SmartFinancial, Inc. 2015 Form 10-K Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee bank holding company operating through SmartBank and Cornerstone Community Bank during 2015. The filing covers the fiscal year ended December 31, 2015. On August 31, 2015, Cornerstone Bancshares merged with Legacy SmartFinancial in a reverse merger for accounting purposes, materially increasing the company’s scale. On February 26, 2016, Cornerstone Community Bank merged into SmartBank, with SmartBank surviving.
- At December 31, 2015, the company operated 12 full-service branches, two loan production offices, one mortgage loan production office and one service center.
- The company completed a $15.0 million common-stock private placement in connection with the merger and listed its common stock on Nasdaq under the symbol SMBK.
- Common shares outstanding at year-end were 5,806,477; 225 full-time-equivalent employees were reported.
Financial performance and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets | $1,024.0 million | $533.8 million |
| Total loans, net | $723.4 million | $359.5 million |
| Total deposits | $858.5 million | $454.8 million |
| Net interest income | $25.0 million | $18.7 million |
| Noninterest income | $2.2 million | $1.2 million |
| Noninterest expense | $23.2 million | $16.4 million |
| Provision for loan losses | $0.9 million | $0.4 million |
| Net income | $1.5 million | $1.8 million |
| Net income available to common shareholders | $1.4 million | $1.7 million |
| Diluted earnings per share | $0.32 | $0.52 |
| Return on average assets | 0.22% | 0.36% |
| Return on average equity | 2.15% | 3.41% |
| Tax-equivalent net interest margin | 4.07% | 4.12% |
| Efficiency ratio | 85.0% | 82.9% |
Net cash provided by operating activities was $2.3 million. Investing activities used $7.9 million, while financing activities provided $38.8 million. Cash and cash equivalents increased to $80.0 million from $46.7 million.
Year-end debt and borrowings included $28.0 million of Federal Home Loan Bank advances, $4.0 million of federal funds purchased, $2.0 million drawn under a revolving line of credit and $28.1 million of securities sold under repurchase agreements. The $8.0 million revolving line matures in August 2020 and was subject to financial and capital covenants; the company reported compliance at year-end.
Regulatory capital remained strong. SmartFinancial reported a total risk-based capital ratio of 12.32%, a Tier 1 risk-based ratio of 11.78%, a common equity Tier 1 ratio of 10.30% and a Tier 1 leverage ratio of 9.45%. The company and both banks were classified as well capitalized.
Material changes versus the prior comparable period
- The merger added approximately $450 million of assets and $421 million of liabilities and drove most of the year-over-year balance-sheet expansion.
- Average interest-earning assets increased to $615.3 million from $455.5 million, lifting net interest income despite a decline in net interest margin.
- Loan balances more than doubled, with total gross loans of $727.7 million versus $363.4 million. Purchased non-credit-impaired loans increased to $233.5 million from $5.9 million, primarily due to the merger.
- Nonperforming assets declined to $8.1 million, or 0.79% of total assets, from $10.1 million, or 1.88%. Nonperforming loans declined to 0.38% of gross loans from 1.39%.
- Noninterest expense increased materially because of the larger operating platform, $1.3 million of merger and conversion costs and $536 thousand of expenses related to the new residential mortgage unit.
- Net income declined despite higher net interest income because of higher operating costs, the provision for loan losses and an elevated effective tax rate of approximately 52%, including $0.3 million of nondeductible merger-related expenses.
- The allowance for loan losses increased to $4.4 million from $3.9 million, but declined as a percentage of total loans to 0.60% from 1.07% because acquired loans were recorded net of purchase discounts.
Guidance, outlook, risks and unusual items
- Management expected 2016 pretax income to average assets to improve, the effective tax rate to decline to approximately 38%, and noninterest expense to average assets to decrease as merger costs subsided.
- Management expected pressure on net interest income to average assets because new assets were expected to carry lower yields and deposit rates could increase. It also expected noninterest income to benefit from mortgage loan sales, SBA loan sales and higher deposit service charges.
- The SBLF preferred stock carried a 1% dividend rate through 2015, or $120 thousand annually, but the rate increased to 9% beginning February 4, 2016. This reduces income available to common shareholders and restricts common dividends and repurchases.
- Approximately 87% of loans were secured by real estate, and commercial real estate, including construction loans, represented approximately 65% of the loan portfolio. Local economic conditions, tourism activity and real estate values are therefore significant credit risks.
- The company was asset-sensitive; management estimated that an immediate 200-basis-point increase in short-term rates could increase net income by approximately $240 thousand over 12 months, although actual results could differ.
- Liquidity risks include reliance on core and noncore funding sources, brokered deposits equal to approximately 6.1% of total deposits, deposit runoff and funding-cost volatility.
- Off-balance-sheet exposure consisted of $122.2 million of unused commitments to extend credit and $2.9 million of standby letters of credit.
- The company reported no material litigation, no unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Assess post-merger comparability because 2015 results include Cornerstone Community Bank only from August 31, 2015.
- Verify the sustainability of loan and deposit growth after the merger and the effect of acquired-loan discount accretion on net interest income.
- Monitor the 9% SBLF preferred dividend rate, common-dividend restrictions and the company’s ability to redeem the preferred stock.
- Review credit concentrations in commercial real estate and construction lending, allowance coverage of organic loans and trends in nonperforming and potential problem loans.
- Evaluate the integration of Cornerstone Community Bank into SmartBank, including expected cost savings, systems conversion and employee or customer retention.
- Reconcile liquidity sources, debt maturities and covenant compliance, including the $27.0 million of scheduled 2016 FHLB and other borrowing maturities.
- Review the company’s regulatory capital buffers under Basel III and the potential effect of future growth, acquisitions or credit losses on capital and dividends.