SmartFinancial, Inc. 2022 Form 10-K Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee bank holding company operating primarily through SmartBank, a community bank serving East and Middle Tennessee, Alabama and the Florida Panhandle. The filing covers the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter filing. SmartBank operated 41 full-service branches and one loan production office at year-end.
The Company provides commercial and consumer banking, mortgage banking, equipment finance, investment services and insurance services. On September 1, 2022, its insurance subsidiary acquired substantially all assets of Sunbelt Group, LLC for $6.5 million, including $5.2 million paid at closing and deferred payments due in 2023 and 2024.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total assets | $4.637 billion | $4.612 billion | Up $25.9 million |
| Net loans and leases | $3.230 billion | $2.674 billion | Up $556.2 million |
| Total deposits | $4.077 billion | $4.022 billion | Up $55.2 million |
| Borrowings | $41.9 million | $87.6 million | Down $45.7 million |
| Subordinated debt | $42.0 million | $41.9 million | Essentially flat |
| Shareholders’ equity | $432.5 million | $429.4 million | Up $3.0 million |
| Net interest income | $137.5 million | $113.4 million | Up 21.3% |
| Provision for loan losses | $4.0 million | $1.6 million | Up $2.4 million |
| Noninterest income | $27.7 million | $23.9 million | Up 15.7% |
| Noninterest expense | $106.3 million | $91.4 million | Up 16.3% |
| Net income | $43.0 million | $34.8 million | Up 23.7% |
| Diluted EPS | $2.55 | $2.22 | Up 14.9% |
| Return on average assets | 0.92% | 0.91% | Up 1 basis point |
| Return on average equity | 10.16% | 8.97% | Up 119 basis points |
| Tax-equivalent net interest margin | 3.20% | 3.24% | Down 4 basis points |
| Efficiency ratio | 64.33% | 66.54% | Improved 221 basis points |
Cash and cash equivalents declined to $266.4 million from $1.045 billion, primarily reflecting $558.4 million of net loan growth and investment-security purchases. Operating cash flow was $56.8 million, compared with $46.2 million in 2021, while investing activities used $840.8 million.
The allowance for loan and lease losses was $23.3 million, or 0.72% of loans and leases, unchanged as a percentage of the portfolio. Net charge-offs were approximately zero, and nonperforming loans were 0.09% of gross loans and leases versus 0.12% in 2021. Nonperforming assets were 0.10% of total assets versus 0.11%.
SmartFinancial reported regulatory capital ratios above minimum requirements. At December 31, 2022, SmartBank’s CET1 ratio was 10.82%, total capital ratio was 11.44% and leverage ratio was 8.90%; the Bank was classified as well capitalized.
Material changes versus the prior comparable period
- Net loans and leases increased 20.8%, driven primarily by organic production from expansion teams in Alabama, Florida and Nashville. Commercial real estate represented 50.0% of gross loans, while construction and land development represented 12.4%.
- Average earning assets increased to $4.315 billion from $3.522 billion. Higher asset yields and deployment of excess liquidity increased interest income, but higher deposit pricing increased interest expense and compressed the net interest margin.
- Average interest-bearing deposit costs rose to 0.60% from 0.36%, reflecting Federal Reserve rate increases and deposit competition. The Federal Reserve increased its federal funds target rate seven times in 2022, by a total of 4.25%.
- Noninterest income benefited from higher service charges, investment services, insurance commissions, interchange fees and capital-markets activity. Mortgage banking income fell to $1.6 million from $4.0 million because higher rates reduced mortgage volume.
- Noninterest expense increased by $14.9 million, primarily from salaries and benefits, branch and infrastructure expansion, technology, FDIC insurance and other growth-related costs. Merger-related and restructuring expense declined to $0.6 million from $3.7 million.
- Available-for-sale securities had net unrealized losses of $45.3 million at year-end, compared with a net unrealized gain of $33 thousand in 2021. The Company attributed the losses primarily to higher interest rates and transferred $162.4 million of securities to held-to-maturity during 2022.
- Accumulated other comprehensive loss increased to $35.3 million from accumulated other comprehensive income of $1.4 million, primarily due to securities and hedging losses.
Guidance, outlook, management commentary and risks
Management did not provide formal earnings or revenue guidance. It stated that it expects to continue organic loan and deposit growth, selective expansion and disciplined merger-and-acquisition activity. Management expected the Company and SmartBank to remain above applicable well-capitalized standards in 2023.
Effective January 1, 2023, the Company adopted the CECL methodology. It estimated an allowance for credit losses of approximately $32.0 million, a liability for unfunded commitments of $3.1 million and a $6.6 million after-tax reduction to equity at adoption. These amounts were estimates and may change with portfolio composition, credit performance and economic forecasts.
The Company estimated that an immediate 200-basis-point increase in short-term rates would reduce net interest income by approximately $1.3 million over 12 months under its static model. It described itself as slightly liability-sensitive. Deposit competition, funding costs, liquidity, securities valuation and borrower repayment capacity remain important sensitivities.
- Credit concentration: approximately 77% of loans and leases had real estate as a primary or secondary collateral component, and approximately 80% of the loan portfolio was concentrated in real-estate-secured loans in the broader regulatory disclosure.
- Commercial real estate and construction lending expose the Company to declines in property values, occupancy, business cash flows and local economic conditions.
- The Company operates in geographically concentrated markets, including tourism-sensitive areas, and lends substantially to small and medium-sized businesses.
- Liquidity risk could increase if customers withdraw uninsured deposits or shift funds to higher-yielding alternatives. Approximately $1.65 billion of deposits were estimated to be uninsured at year-end.
- The Company had $912.0 million of unused commitments to extend credit and $6.9 million of standby letters of credit. These commitments may not be fully drawn.
- The Company had $76.5 million of unsecured federal funds lines, $74.1 million of Federal Reserve discount-window capacity and $589.8 million of additional FHLB borrowing availability, with no FHLB advances outstanding at year-end.
- LIBOR transition remains relevant to certain loans, derivatives and subordinated debt. The Company expected to complete loan transitions to SOFR by June 30, 2023.
- Cybersecurity, third-party technology providers, regulatory changes, acquisition integration, competition, employee retention and potential loan-loss increases are identified as material risks.
- The Company reported no material litigation, no unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting. The internal-control assessment excluded Sunbelt, which represented 0.38% of consolidated revenue and 0.15% of consolidated assets.
Important facts for investors to verify
- Reconcile 2022 loan growth with deposit growth, cash depletion and available wholesale liquidity, particularly under continued deposit repricing pressure.
- Review the impact of CECL adoption, including the final allowance, unfunded-commitment reserve and effect on regulatory capital.
- Assess commercial real estate and construction exposure, collateral values, criticized loans and changes in nonperforming assets.
- Monitor unrealized securities losses, accumulated other comprehensive loss and the potential effect of future securities sales or funding needs.
- Verify the sustainability of net interest income and margin performance as deposit costs continue to rise and rate expectations change.
- Review Sunbelt’s contribution, deferred purchase payments and the Company’s broader acquisition integration and goodwill exposure.
- Confirm the terms and refinancing or repricing implications of the $42.0 million subordinated debt, including the transition from LIBOR-based pricing beginning in 2023 and 2024.
- Consider dividend capacity: the Company paid $0.28 per share in 2022, but dividends depend on earnings, capital, liquidity and regulatory restrictions.