SmartFinancial, Inc. 2023 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, investment services, insurance and mortgage banking across East and Middle Tennessee, Alabama and Florida. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the same periods in 2022, and the balance sheet as of September 30, 2023, compared with December 31, 2022.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $31.0 million | $36.7 million | $98.6 million | $99.9 million |
| Net interest margin, tax-equivalent | 2.81% | 3.29% | 3.01% | 3.10% |
| Noninterest income | $0.7 million | $6.3 million | $14.7 million | $20.6 million |
| Noninterest expense | $28.5 million | $27.2 million | $83.5 million | $78.9 million |
| Net income | $2.1 million | $11.5 million | $22.4 million | $30.0 million |
| Diluted EPS | $0.12 | $0.68 | $1.33 | $1.78 |
| Return on average assets | 0.17% | 0.95% | 0.63% | 0.85% |
| Return on average equity | 1.84% | 10.77% | 6.80% | 9.46% |
- Q3 net income declined $9.5 million, or approximately 82%, year over year. Nine-month net income declined $7.6 million, or approximately 25%.
- Interest income increased substantially, but interest expense increased more sharply as the cost of interest-bearing deposits rose to 2.84% in Q3 2023 from 0.62% in Q3 2022 and to 2.45% for nine months from 0.41%.
- The company recorded a $6.8 million pretax loss on the sale of available-for-sale securities in Q3. Management characterized the transaction as balance-sheet optimization and stated that the loss is expected to be recovered through incremental earnings by no later than 12 months.
- Provision for credit losses was $0.8 million in Q3 and $1.5 million for nine months, compared with $1.0 million and $3.2 million, respectively, in the prior-year periods.
Balance sheet, credit quality and liquidity
| Balance-sheet item | September 30, 2023 | December 31, 2022 | Change |
|---|---|---|---|
| Total assets | $4.80 billion | $4.64 billion | +$159.7 million |
| Loans and leases, gross | $3.38 billion | $3.25 billion | +$125.4 million |
| Loans and leases, net | $3.35 billion | $3.23 billion | +$115.0 million |
| Total deposits | $4.25 billion | $4.08 billion | +$169.4 million |
| Cash and cash equivalents | $400.3 million | $266.4 million | +$133.8 million |
| Borrowings | $14.1 million | $41.9 million | -$27.7 million |
| Shareholders' equity | $446.7 million | $432.5 million | +$14.2 million |
- For the first nine months, operating activities generated $28.0 million of cash, investing activities used $56.6 million and financing activities provided $162.4 million. Cash and cash equivalents increased $133.8 million to $400.3 million.
- The allowance for credit losses was $33.7 million, or 1.00% of gross loans and leases, compared with $23.3 million, or 0.72%, at year-end 2022. Adoption of CECL increased the allowance by $8.7 million at January 1, 2023, with a $6.6 million after-tax reduction to retained earnings.
- Nonaccrual loans increased to $3.9 million, or 0.12% of gross loans, from $2.8 million, or 0.09%. Total past-due loans increased to $5.3 million from $2.2 million.
- Commercial real estate represented 49.3% of gross loans; commercial and industrial loans represented 18.3%, consumer real estate 18.9% and construction and land development 11.0%.
- Estimated uninsured deposits were $1.7 billion, or 40.9% of total deposits. Brokered deposits represented approximately 0.75% of deposits.
- The company reported $746.9 million of commitments to extend credit and $15.6 million of standby letters of credit. The allowance for off-balance-sheet commitments was $2.3 million.
- Management reported unused borrowing capacity of approximately $905.4 million and expects currently available liquidity to meet anticipated customer obligations.
Material changes and unusual items
- The company sold $159.6 million of available-for-sale securities, predominantly U.S. Treasury securities yielding 1.37%, generating a $6.8 million pretax loss. Total securities declined to $667.4 million from $769.8 million at year-end 2022.
- Interest-bearing deposit costs rose significantly as a result of higher market rates and pricing competition, compressing the net interest margin despite loan growth and higher asset yields.
- Noninterest expense increased $1.3 million in Q3 and $4.6 million for nine months, primarily from employee costs, occupancy and equipment, and data processing and technology investments.
- The company adopted CECL and related loan-modification guidance effective January 1, 2023. Prior-year periods were not restated for the CECL transition.
- Accumulated other comprehensive loss was $34.2 million at September 30, 2023, primarily reflecting unrealized losses on securities caused by the higher interest-rate environment.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management expects liquidity to remain adequate and believes the securities-sale loss will be recovered through higher incremental earnings within 12 months. The company reported that its capital ratios exceeded regulatory minimums and the thresholds for well-capitalized status at September 30, 2023. SmartBank's total risk-based capital ratio was 11.87%, CET1 ratio was 11.15% and leverage ratio was 9.00%.
- Primary risks include deposit pricing and retention, interest-rate changes, liquidity and customer confidence, higher funding costs, commercial real estate and construction-loan concentrations, credit deterioration, and potential increases in credit losses.
- Other identified risks include regulatory changes, FDIC assessment costs, competition, cybersecurity, acquisitions and integration, litigation, LIBOR transition, economic weakness and changes in collateral values.
- Management stated that pending or threatened litigation is not expected to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors.
- The company has a $35 million revolving line of credit, with $8 million outstanding and $27 million available at September 30, 2023. Subordinated debt totaled $42.1 million; the principal $40 million notes began resetting to three-month CME Term SOFR plus 281.161 basis points on October 2, 2023.
- The board's $10 million share-repurchase authorization had $4.5 million remaining at September 30, 2023; no shares were repurchased during the quarter. The company paid a quarterly dividend of $0.08 per share beginning in Q1 2023.
Important facts for investors to verify
- Whether higher deposit costs continue to pressure the net interest margin and earnings.
- Whether the securities repositioning produces the expected incremental earnings and recovers the $6.8 million pretax loss within 12 months.
- Trends in nonaccrual loans, past-due loans, commercial real estate exposure, construction lending and the 1.00% allowance ratio under CECL.
- Deposit stability, uninsured deposit levels, deposit pricing and available borrowing capacity.
- Future capital ratios, dividend capacity and the effect of floating-rate subordinated debt after the October 2023 reset.
- The company’s ability to control technology, personnel and infrastructure costs while maintaining organic loan and deposit growth.