SmartFinancial, Inc. 10-Q Summary
Business context and reporting period
SmartFinancial, Inc. is a bank holding company for SmartBank, providing commercial, residential, consumer, deposit and other banking services through offices in Tennessee, Alabama, Florida and Georgia. This unaudited Form 10-Q covers the three and six months ended June 30, 2018.
The May 1, 2018 acquisition of Tennessee Bancshares and the November 1, 2017 acquisition of Capstone materially expanded the company. Accordingly, 2018 results are not fully comparable with 2017 results. The company also announced a proposed acquisition of Foothills Bancorp on June 27, 2018.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net interest income | $19.5 million | $10.2 million | $36.3 million | $20.1 million |
| Net interest income, taxable-equivalent | $19.6 million | $10.3 million | $36.4 million | $20.1 million |
| Net income available to common shareholders | $3.9 million | $1.6 million | $7.3 million | $3.1 million |
| Diluted earnings per share | $0.32 | $0.20 | $0.62 | $0.39 |
| Tax-equivalent net interest margin | 4.57% | 4.15% | 4.48% | 4.11% |
| Noninterest income | $1.6 million | $1.3 million | $3.0 million | $2.2 million |
| Noninterest expense | $15.3 million | $8.8 million | $28.5 million | $17.0 million |
Net income increased approximately 138% in the quarter and 123% for the six-month period. Management attributed the improvement primarily to the acquisitions, higher earning-asset balances and improved earning-asset yields. The second-quarter yield on earning assets increased to 5.38% from 4.66%.
Annualized return on average assets was 0.82% in the second quarter and 0.81% for the first six months. Effective tax rates were approximately 24.8% and 23.3%, respectively, compared with 30.6% and 33.7% in the comparable 2017 periods, primarily reflecting the Tax Cuts and Jobs Act.
Balance sheet, liquidity and capital
| Balance-sheet item | June 30, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $2.06 billion | $1.72 billion |
| Loans, net | $1.57 billion | $1.32 billion |
| Total deposits | $1.72 billion | $1.44 billion |
| Cash and cash equivalents | $170.2 million | $113.0 million |
| Securities available for sale | $156.6 million | $151.9 million |
| FHLB advances and other borrowings | $72.0 million | $43.6 million |
| Shareholders’ equity | $247.5 million | $205.9 million |
Loans increased approximately 19%, deposits increased 19%, and cash and cash equivalents increased approximately 51%, principally reflecting acquisition activity and deposit growth. Brokered deposits represented approximately 10.7% of total deposits. Short-term borrowings were $57.0 million and long-term debt was $15.0 million, including a credit line maturing in 2022.
Management stated that the company and bank exceeded regulatory minimum capital requirements. The filing does not provide the specific regulatory capital ratios in the supplied text.
Cash flow and credit quality
- Operating cash flow for the first six months was $12.2 million, compared with $5.6 million in 2017.
- Investing activities used $50.5 million, including $73.2 million of net loan originations and principal collections, partly offset by securities proceeds and $5.7 million of net cash received in the Tennessee Bancshares combination.
- Financing activities provided $95.5 million, including $75.4 million of deposit growth and $127.0 million of borrowing proceeds, partially offset by $102.6 million of borrowing repayments.
- Net cash increased $57.2 million to $170.2 million at June 30, 2018.
- The allowance for loan losses increased to $7.1 million from $5.9 million, equal to 0.45% of total loans versus 0.44% at year-end. The six-month provision was $1.3 million, with $91 thousand of net charge-offs.
- Nonperforming assets were $5.7 million, or 0.28% of total assets, compared with $6.5 million, or 0.38%, at December 31, 2017. Nonperforming loans were 0.14% of gross loans.
- Off-balance-sheet commitments included $299.6 million of unused credit commitments and $3.7 million of standby letters of credit.
Material changes and unusual items
- The Tennessee Bancshares transaction added approximately $226 million of assets and $207 million of liabilities and resulted in approximately $15.7 million of goodwill and 1.46 million newly issued SmartFinancial shares.
- Capstone integration was completed. The company recorded approximately $38.0 million of Capstone goodwill and incurred $1.1 million of merger expenses in the second quarter and $1.6 million in the first six months.
- Noninterest expense rose substantially because of the acquisitions, including higher salaries, occupancy, data processing, professional services, intangible amortization and merger costs.
- Accumulated other comprehensive loss increased to $3.0 million from $1.2 million, primarily because of unrealized losses on available-for-sale securities.
- Revenue recognition under ASU 2014-09 had no material overall effect, although debit-card network costs are now netted against interchange revenue.
Guidance, outlook and risks
No quantitative earnings or balance-sheet guidance was provided. Management indicated that liquidity was adequate for expected customer obligations, supported by cash, marketable securities, expected mortgage-backed-security principal payments of approximately $13.7 million, and available borrowing capacity.
The proposed Foothills Bancorp merger would provide each Foothills share with $1.75 in cash and 0.666 SmartFinancial shares. Completion requires shareholder and regulatory approvals, an effective registration statement and other customary conditions. Foothills may owe SmartFinancial a $1.45 million termination fee under specified circumstances.
Key risks include merger execution and integration, realization of expected cost savings and revenue synergies, transaction expenses, dilution from share issuance, credit losses, real-estate collateral values, interest-rate and deposit-cost pressure, liquidity needs, and local economic conditions. The company expects the future credit-loss standard, ASU 2016-13, to increase its reserve for credit losses, but the magnitude was not yet determined. Lease accounting adoption is also expected to increase recognized assets and liabilities and may affect regulatory capital ratios.
Management reported effective disclosure controls and no material changes in internal control over financial reporting. Management does not expect pending legal claims to have a material effect.
Facts investors should verify
- Whether the Foothills Bancorp merger receives shareholder and regulatory approvals and whether projected synergies and integration costs are achieved.
- The specific regulatory capital ratios, which are stated to exceed minimums but are not provided in the supplied filing text.
- The sustainability of the 4.57% quarterly net interest margin as deposit costs and market interest rates rise.
- Whether rapid loan growth, especially in commercial real estate and construction lending, changes credit quality or requires higher provisions.
- The eventual impact of ASU 2016-13 on the allowance for credit losses and retained earnings.
- The effect of acquisition-related accounting adjustments, goodwill and intangible amortization on future earnings.
- The concentration and renewal profile of brokered deposits, large time deposits and wholesale borrowings.