SmartFinancial, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
SmartFinancial, Inc. is a Tennessee bank holding company whose wholly owned subsidiary, SmartBank, provides commercial, residential, consumer lending and deposit services through offices in Tennessee, Alabama, Florida and Georgia. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods and December 31, 2018 balance-sheet data. The company is a smaller reporting company and an accelerated filer.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net interest income | $21.1 million | $18.9 million | $62.9 million | $55.2 million |
| Provision for loan losses | $0.7 million | $0.3 million | $1.9 million | $1.6 million |
| Noninterest income | $2.2 million | $1.8 million | $12.3 million | $4.9 million |
| Noninterest expense | $14.7 million | $14.8 million | $47.1 million | $43.3 million |
| Net income | $6.0 million | $4.3 million | $19.8 million | $11.7 million |
| Diluted EPS | $0.42 | $0.34 | $1.41 | $0.96 |
| Tax-equivalent net interest margin | 3.91% | 4.11% | 3.99% | 4.34% |
| Annualized return on average assets | 1.01% | 0.85% | 1.14% | 0.82% |
Q3 net income increased approximately 38% year over year, while nine-month net income increased approximately 70%. Net interest income increased approximately 12% in the quarter and 14% year to date. Earnings benefited from balance-sheet growth and acquisitions, although margin compression reflected higher funding costs.
Balance sheet, liquidity and capital
- Total assets were $2.39 billion at September 30, 2019, compared with $2.27 billion at December 31, 2018.
- Gross loans were $1.87 billion, up from $1.78 billion at year-end; net loans were $1.86 billion. Organic net loans increased approximately 24% to $1.43 billion.
- Total deposits were $2.00 billion, up $76.1 million from year-end. Brokered deposits represented approximately 10.9% of deposits.
- Cash and cash equivalents were $170.9 million, compared with $115.8 million at year-end. Management reported $95.1 million of unused borrowing capacity and expected adequate liquidity.
- Short-term borrowings were approximately $4.8 million. Long-term debt was $64.2 million, consisting of $25.0 million of Federal Home Loan Bank advances and $39.2 million of subordinated debt.
- Shareholders’ equity increased to $306.0 million from $283.0 million. Management stated that the company and bank exceeded regulatory capital minimums, but the filing does not provide the specific capital ratios in the supplied text.
Cash flow and credit quality
- Operating activities provided $26.1 million during the first nine months of 2019, compared with $19.1 million in 2018.
- Investing activities used $53.8 million, primarily reflecting $85.4 million of net loan growth.
- Financing activities provided $82.8 million, principally from deposit growth and net Federal Home Loan Bank borrowings.
- Net cash increased $55.1 million to $170.9 million.
- The allowance for loan losses was $9.8 million, or 0.53% of gross loans, compared with $8.3 million, or 0.47%, at year-end. Nine-month net charge-offs were $0.4 million, and annualized net charge-offs were 0.03% of average loans.
- Nonperforming loans were $3.2 million, or 0.17% of gross loans, and nonperforming assets were $4.7 million, or 0.20% of assets. Both ratios improved modestly from year-end.
- Off-balance-sheet commitments included $383.3 million of commitments to extend credit and $8.0 million of standby letters of credit.
Material changes versus prior periods
- Net interest income grew with higher average earning assets, loans and deposits following the 2018 acquisitions and continued organic growth.
- The tax-equivalent net interest margin declined from 4.11% to 3.91% in Q3 and from 4.34% to 3.99% for the first nine months. The company attributed the decline primarily to higher interest-bearing deposit costs.
- Nine-month noninterest income included a $6.4 million merger termination fee received after termination of the Entegra Financial merger. Excluding this unusual item, the increase in recurring noninterest income was substantially smaller.
- Noninterest expense was essentially flat in Q3 but increased year to date because of the 2018 acquisitions. The Q3 period also included a $0.2 million FDIC insurance credit and lower merger-related expenses.
- Available-for-sale securities declined to $171.5 million from $201.7 million at year-end. Unrealized losses were considered temporary, and management stated it did not intend or expect to be required to sell the securities.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing a $2.1 million operating lease liability and a $2.1 million right-of-use asset at September 30, 2019, with no material income-statement or cash-flow impact.
Outlook, transactions, risks and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management expects liquidity to be adequate for anticipated customer obligations.
- On October 29, 2019, SmartFinancial agreed to acquire Progressive Financial Group, Inc. The proposed consideration includes approximately $14.6 million in cash, subject to adjustment, and 1,292,593 SmartFinancial shares. Closing was expected in the first half of 2020, subject to shareholder, regulatory and other conditions.
- On November 6, 2019, the board approved a regular quarterly dividend and declared a $0.05-per-share dividend payable December 6, 2019.
- The company identified risks related to merger execution and integration, the terminated Entegra transaction, credit quality, interest rates, deposit competition, real estate values, economic conditions, regulatory changes and the realization of acquisition-related synergies.
- The company was implementing the current expected credit loss standard. Management expected the standard to increase the credit-loss reserve but had not determined the amount. The filing states that SmartFinancial qualifies as a smaller reporting company, affecting the implementation timing under the FASB delay described in the filing.
- Management did not expect pending or threatened litigation to have a material adverse effect. No material changes to the risk factors in the 2018 Form 10-K were reported.
Most important facts for investors to verify
- Whether the Progressive Financial Group merger received required approvals, closed as expected and achieved projected strategic or financial benefits.
- The amount and timing of any reserve increase and capital impact from adoption of the expected credit loss standard.
- Whether deposit competition continues to compress the net interest margin and increase funding costs.
- The sustainability of earnings after removing the $6.4 million Entegra merger termination fee.
- Organic loan growth, commercial real estate and construction exposure, criticized loans, nonperforming assets and allowance coverage.
- The company’s specific regulatory capital ratios and the effect of the proposed merger, dividend and any future balance-sheet growth on capital and liquidity.