SmartFinancial Inc (SMBK) 2018 Q4 法說會逐字稿

Good morning, everyone, and welcome to the SmartFinancial Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Frank Hughes with Investor Relations. Please go ahead.

Thank you, Chad. Good morning and thank you for joining us today for our fourth quarter 2018 earnings call. With me this morning are Miller Welborn, Chairman of SmartFinancial, Inc.; Billy Carroll, President and CEO; Ron Gorczynski, Chief Admin Officer; and Bryan Johnson, our Chief Financial Officer. After our prepared remarks, we will then take questions.

Yesterday evening, we issued our earnings release discussing our fourth quarter results. We have also prepared a slide presentation, which we will refer to during the remarks this morning. Both of these can be found on our website at smartbank.com in our Investor Relations section.

During today's call, we will make forward-looking statements which are subject to risk and uncertainty and are intended to be covered by the safe harbor provisions of federal securities law. Actual results and trends could differ materially from these set forth in such statements due to various risks, uncertainties and other factors. More detailed information about these and other risks can be found in our press release that preceded this call and in the Risk Factors and Forward-looking Statements sections of our annual report on Form 10-K.

Statements are valid only as of today's date, and the company disclaims any obligation to update this information, except may be required by applicable law. Additionally, today's presentation contains non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release at the end of the earnings presentation. Please also note, this event is being recorded.

I will now turn the call over to our Chairman of the Board, Miller Welborn.

Thanks, Frank. Good morning, everyone. I appreciate you joining us today. As you all know, we did release our Q4 '18 earnings at the close of business yesterday. Q4 continued our pace of improvement in most every area of the bank. We, as a board, are very excited about this team and this team's ability to drive growth, drive earnings, improve operations, excellent risk and excellent credit metrics.

A couple of highlights from Q4. As you can see, record asset size of $2.3 billion, record earnings of $6.4 million, with core earnings of $5.9 million; NIM up to $4.28 million (sic) [4.29%]; improvement as promised and projected of ROE at 12%; ROA at 1.07%; and core efficiency ratios at 62%. Overall, pristine credit with NPAs at 24 bps, and we are very proud of the way we finished 2018.

I can't stress enough about how all of our trend lines, and that's all of our trend lines and metrics, showed continuing great progress. The plan is working. One other comment, we're very excited about the Entegra deal we announced last week. The SmartBank team's humming now and has extreme, I will repeat, extreme focus on the job ahead to execute in 2019.

With that, I'll turn it over to Billy to dive into the deck and the numbers, what will it be in [bucks]?

Thanks, Miller. Good morning to everybody on the call. I will jump in, I'll begin with the highlights for the quarter and the year, and I'm going to turn it over to Bryan and let him review some of the financial metrics in some greater detail. Then he'll hand it back to me, I'll wrap up and give you some color on what I expect as we move into 2019.

And as Miller said, overall, a very solid quarter for SmartFinancial and we wrapped up our company's busiest year yet. We converted our Alabama, our Capstone Bank deal in the first quarter, closed and converted our Southern Community Bank deal in the second and third, and then closed Foothills Bank in East Tennessee in the fourth, all while having a very strong organic growth for the year.

Our operating metrics continued to trend in a positive way, highlighted by up trends in ROA, growth in EPS and improvement in our efficiencies. All this is in the deck. And I'm going to jump into the deck. And for the first few pages of the slide deck, we've changed it a little bit this quarter. First few pages of the deck, really, for those that might be new to our story, kind of Pages 4, 5, 6 and 7 gives you a little overview of our company, a little bit about our history, our culture and our disciplined acquisition strategy.

But for purposes of today's call, I'm going to jump to Slide 9. So if you flip to this page, Slide 9 on the deck, and I'll start there. Again, I'm extremely pleased with our trends. And in my comments, I'll probably focus more on some of the non-GAAP metrics as we move forward. But for the quarter, we had core earnings of $5.9 million. That's a 61% increase from a year earlier. The 2 larger items that were reported non-core were merger expenses during the quarter, which were in conjunction with the deals that we've been working on. And a $1.6 million tax benefit adjustment related to previously exercised director options that was recognized during our tax return filing process.

Core ROA was 1.07%, a strong move there. Core ROE, as Miller said, north of 12%. And a 12% number there is something we're very proud of. Net interest margin came in at 4.28%, had some accretion impact in that, that helped bolster those numbers a bit. Bryan is going to dive into that, give you a little bit better breakdown on the accretion, but even ex accretion, continued to hold margin in a nice way. Our credit quality remained strong, nonperforming loans to total loans at 0.24% as our credit metrics continue to hold well.

Balance sheet trends, if you flip over to Slide 10, again, great trend lines here. When you look back, and that we start to grasp here at year-end 2016, when you look at the progress this company has made just in a couple of very short years, it's really remarkable. Great growth in assets, loans, deposits and our book value. Our company is growing quickly, and that has been bolstered by a couple of recent acquisitions. But at the same time, we're building a very solid organic grower as well, and I think that's extremely important to note.

In addition to our growth through acquisitions, as shown there on those charts, our organic or net loan growth, absent acquisitions, grew to a 10% annualized pace during the quarter and had a 9.2% pace for the calendar year 2018, coming in slightly ahead or on the very top end of our projections.

Flipping over to Slide 11, taking a look at our earnings profile. I will do this and I'll hand it over to Bryan. The earnings profile, this slide tells a great story. And when you look at it, just to highlight, you can read the bullets. 27% increase year-over-year in net operating earnings per share. 57% increase in our earnings before tax and a 37% increase in total revenue compared to Q4 2017. This slide, I think, tells a great story. When you strip out a little bit of the noise because you have noise when you're growing fast-moving company like us, but when you strip all that out, those metrics, I think, tell a great story for where SmartFinancial is today.

So that being said, our story and corresponding metrics are moving along, definitely as we expected. And I'm going to turn it over to Bryan now to let him dive into margin, noninterest income and expenses and our deposit loan trends. So Bryan?

Thank you, Billy. And before I dive into the net interest income, I just wanted to jump to something, which will kind of tie the next 2 slides together, that could be pretax, pre-provision, income as a percent of average assets. As you know, that's just net interest income as a percent of average assets, plus noninterest income as a percent of average assets plus noninterest expense net of average assets. And if you look at our earnings release, you'll see that's gone from 1.16% a year ago to 1.18% 1.21% to 1.23% to 1.36%, up every single quarter. Executed on plan.

So turning to net interest income as a percent of average assets was 3.90% for the quarter. As mentioned, margin was a little higher due to acquired loans. You can see down in the lower left-hand graph there, our net interest margin for both with and without accretion. Typically, accretion for us has been about a 25 bps impact, which is kind of where we think it'll come in to start next year. But this last quarter, it was 54 ex all accretion, and we do consider some accretion to be base and some to be accelerated. Ex all accretion, it came in at 3.75.

Compared to a year ago, earning asset yield is up 16 basis points. Part of that is accretion, but you can also look and see that we've managed to really increase our yields on the securities portfolio as well. So we are taking advantage of ROAs.

Average cost of interest-bearing liabilities, up 63 basis points. The thing I'll highlight there, if you look down that portion, most of the drive of the increase in interest expense quarter-to-quarter was on our deposits, which we held pretty well but was actually down there, if you look at that sub debt. Sub debt expense went from $19,000 last quarter to $594,000 this quarter. Now back in the second quarter, our deposit base was 72 basis points. And at the time we said, we think we're towards the end of the range and we think it should come down. Third quarter, it came down to 60. Fourth quarter, it came down to 40. So just like we said, we think we'll be able to hold, bring it down and that's what happened.

Turning ahead, noninterest income as a percent of average assets, just to take over 30 basis points. We continue to increase service charges on deposit accounts, so that's been a nice trend, again, going up every single quarter. The only flip we had this last quarter was mortgage, which is, of course, seasonal. We expect fourth quarter to be a little bit low. And then as you know, we do have significant amount of our mortgage operations in the Panhandle. So in addition to the slower fourth quarter, Hurricane Michael, of course, hit down there towards the end of last quarter. And as a result, the mortgage team was highlighted for much of this quarter.

And Bryan, let me jump in real quick right there, too. I think it's important to note, I think in last quarter's call, we had talked about the Hurricane Michael impact. And we really had -- we didn't anticipate a lot of impact, but it did show up a little bit in Q4 in our mortgage production. We've got a really strong team of our mortgage producers that are in the Panhandle, all based in Panama City. Quite frankly, our Panama City office just got opened back up a few weeks ago. And so our team did a nice job, actually closed several loans while working out of our Destin office and remotely over the last several weeks, last several months as a matter of fact. So we did see a little bit of impact. We think that's probably the worst, so that's probably through, and we're back in our office now and anticipate getting that back up on play. So I just wanted to make -- add a little additional color there for everyone, Bryan.

Thanks, Billy. Turn over to Slide 14, noninterest expense. So you might remember that back in the second quarter, as a percent of average assets, it was a 3.15% and we said we were targeting 2.85% to 2.90% as a percent of average assets. Third quarter, we brought it down to 2.90%, at the high end of that range. Second quarter, we brought it down to 2.84%. And then, this is what we said we were going to do and we did it.

Efficiency ratio for the quarter, 67.7%. Strip out all the noncore stuff, down to 62%. We do think 62% is kind of on the low end of our range. That is, of course, driven down by the elevated accretion. We think a good core number for us is 65% and continue to drive that lower.

Looking down at the graph below, you'll see salary increases. Of course, that's impacted by the fact that we've done 3 acquisitions over the period. Merger expense was $1.3 million for the quarter. And the other thing that I would highlight is, of course, Foothills came in at the end of November, so we did have 2 months of operation in the most recent quarter. Once you layer on another quarter of Foothills and then FDIC expense, that's probably about $200,000 there. The other thing kind of going on in our noninterest expense during the quarter is we had a relationship credit with our core provider, which knocked that down about $200,000. But all said, not including merger expense, once you add in Foothills and DP on a normalized rate, we believe our run rate for first quarter noninterest expense is $15 million, give or take. Again, excluding merger expense, which we do expect.

Turning to the next page, you can see our deposit mix. Again, it's all about 1/3, 1/3, 1/3. As I mentioned, our interest expense was up as a result of sub debts. It's kind of hard to see, but the addition of Foothills was actually slightly favorable. It's just relative to our size, it's relatively small. So it didn't move the needle on neither the cost or the breakdown of deposits all that much.

To that point, you can look down at the lower left-hand chart. Over the last year, Fed funds has gone up 1%. Cost of deposits, which includes the impact of interest-bearing deposits, up just 43 bps. And then on the right-hand side, you can see our nice trend of growing deposits over the last year.

Next page, loan portfolio, continue to be well diversified, both in product type and geography. And the all-important CRE guideline ratios, the team has done a great job of not only just growing the loan portfolio, but at the same time bringing those down.

Finally, before I turn it over to Billy, I'm going to hit on asset quality, which modestly is probably something we don't talk about enough around here, so good we tend to take it for granted. As Miller said earlier, NPA is just 24 basis points linked quarter, that's down from 33 the prior quarter. You can see our allowance down there in the lower left, $8.3 million. In addition to that, with bringing on Foothills, we have another $21.5 million as acquired loan discounts. Acquisitions, we can certainly mark with -- our team has done a great job on that. And then finally, lower right-hand side, charge-offs continue to remain at a very low level.

And with that, I'll turn it back to Billy.

Great. Thank you, Bryan. I appreciate the detail on those pieces. I'll wrap up with some comments here and then we'll open it up to questions in just a second. But I'll tell you, I remain so excited about where this company sits today. And it's great to see us really starting to get on point. Think Miller and I both take the approach, as we talk about our company, we stay pretty humble. And sometimes, I don't think we tapped the accomplishments that we have near enough. And really, when you look at 2018, converted 2 banks, closed on 2 other -- closed 2 banks and still grew -- and grew at a high single -- the upper end of our range pace, 10% annualized in the quarter, 9% for the year related to loan growth and still hit the earnings metrics that we promised, I just don't think a lot of times, we get enough credit. And I want to complement our team's effort and their work and the job that they did in 2018. So like I said, I think we always take the approach to be a little bit humble. But I'm going to need to pound the table a little bit today and say, "Guys, this team is doing a great job and this company is moving along at a great pace."

A couple of things that I touched on, that Bryan touched on, I want to hit on again that I think are so critical. Again, strong net loan to deposit growth absent the acquisitions. The strong credit metrics. Bryan said this, I don't think we tapped that enough. This is one of our team's best attributes, and we're just not seeing any of these trends here that causes pause, that comes, sales side does a great job of the underwriting pieces initially as we bring the deals in. And our credit team does a great job of tightening all of that up as we get it on the books. Our credit metrics are sound. Margin, we're a margin bank right now. And margin, as Bryan said, margin held quarter-to-quarter absent the sub debt -- sub debt listed down a few ticks. But absent the sub debt, we were able to hold margin again in that high 3s range, and we think that number can continue at that pace.

Talent acquisition, haven't touched on that yet. Great quarter again for talent acquisition. We are starting to really firm up this recruitment process that we've got going on, added some great sales talent on the lending side during the quarter and also on the financial advisory side. Our FAs with our new Raymond James platform added great talent in our Tuscaloosa and our Pensacola markets that we think will allow us to hit some stride as we move into '19.

Cost saves, from our recent deals, we are hitting our marks. We've hit our marks well on the Southern deal and probably a little ahead of pace on the Foothills deal, still on pace to get all cost saves out of those pieces. So going forward, go-forward strategy, as we look into 2019, we anticipate continued progress on our efficiencies as we convert and re-brand Foothills in March. Our team has great focus as we went through our budgeting process for -- here in the last quarter, great focus on expense controls and really are starting to look for those opportunities now to make investments that will continue to enhance our revenue growth.

And as Miller alluded to in his opening comments, we're really excited about this Entegra merger. This is a pivotal deal that will allow us to become a stronger organic growing strategy organization. That's something that we really want to do, and Miller and I firmly believe that this continues to position us as one of the best banks to work for in the Southeast. And we plan, as we plan to do this, we also plan to increase our focus even more so, doubling down on talent recruitment. And I think as Miller an I've talked about our strategies, he and I, as we lead this company, we're going to lever more of his time moving forward to really help our sales teams in these areas. And Miller, I don't know if you'd like to maybe take a second comment on some of that, but I think that's a real key component of our move forward strategy.

A couple of thoughts here, and a lot of you all are familiar with this. Billy runs this bank and does an excellent job on a day-to-day basis, and I've spent the majority of my time over the last 3 years building -- just building personal relationship with banks and with bankers and bank boards, helping SmartBank grow this platform through partnerships and acquisitions all over our footprint. And as we move to this organic platform, when we get to the $4 billion size, we'll feel more inclined to just organically grind away and improve our metrics. I'm going to probably spend most of my time and transition over to more sales talent recruitment, and that sales on the -- just helping our lending team recruit lenders and helping our wealth management group recruit the investment team members. So I can see a lot more of my time spent there and continuing to build those relationships and helping the bank.

Well, and I think -- thanks, Miller. And that's an important part as we look -- and again, kind of this pivotal time as we look to integrate in a great bank with Entegra. It's a -- the company is positioned so well to move forward. And I'll stop there. I'll just wrap up and say I appreciate everyone's continued confidence in our company. We -- as you can see from these results, we're delivering on building a great Southeastern banking franchise. I'll stop there and we can open it up for questions.

(Operator Instructions) The first question comes from Tyler Stafford with Stephens Inc.

I want to do just circle back on one of the expense comments that was made in the prepared remarks. So the expense run rate should move back towards, give or take, that $15 million level in the first quarter. But with that, do you expect the efficiency ratio to also move back towards that 65%, is that right?

Bryan?

Tyler, that's correct. And, of course, I'm talking of core size operating when you strip out all the merger stuff.

Tyler, I'll just add that we've talked about it. Obviously, this quarter, a little bit different. We had a little bit of tailwind with the accretion. The 62 bps, I think, is a number and we still think we can drive that number down over the long-term to move that down. Towards 60, hopefully sub 60, I think is our goal. But here in the near term, we think that kind of that, the low 60 -- 62 to 65 is probably the right number.

We got a lot of integration to do.

Yes, we still are -- I've used the term growing in their pants in the past. I think we're almost there. But we still have some efficiencies that we need to gain. Love to get that number, and we think we'll get it down, and I think that's probably a good number to use for you guys as you move forward.

Yes, and I can definitely appreciate the downward benefit that you guys are going to get on the efficiency ratio, especially after all the cost savings from the deals flow through. I guess, and maybe I'm missing something, but I thought you guys did, I had you doing roughly a 62% kind of operating efficiency ratio this quarter. And excluding future merger charges, I'm just wondering what's going to add the upward pressure to the efficiency ratio, just from a starting point perspective in the first quarter back towards 65? Is it less accretion? Is that going to be one of the drivers of that?

It's going to be less accretion. As I mentioned, we had about $2.8 million for the quarter. We were projecting around $1.3 million to $1.4 million. So we have some heavy payoffs, paydowns, so that accelerated some of that bucket into the quarter. Again, another month at Foothills, which is another whole month of salaries, DP, occupancy, amortization of intangibles, kind of run down the list, FDIC. And then as I mentioned, we did have -- our DP was a little bit pressed for the quarter due to a relationship credit that we have with our core provider that knocked that expense down for the quarter.

Okay, got it. What -- including the Entegra deal, do you just have what your expectation would be for 2019 for just total schedule accretion? I know you've mentioned on the M&A call that it was going to add $4 million, annually. I'm just trying to get the holistic number for the year, if you had that available.

Yes, I would say, $6 million.

With the half?

I would say $6 million in total.

$6 million in total, got it. Was there one-time benefit this quarter flowing through the security yields? I believe those were up 75 basis points or so quarter-over-quarter. I'm just wondering if there's any one-time benefit that should fall out for that run rate.

I'll let Bryan speak to it. I think, just a little more strategic investment related to repositioning some of the acquired portfolios. Bryan, do you want to cover that?

That's exactly what it is. It was kind of due to, I guess, you would say, to the timing. We are a little bit delayed in getting reinvested with the Southern Community funds, we didn't see the full impact of that quarter, last quarter. We saw all that this quarter, plus we were extremely quick on reinvesting the Foothills portfolio. Most of those, given our yield profile, and given what we've got, we were able to extend a little bit, take advantage of the better yields that are out there. So I mean, it's what I would consider a core number for us. It was just kind of a little bit of the timing of reinvestment issue.

Okay, that makes sense. And then just last one for me. Tax rate expectations for this year. I think you came in a little bit lower than I'm looking for the full year '18. I'm just curious of -- what was your expectation as for the tax rate from here?

It's -- I would tell you, excluding nondeductible merger expenses, because quarter-to-quarter, that will turn that up or down, but we're shooting for about 25%.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Miller Welborn for any closing remarks.

And as always, we appreciate your interest and support of our bank. And I appreciate you joining us this morning. Hope you all have a great day, and we'll talk to you soon. Thanks.

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