KNOXVILLE, TN – SmartFinancial, Inc. (“SmartFinancial” or the “Company”; NASDAQ: SMBK), today announced net income of $2.7 million, or $0.19 per diluted common share, for the first quarter of 2020, compared to net income of $6.7 million, or $0.48 per diluted common share for the fourth quarter of 2019. Net operating earnings (Non-GAAP), which excludes securities gains, merger related and restructuring expenses and non-operating items, totaled $4.3 million, or $0.30 per diluted common share, in the first quarter of 2020, compared to $6.5 million, or $0.46 per diluted common share, in the fourth quarter of 2019.
Highlights for the First Quarter of 2020
- Completed the acquisition of Progressive Financial Group, Inc. (“PFG”)
- Net income of $2.7 million and net operating earnings of $4.3 million (Non-GAAP)
- Return on average assets of 0.43% and net operating annualized return on average assets (Non-GAAP) of 0.67%
- Asset quality remains strong with nonperforming assets to total assets of 0.31%
- Loan growth (excluding loans acquired from PFG) of $53.9 million, or 11.4% annualized
- Tangible book value (Non-GAAP) per share of $16.40, a 8.0% year-over-year increase
- Allowance for loan losses increased to $13.4 million, an increase 31.1%, in light of the current economic conditions
Billy Carroll, President & CEO, stated: “We are pleased to report another very solid quarter during what has proven to be a difficult and uncertain environment for many of our clients. Our team has worked extremely hard to assist clients that have been impacted due to COVID-19, including participation in the Small Business Administration’s Paycheck Protection Program (“PPP”). We mobilized our team to successfully process approximately 1,700 applications totaling over $239 million of loans through the month of April, in round one of the PPP program, as we look forward to our economy’s “restart”, we are well positioned for the future.”
SmartFinancial’s Chairman, Miller Welborn, concluded: “I am extremely proud of this team as we stepped up to help our clients in this time of stress. All of our associates have shown incredible commitment to strengthen, not just our company’s financials, but our clients and communities as well. We also welcome Progressive Financial Group to the SmartFinancial family. This transaction is a great step forward in our growth strategy.”
SmartFinancial completed the acquisition of PFG and its wholly owned subsidiary Progressive Savings Bank on March 1, 2020, and this quarter includes one month results of the acquired company.
Net Interest Income and Net Interest Margin
Net interest income was $22.6 million for the first quarter of 2020, compared to $21.1 million for the fourth quarter of 2019. The tax equivalent net interest margin was 3.90% for the first quarter of 2020, compared to 3.84% for the fourth quarter of 2019. The tax equivalent average yield on interest-earning assets was 4.83% for the first quarter of 2020, a decrease from 4.92% for the fourth quarter of 2019. The yield on interest-bearing liabilities decreased to 1.20% for the first quarter of 2020 from 1.39% for the fourth quarter of 2019.
The yield on average loans was 5.35% for the first quarter of 2020, compared to 5.36% for the fourth quarter of 2019. During the first quarter of 2020, increased discount accretion was recorded on acquired loans (37 basis points in the first quarter of 2020, versus 29 basis points in the fourth quarter of 2019) with loan fees remaining stable quarter over quarter. For the first quarter of 2020, the yield on average loans, excluding accretion, was 4.98%, a decrease of 9 basis points from the 5.07% reported in the fourth quarter of 2019. The decrease in yield on average loans from the fourth quarter of 2019, compared to the first quarter of 2020, was due to market competition and, to a lesser extent, the two emergency interest rate cuts by the Federal Reserve in March of 2020. The impact of the acquired loan discount accretion on the tax equivalent net interest margin was 32 basis points for the first quarter of 2020 and 25 basis points for the fourth quarter of 2019.
The cost of average interest-bearing deposits was 1.10% for the first quarter of 2020 compared to 1.29% for the fourth quarter of 2019. The overall decrease of 19 basis points in average interest-bearing deposits from the fourth quarter of 2019 to the first quarter of 2020 was primarily from the Company’s actions to reduce deposit rates in light of the interest rate cuts.
Provision for Loan Loss and Credit Quality
Provision for loan losses was $3.2 million in the first quarter of 2020, compared to $685 thousand in the fourth quarter of 2019. The allowance for loan losses to originated loans was $12.4 million, or 0.77%, as of March 31, 2020, compared to $10.0 million, or 0.66% as of December 31, 2019, an increase of over 24%. The allowance for loan losses to total loans was $13.4 million, or 0.63%, as of March 31, 2020, compared to $10.2 million, or 0.54% as of December 31, 2019. The remaining discounts on the acquired loan portfolio totaled $17.2 million, or 3.33% as of March 31, 2020. The increase in the provision for loan losses in the first quarter of 2020 was the result of the deterioration in the qualitative factors, such as unemployment and GDP, in our loan loss allowance methodology which was caused by the unstable economic conditions facing the U.S. economy related to the challenges being faced with the world wide COVID-19 pandemic.
The company is not required to implement the provisions of the CECL accounting standard until January 1, 2023, and is continuing to account for the allowance for loan losses under the incurred loss model.
Nonperforming loans as a percentage of total loans was 0.14% as of March 31, 2020, a decrease of four basis points from the 0.18% reported in the fourth quarter of 2019. Total nonperforming assets (which include nonaccrual loans, loans past due 90 days or more and still accruing, and other real estate owned) as a percentage of total assets was 0.31% as of March 31, 2020, as compared to 0.21% as of December 31, 2019. The ten basis point increase is primarily attributable to the addition of other real estate owned from the PFG acquisition.
Noninterest income was $2.8 million for the first quarter of 2020 and the fourth quarter of 2019. During the first quarter of 2020, the primary components of the changes in noninterest income were as follows:
- Increase in mortgage banking income of $210 thousand;
- Increase in investment services income of $176 thousand, stemming from additional production and personnel hires during 2019;
- Addition of insurance commissions income of $269 thousand, new non-interest income source from the acquisition of PFG;
- Increase in interchange and debit card transaction fees of $113 thousand, primarily related to the acquisition of PFG; and
- Decrease in other non-interest income of $787 thousand, primarily from $720 thousand in non-recurring income recorded during the fourth quarter of 2019.
Noninterest expense was $18.8 million for the first quarter of 2020, an increase of $2.7 million, compared to $16.1 million for the fourth quarter of 2019. During the first quarter of 2020, the primary components of the increase in noninterest expense were as follows:
- Salaries and employee benefits decreased $272 thousand. During the first quarter of 2020, after adjusting for the non-recurring items of $603 thousand from the prior quarter, the salaries and employee benefits increased $331 thousand, which is attributable to the additional salaries from the PFG acquisition;
- Increase of $180 thousand in FDIC insurance due to the utilization of FDIC credits during the fourth quarter of 2019;
- Increase of $292 thousand in other real estate and loan related expenses, due to elevated activity in the first quarter of 2020;
- Increase of $1.7 million in merger related and restructuring expenses relating to the acquisition of PFG; and
- Increase of $619 thousand in other expenses during the first quarter of 2020, which is a result of a prior period franchise tax credit of $312 thousand recognized during the fourth quarter of 2019, as well as a franchise tax credit of $468 thousand associated with the origination of State of Tennessee community investment loans.
Income Tax Expense
Income tax expense was $664 thousand for the first quarter of 2020, an increase of $191 thousand, compared to $473 thousand for the fourth quarter of 2019.
For the first quarter of 2020, the effective tax rate was 19.6% and included an NOL carryforward that was available and utilized as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The effective tax rate for the fourth quarter of 2019 was 6.6% and included tax benefits associated with the originations of State of Tennessee Community Investment loans and a tax benefit relating to a prior year amended tax return.
Balance Sheet Trends
Total assets at March 31, 2020, were $2.87 billion compared with $2.45 billion at December 31, 2019. The first quarter increase of $424.6 million is primarily from the acquisition of PFG of approximately $307.2 million and organic loan growth of $99.0 million.
Total liabilities increased to $2.54 billion at March 31, 2020 from $2.14 billion at December 31, 2019. The first quarter increase of $401.1 million was primarily from organic deposit growth of $22.7 million, acquired deposits from the acquisition of PFG in the amount of $272.0 million, and an increase of FHLB and other borrowings of $100.0 million.
Shareholders’ equity at March 31, 2020, totaled $336.2 million, an increase of $23.5 million, from December 31, 2019. The increase in shareholders’ equity was primarily from the issuance of common stock for the acquisition of PFG of $24.5 million and net income of $2.7 million for the first quarter ended 2020, which was offset by the repurchase of the Company’s common stock of $2.0 million and a net change in accumulated other comprehensive income of $1.4 million. Tangible book value per share (Non-GAAP) was $16.40 at March 31, 2020, a decrease from $16.82 at December 31, 2019. Tangible common equity (Non-GAAP) as a percentage of tangible assets (Non-GAAP) was 8.96% at March 31, 2020, compared with 9.93% at December 31, 2019.
Conference Call Information
SmartFinancial will issue its earnings release for the first quarter of 2020 on Tuesday, April 28, 2020, and will host a conference call on Wednesday, April 29, 2020, at 10:00 a.m. ET. To access this interactive teleconference, dial (888) 317-6003 or (412) 317-6061 and enter the confirmation number, 6458361. A replay of the conference call will be available through April 29, 2022, by dialing (877) 344-7529 or (412) 317-0088 and entering the confirmation number, 10142762. Conference call materials (earnings release & conference call presentation) will be published on the company’s webpage located at http://www.smartfinancialinc.com/CorporateProfile ), at 9:00 am ET prior to the conference call.
About SmartFinancial, Inc.
SmartFinancial, Inc., based in Knoxville, Tennessee, is the bank holding company for SmartBank. SmartBank is a full-service commercial bank founded in 2007, with 35 branches across East and Middle Tennessee, Alabama, and the Florida Panhandle. Recruiting the best people, delivering exceptional client service, strategic branching, and a disciplined approach to lending have contributed to SmartBank’s success. More information about SmartFinancial can be found on its website: www.smartfinancialinc.com.
President & CEO
Executive Vice President, Chief Financial Officer
Senior Vice President, Public Relations & Marketing
Non-GAAP Financial Measures
Statements included in this presentation include measures not recognized under U.S. generally accepted accounting principles (“GAAP”) and therefore are considered non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of Non-GAAP financial measures to GAAP financial measures. SmartFinancial management uses several Non-GAAP financial measures, including: (i) net operating earnings, (ii) net operating return on average assets, (iii) net operating return on average shareholder’ equity, (iv) return on average tangible common equity, (v) net operating return on average tangible common equity, (vi) operating efficiency ratio, (vii) operating noninterest income, (viii) operating noninterest expense, (ix) tangible common equity, (x) average tangible common equity, (xi) tangible book value (xii) tax equivalent net interest margin; and ratios derived therefrom, in its analysis of the company’s performance. Net operating earnings excludes the following from net income: securities gains and losses, expenses related to the termination of an Alabama Department of Economic and Community Affairs (“ADECA”) loan program, merger termination fee of $6.4 million in the second quarter of 2019, merger related and restructuring expenses. Net operating return on average assets is the annualized net operating earnings divided by average assets. Net operating return on average shareholders’ equity is the annualized net operating earnings divided by average equity. Return on average tangible common equity is the annualized net income divided by average tangible common equity. Net operating return on average tangible common equity is the annualized net operating earnings divided by average tangible common equity (Non-GAAP). The operating efficiency ratio includes an adjustment for taxable equivalent yields and excludes securities gains and losses and merger related and restructuring expenses from the efficiency ratio. Operating noninterest income excludes the following from noninterest income: securities gains and losses, expenses related to the termination of the ADECA loan program and the merger termination fee of $6.4 million in the second quarter of 2019. Operating noninterest expense excludes the following from noninterest expense: prior year adjustments to salaries, merger related and restructuring expenses and certain franchise tax true-up expenses. Tangible common equity and average tangible common equity excludes goodwill and other intangible assets from shareholders’ equity and average shareholders’ equity, respectively. Tangible book value is tangible common equity divided by common shares outstanding. Management believes that Non-GAAP financial measures provide additional useful information that allows investors to evaluate the ongoing performance of the company and provide meaningful comparisons to its peers. Management believes these non-GAAP financial measures also enhance investors’ ability to compare period-to-period financial results and allow investors and company management to view our operating results excluding the impact of items that are not reflective of the underlying operating performance. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider SmartFinancial’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP.
This news release may contain statements that are based on management’s current estimates or expectations of future events or future results, and that may be deemed to constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements, including statements regarding the potential effects of the COVID-19 pandemic on the Company’s business and financial results and conditions, are not historical in nature and can generally be identified by such words as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “may,” “estimate,” and similar expressions. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results of SmartFinancial to differ materially from future results expressed or implied by such forward-looking statements. Such risks, uncertainties, and other factors include, among others, (1) the risk of litigation related to the termination of our agreement and plan of merger with Entegra Financial Corp. (the “Entegra Merger Agreement”) or the abandonment of the transactions that were contemplated by the Entegra Merger Agreement; (2) reputational risk resulting from the termination of the Entegra Merger Agreement; (3) potential changes to, or the risk that we may not be able to execute on, our business strategy as a result of the termination of the Entegra Merger Agreement; (4) the risk that cost savings and revenue synergies from recently completed acquisitions may not be realized or may take longer than anticipated to realize; (5) disruption from recently completed acquisitions with customer, supplier, employee, or other business relationships; (6) our ability to successfully integrate the businesses acquired as part of previous acquisitions with the business of SmartBank; (7) risks related to the completed acquisition of PFG; (8) the risk that the anticipated benefits from the completed acquisition of PFG may not be realized in the time frame anticipated; (9) changes in management’s plans for the future; (10) prevailing, or changes in, economic or political conditions, particularly in our market areas; (11) credit risk associated with our lending activities; (12) changes in interest rates, loan demand, real estate values, or competition; (13) changes in accounting principles, policies, or guidelines; (14) changes in applicable laws, rules, or regulations, including changes to statutes, regulations or regulatory policies or practices as a result of, or in response to COVID-19; (15) adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of the Company’s participation in and execution of government programs related to the COVID-19 pandemic; (16) the impact of the COVID-19 pandemic on the Company’s assets, business, cash flows, financial condition, liquidity, prospects and results of operations; (17) potential increases in the provision for loan losses resulting from the COVID-19 pandemic; and (18) other general competitive, economic, political, and market factors, including those affecting our business, operations, pricing, products, or services. These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in SmartFinancial’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, in each case filed with or furnished to the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website (www.sec.gov). Undue reliance should not be placed on forward-looking statements. SmartFinancial disclaims any obligation to update or revise any forward-looking statements contained in this release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.