SmartFinancial, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee bank holding company whose wholly owned subsidiary, SmartBank, provides commercial, residential and consumer banking services across East and Middle Tennessee, Alabama and the Florida Panhandle. The unaudited filing covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022 and balance-sheet comparisons to December 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Comparable or prior period |
|---|---|---|
| Net income | $11.5 million | $8.3 million in Q1 2022 |
| Diluted EPS | $0.68 | $0.49 in Q1 2022 |
| Net interest income | $36.0 million | $30.1 million in Q1 2022 |
| Net interest margin, tax-equivalent | 3.31% | 2.91% in Q1 2022 |
| Noninterest income | $6.9 million | $7.1 million in Q1 2022 |
| Noninterest expense | $27.5 million | $25.7 million in Q1 2022 |
| Return on average assets | 0.97% | 0.73% in Q1 2022 |
| Return on average equity | 10.79% | 7.83% in Q1 2022 |
| Total assets | $4.77 billion | $4.64 billion at December 31, 2022 |
| Total deposits | $4.23 billion | $4.08 billion at December 31, 2022 |
| Loans and leases, net | $3.25 billion | $3.23 billion at December 31, 2022 |
| Cash and cash equivalents | $306.9 million | $266.4 million at December 31, 2022 |
| Total borrowings | $16.5 million | $41.9 million at December 31, 2022 |
| Shareholders’ equity | $443.4 million | $432.5 million at December 31, 2022 |
Interest income increased to $53.2 million from $32.9 million, while interest expense increased substantially to $17.2 million from $2.8 million as deposit pricing rose. The effective tax rate was approximately 22.4%, compared with 21.4% in Q1 2022.
Cash flow, liquidity and capital
- Operating activities provided $11.4 million of cash, compared with $10.7 million in Q1 2022.
- Investing activities used $96.8 million, primarily reflecting $76.6 million of available-for-sale securities purchases and a $28.9 million net increase in loans and leases.
- Financing activities provided $126.0 million, including a $152.5 million increase in deposits, partly offset by $24.6 million of debt repayments and $1.4 million of dividends paid.
- Cash and cash equivalents increased $40.5 million during the quarter to $306.9 million.
- Management reported $781.3 million of unused borrowing capacity and $211.0 million of securities maturing over the next 12 months.
- At March 31, 2023, SmartFinancial’s total capital ratio was 11.77%, CET1 ratio was 9.95% and Tier 1 leverage ratio was 7.91%. SmartBank’s corresponding ratios were 11.85%, 11.15% and 8.87%. Both the Company and Bank exceeded minimum requirements and the Bank remained well capitalized.
Material changes versus prior comparable periods
- Net income rose $3.2 million, or approximately 39%, driven primarily by higher net interest income after provision.
- Net interest income increased $5.9 million as average loans, securities and interest-earning assets grew and asset yields rose. The yield on earning assets increased to 4.88% from 3.18%.
- Average interest-bearing deposit cost increased to 2.05% from 0.27%, reflecting Federal Reserve rate increases and deposit competition.
- Noninterest income declined $186 thousand, mainly because mortgage banking revenue fell $662 thousand; insurance commissions increased $358 thousand, partly reflecting the 2022 Sunbelt acquisition.
- Noninterest expense increased $1.8 million, primarily from salaries and benefits, data processing and technology costs and other franchise-growth expenses. No merger-related or restructuring expense was recorded in Q1 2023, compared with $439 thousand in Q1 2022.
- Gross loans and leases increased $28.2 million from year-end 2022. Commercial real estate represented 49.8% of the portfolio, while construction and land development represented 11.8%.
- Total deposits increased $152.4 million, or approximately 3.7%, from year-end 2022. Uninsured or uncollateralized deposits were approximately $1.4 billion, or 32.9% of total deposits.
- The allowance for credit losses increased to $32.3 million, or 0.98% of loans, from $23.3 million, or 0.72%, primarily because of the January 1, 2023 adoption of CECL.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that liquidity and the balance sheet remained strong despite industry-wide volatility following several bank failures. The Company held excess cash for contingency liquidity, conducted proactive customer outreach and sought to maximize funding sources.
SmartFinancial adopted ASU 2016-13, the CECL standard, on January 1, 2023. The adoption increased the loan allowance by $8.7 million, created a $3.0 million allowance for unfunded commitments and reduced retained earnings by $6.6 million after tax. The Company elected the three-year regulatory capital phase-in for the CECL impact.
Credit quality remained generally strong, but nonaccrual loans increased to $3.2 million from $2.8 million at year-end, and total past-due loans increased to $5.0 million from $2.2 million. Management identified commercial real estate and construction and land development as comparatively sensitive to real estate valuations.
- Key risks include deposit outflows, elevated funding costs, uninsured deposits, unrealized securities losses and reduced customer confidence in regional banks.
- Rising rates may pressure deposit costs, liquidity, securities values, loan collateral and net interest margins.
- The Company held approximately $845.2 million of securities at March 31, 2023, including significant unrealized losses. Management concluded the losses were temporary and did not expect to sell the securities before recovery.
- Off-balance-sheet commitments included $822.8 million of commitments to extend credit and $15.8 million of standby letters of credit. The related allowance was $3.2 million.
- The Company expected to complete the transition of outstanding LIBOR-based loans to SOFR by June 30, 2023. Subordinated debt begins repricing with a floating rate in October 2023.
- Management does not expect pending or threatened litigation to have a material adverse effect, but legal proceedings remain subject to uncertainty.
- Disclosure controls and procedures were effective as of March 31, 2023, and no material changes to internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether deposit growth continues and whether uninsured deposits or funding costs increase materially.
- Whether the higher allowance ratio under CECL adequately covers future losses, particularly in commercial real estate and construction lending.
- Subsequent-period trends in net interest margin as deposit costs reprice and interest-rate conditions change.
- The fair value and unrealized loss position of available-for-sale and held-to-maturity securities, including any need to sell securities for liquidity.
- Whether liquidity sources, including the reported $781.3 million of unused borrowing capacity, remain available under stressed conditions.
- Progress and costs associated with the LIBOR-to-SOFR transition and the October 2023 repricing of subordinated debt.
- Changes in nonaccrual loans, past-due loans, charge-offs, criticized assets and the adequacy of regulatory capital.