SmartFinancial Inc
NYSE:SMBK
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SmartFinancial Inc
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Hello, and welcome to the SmartFinancial First Quarter 2024 Earnings Release and Conference Call. My name is Elliot, and I will be your coordinator today. [Operator Instructions]
I'd now like to hand over to Nate Strall, Director of Strategy and Investor Relations. The floor is yours. Please go ahead.
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 of 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 the actual results could vary materially. We list the factors that might cause 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 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 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 done 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 $8.4 million or $0.49 per diluted share. The delta was primarily a gain on the sale of a former branch facility in Destin, Florida, that we sold, once we had completed our 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 that impact. We had growth in loans and 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 the 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 we leverage the market investments we made in 2022.
Ron will dive into the numbers a little deeper, but a couple of high-level comments for me. On growth, we were pleased with the results. The deposit side grew faster than we had anticipated this quarter at $126 million. This drove our cost 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 with 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 clients 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 year-end, 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 impact 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 depicts why we believe our story is one of the 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 7 de novo market expansions we made leading into 2022, but the 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 growth 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?
Well, thanks, Billy, 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 cost of new deposit production was 3.79%. However, we also saw a 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 repricing immediately with any movement in the Fed funds rate and $130 million of CDs repricing during the second quarter.
Late in the first quarter, $110 million of securities yielding 1.5% matured and over $80 million of this was redeployed into securities with a 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 a 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 that 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%, a result of 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 durable rate, with $884 million repricing in the next 3 months, and we have over $90 million of 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 onetime gain on the sale of a former branch building, as Billy had previously mentioned. The decline in noninterest income was 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 the market price well below its intrinsic value.
With that said, I'll turn it back over to Billy.
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 2 market president positions that were open in our Gulf Coast region and added new revenue producers in Chattanooga, Cookeville, 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 performed better in 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 are 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 to adding revenue producers as we start the year. We continue to be an employer of choice for many bankers in our region. And as Ron had mentioned, we're jumping back into 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.
[Operator Instructions] Our first question comes from Will Jones with KBW.
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 5.75% and then you just hold the rest in cash. Is that right?
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.
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?
The $80 million was -- excuse me, of what's maturing? I'm sorry, we invested again at 5.87%. 1.51%.
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 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 deposit cost next quarter? Or is that really maybe more of a second half of the year event?
Well, I think we'll all -- 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 2 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 3 to 5 basis points of margin expansion for the quarter. So let's just say 2.90% range, plus or minus.
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 if 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?
Yes. Well, we were pleased, again, a little more growth than we had anticipated in the quarter. And a lot of it is just the 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 had -- 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's just a good mix really at the end of the day.
And I think it goes to -- and you're 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 -- just 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.
It's 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.
It was also across the entire footprint as well.
Yes. 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.
Great. Yes. Well, it sounds like a nice PPNR improvement story is ahead for you guys.
We now turn to Thomas Wendler with Stephens.
I wanted to start off -- I want 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.
Yes, 2.1%.
And is it safe to assume that's kind of just going to be flowing into cash?
Yes, at this point. Yes, that's what we're looking at.
Okay. Next, I just wanted to move over to revenue. You guys are targeting a 1% ROA. And I think you've 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?
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, we've -- as we've alluded to a couple of times, this -- 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 taken 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 forecast about looking into mid part of next year as we think we can really start to generate that leverage by then.
Yes. We're looking at, as we said, really, our story hasn't changed in our revenue projection. We're still looking at probably the second half Q3. We probably will hit that run rate the $50 million plus. Pretty excited to see that happening. And the $42 million, as Billy had indicated, we're looking at Q3 of this year.
Our next question comes from Feddie Strickland with Janney Montgomery.
Just wanted to go back to the noninterest income guide. Does that $7.5 million include mortgage? And can you just talk about what you're seeing with that business? Does it seem like we could maybe see a bit of a pickup in '24 versus '23 given the population inflow? Or are rate and supply constraints still just too much of an issue right now?
Feddie, look, let me take the first part, then I'll hand it over to Ron to maybe talk through a little bit more of that. Just kind of specifically about mortgage.
We do -- mortgage has never been a huge piece for us. But that said, we really have had a -- what we feel is a good start to the year for that. That's one of the things as we've talked about on prior calls, we added a new Chief Banking Officer, Martin Schrodt.
Last year, Martin has taken lead over that mortgage group, and we're seeing some really nice things happen with that, really with both product mix, growth pipelines. And so that's been a big plus. So we're -- we've been pleased with that moving forward.
But Ron, do you want to speak to kind of the broader noninterest income question?
Yes. We -- most of the stuff is pretty stable at nominal increases, but I'll go back to mortgage. We're pretty much looking at 15% increase in the guidance for our mortgage revenue line.
In the past, we portfolioed more. We did a lot of private banking clients that we decided to keep in-house. But as we switch more to a secondary market, right now, we're 38% of our production is going to secondary. We're probably through midyear, later part of 2024, looking at a 50-50. So that should be a promising component of our noninterest income. The rest is just going to be steady, consistent growth quarter-over-quarter.
I appreciate the color on that. And then I have one for Rhett as well here. Just wondering if you could talk a little bit more about the equipment finance business, what you're seeing? In particular, I wonder if you could give an update on what you're seeing in the trucking sector, whether that was incrementally a little better or worse this quarter from a credit standpoint?
Yes, absolutely. Feddie, we are still seeing good production in that space as far as equipment finance. The heavy construction side of that is doing really, really well.
In the trucking space, specifically, that continues to be an area where what problem assets we have in that bucket fall in that segment, but it definitely, I will say, peaked. We have seen it stabilize. We're basically kind of still working with the same group of clients that we were working with at the end of the year that are facing some challenges.
But I want to make sure that you and everyone else are clear that -- I mean, it's a very small segment of the bank's overall portfolio and exposure. It's about the total watch list items, classified items and repos we have is only about 0.8% of capital and exposure. So it's a very minor piece of the segment for us.
[Operator Instructions] We now turn to Steve Moss with Raymond James.
Maybe just turning on the buyback. On the buyback here, just curious as to how you're thinking about the -- how aggressive you're interested in being on the buybacks here? And just your thoughts on that and capital here?
Yes. I'll -- Steve, I'll make a comment, then I'll let Ron kind of just give an additional -- give some additional color.
I think it's really where we're trading right now. We want to be as aggressive as we can be on it. I mean, to be honest. I mean it's -- obviously, you got parameters around that, that we work through. But for us, I mean, I think it's the best investment we could be making today. And so we're going to look to put as much over there as we can.
Ron, you might talk a little bit more about specific thoughts around that.
Yes. We have -- currently, our capacity is $4.5 million worth of shares. We'll -- again, we anticipate starting that in a few days after the blackout period. And then we'll go from there. Again, we like where the stock is trading. And if we have to expand our buyback, we will. But right now, that's kind of our plan, our short-term plan on this.
Okay. Great. And then in terms of just the -- just the loan payoffs this quarter, Billy, just wondering if you could quantify the size of those payoffs? And it sounds like you probably have a few more in the upcoming quarter maybe impacting loan growth?
Yes, Steve, I'll let Rhett talk specifically about the numbers and kind of what we saw last quarter. It has -- it's not a -- it's not huge, but it's still a little impactful is probably the best way to put it.
And a lot of it -- and I said it in my comments, it's really -- it's quite frankly, I think it's healthy. It makes you feel better about the economy. We've got a lot of business transactions going on, and we're seeing clients get opportunities to sell some assets at higher values, a couple of those potentially business sales.
Like I said, we've got some things that we're seeing out there that will probably continue to get into the quarter. I think at the end of the day, we can kind of overcome that with the growth projections we have. But it's not a huge number, but it is noticeable. And Rhett, you might talk specifically about kind of dollars and what we're seeing on that front.
Yes. I mean, again, as far as payoffs in that what I would consider larger size payoffs, we had a total of about probably $27 or so million in the first quarter. As really common to do there, Steve. I mean, all of that really were related to transactions where clients were just -- were selling assets in the marketplace. Quite a bit of it were what might have been single tenant transactions that were construction that were resold in the secondary market or were actually sold in the first time in secondary market.
And then the other piece of it, we've had a couple of businesses of clients selling either companies or pieces of companies. And so they paid some debt down associated with those components of their overall business model.
So we continue to fight that a little bit here and there. I would anticipate we'll continue to see some pressure here and there as the year goes in that space, just because with where cap rates are in our footprint, compared to interest rates, I think we do have quite a few investors that are looking at the opportunity to still get a pretty good return on their asset and perhaps just sit on the side lines a little bit longer, waiting to start the next project to see if rates do happen to move down for them a little bit.
So that will be an area that we will continue to watch and fight against a little bit. But that's kind of been the nature of what we've seen thus far in the year.
Okay. Appreciate that. And so in terms of just overall loan growth, I mean it sounds like it still remains healthy. Just kind of curious, does the construction bucket, it sounds like that will continue to go down here going forward for the next several quarters?
Yes. I think it is. Overall, we -- production pipelines are healthy. Right now we're on calls with regional President yesterday and kind of getting the feel for outlook. And we still feel good about the outlook. But I mean, Rhett, you can kind of speak to just add any additional color that you think on that?
Yes. I don't know, Steve, if I heard you right, I think you may have said the [indiscernible] construction bucket could go down. I don't know that I don't expect it necessarily to go down. I think it'll hold steady as the year goes. Again, we are seeing good production opportunities, especially in the residential space in our footprint.
Unfortunately, trying to predict the timing of when a house sales, that sort of thing at times can be a little more difficult. And we are still in a very robust market in every footprint we're in, where you're seeing continual demand for housing in our footprint. Our builders were able to return product relatively quickly. But we are also seeing good starts. So I think we'll see that space hold relatively steady as the year goes.
So you're bullish on construction. We just feel like the rest of the portfolio might grow at a faster pace.
Okay. Appreciate that. And then last question for me in terms of just housekeeping. I missed the total number -- the total expense number that you gave, Ron.
Yes. Total expense, $29.7 million range -- $29.7 million range, Steve, with salaries $17.3 million.
Yes, I got that. All right. I appreciate all the color. .
We have a follow-up question from Thomas Wendler with Stephens.
I just want to hop in here with one more question. Previously, you guys have talked about looking at both upstream and downstream for M&A opportunities. In the slides here, I noticed that the focus is kind of on needle-moving opportunities right now. Can you just kind of outline what it would take for you to want to purchase the bank and the asset size and geography, things like that?
Yes. And it's a good question, Tom. Yes, it is in there. I think we're always looking at strategic opportunities that helps us grow, and not just bigger -- our focus now is really getting better.
From a -- from anything, from a downstream standpoint, it's kind of tough given valuations today. It's the reason we've talked about share buybacks and things along those lines, I think that would be first and foremost. So really not looking at anything.
But to me, always evaluating any type of strong strategic opportunity is something that we're always open to do. Miller, I don't know if you have any comments on that.
The only thing I would add there is our currency is just not in a place where it's going to make it possible to do anything short term just -- that makes sense for us, and we look and talk internally every day about opportunities. So really nothing to report. .
All right. I appreciate the additional color.
We have another follow-up from Feddie Strickland with Janney Montgomery.
Just one more question on capital. Just curious, is there a certain level that you kind of want to maintain in terms of TC, common equity Tier 1, total risk-based. I mean, whichever metric you want to pick. Just wonder if there's a certain threshold that you kind of want to keep as you go forward and think about repurchases or any other method of capital deployment?
Ron, you want to?
Yes. I think we're at a good level right now. We intend to use some of our earnings power to start doing some of the repurchases and stuff like that. But we are very comfortable at our level.
Yes, we could dip down 10, 15 basis points per capital ratio, but I think we're in a good spot. Again, just using more of our excess earnings to do some more capital-related activities.
Got you. And then just one additional one. I was just curious, some of the M&A disruption in your backyard. Are you seeing any incremental opportunities in terms of talent or new business? Or have you sort of already picked the low-hanging fruit there?
Yes. Feddie, we're still seeing some of that. As I had stated in my comments, we had a fairly robust start to the year with adding some really good quality bankers throughout our platform.
So I think it is. I think you're seeing disruption, bank strategic changes. There's a lot of different things going on in our region. And so we want to be opportunistic on hiring good talent that fits us culturally that can be additive quickly to our revenue line. So we're going to continue to look for those opportunities and we're fairly bullish that we can find them.
This concludes our Q&A. I'll now hand back to Miller Welborn for final remarks.
Thank you. We appreciate everybody joining us today. Thanks for your interest in our company, and I hope you each have a great week. Thanks. Bye.
Ladies and gentlemen, this call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.