SmartFinancial, Inc. 2019 Q1 Form 10-Q Summary
Business context and reporting period
SmartFinancial, Inc. is a bank holding company for SmartBank, providing banking services to individuals and businesses through offices in Tennessee, Alabama, Florida, and Georgia. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018. The company reported 13,951,590 common shares outstanding as of May 1, 2019.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net income available to common shareholders | $4.7 million | $3.4 million | Increase of approximately 38.5% |
| Diluted earnings per share | $0.34 | $0.30 | Increase of approximately 13.3% |
| Net interest income | $21.0 million | $16.8 million | Increase of approximately 24.9% |
| Provision for loan losses | $0.8 million | $0.7 million | Increase of approximately 15.7% |
| Noninterest income | $1.7 million | $1.5 million | Increase of approximately 16.7% |
| Noninterest expense | $15.6 million | $13.2 million | Increase of approximately 17.8% |
| Income before income taxes | $6.3 million | $4.4 million | Increase of approximately 45.1% |
| Income tax expense | $1.6 million | $0.9 million | Effective tax rate increased to 25.1% from 21.6% |
| Net interest margin, taxable equivalent | 4.10% | 4.35% | Decline of 25 basis points |
| Yield on earning assets, taxable equivalent | 5.25% | 5.01% | Increase of 24 basis points |
| Annualized return on average assets | 0.84% | 0.80% | Improvement of 4 basis points |
Balance sheet, liquidity, and capital
- Total assets were $2.354 billion at March 31, 2019, up from $2.274 billion at December 31, 2018.
- Loans, net of the allowance, were $1.832 billion, compared with $1.769 billion at year-end 2018. Gross loans increased approximately 3.6% during the quarter, driven primarily by organic loan growth.
- Total deposits were $1.994 billion, up $72.4 million from December 31, 2018. Brokered deposits represented approximately 13.3% of total deposits.
- Cash and cash equivalents increased to $133.0 million from $115.8 million at year-end.
- Available-for-sale securities were $198.3 million, compared with $201.7 million at December 31, 2018. Approximately $108.0 million of securities were pledged as collateral.
- Subordinated debt was $39.2 million. Federal Home Loan Bank advances and other borrowings were $8.6 million, down from $11.2 million at year-end. Repurchase agreement balances were $7.1 million.
- Shareholders’ equity increased to $290.5 million from $283.0 million, helped by net income and a $2.3 million improvement in accumulated other comprehensive income.
- Management stated that the company and bank exceeded regulatory minimum capital requirements. Specific capital ratios are not provided in the filing text excerpt.
- Operating cash flow was $7.7 million. Investing activities used $55.6 million, primarily for net loan originations, while financing activities provided $65.1 million, primarily from deposit growth and borrowings. Cash increased $17.2 million during the quarter.
- Off-balance-sheet commitments included $356.0 million of commitments to extend credit and $14.6 million of standby letters of credit. Management expects adequate liquidity and cited available securities, Federal Home Loan Bank, Federal Reserve, and correspondent-bank borrowing capacity.
Material changes versus the prior comparable period
- Average earning assets increased from $1.569 billion to $2.090 billion, principally due to the Tennessee Bancshares and Foothills Bancorp mergers completed in 2018. Average loans increased $449.7 million.
- Net interest income increased $4.3 million on higher asset balances and higher loan and securities yields. However, the net interest margin declined because funding costs increased.
- The average cost of interest-bearing deposits increased to 1.32% from 0.79%, reflecting deposit mix changes and higher deposit rates. Subordinated debt also generated $0.6 million of interest expense in Q1 2019, compared with none in Q1 2018.
- Noninterest expenses increased $2.4 million, primarily from acquired operations, higher salaries and benefits, occupancy, deposit-related costs, amortization, and merger expenses.
- Merger expenses increased to $0.9 million from $0.5 million, including costs related to the proposed Entegra Financial transaction.
- Organic loans increased $133.5 million, or 11.6%, from year-end 2018 to $1.3 billion. Purchased non-credit-impaired loans declined to $515.3 million from $584.5 million, while purchased credit-impaired loans declined to $32.8 million from $34.2 million.
- Credit quality improved overall. Nonperforming loans declined to $2.3 million from $3.3 million, and nonperforming assets declined to $4.3 million from $5.8 million. Nonperforming loans represented 0.12% of gross loans, compared with 0.18% at year-end.
- The allowance for loan losses increased to $8.7 million from $8.3 million but remained 0.47% of total loans. Net charge-offs were $0.4 million, and the provision was $0.8 million.
Guidance, outlook, risks, contingencies, and unusual items
- No formal earnings or financial guidance is provided. Management expects continued adequate liquidity and reported no material change in interest-rate sensitivity from December 31, 2018.
- On April 23, 2019, Entegra Financial terminated the previously announced merger agreement to enter into a competing transaction. SmartFinancial received a $6.4 million termination fee. The company identified potential effects on its stock price, customer and employee retention, reputation, strategy, litigation exposure, and recovery of merger-related costs.
- Management identified credit risk, interest-rate changes, loan demand, real estate values, competition, economic conditions, regulatory changes, acquisition integration, and the realization of acquisition-related cost savings and revenue synergies as material risks.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing right-of-use assets and lease liabilities of approximately $2.3 million each at adoption and $2.2 million each at March 31, 2019. The adoption did not materially affect earnings or cash flows.
- The company expects the future current expected credit loss standard, ASU 2016-13, to increase its credit-loss reserve, although the extent of the impact remains under evaluation. The standard is effective for the company beginning in 2020.
- Available-for-sale securities had $2.3 million of gross unrealized losses at March 31, 2019. Management attributed the losses primarily to interest-rate conditions and did not consider the securities other-than-temporarily impaired.
- Legal proceedings arise in the ordinary course of business. Management does not expect pending matters to have a material effect on financial position, results of operations, or cash flow.
- Disclosure controls and procedures were assessed as effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the $6.4 million Entegra termination fee offsets the strategic, reputational, litigation, and transaction-cost consequences of the terminated merger.
- Whether deposit costs continue to rise and further compress the 4.10% net interest margin.
- The sustainability and credit risk of the 11.6% organic loan growth, particularly in commercial real estate and commercial and industrial lending.
- The adequacy of the $8.7 million allowance for loan losses and the eventual impact of ASU 2016-13 on reserves and capital.
- The level and stability of brokered deposits, which represented 13.3% of total deposits, and the company’s access to contingent funding sources.
- The company’s specific regulatory capital ratios, which the filing states exceeded minimum requirements but does not clearly provide in the excerpt.
- Whether acquisition-related expense reductions and anticipated cost savings or revenue synergies are realized after the 2018 mergers.