.
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of Exchange on which Registered |
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.
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).
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 ☐ | 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
As of May 4, 2022, there were
TABLE OF CONTENTS
2
PART I –FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share data)
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| (Unaudited) |
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| March 31, |
| December 31, | ||
2022 | 2021* | |||||
ASSETS: |
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Cash and due from banks | $ | | $ | | ||
Interest-bearing deposits with banks |
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Federal funds sold |
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Total cash and cash equivalents |
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Securities available-for-sale, at fair value |
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Securities held-to-maturity, at amortized cost | | | ||||
Other investments |
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Loans held for sale |
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Loans and leases |
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Less: Allowance for loan and lease losses |
| ( |
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Loans and leases, net |
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Premises and equipment, net |
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Other real estate owned |
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Goodwill and other intangibles, net |
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Bank owned life insurance |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS' EQUITY: |
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Deposits: |
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Noninterest-bearing demand | $ | | $ | | ||
Interest-bearing demand |
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Money market and savings |
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Time deposits |
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Total deposits |
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Borrowings |
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Subordinated debt |
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Other liabilities |
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Total liabilities |
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Shareholders' equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
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Total shareholders' equity |
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Total liabilities and shareholders' equity | $ | | $ | |
* Derived from audited financial statements.
The accompanying notes are an integral part of the financial statements.
3
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except share and per share data)
Three Months Ended | ||||||
March 31, | ||||||
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| 2022 |
| 2021 | ||
Interest income: |
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Loans and leases, including fees | $ | | $ | | ||
Securities: |
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Taxable |
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Tax-exempt |
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Federal funds sold and other earning assets |
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Total interest income |
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Interest expense: |
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Deposits |
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Borrowings |
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Subordinated debt |
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Total interest expense |
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Net interest income |
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Provision for loan and lease losses |
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Net interest income after provision for loan and lease losses |
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Noninterest income: |
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Service charges on deposit accounts | | | ||||
Mortgage banking |
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Investment services |
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Insurance commissions | | | ||||
Interchange and debit card transaction fees, net | | | ||||
Other |
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Total noninterest income |
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Noninterest expense: |
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Salaries and employee benefits |
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Occupancy and equipment |
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FDIC insurance |
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Other real estate and loan related expense |
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Advertising and marketing |
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Data processing and technology |
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Professional services |
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Amortization of intangibles |
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Merger related and restructuring expenses |
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Other |
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Total noninterest expense |
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Income before income tax expense |
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Income tax expense |
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Net income | $ | | $ | | ||
Earnings per common share: |
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Basic | $ | | $ | | ||
Diluted | $ | | $ | | ||
Weighted average common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of the financial statements.
4
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
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| Three Months Ended | ||||
March 31, | ||||||
2022 | 2021 | |||||
Net income | $ | | $ | | ||
Other comprehensive income (loss): |
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Investment securities: | ||||||
Unrealized holding (losses) on securities available-for-sale |
| ( |
| ( | ||
Tax effect |
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Reclassification of unrealized loss on securities transferred from available-for-sale to held-to-maturity | ( | — | ||||
Tax effect | | — | ||||
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity | ( | — | ||||
Tax effect | | — | ||||
Unrealized gains (losses) on securities available-for-sale, net of tax |
| ( |
| ( | ||
Fair value hedging activities: | ||||||
Unrealized gains (losses) on fair value municipal security hedges |
| ( |
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Tax effect |
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| ( | ||
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax |
| ( |
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Total other comprehensive income (loss) |
| ( |
| ( | ||
Comprehensive income (loss) | $ | ( | $ | |
The accompanying notes are an integral part of the financial statements.
5
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)
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| Accumulated |
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Other | |||||||||||||||||
Common Stock |
| Additional |
| Retained |
| Comprehensive |
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Shares | Amount | Paid-in Capital | Earnings |
| Income (Loss) | Total | |||||||||||
Balance, December 31, 2020 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
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| — |
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Other comprehensive income (loss) |
| — |
| — |
| — |
| — |
| ( |
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Common stock issued pursuant to: |
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Stock options exercised |
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Restricted stock | | | ( | — | — | — | |||||||||||
Stock compensation expense |
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Common stock dividend ($ | — | — | — | ( | — | ( | |||||||||||
Repurchases of common stock | ( | ( | ( | — | — | ( | |||||||||||
Balance, March 31, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Balance, December 31, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
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| — |
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Other comprehensive income (loss) |
| — |
| — |
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| ( |
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Common stock issued pursuant to: |
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Stock options exercised |
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Restricted stock |
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| ( |
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Stock compensation expense |
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Common stock dividend ($ |
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| — |
| — |
| ( |
| — |
| ( | |||||
Repurchases of common stock | — | — | — | — | — | — | |||||||||||
Balance, March 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | |
The accompanying notes are an integral part of the financial statements.
6
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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| Three Months Ended March 31, | ||||
2022 | 2021 | |||||
Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Accretion of fair value purchase accounting adjustments, net |
| ( |
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Provision for loan and lease losses |
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Stock compensation expense |
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Deferred income tax expense |
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Increase in cash surrender value of bank owned life insurance |
| ( |
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Net losses from sale and write downs of other real estate owned |
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Net gains from mortgage banking |
| ( |
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Origination of loans held for sale |
| ( |
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Proceeds from sales of loans held for sale |
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Net gain from sale of fixed assets | ( | — | ||||
Net change in: |
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Accrued interest receivable |
| ( |
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Accrued interest payable |
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Other assets |
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Other liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Available-for-sale: | ||||||
Proceeds from maturities, calls and paydowns |
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Purchases | ( | ( | ||||
Held-to-maturity: | ||||||
Purchases | ( | — | ||||
Proceeds from sales of other investments | — | | ||||
Purchases of other investments |
| ( |
| ( | ||
Purchases of bank owned life insurance | — | ( | ||||
Net increase in loans and leases |
| ( |
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Proceeds from sale of fixed assets | | — | ||||
Purchases of premises and equipment |
| ( |
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Proceeds from sale of other real estate owned |
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Net cash used in investing activities |
| ( |
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Cash flows from financing activities: |
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Net increase in deposits |
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Net (decrease) increase in securities sold under agreements to repurchase |
| ( |
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Repayment borrowings | ( | ( | ||||
Cash dividends paid |
| ( |
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Issuance of common stock |
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Repurchases of common stock |
| — |
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Net cash provided by financing activities |
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Net change in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental disclosures of cash flow information: |
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Cash paid during the period for interest | $ | | $ | | ||
Cash paid during the period for income taxes |
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Cash received from income taxes refunds |
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Noncash investing and financing activities: |
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Acquisition of real estate through foreclosure |
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Transfer of securities from available-for-sale to held-to-maturity | | — | ||||
Change in goodwill due to acquisitions and sale of a portfolio of loans |
| — |
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The accompanying notes are an integral part of the financial statements.
7
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”)
8
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
9
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 $
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: |
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Cash & cash equivalents | $ | | $ | — | $ | — | $ | | ||||
Investment securities available-for-sale |
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| ( | — |
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Restricted investments |
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| — | — |
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Loans |
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| ( | ( |
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Allowance for loan losses |
| ( |
| | — |
| — | |||||
Premises and equipment, net |
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| ( | ( |
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Bank owned life insurance |
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| — | — |
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Deferred tax asset, net |
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| ( | |
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Core deposit intangible |
| — |
| | — |
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Interest Receivable |
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| — | — |
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Other assets |
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| ( | ( |
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Total assets acquired | $ | | $ | ( | $ | ( | $ | | ||||
Liabilities: |
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Deposits | $ | | $ | — | $ | — | $ | | ||||
Time deposit premium |
| — |
| | — |
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Subordinated debt | | — | — | | ||||||||
Payables and other liabilities |
| |
| | ( |
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Total liabilities assumed |
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| ( |
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Excess of assets acquired over liabilities assumed | $ |