SmartFinancial, Inc. 2024 Q1 Form 10-Q Summary
Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee bank holding company for SmartBank, providing commercial, residential, and consumer banking services through operations in East and Middle Tennessee, Alabama, and Florida. The filing covers the unaudited three months ended March 31, 2024, compared primarily with the three months ended March 31, 2023 and, for balance-sheet items, December 31, 2023.
Financial Performance and Key Metrics
| Metric | Q1 2024 | Comparable Period or Date |
|---|---|---|
| Total assets | $4.955 billion | $4.829 billion at December 31, 2023 |
| Interest income | $59.8 million | $53.2 million in Q1 2023 |
| Interest expense | $28.1 million | $17.2 million in Q1 2023 |
| Net interest income | $31.7 million | $36.0 million in Q1 2023 |
| Provision for credit losses | $(0.4) million credit | $0.6 million expense in Q1 2023 |
| Noninterest income | $8.4 million | $6.9 million in Q1 2023 |
| Noninterest expense | $28.6 million | $27.5 million in Q1 2023 |
| Net income | $9.4 million | $11.5 million in Q1 2023 |
| Diluted EPS | $0.55 | $0.68 in Q1 2023 |
| Return on average assets | 0.77% | 0.97% in Q1 2023 |
| Return on average equity | 8.16% | 10.79% in Q1 2023 |
| Tax-equivalent net interest margin | 2.85% | 3.31% in Q1 2023 |
Net loans and leases increased to $3.443 billion from $3.409 billion at year-end 2023. Gross loans and leases were $3.478 billion, with commercial real estate representing 50.0%, commercial and industrial loans 19.2%, consumer real estate 19.0%, and construction and land development 9.3%.
Deposits increased $126.3 million, or approximately 3.0%, to $4.394 billion. Estimated uninsured deposits were $1.92 billion, or 43.7% of total deposits. Brokered deposits represented approximately 0.39% of total deposits.
Cash and cash equivalents increased to $477.9 million from $352.3 million at December 31, 2023. Operating activities provided $7.1 million of cash, investing activities used $3.0 million, and financing activities provided $121.6 million. The company reported $906.5 million of unused borrowing capacity from the Federal Reserve, Federal Home Loan Bank, correspondent banks, and its line of credit.
Total borrowings were $9.8 million, down from $13.1 million at year-end. Subordinated debt was $42.1 million. The company had $29.0 million available under its $35.0 million revolving line of credit, which matures February 1, 2025.
The allowance for credit losses was $34.2 million, or 0.98% of gross loans and leases, compared with $35.1 million, or 1.02%, at December 31, 2023. Nonaccrual loans were $6.2 million, or 0.18% of gross loans, compared with $7.9 million, or 0.23%, at year-end. Total nonperforming assets were 0.18% of total assets.
At March 31, 2024, SmartFinancial and SmartBank exceeded minimum regulatory capital requirements and qualified as well capitalized. SmartBank's total risk-based capital ratio was 12.00%, common equity Tier 1 ratio was 11.23%, and Tier 1 leverage ratio was 9.07%.
Material Changes Versus Prior Comparable Period
- Net income declined $2.1 million, or approximately 18.6%, primarily because net interest income after credit-loss provision declined $3.3 million.
- Net interest income declined $4.3 million as interest expense increased $10.9 million, substantially exceeding the $6.6 million increase in interest income.
- The cost of average interest-bearing deposits increased to 3.16% from 2.05%, reflecting higher market rates and deposit pricing competition.
- The yield on interest-earning assets increased to 5.36% from 4.88%, but the net interest margin compressed to 2.85% from 3.31%.
- Noninterest income increased $1.5 million, including a $1.3 million gain on sale of a former branch building and higher investment-services revenue. Insurance commissions and interchange income declined.
- Noninterest expense increased $1.0 million, driven primarily by higher FDIC insurance expense and data processing and technology costs.
- Average loans and leases increased approximately $200.0 million, while average securities declined approximately $104.1 million.
- Nonperforming and past-due loan measures improved compared with December 31, 2023, although credit exposure remains concentrated in commercial and real estate-related lending.
Outlook, Commentary, Risks and Unusual Items
Management indicated that organic loan and deposit growth continued during the quarter and that available liquidity was adequate to meet expected customer obligations. No specific earnings, margin, loan-growth, or other quantitative forward guidance was provided.
Management identified sensitivity to interest rates, deposit pricing and competition, liquidity conditions, economic growth, inflation, unemployment, real estate values, commercial real estate and construction credit performance, securities valuations, regulatory changes, FDIC assessment costs, cybersecurity events, and the broader banking environment.
Interest-rate modeling indicated estimated 12-month net interest income changes of negative 0.72% for an immediate 100-basis-point increase, negative 1.16% for a 200-basis-point increase, negative 0.15% for a 100-basis-point decrease, and negative 1.18% for a 200-basis-point decrease. Management stated that results were within policy limits.
The investment portfolio included $474.3 million of available-for-sale securities with $36.9 million of gross unrealized losses and $180.2 million of held-to-maturity securities with $19.0 million of gross unrealized losses. Management attributed the losses primarily to changes in interest rates rather than credit deterioration and recorded no related credit-loss allowance.
The company had $696.8 million of commitments to extend credit and $17.9 million of standby letters of credit. It recorded a $2.0 million allowance for these off-balance-sheet commitments. Management does not expect pending or threatened litigation to have a material adverse impact.
The company paid a quarterly common-stock dividend of $0.08 per share. No shares were repurchased during the quarter; approximately $4.5 million remained available under the authorized repurchase program at March 31, 2024.
Important Facts for Investors to Verify
- Whether deposit pricing pressure and higher funding costs continue to compress the net interest margin.
- The sustainability of loan and deposit growth and the extent to which growth depends on higher-cost interest-bearing deposits.
- Credit quality trends in commercial real estate, construction and land development, and commercial and industrial portfolios.
- Changes in nonaccrual loans, criticized assets, charge-offs, and the allowance for credit losses.
- The effect of interest-rate movements on accumulated other comprehensive income, securities valuations, liquidity, and capital.
- The composition and maturity of uninsured deposits, including the $219.7 million of time deposits exceeding $250,000.
- The future impact of the floating-rate subordinated debt, including repricing terms beginning in 2024.
- The company’s ability to maintain dividends while meeting regulatory capital, liquidity, and growth requirements.
- The filing’s internal-controls discussion, which identifies an evaluation date of September 30, 2023 despite the report covering the quarter ended March 31, 2024; investors should verify whether this is a drafting error.