SmartFinancial, Inc. 2021 Form 10-K Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee bank holding company operating primarily through SmartBank, a community bank serving East and Middle Tennessee, Alabama and the Florida Panhandle. The filing covers the fiscal year ended December 31, 2021; the requested “2021 Q4” period is therefore represented by the annual filing and year-end disclosures.
- SmartBank had 40 full-service branches and three loan production offices at December 31, 2021.
- The company completed the acquisitions of Fountain Leasing, LLC on May 3, 2021, and Sevier County Bancshares, Inc. on September 1, 2021.
- At year-end, the company had approximately 539 full-time and 12 part-time employees.
Financial performance and condition
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net income | $34.8 million | $24.3 million | 43.0% increase |
| Diluted EPS | $2.22 | $1.62 | 37.0% increase |
| Net interest income | $113.4 million | $100.9 million | 12.4% increase |
| Provision for loan and lease losses | $1.6 million | $8.7 million | $7.1 million decrease |
| Noninterest income | $23.9 million | $15.4 million | $8.5 million increase |
| Noninterest expense | $91.4 million | $76.7 million | $14.7 million increase |
| Tax-equivalent net interest margin | 3.24% | 3.61% | 37 basis-point decline |
| Return on average assets | 0.91% | 0.79% | 12 basis-point increase |
| Total assets | $4.61 billion | $3.30 billion | 39.5% increase |
| Net loans and leases | $2.67 billion | $2.36 billion | 13.1% increase |
| Total deposits | $4.02 billion | $2.81 billion | 43.4% increase |
| Shareholders’ equity | $429.4 million | $357.2 million | 20.2% increase |
Interest income was $125.2 million and interest expense was $11.8 million. The lower net interest margin reflected lower earning-asset yields and excess liquidity, partially offset by lower deposit costs and PPP fee accretion. Average interest-bearing deposit costs declined to 0.36% from 0.71%.
Cash and cash equivalents increased to $1.05 billion from $481.7 million. Net cash provided by operating activities was $46.2 million, while investing activities used $265.0 million, primarily reflecting securities purchases, bank-owned life insurance purchases and loan growth. Financing activities provided $782.2 million, primarily from deposit growth.
Borrowings were $87.6 million, subordinated debt was $41.9 million and total contractual obligations were $715.1 million. Liquidity included $64.0 million of unused unsecured federal funds lines, $116.9 million of unused Federal Reserve discount-window capacity and $164.5 million of additional FHLB borrowing capacity. The company also had a $25.0 million revolving credit facility, of which $17.5 million remained available.
SmartBank remained well capitalized. At December 31, 2021, SmartBank reported a CET1 ratio of 11.66%, total risk-based capital ratio of 12.29% and leverage ratio of 8.23%. SmartFinancial reported a CET1 ratio of 10.56%, total risk-based capital ratio of 12.55% and leverage ratio of 7.45%.
Material changes versus the prior comparable period
- Net income increased primarily due to higher net interest income, substantially lower credit-loss provisioning and higher fee income, partially offset by increased operating and merger-related expenses.
- Organic net loans and leases increased 12.3% to $2.22 billion. Total loans and leases grew to $2.69 billion, with commercial real estate representing 51.4% of gross loans and leases.
- Deposits increased by $1.2 billion, driven by organic growth and the SCB acquisition. Brokered deposits represented approximately 1.3% of total deposits at year-end.
- The investment portfolio increased to $559.4 million from $215.6 million. During the fourth quarter, $74.6 million of available-for-sale securities were transferred to held-to-maturity classification.
- Nonperforming loans and leases declined to 0.12% of gross loans and leases from 0.24%; nonperforming assets declined to 0.11% of total assets from 0.31%.
- The allowance for loan and lease losses increased to $19.4 million, but declined as a percentage of loans to 0.72% from 0.77%.
- Goodwill increased to $91.6 million, including $17.2 million from SCB and $2.4 million from Fountain. Management reported no goodwill impairment.
- The company issued 1.69 million shares in the SCB transaction and paid $9.6 million in cash consideration. It repurchased $1.2 million of common stock during 2021 and had $4.5 million remaining under its authorized repurchase plan at year-end.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued growth through organic lending, deposit generation, branch expansion and disciplined acquisitions. It reported plans to expand in Alabama and the Gulf Coast region, including new branches and loan production offices, and highlighted a wealth-management team managing approximately $350 million in assets under management.
- Management characterized the acquisition integrations as substantially complete but noted continuing transition and execution risks, including customer or employee attrition, operating disruption, cost overruns and failure to achieve expected synergies.
- The company is asset-sensitive. Its interest-rate model estimated that an immediate 200-basis-point increase in short-term rates would increase net interest income by approximately $14.5 million over 12 months, while a 200-basis-point decrease would reduce it by approximately $1.3 million, under stated static assumptions.
- Key credit risks include concentrations in commercial real estate and construction lending, geographic concentration in the company’s core markets, exposure to small and medium-sized businesses, and the potential decline in real estate values.
- COVID-19 remained a risk to borrower credit quality, liquidity, staffing, operating conditions and future provisions, although no loans remained under COVID-19 modifications at December 31, 2021.
- CECL adoption is required beginning January 1, 2023. The company expects CECL could materially increase the allowance for credit losses but stated that it could not yet reasonably estimate the effect.
- The company ceased issuing new LIBOR-based loans and expects remaining LIBOR remediation activities to continue through June 2023. Certain subordinated debt and hedging instruments remain linked to LIBOR or fallback provisions.
- Off-balance-sheet commitments included $669.8 million of unused commitments to extend credit and $17.9 million of standby letters of credit.
- There was no material litigation reported. Management and the auditors concluded that internal control over financial reporting was effective, although management’s assessment and the auditor’s evaluation excluded Fountain and SCB from the year-end control assessment.
Most important facts for investors to verify
- Whether loan growth and acquisition-related expansion can offset the declining net interest margin and higher operating cost base.
- The sustainability of unusually strong deposit growth and the deployment of approximately $1.05 billion of cash and cash equivalents.
- Commercial real estate, construction and land-development concentrations, collateral values and the performance of the company’s largest borrower relationships.
- The adequacy of the $19.4 million allowance under the forthcoming CECL methodology and the potential regulatory-capital effect of adoption.
- The financial contribution, integration progress and remaining purchase-accounting adjustments for SCB and Fountain, including Fountain’s potential earnout of up to $6.0 million through 2026.
- Interest-rate sensitivity, securities-duration exposure and the effect of rising rates on deposit pricing, securities values and borrower repayment capacity.
- Restrictions on dividends and share repurchases arising from bank capital, liquidity, earnings and regulatory requirements.