SmartFinancial, Inc.

Good day and welcome to the Smart Financial second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on your touchtone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Miller Welburn. Please go ahead.

Thanks, Tom, and good morning, and thanks for joining us this morning for our Q221 earnings call. We always love visiting with this group each quarter to talk about our progress and our company. Joining me on the call today are Billy Carroll, our President and CEO, Ron Gorczynski, our CFO, Rhett Jordan, our CCO, and Nate Strall, our Corporate Strategy Director. Before we get started, I'd like to ask each of you to please refer to page two of our deck that we filed this morning for the normal and customary disclaimers and forward-looking statements, comments. Please take a minute to review these. Folks, it's another great quarter by our team here at the bank. The passion and the energy and execution by all our team this year has been phenomenal. We've always challenged the strength and energy of the smart bank team, and hopefully folks will begin to recognize we are serious. Our organic pace of growth has been impressive, and we see nothing slowing that down in the months ahead. Between very strong markets and the addition of several new sales team members and a new market lift-out, we feel we're positioned perfectly to continue on our current pace. We talk often about how excited we are of where we are as a company, but I can't stress enough about how we feel this company is positioned today. With that, I'm going to turn it over to Billy.

Thanks, Miller, and good morning, everyone. Great group on the call today. As Miller said, another extremely solid quarter for our company. The first half of 2021 has been very exciting, and we demonstrated again this quarter just how our company is becoming one of the Southeast's best banks while building value for our shareholders. I'm going to hit on a couple of highlights, and then I'm going to turn it over to Ron to dive into financials and Rhett to touch on credit. We did have some great highlights for the quarter, starting with earnings and tangible book value. A very nice income quarter with operating earnings coming in at $9.1 million, or $0.60 a share, and TBD has increased to $18.69, a 10% increase year over year. We also had outstanding growth, which is, to me, one of our strongest highlights. Net organic growth on the loan side, excluding PPP numbers, was over 87%. and many, many more. Thank you. Thank you. We received a fifth consecutive regional top workplace award this quarter. We talk a lot about our numbers, which are very important, but it's also important to recognize the culture we are building in this company. We're a great place to work, and I really believe that separates us from the pack. Moving to slide five, this is a great slide to show just where some of our efforts have been focusing this year. If you'll note first, on the left side of this page, we are very excited to announce today the addition in our Alabama market with an expansion into Auburn. We've lifted out a great group of commercial bankers from a large regional bank there and are very thrilled to be in one of Alabama's fastest growing communities and another great southeastern college town. On the right side of the slide, you'll see some of our initiatives. The Sevier County Bank acquisition is moving along nicely and on track for closing this quarter, along with an October systems conversion and rebrand. Their bank has continued to perform well ahead of budget numbers through the first half, and we're excited to get them integrated soon. Air Fountain Equipment finance acquisition closed in early May and was integrated in Q2. This company is a great addition to our franchise and specializes primarily in the financing of heavy equipment, tractors, and trailers. All of the company's principals are staying with us and look forward to leveraging our larger balance sheet to scale an already very successful business. Ron's going to speak to Fountain's financial impacts in a moment. The lift out of the banking team in our Gulf Coast region during Q1 has seen early success. We expect them to be accreted faster than we had originally planned. And I'll speak more of the lift outs in my closing comments. But before I hand it to Rod, let me touch on finally on slide six. Our revenue diversification efforts are continuing to gain strength as seen on this slide. These business lines and subsidiaries We're already contributing nicely to our revenue line and will play an even more important role as we scale. As you can tell, we've got some great things going on, some great things happening in our company right now. So let me hand it over to Ron to dive into financials in greater detail. Ron?

Thanks, Billy, and good morning, everyone. I'll be starting on slide eight, quarterly highlights. These are some of the high-level metrics for the last few quarters. We have had solid performance with continuing net interest income growth, operating free tax pre-provision earnings for the quarter totaled $11.6 million. We also reported diluted operating earnings of $0.60 per share, an increase of 25% when compared to the prior year quarter. Moving on to slide nine, performance trends. As both Daly and Miller have indicated, not only did we have a great quarter, but also a great first six months of 2021. As shown on the slide, we have created much momentum over the last eight quarters, continuing our strong growth trends, with assets reaching almost $3.7 billion at quarter end. Our loan growth continues to be a bright spot for us, with having over 87 million of net organic loan goods for the quarter and over 53 million of acquired leases from our found acquisition. Additionally, we had almost 160 million of our PPP loans forgiven during the quarter, which Rhett will go over in a few more slides. Looking forward, our loan pipelines continue to remain strong and we are starting to see the PPP forgiveness process ramp up for the 2021 vintage. In addition, Our deposits continue to grow and ended the quarter at over 3.1 billion. Moving on to slide 10. This slide represents five quarters of much activity with escalated loan provisions, high amounts of excess liquidity, and PPPP accretion. Focusing on the ROA metrics on the top graph, we are starting to get back to more normalized run rate. Moving on to the lower portion of the slide, Our assets continue to grow. We believe a more consistent gauge of performance in this current environment is our operating return on average tangible common equity, which is at 12.9% for the second quarter, representing some stabilization for what we've been reporting in the prior periods. Turning to slide 11, as Bill had indicated, our tangible worth value per share was $18.69, an increase of 6.5% on a late quarter annualized basis. As the graph reflects, we have consistently been growing in terms of the book value. On the lower portion of the graph, our operating efficiency ratio, represented by the green line, continues to hover at the lower 60s level. The current quota was slightly elevated due to the additional costs associated with the Gulf Coast team left out and from our acquisition of Fountain. Turning now to slide 12, balance sheet and our margins. Starting with loans on the upper left, current loan outstandings compared to the prior year did not change dramatically due largely from our PPP loan activity, but our loan portfolio composition continues to evolve. Rhett will provide more loan information shortly. For our deposits, we had increases over $90 million when compared to the prior loan quarter and increases over $600 million when compared to the same prior year quarter. Our time deposits represent 16% of our deposits, down from 26% from the prior year, with the shift going into money market and savings accounts. At quarter end, we had over 800 million or non-interest-bearing deposits, which represented 26% of our deposit portfolio. Our current loan-to-deposit ratio was at 78.6%, a big change from the 94.8% for the same prior year quarter. Moving on to the right side of the slide, Our net interest income, FTE, was over $27 million, slightly higher than the prior year quarter's $26.4 million, and our average earning assets totaled $3.3 billion, an increase of $218 million. We reported an interest margin of 3.29% at the time of 19 basis points from the prior quarter. This decline was primarily related to, one, the reduced amount of discount loan and PPPP accretion reported for the current quarter, and two, our elevated liquidity position. During the quarter, our loan and lease yields decreased by 15 basis points to 4.52%, primarily from $1.1 million less in discount loan and PPPP accretion, as previously mentioned. Offsetting this decrease was the partial quarter addition of lease income from Fountain, which was 11 basis points accretive to our loan and lease yields. For our interest-bearing deposits, we had a decrease in funding costs of five basis points to 0.39%, with our cost of total deposits for the quarter at 0.29%. For our time deposits, during the third quarter of 2021, we will have over $100 million, or 20% of our time deposits, Maturing and Replacing at a Rated Average Cost of 82 Basis Points. At this point, the majority of our higher-cost time deposits have been repriced. As mentioned in our last earnings call, we believe our core NIM has bottomed, but we are still experiencing elevated cash balances, which increased over $114 million for the quarter, totaling an average quarterly balance of $531 million. This elevated position of excess liquidity has negatively impacted our margin, well over 30 basis points. With continued rate uncertainty, we still are being patient with our cash position and deployment. Currently, with our abundant liquidity and favorable funding mix, we are able to strategically move forward with opportunities. Looking forward, we are forecasting a third quarter margin around 3.35%, We're estimated to have loan accretion of 12 basis points, or approximately 758,000, and estimated PPP loan fee accretion of 30 basis points, approximately 1.9 million. Moving on to slide 13, operating non-interest income. We had another solid quarter of non-interest revenue. As you can see from the quarters presented, we continue to build consistent quarter-over-quarter variable growth trends. Our associates continue to place much emphasis in building our non-interest revenue, with us having revenue increases of almost 50% from the prior year quarter. Some of our current activity includes increases in our service charge and interchange free income, continued increases from investment services with continued growth in assets under management. For our mortgage banking team, we had another consistent quarter. As expected, our Q2 income was steady with revenues totaling $1.1 million. Our pipeline continues to remain strong, even with the headwinds from increased building prices, decreased inventory, and delayed projects. We are still expecting similar production as in the past two quarters. Our other income category included additional fee income from our patent acquisition. Looking forward into the third quarter, we are up and running with our capital markets initiative and are starting to recognize some interest rate swap fees. Our forecast for the third quarter is having non-interest income of $5.5 million. Moving on to slide 14, you'll find our operating non-interest expenses. Through our growth, our team has continued its discipline around expense management. Over the last several quarters, our expenses have remained relatively consistent. For the current quarter, our non-interest expenses have increased slightly primarily in our salary and employee benefits expenses than having a full quarter expense from the Gulf Coast team lift out and two months expense from our fountain acquisition. All the other increases in the various expense categories were primarily operational items stemming from our lift out and fountain acquisition as well as our overall franchise growth. Looking forward, our forecast for the third quarter is having non-interest expenses around $22 million with salary and benefit expense around $13.5 million range. Now to finish off this slide, let's touch base on taxes. Our income taxes for the current quarter reported an effective tax rate of 22%. We are forecasting our effective tax rate of 21.5% to 22% for the third quarter of 2021. At this point, I'll be handing over the slides to Rhett Jordan, Chief Credit Officer, to go over loan and credit-related info. Rhett?

Thank you, Ron. As Ron noted on slide 12, our loan portfolio continues to show good diversification across the loan segments, with 16% annualized organic loan growth quarter-to-quarter of approximately $87 million, and the overall portfolio mix being similar to previous quarters and same period per year. As mentioned, The portfolio has seen consistent growth this year spread across all geographic areas of our footprint. Our CRE portfolio has seen the most growth during the six-month period year-to-date, moving to approximately 39% of total portfolio outstandings as compared to 35% at Q2 2020. This trend has primarily been the result of various owner-occupied and non-owner-occupied commercial projects restarting that were the Tennessee market, which is the Fidget Forge Gatlinburg tourism area,

had gross sales receipts that were up 46% in Q1 2021 compared to Q1 2019. Just phenomenal growth in our tourism zone. In our mobile Baldwin County, Alabama market, looking at population trends, we are seeing solid growth with every graph that we look at moving up and steeply to the right. Just phenomenal growth from a population standpoint in those zones. Chattanooga's MSA, for example, is reporting historically low home inventory, down 50% from last year as more people are relocating to this outstanding city. And we're seeing these same types of trends in Knoxville, Murfreesboro, and Tuscaloosa. The southeast is poised for great continued growth, and it's one of the reasons you are seeing us pivot a bit as we look to more commercial banking lift-out opportunities. Auburn, Alabama is a great example of this and is a perfect market for our company, a rapidly growing small metro MSA with one of the South's best universities. The team we've added there of well-trained, sophisticated bankers will quickly become additive to our franchises. We want to do more of this and continue to explore these lift-out opportunities as a strategic focus for the coming quarters. Our loan pipelines continue to be robust and are equally distributed across all of our markets. Like everybody, we're fighting some pay-offs and pay-downs with excess liquidity, but we feel we can keep going at a solid, high single-digits pace, or maybe even better, as we demonstrated this quarter. It's a very exciting time to be part of this company as an associate and as an investor, and we're positioned well to be opportunistic moving forward. So I'll stop there, and we can open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, press star, then two. And the first question comes from Brett Radice with Hubby Group. Please go ahead. Hey, good morning, guys.

This is actually Ben Gerlinger on for Brett. I just wanted to start off. You guys have a lot of irons in the fire here. So you have the new Auburn team, the Gulf Coast team is ramping up and becoming more creative. that originally expected, Fountain, you got a majority of a quarter into the second quarter results, and then Sevier County next quarter. With all these different moving pieces, you guys continue to have solid loan growth, and the margin looks to be pretty solid, especially with the guidance that it's going to be higher going forward. I was curious, if you back out Sevier County, what should likely add around around 300 or so net loans. Maybe that's a little aggressive, but if you back up that Sevier County, I was curious if you guys had any sense of what you think total loan balances would be by the end of this year.

Total loan balances. Ron, do you have that handy or is that something we might need to circle back with Ben on? I think we've got to hope you have it at your fingertips.

Yeah, I think it's going to be give me a second here. I do have that. Actually, I think it would be similar to where they're at. I think 2.4, almost 2.5 billion. We're not going to see much growth in loan balances. We're really going to have a tradeoff between remaining PPP loans to our originated portfolio. Yeah, how about I get back to you on that? I'm not putting my hands on this exactly. Quick enough.

But you are right. There's a bunch going on around here and a pretty energetic group.

Yeah, I'm sorry. 2.52 billion is what our footings are, not including Sevier County.

Okay, great. That's really helpful. I mean, you guys obviously have a good insight into how fast the Gulf Coast and then how the Auburn team can definitely bring over.

I think it's important. I mean, it really is. We have been thrilled with what we have seen from these lift-out opportunities thus far. And it's reason for my comments of looking for additional opportunities like this. We're at such a great spot now because our size is giving us the ability to do more of this. And I think we're positioned well to really take advantage of these great bankers and and can service those middle market clients that they have.

Right. Yes, absolutely. I think it's a great opportunity for you guys. And then that kind of goes into my next question. With these lift-ups, should that be kind of viewed as a go-forward plan of inorganic growth, I guess you could say? Or do you guys see the potential for more acquisitions?

I'll take that. Miller, you can chime in. I think we're always looking for opportunities, Ben. I think we're an opportunistic group. We're an entrepreneurial group. We always have been. But I do think at this time, and I made the comment, I think you're seeing us pivot a little bit. I think our company now that we've gotten this thing up will be $4 billion in assets, give or take, after the acquisition of Our earnings streams are really starting to kick in. You know, we've got the ability to really grow our company in a more sophisticated way. And so, you know, we'd love to do more of that. I think you would see us focus near term on a little more of that versus M&A. But strategic M&A, if presented, would be something that would interest us.

Yeah. I would say the phone has... obviously in the last week with an announcement last week with one of our national friends. Our phone has been ringing quite a bit, but I will echo Billy that 1A would be adding sales team members and lift out opportunities and enhancing the markets we're already in to add to those teams.

Okay, great. And then my final one was just on the new Additions to the Gulf Coast team and the Auburn team. If you look at your loan portfolio, is there any sort of specialization across the board or is it more so just complementing what you already have and growing the portfolio at a consistent rate?

Yeah, Rhett, you want to kind of cover that kind of based on what you're seeing coming out of those markets?

Yeah, I would say I don't know that I would use the term specialization necessarily as far as any kind of, you know, getting into industry segments or things of that nature. I would be comfortable saying that these teams have a much broader... C&I portfolio base coming from their prior institution. And we feel like that will be a significant part of what their future loan production is going to be centered in. And again, not necessarily any specific industry segment of C&I, but it will be much more along the lines of that type of production. I agree with sophistication.

Yeah. Great. That's helpful, Keller. I'll jump back in the queue. Great quarter, guys.

The next question comes from Graham Dick with Piper Sandler. Please go ahead.

Hey, guys. Good morning. What's going on, Graham? So I just wanted to stick on loan growth and more particularly the Auburn team. Just quickly, do you guys mind sharing how big of a loan portfolio that group might have been managing at their prior institution?

You know, it's a little tough to nail down a specific number because of different areas that they were managing. This is probably a group that had around, I'm looking at about a half a billion in total. Now, I say that, I don't think we're looking to quickly move that sort of number over, but they managed a large book of business that we think we can continue to utilize for some growth.

Right, that's helpful. So about the same size of the, I guess, or the book that the Gulf Coast team was managing.

Comparable, comparable. We had more bankers in that group, a little more diversified in that one. But this is a comparable types of businesses, as Rhett had alluded to, a stronger CNI base and really a group that we think complements the bank extremely well.

Overall, good to see that you guys are able to attract these producers from these larger competitors of yours. And then I guess just shifting towards the balance sheet and liquidity, I'm just wondering if you guys have started to see deposit flows slow down at all to start the third quarter or if it's still continuing at a pretty good clip?

Ron, I mean, we had a strong second quarter. Just any thoughts on trends that you're seeing?

I think, you know, we did have a, you know, between first and second quarter, it's still, you know, we still, from doing those PPP loans, still flushed a lot more deposits. I do, I think we are expecting a slowdown. The deposits are ramping, have ramped up quite quickly. As far as third quarter, I really haven't seen the footies because it's so variable at this point until we get to quarter end. But I think we should experience a slowdown for Q3, but we've been wrong on this before. So that's just a guess at this point.

Okay, great. That's helpful. And then the last thing for me is just on fountains. I know you mentioned there was a line of credit outstanding there of about 400 basis points. I was just wondering if you guys have already replaced that or if that's something that has yet to be completed.

Yeah, we paid that off at the closing. Yeah, we paid that at closing. So we're funding their balance sheet with our cash.

Okay, great. Thanks, guys. Congrats on a good quarter. Thanks, man.

The next question comes from Stuart Lutz with KDW. Please go ahead.

Hey, guys. Good morning. Ron, sorry if I missed this earlier on the call. What's your outlook for fees in the back half of the year? I know we were down a little this quarter. I'm just curious if you think you can get back to the first quarter run rate.

Yeah, the third quarter run rate, we're looking at $5.5 million. It's pretty much similar for the fourth quarter. Again, our initiative for our swap fees is taking hold, so we may bear a little bit of fruit, but it's still early to tell. So right now, I think We're modeling $5.5 million, $5.6 million for the remainder of the year, quarter by quarter.

I think we were pretty much on target for Q2. I think going back and looking, we had a little bit of width one time. Not necessarily one time. We had some commissions go in that not probably recurring as often as we'd like to see because it was such a big jump in Q1 from insurance. But I really like to Ron's comments in mind that it's really nice to see these revenue lines and subs start to take shape. So we hope to see some consistency anticipated and the consistency in that line moving forward. Great. Yeah, I appreciate that detail.

And I guess maybe turning the capital, you know, with the looming close of severe, you know, you're at 7.9 TCE right now. It's going down a little bit next quarter and with all this excess liquidity, but also with the valuation that, you know, 1.3 of tangible book value. What's your appetite for buybacks in the back half of the year? Or are you going to wait until you have, you know, somewhat higher capital levels versus today?

I'll take it, and Ron, if you've got anything. Yeah, I think, as Ron said, I think we've done pretty good about the capital levels. We're big believers, as we've got a lot of shareholders that sit around our tables. We like to appropriately leverage capital, but at the same time, making sure we've got the right levels. I think, so, yeah, I like where we are. I do think we're at a spot now where we'll see that start to build as earnings go in. I don't foresee... I don't foresee as heavy a buyback. It's tough for us to buy back a lot of shares anyway. But we're probably not going to look at that maybe quite as robust as we did back when we were trading at a lower valuation. But we're going to continue to watch it. But I think from a capital standpoint, we're in a nice spot and have the ability to really continue to move it up.

But be clear that we'd like the buyback. I think that's a great use of capital.

As far as sub-debt, we're continually evaluating this arena because sub-debt rates are so efficient for us to execute on. We have a lot of options that we're exploring. Fortunately, it's not a rush because we don't need it, but we are looking at these avenues in totality.

Great. Well, thanks for taking my questions, and I figured out some nice quarter.

Thanks a lot, Stuart. Thanks, Stuart.

The next question comes from Fetty Strickland with Jenny Montgomery Scott. Please go ahead.

Hey, good morning. Good morning, Fetty and Fetty. So just wanted to start, in the deck you mentioned that the Auburn team handled some healthcare banking relationships. Forgive me if I missed this, but more specifically, is that more like managed care or individual family practices, or is that kind of all of the above?

It's really a good mix. So Auburn's got some really nice medical staff. and all of those things. So nothing real. I don't think there's any real concentration or niche that they focus on very generally related to the medical field.

Got it. And then just switching gears, I'm curious what you're hearing on the equipment finance business. I guess More specifically, you know, we've heard some other banks talk about supply chain constraints, and we've all kind of heard about supply chain constraints. Is that playing a role there, and could that maybe mean more upside to that business down the road as those constraints work themselves out, or is it not really playing as much of a role for them?

You know, I think for a fountain team, again, as we specialize in a little more of that heavy equipment, yellow iron type equipment, what we're seeing, we had a great strategy session with that team last week, and we'll talk about it. I think what we're seeing is supply chain is having an impact because what our business line is more focused on is user equipment financing. Thank you for joining us. on the flip side of that as a pro is you're seeing these southeastern markets where we are the growth The residential expansion, that is the demand for these small excavating companies. Those types of businesses are in high demand. So those folks are out needing equipment. So we're seeing a lot of need. We're picking up our volume and our production numbers have stayed extremely, it's been right up, if not a little ahead of our targets. You know, so we like where we are. But supply chain, if supply chain opens up, we think it will actually help us. We're able to kind of handle it really well now with what we've got. New equipment sales.

My group is very bullish on what we're making this year and next year.

I appreciate the additional call, guys, and congrats on a great quarter.

Thanks, man. Thanks.

As a reminder, if you have a question, press star then one to join the queue. The next question comes from Kevin Fitzsimmons with DA Davidson. Please go ahead. Okay.

Good morning, guys.

Most of my questions have been asked and answered, but I figured on this topic, which seems to be a main theme here, the lift out strategy, When you look geographically, any particular regions that would be higher priority in terms of either adding teams to where you already are or southeastern markets where you don't have a presence, where you'd be very interested in entering via team. And on a side note, I want to throw out Metro Nashville, given last week's announcement, whether that would be high up there on the priority and likelihood in terms of being able to get some teams given some potential merger disruption there. Thanks.

Yeah. You know, to answer your question, I think our goal would be to look primarily here in the southeast, continue to build density in our zone, kind of our Tennessee and Alabama and northern Florida zones. So that's going to be primarily where we focus. In specific regards to Nashville, it's tough to say if the transaction that was announced would create opportunities, but I think Nashville has always been on our radar and is still on our radar. We would love to add some density in and around Metro Nashville, maybe not Nashville proper, but our Murfreesboro team that we have has been just rolling phenomenally well over the course of the last couple of quarters. So I think we could easily bridge that into that South Nashville market with something that we'd love to do if opportunity presents.

Density, density, density. There's a couple of markets that you're probably very well aware of.

Hey, Miller, just on a follow-up, you had mentioned earlier that – After last week's announcement, your phone had been buzzing. So I'm just curious, is that smaller banks? Is that larger banks? Is that investment bankers? Is that all of the above? I'm just curious what you were referring to. Absolutely all of the above. Okay. Okay. I served that up on a silver platter.

You made that question really easy for me to answer. But it's not a comment. I was just saying to you, I think Noah said it. It's a great... Noah, we talk about optionality in our company, and we've just got... There's so many great opportunities for us right now. So it's a great time to be sitting in our seat. We've got got several great strategic options that we can evaluate. And all of them are really, really good. So it's just trying to take the right paths.

Okay, great guys. That's all I had. Thank you.

Thanks again.

As we have no further questions, this concludes our question and answer session. I would now like to turn the conference back over to Miller-Wilburn for any closing remarks.

Thank you, Tom. Thank you very much, everybody, for joining us today. We appreciate your interest in our company, and I hope you have a great rest of your week. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.