SmartFinancial, Inc. 2021 Q3 Form 10-Q Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee-based bank holding company whose wholly owned subsidiary, SmartBank, provides commercial, residential and consumer banking services across East and Middle Tennessee, Alabama and the Florida Panhandle. This unaudited quarterly report covers the three and nine months ended September 30, 2021. Amounts are in thousands except per-share data.
- Common shares outstanding at November 5, 2021: 16,802,080.
- Completed the acquisitions of Sevier County Bancshares, Inc. on September 1, 2021 and Fountain Equipment Finance, LLC on May 3, 2021.
- Completed the sale of a Richmond, Virginia loan portfolio and related branch assets to First Bank on September 30, 2021.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net interest income | $30.4 million | $26.0 million | $83.5 million | $74.4 million |
| Provision for loan and lease losses | $1.1 million | $2.6 million | $1.2 million | $8.7 million |
| Noninterest income | $6.3 million | $4.1 million | $17.1 million | $10.5 million |
| Noninterest expense | $23.3 million | $19.2 million | $63.6 million | $56.8 million |
| Net income | $9.6 million | $6.4 million | $28.1 million | $15.3 million |
| Diluted EPS | $0.61 | $0.42 | $1.84 | $1.02 |
| Tax-equivalent net interest margin | 3.35% | 3.39% | 3.37% | 3.62% |
| Annualized return on average assets | 0.97% | 0.76% | 1.04% | 0.68% |
- Total assets were $4.384 billion at September 30, 2021, compared with $3.305 billion at December 31, 2020.
- Total loans and leases increased to $2.653 billion from $2.382 billion; net loans and leases increased to $2.633 billion from $2.364 billion.
- Total deposits increased to $3.799 billion from $2.805 billion, primarily from organic growth and the SCB acquisition.
- Cash and cash equivalents increased to $1.091 billion from $481.7 million. Nine-month operating cash flow was $45.6 million; investing activities provided $2.5 million and financing activities provided $561.4 million.
- Available-for-sale securities increased to $339.3 million from $215.6 million.
- Total shareholders’ equity increased to $424.7 million from $357.2 million.
- Total borrowings were $88.7 million, compared with $81.2 million at year-end, and subordinated debt was $41.9 million, compared with $39.3 million.
- The $25.0 million revolving line of credit had $7.5 million outstanding and $17.5 million available at September 30, 2021.
- The allowance for loan and lease losses was $19.3 million, or 0.73% of loans and leases, compared with $18.3 million, or 0.77%, at year-end.
- Nonperforming assets declined to $6.1 million, or 0.14% of total assets, from $10.4 million, or 0.31%.
Material changes versus prior comparable periods
- Q3 net income increased approximately 50% and nine-month net income increased approximately 84%, driven by higher net interest income after provision and stronger noninterest income.
- Net interest income after provision increased by $5.8 million in Q3 and $16.7 million for the first nine months. Lower provisions reflected reduced COVID-19-related credit provisioning compared with 2020.
- Noninterest income increased 53.1% in Q3 and 64.0% for the first nine months. Drivers included deposit service charges, insurance commissions, interchange fees, mortgage banking, Fountain-related fees, bank-owned life insurance income and swap fees.
- Noninterest expense increased 21.6% in Q3 and 12.0% for the first nine months, primarily from personnel, facilities, technology and growth-related costs.
- The net interest margin declined despite balance-sheet growth, reflecting lower asset yields and excess liquidity; the lower cost of interest-bearing deposits partly offset this pressure.
- Loans and leases grew through organic production, the Fountain and SCB acquisitions, and $138.4 million of new PPP originations, partly offset by $341.5 million of forgiven PPP loans.
- SCB added approximately $484.9 million of assets and $443.1 million of liabilities; consideration included 1,691,535 SmartFinancial shares and approximately $9.6 million in cash. Preliminary goodwill was $15.6 million.
- Fountain added approximately $54.1 million of assets and assumed $683 thousand of liabilities. The transaction included $14.0 million of cash consideration and repayment of approximately $45.8 million of indebtedness; preliminary goodwill was $2.4 million and a performance-based earnout of up to $6.0 million remains possible.
Outlook, risks, contingencies and unusual items
- The filing provides no formal earnings, revenue or margin guidance. Management states that current liquidity is adequate for expected customer obligations.
- Management identified approximately $263.8 million of unused borrowing capacity, $61.3 million of investments maturing within 12 months and expected mortgage-backed security principal payments of $11.2 million.
- Interest-rate modeling was within policy limits except for an instantaneous 200-basis-point increase scenario, which exceeded the net-interest-income limit because of excess cash on the balance sheet. Economic-value-of-equity scenarios remained within policy limits.
- COVID-19 remains a risk factor, but no loans remained under COVID-19 modifications at September 30, 2021. TDR loans totaled approximately $212 thousand, none on nonaccrual.
- Key risks include commercial real estate and construction lending concentrations, credit deterioration, interest-rate and liquidity risk, acquisition integration, cybersecurity, regulatory changes, economic weakness, inflation, litigation and the potential effect of COVID-19 on borrowers and operations.
- Off-balance-sheet commitments included $616.3 million of commitments to extend credit and $10.4 million of standby letters of credit.
- Unrealized securities losses were considered temporary and primarily attributable to interest-rate and market changes rather than issuer credit deterioration.
- The branch and loan portfolio sale resulted in a $2.5 million goodwill reduction. Merger-related and restructuring expense was $464 thousand in Q3 and $939 thousand for the first nine months.
- The Company remains a smaller reporting company and does not plan to early adopt CECL; adoption was expected for fiscal years beginning after December 15, 2022.
- Management reported that the Company and Bank exceeded minimum capital requirements and the thresholds for “well capitalized” status. SmartBank’s September 30, 2021 total risk-based capital ratio was 12.59% and leverage ratio was 9.20%.
- Pending litigation is described as ordinary-course and not expected to have a material adverse effect. The filing reports no material changes to the risk factors in the 2020 Form 10-K.
Important facts for investors to verify
- Whether SCB and Fountain achieve the expected revenue synergies, cost savings and integration benefits, and whether Fountain’s earnout becomes payable.
- Whether loan growth, commercial real estate exposure and the allowance ratio remain consistent with credit quality trends as PPP-related effects diminish.
- Whether excess liquidity and future interest-rate increases continue to pressure asset yields and net interest margin.
- The sustainability of increased noninterest income, including acquisition-related fees, mortgage banking, insurance, swap fees and bank-owned life insurance income.
- Capital, liquidity and dividend capacity after acquisitions, growth, share issuance and potential regulatory or credit-loss requirements.
- The impact of CECL adoption, LIBOR transition and other pending accounting or regulatory changes.
- The filing states that disclosure controls were evaluated as effective as of June 30, 2021, although the report covers the quarter ended September 30, 2021; investors should verify this stated evaluation date.