SmartFinancial, Inc. 2017 First-Quarter 10-Q Summary
Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee bank holding company whose wholly owned subsidiary, SmartBank, provides commercial, residential, consumer and related banking services through 13 branches, two loan production offices and one mortgage production office in eastern Tennessee, the Florida Panhandle and north Georgia. The filing covers the unaudited three months ended March 31, 2017. This was the fourth full quarter since the February 26, 2016 merger of SmartBank and Cornerstone Community Bank.
Key Financial Metrics
| Metric | Q1 2017 | Comparable period or date |
|---|---|---|
| Net income | $1.64 million | $1.35 million in Q1 2016 |
| Net income available to common shareholders | $1.45 million | $1.14 million in Q1 2016 |
| Diluted earnings per share | $0.19 | $0.19 in Q1 2016 |
| Total assets | $1.051 billion | $1.062 billion at December 31, 2016 |
| Net loans | $802.4 million | $808.3 million at December 31, 2016 |
| Total deposits | $889.7 million | $907.1 million at December 31, 2016 |
| Cash and cash equivalents | $55.5 million | $68.7 million at December 31, 2016 |
| Stockholders’ equity | $132.6 million | $105.2 million at December 31, 2016 |
| Net interest income | $9.82 million | $9.13 million in Q1 2016 |
| Tax-equivalent net interest margin | 4.07% | 4.01% in Q1 2016 |
| Return on average assets | 0.64% | 0.54% in Q1 2016 |
| Nonperforming assets to total assets | 0.37% | 0.42% at December 31, 2016 |
Interest income increased to $10.95 million from $10.15 million, while interest expense increased to $1.13 million from $1.02 million. The provision for loan losses declined to $12,450 from $137,557. Noninterest income decreased to $926,708 from $1.07 million, principally because Q1 2017 included no securities gain and recorded a loss on foreclosed-asset sales. Noninterest expense increased to $8.14 million from $7.95 million, driven primarily by salaries and professional services. The effective tax rate was approximately 36.5%.
Net cash provided by operating activities was $2.62 million, compared with $3.86 million in Q1 2016. Investing activities used $1.86 million, compared with $4.00 million used in the prior-year period. Financing activities used $13.96 million, including a $12.0 million preferred-stock redemption, a $17.4 million decrease in deposits and a $3.5 million reduction in repurchase-agreement borrowings. Common-stock issuance provided $37.5 million. Cash and cash equivalents decreased by $13.2 million during the quarter.
At March 31, 2017, the allowance for loan losses was $5.15 million, or 0.64% of total loans. Gross loans were $807.5 million, including $26.6 million of purchased credit-impaired loans. Net charge-offs were $35,000, consisting of $25,000 of charge-offs and $60,000 of recoveries.
Material Changes Versus Prior Comparable Period
- Net income increased 21.9% and net income available to common shareholders increased 27.4% year over year, although diluted EPS remained $0.19 because of substantially higher average shares outstanding.
- Net interest income increased approximately 7.5%, supported by a $76.6 million increase in average loan balances and higher securities yields. Average earning assets increased to $979.5 million from $926.7 million.
- The tax-equivalent net interest margin improved six basis points to 4.07%; the yield on earning assets increased to 4.54% from 4.41%.
- Noninterest income declined approximately 13.5% because the company had no securities-sale gain in 2017 and recorded a loss rather than a gain on foreclosed-asset sales.
- Organic net loans increased $13.8 million, or 2.2%, to $625.7 million. Purchased non-credit-impaired loans declined to $150.1 million from $169.2 million, while purchased credit-impaired loans declined to $26.6 million from $27.2 million.
- Nonperforming loans declined to $1.47 million from $2.11 million, and total nonperforming assets declined to $3.84 million from $4.50 million.
- The company completed a public offering of 2,010,084 common shares on January 30, 2017, generating approximately $33.2 million of net proceeds. It used the proceeds to redeem the $12.0 million of SBLF preferred stock and pay $195,000 of accrued dividends on March 6, 2017.
- Common shares outstanding increased to 8.21 million at March 31, 2017, from 5.90 million at December 31, 2016. Preferred stock was no longer outstanding at quarter-end.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings, revenue or balance-sheet guidance. Management stated that loan growth, higher securities yields, increased noninterest-bearing deposits and reductions in FHLB borrowings supported the quarter’s margin improvement. Management also cited operating efficiencies from scale and an improving economic environment in its markets.
Management identified risks involving deterioration in asset quality, higher loan losses, foreclosed assets, liquidity needs, competition, local economic conditions, interest-rate changes, regulatory requirements, capital-market conditions, technology, key personnel and the ability to realize merger benefits. Commercial real estate and construction and land-development loans carry comparatively higher credit risk. Management stated that liquidity and interest-rate sensitivity had not materially changed from December 31, 2016, and that bank and company capital ratios exceeded regulatory minimums; specific ratios were not included in the provided filing text.
Off-balance-sheet commitments at March 31, 2017 included $133.4 million of commitments to extend credit and $2.9 million of standby letters of credit. Brokered deposits represented approximately 7.6% of total deposits. Management stated that pending legal claims were not expected to have a material effect on consolidated financial condition, results or cash flow.
The financial statements are unaudited, and management’s estimates for the allowance for loan losses, foreclosed assets, deferred taxes, securities impairment and financial-instrument fair values could change materially. Securities available for sale had $1.36 million of gross unrealized losses, which management attributed principally to interest-rate conditions rather than credit deterioration.
Important Facts for Investors to Verify
- Confirm the sustainability of organic loan growth and the effect of loan mix, particularly commercial real estate and construction lending, on future credit losses.
- Monitor deposit outflows, brokered-deposit reliance, liquidity sources and the maturity schedule of large time deposits.
- Assess whether the improved 4.07% net interest margin can be maintained as deposit costs and market interest rates change.
- Reconcile the benefit of the common-equity offering and preferred-stock redemption with the dilution reflected in per-share results.
- Review future performance of purchased and purchased credit-impaired loans, including the remaining purchase discount and accretion income.
- Track nonperforming loans, foreclosed assets, potential problem loans of approximately $995,000 and the adequacy of the $5.15 million allowance.
- Obtain and review the company’s reported regulatory capital ratios, which are described qualitatively in this filing but not numerically in the provided text.