KNOXVILLE, TN – January 19, 2021 – SmartFinancial, Inc. (“SmartFinancial” or the “Company”; NASDAQ: SMBK), today announced net income of $9.0 million, or $0.59 per diluted common share, for the fourth quarter of 2020, compared to net income of $6.4 million, or $0.42 per diluted common share for the third quarter of 2020. Operating earnings (Non-GAAP), which excludes securities gains, merger related and restructuring expenses and non-operating items, totaled $9.2 million, or $0.61 per diluted common share, in the fourth quarter of 2020, compared to $6.6 million, or $0.44 per diluted common share, in the third quarter of 2020.
Highlights for the Fourth Quarter of 2020
- Net income of $9.0 million and operating earnings of $9.2 million (Non-GAAP)
- Operating noninterest income (Non-GAAP) increased $381 thousand or 36.9% annualized quarter-over-quarter
- Tangible book value per share (Non-GAAP) of $17.92, a 15.1% annualized quarter-over-quarter increase
- Deposits increased by $153.2 million or 23.1% annualized from September 30, 2020
- Paid off $237.8 million in borrowings from the Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“PPPLF”)
- COVID loan modifications declined to 0.7% of total loans
Billy Carroll, President & CEO, stated: “We are extremely pleased with our results for the quarter and for the year. The year was unprecedented on several fronts, but our energetic, entrepreneurial team rose to the occasion and posted very sound results. Our continued focus on diversification of revenue and work on efficiency gains are being seen in our metrics, and that, coupled with our solid credit quality, keeps us very excited about our future.”
SmartFinancial’s Chairman, Miller Welborn, concluded: “The fourth quarter of 2020 and the entire year of 2020 exceeded our expectations. Our Board could not be happier or prouder of the entire team for the incredible effort and execution of our Strategic Plan. This COVID pandemic has affected a tremendous number of people and the SmartBank team continues to help our clients and the communities we serve.”
Net Interest Income and Net Interest Margin
Net interest income increased $463 thousand to $26.5 million for the fourth quarter of 2020 or approximately 1.8% when compared to $26.0 million for the third quarter of 2020, mainly attributable to a reduction in the cost of interest-bearing liabilities. Average earning assets totaled $3.0 billion, a decrease of $106.9 million, primarily driven by a decrease in cash and cash equivalents used to pay off $237.8 million in borrowings related to PPPLF funding. Average interest-bearing liabilities decreased $139.4 million, primarily as a result of the PPPLF pay off, and was offset by an increase of $80.1 million in average interest-bearing deposits.
The tax equivalent net interest margin was 3.57% for the fourth quarter of 2020, compared to 3.39% for the third quarter of 2020. The tax equivalent net interest margin was positively impacted by a 13 basis point increase in the average yield on interest-earning assets and a 5 basis point decline in the rate on interest-bearing liabilities over the prior quarter. Lower market interest rates continue to negatively impact earning asset yields, but these declines have been largely mitigated by a lower cost of funds. The primary drivers of the yield increase on interest-earning assets during the fourth quarter of 2020 was an increase in total loan fees of $748 thousand which was offset by a $192 thousand decline in discount accretion. The increase in loan fees during the quarter is attributable to $2.2 million of the Paycheck Protection Program (“PPP”) fee accretion and $1.3 million of other loan fees compared to $1.8 million of PPP fee accretion, and $905 thousand of other loan fees recognized in the third quarter of 2020. Accretion income on acquired loans for the quarter totaled $768 thousand compared to $960 thousand recognized in the third quarter of 2020. The Company continues to carry excess liquidity on the balance sheet that resulted from significant deposit growth during the second and third quarters and continued muted loan growth. The lower cost of deposits realized during the current quarter was attributable to the maturing and repricing of time deposits and the payoff of the PPPLF borrowing, which further contributed to the increase in the tax equivalent net interest margin.
The yield on interest-bearing liabilities decreased to 0.60% for the fourth quarter of 2020 when compared to 0.65% for the third quarter of 2020. The cost of average interest-bearing deposits was 0.50% for the fourth quarter of 2020 compared to 0.59% for the third quarter of 2020, a decrease of 9 basis points. The lower cost of average deposits was attributable to the maturing and repricing of time deposits, with average costs decreasing 18 basis points. The cost of total deposits for the fourth quarter of 2020 was 0.38%.
The following table presents selected interest rates and yields for the periods indicated:
Provision for Loan Loss and Credit Quality
There was no provision for loan losses during the fourth quarter of 2020, compared to $2.6 million in the third quarter of 2020. At December 31, 2020, the allowance for loan losses was $18.3 million. The allowance for loan losses to total loans was 0.77% as of December 31, 2020, compared to 0.78% as of September 30, 2020. For the Company’s originated loans, the allowance for loan losses to originated loans, less PPP loans, was 0.96% as of December 31, 2020, compared to 1.00% as of September 31, 2020. The remaining discounts on the acquired loan portfolio totaled $14.5 million, or 3.76% of acquired loans as of December 31, 2020. During the quarter, the Company added a qualitative factor to the loan loss model, which is based upon the average number of COVID cases within our footprint. As of December 31, 2020, the Company had COIVD related modified loans totaling $17.2 million, or 0.7%, of the loan portfolio, as compared to $232.5 million or 9.7%, of the loan portfolio on September 30, 2020. The following table presents detailed information related to the provision for loan losses for the periods indicated (dollars in thousands):
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 0.24% as of December 31, 2020, an increase of fifteen basis points from the 0.09% reported in the third quarter of 2020. 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 December 31, 2020, as compared to 0.18% as of September 30, 2020. 3 The following table presents detailed information related to credit quality for the periods indicated (dollars in thousands):
Noninterest Income Noninterest income increased $855 thousand to $5.0 million for the fourth quarter of 2020 compared to $4.1 million for the third quarter of 2020. During the fourth quarter of 2020, the primary components of the changes in noninterest income were as follows:
- Increase in service charges on deposit accounts of $140 thousand, primarily related to increased transaction volume;
- Increase in mortgage banking income of $302 thousand, continued to experience high volume during the quarter;
- Increase in other income of $476 thousand, related to $465 thousand of previously reserved funds from a dissolved loan program from the Alabama Department of Economic and Community Affairs (“ADECA”). These funds were placed in reserves for potential future losses. During the fourth quarter of 2020, these specific loans paid-off and the reserve was no longer required; and
- Decrease in interchange and debit card transaction fees of $108 thousand, due to a one-time credit of $130 thousand from vendor reported during the third quarter of 2020. The following table presents detailed information related to noninterest income for the periods indicated (dollars in thousands):
Noninterest Expense Noninterest expense was $20.0 million for the fourth quarter of 2020 compared to $19.2 million for the third quarter of 2020. During the fourth quarter of 2020, the primary components of the changes in noninterest expense were as follows:
- Salaries and employee benefits increased $484 thousand, increase is primarily attributable to year-end employee incentive accrual adjustments and various other employee benefit related accruals;
- Professional services increased $192 thousand, due to increased volume of services performed;
- Amortization of intangibles increased $169 thousand, increase is from a cumulative adjustment for the amortization of intangible assets (client list and trademark) related to the insurance company purchased in the acquisition of Progressive Financial Group (“PFG”);
- Merger related and restructuring expense increased $412 thousand, primarily related from the consolidation and termination of two leased properties;
- FDIC insurance decreased $237 thousand, the decrease was related to an elevated third quarter expense due to an accrual adjustment; and
- Other real estate and loan related expenses decreased $127 thousand, primarily attributable to decreased activity in loan related activity. The following table presents detailed information related to noninterest expense for the periods indicated (dollars in thousands):
Income Tax Expense Income tax expense was $2.5 million for the fourth quarter of 2020, an increase of $531 thousand, compared to $2.0 million for the third quarter of 2020. For the fourth quarter of 2020, the effective tax rate was 21.7% compared to 23.5% for the third quarter of 2020. The lower effective tax rate during the fourth quarter of 2020 was primarily from tax benefits associated with a program the State of Tennessee manages for Community Investment loans. Balance Sheet Trends Total assets at December 31, 2020, were $3.30 billion compared with $2.45 billion at December 31, 2019. The increase of $855.8 million is primarily attributable to assets acquired from the acquisition of PFG of approximately $308.2 million, increase in cash and cash equivalents of $241.8 million and the net originations of $288.9 million of PPP loans. Total liabilities increased to $2.95 billion at December 31, 2020 from $2.14 billion at December 31, 2019. The increase of $811.4 million was primarily from organic deposit growth of $486.0 million, acquired deposits from the acquisition of PFG in the amount of $272.0 million, and an increase in borrowings of $49.6 million. Shareholders’ equity at December 31, 2020, totaled $357.2 million, an increase of $44.4 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, net income of $24.3 million for the year ended December 31, 2020 and a net change in accumulated other comprehensive income of $2.0 million, 5 which was offset by the repurchase of the Company’s common stock of $4.3 million and $3.0 million of dividends paid. Tangible book value per share (Non-GAAP) was $17.92 at December 31, 2020, an increase from $16.82 at December 31, 2019. Tangible common equity (Non-GAAP) as a percentage of tangible assets (Non-GAAP) was 8.41% at December 31, 2020, compared with 9.93% at December 31, 2019. The following table presents selected balance sheet information for the periods indicated (dollars in thousands):
Conference Call Information
SmartFinancial issued this earnings release for the fourth quarter of 2020 on Tuesday, January 19, 2021, and will host a conference call on Wednesday, January 20, 2021, at 10:00 a.m. ET. To access this interactive teleconference, dial (888) 317-6003 or (412) 317-6061 and enter the confirmation number, 0205038. A replay of the conference call will be available through January 20, 2022, by dialing (877) 344-7529 or (412) 317-0088 and entering the confirmation number, 10151327. Conference call materials 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
(865) 868-0613 | firstname.lastname@example.org
Executive Vice President, Chief Financial Officer
(865) 437-5724 | email@example.com
Kelley Fowler Senior Vice President, Public Relations & Marketing
Non-GAAP Financial Measures
Statements included in this earnings release 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 NonGAAP financial measures, including: (i) operating earnings, (ii) operating return on average assets, (iii) operating pre-tax preprovision return on average assets (iv) operating return on average shareholder’ equity, (v) return on average tangible common equity, (vi) operating return on average tangible common equity, (vii) operating efficiency ratio, (viii) operating noninterest income, (ix) operating pre-tax pre-provision income (x) operating noninterest expense, (xi) tangible common equity, (xii) average tangible common equity, (xiii) tangible book value; and ratios derived therefrom, in its analysis of the company’s performance. 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. Operating return on average assets is the annualized operating earnings divided by average assets. Operating pre-tax pre-provision return on average assets is the annualized operating pre-tax pre-provision income divided by average assets. Operating return on average shareholders’ equity is the annualized operating earnings divided by average equity. Return on average tangible common equity is the annualized net income divided by average tangible common equity. Operating return on average tangible common equity is the annualized 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 pre-tax pre-provision income is net interest expense plus operating noninterest income less operating noninterest expense. 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) risks associated with our growth strategy, including a failure to implement our growth plans or an inability to manage our growth effectively; (2) claims and litigation arising from our business activities and from the companies we acquire, which may relate to contractual issues, environmental laws, fiduciary responsibility, and other matters; (3) the risk that cost savings and revenue synergies from recently completed acquisitions may not be realized or may take longer than anticipated to realize; (4) disruption from recently completed acquisitions with customer, supplier, employee, or other business relationships; (5) our ability to successfully integrate the businesses acquired as part of previous acquisitions with the business of SmartBank; (6) risks related to the completed acquisition of PFG; (7) the risk that the anticipated benefits from the completed acquisition of PFG may not be realized in the time frame anticipated; (8) changes in management’s plans for the future; (9) prevailing, or changes in, economic or political conditions, particularly in our market areas; (10) credit risk associated with our lending activities; (11) changes in interest rates, loan demand, real estate values, or competition; (12) changes in accounting principles, policies, or guidelines; (13) 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; (14) 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; (15) the impact of the COVID19 pandemic on the Company’s assets, business, cash flows, financial condition, liquidity, prospects and results of operations; (16) potential increases in the provision for loan losses resulting from the COVID-19 pandemic; and (17) 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.