SmartFinancial, Inc. 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining us for SmartFinancial's third quarter 2026 earnings webcast and conference call. During today's call, we will reference the slides and earnings release available in the investor relations section of our website at smartbank.com. Billy Carroll, our President and Chief Executive Officer, will begin the call, followed by Ron Gorczynski, our Chief Financial Officer, who will provide additional commentary. We will be available to answer your questions at the conclusion of our call. Our comments today include forward-looking statements. These statements are subject to risks and uncertainties, and actual results may differ materially. Factors that could cause actual results to differ materially are described in our earnings release and SEC filings, which are available on our website.

We undertake no obligation to update any of the forward-looking statements as a result of new information, future developments, or otherwise, except as required by law. During today's call, we may reference non-GAAP financial measures related to the company's performance. Reconciliation of these measures to the most directly comparable GAAP measures are included in the appendices to the earnings release and investor presentation filed with the SEC on October 19, 2026. I will turn the call over to Billy Carroll.

Thanks, Nate, and good morning, everyone. Great to be with you, and thank you for joining us today and for your interest in SMBK. As usual, I will open our call with some commentary and then hand it over to Ron to walk through the numbers in greater detail. After our prepared comments, we will open it up with Ron, Nate, Rhett, Miller, and myself available for Q&A. The third quarter was another outstanding one for our company. We continue to build strong organic momentum, generated record operating revenue, and expanded our return metrics. The foundation we have built over the past several years is producing the results we expected, and our team remains highly focused on disciplined growth and long-term shareholder value. Let me jump right into some of the highlights.

First, as I always say, one of the most important metrics to me, we continue to increase the tangible book value of our company. Tangible book value per share was up, ending the quarter at $28.50. The tangible book value excluding AOCI increased to $30.03. That represents 15% annualized quarter-over-quarter growth, excluding AOCI. For the quarter, we posted operating earnings of $18.6 million, or $1.10 per diluted share, and record operating revenue of $57.5 million. We did have a few moving parts that netted out positive to operating earnings this quarter, including a nice tax credit transaction that Ron will discuss in a moment. We again delivered excellent growth on both sides of the balance sheet, with 15% annualized organic loan growth and 12% annualized core deposit growth. Our return metrics, though slightly aided this quarter, continue to strengthen.

Operating return on average assets increased to 1.20%, and operating return on average tangible common equity increased to 15.1%. Credit quality remains very sound. Non-performing assets were only 25 basis points of total assets, and annualized net charge-offs were six basis points. We did have a slight uptick in delinquencies in our Fountain Equipment Finance, as higher diesel prices have strained some transportation business, but overall, very manageable as that continues to be a relatively small piece of our overall loan book. We were thrilled to open our full-service Columbus, Georgia Financial Center during the quarter. This is our first branch in this great state and an important step in building density in that market and supporting the strong start our Columbus team has made. Looking at the first few pages in our deck, you can see the continued progress in revenue, EPS, return metrics, and tangible book value.

The consistency of those trends demonstrates the strength of our organic strategy and the operating leverage we are building. A couple of additional high-level comments from me. On growth, we added $174 million in loans this quarter, representing 15% annualized. The growth remains broad-based, with strong production across all regions and continued momentum in C&I lending. Our average loan portfolio yield, including fees and accretion, ticked up to 6.08%. Regarding deposits, core deposits increased $163 million or 12% annualized during the quarter. Our focus on both sides of the balance sheet continues to pay off, and loan-to-deposit ratios maintain very manageable at 87%. Deposit pricing remains competitive, and higher funding costs pressure the margin modestly, but net interest income still increased nicely to $49.4 million as balance sheet growth more than offset that pressure. On expenses, operating non-interest expense was $36.4 million.

The quarter included some slightly higher one-time items, along with continued investment in our people and franchise. Even with that increase, year-over-year operating revenue growth outpaced operating expense growth. We will maintain discipline around expenses, but we will also continue making investments that support growth, including revenue-producing talent, technology, and strategic facilities. All in all, another excellent quarter of continued execution. I am going to stop there and hand it over to Ron to dive into the details.

Ron? Thanks, Billy. Good morning, everyone.

I will start with deposits. During the quarter, our non-broker deposits grew $163 million, driven by continued new account growth and strong relationship expansion. The weighted average cost of new deposit production increased 43 basis points to 3.33% for the quarter and was 3.36% for September. Non-interest bearing deposits were essentially unchanged at $920 million, representing approximately 70% of total deposits. Interest-bearing deposit costs increased nine basis points to 2.71%, while total deposit costs increased 11 basis points to 2.26%. Loan balances increased to $174 million, with growth diversified across all loan categories and geographies. New loan production carried a weighted average yield of 6.37% for the quarter and was 6.78% for September. Our growth on both sides of the balance sheet reflects the consistent execution of our relationship-based strategy.

Our bankers remain focused on pairing quality loan growth with broader client relationships, operating accounts, and core deposits. Turning to margin, net interest income increased $1.3 million to $49.4 million, and net interest margin was 3.45%, in line with our stated guidance. Looking ahead, we expect continued improvement in asset yields to support modest margin expansion over time. However, near-term deposit cost pressure is expected to continue to offset some of that benefit. As such, for the fourth quarter, we currently expect net interest margin to remain around current levels in the 3.45% range. Our provision for credit losses declined to $687,000 from $1.5 million in the prior quarter. This included approximately $1.1 million of provision, partially offset by a $371,000 release from our unfunded commitments liability. The provision also benefited from a $1.7 million net release of a loan-specific reserve, driven by a loan payoff.

Overall, the allowance for credit losses increased slightly to $45.6 million, and our allowance to loans ratio declined to 94 basis points. We believe the allowance is appropriate for the portfolio and current environment. Operating non-interest income was $8.1 million, up $245,000 from the prior quarter, led by service charges and mortgage banking income. Together, with higher net interest income drove operating revenue to $57.5 million, reflecting continued momentum across the company. Operating non-interest expense totaled $36.4 million, up $2.4 million from the prior quarter. Approximately $1 million of this increase was attributable to sale losses and valuation write-downs on repossessed equipment in our Fountain Equipment Finance subsidiary. Salary and benefit expenses also increased, primarily due to higher production-related variable compensation. Professional service expense included approximately $300,000 of consulting and placement costs associated with our tax credit purchase.

Adjusting for the Fountain Equipment Finance and tax credit expenses, our non-interest expenses were in line with our stated guidance. Our operating efficiency ratio increased to approximately 63% from 60% in the prior quarter. Although the ratio was elevated this quarter due to the aforementioned items, we expect to generate positive operating leverage over time as our recent investments contribute more meaningfully to revenue. We will continue making targeted investments in our expanding markets while maintaining discipline across the broader expense base. For the fourth quarter, we expect operating non-interest income of approximately $7.5 million and operating non-interest expense of $35 million-$35.5 million. Salary and benefit expenses are expected to range from $21 million-$21.5 million, reflecting production-related incentive compensation and additional hiring. Incentive compensation accruals will vary with performance. Turning to taxes, income tax expense was $1.9 million, compared with $4.2 million in the prior quarter.

During the quarter, we purchased $36 million of transferable energy tax credits at a discount to face, resulting in a $2.6 million income tax benefit. Looking ahead, we may consider similar transactions from time to time as part of our tax planning. Our effective tax rate going forward will be in the range of 19.5%-20.5%. I will wrap up with capital. Our tangible common equity ratio was 7.8%, compared with 8% in the second quarter. The decline in the tangible common equity ratio was primarily attributable to changes in AOCI, as rising interest rates reduced the fair value of our bond portfolio during the quarter. In contrast, our estimated common equity tier 1 ratio increased to 9.8%, and our estimated total risk-based capital ratio was 12.6% at quarter end.