SmartFinancial, Inc. — 2022 First-Quarter Form 10-Q
Business Context and Reporting Period
SmartFinancial, Inc. is a bank holding company whose wholly owned subsidiary, SmartBank, provides commercial, residential and consumer banking services through locations in East and Middle Tennessee, Alabama and the Florida Panhandle. This unaudited quarterly report covers the three months ended March 31, 2022, with comparisons to the three months ended March 31, 2021 and balance-sheet comparisons to December 31, 2021. Amounts are in thousands unless otherwise noted.
Key Financial Metrics
| Metric | Q1 2022 | Comparable/period-end prior | Change |
|---|---|---|---|
| Interest income | $32.9 million | $29.3 million | +$3.6 million |
| Net interest income | $30.1 million | $26.3 million | +$3.9 million |
| Provision for loan and lease losses | $1.0 million | $0.1 million | +$0.9 million |
| Noninterest income | $7.1 million | $5.7 million | +$1.4 million |
| Noninterest expense | $25.7 million | $19.5 million | +$6.3 million |
| Net income | $8.3 million | $9.8 million | -$1.5 million |
| Diluted earnings per share | $0.49 | $0.65 | -$0.16 |
| Tax-equivalent net interest margin | 2.91% | 3.48% | -57 basis points |
| Return on average assets | 0.73% | 1.18% | -45 basis points |
| Return on average equity | 7.83% | 10.96% | -3.14 percentage points |
| Net loans and leases | $2.786 billion | $2.674 billion at Dec. 31, 2021 | +$111.9 million |
| Total deposits | $4.191 billion | $4.022 billion at Dec. 31, 2021 | +$169.4 million |
Net cash provided by operating activities was $10.7 million, compared with $16.1 million in Q1 2021. Investing activities used $409.6 million, primarily reflecting securities purchases and a $112.6 million net increase in loans and leases. Financing activities provided $117.8 million, including $169.6 million of deposit growth and repayment of $50.0 million of borrowings. Cash and cash equivalents ended the quarter at $764.0 million, down from $1.045 billion at December 31, 2021.
Total assets increased to $4.719 billion from $4.612 billion, while shareholders’ equity declined to $420.0 million from $429.4 million, primarily because of a $17.0 million after-tax accumulated other comprehensive loss associated largely with investment securities. Borrowings declined to $36.7 million from $87.6 million following the repayment of a $50.0 million FHLB advance. Subordinated debt was $42.0 million.
The allowance for loan and lease losses was $20.1 million, or 0.72% of total loans and leases, compared with $19.4 million and 0.72% at year-end. Nonperforming loans were 0.12% of gross loans and leases, and nonperforming assets were 0.11% of total assets at both period ends.
Material Changes Versus the Prior Comparable Period
- Net income fell 15.3%, primarily because noninterest expense increased 32.1%, exceeding growth in net interest income after provision and noninterest income.
- Net interest income increased 14.7% as average interest-earning assets expanded to $4.22 billion from $3.08 billion, aided by organic growth and the Fountain and Sevier County Bancshares acquisitions. The margin compressed because of lower earning-asset yields, reduced PPP fee accretion and excess liquidity held at low yields.
- Noninterest income increased 25.0%. Service charges, investment services, interchange fees and other income increased, while mortgage banking and insurance commissions declined.
- Higher salaries and benefits, occupancy, professional services, technology, amortization and merger-related costs drove the increase in noninterest expense. Management attributed much of the increase to acquisitions and expansion into additional Alabama and Florida markets.
- Organic net loans and leases increased 7.0% from year-end to $2.379 billion, partly offset by $24.4 million of PPP loan forgiveness. PPP loans outstanding declined to 273 loans totaling $27.9 million from 587 loans totaling $52.2 million.
- The investment portfolio increased to approximately $830.0 million from $559.4 million. The Company purchased securities and transferred $162.4 million of available-for-sale securities to held-to-maturity. Unrealized losses were attributed primarily to interest-rate and market changes rather than credit deterioration.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management stated that it currently anticipates adequate liquidity, supported by cash and marketable securities, expected security cash flows and approximately $417.6 million of unused borrowing capacity. The Company also reported that SmartFinancial and SmartBank exceeded regulatory minimums and the thresholds for “well capitalized” status at March 31, 2022.
- Management is preparing for adoption of the CECL credit-loss model in January 2023. The Company expects adoption could materially affect the allowance and may require a significant increase, but it cannot reasonably estimate the impact.
- Interest-rate sensitivity modeling estimated a 4.27% increase in 12-month net interest income for an instantaneous 100-basis-point rate increase, an 8.37% increase for a 200-basis-point increase and a 3.29% decrease for a 100-basis-point decrease.
- Key risks include credit deterioration, commercial real estate and construction exposure, changing interest rates, liquidity needs, inflation, competition, regulatory actions, acquisition integration, cybersecurity, litigation, geopolitical events and continued COVID-19 effects.
- Off-balance-sheet commitments included $723.4 million of commitments to extend credit and $17.9 million of standby letters of credit. These amounts are not necessarily future cash requirements.
- The Company had approximately $625 thousand of troubled debt restructurings at March 31, 2022, none on nonaccrual status. One $516 thousand loan was modified as a troubled debt restructuring during the quarter.
- Legal proceedings are described as ordinary-course matters, and management does not expect them to have a material adverse impact. No material changes were reported to the risk factors in the 2021 Form 10-K.
Important Facts for Investors to Verify
- Whether margin pressure persists as interest rates rise and excess liquidity is redeployed.
- The sustainability and credit quality of rapid organic loan growth, particularly in commercial real estate and construction lending.
- The size and timing of the CECL adoption adjustment and subsequent allowance volatility.
- Whether acquisition-related expenses decline and expected revenue synergies from Fountain and Sevier County Bancshares are realized.
- The magnitude and duration of accumulated other comprehensive losses in the securities portfolio as rates and bond prices change.
- Deposit retention, borrowing capacity and liquidity coverage as loan demand and customer withdrawals evolve.
- Future dividend capacity, which depends on earnings, capital, liquidity, regulatory requirements and the Bank’s ability to upstream dividends.