SmartFinancial, Inc. 2021 Q1 SEC Filing Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee bank holding company whose wholly owned subsidiary, SmartBank, provides commercial and consumer banking services through 35 branches and one loan production office in Tennessee, Alabama and the Florida Panhandle. The unaudited Form 10-Q covers the three months ended March 31, 2021, with comparison to March 31, 2020 and balance-sheet comparison to December 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $3.56 billion | $3.30 billion at December 31, 2020 |
| Net loans | $2.47 billion | $2.36 billion at December 31, 2020 |
| Total deposits | $3.05 billion | $2.81 billion at December 31, 2020 |
| Interest income | $29.3 million | $28.0 million in Q1 2020 |
| Net interest income | $26.3 million | $22.6 million in Q1 2020 |
| Tax-equivalent net interest income | $26.4 million | $22.7 million in Q1 2020 |
| Tax-equivalent net interest margin | 3.48% | 3.90% in Q1 2020 |
| Noninterest income | $5.7 million | $2.8 million in Q1 2020 |
| Noninterest expense | $19.5 million | $18.8 million in Q1 2020 |
| Net income | $9.8 million | $2.7 million in Q1 2020 |
| Diluted EPS | $0.65 | $0.19 in Q1 2020 |
| Annualized return on average assets | 1.18% | 0.43% in Q1 2020 |
| Allowance for loan losses | $18.4 million, or 0.74% of loans | $18.3 million, or 0.77%, at December 31, 2020 |
Net cash provided by operating activities was $16.1 million, compared with $9.1 million in Q1 2020. Investing activities used $183.7 million, principally reflecting a $103.3 million net increase in loans, $55.8 million of securities purchases and a $40.0 million purchase of bank-owned life insurance. Financing activities provided $242.6 million, primarily from a $243.1 million increase in deposits. Cash and cash equivalents ended the quarter at $556.7 million, up from $481.7 million at December 31, 2020.
Borrowings totaled $82.6 million, primarily consisting of $75.0 million of Federal Home Loan Bank borrowings, and subordinated debt totaled $39.4 million. The $25.0 million revolving line of credit was undrawn and fully available at March 31, 2021. Management reported $276.7 million of unused borrowing capacity from the Federal Reserve, FHLB, correspondent banks and the line of credit.
Material changes versus prior comparable period
- Net income increased $7.0 million, or approximately 257%, primarily reflecting higher net interest income, substantially lower loan-loss provision and stronger noninterest income.
- Net interest income increased $3.7 million, while the net interest margin declined 42 basis points to 3.48%. Average interest-earning assets increased to $3.08 billion from $2.34 billion, aided by the PFG acquisition, PPP participation and higher liquidity.
- Interest expense declined to $3.0 million from $5.4 million as the average cost of interest-bearing deposits fell to 0.44% from 1.10%.
- Noninterest income increased 102% to $5.7 million. Drivers included insurance commissions, mortgage banking, service charges and interchange and debit-card fees.
- Noninterest expense increased 3.6% to $19.5 million, driven mainly by salaries, occupancy, FDIC insurance, data processing and technology, and other expenses. Merger-related and restructuring expense declined to $103,000 from $2.1 million.
- The provision for loan losses fell to $67,000 from $3.2 million. Net charge-offs were $43,000, compared with $12,000 in Q1 2020.
- Net loans increased $104.9 million from year-end 2020. Organic loans increased 7.2% to $2.12 billion, including $119.5 million of first-quarter PPP originations, partly offset by $82.0 million of PPP forgiveness.
- Total deposits increased $243.0 million, with growth concentrated in noninterest-bearing demand, interest-bearing demand, and money market and savings accounts.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management reported adequate liquidity, capital levels above regulatory minimums, and “well capitalized” status for both SmartFinancial and SmartBank. At March 31, 2021, SmartBank’s total risk-based capital ratio was 13.05%, common equity Tier 1 ratio was 12.31%, and leverage ratio was 9.33%.
Management stated that COVID-19 modifications had largely run off: 10 loans totaling $1.7 million, or 0.07% of total loans, remained under such modifications. Nonperforming assets were $10.2 million, or 0.29% of total assets, and potential problem loans were approximately $6.9 million, or 0.29% of total loans.
Key risks include deterioration in commercial real estate and construction lending, higher future credit losses, COVID-19 effects, interest-rate and liquidity risk, competition, regulatory actions, cybersecurity, litigation, and risks associated with acquisitions and integration. The company’s interest-rate model indicated that an instantaneous 100-basis-point rate decrease could reduce projected next-12-month net interest income by 0.81%, while a 200-basis-point decrease could reduce it by 1.23%.
Subsequent events are significant. On April 14, 2021, SmartFinancial agreed to acquire Sevier County Bancshares for an implied aggregate value of approximately $38.2 million, subject to shareholder, regulatory and customary approvals and expected to close in the third quarter of 2021. On May 3, 2021, SmartBank completed the acquisition of Fountain Leasing for $14 million in cash, repaid approximately $45 million of Fountain debt and assumed a potential earnout of up to $6 million.
Important facts for investors to verify
- Whether loan growth, including PPP-related balances and fee accretion, is sustainable after PPP forgiveness and normalization of liquidity.
- Whether the lower provision for loan losses remains appropriate as COVID-19 relief expires and economic conditions change.
- The effect of the 42-basis-point decline in net interest margin and continued low interest rates on future earnings.
- The terms, regulatory approvals, dilution, integration costs and expected synergies of the Sevier County Bancshares merger.
- The financial and operational impact of the completed Fountain Leasing acquisition, including the $45 million debt repayment and potential $6 million earnout.
- Capital and liquidity capacity after acquisitions, loan growth, dividends and the remaining $4.5 million stock-repurchase authorization.
- Changes in credit quality, nonperforming assets, commercial real estate exposure and the adequacy of the $18.4 million allowance for loan losses.