SmartFinancial, Inc. — Form 10-Q Summary
Business context and reporting period
SmartFinancial, Inc. is a bank holding company for SmartBank, serving individuals and businesses through operations in East and Middle Tennessee, Alabama and the Florida Panhandle. The unaudited filing covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods. Dollar amounts are in thousands unless otherwise stated.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Interest income | $42,297 | $33,311 | $111,521 | $92,455 |
| Net interest income | $36,708 | $30,382 | $99,889 | $83,539 |
| Provision for loan and lease losses | $974 | $1,149 | $3,230 | $1,211 |
| Noninterest income | $6,250 | $6,309 | $20,590 | $17,143 |
| Noninterest expense | $27,230 | $23,309 | $78,874 | $63,570 |
| Net income | $11,543 | $9,600 | $30,018 | $28,134 |
| Diluted EPS | $0.68 | $0.61 | $1.78 | $1.84 |
| Tax-equivalent net interest margin | 3.29% | 3.35% | 3.10% | 3.37% |
| Return on average assets | 0.95% | 0.97% | 0.85% | 1.04% |
| Return on average equity | 10.77% | 9.70% | 9.46% | 10.05% |
At September 30, 2022, total assets were $4.797 billion, net loans and leases were $3.076 billion, deposits were $4.280 billion, cash and cash equivalents were $543.0 million, and shareholders’ equity was $414.7 million. The allowance for loan and lease losses was $22.8 million, or 0.73% of loans and leases, compared with 0.72% at December 31, 2021.
Operating cash flow for the first nine months was $41.6 million. Investing activities used $729.9 million, primarily reflecting a $404.8 million increase in loans and purchases of available-for-sale and held-to-maturity securities. Financing activities provided $186.2 million, including a $258.9 million increase in deposits, partially offset by a $75.0 million repayment of borrowings. Cash and cash equivalents declined by $502.0 million from the beginning of the year.
Total borrowings were $18.4 million at September 30, 2022, down from $87.6 million at year-end 2021 following repayment of $75.0 million of Federal Home Loan Bank advances. Subordinated debt was $42.0 million. The company had $12.5 million outstanding and $12.5 million available under its $25.0 million revolving line of credit, maturing March 24, 2023.
Material changes versus prior comparable periods
- Third-quarter net income increased 20.2% to $11.5 million, while nine-month net income increased 6.7% to $30.0 million. Nine-month diluted EPS declined to $1.78 from $1.84 because of higher average shares outstanding.
- Net interest income increased 20.8% in the third quarter and 19.6% for the nine months, driven primarily by loan, securities and earning-asset growth. Higher deposit costs and lower PPP fee accretion contributed to compression in the net interest margin.
- Noninterest expense increased 16.8% in the third quarter and 24.1% for the nine months, primarily due to salaries and benefits, facilities, FDIC insurance, technology and other growth-related costs.
- Noninterest income was essentially flat in the third quarter but increased 20.1% for the nine months. Higher service charges, investment services and interchange income offset lower mortgage banking and insurance commission revenue.
- Net loans and leases increased $402.3 million, or 15.0%, from year-end 2021 to $3.076 billion. Management reported organic net loan and lease growth of $517.2 million, or 23.3%, excluding acquired loans and leases.
- Deposits increased $258.5 million, or 6.4%, from year-end 2021. Securities increased from $559.4 million to $806.8 million as excess liquidity was deployed, particularly into U.S. Treasuries.
- Accumulated other comprehensive income declined from a $1.4 million gain at year-end 2021 to a $40.8 million loss, primarily due to unrealized losses on available-for-sale securities and losses on hedging instruments as interest rates increased. Management classified the securities losses as temporary and did not expect to sell the securities before recovery.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or balance-sheet guidance. Management described its markets as generally solid but cited inflation, rising interest rates, labor shortages, supply-chain disruptions and recession concerns. Management expects liquidity to remain adequate, supported by approximately $548.5 million of unused borrowing capacity, marketable securities and other funding sources.
On September 1, 2022, the company completed the $6.5 million acquisition of substantially all assets of Sunbelt Group, LLC through its Rains Agency subsidiary. The transaction generated $4.6 million of goodwill and a $1.9 million customer-relationship intangible. Sunbelt contributed $168 thousand of revenue and $1 thousand of net income from the acquisition date through September 30, 2022.
The company entered into $100 million notional interest-rate collars during the third quarter as cash-flow hedges for a portion of its variable-rate commercial loan portfolio. It also had $151.0 million of notional customer-related interest-rate swaps at September 30, 2022.
SmartFinancial plans to adopt the current expected credit loss model in January 2023 and stated that a higher allowance for loan losses is likely. The size of the increase is not clearly provided. Adoption could materially affect the allowance, capital and earnings and may increase volatility.
Key risks include credit deterioration, concentrations in commercial real estate and construction lending, interest-rate and liquidity risk, declining real estate values, deposit pricing pressure, acquisition integration, regulatory examinations, cybersecurity, third-party service providers, litigation, inflation, recession, geopolitical events and the continuing effects of COVID-19. Management stated that pending litigation is not expected to have a material adverse impact.
Off-balance-sheet commitments included $885.9 million of commitments to extend credit and $16.1 million of standby letters of credit. The company remained above regulatory minimums and met the “well capitalized” threshold. SmartBank’s September 30, 2022 total capital ratio was 11.41%, CET1 ratio was 10.78% and leverage ratio was 8.27%.
Important facts for investors to verify
- Expected magnitude and capital impact of the January 2023 CECL adoption.
- Sustainability of strong organic loan growth and the effect of higher interest rates on credit quality, deposit costs and net interest margin.
- Exposure to commercial real estate and construction lending, including changes in criticized, nonaccrual and past-due loans.
- Realized-loss risk in the securities portfolio, which had approximately $82.0 million of aggregate unrealized losses across available-for-sale and held-to-maturity securities at September 30, 2022.
- Liquidity and funding requirements associated with $885.9 million of unused credit commitments and the March 2023 revolving-line maturity.
- Integration results, deferred payments and revenue contribution from the Sunbelt acquisition.
- Future dividend capacity, given regulatory restrictions, capital needs and the company’s quarterly $0.07-per-share dividend.