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SmartFinancial, Inc. (SMBK) Q4 2018 Earnings Conference Call Transcript

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SMBK earnings call for the period ending December 31, 2018.

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SmartFinancial, Inc.  (SMBK 2.60%)
Q4 2018 Earnings Conference Call
Jan. 24, 2019, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:


Good morning, everyone and welcome to the SmartFinancial Fourth Quarter 2018 earnings conference call. All participants will be in listen-only mode. (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.

Nathaniel Frank Hughes -- Executive Vice President of SmartFinancial Investment and Institutional IR

Thank you, Jed. 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 question. Yesterday evening, we issued our earnings release discussing our fourth quarter results. We have also prepared a slide presentation, which will -- we will refer to during the remarks this morning. Both of these can be found on our website at 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 and in the Risk Factors and Forward-Looking Statement 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 maybe 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.

W. Miller Welborn -- Chairman of the Board

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, 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 co earnings of $5.9 million. NIM up to 4.28%, improvement as promised and projected of ROE at 12%, ROAA at 1.07% and core efficiency ratios at 62%. Overall, pristine credit with NPAs at 24 bips. We are very proud of the way we finished 2018. I can't stress enough about how all of our trendlines and that's all of our trendlines and metrics are continuing great progress. The plan is working. One other comment, we're very excited about the Entegra deal we announced last week. This SmartBank team is 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 will be folks.

William Y. Carroll -- President & Chief Executive Officer

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 then I'm going to turn over to Bryan, let him review our financial -- 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.

You know 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, 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 continue to trend in a positive way, highlighted by up trends and ROA both in EPS and improvement in our efficiencies. All this is in the deck and I'm go and 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 are those that might be new to our story, kind of Pages, 4, 5, 6 and 7 gives you a little overview on our Company. Little bit about our history, our culture and our disciplined acquisition strategy. But for purposes of today's call, I will jump to Slide 9. So if you flip to this page, Slide 9 in 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 two 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 $1.6 million tax benefit adjustment related to previously exercised or extra options that was recognized during the -- during our tax return filing process. Core ROAA 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 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 -- even ex-accretion continue to hold margin in a nice way. Our credit quality remained strong non-performing 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 in that we start to -- we start the graphs here at year end, 2016. When you look at the progress this Company has made just in, just in a couple of very short years, it's really remarkable, great growth in assets, loans, deposits in 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 grow through acquisitions as shown there on those charts, our organic or net loan growth absent acquisitions grew at a 10% annualized pace during the quarter and at a 9.2% pace for the calendar year 2018 coming in slightly ahead or on the very top ten of our projections. Flipping over to Slide 11. Take 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 and not a 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 a 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, non-interest income and expenses and our deposit and loan trend. So Bryan?

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

Thank you, Billy. And before I dive into net interest income, I just wanted to jump to something which will kind of tie the next two (ph) slides together. What's could be pre-tax, 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 non-interest income as a percent of average assets, plus non-interest expense kind 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%, 1.36% up every single quarter executing non-plan.

So turning to net interest income. The percent of average assets was 3.90% for the quarter. As mentioned, margin was little higher due to acquired loans. You can see down in the lower left hand quadrant there, our net interest margin both with and without accretion, typically accretion for us has been about a 25 bips impact, which is kind of where we think it will come in to start next year, but this last quarter it was 54 bips ex all accretion and we do consider some accretion to be base and some of the bips are rated ex all accretion payment of accelerated ex all accretion payment of 3.75% (ph) . Compared to year ago, earning asset yields up 16 basis points, part of that is accretion but you can also look and see that we've edged up, really increased our yields on the securities portfolio as well.

We are taking advantage of higher rates. Average cost of interest bearing liabilities up 63 basis points. The thing I'll highlight there, as you -- if you look down that portion. Most of the drive of the increase in interest expense over quarter-to-quarter was it -- on our deposits, which we held pretty, pretty well but it was actually down there if you look at that sub debt. Sub debt expense went from $19,000 last quarter to $584,000 this quarter. Now back in second quarter, our deposit beta was 72 basis points. And at the time we said, we think we're toward the high end of the range but we think it's going to come down. Third quarter came down at 60 basis points, fourth quarter came down to 40 basis points.

So just like we said, we think we've been able to hold, bring it down, and that's what happens. Turning ahead, non-interest income, percent of average assets just to take over 30 basis points. We continue to increase service charges on deposit accounts and that's been a nice trend again going up every single quarter. The only blip we had this last quarter was mortgage, which is of course seasonal. We expect fourth quarter to be a little bit low. Now, as you know, we do have a significant amount of our mortgage operations in the Panhandle.

So in addition to the slower fourth quarter, Hurricane Michael, of course, hit down there toward the end of last quarter. And as a result, our mortgage team was highlighted for much of this quarter.

William Y. Carroll -- President & Chief Executive Officer

And Bryan, let me jump in real quick right there too, I think it is important to know that last -- I think last quarter's call we had talked about the -- the Hurricane Michael impact, and we really had -- we didn't anticipate a lot of impacted, but it did show up a little bit in Q4, in our mortgage production. We've got a really -- we got a 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 of that's probably through and we're back in our office now and anticipate getting that backup employing. So I just wanted to make -- add a little additional color over there, Bryan, Thank you.

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

Thanks, Billy. Turning over to Slide 14. Non-interest expense. So you might remember that back in the second quarter as a percent of average assets it was at 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%. Again, 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 non-core stuff down to 62%, we do think 62% is kind of on the low end of our range if that is of course driven down by elevated accretion, we think a good core number for us and 65% and continue to drive that one...

Looking down at the graph below, you'll salary increases, of course, that's impacted by the fact we've done three acquisitions over the period. Merger expense was $1.3 million for the quarter. The other thing that I would highlight is, of course, Foothills came in at ending of November. So we did have two 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 non-interest expense during the quarter is we had a relationship credit with our core provider, which knock that down about $200,000. With all said, not including merger expense, what you add in -- including Foothills and DP on a normalized rate, we believe our run rate for first quarter non-interest expense is $15 million, give or take, again excluding merger expense which we didn't expect.

Turning to next page, it's your deposit mix. Again, it's all about one third, one third, one third, as I mentioned our interest expense was up as a result of sub debt, kind of hard to see by the addition of Foothills was actually slightly favorable. It's just relative to our size, is relatively smaller, so it didn't move the needle on the -- neither the cost or the breakdown of deposits all that month. To that point, you can look down at the lower left hand chart, over the last year. Fed funds has gone up 4%, lots of deposits, which includes the impact of interest bearing deposits up just 43 bips. Then on the right hand side, you can see our nice trend of growing deposits over the last year.

Next page, loan portfolio continues to be well diversified both in product type and geography and the all-important CRE guideline ratios. Team has done a great job of not only just growing the loan portfolio, but the same time bringing those down. Finally, before I turn over to Billy -- again on asset quality, which mostly 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, this quarter, that's down from 33 basis points the prior quarter. You can see our allowance down there in the lower left, $8.3 million in addition to that we're bringing on Foothills. We have another $21.5 million in acquired loan discounts. Acquisitions, we can certainly mark -- our team has done a great job on that. And then finally, lower right-hand side, charge-offs continue to remain at very low level.

And with that, I will turn it back to Billy.

William Y. Carroll -- President & Chief Executive Officer

Great, thank you, Bryan. 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 plane. I 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 two banks, closed on two other -- closed two banks, and still grew at it and grew at a high single -- upper end of our range pace 10% annualized in the quarter, 9% year -- for the year related to loan growth and still hit our earnings metrics that we promised.

I just don't think a lot of times we get enough credit and I want to complement our teams' efforts and our work in the job that they did in 2018. So like I said, I think we always take the approach of being a little bit humble. But I am going to hit -- 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've touched on and then Bryan touched on. I want to hit on again that I think are so critical, again strong net loan and 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 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 to sub debt. Sub debt placed it down a few ticks but absent to sub debt, we were able to hold margin again in that high -- that high threes 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, 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 FAAs with the renew 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 really -- 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 rebrand Foothills in March. Team has great focus as we looked at 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. It was Miller -- alluded too 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 nor I firmly believe that this continues to position us as one of the best banks to work for in the Southeast.

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 and 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.

W. Miller Welborn -- Chairman of the Board

Yes, couple of thoughts here. And lot of -- you all are familiar with this, Billy runs this bank and does an excellent job on a day-to-day basis. Not spent the majority of my time over the last three years building -- just building personal relationships with banks and with bankers and bank boards helping SmartBank grow this platform through partnerships and acquisitions all of our footprint, and as we move to this organic platform and when we get to the $4 billion size, we'll feel more inclined to just organically grind away and improve our metrics. I'am going to probably spend most of my time and transition over to the more sales talent recruitment and that sales on the -- just helping our lending team recruit lenders and and helping our wealth management group recruit the investment team members. So I can say, a lot more of my time spent there and continuing to build those relationships and helping the bank.

William Y. Carroll -- President & Chief Executive Officer

Well, and I think -- thanks, Miller. That's an important part as we look at 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 -- say we -- I appreciate everyone's continued confidence in our Company. We -- as you can see from these results, we are delivering on building a great Southeastern banking franchise, and I'll stop there and we can open it up for questions.

Questions and Answers:


Thank you. We will now begin the question-and-answer. (Operator Instructions). The first question comes from Tyler Stafford with Stephens, Inc. Please go ahead.

Tyler Stafford -- Stephens, Inc. -- Analyst

Hey, good morning, everyone.

Nathaniel Frank Hughes -- Executive Vice President of SmartFinancial Investment and Institutional IR

Good morning, Tyler.

Tyler Stafford -- Stephens, Inc. -- Analyst

I wanted to circle back on, one of the expense comments that was made in the prepared remarks, so the expense run rate should move back toward give or take that $15 million level in the first quarter, but with that you expect the efficiency ratio to also move back toward that 65%, is that, is that right?

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

Yes, Tyler. That's correct and of course I'm talking core size operating once you strip out at the merger stuff.

William Y. Carroll -- President & Chief Executive Officer

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

W. Miller Welborn -- Chairman of the Board

We got no integration to do.

William Y. Carroll -- President & Chief Executive Officer

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

Tyler Stafford -- Stephens, Inc. -- Analyst

Yeah, I can definitely appreciate the downward benefit that you guys are going to get on 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 toward 65% (ph)? It is less accretion is that going to be one of the drivers of that?

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

It's going to be, 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 (ph). So we had some heavy payoffs, paydowns so that accelerated some of that bucket into the quarter. Again another month at Foothills which is another all month of salaries, DP, occupancy, amortization of intangibles can run down the list, FDIC and then as I mentioned, we did have a -- our DP was a little bit depressed for the quarter due to a relationship credit, that we have with our core provider that did knock that expense down for the quarter.

Tyler Stafford -- Stephens, Inc. -- Analyst

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

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

Yes, I will say 6 (ph). Half year of accretion.

W. Miller Welborn -- Chairman of the Board

With a half year, yes.

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

Yes, so I would say, 6 is total.

Tyler Stafford -- Stephens, Inc. -- Analyst

6 in total. Okay, got it. Was there a onetime 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 onetime benefit that should fall out for that run rate.

W. Miller Welborn -- Chairman of the Board

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

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

That's exactly what it is and it was kind of due to the, I guess you would say to that timing. We were 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 of that this quarter, plus we are extremely quick on reinvesting the Foothills portfolio. Most of those given our AL profile, and given what we've got, we were able to extend a little bit, take advantages of the better yields that are out there. So I mean, it's -- what I'd consider a core number for us, it was just kind of a little bit of a timing of reinvestment issue.

Tyler Stafford -- Stephens, Inc. -- Analyst

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 was looking for the full year '18. So I'm just curious if, what's your expectation is for the tax rate from here?

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

It's, I would tell you. Excluding non-deductible merger expenses because quarter-to-quarter that will throw that up or down , we're shooting for about 25 bips (ph).

Tyler Stafford -- Stephens, Inc. -- Analyst

Okay, thanks so much guys. I appreciate it.

W. Miller Welborn -- Chairman of the Board

Thanks, Tyler.


(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.

W. Miller Welborn -- Chairman of the Board

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


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

Duration: 28 minutes

Call participants:

Nathaniel Frank Hughes -- Executive Vice President of SmartFinancial Investment and Institutional IR

W. Miller Welborn -- Chairman of the Board

William Y. Carroll -- President & Chief Executive Officer

C. Bryan Johnson -- Executive Vice President, Chief Financial Officer

Tyler Stafford -- Stephens, Inc. -- Analyst

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