SmartFinancial, Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020. The unaudited consolidated results include one month of operations from the March 1, 2020 acquisition of Progressive Financial Group, Inc. (PFG). SmartFinancial is a bank holding company operating SmartBank across Tennessee, Alabama, and the Florida Panhandle through 35 branches and two loan production offices.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 / Prior period |
|---|---|---|
| Total interest income | $28.0 million | $26.9 million |
| Net interest income | $22.6 million | $21.0 million |
| Provision for loan losses | $3.2 million | $0.8 million |
| Noninterest income | $2.8 million | $1.7 million |
| Noninterest expense | $18.8 million | $15.6 million |
| Net income | $2.7 million | $4.7 million |
| Diluted EPS | $0.19 | $0.34 |
| Tax-equivalent net interest margin | 3.90% | 4.10% |
| Return on average assets | 0.43% | 0.84% |
| Cash and cash equivalents | $309.1 million | $184.0 million at Dec. 31, 2019 |
| Total assets | $2.87 billion | $2.45 billion at Dec. 31, 2019 |
| Total loans, net | $2.13 billion | $1.89 billion at Dec. 31, 2019 |
| Total deposits | $2.34 billion | $2.05 billion at Dec. 31, 2019 |
| Shareholders’ equity | $336.2 million | $312.7 million at Dec. 31, 2019 |
Material Changes Versus Comparable Periods
- Net income decreased approximately 42% year over year, driven primarily by a higher loan-loss provision, higher operating expenses, and merger-related costs.
- Net interest income increased approximately 7.5%, supported by higher average loan and earning-asset balances. Average interest-earning assets rose to $2.34 billion from $2.09 billion.
- The net interest margin declined from 4.10% to 3.90%, reflecting lower earning-asset yields following Federal Reserve rate cuts and competitive loan pricing. The cost of interest-bearing deposits declined from 1.32% to 1.10%.
- Noninterest income increased 66% to $2.8 million, helped by mortgage banking, investment services, and $269 thousand of insurance commissions added through PFG.
- Noninterest expense increased 20.6% to $18.8 million. Merger-related and restructuring expense increased to $2.1 million from $0.9 million.
- The allowance for loan losses increased 31.1% from year-end 2019 to $13.4 million, or 0.63% of total loans, primarily reflecting deterioration in economic assumptions related to COVID-19. Net charge-offs were $12 thousand in Q1 2020 versus $368 thousand in Q1 2019.
- Gross loans increased to $2.15 billion from $1.90 billion at year-end. Organic net loans increased 6.4% to $1.61 billion, while purchased loans increased largely because of the PFG acquisition.
- Total deposits increased $294.7 million from year-end, primarily due to PFG. Brokered deposits represented approximately 11.2% of total deposits at March 31, 2020.
Business Combination and Capital
- On March 1, 2020, SmartFinancial acquired PFG, obtaining approximately $301 million of assets and assuming approximately $272 million of liabilities. Consideration included $9.8 million in cash and 1,292,578 SmartFinancial shares. The transaction generated $8.3 million of goodwill and $1.4 million of core deposit intangibles.
- PFG contributed $505 thousand of revenue and $117 thousand of net income during the post-acquisition period included in Q1 results.
- SmartBank remained well capitalized. At March 31, 2020, SmartBank’s total capital ratio was 12.62%, Tier 1 capital ratio was 12.05%, common equity Tier 1 ratio was 12.05%, and leverage ratio was 11.42%.
- The company paid a $0.05 per-share quarterly dividend and repurchased 125,579 shares for approximately $2.0 million during the quarter.
Cash Flow, Liquidity, and Debt
- Net cash provided by operating activities was $9.1 million. Investing activities used $3.6 million, while financing activities provided $119.6 million. Ending cash and cash equivalents were $309.1 million.
- Borrowings totaled $125.4 million at March 31, 2020, including $75.0 million of FHLB advances and a $50.0 million Federal Reserve Discount Window advance. Subordinated debt was $39.3 million.
- The company established a $25.0 million revolving line of credit, with no balance outstanding at quarter-end. The line remained fully available and the company was in compliance with its covenants.
- Management reported approximately $196.6 million of unused borrowing capacity from the Federal Reserve, FHLB, correspondent banks, and the revolving line of credit. Management expected liquidity to be adequate for anticipated customer obligations.
- Off-balance-sheet commitments included $419.3 million of commitments to extend credit and $23.0 million of standby letters of credit. These amounts do not necessarily represent future cash requirements.
Outlook, Risks, Contingencies, and Unusual Items
- COVID-19 created significant economic uncertainty and may materially affect credit losses, collateral values, liquidity, operations, customer activity, and future earnings. Management stated that the ultimate impact could not be quantified.
- As of March 31, the Bank had modified approximately $70.1 million of loans for COVID-19-affected borrowers under interagency guidance. The filing states that the potential financial statement impact of this guidance could be material but was not quantifiable.
- The company identified heightened exposure to commercial real estate, construction and land development, hospitality, energy, retail, and restaurant borrowers, as well as potential increases in delinquencies, loan losses, and regulatory requirements.
- Nonperforming assets increased to $9.0 million, or 0.31% of total assets, from $5.1 million at year-end, primarily because of other real estate owned acquired from PFG. Nonperforming loans were $3.1 million, or 0.14% of gross loans.
- Management performed an interim goodwill impairment analysis in response to COVID-19 and recorded no impairment charge. Future deterioration in economic conditions could lead to impairment charges.
- The company adopted ASU 2019-01 without a material impact. As a smaller reporting company, it does not plan to early adopt the current expected credit losses standard and expects adoption after December 15, 2022.
- Management did not expect pending or threatened litigation to have a material adverse effect, but the outcomes of legal matters are not certain.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Investor Verification Points
- Verify subsequent-period loan modifications, delinquency trends, charge-offs, allowance adequacy, and credit exposure to COVID-19-sensitive industries.
- Assess whether the PFG acquisition produces the expected revenue synergies, cost savings, integration benefits, and asset-quality outcomes.
- Monitor net interest margin pressure from low interest rates, deposit repricing, loan competition, and changes in the earning-asset mix.
- Review liquidity and funding as borrowings mature, including the $50.0 million Federal Reserve advance due June 25, 2020 and FHLB advances subject to put options.
- Confirm future goodwill, core deposit intangible, and other real-estate-owned valuations under changing economic and real-estate conditions.
- Evaluate the sustainability of dividends and share repurchases given earnings, capital requirements, liquidity needs, and regulatory restrictions.
- Review the company’s forward-looking COVID-19 disclosures and subsequent SEC filings because the filing states that the pandemic’s ultimate impact was highly uncertain.