Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee bank holding company operating through SmartBank, which served eastern Tennessee, northwest Florida, and north Georgia through 15 offices. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The results include the combined company following the August 31, 2015 merger and the February 26, 2016 merger of SmartBank and Cornerstone Community Bank; therefore, comparisons with earlier periods are affected by merger-related scale and accounting.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total interest income | $10.8 million, versus $7.1 million | $31.6 million, versus $17.2 million |
| Net interest income | $9.7 million, versus $6.4 million | $28.4 million, versus $15.4 million |
| Provision for loan losses | $261 thousand, versus $32 thousand | $617 thousand, versus $356 thousand |
| Noninterest income | $1.2 million, versus $179 thousand | $3.2 million, versus $1.1 million |
| Noninterest expense | $8.0 million, versus $6.5 million | $24.5 million, versus $15.1 million |
| Net income | $1.6 million, versus a $77 thousand loss | $4.2 million, versus $328 thousand |
| Net income available to common shareholders | $1.3 million; diluted EPS $0.22 | $3.4 million; diluted EPS $0.56 |
Management reported third-quarter annualized return on average assets of 0.63% and return on average equity of 6.14%; nine-month figures were 0.55% and 5.38%, respectively. Tax-equivalent net interest margin was 4.03% in the quarter and 4.06% for the nine months, compared with 4.04% and 3.92% in the respective 2015 periods.
| Balance Sheet Metric | September 30, 2016 | December 31, 2015 |
|---|---|---|
| Total assets | $1.041 billion | $1.024 billion |
| Cash and cash equivalents | $58.6 million | $80.0 million |
| Securities available for sale | $138.6 million | $166.4 million |
| Gross loans | $797.1 million | $727.7 million |
| Net loans | $792.2 million | $723.4 million |
| Total deposits | $860.8 million | $858.5 million |
| FHLB advances and other borrowings | $43.0 million | $34.2 million |
| Total stockholders’ equity | $105.2 million | $100.2 million |
Net cash provided by operating activities was $12.2 million for the first nine months. Investing activities used $40.9 million, primarily reflecting $66.8 million of net loan originations and collections and $21.4 million of securities purchases. Financing activities provided $7.3 million. Cash and cash equivalents declined $21.4 million to $58.6 million.
Material Changes Versus Comparable Periods
- Net income available to common shareholders increased from a $107 thousand loss in the third quarter of 2015 to $1.3 million in the third quarter of 2016, and from $238 thousand to $3.4 million for the first nine months.
- Net interest income increased primarily because merger-related balance-sheet growth increased average earning assets, loans, and deposits. Average third-quarter earning assets rose to $953.7 million from $630.5 million.
- Noninterest income benefited from higher loan-sale gains and substantially lower losses on foreclosed-asset sales. Third-quarter gain on sale of loans and other assets was $287 thousand, compared with $66 thousand; gain on foreclosed assets was $131 thousand, compared with a $446 thousand loss.
- Noninterest expense increased in absolute dollars because of the expanded post-merger operating platform, but declined as a percentage of average assets to 3.13% from 3.66% in the third quarter and to 3.24% from 3.48% for the nine months.
- Net loans increased approximately 9.5% from year-end, including 28.8% growth in organic loans to $581.8 million. Purchased credit-impaired loans declined to $28.8 million from $38.3 million.
- Asset quality improved: nonperforming assets declined to $3.9 million from $8.1 million, and nonperforming assets as a percentage of total assets declined to 0.38% from 0.79%. The allowance for loan losses increased to $5.0 million from $4.4 million, or 0.63% of total loans versus 0.60%.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantitative earnings or operating guidance. Management emphasized continued loan growth, merger-related efficiencies, and improving economies in its markets. Management stated that liquidity and interest-rate sensitivity had not materially changed from December 31, 2015 and that regulatory capital ratios exceeded minimum requirements, although specific ratios are not provided in the filing text.
- Credit risk is concentrated in commercial real estate, consumer real estate, and construction and land development loans, which together represented approximately 88.6% of gross loans.
- Management identified risks from local economic conditions, collateral values, loan losses, foreclosures, interest-rate changes, competition, regulation, technology, key-person retention, and the ability to realize merger benefits.
- At September 30, 2016, the Bank had $135.8 million of unfunded commitments to extend credit and $2.9 million of standby letters of credit.
- Brokered deposits represented approximately 8.7% of total deposits. Short-term borrowings totaled $43.0 million; the filing states there was no long-term debt outstanding.
- Restructured loans totaled approximately $3.4 million, including $451 thousand on nonaccrual status. Potential problem loans totaled approximately $617 thousand.
- The filing states that pending legal claims are not expected to have a material effect. The financial statements are unaudited, and management notes that allowance, foreclosed-asset valuation, deferred-tax, impairment, and fair-value estimates may change materially.
- Recently issued accounting standards, including the current expected credit loss model, were under evaluation; the filing does not quantify their eventual impact.
Investor Verification Items
- Verify that loan growth remains supported by underwriting quality, particularly in commercial real estate and construction lending.
- Monitor nonperforming assets, criticized loans, charge-offs, recoveries, and the adequacy of the allowance as the portfolio expands.
- Assess whether noninterest income gains and improved foreclosed-asset results are recurring or unusually favorable.
- Evaluate deposit mix, brokered-deposit reliance, borrowing maturities, and the decline in cash and securities available for liquidity.
- Confirm post-merger expense synergies and whether reported profitability is sustainable after merger-related comparisons normalize.
- Review regulatory capital ratios and the potential effects of the future credit-loss accounting standard, which are not fully quantified in the provided filing text.