SmartFinancial, Inc. 2020 Form 10-K Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee bank holding company operating primarily through SmartBank, a Tennessee-chartered commercial bank serving East and Middle Tennessee, Alabama, and the Florida Panhandle. SmartBank provides commercial, real estate, construction, consumer, mortgage, wealth-management, and insurance services through 35 full-service branches, a loan production office, and a service center as of March 1, 2021.
This Form 10-K covers the fiscal year ended December 31, 2020, filed March 16, 2021. The filing is an annual report rather than a quarterly report. The period includes the March 1, 2020 acquisition of Progressive Financial Group, Inc. (“PFG”).
Financial performance and condition
| Metric | 2020 | 2019 | Change or comment |
|---|---|---|---|
| Net income | $24.3 million | $26.5 million | Down 8.3% |
| Diluted earnings per share | $1.62 | $1.89 | Down 14.3%; share count increased |
| Net interest income | $100.9 million | $83.9 million | Up $17.0 million |
| Tax-equivalent net interest income | $101.4 million | $84.3 million | Up $17.1 million |
| Tax-equivalent net interest margin | 3.61% | 3.95% | Down 34 basis points |
| Provision for loan losses | $8.7 million | $2.6 million | Increase primarily related to COVID-19 uncertainty |
| Noninterest income | $15.4 million | $15.3 million | Broadly stable; 2019 included a $6.4 million merger termination fee |
| Noninterest expense | $76.7 million | $63.2 million | Up $13.6 million, including PFG-related growth and costs |
| Return on average assets | 0.79% | 1.13% | Down 34 basis points |
| Total assets at year-end | $3.30 billion | $2.45 billion | Record level; up $855.8 million |
| Net loans at year-end | $2.36 billion | $1.89 billion | Up $476.7 million |
| Deposits at year-end | $2.81 billion | $2.05 billion | Up $758.0 million |
| Cash and cash equivalents | $481.7 million | $184.0 million | Significant increase |
| Shareholders’ equity | $357.2 million | $312.7 million | Up $44.4 million |
Net interest income benefited from larger average earning assets, the PFG acquisition, organic loan growth, and PPP participation. Average earning assets increased to $2.81 billion from $2.14 billion. The yield on earning assets declined to 4.20% from 5.10%, while the average cost of interest-bearing deposits declined to 0.71% from 1.35%.
Net cash provided by operating activities was $29.1 million, compared with $29.9 million in 2019. Investing activities used $259.3 million, primarily because of net loan growth and securities purchases, partly offset by $46.1 million of cash received in the PFG acquisition. Financing activities provided $528.0 million, including deposit growth and borrowings. Cash dividends paid were $3.0 million, and common stock repurchases totaled $4.3 million.
The allowance for loan losses increased to $18.3 million from $10.2 million, or 0.77% of total loans versus 0.54%. Net charge-offs were $580 thousand, or 0.03% of average loans. Nonperforming loans were $5.8 million, or 0.24% of gross loans, compared with 0.18% in 2019. Total nonperforming assets were $10.4 million, or 0.31% of total assets, compared with 0.21%.
At year-end, total borrowings were $81.2 million, including $75.0 million of FHLB advances, and subordinated debt was $39.3 million. The company also had a $25.0 million revolving line of credit with no outstanding balance. Liquidity included $69.6 million of unused unsecured federal funds lines, $149.2 million of Federal Reserve discount-window capacity, and $35.5 million of additional FHLB borrowing capacity.
SmartBank was classified as well-capitalized at December 31, 2020. Its total risk-based capital ratio was 13.57%, CET1 ratio was 12.78%, Tier 1 risk-based capital ratio was 12.78%, and leverage ratio was 9.58%.
Material changes versus the prior comparable period
- PFG was acquired on March 1, 2020 for total consideration of $34.4 million, including $24.5 million of SmartFinancial stock and $9.8 million of cash. The acquisition added approximately $301 million of assets, $272 million of liabilities, and $8.5 million of goodwill.
- The company originated approximately 2,950 PPP loans totaling $300.8 million. At December 31, 2020, approximately 2,863 PPP loans with $288.9 million of principal remained outstanding. PPP fee income totaled approximately $11.0 million, of which $5.9 million was recognized in 2020.
- Organic net loans increased 31.1% to $1.98 billion, while total loans grew substantially because of PFG and PPP lending.
- Deposits increased substantially, driven by the PFG acquisition and PPP-related deposit balances. Brokered deposits represented approximately 2.2% of total deposits at year-end.
- Noninterest income was flat despite the absence of the $6.4 million Entegra merger termination fee recognized in 2019. Mortgage banking, investment services, insurance commissions, interchange fees, and deposit service charges increased.
- Noninterest expense rose $13.6 million, reflecting higher personnel, occupancy, FDIC insurance, professional-services, and merger-related costs.
- The company repurchased 133,711 shares during the fourth quarter at a weighted average price of $16.70. Approximately $5.7 million remained available under the $10.0 million authorization at year-end.
- The company has not adopted CECL and expects adoption to be required beginning January 1, 2023 because it qualifies as a smaller reporting company.
Guidance, outlook, commentary, risks, and unusual items
Management stated that SmartBank was expected to continue exceeding applicable well-capitalized regulatory requirements and the capital conservation buffer in 2021. No formal earnings or revenue guidance was provided.
Management identified COVID-19 as the principal unusual operating factor. COVID-related qualitative adjustments, including modified-loan levels, local case counts, and additional sensitivity to hospitality and restaurant exposures, contributed approximately $8.3 million to the year-end allowance. Loans remaining under COVID-19 modifications totaled $17.2 million, or 0.7% of total loans, at year-end.
The loan portfolio remains concentrated in real estate and commercial lending. Approximately 72% to 73% of loans had real estate as a primary or secondary collateral component, and commercial real estate, including commercial construction, represented approximately 51% of loans. The ten largest borrowing relationships totaled approximately $192 million, or 8% of total loans. Management reported that the portfolio was below the regulatory concentration thresholds for construction and total commercial real estate lending, but future growth in those categories could be constrained by capital growth.
Key risks include further COVID-19-related credit deterioration, higher loan losses, weakness in Tennessee and other operating markets, tourism and hospitality exposure, interest-rate and net-interest-margin pressure, liquidity and funding risk, cybersecurity and third-party systems risk, regulatory restrictions, integration and synergy risks from PFG, competition, and the transition away from LIBOR. The company is asset-sensitive; its model estimated that an immediate 200-basis-point rate increase would increase net interest income by approximately $11.9 million over 12 months, while a 200-basis-point decrease would reduce it by approximately $2.4 million.
Other notable items include $74.1 million of goodwill with no impairment identified at December 31, 2020; $4.6 million of other real estate owned; $201 thousand of gross unrealized losses on available-for-sale securities considered temporary; and $476.8 million of unused loan commitments plus $5.3 million of standby letters of credit. The company and auditor reported effective internal control over financial reporting, with the PFG operation excluded from the scope of the control assessment because it was acquired during 2020.
Important facts for investors to verify
- Whether PPP loan forgiveness, fee accretion, and runoff will materially affect future loan balances, interest income, and fee revenue.
- Whether COVID-19 modifications and the large increase in the allowance adequately reflect eventual credit losses, particularly in commercial real estate, construction, hospitality, and restaurant exposures.
- Whether the PFG acquisition generates the expected revenue synergies, cost savings, deposit retention, and asset quality outcomes after full-year integration.
- Whether declining asset yields and continued low interest rates further compress the net interest margin.
- The timing and balance-sheet impact of CECL adoption beginning in 2023.
- The company’s ability to maintain liquidity and capital while loan growth, contractual obligations, and unused commitments remain elevated.
- The sustainability of dividends and share repurchases, given regulatory capital, earnings, liquidity, and dividend restrictions.
- The company’s progress in replacing LIBOR references in loans, derivatives, and subordinated debt before applicable transition deadlines.