SmartFinancial, Inc. 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee bank holding company operating through SmartBank, which provides commercial, residential, and consumer banking services through 14 branches, a loan production office, and a mortgage production office in eastern Tennessee, northwest Florida, and north Georgia. This unaudited report covers the quarter and six months ended June 30, 2017, compared primarily with the same periods in 2016 and December 31, 2016 for balance-sheet measures.
On May 19, 2017, SmartBank completed the acquisition of an Atlantic Capital Bank branch in Cleveland, Tennessee. On May 22, 2017, SmartFinancial announced a pending merger with Capstone Bancshares, Inc. and Capstone Bank.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Net income | $1.65 million | $1.19 million | $3.29 million | $2.54 million |
| Net income available to common shareholders | $1.65 million | $0.92 million | $3.10 million | $2.06 million |
| Diluted earnings per share | $0.20 | $0.15 | $0.39 | $0.34 |
| Net interest income | $10.25 million | $9.61 million | $20.07 million | $18.74 million |
| Provision for loan losses | $0.30 million | $0.22 million | $0.31 million | $0.36 million |
| Noninterest income | $1.25 million | $0.96 million | $2.18 million | $2.03 million |
| Noninterest expense | $8.83 million | $8.47 million | $16.97 million | $16.42 million |
- Tax-equivalent net interest margin was 4.15% in the second quarter and 4.11% for the first six months, compared with 4.16% and 4.06%, respectively, in the comparable 2016 periods.
- Annualized return on average assets was 0.61% in the second quarter, compared with 0.48% in the prior-year quarter.
- Effective tax rates were approximately 30.6% for the quarter and 33.7% for the six months, compared with 36.7% and 36.4%, respectively, in 2016.
Balance Sheet, Capital, Liquidity, and Cash Flow
- Total assets increased to $1.15 billion at June 30, 2017, from $1.06 billion at December 31, 2016. Net loans increased to $859.9 million from $808.3 million, while total deposits increased to $981.6 million from $907.1 million.
- Organic net loans increased $62.0 million, or 10.1%, to $674.0 million. Gross loans increased $52.0 million during the first six months, including purchased loans.
- Cash and cash equivalents were $82.8 million, compared with $68.7 million at year-end. Securities available for sale were $132.8 million.
- There were no Federal Home Loan Bank advances or other borrowings outstanding at June 30, 2017, compared with $18.5 million at December 31, 2016. Repurchase-agreement liabilities were $22.9 million.
- Stockholders’ equity increased to $134.7 million from $105.2 million, supported by a January 2017 common-stock offering and earnings. The company issued approximately 2.0 million common shares and received approximately $33.2 million of net proceeds.
- Six-month operating cash flow was $5.6 million, investing cash flow was negative $42.5 million, and financing cash flow was $50.9 million, resulting in a $14.1 million increase in cash and cash equivalents.
- At June 30, 2017, the Bank had $154.1 million of commitments to extend credit and $2.8 million of standby letters of credit. Brokered deposits represented approximately 13.0% of total deposits.
- Management stated that the company and Bank exceeded regulatory minimum capital requirements; the filing text does not provide the specific capital ratios.
Material Changes Versus Prior Comparable Period
- Second-quarter net income available to common shareholders increased approximately 79% year over year, while diluted EPS increased to $0.20 from $0.15. Six-month diluted EPS increased to $0.39 from $0.34.
- Net interest income increased primarily because of higher average loan balances. Average earning assets increased to $992.1 million in the quarter from $928.7 million, and average loans increased by $83.2 million.
- Noninterest income increased due mainly to higher SBA and mortgage loan-sale volumes; second-quarter gains on loan and other asset sales were $405,000 versus $197,000.
- Noninterest expense increased because of merit-based salary increases and merger and conversion costs, although noninterest expense declined as a percentage of average assets.
- Asset quality improved. Nonperforming loans declined to $1.1 million from $2.1 million at year-end, and nonperforming assets declined to $3.5 million from $4.5 million. Nonperforming assets were 0.30% of total assets versus 0.42% at year-end.
- The allowance for loan losses increased to $5.5 million from $5.1 million, or 0.64% of total loans versus 0.63%. Six-month net charge-offs were $83,000, compared with net recoveries of $37,000 in 2016.
- The Cleveland branch acquisition added approximately $24.1 million of loans and $26.9 million of deposits at fair value, with $660,000 of goodwill and $310,000 of core deposit intangible recognized. The branch contributed $178,847 of revenue and $52,465 of net income during the six months.
- The company redeemed the $12.0 million of SBLF preferred stock and paid $195,000 of accrued preferred dividends in March 2017. No preferred shares remained outstanding at June 30, 2017.
Guidance, Outlook, Risks, and Unusual Items
No formal earnings or financial guidance was provided. Management emphasized continued organic loan growth, scale efficiencies, and the pending Capstone acquisition, which it expected would increase assets to more than $1.5 billion upon completion.
- Key risks include deterioration in asset quality, higher loan losses, increased foreclosed real estate, liquidity needs, competition, local economic conditions, interest-rate changes, commercial real estate and construction-loan exposure, regulatory developments, technology changes, and retention of key personnel.
- The Capstone merger is subject to completion and may not deliver the anticipated benefits. Merger and conversion costs were already contributing to higher operating expenses.
- Management identified allowance adequacy, foreclosed-asset valuation, deferred taxes, securities impairment, and financial-instrument fair values as significant estimates subject to change.
- Unrealized losses on securities available for sale totaled $830,000 at June 30, 2017. Management attributed them primarily to interest-rate conditions and did not consider the securities other-than-temporarily impaired.
- The filing states that pending legal claims are not expected to have a material effect, although outcomes of individual matters were not determinable.
- Disclosure controls and procedures were deemed effective, and no material changes in internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Completion timing, consideration, integration costs, and expected financial benefits of the Capstone Bancshares merger.
- Sustainability of loan growth and deposit growth, including reliance on brokered deposits and the changing cost of interest-bearing deposits.
- Credit quality trends in commercial real estate, construction and land development, and other real-estate-secured loans.
- Adequacy of the $5.5 million allowance for loan losses relative to portfolio growth, local economic conditions, and regulatory review.
- Interest-rate sensitivity, future funding needs, and the effect of higher deposit costs on net interest margin.
- Specific regulatory capital ratios and any conditions attached to the company’s statement that capital exceeded minimum requirements.