SmartFinancial, Inc. 2019 Q2 Form 10-Q Summary
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 offices in Tennessee, Alabama, Florida, and Georgia. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The company reported 13,953,209 common shares outstanding as of August 1, 2019.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $20.8 million | $19.5 million | $41.8 million | $36.3 million |
| Provision for loan losses | $0.4 million | $0.6 million | $1.2 million | $1.3 million |
| Noninterest income | $8.4 million | $1.6 million | $10.1 million | $3.1 million |
| Noninterest expense | $16.8 million | $15.3 million | $32.4 million | $28.5 million |
| Net income | $9.1 million | $3.9 million | $13.9 million | $7.3 million |
| Diluted EPS | $0.65 | $0.32 | $0.99 | $0.62 |
| Tax-equivalent net interest margin | 3.94% | 4.57% | 4.04% | 4.48% |
| Annualized return on average assets | 1.56% | 0.82% | 1.21% | 0.84% |
At June 30, 2019, total assets were $2.39 billion, up from $2.27 billion at December 31, 2018. Total deposits were $2.01 billion, up from $1.92 billion. Loans were $1.83 billion, net of the allowance for loan losses, compared with $1.77 billion at year-end. Shareholders’ equity was $299.6 million, compared with $283.0 million.
The allowance for loan losses was $9.1 million, or 0.50% of total loans, compared with $8.3 million, or 0.47%, at December 31, 2018. Nonperforming assets were $4.7 million, or 0.19% of total assets, compared with $5.8 million, or 0.25%, at year-end. Net charge-offs were $0.4 million for the first six months, while recoveries were $0.2 million.
Cash and cash equivalents were $199.5 million at June 30, 2019, compared with $115.8 million at December 31, 2018. For the first six months, operating activities provided $17.9 million, investing activities used $25.3 million, and financing activities provided $91.1 million. Total debt included $15.5 million of Federal Home Loan Bank advances and other borrowings and $39.2 million of subordinated debt.
Material changes versus prior periods
- Net income increased substantially, primarily reflecting a $6.4 million merger termination fee recognized in the second quarter.
- The planned merger with Entegra Financial Corp. was terminated. Merger-related and restructuring expenses were $1.8 million in the second quarter and $2.7 million for the first six months, compared with $1.1 million and $1.6 million, respectively, in the prior-year periods.
- Net interest income increased with larger average loan and securities balances, partly attributable to the 2018 Tennessee Bancshares and Foothills Bancorp acquisitions. Average earning assets increased to $2.13 billion in the second quarter from $1.72 billion.
- The net interest margin declined to 3.94% from 4.57% in the second quarter and to 4.04% from 4.48% for the first six months. Management attributed the decline primarily to higher deposit costs and lower accretion income on acquired loans.
- Average interest-bearing deposit costs increased to 1.42% in the second quarter from 0.96% and to 1.37% for the first six months from 0.88%, reflecting higher rates and competition.
- Organic net loans increased 16.9% from year-end to $1.34 billion. Purchased non-credit-impaired loans declined to $451.6 million from $584.5 million, while purchased credit-impaired loans declined to $31.6 million from $34.2 million.
- Noninterest expense increased year over year because of acquired operations, higher personnel and occupancy costs, amortization, and merger-related activity, although expense-to-average-assets ratios declined.
Outlook, risks, contingencies, and unusual items
No quantitative earnings or financial guidance was provided. Management stated that liquidity was expected to be adequate to meet customer obligations, supported by cash, securities, expected mortgage-backed security principal payments of approximately $13.1 million over the next 12 months, and unused borrowing capacity.
- Brokered deposits represented approximately 11.9% of total deposits. Rising deposit costs, competition, interest-rate changes, loan demand, and funding availability may pressure margins and liquidity.
- Unused commitments to extend credit totaled $376.0 million, and standby letters of credit totaled $15.1 million. These commitments may create future funding and credit exposure, although many are expected to expire undrawn.
- Management identified credit risk, real estate values, economic conditions, regulatory changes, acquisition integration, realization of cost savings and synergies, and litigation associated with the terminated Entegra transaction as material risks.
- Management stated that pending or threatened litigation was not expected to have a material adverse effect, but the ultimate outcome of legal matters was not determinable.
- The company adopted the new lease standard on January 1, 2019, recognizing a $2.1 million operating lease liability and a $2.1 million right-of-use asset at June 30, 2019; the adoption did not materially affect net income or cash flows.
- The company was evaluating the current expected credit loss standard. Management preliminarily expected the standard to increase the reserve for credit losses, but the ultimate impact was not yet clear.
- Unrealized losses on available-for-sale securities were considered temporary and primarily attributable to interest-rate and market changes rather than issuer credit deterioration.
Most important facts for investors to verify
- How much of the $6.4 million Entegra termination fee is nonrecurring and how reported earnings perform excluding it.
- Whether loan growth remains strong while the allowance ratio and credit quality remain adequate.
- Whether higher deposit costs continue to compress the net interest margin.
- The eventual capital and earnings impact of CECL implementation, including the company’s classification as a smaller reporting company.
- Progress in integrating the 2018 acquisitions and the realization of expected cost savings or revenue synergies.
- The company’s capital ratios and regulatory minimum compliance; the filing states that applicable ratios exceeded minimum requirements but does not provide the specific ratios in the supplied text.