SmartFinancial, Inc. (NASDAQ:SMBK) Q1 2024 Earnings Call Transcript

SmartFinancial, Inc. (NASDAQ:SMBK) Q1 2024 Earnings Call Transcript April 23, 2024

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Operator: Hello. And welcome to the SmartFinancial’s First Quarter 2024 Earnings Release and Conference Call. My name is Alex and I’ll be your coordinator today. [Operator Instructions] I will now like to hand over to Nate Strall, Director of Strategy and Investor Relations. The floor is yours. Please go ahead.

Nate Strall: Good morning, everyone, and thank you for joining us for SmartFinancial’s first 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 at smartbank.com. Billy Carroll, our President and Chief Executive Officer will begin our call, followed by Ron Gorczynski, our CFO 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 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 appendixes of the earnings release and investor presentation filed on April 22, 2024, with the SEC. And now I’ll turn it over to Billy Carroll to open our call.

Billy Carroll : Thanks Nate. And good morning, everyone. Great to be with you and thank you for joining us today and thanks for your interest in SMBK. We’re changing the format a little this quarter moving to just prepared comments from Ron and myself to streamline the first part of the call. We also have Miller, Rhett and Nate here and they’ll be available for the Q&A portion. Nate’s also did a great job of adding some new slides to our deck. As you can see from the release, we had a nice start to the year. We had net income of $9.4 million for the quarter, or $0.55 per diluted share. On an operating basis, we came in at $8.40 million or $0.49 per diluted chair. The delta was primarily again on the sale of a former branch facility in Destin, Florida that we sold once we completed their move to a new office in a better location.

We also had a little tailwind from some provision release. Jumping into the highlights, I’ll be referring to the first few pages in our deck, pages 3, 4, and 5. First, we continue to increase the tangible book value for our company, moving up to $21.12 per share, including the impacts of AOCI, and $22.73 excluding net impact. We had growth and loans in deposits at approximately 4% and 12% respectively. Our history of strong credit continues with the metric ticking down from a low base last quarter even more to only 18 basis points in NPAs. Total revenue was back over $40 million and net interest income continued to expand with inflection point we saw at the end of last quarter. Noninterest expenses were steady at $28.6 million for the quarter.

We maintained our strong liquidity position, covering our uninsured deposits at 1.4x. And our return metrics started their inflection as well, as we had projected with operating ROA and ROE at 0.69% and 9.5%, respectively, on our path back to 1% and 14% plus as leverage the market investments we made in 2022. Ron will dive into the numbers a little deeper but a couple of high level comments from me. On growth, we were pleased with the results. The deposit side grew faster than we had anticipated this quarter at $126 million. This droves our costs of deposits up a little 17 basis points with those net new dollars coming on at reasonable rates just higher than our overall current cost. I was pleased would maintaining the 21% noninterest bearing component as we all know, that’s getting tougher.

On loans, we were up $34 million, a little below our forecast, primarily due to a couple of unanticipated payoffs for client-sold assets, but production was healthy. Yields on the loan side continue to grow up 10 basis points for the quarter. Our loan mix was almost identical to yearend with our CRE concentration ratios edging down again this quarter giving us some dry powder there for the right opportunities. I think it’s important to note that our balance sheet pipelines look solid as well as we forecast out a couple of months. We are seeing clients continue to sell assets and businesses, which isn’t a bad thing, but it could have some impacts on timing of overall loan growth this year as we saw this quarter. That said, I still think we can hold to our mid to high single digits on growth for the year on both sides of the balance sheet.

I do want to draw your attention to a couple of slides that Nate added this quarter that depict why we believe our story is one of our best values in the region. Slide 7. I think it’s important to remind our stakeholders of what we’ve accomplished over the last few years with the best yet to come. There’s some great information here on our company’s journey from when Miller and I combined our banks into the $1 billion platform in 2015, from pulling those companies together and validating our model to then scaling the company with several years of successful acquisitions and organic growth to where we are now with focus on generating operating leverage. As we’ve discussed on prior calls, recent rate increases have delayed returns popping back quickly after our seven de novo market expansions we made leading into 2022.

But foundation is set and we are poised for continued performance enhancements. Another new slide, slide 8, shows why we’re so bullish on our future. Taking a look graphically at our footprint, you’ll see we are operating in, arguably, some of the country’s best regions. And the South population gross numbers are strong, and we’ll benefit from that moving forward as well. All said, a nice start to 2024. So let me go ahead and turn it over to Ron for his commentary, and then we’ll open it up for some questions. Ron?

Ron Gorczynski : Well, thanks, Bill, and good morning, everyone. During the first quarter, we experienced deposit growth of over $126 million, or almost 12% annualized, resulting in a loan to deposit ratio of 79%. Interest-bearing deposit costs increased 16 basis points to 3.16%, and were 3.23% for the month of March. Our deposit growth was driven primarily by new relationship managers, boarding clients, coupled with new net deposit growth from our existing clients. While the growth is encouraging, it did come at an elevated cost. For Q1, the weighted average costs of new deposit production were 3.79%. However, we also saw new and existing noninterest-bearing deposit relationships expand, which resulted in noninterest-bearing deposits to remain above 20% of the total portfolio.

We currently have $1.2 billion, or 36%, of our interest-bearing deposits, re -pricing immediately with any movement in the Fed funds rate, and $130 million of CDs re-pricing during the second quarter. Like in the first quarter, $110 million of securities, yielding 1.5% matured, and over $80 million of this was redeployed into securities with the weighted average yield of 5.87%. Additionally, we have $61 million of securities, yielding 2.1% maturing in late May. These maturities, coupled with strong deposit growth, resulted in significant liquidity build with cash and cash equivalents totaling over 9.5% of total assets. While this is above our long-term cash position target, we are not rushing to deploy the excess liquidity given solid cash yields and the considerable lending opportunities we are seeing across our footprint.

Moving forward, we do intend to selectively purchase securities as part of our overall balance sheet management process, but right now it’s paying to be patient. Our quarterly net interest margin remained flat at 2.85%. It resulted in several factors. As discussed previously, deposit growth came in stronger than forecasted, while loan growth was muted due to a handful of large, unexpected loan payoffs. While payoffs are not optimal in the short term, we are encouraged by the fact that loan growth, excluding payoffs, would have been well above our mid-single digit growth guidance. Weighted average yields on new loan originations were at 8% and contractual yields expanded by 10 basis points to 5.71%. Looking ahead, 43% of our loan portfolio is variable rate with $884 million repricing in the next three months, and we have over $90 million fixed rate loans yielding 5.54% maturing ratably over 2024.

While the variables influencing margin are difficult to forecast, we do believe we’ve passed an inflection point in our margin compression. Looking ahead to Q2 and the second half of 2024, we anticipate modest margin expansion pushing operating revenue to a returning $42 million plus quarterly run rate. This quarter also saw a slight shift in our interest rate sensitivity profile. Given the uncertainty around the economic environment and the potential for higher for longer interest rates, we strategically moved our interest rate sensitivity from a liability sensitive to a more neutral position. We accomplished this through the purchase of floating to fixed rate securities, short-term CD maturity extensions, and by holding a larger than usual cash position.

Importantly, this position can be quickly and dynamically adapted to whatever interest rate environment unfolds. Longer term, we do anticipate moving back to a more liability sensitive position through the strategic deployment of cash. Operating noninterest income was lower than forecasted at $7 million, adjusting for a $1.35 million one-time gain on the sale of a former branch building, as Billy had previously mentioned. The decline in noninterest income is primarily attributable to slower than anticipated capital markets revenue and reduced quarterly interchange fees, both of which we feel will normalize in the coming quarters. Our operating expenses were in line with previously provided guidance with no material deviations to note. Noninterest income growth and expense containment continue to be primary objectives as we focus on fully leveraging the infrastructure investments we made over the last few years.

Looking ahead to the second quarter, we are forecasting noninterest income in the mid-$7 million range and noninterest expense of approximately $29.7 million range with salary and benefit expenses comprising $17.3 million. I’ll conclude with a quick comment on capital. Capital grew $7 million over the quarter with our consolidated TCE ratio ending at 7.4%. We are in a well- capitalized position with a very strong future credit outlook. Consequently, in this quarter, we anticipate resuming our share repurchase program as we believe our stock has reached a market price well below its intrinsic value. With that said, I’ll turn it back over to Billy.

Billy Carroll : Thanks Ron. I like where we are positioned and continue to feel very good about what we’ll accomplish in the near term. As you’ve heard, the key for us is continuing to gain operating leverage. That’s the focus of our team. We have upgraded the two market president positions that were opened in our Gulf Coast region and added new revenue producers in Chattanooga, Copeville, Destin, Tallahassee, Huntsville, Auburn, and Dothan in recent weeks. Given the current rate outlook, we’re positioned to handle higher for longer in the environment if that’s where we stay. While we perform better rates down, as Ron alluded to, we can handle just about any rate trajectory. While maybe a little more challenging in some areas, we can still push our return targets in a higher rate environment.

So to summarize, we are executing and gaining leverage on large investments we made a couple of years ago. We’re taking advantage of cash flows coming off the investment portfolio and that coupled with projected growth will lead to margin expansion throughout 2024. Our credit quality is outstanding and with clarity on credit and regional growth expectations, we are back adding revenue producers as we start the year. We continue to be an Employer of Choice for many bankers in our region. As Ron had mention, we’re jumping back in to repurchasing shares given our current valuation as soon as possible. There’s no better investment we can make. I appreciate the work of our SmartFinancial, SmartBank team and the efforts of our near 600 associates.

This team continues to perform well and we’re building a great culture. We’ll stop there and open it up for questions.

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Q&A Session

Operator: [Operator Instructions] And first question comes from Will Jones with KBW.

Will Jones: Hey, great. Good morning, guys. Hey, so, Ron, I was hoping you could just walk us back through that bond redeployment that you saw all the cash flows that came through this quarter. I think I heard you say you reinvested $80 million of that at a little over five and three quarters, and then you just hold the rest in cash. Is that right?

Ron Gorczynski : Yes, we did over $80 million, it’s 5.87% yield. We deployed it. Majority of it went to mortgage backed securities and swap mortgage backed securities. We saw the value in that during the quarter and the rest are some agencies and a little bit of corporate. But yes, $80 million of it. We did redeploy to the later part of the quarter.

Will Jones: Got you. Okay. So we’ll see a majority of that benefit roll through into the second quarter and what was the yield previously on that $80 million?

Ron Gorczynski : The $80 million was one point of, excuse me, of what’s maturing. I’m sorry, we invested in the [Multi speakers] 1.51%.

Will Jones: Okay, got it. That’s helpful. So then as we just think about the margin expansion, you expect moving forward, obviously we’ll have the tailwinds of this bond rate redeployment. You’ll have another big slug of bond maturities next quarter, and it feels like deposit costs are starting to moderate at least. Do you feel like we could see a peak in a positive cost next quarter or is that really maybe more of a second half of the year event?

Ron Gorczynski : Well, I think we’ll — all order in totality we are optimistic on the expansion for Q2 and beyond. We will have funding pressures, but as you mentioned, it’s at a much more muted pace. For the last two quarters, we have had interest earning assets, income growth outpacing our funding cost growth. As you mentioned, the cash flows from the securities maturing and the redeployment and our future maturing securities all leads to a continued trend. We’re projecting about three to five basis point of margin expansion for the quarter. So let’s just say 290 range, plus or minus.

Will Jones: Okay, great, that’s super helpful. And then lastly for me, you guys obviously saw really nice deposit growth this quarter. Billy, I was hoping you could just walk us through what kind of were some of the drivers there and what went right for you guys in the quarter. And obviously this is a challenging level to continue growing at, but the outlook still feels pretty positive. Just walk us through where your positive momentum is on the deposit side.

Billy Carroll: Yes, well, we were pleased again, a little more growth than we had anticipated in the quarter. And I got a lot of it. It’s just the other work that our teams continue to do. We talk about the great teams that we’ve got throughout our company. And so a lot of it was new business. It was new to us business. We picked up a couple of really nice large corporate accounts in there. We had some growth in some existing accounts. We picked up a little bit of that was public funds. We picked up a nice new public fund account at a very reasonable rate during the quarter. So it was just a good mix really at the end of the day. And I think it goes to, and you are right, I think it goes to the optimism that we have in our company, the work that our relationship managers are doing out there in the field.

And just there’s a lot of positives about being able to continue to grow, not just on the deposit side, but the loan side. Ron had alluded to it. The dollars are coming on at a higher rate. So I think the cost of deposits is going to continue to kind of edge higher. But as we said, we like where we are from a production standpoint, and we think we can combat that and continue to expand some margin.

Miller Welborn : It was also across the entire footprint as well.

Billy Carroll: Yes, that’s a great point, Miller. Yes, it wasn’t just one zone. I mean, that’s what we’ve seen. The regional president group we have right now is doing such a nice job of really getting out and growing these zones. And so it’s very, very evenly distributed throughout our entire footprint.

Will Jones: Great, yes, well, it sounds like a nice PP&R improvement story ahead for you guys. So thanks for the questions.

Operator: We now turn to Thomas Wendler with Stephen.

Thomas Wendler: Hey, good morning, everyone. I wanted to start off with the yield on the $61 million of securities maturing this quarter. Ron, I think you might have tried to mention it earlier, but I didn’t catch it.

Ron Gorczynski : Yes, 2.1%.

Thomas Wendler: Thank you. And is it safe to assume that’s kind of just going to be flowing into cash?

Ron Gorczynski : Yes, at this point, yes. That’s what we’re looking at.

Thomas Wendler: Okay. Thank you for that. Next, I just wanted to move over to revenue. You guys start targeting a 1% ROA, and I think you previously mentioned kind of hitting a $50 million revenue bogey in the second half of ‘25. Is that still how you’re kind of thinking about revenue growth moving forward?

Billy Carroll: Yes, Thomas, I’ll open and then let Ron kind of dive into where we think kind of longer term outlook is. But, yes, obviously, as we’ve alluded to a couple of times, our whole focus right now is getting this operating leverage back, and you can see it starting to happen. It just doesn’t happen overnight. It’s taking a little while, but, yes, we’re seeing that continue to move up. Ron had mentioned we’re moving back toward the $42 million run rate here in the near term, and then Ron can kind of Ron, I’ll let you maybe speak to forecasts about looking into midpart of next year’s. We think we can really start to generate that leverage by then.