SmartFinancial, Inc. 2022 Q2 Form 10-Q Summary
Business Context and Reporting Period
SmartFinancial, Inc. is a Tennessee-based bank holding company operating through SmartBank, which provides commercial, residential and consumer banking services across East and Middle Tennessee, Alabama and the Florida Panhandle. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the same periods in 2021 and to December 31, 2021.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Interest income | $36.3 million | $29.9 million | $69.2 million | $59.1 million |
| Net interest income | $33.1 million | $26.9 million | $63.2 million | $53.2 million |
| Provision for loan losses | $1.3 million | $(5) thousand | $2.3 million | $62 thousand |
| Noninterest income | $7.2 million | $5.1 million | $14.3 million | $10.8 million |
| Noninterest expense | $25.9 million | $20.8 million | $51.6 million | $40.3 million |
| Net income | $10.2 million | $8.8 million | $18.5 million | $18.5 million |
| Diluted EPS | $0.61 | $0.58 | $1.10 | $1.23 |
| Tax-equivalent net interest margin | 3.08% | 3.29% | 3.00% | 3.38% |
| Return on average assets | 0.87% | 0.98% | 0.80% | 1.08% |
| Return on average equity | 9.76% | 9.53% | 8.79% | 10.24% |
At June 30, 2022, total assets were $4.79 billion, cash and cash equivalents were $654.9 million, net loans and leases were $2.97 billion, deposits were $4.28 billion and shareholders’ equity was $420.4 million. The allowance for loan and lease losses was $21.9 million, or 0.73% of loans and leases.
Cash provided by operating activities was $28.4 million for the first six months of 2022. Investing activities used $601.4 million, primarily due to $299.8 million of loan growth and $317.4 million of securities purchases. Financing activities provided $182.9 million, principally from a $260.0 million increase in deposits, partially offset by a $75.0 million repayment of borrowings. Cash and cash equivalents declined by $390.1 million to $654.9 million.
Borrowings totaled $12.5 million, down from $87.6 million at December 31, 2021, after the repayment of $75.0 million of FHLB advances. Subordinated debt was $42.0 million. The company had a $25.0 million revolving credit facility, of which $17.5 million remained available at June 30, 2022.
Material Changes Versus Comparable Period
- Q2 net income increased $1.4 million, or approximately 16%, primarily from higher net interest income after provision and noninterest income.
- Six-month net income was essentially unchanged because higher net interest income after provision and noninterest income were offset by materially higher operating expenses.
- Net interest income increased $6.2 million in Q2 and $10.0 million for the six-month period, supported by loan, securities and liquidity growth. The net interest margin declined because of lower asset yields, reduced PPP fee accretion and lower-yielding excess liquidity.
- Noninterest income increased 40.6% in Q2 and 32.3% for the six-month period. Growth in service charges, investment services, interchange fees, swap fees and acquired Fountain-related fees exceeded declines in mortgage banking and, for the six-month period, insurance commissions.
- Noninterest expense increased 24.7% in Q2 and 28.3% for the six-month period, driven mainly by salaries and benefits, facilities, FDIC insurance, technology and franchise-growth costs.
- Net loans and leases increased $298.1 million, or approximately 11.1%, from year-end 2021. Management reported organic net loan growth of $380.7 million, partly offset by reductions in acquired loans.
- Deposits increased $259.7 million from year-end 2021, primarily through organic growth. Brokered deposits represented approximately 0.98% of total deposits.
- The securities portfolio increased from $559.4 million to $813.2 million as the company deployed cash into higher-yielding assets, including U.S. Treasuries. The company also transferred $162.4 million of securities from available-for-sale to held-to-maturity during the first quarter.
- Accumulated other comprehensive loss increased to $24.6 million, primarily because of unrealized losses on securities and fair-value hedge instruments resulting from higher interest rates. Management classified the securities losses as temporary.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management described its markets as generally solid and near pre-pandemic activity levels, but cited inflation, rising interest rates, labor shortages, supply-chain disruption and recession concerns as headwinds. Management expects adequate liquidity to meet customer obligations, supported by cash and securities, expected security cash flows and approximately $425.3 million of unused borrowing capacity.
- Management expects to adopt the CECL credit-loss model in January 2023. The filing states that adoption could materially increase the allowance for credit losses and create greater earnings volatility, but the impact could not yet be reasonably estimated.
- Credit exposure is concentrated in commercial real estate and construction and land development loans. Management identifies real estate values, local economic conditions, borrower cash flows and regulatory reviews as key loss drivers.
- Nonperforming loans and leases were 0.11% of gross loans at June 30, 2022, compared with 0.12% at year-end 2021. Nonaccrual loans were $3.4 million, or 0.11% of loans.
- Commitments to extend credit were $747.3 million and standby letters of credit were $17.5 million. These off-balance-sheet commitments may create future funding and credit exposure, although many are expected to expire undrawn.
- The company had $678 thousand of troubled debt restructurings at June 30, 2022, and modified three loans totaling $568 thousand during the first six months.
- Management identified risks from economic weakness, interest-rate changes, inflation, liquidity needs, competition, regulatory changes, cybersecurity, litigation, geopolitical events, COVID-19 effects and integration of prior acquisitions. No material changes to the risk factors in the 2021 Form 10-K were reported.
- The company stated that it and the Bank exceeded regulatory minimums and the thresholds for well-capitalized status. SmartBank’s June 30, 2022 ratios included 11.72% total risk-based capital, 11.08% Tier 1 risk-based capital, 11.08% CET1 capital and 8.33% Tier 1 leverage.
- The company declared quarterly common stock dividends of $0.07 per share beginning in the first quarter of 2022. Future dividends remain subject to earnings, capital, liquidity, regulatory restrictions and board discretion.
- Management stated that pending or threatened litigation is not expected to have a material adverse effect, although legal outcomes are not currently determinable.
Most Important Facts for Investors to Verify
- Whether loan growth can be sustained without deterioration in commercial real estate, construction and other credit portfolios.
- The size and timing of the allowance adjustment and capital impact from January 2023 CECL adoption.
- Whether rising funding costs compress the 3.00% six-month net interest margin as deposits reprice.
- The sustainability of noninterest income increases, particularly swap fees, investment services and acquired-business revenue, versus lower mortgage banking activity.
- Whether the $601.4 million of investing cash outflows and reduced cash balance affect liquidity under further loan growth or deposit outflows.
- The extent to which unrealized securities losses and accumulated other comprehensive loss affect tangible capital and future earnings.
- The company’s ability to manage acquisition integration, personnel, technology and other expenses while maintaining earnings growth.
- The availability and terms of borrowing capacity and the potential funding requirement from $747.3 million of unused lending commitments.