Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee bank holding company operating through SmartBank, serving individuals and businesses in eastern Tennessee, northwest Florida, and north Georgia. This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparison to March 31, 2015 and December 31, 2015 balance-sheet data.
The February 26, 2016 merger of SmartBank and Cornerstone Community Bank was completed during the quarter, following the August 31, 2015 merger of Legacy SmartFinancial and Cornerstone Bancshares. Because of the merger, current-period results are not fully comparable with the prior-year period.
Financial Performance and Position
| Metric | Q1 2016 | Comparable period |
|---|---|---|
| Total interest income | $10.2 million | $5.0 million in Q1 2015 |
| Net interest income | $9.1 million | $4.5 million in Q1 2015 |
| Net interest margin | 3.96% | 3.79% in Q1 2015 |
| Noninterest income | $1.1 million | $0.8 million in Q1 2015 |
| Noninterest expense | $8.0 million | $4.3 million in Q1 2015 |
| Net income | $1.35 million | $0.34 million in Q1 2015 |
| Net income available to common shareholders | $1.14 million | $0.31 million in Q1 2015 |
| Diluted earnings per share | $0.19 | $0.09 in Q1 2015 |
| Annualized return on average assets | 0.54% | 0.27% in Q1 2015 |
| Annualized return on average equity | 5.33% | 2.42% in Q1 2015 |
Net interest income benefited primarily from merger-related balance-sheet growth. Average earning assets increased to $926.7 million from $471.8 million, while the yield on earning assets increased to 4.40% from 4.27%. The provision for loan losses declined to $138 thousand from $284 thousand.
At March 31, 2016, total assets were $1.016 billion, net loans were $736.4 million, securities available for sale were $157.6 million, and stockholders’ equity was $102.0 million. Total deposits were $859.1 million. Cash and cash equivalents totaled $68.9 million.
Loan growth was approximately 7.2% annualized during the quarter. Organic loans increased 7.5% from year-end 2015 to $485.4 million. The allowance for loan losses increased to $4.5 million, or 0.61% of total loans, from $4.4 million, or 0.60%.
Operating cash flow was $3.9 million, compared with $0.4 million in Q1 2015. Investing activities used $4.0 million, primarily reflecting net loan originations and collections. Financing activities used $10.9 million, including repayments of borrowings and preferred dividends. Cash and cash equivalents decreased by $11.0 million during the quarter.
Borrowings included approximately $30.1 million of Federal Home Loan Bank advances and other borrowings and $20.7 million of securities sold under repurchase agreements at March 31, 2016. Management stated that regulatory capital ratios exceeded minimum requirements, but the filing text does not provide the specific ratios.
Material Changes Versus Prior Period
- Net income increased approximately 299% year over year, while diluted EPS increased to $0.19 from $0.09.
- Net interest income more than doubled, primarily because of the Cornerstone merger and substantially larger earning-asset balances.
- Noninterest income increased 33%, driven by higher deposit service charges and gains on loan and other asset sales. Gains on foreclosed-asset sales declined to $58 thousand from $383 thousand.
- Noninterest expense increased substantially because of additional employees, branches, facilities, data-processing costs, professional fees, and other expenses associated with the merger and public-company reporting. Noninterest expense as a percentage of average assets improved to 3.18% from 3.32%.
- Total assets decreased modestly from $1.024 billion at year-end 2015, while net loans increased $13.1 million and deposits increased $0.6 million.
- Nonperforming assets improved to $7.9 million, or 0.78% of total assets, from $8.1 million, or 0.79%. Nonperforming loans were $2.8 million, or 0.38% of gross loans.
- Unrealized gains in accumulated other comprehensive income increased stockholders’ equity by $563 thousand during the quarter.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantitative earnings or balance-sheet guidance. Management highlighted continued loan growth, merger integration, operating efficiencies, and the performance of mortgage and SBA lending activities. The February 2016 bank merger also involved conversion of Cornerstone Community Bank’s core operating system.
- Key risks include deterioration in asset quality, higher loan losses, foreclosures, local economic conditions, interest-rate changes, competition, liquidity needs, regulatory requirements, capital-market conditions, and the ability to retain key personnel.
- Commercial real estate and construction and land-development loans represent significant concentrations and are particularly sensitive to collateral values and local economic conditions.
- Management identified merger integration and realization of anticipated merger benefits as important uncertainties. Merger-related effects limit comparability with Q1 2015.
- Purchased credit-impaired loans had a carrying value of $34.3 million and a remaining purchase discount of approximately $8.8 million. Accretable yield was $9.6 million at March 31, 2016.
- Off-balance-sheet commitments included $127.8 million of commitments to extend credit and $2.9 million of standby letters of credit. These amounts are not recorded as liabilities unless drawn and may not represent actual future cash requirements.
- Management stated that pending legal claims are not expected to have a material effect. Disclosure controls were deemed effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile post-merger results with pro forma or comparable information, since Q1 2016 includes acquired operations and Q1 2015 does not.
- Review the sustainability of earnings growth after separating merger effects, loan-purchase accounting accretion, securities gains, and other nonrecurring or variable items.
- Monitor loan growth, commercial real estate and construction exposure, nonaccrual loans, troubled debt restructurings, charge-offs, and allowance adequacy.
- Verify the Company’s specific regulatory capital ratios and available borrowing capacity, which are not fully quantified in the filing text.
- Assess deposit composition, including approximately 5.8% brokered deposits and $234.0 million of time deposits over $100,000, together with upcoming maturities.
- Evaluate liquidity against the $127.8 million of unused credit commitments and the quarter-end decline in cash and cash equivalents.