of higher rate loans. This reduction was slightly offset by strategic utilization of balance sheet cash. The weighted average yield on new loan production for the quarter was 6.40% and 6.45% for March. Looking forward, we anticipate that our margin will stabilize and remain relatively flat for the second quarter before increasing slightly in the second half of the year. Turning to credit. Our provision expense for the quarter was $4.1 million, which includes $926,000 attributable to an increase in our unfunded commitments liability. As mentioned during the last earnings call, we've updated our CECL allowance model enabling broader capabilities such as economic forecasting, tailored to loan segments and stronger qualitative adjustments. Details about this model update will be included in our first quarter 10-Q filing. Due to the changes in our modeling approach and quarterly activities, the allowance for credit losses increased to $44 million, representing 0.97% of total loans compared to 0.94% in the previous quarter. And our liability for unfunded commitments totaled $4.5 million, up from $3.6 million. Looking forward, we anticipate that the allowance to remain within the 97, 98 basis point range, contingent on prevailing market and credit conditions. Furthermore, our asset quality metrics remain robust with nonperforming assets accounting for just 0.25% of total assets and net charge-offs were limited to 2 basis points. Operating noninterest income was $7.9 million, down slightly from the last quarter, but exceeding expectations. Higher investment services fees offset lower mortgage banking and capital markets revenue which was lower primarily due to seasonality. Other income sources met or modestly surpassed expectations. Operating noninterest expenses for the quarter increased slightly to $32.9 million, which was modestly below our guidance. Salary and benefit expenses were higher mainly due to variable compensation on stronger-than-anticipated [ reduction ] as well as our annual merit increase adjustments that started in March. We also reduced our FDIC insurance accrual of $275,000 this quarter, but expect this expense to return to normal levels in future periods. Our operating efficiency ratio for the first quarter remained around 60% plus level showing our continued focus on improving margins and controlling costs. For the second quarter, noninterest income is projected to be approximately $7.8 million and noninterest expense is expected to be in the range of $34 million to $34.5 million. Salary and benefit expenses are anticipated to range from $20.5 million to 20 million -- $21 million, slightly elevated from the prior quarter due to the full quarter effects of our merit increases and new hires. Our accruals for incentive-based compensation will fluctuate based on performance and may vary throughout the year. I'll conclude with capital. The company's consolidated TCE ratio increased to 8%, and our total risk-based capital ratio remained well above regulatory well capitalized standards at 12.7%. 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.

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 our return metrics, we feel very confident in our ability now to move through the 1% and 12% ROA and ROE thresholds as we look into 2026. I mentioned on our last quarter call, our internal 4x4 challenge of hitting a $4 EPS run rate by the fourth quarter of 2026. So basically hitting $1 per share and EPS by Q4 of this year. We rolled that initiative out internally during the quarter, and our team embraced it. We've got a little bit of work to do, but we've had a nice start to the year, and we're going to continue to push to hit that EPS target. I like our chances on accomplishing this goal. We believe we're one of the brightest banking stories in the Southeast. Outstanding growth markets paired with strong experienced bankers and a very focused executive team. Our primary efforts will be on generating more operating leverage throughout 2026 with our focus on doubling down on our organic strategy and getting deeper in our markets. As I mentioned, pipelines are solid, and I think we can continue growing at this high single digits plus pace. Talent acquisition continues to be a high priority for our company, and I really like what I've seen during the first part of this year. We've continued to add select revenue producers in several markets and have several more committed to come onboard soon. We're constant recruiters and I like our position as we continue seeing market disruption in the South. Just an anecdotal comment on that. I was at a client event in Alabama last week, and I had a new Smart Bank client that one of our new bankers has brought over to us come up to me and say how much he enjoyed working with us, saying, you guys can do everything the regionals can do, but you're better and more nimble -- that sums up our business strategy and our recruiting strategy, and we're having great success with both. So we will continue to look for these organic growth opportunities and remain very focused on recruiting. So to summarize, we kicked off a very solid 2026, and we are positioned very well. We are executing, growing revenue, EPS and book value and staying prudent on expense growth. We remain optimistic around our ability to add balance sheet growth and have a nice tailwind coming with rate resets in our loan portfolio over the coming quarters. Credit remains very sound. And on goal setting, we're executing on this year's 4x4 initiative as we have line of sight to a $4-plus earnings per share target. And I also wanted to add how Saturday am that we've elevated Cynthia Tan to our Chief Operating Officer role. Cynthia is one of the best leaders in our company and will be tasked on aligning all of our operational and tech initiatives. He's going to do a great job in this role. I appreciate the work of our SmartFinancial, SmartBank team and the efforts of all of our associates. I'm very proud of what we've got going on here at SMBK. So I'm going to stop there and open it up for questions.

[Operator Instructions] Our first question comes from Brett Rabatin from StoneX.

Hey, good morning, everyone. I wanted to start on -- I wanted to start on just the growth outlook from here. Obviously, you guys continue to execute really well on growth. And there's been rumblings of some competitors in Tennessee, in particular, being very aggressive with rate? And just wanted to see if that -- if you were seeing any of that and then just the pace of growth in 1Q, if that's sustainable, particularly on loan growth over the rest of the year?

Yes. Brett, I'll start and Rhett, you can chime in from what you're seeing in pipelines as well. But yes, it has -- we had, again, a really solid first quarter. Our pipelines feel good. As I said in my comments, I think we can continue at or around that 10% plus/minus. -- might be a little more, might be a little bit less -- but I like your pace. Competition is -- I'll tell you I don't know where we're talking about this today. We could have had a lot more we're turning away some do so good deals just because we're seeing some unreasonable rate competition. And that's okay. I mean, we just -- one of the things, and I think you've heard me comment on it in past calls is, we've really got a nice disciplined approach around our pricing model. And again, growing both sides of the balance sheet is really important for us. And so as not that we won't make an exception here or there for the right types of situations. But for the most part, we really hold to making sure that we're hitting our return on risk-adjusted capital targets. And so we are seeing some competition that's a little bit crazy. We're letting some of those deals go. We're involved in them. Sometimes we just think the price [ in step then. ] But I mean, you might talk a little bit about pipelines and just how you feel about kind of this high single digits plus pace.

No. Billy, you kind of stole my thunder because I was going to say the same thing that despite the growth we saw, we actually could have -- we could have produced more, and we not been a little -- not been as disciplined as we were on our return brand. So the pipeline itself, though, continues to backfill at a pretty consistent pace. I mean as we've kind of monitored this growth like we've had for the past several quarters, you see it in the numbers. The pipeline just continues to backfill each quarter end when we look at -- and what we've got coming for the balance of the next couple of 3 quarters. So it -- all indicators are that the market pace is still good. There's a lot of opportunity out there, and we are certainly getting our pressure.

Yes. Brett, I'd also add, it's not just Tennessee. It's all across the footprint. All about in the Panhandle has been very strong as well.

Okay. That's great color, guys. I appreciate all that. And then just wanted to ask on the balance sheet management. Your loan-to-deposit ratio has increased last year, and you talked about paying down some brokered CDs this quarter but just wanted to hear you guys' thoughts on managing the balance sheet the loan-to-deposit ratio, if there's an upper limit that you guys might have on that and then just funding the growth where you think that comes from in terms of product and how you're going to do that?

Ron, do you want to take that?.

Sure. We've been hovering around the 86%, 87% loan deposit ratio. We're not afraid to go up to 90, 90 plus. But at this point, we don't see the need. Our deposit generation has been strong throughout our footprint. As you can see for Q1, a lot of it's been money market generated. We are leading off on the CD side. We feel the relationship building of that money market category has been pretty special for us going forward. Other than that, again, relationship building and a lot of -- we have a lot of deposit opportunities in our footprint.

Our next question comes from Russell Gunther from Stevens.

Russell, I wanted to ask on deposit costs did a great job dropping those this quarter. Within the margin update you guys provided -- how are you thinking about the ability to lower deposit costs from here if the Fed does remain on pause? Do you have some incremental room -- or should we be thinking about potentially some upward pressure on deposit costs going forward?.

Ron, do you want to take that? I think from what Russell is saying, I think with rates being up a little bit, probably have a little bit more read on that. But you want to discuss kind of thoughts around deposit costs moving forward?

Yes, we're pretty neutral at this point in time. We've -- our flatness is really due to -- we have seen some mix shift in our deposit portfolio. Our team has done a great job of expanding our margin over the last several quarters. But we're seeing coming into a period of seasonality. Second quarter for us is traditionally a heavy cash quarter for clients for tax payments and other sources and other uses. Even though we've seen competition through our footprint, as we'll probably get a question on that, our team has done a great job of bringing in deposits and keeping the rates down. So in essence, I think we will still see a little bit of rate movement upward, but we're only looking at very few basis points quarter-over-quarter from here on. So pretty neutral at this point.

Okay. That is very helpful. And then you led the witness here a little bit. Let me follow up on your deposit cost competition. It's also a follow-up to Brett's very good question. I mean the Southeast is always a competitive place to operate. Maybe just high level, how would you describe the environment this quarter incrementally has that high level of competition increased. It sounds like on the loan side, but perhaps just the deposit side too.

Yes. Yes, I'll grab that one, Russell. Yes, it has. I think competition is ramping up. I don't think there's any doubt about that. I mean you've got a lot of banks that are out there looking for growth. We've been fortunate. Again, I go back to -- I think our process has really been good. And I think that's what's allowed us to drive growth and continuing to do it at right levels that we're comfortable at. But yes, it's on both sides. Brett talked about loan pricing. It's the same on the deposit pricing side. We're seeing especially with thoughts around maybe a flatter rate environment in '26, I think it's fueling a little bit of fire to keep deposit rates higher. So I think we're going to -- we'll continue with that. But, again, we're -- our deposit growth is not always rate sensitive. I know we've -- I've talked about it on prior calls, the treasury management team that we have in our company, and they're doing such a great job with their commercial bankers. And we're bringing in some really good -- just good core operating business outside of just kind of where prevailing money market rates are. And so I like the way we're growing the deposit side. I think we continue to do it like that, Ron said, probably had a little bit of mix shift this quarter that might give us a little bit of kind of short-term pressure. But all in all, I still think we continue to kind of do it at the same levels that we've been doing.

Great. And then, guys, just last one for me, a follow-up in terms of very helpful to get production yields this quarter, the 640 and the $645 million in March, and I always go right to that repricing slide on #4. How are those kind of yields holding relative to what's coming on in the pipeline? Is that kind of similar levels? Or do you see some pressure there?

Yes. I think it's close to the same, maybe a little bit of additional pressure on those Russell. But all in all, we're getting some nice yield pickup. So I think we're trying to be strategic and trying to be out in front of these rate resets and maturities well in advance. But yes, we're watching it closely. Maybe a little bit of additional pressure just like new production today, but still to the positive. Ron, I don't know if you've got anything to add on that?

Yes. The renewals and the repricing has been obviously a tailwind for us. We are renewing 88% of the loans that are coming up for repricing or renewal. That's -- and are coming in about 120 basis points higher. So they're very similar to the rates for today, maybe 10 basis points lighter but still very strong in that area.

[Operator Instructions] Our next question comes from Catherine Mealor from KBW.

Follow-up on the margin is in your guidance for the margin to be flat this quarter and then expand slightly in the back half of the year, do you have any -- what are your rate forecast under that scenario?

Yes, we're -- it's flat. We're not assuming up or down at this point in time..

Okay. So no more rate cuts were just in a flat rate environment. We were kind of stable to maybe up as we get better loan repricing in the back half of the year?

Correct.

Even if deposit costs kind of start to trend up a little bit?

Correct.

Okay. That's great. And then on the expense guide, it's helpful to see the next quarter's expense guide, which is still kind of shaking out to about that 5% annual growth rate. But just curious if you still feel like that 5% full year expense growth guide is appropriate? Or is there anything that with the recruiting you've talked about or anything else that you think we should be aware of to model in the back half of the year?

Yes. Ron, yes, just high level for me, Catherine, from the recruiting side, we think we can we think we can handle some of the recruiting. We don't do -- we're not going out and doing really, really large ad. We're just kind of selectively adding the right producing team members when they come on board. So we should be able to absorb that with the increased production. But Ron can talk about guidance. But yes, I don't think we've got a lot of really heavy expense lift in the forecast going forward. Most of that's already built in. But Ron, any color on that?

Yes, Catherine, we're projecting pretty much for the rest of the year, quarter-over-quarter. We're going to stay within a -- looking to stay within a tight band between $3.5 million to $5 million kind of in there. We're not expecting any other -- not expecting creep unless something strategic comes along. We're still looking to get our efficiency ratio to trend down to that target 60% level by year-end. So the only other item is the variable comp piece that could change some of this if we do get extended production and then variable comp will kick in. But no, we look like we can keep it in that band.

[Operator Instructions] our next question comes from Stephen Scouten from Pipas.

I guess going back to NIM just for 1 second. I'm kind of curious what you guys see as the biggest risk to the continued positive trajectory on the NIM, especially in that back half of 26, what could kind of cause that to be different than expected currently?

Ron, I'll let you take a stab at it is going to be just competitive pressure on really more just money market rates and funding rates probably a big driver in the second half is just not knowing exactly where rates are going to come or what kind of pressures we're going to get Stephen, I still think if rates hold steady, I still think we can do a pretty nice job on the loan yield front. I think it's just going to be more funding cost -- pressures potentially. Ron, anything else you'd add to that?

No, exactly. It's going -- going to be in the funding cost. And if we do have trending more of our mix shift at noninterest-bearing, but really, those are the other items.

Okay. And I know you guys noted that more of the growth had come kind of from money market and savings. Were there any sort of specials on the money market rates? Anything unusual that led to that kind of material pickup there from a mix shift?

I don't think so. I don't think we really did anything.

It's actually hard work.

Yes. And really, we prefer selling money markets and CDs. So -- but yes, not we didn't have any rate promos or anything out of the norm, Stephen.

Okay. Great. And then just last for me. I guess you guys noted the Director of Private Banking and some wealth management hires there in Nashville. How do you feel about your Nashville presence today? Is that something we should continue to see you focus on expanding given the current opportunity set? And if so, kind of what could that look like over the next couple of years?

Yes, it is. We're -- as I've said, we're really -- just really lean into all of our zones. We've just got such great ability to grow share in so many of our markets. But obviously, Nashville is a big one. It's a big market. We're really starting to build some nice momentum. I was over there with some clients a couple of weeks ago. And there's -- we've got really good energy over there. We've got a couple of them really got some nice team members that we've added over the course of the last couple of years. They've got more that we want to add over there. So I think that's a market that's going to be important to us as we go forward. But we're -- we've got a lot of other zones where we're growing share, too, but NASH is going to be 1 that I think has got a heck of an upside for us.

Great. Appreciate that or congrats on all the continued progress here.

Our next question comes from Steve Moss from Raymond James.

Good morning, guys, and nice quarter here. Most of my questions was asked to answer here. Just kind of curious in terms of just the -- maybe the pipeline mix is focusing to be more construction nonoiREor just kind of how you guys are thinking about how you guys are feeling with that underlying mix?

Yes. I'll dive in on pipelines and so seeing more of that. But we've been able to keep it pretty balanced and pretty agnostic to kind of what whatever group that I think we've been able to hold. I still think we'll be able to hold but any additional color on how you see the loan composition looking over the next few quarters.

Name with regard to kind of what our focus is. I mean, clearly, you look at the graph got there, I think it's Page 9 of the deck that outlines our loan composition. I mean you might have a slight move here or there on a percentage point or 1 quarter to the next. But overall, as you can see, it's maintaining a pretty steady pace as it relates to the mix of the portfolio. When you look at our fourth quarter production and it really ties in almost exactly to the same those same metrics for the quarter. So I mean, it's a -- it's just a continued solid, strong mix across the different segments of the book. And we are we're focused in doing that. We've got our [indiscernible] set where they have some target areas and specializations here and there, and each 1 of them are, as Millapointed out earlier, across the geography and across our different markets. One of them are carrying their own waiting wireline. I mean so far and say it's been a very consistent mix.

Okay. Appreciate that. And then maybe just in terms of expansion Bill, you just talked about the Nashville area. Just kind of curious, as you hire teams selectively here or people selectively -- should we think about any de novo expansion around that market? Or any thoughts on M&A these days? I know you guys are speaking to leverage your existing base, but just kind of updated thoughts there.

Yes. On your third question on de novo expansion. No, not really. I mean I think obviously, we -- last quarter, we talked about excited to get Columbus, Georgia started. Really excited about what our team is starting to build down there and building it really quickly. So I've been happy with that. But outside of that, nothing really will look -- I think we -- we'll probably look to add another Nashville area office sometime here in the foreseeable future. Just maybe a couple of other small offices to support some of our markets as we look out over the next couple of years. But nothing really big on that front, Steve, probably just like I said, focus on that de novo Columbus zone and then really focus on probably just growing national, maybe add a branch there and maybe another one in another market or 2 over the next couple of years.

Got it. And still all quiet on the M&A for I take it?

Yes, in M&A. M&A, I forgot about M&A miller, start lapping, it's -- I'll just -- and we have -- we've had -- we've been successful in M&A over the years, before this pivot that we made a few years ago and the leadership that we've been able to put in on the sales side, the organic growth, and I think you see it the results and what it's done, the revenue growth, the EPS growth. And I said it take a unicorn to probably get us to move Nolato the firm now and just the company and the work ethic in just -- what we're doing now is, Mark. Yes. And so yes, probably a little light on prioritizing that, Steve, but love where we're sitting.

[Operator Instructions] We currently have no further questions, and therefore concludes the Q&A session. I would now like to hand back to Miller Welborn, Chairman of the Board for any closing remarks.

Thanks, Claire. And I appreciate everybody joining us today. It's great to be with you all. And as Billy said, it's just an exciting time to be part of this bank and just being cost of recruiters, and that's a great team members all across the bank footprint and also just great clients. We appreciate you all being part of it. Thank you, and have a great day.

This now concludes today's call. You may now disconnect your lines.