KNOXVILLE – SmartFinancial, Inc. (“SmartFinancial” or the “Company”; NASDAQ: SMBK), has announced a net income of $8.8 million, or $0.58 per diluted common share, for the second quarter of 2021, compared to net income of $6.2 million, or $0.41 per diluted common share, for the second quarter of 2020, and compared to net income of $9.8 million, or $0.65 per diluted common share, for the first quarter of 2021. Operating earnings (Non-GAAP), which excludes securities gains, merger related and restructuring expenses and non-operating items, totaled $9.1 million, or $0.60 per diluted common share, in the second quarter of 2021, compared to $7.3 million, or $0.48 per diluted common share, in the second quarter of 2020, and compared to $9.8 million, or $0.65 per diluted common share, in the first quarter of 2021.
Highlights for the Second Quarter of 2021
- Net organic loan growth of over $87 million, a 16.3% annualized quarter-over-quarter increase
- Operating earnings (non-GAAP) of $9.1 million, or $0.60 per diluted share
- Tangible book value per share (Non-GAAP) of $18.69, a 6.5% annualized quarter-over-quarter increase
- Announced the $38.1 million proposed acquisition of Sevier County Bancshares
- Announced and completed the acquisition of Fountain Equipment Finance (“Fountain”)
- Hired three seasoned commercial banking team members in Auburn, Alabama
Billy Carroll, President & CEO, stated, “Our team continues to execute at a very high level, as evidenced by another nice quarter. Growth has continued to be very strong, and our sales team are capitalizing on our outstanding markets. We are also extremely excited to open SmartBank Auburn and continue to organically build out our Alabama footprint.”
SmartFinancial’s Chairman, Miller Welborn, concluded, “Another incredibly solid quarter by our team. Our Board could not be more excited about the trajectory of our company. We continue to execute our growth strategy for loans, deposits and earnings and remain extremely bullish on our Company’s future.”
Net Interest Income and Net Interest Margin
Net interest income was $26.9 million for the second quarter of 2021, compared to $26.3 million for the first quarter of 2021. Average earning assets totaled $3.3 billion, an increase of $218.2 million. The growth was primarily driven by an increase in average cash and cash equivalents of $114.0 million, average securities of $26.9 million and average loans and leases of $79.9 million of which $35.7 million of the increase is related to the acquisition of Fountain during the second quarter. Average interest-bearing liabilities increased $157.3 million, directly related to continued core deposit growth.
The tax equivalent net interest margin was 3.29% for the second quarter of 2021, compared to 3.48% for the first quarter of 2021. The tax equivalent net interest margin was impacted by a 23 basis point decrease in the average yield on interest-earning assets and offset by a 5 basis point decline in the rate on interest-bearing liabilities over the prior quarter. The decrease in yield on interest-earning assets was primarily driven by a decreased level of loan discount accretion and Payroll Protection Program (“PPP”) fee accretion and additional excess liquidity from the significant deposit growth experienced during the first six months of 2021. We recognized $1.1 million less of loan discount accretion and PPP fee accretion during the second quarter of 2021 when compared to the first quarter of 2021. However, the interest-earning yield compression was partially offset by the acquisition of Fountain, resulting in a positive margin impact of 13 basis points.
The lower yields on interest-earning assets continue to be mitigated, in part, by a lower cost of funds. The yield on interest-bearing liabilities decreased to 0.49% for the second quarter of 2021 when compared to 0.54% for the first quarter of 2021. The cost of average interest-bearing deposits was 0.39% for the second quarter of 2021 compared to 0.44% for the first quarter of 2021, a decrease of 5 basis points. The lower cost of average deposits was attributable to the maturing and repricing of time deposits, which decreased 14 basis points during the period. The cost of total deposits for the second quarter of 2021 was 0.29% compared to 0.33% in the first quarter of 2021.
Provision for Loan and Lease Losses and Credit Quality
At June 30, 2021, the allowance for loan and lease losses was $18.3 million. The allowance for loan and lease losses to total loans and leases was 0.74% as of June 30, 2021 and March 31, 2021, respectively. For the Company’s originated loans and leases, the allowance for loan and lease losses to originated loans and leases, less PPP loans, was 0.86% as of June 30, 2021, compared to 0.93% as of March 31, 2021. The remaining discounts on the acquired loan and lease portfolio totaled $13.0 million, or 3.61% of acquired loans and leases as of June 30, 2021.
The Company is not required to implement the provisions of the Current Expected Credit Losses (“CECL”) accounting standard until Jan. 1, 2023 and is continuing to account for the allowance for loan and lease losses under the incurred loss model.
Nonperforming loans and leases as a percentage of total loans and leases was 0.15% as of June 30, 2021, a decrease of 10 basis points from the 0.25% reported in the first quarter of 2021. Total nonperforming assets (which include nonaccrual loans and leases, loans and leases past due 90 days or more and still accruing, other real estate owned and other repossessed assets) as a percentage of total assets was 0.18% as of June 30, 2021, as compared to 0.29% as of March 31, 2021.
Noninterest income decreased $548 thousand to $5.1 million for the second quarter of 2021 compared to $5.7 million for the first quarter of 2021. During the second quarter of 2021, the primary components of the changes in noninterest income were as follows:
- Decrease in insurance commissions of $909 thousand, primarily due from larger commissions recognized in the prior quarter from the placement of life insurance policies;
- Increase in other of $237 thousand, is primarily attributable to $155 thousand of new fee income from the acquisition of Fountain and an increase in the cash surrender value of bank owned life insurance (“BOLI”) income of $57 thousand.
Noninterest expense increased $1.3 million to $20.8 million for the second quarter of 2021 compared to $19.5 million for the first quarter of 2021. During the second quarter of 2021, the primary components of the changes in noninterest expense were as follows:
- Salaries and employee benefits increased $1.3 million, primarily due to the additional headcount from both the Fountain acquisition and hiring of the Gulf Coast Team, and from a reduction in deferred salary cost that was recognized in the prior quarter relating to the PPP loan originations;
- Data processing and technology increased $130 thousand, primarily from continued infrastructure build;
- Professional services increased $208 thousand, primarily from additional services performed during the quarter;
- Merger related and restructuring expense increased $269 thousand: and
- Other decreased $502 thousand, primarily from an investment in a start-up fintech company recognized in the prior quarter.
Income Tax Expense
Income tax expense was $2.5 million for the second quarter of 2021, a decrease of $194 thousand, compared to $2.7 million for the first quarter of 2021.
For the second quarter of 2021, the effective tax rate was 22.0% compared to 21.5% for the first quarter of 2021.
Balance Sheet Trends
Total assets at June 30, 2021 were $3.65 billion compared with $3.30 billion at Dec. 31, 2020. The increase of $349.4 million is primarily attributable to increases in cash and cash equivalents of $191.8 million, securities available-for-sale of $35.2 million, loans and leases of $86.1 million and bank owned life insurance of $40.8 million. The increase in loans and leases consisted of organic loan growth of $143.1 million and leases acquired from Fountain of $53.7 million, offset by $110.0 million in net PPP loan activity of $138.4 in originations and $248.4 million in forgiveness.
Total liabilities increased to $3.28 billion at June 30, 2021 from $2.95 billion at Dec. 31, 2020. The increase of $333.1 million was primarily from organic deposit growth of $334.3 million.
Shareholders’ equity at June 30, 2021 totaled $373.4 million, an increase of $16.2 million, from Dec. 31, 2020. The increase in shareholders’ equity was primarily from net income of $18.5 million for the six months ended June 30, 2021, and a net change in accumulated other comprehensive income of $155 thousand, which was offset by repurchase of the Company’s common stock of $1.2 million and $1.8 million of dividends paid. Tangible book value per share (Non-GAAP) was $18.69 at June 30, 2021, an increase from $18.39 at March 31, 2021. Tangible common equity (Non-GAAP) as a percentage of tangible assets (Non-GAAP) was 7.93% at June 30, 2021, compared with 8.41% at Dec. 31, 2020.
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.