Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee-based bank holding company operating through SmartBank, which provides commercial and consumer banking services across East and Middle Tennessee, Alabama, and the Florida Panhandle. The unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods and December 31, 2020 balance-sheet data.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net interest income | $26.9 million | $25.7 million | $53.2 million | $48.3 million |
| Noninterest income | $5.1 million | $3.5 million | $10.8 million | $6.3 million |
| Total revenue proxy: net interest income plus noninterest income | $32.0 million | $29.3 million | $64.0 million | $54.6 million |
| Net income | $8.8 million | $6.2 million | $18.5 million | $8.9 million |
| Diluted EPS | $0.58 | $0.41 | $1.23 | $0.60 |
| Tax-equivalent net interest margin | 3.29% | 3.63% | 3.38% | 3.75% |
| Noninterest expense | $20.8 million | $18.8 million | $40.3 million | $37.6 million |
| Provision for loan and lease losses | $(5) thousand | $2.9 million | $62 thousand | $6.0 million |
Annualized return on average assets was 0.98% at June 30, 2021, compared with 0.79% at June 30, 2020. The effective tax rate was approximately 22.0% in the second quarter and 21.7% for the first six months, versus 18.8% and 19.0%, respectively, in the prior-year periods.
Balance Sheet, Liquidity, and Capital
- Total assets were $3.65 billion at June 30, 2021, up from $3.30 billion at December 31, 2020.
- Total deposits were $3.14 billion, up $334.3 million from year-end 2020. Brokered deposits represented approximately 1.7% of total deposits.
- Total loans and leases were $2.47 billion, compared with $2.38 billion at year-end; net loans and leases were $2.45 billion.
- Total cash and cash equivalents were $673.5 million, compared with $481.7 million at year-end.
- Borrowings were $78.8 million, compared with $81.2 million at year-end, and subordinated debt was $39.4 million. The $25.0 million revolving line of credit was undrawn and fully available at June 30, 2021.
- Shareholders’ equity was $373.4 million, compared with $357.2 million at year-end.
- The allowance for loan and lease losses was $18.3 million, or 0.74% of loans and leases, versus 0.77% at year-end.
- SmartBank was classified as well capitalized. Its total risk-based capital ratio was 12.19%, common equity Tier 1 ratio was 11.50%, and leverage ratio was 8.75% at June 30, 2021.
Cash Flow and Off-Balance-Sheet Commitments
- Six-month operating cash flow was $31.2 million, compared with $1.3 million in the prior-year period.
- Investing activities used $168.6 million, including $65.2 million of securities purchases, a $40.0 million BOLI purchase, $31.5 million of net loan growth, and $59.4 million of cash paid in the Fountain acquisition.
- Financing activities provided $329.2 million, primarily from a $334.4 million increase in deposits.
- Unused borrowing capacity was approximately $240.3 million. Management stated that liquidity was adequate for expected customer obligations.
- Off-balance-sheet commitments included $640.3 million of unused commitments to extend credit and $7.5 million of standby letters of credit.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 42.2% year over year; six-month net income increased 108.1%.
- Six-month net interest income increased $4.8 million, while the provision for loan losses declined by approximately $6.0 million from the elevated COVID-19-related provision in 2020.
- Noninterest income increased 46.5% in the quarter and 71.2% for the six months, driven by deposit service charges, mortgage banking, investment services, insurance commissions, interchange fees, and other fee income.
- Noninterest expense increased 10.6% in the quarter and 7.1% for the six months, primarily from salaries, infrastructure and occupancy, FDIC insurance, technology, and growth-related costs. Merger-related and restructuring expense declined substantially from 2020.
- The net interest margin contracted to 3.29% in the quarter and 3.38% for the six months, despite higher average earning assets and lower funding costs. Management attributed the margin pressure primarily to the low-rate environment and lower asset yields.
- Nonperforming assets declined to $6.5 million from $10.4 million at year-end, and nonperforming loans and leases declined to $3.8 million from $5.8 million.
- Organic net loans and leases increased 5.8% from year-end to $2.10 billion. The company originated $138.4 million of 2021 PPP loans, while $247.6 million of 2020 PPP loans were forgiven.
Guidance, Outlook, Risks, and Unusual Items
- No formal earnings or financial guidance is provided in the filing. Management expects adequate liquidity and continues to focus on organic growth, integration, and expansion in the Gulf Coast region.
- On May 3, 2021, the company acquired Fountain Leasing, renamed Fountain Equipment Finance, for approximately $59.8 million of consideration, including repayment of acquired debt. The transaction added approximately $54.1 million of assets and generated $2.4 million of preliminary goodwill and $2.7 million of customer-relationship intangible assets. A performance-based earnout could require up to $6.0 million of additional cash payments through 2026.
- The company announced the proposed acquisition of Sevier County Bancshares, Inc., with an estimated closing in the third quarter of 2021. Expected synergies and successful integration are not assured.
- COVID-19 loan modifications had fully ended by June 30, 2021. PPP loans outstanding totaled $178.9 million across 2,015 loans and are guaranteed by the SBA, subject to applicable forgiveness and program requirements.
- The company expects to adopt the CECL credit-loss standard after December 15, 2022 because it qualifies as a smaller reporting company and does not plan early adoption.
- Material risks include deterioration in commercial real estate and construction loans, higher credit losses, interest-rate and margin pressure, liquidity needs, economic weakness, regulatory changes, cybersecurity, acquisition integration, litigation, and COVID-19 effects.
- The company has a $40 million fixed-to-floating subordinated note outstanding. The rate resets in October 2023 based on three-month LIBOR or an alternative rate under the note terms, creating reference-rate transition considerations.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material changes to the risk factors disclosed in the 2020 Form 10-K.
Important Facts for Investors to Verify
- Whether the lower net interest margin persists as PPP balances run off and interest rates remain low.
- The sustainability of fee income growth, particularly mortgage banking, insurance, and PPP-related income.
- Credit performance in commercial real estate, construction and land development, and commercial and industrial portfolios as pandemic support programs expire.
- The final purchase accounting, earnout exposure, and operating contribution from Fountain Equipment Finance.
- The timing, consideration, dilution, regulatory approvals, and integration risks associated with the proposed Sevier County Bancshares acquisition.
- The impact of future CECL adoption and the transition away from LIBOR on credit reserves, earnings, and interest-rate hedges.
- Future dividend and share-repurchase capacity, which remains subject to earnings, capital levels, regulatory restrictions, and board discretion.