SMARTFINANCIAL INC. [SMBK] Filings

10-Q 1 smbk-20220331x10q.htm 10-Q

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-37661

(Exact name of registrant as specified in its charter)



Tennessee		62-1173944
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5401 Kingston Pike, Suite 600 Knoxville, Tennessee		37919
(Address of principal executive offices)		(Zip Code)

865-437-5700		Not Applicable
(Registrant’s telephone number, including area code)		(Former name, former address and former fiscal
		year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of Exchange on which Registered
Common Stock, par value $1.00	SMBK	The Nasdaq Stock Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or and emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check market if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of May 4, 2022, there were 16,896,987 shares of common stock, $1.00 par value per share, issued and outstanding.

Table of Contents

TABLE OF CONTENTS


PART I –FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at March 31, 2022 and December 31, 2021	3

	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2022 and 2021	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 4.	Controls and Procedures	55

PART II – OTHER INFORMATION		56

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	56

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	58

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PART I –FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share data)


	(Unaudited)
	March 31,		December 31,
	2022		2021*
ASSETS:
Cash and due from banks	$	83,080	$	110,333
Interest-bearing deposits with banks		643,388		897,244
Federal funds sold		37,500		37,500
Total cash and cash equivalents		763,968		1,045,077
Securities available-for-sale, at fair value		540,483		482,453
Securities held-to-maturity, at amortized cost		289,532		76,969
Other investments		16,499		16,494
Loans held for sale		5,894		5,103
Loans and leases		2,806,026		2,693,397
Less: Allowance for loan and lease losses		(20,078)		(19,352)
Loans and leases, net		2,785,948		2,674,045
Premises and equipment, net		84,793		85,958
Other real estate owned		1,612		1,780
Goodwill and other intangibles, net		105,215		105,852
Bank owned life insurance		80,074		79,619
Other assets		44,561		38,229
Total assets	$	4,718,579	$	4,611,579

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	1,093,933	$	1,055,125
Interest-bearing demand		975,272		899,158
Money market and savings		1,573,101		1,493,007
Time deposits		549,047		574,648
Total deposits		4,191,353		4,021,938
Borrowings		36,713		87,585
Subordinated debt		41,952		41,930
Other liabilities		28,519		30,696
Total liabilities		4,298,537		4,182,149
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding		—		—
Common stock, $1 par value; 40,000,000 shares authorized; 16,893,282 and 16,802,990 shares issued and outstanding, respectively		16,893		16,803
Additional paid-in capital		293,376		292,937
Retained earnings		125,329		118,247
Accumulated other comprehensive income (loss)		(15,556)		1,443
Total shareholders' equity		420,042		429,430
Total liabilities and shareholders' equity	$	4,718,579	$	4,611,579

* Derived from audited financial statements.

The accompanying notes are an integral part of the financial statements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except share and per share data)


		Three Months Ended
	March 31,
	2022		2021
Interest income:
Loans and leases, including fees	$	29,643	$	28,018
Securities:
Taxable		2,418		724
Tax-exempt		368		259
Federal funds sold and other earning assets		486		291
Total interest income		32,915		29,292
Interest expense:
Deposits		2,014		2,331
Borrowings		157		117
Subordinated debt		626		584
Total interest expense		2,797		3,032
Net interest income		30,118		26,260
Provision for loan and lease losses		1,006		67
Net interest income after provision for loan and lease losses		29,112		26,193
Noninterest income:
Service charges on deposit accounts		1,319		1,009
Mortgage banking		834		1,139
Investment services		1,070		531
Insurance commissions		901		1,466
Interchange and debit card transaction fees, net		1,284		839
Other		1,703		707
Total noninterest income		7,111		5,691
Noninterest expense:
Salaries and employee benefits		15,046		10,869
Occupancy and equipment		3,059		2,341
FDIC insurance		641		371
Other real estate and loan related expense		729		602
Advertising and marketing		369		190
Data processing and technology		1,586		1,379
Professional services		1,242		641
Amortization of intangibles		637		444
Merger related and restructuring expenses		439		103
Other		1,970		2,524
Total noninterest expense		25,718		19,464
Income before income tax expense		10,505		12,420
Income tax expense		2,246		2,664
Net income	$	8,259	$	9,756
Earnings per common share:
Basic	$	0.49	$	0.65
Diluted	$	0.49	$	0.65
Weighted average common shares outstanding:
Basic		16,718,371		15,011,573
Diluted		16,858,288		15,111,947

The accompanying notes are an integral part of the financial statements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)


	Three Months Ended
	March 31,
	2022		2021
Net income	$	8,259	$	9,756
Other comprehensive income (loss):
Investment securities:
Unrealized holding (losses) on securities available-for-sale		(20,348)		(2,808)
Tax effect		5,256		738
Reclassification of unrealized loss on securities transferred from available-for-sale to held-to-maturity		(2,009)		—
Tax effect		519		—
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity		(11)		—
Tax effect		3		—
Unrealized gains (losses) on securities available-for-sale, net of tax		(16,590)		(2,070)
Fair value hedging activities:
Unrealized gains (losses) on fair value municipal security hedges		(551)		1,313
Tax effect		142		(343)
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		(409)		970

Total other comprehensive income (loss)		(16,999)		(1,100)
Comprehensive income (loss)	$	(8,740)	$	8,656

The accompanying notes are an integral part of the financial statements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - (Unaudited)

For the Three Months Ended March 31, 2022 and 2021

(Dollars in thousands, except for share data)


								Accumulated
								Other
	Common Stock			Additional		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Earnings		Income (Loss)		Total
Balance, December 31, 2020	15,107,214	$	15,107	$	252,693	$	87,185	$	2,183	$	357,168
Net income	—		—		—		9,756		—		9,756
Other comprehensive income (loss)	—		—		—		—		(1,100)		(1,100)
Common stock issued pursuant to:
Stock options exercised	15,965		16		131		—		—		147
Restricted stock	40,967		41		(41)		—		—		—
Stock compensation expense	—		—		201		—		—		201
Common stock dividend ($0.06 per share)	—		—		—		(907)		—		(907)
Repurchases of common stock	(59,610)		(59)		(1,148)		—		—		(1,207)
Balance, March 31, 2021	15,104,536	$	15,105	$	251,836	$	96,034	$	1,083	$	364,058

Balance, December 31, 2021	16,802,990	$	16,803	$	292,937	$	118,247	$	1,443	$	429,430
Net income	—		—		—		8,259		—		8,259
Other comprehensive income (loss)	—		—		—		—		(16,999)		(16,999)
Common stock issued pursuant to:
Stock options exercised	27,550		27		190		—		—		217
Restricted stock	62,742		63		(63)		—		—		—
Stock compensation expense	—		—		312		—		—		312
Common stock dividend ($0.07 per share)	—		—		—		(1,177)		—		(1,177)
Repurchases of common stock	—		—		—		—		—		—
Balance, March 31, 2022	16,893,282	$	16,893	$	293,376	$	125,329	$	(15,556)	$	420,042

The accompanying notes are an integral part of the financial statements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	8,259	$	9,756
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,387		1,499
Accretion of fair value purchase accounting adjustments, net		(358)		(1,636)
Provision for loan and lease losses		1,006		67
Stock compensation expense		312		201
Deferred income tax expense		948		446
Increase in cash surrender value of bank owned life insurance		(455)		(370)
Net losses from sale and write downs of other real estate owned		59		151
Net gains from mortgage banking		(834)		(1,139)
Origination of loans held for sale		(30,916)		(35,229)
Proceeds from sales of loans held for sale		30,959		40,219
Net gain from sale of fixed assets		(348)		—
Net change in:
Accrued interest receivable		(452)		(86)
Accrued interest payable		352		367
Other assets		(5,244)		(1,234)
Other liabilities		5,019		3,078
Net cash provided by operating activities		10,694		16,090
Cash flows from investing activities:
Available-for-sale:
Proceeds from maturities, calls and paydowns		10,217		16,241
Purchases		(257,101)		(55,757)
Held-to-maturity:
Purchases		(50,575)		—
Proceeds from sales of other investments		—		147
Purchases of other investments		(5)		(80)
Purchases of bank owned life insurance		—		(40,000)
Net increase in loans and leases		(112,551)		(103,308)
Proceeds from sale of fixed assets		1,224		—
Purchases of premises and equipment		(879)		(1,009)
Proceeds from sale of other real estate owned		108		98
Net cash used in investing activities		(409,562)		(183,668)
Cash flows from financing activities:
Net increase in deposits		169,591		243,084
Net (decrease) increase in securities sold under agreements to repurchase		(872)		1,447
Repayment borrowings		(50,000)		(4)
Cash dividends paid		(1,177)		(907)
Issuance of common stock		217		147
Repurchases of common stock		—		(1,207)
Net cash provided by financing activities		117,759		242,560
Net change in cash and cash equivalents		(281,109)		74,982
Cash and cash equivalents, beginning of period		1,045,077		481,719
Cash and cash equivalents, end of period	$	763,968	$	556,701
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	2,112	$	2,665
Cash paid during the period for income taxes		15		—
Cash received from income taxes refunds		50		—
Noncash investing and financing activities:
Acquisition of real estate through foreclosure		—		14
Transfer of securities from available-for-sale to held-to-maturity		162,378		—
Change in goodwill due to acquisitions and sale of a portfolio of loans		—		324

The accompanying notes are an integral part of the financial statements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

SmartFinancial, Inc. (the "Company," “SmartFinancial,” “we,” “our” or “us”) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, SmartBank (the "Bank"). The Company provides a variety of financial services to individuals and corporate customers through its offices in East and Middle Tennessee, Alabama, and the Florida Panhandle. The Bank’s primary deposit products are noninterest-bearing and interest-bearing demand deposits, savings and money market deposits, and time deposits. Its primary lending products are commercial, residential, and consumer loans.

Basis of Presentation and Accounting Estimates:

The accounting and financial reporting policies of the Company and its wholly owned subsidiary conform to U.S. generally accepted accounting principles (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements for the Company and its wholly owned subsidiary have not been audited. All material intercompany balances and transactions have been eliminated.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired, and liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company’s annual report on Form 10-K for the year ended December 31, 2021.

Recently Issued and Adopted Accounting Pronouncements:

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”). It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020, through December 31, 2022. The Company implemented a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. As of December 31, 2021, the Company ceased issuance of new LIBOR loans. Alternative reference rates at this time are predominantly Secured Overnight Funding Rate (“SOFR”) based. Remaining LIBOR transition project activities include remediation of remaining LIBOR products by June of 2023. ASU 2020-04 will not have a material impact on the Company’s consolidated financial statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, 2021, as filed in its Annual Report on Form 10-K with the Securities and Exchange Commission ("SEC"). The following is a summary of recent authoritative pronouncements issued but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In October 2019, the Financial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that the Current Expected Credit Loss (“CECL”)

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

model will be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as currently defined by the SEC, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For calendar-year-end companies that are not SRCs, this will be January 1, 2020. The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations and the Company meets the regulations as an SRC. For SRCs and other entities, the Board decided that CECL will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The Company does not plan to adopt this standard early and being that the Company is an SRC, adoption is required for fiscal years beginning after December 15, 2022.

Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

A cross-functional working group comprised of individuals from credit administration, risk management and accounting and finance are in place implementing and developing the data, forecast, processes, and portfolio segmentation that will be used in the models that will estimate the expected credit loss for each loan segment. The Company has contracted with a third party vendor solution to assist us in the application, analysis, and model development required with implementation of ASU 2016-13. The Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, and it will be influenced by the composition, characteristics and quality of our loan and securities portfolio, as well as the economic conditions and forecasts as of each reporting period. These economic conditions and forecasts could be significantly different in future periods.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method, which allows multiple hedged layers to be designated for a single closed portfolio of financial assets resulting in a greater portion of the interest rate risk in the closed portfolio being eligible to be hedged. The amendments allow the flexibility to use different types of derivatives or combinations of derivatives to better align with risk management strategies. Furthermore, among other things, the amendments clarify that basis adjustments of hedged items in the closed portfolio should be allocated at the portfolio level and not the individual assets within the portfolio. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-01 prospectively. If an entity elects to early adopt ASU 2022-01 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company is assessing ASU 2022-01 and its impact on its accounting and disclosures.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a borrower results in a new loan or continuation of an existing loan. The amendments enhance existing disclosures and require new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of origination in the vintage disclosures. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-02 prospectively. If an entity elects to early adopt ASU 2022-02 in an

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company will adopt ASU 2022-02 when adopting ASU 2016-13 in January 2023 and will assess its impact on its accounting and disclosures.

Note 2. Business Combinations

Sevier County Bancshares, Inc.

On September 1, 2021, the Company completed the acquisition of Sevier County Bancshares, Inc., a Tennessee corporation (“SCB”), pursuant to an Agreement and Plan of Merger dated April 13, 2021 (the “Merger Agreement”).

In connection with the merger, the Company acquired $484.9 million of assets and assumed $443.1 million of liabilities. Pursuant to the Merger Agreement, at the effective time of the merger, SCB shareholders were entitled to receive for each share of SCB common stock, no par value per share, outstanding immediately prior to the Merger, either (i) $10.17 in cash (the “Per Share Cash Consideration”), or (ii) 0.4116 shares of Company common stock, par value $1.00 (the “Per Share Stock Consideration”). Pursuant to the terms of the Merger Agreement, (i) each SCB shareholder holding 20,000 shares or more of SCB common stock will receive the Per Share Stock Consideration and (ii) each SCB shareholder holding fewer than 20,000 shares of SCB common stock may elect to receive either the Per Share Stock Consideration or the Per Share Cash Consideration. SmartFinancial issued 1,692,168 shares of SmartFinancial common stock and paid $9.6 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $17.2 million, representing the intangible value of SCB’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.6 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

The purchased assets and assumed liabilities were recorded at their acquisition date fair values ⁽¹⁾ and are summarized in the table below (in thousands).


			Initial
	As recorded		Fair value		Subsequent		As recorded
	by SCB		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	84,313	$	—	$	—	$	84,313
Investment securities available-for-sale		64,219		(614)		—		63,605
Restricted investments		533		—		—		533
Loans		304,620		(4,551)		(3,049)		297,020
Allowance for loan losses		(3,644)		3,644		—		—
Premises and equipment, net		15,579		(295)		(22)		15,262
Bank owned life insurance		7,116		—		—		7,116
Deferred tax asset, net		10,340		(4,007)		769		7,102
Core deposit intangible		—		1,550		—		1,550
Interest Receivable		884		—		—		884
Other assets		920		(272)		(533)		115
Total assets acquired	$	484,880	$	(4,545)	$	(2,835)	$	477,500

Liabilities:
Deposits	$	435,036	$	—	$	—	$	435,036
Time deposit premium		—		888		—		888
Subordinated debt		2,500		—		—		2,500
Payables and other liabilities		5,563		115		(1,254)		4,424
Total liabilities assumed		443,099		1,003		(1,254)		442,848
Excess of assets acquired over liabilities assumed	$