SMBK - NASDAQ

Hello everyone and welcome to the SmartFinancial’s Second Quarter 2024 Earnings Release and Conference Call. My name is Ezra and I’ll be your coordinating your call today. [Operator Instructions] I will now hand over to your host, Nate Strall, Director of Investor Relations, to begin. Nate, please go ahead.

Thanks, and good morning, everyone, and thank you for joining us for Smart Financial's second-quarter 2024 earnings call. During today's call, we will reference the slides and press release that are available within 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 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 will 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 the investor presentation filed on July 22, 2024, 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 then hand it over to Ron to walk through the numbers in 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 right in. A pretty good quarter for us where we saw more of the inflection we've anticipated. We posted net income of $8 million for the quarter or $0.48 per diluted share. On an operating basis, we came in at $7.8 million or $0.46 per diluted share, the delta being a small gain on the sale of a piece of bank property. Jumping into the highlights, we'll be referring to the first few pages in our deck, Pages 3, 4, and 5. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company, moving up from $21.66 per share, including the impacts of AOCI, and $23.18 excluding that impact. That's a 10% annualized quarter-over-quarter increase. Looking at the graph on the lower right on Page 5, you'll see the value growth we continue to deliver for our shares. We had a very solid loan growth quarter, over 11% annualized as we saw continued growth in new relationships and an increase in funding online. There was some contraction in deposits that was expected after experiencing a fairly robust growth in the first quarter. While the balance sheet remained relatively flat, we've remixed it and continue to bring in some outstanding new client relationships and a history of strong credit continues with the metric holding very low at 20 basis points in NPAs. As you know, we operate with a low-risk profile in terms of credit. Our CRE ratios continue to hold flat, giving us the ability to add in those buckets when the right opportunities present. The only movement we've really seen on credit has been a few lingering small trucking company credits we've worked through in our Fountain equipment portfolio. We continue to be very pleased with the production of that team, just focusing a little more on the heavy equipment sector. Total revenue came in at $40.4 million and net interest income continued to expand with the inflection point we've discussed. Non-interest expenses were relatively steady at $29.2 million for the quarter. The operating leverage that we've talked about on prior calls is starting to happen as we continue to grow the revenue line with minimal investments on the expense side. Looking at the charts on Page 5, highlighting the operating PPNR chart, the movement up has started after a couple of flattish quarters. We're looking forward to and expecting to continue to see that trend to happen. Before Ron jumps into the details, just a couple of additional high-level comments from me on growth. We were pleased with the results. On the loan side, we were up $96 million, again about 11% annualized for the quarter and 7.5% annualized year-to-date. Our regional sales teams are doing a nice job growing new clients. Yields on the loan side continue to expand with the full portfolio's average loan yield up 9 basis points to 5.8%. Our mix was almost identical with the first quarter. On the deposit side, we contracted a little, as I mentioned, after a higher-than-expected growth in Q1. The contraction was primarily some seasonality coupled with tax payments, plus the quarter we rolled off $15 million in wholesale funding that was not replaced. The leveraging of deposits was by design, bringing our loan-to-deposit ratio to 83%. I'm pleased with the work on the deposit cost as well as average total costs were up only 4 basis points in the quarter to 2.56%. We also continue to hold our non-interest-bearing mix at over 20%, which is not an easy feat in this environment. And I think, Ron, I think that is it on mine. I'm going to pass it over to you.

Thanks, Billy. Good morning, everyone. We are very pleased with our balance sheet's performance over the last several quarters. Billy touched base on our deposits, which I'll provide more commentary on in a minute, but I want to start with the positive trend we saw in our securities portfolio. For the quarter, the weighted average yield rose 66 basis points to 3.60%. As highlighted during previous calls, we had $150 million of low-yielding treasuries mature in the first half of the year and we've redeployed 118 million of those proceeds into new securities with a weighted average yield of 5.73%. The remaining principal balance of these maturities have been mostly earmarked to fund new loan production. As a result, funding for new security purchases will only be allocated to the most advantageous opportunities and for general balance sheet management. To add a little more color on our deposit portfolio, during Q2, interest-bearing deposit costs increased 7 basis points to 3.23% and were 3.23% for the month of June. The weighted average cost of new deposit production for the quarter was 3.16% and our overall deposit composition remained consistent with noninterest-bearing to total deposits remaining above 20%. Looking ahead, we expect deposit balances to rebound as our client liquidity builds and our relationship managers continue to win net new deposit business relationships. As messaged last quarter, we have passed the inflection point in our net interest margin, which expanded by 12 basis points of 2.97%. The margin enhancement was a result of several factors, including the previously mentioned yield enhancement on the securities portfolio and a favorable 7.84% weighted average yield on new loan originations. Additionally, total deposit costs increased only 4 basis points linked quarter, signaling further funding cost stabilization. While the variables influencing margin are difficult to forecast, we do expect continued margin expansion during the second half of 2024 primarily driven by new loan production, fixed and adjustable-rate loan maturities, and our liability sense of interest rate position. Currently, $115 million of fixed and adjustable-rate loans with a weighted average yield of 5.83% will mature or reprice ratably over the remainder of 2024. We also have $150 million in time deposits repricing during the third quarter, and while our modeling doesn't include a change in the Fed funds rate during the third quarter, we have $949 million available rate loans and $1.2 billion of interest rate deposits that will reprice immediately upon Fed funds rate movement. As a result of these factors, this quarter we anticipate surpassing a $42 million plus quarterly operating revenue run rate and are targeting a margin in the range of 3.05%. Operating non-interest income was $7.3 million, adjusting for a $283,000 gain from the sale of a bank-owned property and operating expenses were lower than forecasted at 29.2 million, largely as a result of ongoing cost management efforts. Looking ahead to the third quarter, we are forecasting noninterest income in the mid $7 million range and non-interest expense of approximately $30.5 million range with salary and benefit expenses comprising 18 million. I'll conclude with capital. For much of the quarter, our stock price was trading well below its intrinsic value, not fairly reflecting the value of our company. As such, we took advantage of this opportunity and repurchased over 136,000 shares at a weighted average price of $21.57. Despite the repurchases, our consolidated TCE ratio grew 23 basis points to 7.7%. Our total risk-based capital ratio did decrease slightly by 17 basis points. However, this was due to our strong loan growth being funded by risk-weighted cash. Overall, we continue to be in a well-capitalized position for the very strong future credit and earnings outlook. With that said, I will turn it back over to Billy.

Thanks, Ron. I want to reiterate again the value proposition for our company, drawing your attention back to Page 7 of our deck, reminding our stakeholders of what we've accomplished over the last few years with the best still to come. As we've discussed, the major investments we made in 7 de novo markets a couple of years back was comparable to an acquisition without issuing stock. We diluted our return a little to accomplish this, but now that we're through absorbing the 500 basis point rate increase, we can feel the operating leverage starting to kick in. We've made it through the tough part and are getting over the hump of moving our ROA and ROE back to over 1% and 12%, respectively, as we had prior to the market expansions and rate increases. The operating foundation we've built, coupled now with the sales organization we're creating, have me very optimistic about our company's future. We're now more fully leveraging the functionality of our nCino platform, we are utilizing the sales force front end to consistently create a stronger prospect in process for the sales team and we're leaning into their pricing and profitability systems to coach our teams in the value of core relationships. The regional president structure we have and the accountability we're putting into these zones is really starting to bear fruit. Our operating platform combined with a reinvigorated sales emphasis, operating in some of the best markets of the country is a pretty good formula. We're continuing to look to add sales talent that fits our culture. We've added over 10 new sales team members so far this year and have several in our talent pipeline currently. I believe we continue to be one of the region's banks of choice for great bankers. I also think we're positioned well for whatever materializes in the way of rates. We're continually running several scenarios of forecasting to make sure we can accomplish our return targets and those objectives on a variety of paths. So to summarize, I like where we're sitting. We are executing and have started gaining the operating leverage that we anticipated with a solid path back to our return targets. Margin is starting to expand back. Credit continues to be very sound, and we're seeing great new client growth and sales energy in our company. All said, a very solid first half for our company. I appreciate the work of the SmartFinancial and SmartBank team and the efforts of over the near 600 associates we have. This team is continuing to perform well in building a great culture. We're going to stop there and then open it up for questions.

Thank you very much. [Operator Instructions] We've got our first question from Will Jones with KBW. Will, your line is now open. Please go ahead.

Hey, so great work on the margin this quarter. I think it may have been a little underappreciated. So some of the reinvestment opportunities you guys were having, just Ron, you called out some of the significant bond maturities you saw over the first half of the year. I was just curious, just wanted to start there. So the bond yields of 360 that we saw this quarter, does that kind of fully reflect the full benefit of some of the reinvestment you've done or I'm just trying to gauge where there may be a little more upside to two securities yields as we move into the third quarter. So, Ron, what's a good jumping point off, do you think for that securities yield percentage?

Yes, for the next couple of quarters, we're probably in the 360, 365 range. We managed to get pretty close to full benefit for Q2. So it'll be like kind yields going forward.

Yes, okay. That's great. And then, I mean, the commentary around deposit costs, it feels very favorable. I mean, we -- I think, I recall last quarter that we talked about the March deposit cost of 2023 and that's kind of where we landed this quarter and then new deposits are even coming on lower. So I knew it still could be too early to call victory on deposit costs, but do you think we could see an inflection next quarter or maybe as we exit 2024?

Well, I'll start, and then, Ron, you chime in. Well, yes, I mean, I think we -- a nice job on that front. And like to your point, it's not easy and I don't know if we would say we've declared victory yet. Obviously, we feel like rates of, I think, next move, we market into down, but the team's done a good job of holding that. As we talked about, we leveraged a little bit of that liquidity, so we're not in a position where we have to push on the deposit rates. So we -- I think that played their benefit this quarter, we, very well -- we're going to kind of wait and watch. We could see -- we could leverage it a little bit more in Q3. So I think -- I don't know if we're ready for an inflection yet without a rate cut, but I think we can hold our own for a little while. Ron, any additional color?

Yes, we want to -- we can't be aggressive on our rate assumptions. We're thinking the amount of increasing has stalled. So we're looking at 3 to 4 basis points, I think, of cost incrementally going quarter over quarter still under pacing the amount of our loan yields, our asset yields increasing much more than that.

Okay. That's super helpful. And then just last from me, Ron, just housekeeping. The $150 million of time deposits at reprice, where are those going to and where are they coming from in terms of rate?

Yes, for Q1 we had one where they're going to, we had about 78%, 80% retainage and they're going anywhere from sheet rates, so anywhere from 275 to low fours. Again, it all depends on the customer, the amount, and such. So it's -- there's really not one answer for that. It's -- we're seeing a variety of outcomes, but we are retaining about 80% of the time deposits.

Yes. Okay. That's helpful. Well, great quarter, guys. That's it for me.

Thanks, Will.

Thanks, Will.

Thank you. And our next question is from Stephen Scouten with Piper Sandler. Stephen, your line is now open. Please go ahead.

Thanks, guys. Good morning. So appreciate all the commentary in the forward guidance there. I think you said 305 NIM expected for the third quarter. If I look back at my notes, I think we were talking like a 290 for this quarter. So I guess my question is, what came in better than you would have expected at this point last quarter and do you think some of those trends can continue versus that relative improvement?

Yes, I'll start and Billy can add to it. First, this is the third consecutive quarter where our growth in interest income exceeded the growth in interest expense, a trend we expect to continue. I think our loan yields, our loan production came in heavier than expected. Our loan yields, we expected we are expected to increase 7 to 9 basis points and I think we're a little bit less than that for our expectations last quarter. And, I think our deposit costs have slowed. We're probably a little bit heavier, but we came in at 4 basis points. So really a combination of things and also our loan and deposit mix has changed. So kind of a variety of good things that are happening for us at this point.

Yes, that's helpful. That makes sense. And then as you think about the prospect, I know you said you don't have any rate cuts, I guess, in the third quarter in kind of your model. But when you think about the prospect of rate cuts, have you guys quantified what maybe each 25 basis point cut looks like for you guys from a NIM perspective or an NII perspective? I mean, obviously, I can see the asset sensitivity that's in the presentation, but just curious how you think about it on each maybe 25 basis point move?

Yes at this point, we're slightly liability-sensitive. These 25 basis points cuts are really not it helps us, it's not hurting us. So I think incrementally, we're probably putting on $400,000 of income annually or 2 basis points would pick up for that for the next quarter if it happened early in the quarter. So let's just say 2 basis points.

That’s good. Okay. Great. And then as we think about and I apologize if I missed it, kind of that ideology behind the $50 million in operating revenue for 3Q '25, I think was kind of where you guys were targeting. Do we still think that's a viable path? And if so, how much balance sheet growth do we need to see to get there or where does the NIM need to go, like, how can we think about the path to that number and the progress we would need to see to get there?

Hey, Steven. It's Billy. Yeah. We still feel very good about our ability to get there. Obviously, it's a function of growth and margin. Expense controls are kind of a given. We believe we continue to hold our expense line with just reasonable growth over the next several quarters. And I think you see us, as Ron said, you've kind of given our guidance of getting up, hope to north of 42 is what we think for next quarter. I think you can see that trend continue to move up into the high 40s. And so for us, it's a function of getting some growth. It's a bunch of getting the growth on the balance sheet. I think for us, if we can get, ideally get a couple of $100 million of growth on the balance sheet over the next year. I think that’s doable. I think if we do that with a NIM and the $335 to $340 range, coupled with the balance sheet growth, I think it gets us there by the end of next year and that's our goal. As we've talked about with you and others on this call, the growth that we had coupled with a little bit of this rate increase squeezed us a little bit but that was fine. We're coming out of it now and we have a really good, I think a path. We obviously got to execute. We got to grow the balance sheet but sales teams are teed up to do that. And I think if we can get this couple hundred million of growth on the balance sheet coupled with that margin expansion into that 335 range, it gets us where we want to be from a return target standpoint.

Absolutely. That's extremely helpful. Thank you. Appreciate all the time.

Thanks, Stephen.

Thanks, Stephen.

Thanks. Thank you. Our next question is from Steve Moss with Raymond James. Steve, your line is now open. Please go ahead.

Hey, good morning, guys. This is Thomas filling in for Steve.

Hey, Tom.

Hey, good morning.

Hey, so loan growth is really strong on the quarter. What are some of the kind of notable underlying trends you're seeing there, maybe geographically or in a product segment? And then maybe how is the overall pipeline looking today?

Yes, I'll start with pipeline then I'll -- Nate, jump in, talk a little bit about kind of what we're seeing, what the mix is, what the trends look like. Overall, pipeline's still really good. We've got -- we did get to have as we saw this quarter in Q2, I think we're going to see a little bit more in Q3 continued growth on some of the lines that we have out there, some of the construction deals that are still funding. So that's a plus but I still feel pretty good about our guidance that we've given in the past. I feel pretty good about that kind of that mid to high single-digit guidance on the loan growth side. We feel good about our ability to grow the deposit side too. A little of it's going to be how we want to handle the rate fluctuation. As I said, we may look to lever a little bit more in Q3 because we've got the ability to do it. It's just going to be a function of how we want to manage that but pipelines are good and we feel, continue to feel optimistic on our ability to grow the loan book. Nate, you might talk a bit about what we've seen, the types of loans that we've been putting on lately, and kind of what we expect for Q3.

Sure. Yes, Thomas, if you look at the portfolio itself, just our balance growth has really come predominantly in our C&O lending space, our commercial real estate, both on our occupied and non-occupied, a good mix there. And then we've had good continued balance growth in our one to four-family term debt. So construction, as you can see in our ratios, we've continued to see our CRE construction ratios decline. That's been kind of a combination. We did have a couple of larger one to four construction projects that paid off, you could say sold in the beginning half of the year but we do have a number of good projects on the way now that we believe we'll see some of those balance recovery. So it's been a pretty good mix across the portfolio and you see that in the slide deck with the fact that our categories within the portfolio are continuing to just trend relatively steady period to period. So we're just not seeing big swings in any specific segment.

And it's been very geographically diverse too.

Yes, absolutely. We typically will see some of our larger segment markets are all contributing at a pretty comparable rate. And then our -- but also our lift-up markets are some of our newer footprint markets are beginning to gradually increase their production as well. So it's really coming from across the footprint.

Well, and Thomas, I'll add to it too, and I touched on a little bit in my prepared comments about our regional president structure and how we're really getting those teams engaged on the sales side. I think we've always sold well. But right now, I mean, we've got a really good group of leadership in these regional spots and the growth that we're seeing, the sales energy that we have, it's as good as we've ever had in this company in a market where it's not easy to sell, and so I think that's the reason you hear some optimism in our tone. We've obviously, we've got work to do. We've got targets that we need to hit. We've stated publicly that we're going to go get after, and I know we can get there but it's a good energy and as Miller and Rhett alluded to, it's spread throughout all of our geographies. So very evenly balanced, and we feel really good about the prospects of growing that side.

Our next question is from Russell Gunther with Stephens. Russell, your line is now open. Please go ahead.

Just to circle back to the loan growth discussion, so I think the mid to high single digits implies kind of closer to the mid-single digits for the back half of the year. Obviously, 2Q is quite strong. But, one would just be helpful if you could set the table more specifically for the next couple of quarters on loan growth. And I'd also be curious to learn if there were any notable commercial under hires in 2Q.

Yes. Second half growth and that's the reason I alluded to kind of we balanced it out a little bit lighter Q1, a little stronger Q2, came in at 7.5% year-to-date. I think we're still I think we're right there, give or take. I think again, that 5% to 8% number still feels pretty good. Again, it's just gonna be a function of, can we a couple of deals? Our pipelines are good. It's just a function of getting them all closed and on the balance sheet. Some deals may fall out but we're still very optimistic that we can continue our growth similar to what we saw in the first half of the year. So again, that I feel like that could be fairly, and maybe not be it may not be as lumpy as we saw first half but 5% to 8% is still, I think, a pretty good range. As far as new hires, we picked up a couple of really good commercial bankers, in the first half as I talked about. We've added 10 total new sales team members. Some of that's recalibrated folks come and go, but yes, I think the 10 that we've added have been really, really good and most of those have been on the commercial side. We've had a couple and a couple of other revenue-producing arms but most of it commercial, couple of really good private bankers. And so those folks, we feel very good about their ability to continue to bring in new business. So I think that's the reason we're kind of lean to continue to feel like we can hit those loan growth targets and it's still in a world where loan growth, organic loan growth is not easy.

Yes. Understood. I appreciate it, Billy. And then you guys have touched on CRE and CND concentration ratios on the call and maybe pointed them a little bit higher based on back-after-the-year growth expectations. But just give us a sense for where you plan to target those ratios and whether or not that is any impediment to growth targets for the back after this year or next.

Yes. I'll start and I'll let Rhett chime in with his thoughts on fundings. We've always liked commercial real estate. We don't shy away from it. Again, I think when you look at the way we underwrite, the types of deals that we look at, the sponsors that we have on those deals, we feel good about it. So I don't think -- we're not looking to go lean in heavy to CRE, but we want to continue to prudently use that bucket. Where we end up, Rhett, I'll let you, I know just based on where you think projections are and fundings, I'll let you chime in on thoughts around kind of growth maybe in the ratios over the next quarter or two.

Yes. As we mentioned a little bit earlier, we had a handful of projects that we are wrapping up near the end of last year that transitioned into the first part of '24 that have paid off. So we had some balance reduction as a result of that. But as I mentioned, we still continue to have good production in the segment of new loans going on the books that we'll see some advances. So I would envision that we will begin to see those ratios begin to transition back up a little bit but I don't see it being a significant move, honestly, in balance as outstanding between now and year-end. We may see it trend up a little bit from where it sits today. This is probably I think the lowest quarter we've had in a while but I don't see it moving significantly. Also, at the end of the day, I think it's still going to be somewhere in that. We may see it move up closer to a 70s-type ratio mark in the construction segment, but doubt it'll get much higher than that.

Okay. Great. Thank you, guys. Then last one for me, you quantified the benefit that a rate cut would bring to the table. What type of rate backdrop do you guys assume in that $50 million revenue target we discussed earlier?

Yes. Right now, we're kind of running this thing in a flat-rate scenario. Obviously, we know what the market's saying and I think we all feel like the next moves are down. It's just a matter of when. But the assumptions that we've built in have been in a right environment that holds flat.

Got it. Okay. Great, guys. Thank you very much for taking my questions.

Thanks, Russell.

Thank you. [Operator Instructions]. We've got our next question from Christopher Marinac with Janney Montgomery Scott. Christopher, your line is now open. Please go ahead.

Thanks. Good morning. I wanted to go back to the repricing points that you're making in the presentation and also this morning. Is there a minimum new loan yield that is going on the books today? I just was curious how to think through that and do you think that new yield may go a little bit higher as you get into third and fourth quarter?

Chris, look, you gave the stats on what we new loan yields going on in Q2 were 776. I think it, I obviously, a lot of that, again, Chris, between fixed and float, it is but that's probably still a pretty good assumption. Yes, it might be a little bit lower than that just thinking about some of the deals that we've got out there in the pipeline. So it may be a little bit lower than that but not much, assuming again, assuming rates stay at the spot where we see them today. But, no, I think we can continue to hold in that mid-7s level.

Okay. And then if we think through just a modest interest rate cut in the future, is the beta on the way down gonna be similar to what we've seen in your experience the last couple of years or is it too early to tell?

Ron, you want to take that?

Yeah, I'll take that. I think it's too early to tell. The market competition is really going to justify what we can do. We intend to take advantage of the first couple of rate cuts and then see what the market is bearing and see how our production is handling it but, yes, some really short answer is it's too early to tell at this point. Bill, I don't know if you have anything to add to that.

No, I think it is. It is going to be tough. Obviously, we're going, given our -- Chris, given our position with where we are on liquidity and our loan to deposit ratio, we've got we're gonna -- we're gonna probably try to push down a little bit faster add to Ron's point, you got it. You still have market competition you got to contend with. So we're gonna try to balance that, but it's a game-time decision, everyone. It is a game-time decision. And I do wanna follow up, Chris, on your first question. Nate nudged me and said don't forget about our rate-rock model. It's one of the things on loan yields. I mentioned in my prepared comments the work that we've been doing with our pricing profitability model. It's been really impactful. And so when we're using our risk-adjusted return on capital bogeys with these sales teams. So even if we're pricing the loan a little more aggressively, for example, we're still getting our rate-rock returns and a lot of those, that's just a function of the ancillary business, the deposit business, the treasury business that we are getting from those clients. So, yes, I think when we look at loan yield, we try to look at, we look at it very holistic and under the guise of a risk-adjusted return on capital. Just to kind of add a little additional color to that comment.

No. That's great. I appreciate that. And then just one quick follow-up is, Billy, have customer attitudes changed at all to the positive, I was just start thinking through the pipeline comments on the call this morning. And is anything different now than perhaps earlier this year?

If we get out, I know we all get out. Miller and I particularly are out a lot in our markets. Right now, we're in several of our markets last week and visiting with clients and prospects. There continues to be a very, I guess, cautious optimistic tone, that we see in really the zones where we're operating. So, yeah, Chris, I think overall, there's some optimism. Obviously, the market is changing. Inflation is still impactful although slowing and we're seeing you're seeing some slowdown. Some clients were seeing a little bit of slowness here or there or a little bit of a downward trend, but it's a small downward trend off of a record 2023, so things are still relatively good and that's kind of what we're seeing from clients and Miller, I know you're in the markets too, any thoughts?

Yes. And I certainly don't want to talk politics, but that's certainly on everybody's mind and it's just, there's something different every day and I think that's the way the wind's going to blow until November.

No. All fair and thank you all for the comments this morning, it's very helpful.

Thanks, Chris.

Thank you very much. We currently have no further questions, so I will pass back to Miller Welburn to conclude.

Thanks, Ezra. And thank you all for being on the call today and for being interested in what we're doing here at the bank and for being part of our story. We appreciate the support and have a great day. Thank you.