SMARTFINANCIAL INC. annual report, FY2023

SmartFinancial, Inc. 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report, not a standalone fourth-quarter filing. SmartFinancial is a Tennessee bank holding company operating primarily through SmartBank, with 42 branches across Tennessee, Alabama and Florida, plus equipment-finance, insurance, investment-services and mortgage-banking activities.

Financial Performance and Position

Metric	2023	2022	Change
Total assets	$4.829 billion	$4.637 billion	+$191.9 million
Total loans and leases	$3.444 billion	$3.254 billion	+5.9%
Net loans and leases	$3.409 billion	$3.230 billion	+$179.1 million
Total deposits	$4.268 billion	$4.077 billion	+$190.8 million
Net interest income	$130.1 million	$137.5 million	-5.4%
Net income	$28.6 million	$43.0 million	-33.5%
Diluted EPS	$1.69	$2.55	-33.7%
Shareholders’ equity	$459.9 million	$432.5 million	+$27.4 million

• Interest income increased to $218.0 million from $158.8 million, but interest expense rose sharply to $88.0 million from $21.3 million, primarily because deposit costs increased as market interest rates rose.
• Tax-equivalent net interest margin declined to 2.97% from 3.20%; the interest-rate spread declined to 2.32% from 3.01%.
• Noninterest income declined to $22.3 million from $27.7 million, principally due to a $6.8 million pretax loss on securities sales. Mortgage-banking income also decreased, partly offset by higher service charges, investment-services income and insurance commissions.
• Noninterest expense increased to $113.2 million from $106.3 million. Salaries and benefits, occupancy, FDIC insurance, data processing and technology costs increased with franchise growth and infrastructure investment. The efficiency ratio increased to 74.24% from 64.33%.
• Return on average assets declined to 0.60% from 0.92%; return on average equity declined to 6.45% from 10.16%.
• Cash provided by operating activities was $39.7 million. Investing activities used $135.2 million, including $213.6 million of net loan growth. Financing activities provided $181.4 million, primarily from a $190.9 million increase in deposits. Cash and cash equivalents increased to $352.3 million from $266.4 million.
• The allowance for credit losses was $35.1 million, or 1.02% of loans, versus $23.3 million, or 0.72%, at year-end 2022. Net charge-offs were $678 thousand, or 0.02% of average loans.

Debt, Liquidity and Capital

• Borrowings declined to $13.1 million from $41.9 million. Subordinated debt was $42.1 million, consisting primarily of $40 million of fixed-to-floating subordinated notes. The notes reset to an 8.20642% rate on October 2, 2023.
• The Company had an $35.0 million revolving line of credit, with $8.0 million outstanding and $27.0 million available at year-end; maturity was extended to February 1, 2025.
• SmartBank had no FHLB advances or Federal Reserve discount-window borrowings outstanding. Available liquidity included $98.0 million of unsecured federal funds lines, $283.0 million of discount-window capacity and $469.9 million of additional FHLB borrowing capacity.
• Uninsured deposits totaled approximately $1.76 billion, compared with $1.65 billion in 2022. Brokered deposits were approximately 0.52% of total deposits.
• SmartFinancial reported a 10.16% CET1 ratio, 10.16% Tier 1 risk-based capital ratio, 11.80% total capital ratio and 8.27% Tier 1 leverage ratio. SmartBank reported 11.26%, 11.26%, 12.02% and 9.18%, respectively. Both were above applicable well-capitalized standards.
• The Company paid $5.4 million in common dividends, or $0.32 per share, compared with $4.7 million, or $0.28 per share, in 2022. Future dividends remain subject to earnings, liquidity, capital and regulatory restrictions.

Material Changes and Unusual Items

• SmartFinancial adopted CECL on January 1, 2023. The adoption increased the loan allowance by $8.7 million, increased the allowance for off-balance-sheet exposures by $3.0 million and reduced retained earnings by $6.6 million net of tax.
• In the third quarter, the Company sold $159.6 million of available-for-sale securities as part of a balance-sheet optimization transaction. The transaction produced a $6.8 million pretax loss, or approximately $5.0 million after tax, while securities were reinvested into higher-yielding assets.
• Total securities declined to $689.6 million from $769.8 million. Net unrealized losses in the available-for-sale portfolio improved to $33.0 million from $45.3 million, but the securities portfolio remained exposed to interest-rate movements.
• Asset quality weakened modestly: nonperforming loans and leases increased to 0.24% of gross loans from 0.09%, and nonperforming assets increased to 0.20% of total assets from 0.10%.
• Commercial real estate, including commercial construction, represented approximately 56% of loans. Approximately 79% of loans and leases had real estate as a primary or secondary component of collateral.
• The common stock listing was transferred from Nasdaq to the New York Stock Exchange during the fourth quarter of 2023 under the symbol SMBK.
• Management reported no material litigation at December 31, 2023. It disclosed $717.0 million of unused lending commitments and $7.6 million of standby letters of credit.

Outlook, Commentary and Principal Risks

Management’s strategy remains focused on organic loan and deposit growth, disciplined acquisitions and expansion of community-banking services. The filing does not provide specific earnings, revenue or margin guidance for 2024. Management stated that it expects the Company and SmartBank to continue exceeding applicable well-capitalized requirements and the capital conservation buffer in 2024.

• The Company is slightly liability-sensitive to interest rates. Its model estimated that an immediate 200-basis-point increase could reduce 12-month net interest income by approximately $9.5 million, while a 200-basis-point decrease could increase it by approximately $10.5 million under the stated assumptions.
• Key risks include deposit repricing and attrition, elevated funding costs, liquidity stress, interest-rate volatility, securities losses, commercial real-estate concentration, collateral-value declines and higher credit losses.
• Management identified regional-bank confidence, uninsured deposits and increased regulatory scrutiny as continuing industry risks following bank failures in 2023.
• Additional risks include competition from banks and fintech companies, cybersecurity and third-party technology failures, regulatory changes, acquisition and integration risk, mortgage-market weakness, reliance on key personnel and limitations on dividends or capital distributions.
• Goodwill was approximately $96.1 million at year-end. The Company performed additional goodwill impairment testing in 2023 and reported no impairment.
• The Company’s internal control over financial reporting and disclosure controls were assessed as effective. FORVIS, LLP issued unqualified opinions on the financial statements and internal controls.

Investor Verification Priorities

• Verify whether deposit growth is sustainable and monitor the mix, pricing and runoff of the approximately $1.76 billion of uninsured deposits.
• Track net interest margin, deposit costs and the Company’s liability-sensitive exposure as interest-rate expectations change.
• Review commercial real estate and construction exposure, criticized loans, nonaccrual loans, collateral values and allowance adequacy under CECL.
• Assess the effect of the securities sale, remaining unrealized losses and future securities repositioning on earnings, tangible capital and liquidity.
• Confirm available borrowing capacity and collateral requirements, particularly FHLB and Federal Reserve facilities and the $35.0 million corporate credit line.
• Evaluate whether operating expenses and technology investments decline relative to revenue growth and whether the efficiency ratio improves.
• Review dividend capacity, regulatory capital buffers and any changes in banking regulation or deposit-insurance assessments.