SmartFinancial, Inc. — 2018 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
SmartFinancial, Inc. is a bank holding company whose wholly owned subsidiary, SmartBank, provides commercial, residential, consumer and related financial services through offices in Tennessee, Alabama, Florida and Georgia. This unaudited Form 10-Q covers the three months ended March 31, 2018. The period includes the effects of the November 1, 2017 Capstone Bancshares merger and is therefore not fully comparable with the first quarter of 2017.
As of April 30, 2018, 11,236,325 common shares were outstanding. The Company reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total interest income | $19.4 million | $10.9 million | +77.0% |
| Net interest income before provision | $16.8 million | $9.8 million | +71.2% |
| Provision for loan losses | $0.7 million | Less than $0.1 million | Higher |
| Noninterest income | $1.5 million | $0.9 million | +54.4% |
| Noninterest expense | $13.2 million | $8.2 million | +62.0% |
| Net income | $3.4 million | $1.6 million | +107.7% |
| Net income available to common shareholders | $3.4 million | $1.4 million | +135.7% |
| Diluted EPS | $0.30 | $0.19 | +57.9% |
| Tax-equivalent net interest margin | 4.38% | 4.07% | +31 basis points |
| Annualized return on average assets | 0.80% | 0.64% | +16 basis points |
Net interest margin and earnings benefited from substantially higher average earning assets, loan balances and yields. The filing does not present a conventional consolidated revenue figure; the principal revenue components were interest income and noninterest income. Pre-tax income was $4.4 million, and the effective tax rate was approximately 21.6%, compared with approximately 36.5% in the prior-year quarter, primarily because of the Tax Cuts and Jobs Act.
Balance Sheet, Capital and Liquidity
| Metric | March 31, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $1.760 billion | $1.721 billion |
| Gross loans | $1.374 billion | $1.323 billion |
| Net loans | $1.368 billion | $1.317 billion |
| Total deposits | $1.500 billion | $1.439 billion |
| Cash and cash equivalents | $96.7 million | $113.0 million |
| Securities available for sale | $156.2 million | $151.9 million |
| FHLB advances and other borrowings | $30.0 million | $43.6 million |
| Stockholders’ equity | $208.9 million | $205.9 million |
Gross loans increased $51.0 million during the quarter, described by management as more than 15% annualized growth. Organic net loans increased $97.4 million, while purchased non-credit-impaired loans declined to $446.8 million and purchased credit-impaired loans declined to $29.8 million of carrying value. Deposits increased $61.2 million. Brokered deposits represented approximately 16.2% of total deposits.
Borrowings included $20.0 million of short-term FHLB advances and $10.0 million of long-term debt. Management stated that the Company and Bank exceeded regulatory minimum capital requirements, although specific capital ratios are not provided in the filing text. Liquidity sources included cash, securities, expected security principal payments, unused FHLB and Federal Reserve capacity, and correspondent-bank borrowing capacity.
Cash Flow and Credit Quality
- Operating activities provided $3.2 million of cash, compared with $2.6 million in Q1 2017.
- Investing activities used $59.7 million, primarily because net loan originations and principal collections used $50.6 million and securities purchases used $11.2 million.
- Financing activities provided $40.2 million, reflecting deposit growth and net borrowing activity.
- Cash and cash equivalents decreased $16.3 million to $96.7 million.
- The allowance for loan losses increased to $6.5 million from $5.9 million; net charge-offs were $72 thousand and the provision was $689 thousand.
- Nonperforming assets were $5.3 million, or 0.30% of total assets, down from $6.5 million, or 0.38%, at December 31, 2017.
- Nonperforming loans were $2.6 million, or 0.19% of gross loans. Potential problem loans were approximately $332 thousand.
Material Changes and Unusual Items
- The Capstone merger materially increased the Company’s scale and affected comparability. Capstone contributed approximately $6.8 million of revenue and $2.5 million of net income during Q1 2018. The transaction generated approximately $38.0 million of goodwill.
- Noninterest expense increased primarily because of the Capstone acquisition, including higher personnel, occupancy, data-processing and professional-service costs. Merger expenses were $498 thousand in Q1 2018 versus none in Q1 2017.
- The Company recorded a $1.4 million after-tax other comprehensive loss from unrealized securities losses, compared with $0.3 million of other comprehensive income in Q1 2017. Management attributed the securities losses primarily to interest-rate changes and did not consider the securities other-than-temporarily impaired.
- The Company adopted revenue-recognition and financial-instrument accounting updates effective January 1, 2018. Management reported no material impact on revenue recognition or opening retained earnings. Debit-card network costs are now netted against related interchange revenue; Q1 2018 gross interchange fees were $332.5 thousand and related network costs were $187.0 thousand.
- The allowance for credit losses and fair values remain subject to management estimates, appraisals, economic conditions and regulatory review.
- Off-balance-sheet commitments included $256.2 million of commitments to extend credit and $3.1 million of standby letters of credit.
Outlook, Risks and Subsequent Events
The filing does not provide formal earnings or revenue guidance. Management described loan growth, deposit growth, improved asset quality and adequate liquidity, but cautioned that future results are exposed to credit risk, interest-rate changes, loan demand, real-estate values, competition, local economic conditions, merger integration, merger-related costs, regulatory changes and accounting changes.
The Tennessee Bancshares merger was consummated on May 1, 2018, after the reporting date. The filing states that the initial purchase accounting had not been completed; therefore, the Q1 2018 financial statements do not include the post-closing operating results of that transaction. The Company also expects the future lease-accounting standard to recognize operating-lease assets and liabilities and potentially affect regulatory capital ratios. The expected impact of the current expected credit loss standard on the allowance and financial statements remains under evaluation.
Management stated that pending legal claims are not expected to have a material effect. No material changes to the risk factors disclosed in the 2017 Form 10-K were reported.
Important Facts for Investors to Verify
- Assess how much of the earnings increase reflects the Capstone merger rather than organic growth, including the sustainability of the $6.8 million of Capstone revenue and $2.5 million of Capstone net income.
- Reconcile reported loan growth with deposit growth, brokered-deposit reliance and the $59.7 million quarterly use of investing cash flow.
- Monitor credit quality, the $6.5 million allowance, net charge-offs, purchased credit-impaired loans and the eventual impact of the expected credit loss standard.
- Evaluate sensitivity to deposit repricing and interest rates; the filing’s latest disclosed model indicated higher rates would benefit projected net interest income, while a 100-basis-point decline would reduce it.
- Verify the final purchase accounting, consideration, goodwill and capital effects of the Tennessee Bancshares transaction completed May 1, 2018.
- Review securities’ unrealized losses, interest-rate exposure and the concentration of loans in commercial and real-estate-related categories.
- Confirm regulatory capital ratios and the effect of future lease accounting, since specific capital ratios and a quantified lease impact are not provided in the filing text.