SmartFinancial Inc (SMBK) 2021 Q4 法說會逐字稿

Hello, and welcome to today's SmartFinancial Fourth Quarter 2021 Earnings Call. My name is Bailey. I'll be your moderator for today's call. (Operator Instructions) I would now like to pass the conference over to our host, Miller Welborn. Miller, please go ahead.

Thanks, Bailey. Good morning, and thanks for joining us this morning for our Q4 2021 earnings call. We always enjoy visiting with this group each quarter to talk about our progress in our company. Joining me on the call today are Billy Carroll, our President and CEO; Ron Gorczynski, our CFO; Rhett Jordan, our Chief Credit Officer; and Nate Strall, our Director of Corporate Strategy.

Before we get started, I'd like to ask each of you to please refer to Page 2 of our deck that we filed this morning for the normal and customary disclaimers and forward-looking statements comments. Please take a moment to review these.

What a fantastic quarter by our team here at SmartBank and a great end to a really strong year for our company. We demonstrated again our ability to outwork the competition and execute our strategic plan. Our organic pace of growth has been impressive and we see nothing slowing that down in the months ahead between very, very strong markets and the addition of several new sales team members that Bill will talk about shortly. We feel we're well positioned to continue at our current pace. As we jump into 2022, we're excited about what lies ahead for us this year.

With that, I will hand it off to Billy.

Thanks, Miller, and good morning, everyone. As Miller said, this has been one heck of a year for SmartFinancial. We wrapped up another solid quarter to close out 2021. And I believe this last year was probably as transformative as any we've had. The evolution our company has made in the last 12 months has been incredible, and our position for the future is very exciting.

First, let me touch on some slides shown in our deck. I'll reference Page 3. We -- first, we wrapped up Sevier County Bank acquisition, achieving our targeted cost saves of over 63%. We've also done a nice job there retaining assets and the necessary sales team pieces while picking up a great long-term core deposit base. This was a great transaction for us.

Our Fountain Equipment Finance Group that was acquired midyear has had a solid production quarter. We remain very bullish on this line of business in 2022 as we now look to leverage the bank's footprint and sales network. Organically, our investment in several new sales teams in the second half of 2021 is progressing well. We've added over 25 bankers during this expansion, adding several great new markets to our franchise.

During Q4, our new dealer floor plan team has put the needed operational pieces in place, and we're excited to see this group go to market in 2022. We also made an exciting addition to our wealth management team by bringing on an experienced group in our Gulf Coast region that had previously managed over $350 million in AUM. This team is now fully integrated and having some great early success.

Let me touch on our organic growth expansion now since that has been a major pivot for us. Page 4 provides a nice map. Those familiar with our story know, we took advantage of some great opportunities during 2021 to add talent and deepen our presence in our existing footprint. This has been a large investment for us and one that will and, quite frankly, already has dramatically changed our company in a great way. To update where we are on what we have added just in the last couple of quarters, new branch offices are now open in Montgomery, Dothan, Mobile and Auburn, Alabama. We've opened our Birmingham, Alabama LTO and added our market leadership there. We've expanded our sales team in Tallahassee, Florida, and we've expanded our national presence with the addition of several outstanding bankers in one of the country's most dynamic markets. As we've communicated, these investments will take a few quarters to start moving the EPS line, but I'm extremely confident that we will create strong revenue growth as we move into the latter part of 2022.

Page 5 details these new markets. And as you can see, we're rounding out our footprint to include some of the best growth markets in the country.

Before I turn it over to Rhett and Ron to dive into the details, allow me to touch on a few numbers referenced on Page 6 of the deck. For the quarter, $8.7 million and operating net income of $0.52 per share, 12% annualized organic loan growth in Q4, right on top of where we thought we would be, 23% annualized deposit growth for the quarter as we continue to build liquidity. Our deposit mix transition over the last year does not need to go unnoticed. We're building a really strong core funding base. 11 basis points on nonperforming assets as credit quality remains very strong, double-digit return on tangible common equity and footings now at $4.6 billion in assets, rounding out a really, really nice quarter for us.

So let me hand it over to Rhett to dive into the balance sheet and the credit metrics a little bit. Rhett?

Thank you, Billy. Looking at Slide 7 in the deck, our loan portfolio has continued to see steady growth throughout the past 4 years, ending 2021 just short of $2.7 billion in outstanding loan balances. That equates to a compound annualized growth rate of 20% over the same time period. Our average loan portfolio yield for the year 2021 was 4.67% and was relatively stable throughout the year. We wrapped up the most recent quarter at 4.53%, down from an unusually strong Q3, but in line with prior quarters this year.

We're extremely pleased with 2021 performance, especially given the challenging headwinds generated by excess liquidity across all financing sources in the marketplace continuing to put pressure on loan yields. Likewise, our deposit portfolio has seen continued strong growth over that same time frame, with exceptionally strong performance in 2020 and '21. During the current quarter, our core deposits increased over $220 million or 23% annualized. Between this growth and our focus on controlling funding costs, we've lowered our total cost of deposits to 22 basis points, a 3 basis point decline from previous quarter and ended the year with a loan-to-deposit ratio of 67%. Ron will provide more information on deposit composition in a few slides.

As you can see on Page 8, our loan growth for the year finished strong with Q4 net organic loan growth of over $75 million. Year-to-date portfolio balance growth of $311 million represents an annualized growth rate of 12.4%. Considering these levels were net of $35 million in PPP loans forgiveness activity in Q4 and over $375 million in PPP loans forgiven since year-end 2020, this capped a very strong production year for 2021. Portfolio mix, excluding PPP impact and geographic diversification of the portfolio, remained consistent throughout 2021. We're very proud of what proved to be an outstanding organic loan growth year for our bank. Moving into 2022. While we recognize our loan-to-deposit ratio was below historic levels, we're thrilled to have excess liquidity to fund what we believe will be a significant year of production from our new lending team members and our legacy core markets.

Slide 9 shows our overall asset quality metrics continuing the same strong trends we saw all year. Q4 saw our NPA ratio fell 3 basis points to 0.11%, the lowest level since 2009. Net charge-offs of 5 basis points and over 30-day past due ratio of 0.33% and classified loans of 0.35% were all consistent with Q3 levels. Despite the aforementioned loan growth, our CRE exposure actually saw a slight reduction at year-end, primarily in our Construction and Development segment. As a number of construction projects, including several owner-occupied transactions were completed late in the year and moved into permanent financing positions. As a result, we ended the year at 75% and 290% of capital for our regulatory C&D and total CRE guidance ratios, both down from second and third quarter ends. Overall, our asset quality continues to demonstrate superior metrics resulting from a combination of strong economic conditions in our market area and unwavering commitment to strict credit underwriting standards.

As for our PPP loan book, as you can see on Slide 10, we have nearly completed our 2020 loan pool forgiveness, and our 2021 pool has seen 63% of originations successful given to date. We will be working through the remaining $50 million in balances over the next couple of quarters as borrowers submit final applications for forgiveness and don't foresee any issues in concluding our participation in the program. We could not have been more pleased with our team's initial commitment to nimble responsiveness and dedication throughout the PPP loan program process.

Now I'll turn it back over to Ron to walk you through our allowance positioning and some additional detail on our margin. Ron?

Thanks, Rhett. Now let's move forward to Slide 11, our loan loss reserve. As Rhett indicated, our strong credit quality has led to minimal provision for the quarter. At quarter end, our allowance to originated loans and leases was at 0.74%, and our total reserves to total loans and leases was at 1.31%. Given our positive credit outlook going into 2022, we expect to continue minimum provision going forward mainly to support new growth and conservative safeguard against unforeseen events.

On Slide 12, our deposit composition had a little change for the quarter. Our noninterest-bearing deposits grew 32% annualized, and our noninterest-bearing to total deposit ratio held at 26%. Looking ahead, we are cognizant of a potentially rising rate environment and its impact on deposit pricing. However, given the bank's current liquidity position, we don't expect significant near-term changes in deposit costs or composition. We do, however, anticipate some minimal downward repricing of some higher cost Sevier County bank time deposits in the coming months.

Moving on to Slide 13, liquidity utilization. During the quarter, we continued to experience liquidity build and in line with our previously discussed securities purchasing program began strategically putting excess funding to work. Our bond purchase strategy has been built around 2 central themes, discipline and patience. Our directive has been to take advantage of upgrade periods and take repurchases during periods of market weakness as we saw near year-end. As we move into 2022, we will continue to evaluate our liquidity utilization for support and not only our loan growth, but our continued purchase of securities.

Even with purchasing over $250 million securities this quarter, our cash position remained virtually unchanged when compared to the prior quarter with total cash just above $1 billion. Our net interest margin for the current quarter was 2.92%, a decrease of 43 basis points from the prior quarter. During the quarter, our margin was negatively impacted by $1.3 million less of discount loan accretion and $1.2 million less of PPP fee accretion. However, with over 17% of our total assets in low-yielding interest-earning cash, our excess liquidity position continues to be the largest factor suppressing margin today.

During the quarter, we did experience a decline in our security portfolio yields due to the recent purchases of shorter-duration, lower-yielding bonds. However, these purchases provided us with over $500,000 more revenue and will result even higher income next quarter as we realize a full 3 months of interest income. Also on a positive note, after removing all accretion, loan yields remained in line with yields experienced in the prior quarter. Additionally, we also benefited from a 5 basis point decrease in interest-bearing deposits. We are forecasting the first quarter margin in the range of 2.9% to 2.95%, slightly lower than we anticipated due to the additional inflows of deposits. The margin also includes estimated loan accretion of 6 basis points or $416,000 and estimated PPP loan fee accretion of 20 basis points, approximately $1.4 million.

Given the asset-sensitive nature of our balance sheet, we feel confident that we are appropriately positioned to benefit from what is shaping up to be a rising rate environment. Our most recent rate shop shows a 6% increase in net interest income and an up 100 basis point scenario. We have $440 million availability loans without floors and another $600 million in a floor position. Of these floor loans, we have over $67 million that will go back to floating after the first 50 bps -- after the first 50 basis point of rate hikes. We also have at year-end, $900 million of interest earning cash that we priced in the event of a rate move.

Despite some modest deposit cost increases in the up 100 scenario, we believe our heightened liquidity position and better deposit composition will allow us to delay and insulate us from the full effect of any market rate increases. Before we leave this slide, let's touch base on operating revenue. Operating revenue growth continues to be a primary focal point for the company, especially since our other traditional operating metrics continue to be skewed as a result of the excess liquidity in the current operating environment. Our operating revenues remained strong, nearing that of the prior quarter despite a $2.5 million reduction in discount amount of PPP fee accretion. We are also pleased to have another strong quarter of noninterest income, which contributed $6.8 million or 18.5% of total operating revenue. As Billy mentioned, we will continue our revenue expansion, both through new opportunities and with existing platform optimization, which is a primary focus for the company as we move into 2022.

Diving deeper into noninterest income. Let's move on to Slide 14. Noninterest income continues to experience strong tailwinds as our operational focus in building non-spread base revenue streams are continuing to play out. Noninterest income increased $500,000 from the prior quarter to $6.8 million, which includes service charges and interchange income increasing over $500,000 from increased activity in transactional volume and the inclusion of Sevier County Bank and investment services revenue increasing over $170,000 primarily from the addition of our new wealth team and increased volumes from existing wealth advisers. Offsetting some of these gains was reduced income from our mortgage and insurance units mostly due to seasonality.

We also recognized a $341,000 onetime gain and other income related to the sale of our credit card portfolio. In comparison with the prior quarter, our noninterest income increased almost 8% and more impressively, having increases over 36% from prior year quarter. We remain very optimistic regarding strong opportunities for fee generation within our family of fee generators. Our forecast for the first quarter is having noninterest income of $6.9 million.

Moving on to Slide 15. Operating expenses. For the fourth quarter, our operating expenses increased $1.8 million to $25.1 million, and our salary benefit expense increased $1.4 million to $15 million, both in line with our prior quarter guidance. A significant portion of the increase was due to the additional operational expenses related to Sevier County Bank as well as expenses related to all of that initiatives. As Billy highlighted earlier, we have completed the integration of Sevier County Bank. And looking back, we're extremely pleased with the results of the integration as well as surpassed our original cost saving estimates.

As expected, our operating efficiency ratio was elevated this quarter at 68%. Looking forward into 2022, we anticipate this ratio decreasing into the mid-60s range as the newly hired lift-out teams gain steam as well as having our other internal platform optimization strategies unfold. For the first quarter of 2022, we expect an expansion run rate of $25.5 million loans with salary and benefit expense of approximately $15.5 million.

Slide 16 summarizes some of our current technology initiatives. As mentioned on previous calls, we continue to advance our technology platforms in all areas of the bank. Our primary focus has always been to enhance and improve our customers' wow experience and make SmartBank an easier organization to do business with. In fulfilling this mission, part of our strategy has been to invest heavily in remote working technologies and allow employees the flexibility to work remotely as needed.

While we currently do envision the majority of our workforce work remotely full time, we do anticipate certain teams embracing the hybrid or even a fully remote working model. Having this capability has increased employee productivity and perhaps more importantly, giving us flexibility to recruit new team members, which previously would have been geographically unavailable. As we move into 2022, we are extremely excited about the technology improvements to come and benefit it provides recruiting the best and brightest talent across all operational areas.

And to finish off on Slide 17, capital. Our capital ratios continue to be some management's most modern metrics. Management routinely evaluates the bank's capital position as it relates to projected forecast, lending opportunities as well as potential strategic initiatives. At quarter end, the company and bank both exceeded well-capitalized regulatory standards and we believe is well positioned to execute on our 2022 strategic plan. As in previous quarters, the company continued to grow extended book value per share. At quarter end, our tangible book value was $19.26, representing a quarter-over-quarter annualized growth of 5% and a growth of 7.5% for the year. We continue to be focused on building long-term shareholder value.

With that said, I'll turn it back over to Bill.

Thanks, Ron. And to close, our markets are all performing extremely well. The Southeast is poised for great continued growth, and it's one of the reasons you're seeing us pivot to our strategy of using these commercial banking lift-out opportunities.

We are becoming recognized in our region as a great place to work. And I believe there are a small group of banks in that peer set that high-caliber bankers want to go when looking to make a move. We are becoming one of those places.

The lending side of the house continues to be robust. Production has been strong, but we're still battling some of the excess liquidity in the system that's leading to continued lower line utilization and some paydowns. But that said, our new teams are starting to build nice pipelines. And as these loans move on to the balance sheet, we believe that loan growth will continue in the low to mid-teens on an annualized basis for the next few quarters.

As Ron alluded to, we've got several moving parts as the new teams ramp-up as PPP income rolls off. But with 20% of our assets and cash, just a little rate movement upward, it should provide some nice wind at our back. We feel very good about our ability to produce solid metrics this year even with the investments we've made and as we move into becoming a strong organic revenue growth company.

The momentum that is being built as we execute our plan this year will be transformative to our financials. It's a very exciting time to be part of this company as a client, as an associate and as an investor, and we are well positioned moving forward. So I'll stop there, and we will open it up for questions.

(Operator Instructions) Okay, so we do have our first question, and that question comes from Graham Dick of Piper Sandler.

So obviously, 2021 was a huge year for you guys on the strategic front with M&A, new hires, lift-outs and market expansion. I'm just trying to understand, are you guys thinking about maybe slowing down this year and really focusing on operating franchise as it is currently? Or are you still just seeing so many great opportunities out there that might simply be too good to pass up, maybe in the form of more lift-outs or new market entries?

Yes, it's a great question, Graham. You've been familiar with our story. I think we're always opportunistic. But at the same time, I really think our plan for this year is to really have this is really more of just a blocking and tackling year. This is a year where we really are focusing on the integrations, in particular, these new team members, making sure that we have success in all these new zones, really focusing on expense controls, getting that efficiency ratio. And we've made some huge investments last year, and we're really excited about those. We need to make sure that those come to fruition like we want. So I would say we're going to lean to a little bit more of what I would call a blocking and tackling year. Could there be some additional hires that come in their existing markets? Yes, possibly. We're going to be opportunistic on the hiring front, but probably not looking to replicate anything near what we did in 2021.

Okay. Great. That makes sense. Definitely a really busy year for you all. And then I guess if that translates to expenses, I heard that $25.5 million guidance for at least 1Q. Are you thinking that might be sustainable for the next few quarters or maybe just a little bit higher, given you don't have anything planned to -- or I guess any plans for any big strategic initiatives to start the year? Or are you seeing -- expecting to see maybe a little bit of wage inflation or general cost inflation or additional tech spend that might lift that higher, I mean, maybe over $26 million as a run rate for the full year?

Yes. Ron, I'll let you take that. Obviously, you're getting -- I mean, wage inflation, I think we're all experiencing some of that. So we know that there's probably a little bit of build into that. Ron, do you want to give some color on your thoughts around kind of forward guidance?

Yes. We -- Q1, $25.5 million. I think we'll max out around $26 million in the later Q3, Q4. I think we've already embedded some wage inflation in our numbers. So I'm pretty confident that we probably won't go over that $26 million mark for later quarters, around $25.5 million, $25.7 million for the first 2 quarters.

Okay. Awesome. That's very helpful. And I guess just the final thing for me, last one is just those numbers on the asset sensitivity or more specifically, your variable-rate book. Do you mind just going back and repeating this? I've got this $440 million number maybe in variable rate loans that are not -- therefore, I might have misheard it, just if you could just repeat that, that would be helpful.

Sure. We have $440 million that are out of floors that will reprice immediately within 3 months of a rate hike. And we have $600 million that are in floors. And after 50 basis points of rates up, we should see probably around $67 million to $70 million of those turn to full flow -- to full variable.

The next question comes from Brett Rabatin from Hovde Group.

Wanted to first go to the margin. And I think if I heard you correctly, you gave guidance for $290 million to $295 million for the first quarter. And I wanted to make sure I understood the linked-quarter increase in the securities portfolio. So on that $290 million to $295 million, I assume that includes the $460,000 and $1.4 million for discount accretion and the PPP fees. And then wanted to make sure I understood the commentary on the securities portfolio correctly. It sounds like you added about $0.5 million in income from securities. Was just curious how much you added or what the -- what you bought during the quarter and how much the yield was on the acquired securities?

Yes. I'll take that, Brett. For the $292 million, it's fully loaded with the accretion that was booked. In the guidance we gave, a little bit less accretion for Q1. But for the securities we purchased during the quarter, $250 million worth of securities. We're probably looking around $142 million, $143 million interest rate yield on those with duration probably around 5%. At this point, we're less than 5%. Going forward, we did purchase a little bit in 2022 $50 million so far, and we pushed our duration down into the 3-, 3.5-year mark. And that's probably around $150 million. So does that answer your question. You need more information on that?

Yes. No, that's helpful. And then as I just think about the 6% for a 100 basis point upside and I think about the first quarter and the possibility of a March rate hike, it seemed like between the liquidity that you have on the balance sheet, the reprices and the loans that reprice, it seems like your margin should be over 3% depending on rate hikes later this year. Would there -- I guess, am I thinking about it correctly? And is there anything that would be maybe an impediment to that?

Yes. We've -- other than the rate shock, we had done a scenario, where March's rates up for the first quarter is probably de minimis, just it's going to be so late in the quarter. But we projected a 25 basis point increases for March, June and December. And we're looking at an additional $5.3 million of net income -- net interest income on that. And so -- excuse me, net income on that. So we are -- our margins will go up with that. And especially if we have the loan growth we're expecting to get some yield of that probably $600 million of cash that we're sitting on, so I think upgrade will be our trends going forward.

Okay. That's great color. And then lastly, you just mentioned loan growth. I'm curious the dealer floorplan in particular, does that ramp-up pretty quickly here? And how much does that contribute to the low to mid-teens loan growth this year?

Yes. And Rhett, I'll let you speak a little more specifically the thoughts around that. Probably not much right out of the gate, Brett. As we look to bring these folks on, we think this first quarter is going to be a lot of transition opportunities for us. As you know, especially as dealer inventories are a little bit lower right now, their line utilizations are lower, which we actually think is a great time to probably get into this business as some of those opportunities present. But Rhett, you want to give a little color on our beta group and thoughts around that?

Yes. Billy, I was going to basically kind of say pretty much the saying you did. I think we'll see more impact there in the latter part of the year than the early part of the year. I think as you mentioned earlier, we've spent most of the fourth quarter that went into the early part of this quarter in just preparing that division. That's a new line of business for us. So getting software capabilities in place, getting everybody set up and ready to go has been a key focus. And the utilization rates are still low in that space. So I would anticipate it to be a little more impactful on the second half of the year than the front end of the year.

Our next question comes from Matt Olney from Stephens.

I want to ask more about the excess liquidity that you have right now. You've hired a number of new loan producers. So I'm sure much of the liquidity is earmarked for loan growth this year, but it still seems like you've got room to deploy a lot more liquidity in the securities portfolio. What are the updated thoughts about how much you're willing to deploy into securities throughout the course of the year?

Yes. And Ron, I'll just high level. And then Ron, I'll let you kind of give some -- maybe a little bit deeper color. For us, Matt, it's just been -- we've just not been -- we felt like we needed to put some to work in Q4, which we did. And Ron and the team were very, I think, deliberate in the way they invested it and kind of watched the market to do that. Obviously, with projected rate increases in there, we're watching that closely. I think or thought we'd like if we do go, we like staying shorter given what's going on. And I think at the end of the day, we really like this position of additional liquidity strength right now. But Ron, I'll let you kind of doing that -- while it does drag, it's a nice tool to have in the tool belt.

Yes, thanks. That's a good question. We originally wanted to purchase around $400 million of securities. We're about $100 million short. We're in a pause mode. We're kind of waiting for rates stabilize a little bit to see where this is going. We do anticipate to probably purchase another $100 million in the near future and then kind of see where our loan growth is going, and more importantly see where our deposit growth is going. So again, so we can look forward to see what's best. But we've been patient a long time. It's no sense to rush out today and go ahead and buying up an investment security. It may not be the best answer, that's what we're doing at this point in time.

No, I appreciate that, and it's a moving target with lots of difficult moving pieces there. So I appreciate the color. And I also want to make sure I appreciate the guidance around efficiency. I think I heard you say a mid-60% range. I just want to clarify, is that the average for the full year? And if so, should we be assuming a little bit on the higher end in the front part of the year and a little bit lower in the back half of the year?

Yes. No, this -- I'm sorry, this guidance is for the Q1, so it's not for the full year. We are higher for Q1. We will drift down and ending probably around the mid-60% range by year-end. So yes, what you said, it will get better as we go forward.

The next question comes from Feddie Strickland at Janney Montgomery Scott.

Just wonder, do you think the continued in-migration of people in the areas like Tennessee and the Panhandle can offset some of the pressures of higher rates on the mortgage side?

Yes. From a mortgage -- just kind of from a mortgage revenue standpoint, Feddie?

Demand side.

Correct. Just on the mortgage revenue demand point.

We do. We've never been a huge refi shop anyway with -- our focus has been more on purchase transactions. And yes, to answer your question is, we believe -- I think we believe that our mortgage line can stay -- continue to be a good contributor for us just with the inflow and growth that we're seeing -- population growth we're seeing in our zones. Inventory is probably one of the biggest headwinds. But when we talk to our teams out in the field, it's just a lack of inventory is probably the biggest headwind. But if that would stay reasonable, we feel -- still feel really good that mortgage can be a nice contributor going forward.

Got you. And then are you hearing anything incrementally different from customers on their business outlook? Or are they seeing any kind of easing up of supply chain issues? Or has that been an issue for your customers?

Yes. It depends. I'll let Rhett kind of chime in on what he's hearing from our market teams. But I think it's dependent on the industry. For the most part, I think most of their businesses that we're doing with have been pretty positive. Miller, you may have some comment on this as you talk to some of our clients. The ones I've talked to feel pretty good about where we are. I think there are some supply chain challenges. But overall, most of our customers feel pretty good. I don't know Miller you or Rhett...

There's no doubt it's touched everybody a little bit. Hopefully, it has bottomed and I don't see it getting much worse, something that will gradually get a little bit better. But I think supply chain has probably touched everybody in some sense.

Rhett, anything from you?

I was going to say the same, Billy. I mean I think the supply chain, clearly, you probably see it more so in certain asset areas as far as equipment. Just delays in being able to complete a purchase if somebody needs to add a new piece of equipment or expand the fleet or something to that effect just finding available assets to purchase is still a challenge at times. But for the most part, just general business activity, Most clients were very pleased with '21. Numbers are looking very good. And the outlook that we're doing, most of them are bullish on '22 at this point.

No, that's great color. And one last question. I was just curious, do you see opportunities to improve the margin even without the Fed hike? It sounds like you guys have some -- from your prepared comments, that some favorable deposit repricing coming up.

Ron, do you want to touch base on the positive pricing?

Yes. The positive pricing, we'll have some, but it's probably very similar to what we saw last quarter, 2 to 3 basis point probably max movement. If there were no Fed increases coming out, we would be able to improve the margin by taking our excess of trade that we're getting 14, 15 basis points and putting investment security. So we would be able to improve the margin. On the back of the napkin, we're looking -- our excess liquidity today is probably hurting the margin around 40 basis points. So it's -- we can probably move the needle one way or the other and get the margin elevated over time with or without the Fed increases.

Got it. Congrats on a great quarter, guys.

Thank you The next question comes from Kevin Fitzsimmons from D.A. Davidson.

Most questions have been asked and answered. I was just more kind of take you back on Feddie's last question there. Because when we think about the tailwind of favorable mix shift of earning assets of taking that excess liquidity, putting to work in the securities book theoretically helping the margin, it seems like it would -- it only becomes more evident if the flow into the bucket of excess liquidity starts to slow down a little, in other words, deposit growth. So I know, I think you guys in your prepared remarks said you expect excess liquidity in deposits to remain high or elevated. I'm not sure what word it was. But is there -- should we be thinking more about a scenario where we've had this really outsized deposit growth? But should we be looking out a number of quarters and starting to think about much more limited deposit growth and maybe even having a quarter where deposits go down?

And maybe I'm just curious how you would think of that because maybe we're looking out at a pivot point where NII has been driven by balance sheet growth while the margin has been getting hit. And could we be setting ourselves up for the opposite where if deposit growth really moderates, even without -- and then on top of it rate hikes, you can really -- I don't see why you wouldn't see healthy margin expansion. But then if that excess liquidity is draining, which is a good thing for the margin, it may be it keeps a limit on average earning asset growth. So I'm just -- I know that's a lot, but I just wanted to throw that kind of scenario out there and see what you thought about the top growth.

No, I think you're right. I think a lot of it is going to be asset mix movement. I mean it really is at the end of the day. And the wildcard there is what the continued deposit growth number is going to be. I don't think there was any doubt, we were surprised with the amount of deposit growth we saw in '21. The great -- the good thing about it is we've picked up a lot of these new teams, and these are great relationship bankers. And so we're moving the other accounts in. But yes, I do believe that you'll see deposit growth slow a little bit. And as we change that mix, kind of going back to Feddie's comment, that should help margin on its own, absent any real large rate increases from the Feds. I think your comments are spot on and I don't know, Ron, anything from you?

No, I totally agree and we've been modeling that one way or the other. We were a different bank coming into pandemic and now we're a different bank coming out. And the one [ball] we were getting our hands around is the lift-outs. We did hire good deposit gatherers. So we're trying to balance what is the probable answer. But that's a very good question, by the way. So...

What a great problem to have.

Great problem to have. Yes. We just have to see how this one plays out but...

Kevin, it's funny, Ron and I were talking this morning when this pandemic started, we said what the -- there's something like this, there's probably some opportunity. We need to make sure that we're positioned as we come out of this thing to come out swinging and I think we believe we have. And I love where we're sitting today. And like I said, even though, yes, the additional liquidities drag in margin a little bit. Man, I'll tell you, it's a great position of strength for us to be sitting in today. I like having this asset sensitivity on the balance sheet. Gives us a lot of flexibility with changing mix, putting some of it to work in investments if the yields get where we like them. It's a good spot to be in.

Yes, I know and I totally understand why it's difficult to make any kind of forecast or prediction about deposit growth. But it seems that -- and partly it's because we have a backdrop of rising rates now that the tone about excess liquidity seems like in the past quarter or so, it has shifted from being the biggest drag on earnings to being the biggest opportunity looking forward. And -- but I think that the positive growth aspect is key.

Yes, agree.

And then one additional thing, Ron, I was trying my best to keep up with you on the rate shock scenario. Would you mind giving those numbers again?

Sure. With 100 basis point shock, we'll see a 6% increase in net interest income. Currently, we have $440 million available rate loans without floors, another $600 million with, and that 50 basis points of that $600 million, $67 million will go back to floating. So we have a little bit of a ways away of increases to get more of the floor, to get these loans out of the floor position. And our deposit betas for this is maybe about 40%. On actuality base where we're at today, I think we can go lower than that, probably 30%, 35% range. So we -- I think we still have some opportunities of this. But again, upward rates, as Bill indicated, we're in a pretty good position going forward.

Our next question comes from Stuart Lotz of KBW.

Just 2 more questions for me. Most of my stuff has been answered already. But Ron, if we could go back to your fee guidance for next quarter. I think you mentioned you expect fees of about $6.9 million in the first quarter, which is a little up from this quarter. But if I understood you correctly, there was about $340,000 from a onetime gain or a onetime gain in this portfolio. So I'm just curious what you think is driving the higher sort of fee guidance next quarter?

Yes. We really have 2 items that are driving it. Our mortgage line, the seasonality of the fourth quarter overseeing a decrease. So we're seeing that ramp back up more towards our Q3 production level. It's about $160,000 to $170,000 increase. And also the big -- the other items are wealth. We've brought on the new wealth division that they came on mid- to late fourth quarter. So that's -- we're looking to get about $400,000 of increased revenue from that line item. Those 2 alone will get us there and also insurance, again, less of an impact, so increasing probably more to Q3 levels. So those 3 items are going to drive us back to that $6.9 million run rate.

Okay. Great. And how are you thinking about the growth rate for the full year on top of that? I mean do you think total fee income of $28 million is reasonable just given the hiring momentum and expectation for kind of improved contribution from some of your new teams there?

We're not really going -- getting into full year guidance. But I think $28 million is attainable and then some. But we'll take that quarter-by-quarter as we move forward to the year.

Got it. And just one more for me. Turning to capital. I think your TCE ratio and kind of total risk-based capital are a little bit, I guess, artificially low right now just given all the excess liquidity. But given your expectation for pretty substantial loan growth this year, is there any appetite to, I guess, tap capital markets given would you see your rates are going to start moving higher, maybe appetite for common equity or additional sub debt? Just kind of any comments there.

Yes. I'll jump in there, Stuart. Yes, for us, I think we're always watching what's going on in the market. And we'll continue to look to be opportunistic. We do feel that the ratios have stabilized. They got a little pinched with the acquisitions, which we knew. But as we look to go ahead and project out into 2022, we feel pretty comfortable with the position. We've always been comfortable leveraging appropriately. We think that's the right thing to do from a shareholder standpoint. So prudently leveraging it is something that we're comfortable with. But that said, we know where the markets are and could look for opportunities to take advantage of that potentially as we look ahead into the year.

(Operator Instructions) Our final question comes from William Wallace of Raymond James.

Just a couple of housekeeping questions. On the NIM gap for the first quarter, what is the PPP fees you all are anticipating?

I believe that PPP fee is $1.4 million.

I'm sorry, could you repeat that?

$1.4 million.

$1.4 million. Okay. Yes. Okay. And then just on the loan guide, I'm curious, and I apologize if I missed this, I got in a little bit late, but I'm curious what pipelines look like coming into the first quarter versus coming into the fourth quarter?

Just from a loan pipeline standpoint, I'd say the pipeline looks stronger going into Q1 than that going into -- Q4 was good. I think Q1 is a little bit better. As you know, pipelines, you've got to get them. It just takes a while to get them through the process, through the system and get them onto the books. But pipelines are really good. It's -- we feel these new teams are coming online well with some nice momentum and feel pretty bullish on our pipeline and maybe even spread through the market.

Yes. To that last comment, what is -- what do the pipelines look like? Or what does production look like out of the existing producers, not the new teams? Are those also growing?

Good. That's good. I think when you look at the existing markets, I think we tend to probably battle the payoff, paydown issues more in existing markets where we've got a stronger base, got a larger footprint. I think that's where it is. So when you look at net growth out of those markets, those markets are not -- production is good, but their contribution to the net balance growth number is a little bit smaller. So we think the newer groups can kind of help bolster that low to mid-teens guidance on loans.

There are currently no further questions registered. So I'll pass the conference back over to the management team.

Thank you. Appreciate it, and thanks very much for your support of our company and for interest in where we're headed, and I hope you each have a great week. Take care.

And that concludes the SmartFinancial Fourth Quarter 2021 Earnings Call. You may now disconnect your line.