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Edited Transcript of SMBK earnings conference call or presentation 22-Oct-19 2:00pm GMT

Q3 2019 SmartFinancial Inc Earnings Call

Chattanooga Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of SmartFinancial Inc earnings conference call or presentation Tuesday, October 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ronald J. Gorczynski

SmartFinancial, Inc. - CFO

* Wesley Miller Welborn

SmartFinancial, Inc. - Chairman of the Board

* William Young Carroll

SmartFinancial, Inc. - President, CEO & Director

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Conference Call Participants

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* Daniel Edward Cardenas

Raymond James & Associates, Inc., Research Division - Research Analyst

* Feddie Justin Strickland

Janney Montgomery Scott LLC, Research Division - Associate

* Kevin Patrick Fitzsimmons

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Peter Finley Ruiz

Sandler O'Neill + Partners, L.P., Research Division - Director

* Stuart Lotz

Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day and welcome to the SmartFinancial Third Quarter 2019 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would like to turn the conference over to Miller Wellborn, Chairman. Please proceed.

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Wesley Miller Welborn, SmartFinancial, Inc. - Chairman of the Board [2]

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Thank you, Francesca. Good morning, and thanks for joining us this morning. We appreciate your interest in SmartFinancial and SmartBank. Joining me this morning are Billy Carroll, our CEO and President; and Ron Gorczynski, our CFO.

Before we start, I'd like to ask you to please refer to the disclaimer page and our non-GAAP forward looking statements page, both of these were included in our earnings release yesterday and our investor deck that was filed this morning.

A couple of highlights for our third quarter. We do feel like we had a strong, very solid quarter. We've used the term intermittent last couple of days as a noise-free quarter, and that's rare for us, as you all know. $6 million in earnings for the Q3 is very solid for us, and our ROA hit our target of 1% and continues to progress north. Our Board is very pleased with the job that Billy and our executive management team is doing. And I believe that Billy, along with his finance team, our risk team, lending team, credit team and our operations team are all hitting on all cylinders.

We're also very excited about the economic news and outlook that we're picking up anecdotally in all of our markets. So they all look very strong and feel very strong. And we really feel we're poised to finish 2019 strong as we continue to execute our plan.

And with that, I'm going to turn it over to Billy and let him talk about a few specific comments. Billy?

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [3]

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Thank you, Miller, and good morning to everyone on the call. I'll open up, as I typically do, with some anecdotal comments. And then I'm going to turn it over to Ron Gorczynski, our CFO, and let Ron walk through the deck in some greater details.

So as Miller said, a really solid quarter for us here in Q3. Consistency is a word we've been using quite a bit, and we have had a strong focus on our team's efforts to build a consistent earnings foundation for our company.

Before I jump into performance, a couple of -- just a couple of key items that I wanted to highlight from third quarter. For the third consecutive year, our bank was recognized as one of East Tennessee's top places to work. We spent a great deal in time on building our culture in the company while we're building a solid financial foundation. And I think that sometimes, as we focus so much on numbers, that this key intangible often gets overlooked. And I truly believe we are one of the best companies in the Southeast to work for, and these type of accolades continue to support that. Another honor we received over the last quarter was being named to Fortune magazine's list of 100 Fastest-Growing Companies for 2019, a very impressive group of companies on that list, and it was really nice to see our name among them. So just a couple of highlights there for us internally. And I think it's a great honor that our team should be very proud of.

I'll go ahead and jump into the deck. And I think that was posted, and everybody should have copies or access to that. If you look at Page 6 of our deck, I think this is a slide that we added last quarter, and it continues to be a really nice summary of our story. Looking at our positive net operating earnings growth trajectory, we continued to focus on growing that darker blue bar and reducing our reliance on accretion income, as we have said in past quarters. And this graph tells the story of our successful M&A integration over the last 18 months.

The next slide in the deck is Page 7 which has some of our performance trends. A very nice operating earnings quarter. As Miller said, it's $6 million. That's up 21% from a year earlier. Getting some consistency in our ROA, reporting slightly north of our near-term 1% goal, along with consistency in our plus 10% ROE. I really liked the efficiency ratio trends that you see on that bottom right graph. This is the number that we really focus on, this quarter coming in at 62.4% on our operating efficiency ratio. I believe we still have some room to move that number down as we look into 2020 and making some really nice trends there.

Ron will dive deeper into the NIM in a moment, but that held up really well given the headwinds during the third quarter that, really, all banks experienced.

Credit remained really strong with no signs that cause us any pause. Our credit team monitors all the markets for signs of slowing. And while we continue to be cautious, we remain very bullish on the Southeastern markets in where -- in which we operate.

As we also noted in the earnings release, solid loan growth for the quarter at 6.9% annualized and 6.7% year-to-date. So really right in our target range as we've communicated.

So to summarize those opening comments, our quarter is exactly as we'd anticipated and communicated. We believe, and really do believe we can continue to build a great foundation for SmartFinancial.

So I'm going to stop there and let Ron take it and jump into the deck with additional comments.

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [4]

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Thanks, Billy, and good morning, everyone. Let's start with Slide 8, our balance sheet trends. All of our trends are showing continued stable growth. Since year-end 2018, our total assets increased $116 million, loans increased $89 million and our deposits increased $76 million. We continued to build shareholder value with our consistent increases in our tangible book value. During the quarter, we took an opportunity to use some of our balance sheet liquidity to fund loans and to pay down some broker deposits.

Moving on to the next slide, our earnings profile. Our net interest income and total revenue increased over 12% and over 13% year-over-year, respectively. Our noninterest expenses, when backing out merger-related expenses, increased at a rate of 5% and our diluted operating EPS increased almost 10% year-over-year. To reiterate what Billy had indicated, our consistent growth have been building blocks for our increased profitability.

Going through the next few slides, we'll go into the individual components of GAAP and operating results. Keep in mind, as we move forward through the slides, we had completed both the Foothills and Tennessee Bancshare acquisitions.

Moving on to Page 10, net interest income. We have had steady increases in our average earning assets and liabilities as our company grows. Our margin for the current quarter was 3.91%, a 3 basis point decrease from the prior linked quarter primarily due to lower loan yields as well as decreased investment yields. Loan yields, when removing accretion, have decreased 1 basis point to 5.22% in comparison with the prior linked quarter of 5.23%. During the current quarter, we experienced increased loan fees that assisted with partially offsetting the 2 Fed rate decreases experienced during the quarter. As we move forward, loan accretion will have less of an impact on our loan yields and margin.

During the current quarter, we recorded loan accretion of 66 -- excuse me, 26 basis points in the loan yield, an increase from our scheduled accretion due to accelerated prepayments and paydowns. Our scheduled loan accretion going forward is still estimated at 15 to 20 basis points. Our margin less accretion was 3.68% for both second and third quarters of 2019.

Interest-bearing deposit costs have decreased 5 basis points to 1.37% when compared to the prior linked quarter. During the latter part of the third quarter, we substituted $45 million of brokered deposits at a rate of 2% with an FHLB advance at a rate of 93 basis points.

Looking forward, we see much opportunity for potential rate savings in our deposit portfolio. In our time deposit portfolio consisting of brokered deposits and retail deposits, we have approximately 1/3 of these deposits maturing during the fourth quarter, and we'll have the ability to replace these at lower rates. We will continue to strategically fund our wholesale deposits with short maturities.

Additionally, we are currently reviewing on our opportunities within our exception pricing structure and are in the process of coaching our associates to deploy our strategy during Q4, which is to reduce the exception pricing rates on an ongoing basis.

On to Slide 11. Our noninterest income continues to build momentum. Operating noninterest income to average assets have increased to 37 basis points, an increase of $180,000 from the prior linked quarter. We've had consistent growth in majority of our noninterest income components. Our mortgage and wealth platform continues to build momentum. Mortgage banking has experienced higher production levels for the current quarter as expected due to the favorable rate environment.

Moving on to Page 12, you'll find our noninterest expenses. We had a relatively quiet quarter with little merger-related restructuring expenses recorded. During the current quarter, operating expenses decreased by $378,000. This decrease was primarily a result of the FDIC assessment credit that was recorded due to the overfunding of the insurance reserve and addition of data processing credit from our core provider. Taking these into account, our operating expenses remained flat. Personnel expense increases are primarily related to increased commissions and incentive accruals as well as various talent upgrades. Our efficiency -- our operating efficiency ratio for this quarter was 62.4%. We have consistently lowered our operating efficiency ratio over the past several quarters as we leverage our support structure for our growth.

Hey, Billy, before we move forward, do you want to touch base on our current hiring?

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [5]

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Yes. And I can, I'll allude to this in maybe even a little bit more in my closing comments, but hiring continues to be a big focus for us as we continue to build out our organic strategy. And as you can see in the deck and in Ron's comments, we continue to really focus on adding some stuff there. That's the reason you're seeing a little bit of an increase in our compensation line. But for example, really, when you look at third quarter, we ended up with adding net 6 new revenue producers and at the same time, only adding net 1 nonrevenue producer. I think that's the type of hiring that you -- we anticipate going forward. We believe we will see more and more of that. Our team is continuing to work hard on recruiting and growing that revenue producer line. So that is what is driving some of the increased compensation expense.

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [6]

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Thanks, Billy. Page 13, we give details on our deposits. On the bar chart to the right, you'll see that our composition has changed slightly when compared to the prior quarters with an internal emphasis of increasing noninterest-bearing demand accounts which experienced an 8.7% annualized growth during the current quarter. Our cost of interest-bearing deposits for the current quarter decreased by 5 basis points when compared to the prior quarter, and our total cost of deposits decreased 7 basis points during the same period. As previously mentioned, we are -- we replaced $25 million of brokered deposits with alternative FHLB funding to take advantage of reduced cost.

Page 14. Our loan portfolio experienced a $31.8 million increase for the current quarter or 6.9% annualized. Our loan production continues to be ahead of internal projections. We experienced late quarter growth and we will benefit from this during the fourth quarter. We anticipate having a mid-single digit growth for the remainder of the fourth quarter, and our loan-to-deposit ratio was at 93%. Our CRE ratios, as seen on the lower-left side, have been consistent over the past 5 quarters. We continue to benefit from the superior credit quality our team is booking.

That brings us to Slide 15, asset quality. As Billy had mentioned, we have continued to benefit from our strong asset quality. We are still performing better than our peers. Our nonperforming assets to total assets was up 20 basis points, a much lower level than the 65 basis points that our peers are -- that are being presented by our peers. At quarter-end, our nonperforming assets totaled $4.7 million. Our allowance for loan losses to loans had increased slightly to 53 basis points, largely from our acquired portfolio decreasing over time and being replaced by organic loan subject to our reserve. Our remaining fair value discounts totaled $60.8 million at quarter-end. For the current quarter, we had minimal charge-offs. Again, our credit quality has been steady, consistent, no signs of deterioration.

And with all that, I'll hand this back over to Billy.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [7]

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Thanks, Ron. I think you see from the deck and in Ron's comments, the work that our team is doing is really starting to pay off. Consistency, as I said earlier, is a key focus. We feel we can continue to drive solid organic growth, particularly with several great hires on the sales side as I alluded to just a second ago during the last couple of quarters.

With those team -- new team members, it takes a quarter or two to build a pipeline. And as I sit down and look with our team and really anticipate our top line moving forward, I feel very optimistic. There's no doubt we're seeing some headwinds out there. And competition is extremely tough as I know most banks are seeing today. We're seeing some credit stretch in some of the areas and pricing is a struggle, no doubt. But that said, I feel we are in a position to hold our own with any competitor in any of our markets. It comes down to people, and again, we're building a great team of folks to run this company.

To close my comments, I'd like to refer to Slide 16 of our deck. It's a nice summary slide of our initiatives for the year. We continue to check those boxes. Now having completed our operational restructuring that happened over the last couple of quarters. Retooling of our finance group, now led by Ron, this is making -- this is helping us make some great strides in those internal efficiencies that we've been talking about. Kind of a bank-wide org charts scrub to make all of the departments more effective. And then a core data processing decision that was finalized during Q3 that will allow us to believe -- what we believe to yield some really nice upside as we look into 2020 and forward with the data processing arrangement.

The 2 ongoing areas that we will -- I think will probably always be ongoing for us, but we leave them on this chart to keep us focused on those 2 key areas of growth, organic and M&A. On the organic side, Greg Davis -- Greg is our Chief Lending Officer, and his regional presidents continue to do a really nice job in identifying and recruiting candidates to our team. And on the M&A front, Miller and I continue to evaluate opportunities that fit our company. We remain very confident that we can continue to execute on both of those strategic objectives moving forward.

So I'll stop there, and we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Stuart Lotz with KBW.

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Stuart Lotz, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [2]

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Congrats on a nice quarter. And I guess my first question, just digging into the margin, Ron. You mentioned that there was some higher loan fees this quarter that helped to kind of offset the core loan yield compression. Can you quantify that for us just in terms of how much that added to total loan yields?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [3]

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Yes. The fees -- we had 100 -- let's say on average, probably about $150,000 increased loan fees primarily due to some prepayments and paydowns. So that -- it was $150,000. Our run rate has been very consistent, and this anomaly again was $150,000. How's that? Now in terms of the -- sorry, the accretion was down $128,000. So net-net, they kind of offset each other also when you look at that.

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Stuart Lotz, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [4]

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Okay. So that $150,000 in terms of basis points, do you have that in front of yours that -- I mean I can run that math. But...

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [5]

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Yes. I don't. It's probably going to be about 3 basis points. I'm sorry, it's going to be -- yes, it's going to be 3 or 4 basis points on the loan.

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Stuart Lotz, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [6]

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Okay. Got it. Then really good job on the deposit side this quarter. It looked like money markets were down about 20 basis points. Just curious what you're seeing in terms of -- or moving forward with your CDs repricing in fourth quarter, how much lower it can really -- could we see deposit cost trends in the coming quarters?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [7]

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We're -- we kind of did the back-of-the-envelope math. And with this -- I think with the CD repricing, we're probably looking at 3, 4 basis points around that area. Again, the guidance is tough. The market competition we're seeing is starting to get some relief because everyone is starting to lower rates now. Third quarter, was, everyone kind of ignored, really all the rate decreases. Fourth quarter, I think, we are in a better position to lower our rates. So I think 3 to 4 basis point range should be attainable.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [8]

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Yes. And I'll add, Stuart. It's really -- the deposit -- core deposit downside guidance is so tough because it's so market-specific. And you're still getting a lot of competition out there. We're internally -- we're doing a really nice job of pushing this down, getting some of our exception pricing down. But a lot of that is more negotiations versus just kind of what we look at from a rates...

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Wesley Miller Welborn, SmartFinancial, Inc. - Chairman of the Board [9]

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And really market-driven.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [10]

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And so as Ron said, it's really kind of tough. But we do think there is some room in our core funding base to push this down, especially with some of the CDs that are rolling off this coming quarter.

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Stuart Lotz, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [11]

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Some of your peers have disclosed just like monthly deposit pricing. Could you just give us some color on where deposit rates stood at the end of September and how that differs from, say, July and August?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [12]

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July and August, we really are -- we made most of our movements in the wholesale arena. We had -- as we indicated last quarter, we had a brokered money market fund that had a higher rate than normal. And so I think the rates that we're looking at for average probably aren't all that different from where we wound up at -- during September. So going forward, again, we'll be starting at that base because I think our interest-bearing demand, our savings are pretty much -- we didn't differ from that from September to the -- for the most part. Again, our biggest opportunity will be for the time deposits and taking these money market, savings accounts that are in our exception pricing bucket and working those down over the next several months.

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Stuart Lotz, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [13]

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Got it. I appreciate the color. And so just one follow-up, Ron. I know it's everyone's favorite question, but CECL. I think you guys file as a small reporting company in last week. We got the FASB delayed, and that was finalized. Is CECL, in terms of when you plan to implement, are you kind of planning on the delay at this point? And when could we expect to receive more color there?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [14]

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Yes. We were, as everyone else, we were on track of having it implemented. We did take a pause. We -- even though our guidance, we're allowed to do to 2023, I do believe we will implement earlier. We're going to sit back this year to see how everyone else digests this and take advantage of everyone else's woes and reporting. I've listened to all the reports on this. So I don't know what the exact date but it won't be next year. How is that?

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Stuart Lotz, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [15]

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Okay. So we should take it out of 2020?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [16]

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Oh, yes. Definitely 2020, we're not implementing it during 2020. Unless Billy and Miller tell me otherwise. But I don't think we're not.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [17]

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Take advantage of a little bit of good fortune, Stuart, of coming in under the revenue guidance.

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Operator [18]

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The next question is from Peter Ruiz with Sandler O'Neill.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [19]

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Just maybe on loan growth, guys. It sounds like you're kind of reiterating that mid-single digit kind of outlook here. Sounded like you were a little bit optimistic on the economic backdrop there. When we think about the hiring activity that you guys have had in 2019, if the economy remains favorable, do you think that we could see kind of an uptick here and loan growth getting maybe to a high single digit pace in 2020? Or what are the puts and takes there?

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [20]

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Yes. I think we could. I think our guidance is still, as Ron said, kind of the mid to high numbers to that. I do think there is still some -- you still got this, you kind of got a geopolitical backdrop, and there's some uncertainty out there in the markets. But we're really kind of -- we're supplementing that with a lot of new team members, and those folks have been able to move some portfolios over. And so for us, I think net-net, we still feel very good about our ability to grow. If you get a little bit of economic tailwind, then yes, I think we could hit the higher end of the range. But for us, just trying to stay a little bit conservative on our forecasting, we're probably thinking more in that 6%, give or take line.

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Wesley Miller Welborn, SmartFinancial, Inc. - Chairman of the Board [21]

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So macro-driven and Washington-driven. Markets are strong.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [22]

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Great. And just maybe on expenses, the FDIC credit this quarter and also the data processing credit that you mentioned. So it sounds like kind of, taking those out, you probably had kind of flattish expenses this quarter. Obviously continue to hire. So maybe just thinking stable to slightly higher from here. I know the first half of the year was a ton of investment. So just want to get your thoughts there.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [23]

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Yes. I think so, and Ron can chime in. I think stable to slightly higher is really kind of where we're looking at kind of that noninterest expense line. I think we're at a spot where we -- and I've said this before, I don't think we have to make a lot of investments outside sales team additions that we want to have. I think our overall expense run rate should be fairly stable moving forward. Ron, any color...

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [24]

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Yes. I don't see anything that's going to -- again, expense line will creep up. Everything else should be well maintained. So yes, slightly greater but nothing significant.

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Operator [25]

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The next question is from Kevin Fitzsimmons with D. A. Davidson.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [26]

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I was just -- there's a lot of different variables, and you've talked about on the yield side and the funding cost side. If we -- if you just kind of look out the next quarter or 2 and however you want to do it from reported margin or core margin, and then we have a rate cut -- have a few rate cuts announced, possibly more. Can you just kind of give us some guidepost on sensitivities for that margin? I know there's still headwinds, but the bias is downwards. But just wondering what kind of range of impact to bake in here.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [27]

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You're looking at what kind of what I would call core NIM, Kevin, just kind of ex accretion, core NIM. Ron, I think you said we came in at...

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [28]

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We came -- I think to finish off the year, our NIM should be around 3.85%, 3.90%. Without accretion, 3.60%, 3.65% range, somewhere in there.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [29]

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Okay. And the accretion, you would assume that to slowly diminish, right? The pace of that quarterly going forward?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [30]

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Yes. We probably -- the 15, 20 basis points, I'd -- looking at our scheduled accretion, we probably got a good strong 18 months left to that, still left. And then it really drops down in that point forward. So the next year, we'll still have -- we'll still maintain that flow unless prepayments and annual paydowns occur, then we start losing that due to the bucket. But that's where we're at.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [31]

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Got it. Okay. Just one follow-up about M&A. Now I know you guys have been very active in the past, and there's obviously less discussion about it going forward but -- that you're looking at opportunities. What -- is it a combination of maybe the pricing multiple is lower today, you're focused on organic growth, maybe the right targets aren't out there? Can you just give us a little sense on -- is it more deliberate? Or is it a byproduct of environmental issues that you're not as active in M&A recently?

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Wesley Miller Welborn, SmartFinancial, Inc. - Chairman of the Board [32]

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I think it's more of a deliberate approach. Now we've said for several quarters now, we've had to build a certain kind of platform, a certain sized platform, and M&A was really first on the growth side and organic was second. We've really flipped that to be organic first and M&A second. We've always been very disciplined. I think we'll continue to be even more disciplined going forward. We'd look, golly bum, we are building more calls than we ever have. So it's busy looking. But it's -- we can be very picky now, and it's a couple of criteria. Got to have strong deposit franchise, a short earn back, minimal dilution, end market or improved market density. So we -- yes, we're looking but just haven't found the right one yet.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [33]

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Yes. And I'll add on it, Kevin. I think Miller is right. It's -- and I've said this before, I think over the last couple of years, it's probably been a little bit more of an acquisition, 1a organic, 1b focused. I do think that has shifted this year to probably an organic 1a acquisition, 1b. Still like the opportunities to grow the company via acquisitions. And Miller and I feel very strongly that we'll have some opportunities on that front, but we just got to make sure it aligns with everything we need.

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Wesley Miller Welborn, SmartFinancial, Inc. - Chairman of the Board [34]

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Yes. We've got a team that is very good at integration. And I think that's a key that -- a lot of banks do M&A, a few of them do it what I would call really well and have really strong integration teams, and we've got one that loves doing them. So it's -- hopefully we'll continue that phase.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [35]

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I'm optimistic we'll find some.

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Operator [36]

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The next question is from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [37]

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Nice quarter. I wanted to start on some of the funding dynamics. You mentioned the money markets being exception-priced. How much total money markets are exception-priced? And what is that's kind of average cost right now?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [38]

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I would say we're probably in the $275 million, $300 million range. And we're probably looking around plus or minus 2%.

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Tyler Stafford, Stephens Inc., Research Division - MD [39]

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Okay. And then you're -- I guess you're kind of new onboarded money market rate right now. Did you talk about where new funding is coming on the books today?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [40]

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I'm sorry, for the brokered deposits or for just regular money markets?

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Tyler Stafford, Stephens Inc., Research Division - MD [41]

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Just regular money markets.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [42]

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1 70.

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [43]

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1 70, plus or minus, probably about 1 70 is a good average.

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Tyler Stafford, Stephens Inc., Research Division - MD [44]

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Got it. And then can you just speak to some of the, I guess, geographical growth or with the loan growth you're -- or pockets of strength you're seeing? And then just in terms of new loan pricing, what you're seeing from a spread perspective as well?

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [45]

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Yes. I'll touch on that. From a growth standpoint, it's really -- all of our markets have really shown really solid growth as we break it down. We kind of break our margins into Upper East Tennessee, Southern Tennessee, which is the Chattanooga region, north -- kind of Northeast Tennessee is our Knoxville, MSA and around then jump into our Alabama presence and then our coastal presence. And so really, when you look at all of those, all the markets have had really, really solid production and really nice growth added to the franchise this year. So really, it's not just coming out of one region, it's very balanced and nicely diversified.

From a new production standpoint, I alluded to this in the comments. I mean the loan pricing, it's a challenge. I think kind of the -- when you looking at 5-year fixed top rates, if you just look at a 5-year fixed rate, I think we're looking at those for solid credits. I still think we're kind of getting up into those kind of mid- to high 4s on a lot of them. We are working thinner than that on some deals, especially relationship deals where you're getting some core funding along with that. So really kind of in a -- kind of the mid 4s is where we are putting in, mid- to high 4s, new production. And then from a spread standpoint, if you're looking at on a float, you're probably somewhere in the 2 75-ish range on a margin.

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Tyler Stafford, Stephens Inc., Research Division - MD [46]

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Got it. Okay. Thanks for that, Billy. I hopped on a bit late, so I apologize if you addressed this in your prepared comments. But did you quantify how much savings you'd expect to realize from the core data processing decision in the contract that's up next year?

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [47]

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Yes. We didn't quantify it. And there's -- actually there's a variable component to that, and the contract really is -- the contract probably is as much as kind of the near term gain on savings. It's really allows us to scale with a better cost as well. But what Ron and I have kind of looked that, we kind of measured it in anticipation of a question on it today. We're saying from our core data processing piece, that's probably somewhere around a 15%, give or take, savings to our core data processing run rate. But really, we think the key benefit is going to be scalability at a better price as we look to grow and acquire moving forward.

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Tyler Stafford, Stephens Inc., Research Division - MD [48]

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(inaudible) questions, the loan fees of $150,000, was that the anomaly increase quarter-over-quarter? Or is that what the total loan fees were this quarter?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [49]

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No, it was the increase. It was 4 basis points, $153,000 extra. Our run rate's probably around the $700,000, $750,000 a quarter. We got up into the $900,000 for the quarter. So that's just the differential that we're not expecting to get next quarter.

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Operator [50]

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The next question is from Daniel Cardenas with Raymond James.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [51]

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Maybe if you could give us a little bit of color in terms of the new hires, which markets are they going to be serving? And are these hires from larger financial institutions or similar sized institutions to yourself?

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [52]

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Yes. It's a good question. It's -- our focus in the last quarter, we've really put more emphasis in our markets that were brought to us out of the -- one of the acquisitions, the Southern acquisition from last year. So the majority of what we've added over the last quarter has been in Murfreesboro, Tennessee and Huntsville, Alabama, to really, really, just outstanding markets that can yield some nice upside, we believe. So we've put focus on there. We've also added a couple of folks in East Tennessee, 1 in Northeast and then 1 in the Southeast or actually the Southeast this quarter. But really, really nice production hires.

The ones that we've hired in Huntsville and Murfreesboro have come out of a mix. They've come out of several -- about half-and-half. Half out of what I would say a larger regional type bank and then the other half out of a midsized to larger community banks. So it's been a nice mix. We still are able to look to recruit folks really kind of -- really no real specialist area. Good generalist. But for the majority of it, they've had a little bit stronger C&I focus.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [53]

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And are they working through a noncompete right now? Or can they kind of hit the ground running?

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [54]

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They can hit the ground running. Everybody that we've added can hit the ground running. As I said, it takes -- what we see, it typically takes about 2 quarters, it takes about 6 months to get that pipeline going to where we start seeing production hit the balance sheet. But everybody is off and running pretty quickly. So been excited to see what we've been able to add just here in the near term with those new hires.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [55]

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Great. And then just one quick admin question. How should we be thinking about the tax rate here in Q4?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [56]

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I would say 24.5%, 25%, probably somewhere in between.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [57]

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Same thing for 2020 then?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [58]

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Expectation? Yes, I don't think so. I don't think we're going to have -- we're not having too many drastic changes in that area, so yes. Probably 25% is fair. That will cover it.

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Operator [59]

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The next question is from Feddie Strickland with Janney Montgomery Scott.

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Feddie Justin Strickland, Janney Montgomery Scott LLC, Research Division - Associate [60]

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Just a quick clarification question. You gave some margin guidance in Q4 in response to Kevin's question, and I think it's 3.85%, 3.90%. How many rate cuts are you guys modeling into that?

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [61]

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Probably, I would say, well, I'm anticipating one. But we really didn't -- this past quarter, we were able to accommodate the 2 rate cuts. And I would say, even though it's one solid, I think the low-end would probably accommodate the 2. Does that make sense? So if we...

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Feddie Justin Strickland, Janney Montgomery Scott LLC, Research Division - Associate [62]

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No, absolutely.

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Ronald J. Gorczynski, SmartFinancial, Inc. - CFO [63]

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Yes. I think if it's 50 basis points, we'll stay to the lower range. If it's just one, we'll definitely be at the higher range.

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Feddie Justin Strickland, Janney Montgomery Scott LLC, Research Division - Associate [64]

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Got you. And then one other quick follow-up. Just what do you guys hearing overall from your borrowers in your markets? Any change in sentiment from the prior quarter? Any areas that you're worried about? Just, I guess, general customer sentiment.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [65]

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Yes. Really, Feddie, not a lot of change. I think I alluded to it, I think just kind of political environment, the 2020 election. You start to have a little bit of conversation around that. But overall, most of the clients that we talk to continue to be very bullish. I mean, gosh, I mean, when you get it to head -- you talk to our industries in Chattanooga or Tuscaloosa and...

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Wesley Miller Welborn, SmartFinancial, Inc. - Chairman of the Board [66]

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Panhandle.

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William Young Carroll, SmartFinancial, Inc. - President, CEO & Director [67]

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Panhandle, very bullish. You look at tourism. Tourism, up in Upper East Tennessee and down in other coastal region. It has been absolutely off the charts this year. Business has been really be good there. You've got -- we've got -- you've talked to some folks in Alabama. You've got some kind of mobile area folks that you've talked about maybe a little bit of some tariff impact. But none of it is really, I would say that the negative kind of component of that is really very, very small. The majority of our clients feel very good about where they're going to finish up 2019. Probably cautiously optimistic for 2020.

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Operator [68]

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

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Wesley Miller Welborn, SmartFinancial, Inc. - Chairman of the Board [69]

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Thanks, Francesca. And thank you, all, for joining us today. We appreciate your interest in us, your time invested in us today and also your investment in SmartFinancial. Have a great day. Thanks.

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Operator [70]

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