SmartFinancial, Inc. 10-Q Summary
Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee 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 Form 10-Q covers the quarter and six months ended June 30, 2023; comparable periods are the three and six months ended June 30, 2022. Amounts are in thousands unless otherwise noted.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Interest income | $52,094 | $36,309 | $105,273 | $69,224 |
| Interest expense | $20,519 | $3,247 | $37,716 | $6,044 |
| Net interest income | $31,575 | $33,062 | $67,557 | $63,180 |
| Provision for credit losses | $113 | $1,250 | $663 | $2,256 |
| Noninterest income | $7,130 | $7,229 | $14,055 | $14,340 |
| Noninterest expense | $27,410 | $25,926 | $54,939 | $51,643 |
| Net income | $8,836 | $10,215 | $20,336 | $18,475 |
| Diluted EPS | $0.52 | $0.61 | $1.20 | $1.10 |
| Tax-equivalent net interest margin | 2.93% | 3.08% | 3.12% | 3.00% |
| Return on average assets | 0.75% | 0.87% | 0.87% | 0.80% |
| Return on average equity | 7.98% | 9.76% | 9.36% | 8.79% |
At June 30, 2023, total assets were $4.746 billion, loans and leases were $3.338 billion gross and $3.305 billion net, deposits were $4.200 billion, shareholders’ equity was $444.8 million, and cash and cash equivalents were $238.9 million. The allowance for credit losses was $32.7 million, or 0.98% of loans and leases.
Six-month operating cash flow was $21.3 million, compared with $28.4 million in the prior-year period. Investing activities used $142.5 million, primarily reflecting $84.9 million of net loan growth and $78.1 million of available-for-sale securities purchases. Financing activities provided $93.7 million, including a $122.6 million increase in deposits, partially offset by $52.6 million of borrowing repayments and $2.7 million of dividends. Cash and cash equivalents declined by $27.5 million to $238.9 million.
Total borrowings were $15.5 million at June 30, 2023, down from $41.9 million at December 31, 2022. Subordinated debt was $42.1 million. The Company had $24.5 million available under its $35 million revolving line of credit. Management reported approximately $1.1 billion of unused borrowing capacity across the Federal Reserve, Federal Home Loan Bank, correspondent banks and the line of credit.
Material Changes Versus Comparable Periods
- Second-quarter net income declined $1.4 million, or approximately 13.5%, and diluted EPS declined $0.09, primarily because higher funding costs reduced net interest income and operating expenses increased.
- Six-month net income increased $1.9 million, or approximately 10.1%, and diluted EPS increased $0.10. Net interest income after provision increased $6.0 million, more than offsetting higher noninterest expense and income taxes.
- Interest income increased substantially as average loan and lease balances grew and asset yields rose, but interest expense increased sharply as the average cost of interest-bearing deposits rose to 2.46% in the second quarter and 2.25% for the six-month period, versus 0.33% and 0.30%, respectively, in the prior-year periods.
- Net loans and leases increased $74.8 million from year-end 2022, while deposits increased $122.5 million. Consumer real estate and commercial and industrial loans grew, while construction and land development loans declined.
- The Company adopted CECL under ASU 2016-13 on January 1, 2023. The adoption increased the loan allowance by $8.7 million and produced a $6.6 million after-tax reduction to retained earnings. The allowance ratio increased from 0.72% at December 31, 2022 to 0.98% at June 30, 2023.
- Available-for-sale and held-to-maturity securities totaled approximately $823.9 million at June 30, 2023, compared with $769.8 million at year-end 2022, reflecting deployment of cash into primarily floating-rate or short-term government-backed securities.
- Noninterest expense increased 5.7% in the quarter and 6.4% for the six months, driven primarily by employee costs, occupancy and equipment, and data processing and technology investments.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that current liquidity is adequate to meet expected customer obligations. The Company had $770.9 million of unused commitments to extend credit and $16.3 million of standby letters of credit; the related off-balance-sheet credit-loss allowance was $2.8 million.
Asset quality remained generally strong, but nonaccrual loans increased to $3.7 million, or 0.11% of gross loans, from $2.8 million, or 0.09%, at year-end 2022. Past-due loans totaled $5.2 million, and no loans were 90 days or more past due and still accruing interest at June 30, 2023. Commercial real estate represented 49.2% of loans, and construction and land development represented 11.8%, creating exposure to real estate values, refinancing conditions and borrower cash flows.
The securities portfolio had significant unrealized losses caused, according to management, by interest-rate movements rather than credit deterioration. AFS securities had gross unrealized losses of $46.3 million, and HTM securities had gross unrealized losses of $23.1 million. Management reported no required write-down or material securities credit-loss allowance.
Key risks include deposit pricing and retention, liquidity and customer confidence following banking-industry stress, higher interest rates, margin compression, commercial real estate and construction credit performance, economic weakness and unemployment, regulatory changes, cybersecurity, litigation, acquisitions, and changes in accounting standards. The Company completed its LIBOR loan transitions to SOFR by June 30, 2023.
SmartFinancial and SmartBank exceeded minimum regulatory capital requirements and the thresholds for well-capitalized status at June 30, 2023. The Company paid a quarterly common-stock dividend of $0.08 per share beginning in the first quarter. Future dividends remain subject to board discretion, earnings, liquidity, capital and regulatory restrictions. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether deposit costs continue to rise faster than loan and securities yields, pressuring the net interest margin.
- Whether nonaccrual loans, past-due loans, charge-offs and the 0.98% allowance ratio increase as the portfolio expands.
- The sensitivity of commercial real estate and construction loans to property values, refinancing conditions and economic conditions.
- The magnitude and duration of unrealized securities losses and their potential effect on tangible capital and liquidity if securities must be sold.
- Deposit stability, uninsured deposits of approximately $1.7 billion, funding capacity and reliance on wholesale or brokered deposits.
- The future reset and refinancing economics of the $42.1 million subordinated debt, including the transition to SOFR-based pricing.
- The sustainability of the $0.08 quarterly dividend and the remaining $4.5 million authorization under the share-repurchase plan; no repurchases occurred during the quarter.
- The assumptions underlying the CECL model, including forecasts, risk ratings, qualitative adjustments and the three-year regulatory capital phase-in.