Smartfinancial Inc. Q4 FY2021 Earnings Call

Thanks, Bailey. Good morning, and thanks for joining us this morning for our Q4 2021 earnings call. We always enjoy this group each quarter to talk about our progress and our company. Joining me on the call today are Billy Carroll, our President and CEO; Ron Gorczynski, our CFO; Rhett Jordan, our 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 two 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've 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 strong markets and the addition of several new sales team members that Billy will talk about shortly, we feel we are well-positioned to continue our current pace. As we jump into 2022, we're excited about what lies ahead for us this year. With that, I'm going to 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 positioning for the future is very exciting. First, let me touch on some slides shown in our deck. Well, I'll reference page three. We wrapped up our 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, the 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 operational 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 four 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 and 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 LPO, and added our market leadership there. We've expanded our sales team in Tallahassee, Florida, and we've expanded our Nashville presence with the addition of several outstanding bankers in one of the country's most dynamic markets. And we've communicated these investments; they'll 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 five 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 six of the deck. For the quarter, $8.7 million in operating net income or $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 non-performing assets as credit quality remains very strong; double-digit return on tangible common equity and putting us now at $4.6 billion in assets, rounding out a 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 seven in the deck, our loan portfolio has continued to see steady growth throughout the past four 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 the 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 timeframe, 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 three basis point decline from the 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 eight, 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 loan 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 in 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 nine shows our overall asset quality metrics continuing the same strong trends we saw all year. Q4 saw our NPA ratio fall three basis points to 0.11%, the lowest level since 2009. Net charge-offs of five 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 successfully forgiven 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 we don't foresee any issues 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 margins, Ron?

Thanks, Rhett. 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 up 0.74% and our total reserves to total loans and leases were at 1.31%. Given our positive credit outlook going into 2022, we expect to continue minimal provisions going forward mainly to support new growth and conserve safeguards against unforeseen events. On slide 12, our deposit composition had little change for the quarter. Our non-interest bearing deposits grew 32% annualized and our non-interest 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 a minimal downward re-pricing at some higher-cost Sevier County Bank term deposits in the coming months. Moving on to slide 13, liquidity utilizations; 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 two central themes, discipline and patience. Our directive has been to take advantage of upgrade periods and taper purchases 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 yields, 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 accretion. However, with over 70% of our total assets and 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 in even higher income next quarter as we realize the full three 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, they also benefit from the five basis point decrease in interest-bearing deposits. We are forecasting the first quarter margin in a 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 six 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 shock shows a 6% increase in net interest income in an up 100 basis points scenario. We have $449 million in availability loans and another $600 million better in accrual position. Of those forward loans, we have over $67 million declared after the first 50 basis point rate hikes. We also have at year-end $900 million of interest earning cash that we can move. Despite some modest deposit costs increases in the 100 basis point scenario, we believe 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 remain strong mirroring that of prior quarter despite a $2.5 million reduction in loan discount PPP accretion. We're also pleased to have another strong quarter of non-interest income, which contributed $6.8 million, or 18.5% of total operating revenue. As Billy mentioned, we will continue our revenue expansion, both from new opportunities and platform optimization, which is the primary focus for the company as we move into 2022. Diving deeper into non-interest income, let's move on to slide 14. Non-interest income continues to experience strong tailwinds, as our operational focus is going non-spread based revenue streams are continuing to play out. Non-interest income increased by $500,000 from the prior quarter to $6.8 million, which includes service charges and interchange income increasing over $500,000 from increased activity and transaction volume, and inclusion of Sevier County Bank and investment services revenue increasing over $170,000, primarily from the addition of our new wealth team and increased borrowing from existing wealth advisors. Offsetting some of these gains was reduced income from mortgage insurance units, mostly due to seasonality. We also recognize a $339,000 full-time gain, and other income related to the Sevier credit card portfolio. In comparison to the prior quarter, our non-interest income increased almost 8%, and more impressively having increases over 36% from prior year quarter. We remain very optimistic regarding strong opportunities for income generators. Our forecast for the first quarter is having non-interest 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 $50 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 those initiatives. As Billy highlighted earlier, we have completed the integration with Sevier County Bank, and looking back, we are extremely pleased with the results of the integration, as well as surpassing 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 well as having other internal platform optimization strategies unfold. For the first quarter of 2022, we expect an expansion rate of $25.5 million range with Sevier benefit expenses taxed at $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 customer's life experience and make small banking easier and more enjoyable to do business with. In fulfilling this mission, part of our strategy has been to invest heavily in remote working technologies and allowing employees the flexibility to work remotely as needed. While we currently don't envision the majority of our workforce working remotely full-time, we do anticipate certainties in terms of a hybrid, or even a fully remote working model. Having this capability has increased employee productivity, and perhaps more importantly, given 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 technological improvements to come and the benefits they provide in recruiting the best and brightest talent across all operational areas. And to finish up on slide 17, capital; our capital ratios continue to show some of the management's most modern metrics. Management routinely evaluates the bank's capital position as it relates to projected forecasts, lending opportunities, as well as potential strategic initiatives. At quarter end, the company has 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 its standard value per share, at quarter end, our trending 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 Billy.

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 this pivot through our strategy of using these commercial banking lifting opportunities. We're becoming recognized in our region as a great place to work, and I believe there are few groups of banks in that peer set that high-caliber bankers want to go to 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 onto 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 in cash, just a little rate movement upward should provide some nice window to that. 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're well-positioned moving forward. So, I'll stop there, and we will open it up for questions.

Thank you. We have our first question from Graham Dick of Piper Sandler. Graham, please go ahead.

Hey, good morning, guys.

Hey, Graham.

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 it. Are you guys thinking about maybe slowing down this year, and really focusing on operating the franchises it has currently or are you still just seeing so many great opportunities out there that it 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 more of just a blocking and tackling year. This is a year where we really are focusing on the integrations, in particular of these new team members, making sure that we have success in all these new zones, really focusing on expense controls, and 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.

It sounds like you have had a very busy year. Regarding expenses, I heard the guidance of $25.5 million for at least Q1. Do you think that figure might be sustainable over the next few quarters, or could it increase slightly? I understand there aren't any major strategic initiatives planned for the start of the year, but are you facing wage inflation, general cost increases, or additional tax expenses that could push that figure above $26 million as a full-year run rate?

Yes, Ron, I'll let you take that. Clearly, we are all experiencing some wage inflation, so we understand there may be a slight increase in that area. Ron, could you share your thoughts on the forward guidance?

Yes. The Q1 $25.5 million, I think we'll match that around $26 million in 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 in the later quarters, around $25.5 million, $25.7 million for the first two quarters.

Okay, that's very helpful. The last thing for me is about the asset sensitivity, specifically regarding your variable rate book. Could you please repeat those numbers? I have $440 million in variable rate loans that I'm unsure about, so it would be helpful if you could clarify that.

Sure, we have $440 million that are out of floors that will price immediately, all within three 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 the $67 million, $70 million turn to full flow.

Okay, perfect. All right, that's it for me, guys. Thanks for taking my questions, and congrats on another really good quarter.

Thanks, Graham.

Thank you, Graham. The next question comes from Brett Rabatin from Hovde Group. Brett, please go ahead.

Hey, guys, good morning.

Hey, Brett.

Wanted to first go to the margin, and I think, if I heard you correctly, you gave guidance for 290 to 295 for the first quarter. And I wanted to make sure I understood the linked quarter increase from the securities portfolio. Well, so, one, of that 290-295, I assume that includes the $460,000 and $1.4 million for discount accretion in the PPP fees. And then wanted to make sure I understood the commentary around the securities portfolio correctly. It sounded like you guided about $500,000 in income from securities. Was just curious how much guided or 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 is 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 at 142-143 interest rate yield on those, with duration probably around 5%, at this point a little less than 5%. Going forward, we did purchase a little bit in 2022, $50 million so far, and we pushed our division down into the three, three-and-a-half-year mark, and that's probably around $150 million. So, does that answer your question, any more information on that?

Yes, that's helpful. Thinking about the 6% for a 100 basis point increase and the potential for a March rate hike, it seems that with the liquidity you have on the balance sheet, the repricing of loans, your margin should exceed 3% depending on rate hikes later this year. Am I considering this correctly? Are there any factors that could hinder that?

Yes, aside from the rate shock, we have analyzed a scenario where March's rates for the first quarter are likely affected by being late in the quarter. We projected 25 basis point increases for March, June, and December. This could result in an additional $5.3 million of net income for us. Consequently, our margin is expected to improve, especially if we experience the loan growth we anticipate, which will generate some yield from the approximately $600 million in cash we currently hold. Therefore, I believe the upward trend in rates will continue moving forward.

Okay, that's great color. And then, lastly, you just mentioned loan growth. I'm curious, that the dealer floor plan, 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?

You know, Rhett, I'll let you elaborate on that. Initially, we might not see much change, but as we consider bringing new people on board, we anticipate a lot of transition opportunities this first quarter. Currently, dealer inventory is relatively low, and their line utilizations are also down, which we believe is an opportune time to enter this market as these chances arise. Rhett, can you provide some insights on our Dealer Group and your thoughts on that?

Well, Billy, I was going to basically kind of say pretty much the same 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.

Okay, that's great color. Appreciate it. Thanks for it.

Thank you, Brett. Our next question comes from Matt Olney from Stephens. Matt, please go ahead.

Hey, thanks. Good morning, guys.

Good morning, Matt.

Good morning, Matt.

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, just high-level, I mean, Ron, I'll let you kind of give some maybe a little bit deeper color. For us, Matt, we’ve just not been really excited. 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 thought we'd like if we do go, we'd like staying shorter given what's going on. And I think at the end of the day, we really liked this position of additional liquidity strength right now. But Ron, I'll let you kind of build on that. While that 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 were about $100 million short, we are in pause mode to kind of let 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 deposit growth is going. So, again, we can look forward to see let's pause, but we've been patient a long time, and there’s no sense to rush out today and go ahead and buy up investment securities that may not be the best answer. But that's what we're doing at this point of time.

I appreciate that. And it's a moving target with lots of difficult moving pieces there. So, appreciate the color. And also want to make sure I appreciate the guidance around efficiency. I think I heard you say a mid-60% range. 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?

Matt, I'm sorry, this guidance is for Q1. So, it's not for the full-year. We anticipate being higher in July and expect to end the year probably around the mid-60 range. So, yes, you mentioned it will improve as we move forward.

Okay, thanks for the clarification.

Thank you, Matt. The next question comes from Feddie Strickland, Janney Montgomery Scott. Feddie, please go ahead.

Hey, good morning, guys.

Good morning, Feddie.

Good morning, Feddie.

I was just wondering, do you think the continued in-migration of people into areas like Tennessee in 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, the demand size.

Correct. Yes, from a mortgage revenue standpoint.

We have not focused heavily on refinancing; our primary emphasis has been on purchase transactions. In response to your question, we believe our mortgage segment can remain a strong contributor, supported by ongoing population growth and resilience. The main challenge we face is the lack of inventory, which our teams have identified as a significant headwind. If inventory levels stabilize, we are optimistic that our mortgage sector can continue to be a valuable contributor in the future.

Got you. Are you hearing anything new from customers about their business outlook? Are they experiencing any improvement in supply chain issues, or is that still a concern for your customers?

It depends. Rhett can provide insights based on what he hears from our market teams. However, I believe it varies by industry. Overall, most of the businesses we interact with have a positive outlook. Some of you might have comments on this as you engage with our clients, but the clients I've spoken to seem optimistic about our relationship. There are some supply chain challenges, but generally, most of our customers are feeling positive.

We got to trust everybody a little bit. Hopefully, it is bottomed and getting much worse, but they gradually get a little bit better. I think it's spotting, it's 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 or so in certain asset areas as far as equipment, just delays in being able to complete the 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.

Now that's great color. Thanks. And one last question. I was just curious; do you see opportunities to improve the margin even without the Fed hikes? It sounds like you guys have some prepared comments that suggest some deposit repricing coming up?

Rhett you have touch base on deposits?

Yes, deposit re-pricing will have some, that's probably very similar to what we saw last quarter 2 to 3 basis points for a max movement. If they will know that increase is coming out. We were created to improve the margin by taking our excess credit over again 14, 15 basis points and putting investment securities. So, we would be able to improve the margin, on the back of the napkin. We were looking at our excess liquidity today. It's not hurting a margin around 40 basis points. So, it's, yes, 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. Thanks for answering all my questions and congrats on a great quarter guys.

Thank you, Feddie. The next question comes from Kevin Fitzsimmons from D.A. Davidson. Kevin, please go ahead.

Okay. Good morning, guys. How are you?

Hi, Kevin.

Hi, Kevin.

Hi, Kevin.

Most questions have been addressed. I wanted to build on Feddie's last question. When considering the positive impact of the favorable mix of earning assets from investing in securities, which theoretically aids in margin growth, this becomes more apparent if the influx of excess liquidity starts to decrease, meaning slower deposit growth. I understand your prepared remarks suggested that you anticipate excess liquidity and deposits to stay high or elevated. However, should we be considering a scenario where we've experienced significant deposit growth but might need to prepare for more constrained growth in the coming quarters, or even a period of declining deposits? I’m curious about your perspective on this, as it feels like we might be approaching a turning point where net interest income has been propelled by balance sheet expansion, while margins have been under pressure. If that deposit growth moderates, along with ongoing rate hikes, it seems plausible that we could see healthy margin expansion. However, if excess liquidity diminishes—which could be beneficial for margins—this might limit the growth of average earning assets. I realize that’s a lot to unpack, but I wanted to share that scenario and get your thoughts on asset growth.

Yes, Kevin, I think you're right. A lot of it will depend on asset mix movement. At the end of the day, the wildcard is what the continued deposit growth will be. We were definitely surprised by the amount of deposit growth we experienced in '21. The positive aspect is that we have brought in many new teams who are excellent relationship bankers, and we are moving other accounts as well. I do believe you'll see some deposit growth, and as we adjust that mix, it should help improve margin on its own, assuming there aren't any significant rate increases from the Fed. I believe your comments are accurate. Ron, do you have anything to add?

I completely agree. We've been considering the situation from different angles. You will come out of the pandemic with a different bank than you entered. The key aspect we're focusing on is delivering the best results. We have brought in skilled deposit gatherers, so we are trying to find the most likely outcome. That’s a very pertinent question, by the way.

Kevin, we are talking this morning, when this pandemic started, we said you know, what, there's something like this. There's probably some opportunities, we need to make sure that we're positioned as we come out of this thing to come out swinging and then I think we believe we have and I love where we're sitting today. And like I said, even though yes, but the additional liquidity is dragging margin a little bit, man, I'll tell you this. It's a great position of strength for us to be sitting in today. Like Kevin this asset sensitivity on the balance sheet gives a lot of flexibility with changing mix, putting some of it to work and investments at the yields to get where we like them. It's good spot to be in.

I understand that making forecasts about deposit growth can be challenging, especially given the backdrop of rising rates. Recently, the perception of excess liquidity has shifted from being a major hindrance to earnings to presenting a significant opportunity moving forward, and I believe that the aspect of positive growth is crucial.

Yes, and then one additional thing Ron. I was trying my best to keep up with you in the rate shock scenario, would you mind giving those numbers again?

Sure. With a 100-basis points shock, there's a 6% increase in net interest income. Currently, we have $440 million in abandoned rate loans that are not closed, and another $600 million that are, with a 50 basis points rate. Of that $600 million, $67 million will return to a floating rate, so we have a bit of room to increase and maintain our positions above the floor. Our deposit rate for this is about 40%. Based on where we are today, I believe we can go lower than that.

Got it. Great.

Probably 30%, 35% range. So, I think we still have some opportunities at this, but again, upward rates are going to indicate, we are in the pretty good position going forward.

Got it. Thanks Ron.

Thanks, Kevin.

Thank you, Kevin. Our next question comes from Stuart Lotz of KBW. Stuart, please go ahead.

Hi, guys. Good morning. I hope everyone's doing well. Just a few more questions from 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 one-time gain this portfolio. So, just curious what you think is driving the higher sort of fee guidance next quarter?

We have two main factors contributing to this. First, our mortgage line and the seasonal decline in the fourth quarter are seeing a decrease, but we expect to ramp back up to production levels similar to Q3, which would represent an increase of around $160,000 to $170,000. Second, we launched a new wealth division in mid to late fourth quarter, which we anticipate will generate about $400,000 in additional revenue. Additionally, while insurance has a lesser impact, it's also projected to increase back to Q3 levels. Together, these factors will help us achieve a run rate of $6.9 million.

Okay, great. And how are you thinking about a growth rate for the full-year on top of that? I mean, you think non-interest income of 29 is reasonable, just given the hiring momentum and expectations for kind of improved contribution from some of your new teams there?

We're not really going into full-year guidance. But I think $28 million is attainable. And then some, but we will take that quarter-by-quarter as we move forward.

Got it. And just one more for me, turning to capital, I think your TCE ratio and kind of risk-based capital are a little bit I guess artificially low right now just going 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 rates are going to start moving higher, maybe any appetite for common equity or additional sub debt? Just kind of any comments there? Thanks.

Yes, I’ll respond to that, Stuart. We are consistently monitoring market developments. We plan to remain opportunistic, and we believe the ratios have stabilized. They were slightly impacted by the acquisition, but as we look ahead to 2022, we feel quite confident about our position. We have always been comfortable with appropriate leveraging, which we believe is the right strategy for shareholders. Thus, prudently leveraging is something we are at ease with, while also being aware of market conditions and looking for potential opportunities as we move forward into the year.

Great, thanks for taking my questions, guys.

Thank you.

Thank you, Stuart. Our final question comes from William Wallace of Raymond James. William, please proceed.

Thanks. Good morning, guys.

Hi, how are you?

I'm good, thank you. I have a couple of housekeeping questions regarding the NIM guidance for the first quarter. What are the PPP fees you are anticipating?

PPP is $1.4 million.

I'm sorry, could you repeat that?

$1.4 million.

Okay, and then just on the loan guide. I'm curious and I apologize if I missed this again a little bit late. But I'm curious what pipelines look like coming into the first quarter versus coming into the fourth quarter?

Yes, from a loan pipeline perspective, I believe the pipeline is stronger as we head into Q1 compared to Q4. Q1 seems to show improvement. It takes time to move pipelines through the system and off our books, but they are looking really good. We are optimistic about the new teams gaining traction and feel confident about our pipeline.

And evenly spread through the market.

Yes, so to that last comment, what are the pipelines look like or what does production look like out of the existing producers not the new teams also are growing?

Good, I think when you look at the existing markets, I think we tend to probably battle the pay off pay down 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 new group, the newer groups can kind of help bolster that low to mid-teens guidance on loans.

Okay, great. Yes, that's very helpful. I appreciate all the color today, guys. Thank you.

Thanks.

Thank you, William. 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. If you're interested in where we're headed, 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 lines.