KNOXVILLE – SmartFinancial, Inc. (“SmartFinancial” or the “Company”; NASDAQ: SMBK), today announced net income of $6.2 million, or $0.41 per diluted common share, for the second quarter of 2020, compared to net income of $2.7 million, or $0.19 per diluted common share for the first quarter of 2020. Operating earnings (Non-GAAP), which excludes securities gains, merger related and restructuring expenses and non-operating items, totaled $7.3 million, or $0.48 per diluted common share, in the second quarter of 2020, compared to $4.3 million, or $0.30 per diluted common share, in the first quarter of 2020.
Highlights for the Second Quarter of 2020
- Net income of $6.2 million and operating earnings of $7.3 million (Non-GAAP).
- Diluted earnings per share increased 115.8% for the quarter and diluted operating earnings per share (Non-GAAP) increased 60.0% for the quarter.
- Total assets grew to over $3 billion.
- Completed the integration of Progressive Financial Group (“PFG”)
- Tangible book value (Non-GAAP) per share of $16.90, a 6.6% year-over-year increase.
- Originated approximately 2,800 Paycheck Protection Program (“PPP”) loans totaling $292.8 million.
Billy Carroll, president & CEO, stated: “We are extremely pleased to report another very solid quarter. While finalizing our Progressive Financial Group integration and conversion, we reported outstanding increases in revenue, in particular our non-interest income performance. Our team also continues to focus on our tremendous asset quality and have worked with many new and existing clients to secure PPP funding, creating a number of great opportunities for our bank. The outlook for our company remains very strong.”
SmartFinancial’s Chairman, Miller Welborn, concluded: “We have closed another great quarter for our company. Our team has continued to successfully execute our Strategic Plan. We have strengthened our Balance Sheet, served our clients and our shareholders well and continued to increase the book value of our stock.”
Net Interest Income and Net Interest Margin
Net interest income increased $3.1 million to $25.7 million for the second quarter of 2020, compared to $22.6 million for the first quarter of 2020, primarily attributable to the full quarter effects of the Company’s March 1, 2020 acquisition of PFG (the “PFG Acquisition”) and participation in the PPP. Average earning assets increased $532.0 million, which reflects a $376.1 million increase in average loans, a $21.1 million increase in securities and a $134.8 million increase in other earning assets. Average interest-bearing liabilities increased $353.8 million, driven by an increase of $168.5 million in average interest-bearing deposits and an increase of $185.2 million in borrowings.
The tax equivalent net interest margin was 3.63% for the second quarter of 2020, compared to 3.90% for the first quarter of 2020. The tax equivalent net interest margin was impacted by a 61 basis point decline in the average yield on interest-earning assets offset by a 43 basis point decline in the rate on interest-bearing liabilities over the last quarter. The tax equivalent net interest margin, less discount accretion was 3.50% for the second quarter of 2020, a decrease from 3.58% for the first quarter of 2020.
The tax equivalent average yield on interest-earning assets was 4.22% for the second quarter of 2020, a decrease from 4.83% for the first quarter of 2020. The yield on average loans was 4.87% for the second quarter of 2020, compared to 5.35% for the first quarter of 2020. Offsetting the effects of the Federal Reserve rate cuts included in yield on average loans for the second quarter of 2020 was $1.9 million of PPP fee accretion and $888 thousand of discount accretion on acquired loans, compared to $1.8 million of discount accretion recognized in the first quarter of 2020. Additionally, increases in liquidity positions negatively impacted the net interest margin with lower yields earned on the excess cash position.
The yield on interest-bearing liabilities decreased to 0.77% for the second quarter of 2020 from 1.20% for the first quarter of 2020. The cost of average interest-bearing deposits was 0.71% for the second quarter of 2020 compared to 1.10% for the first quarter of 2020, a decrease of 39 basis points. This decrease was a result of the Company’s efforts deployed to reduce deposit rates in reaction to the Federal Reserve rate cuts.
Provision for Loan Loss and Credit Quality
Provision for loan losses was $2.9 million in the second quarter of 2020, compared to $3.2 million in the first quarter of 2020. At June 30, 2020, the allowance for loan losses was $16.3 million. The allowance for loan losses to total loans was 0.67% as of June 30, 2020, compared to 0.63% as of March 31, 2020. For the Company’s originated loans, the allowance for loan losses to originated loans, less PPP loans, was 0.89% as of June 30, 2020, compared to 0.77% as of March 31, 2020. The remaining discounts on the acquired loan portfolio totaled $16.2 million, or 3.40% of acquired loans as of June 30, 2020. The elevated provision for loan losses was due to the continued economic conditions facing the U.S. economy related to the challenges being faced with the worldwide COVID-19 pandemic.
The Company is not required to implement the provisions of the CECL accounting standard until Jan. 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 0.16% as of June 30, 2020, an increase of two basis points from the 0.14% reported in the first 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 0.28% as of June 30, 2020, as compared to 0.31% as of March 31, 2020.
Noninterest income increased $693 thousand to $3.5 million for the second quarter of 2020 compared to $2.8 million for the first quarter of 2020. During the second quarter of 2020, the primary components of the changes in noninterest income were as follows:
- Increase in mortgage banking income of $347 thousand, as volume increased during the second quarter;
- Increase in insurance commissions income of $204 thousand, due to a full quarter of revenue from the PFG Acquisition;
- Increase in interchange and debit card transaction fees of $232 thousand, related to a full quarter of activity from the PFG Acquisition; and
- Decrease in investment services income of $74 thousand.
Noninterest expense was $18.8 million for the second and first quarters of 2020. Even though noninterest expense remained constant between the second and first quarters of 2020, the primary changes within noninterest expense were as follows:
- Salaries and employee benefits increased $351 thousand. The increase is attributable to the full quarter of salaries and benefits from the PFG Acquisition, annual salary increases, and other employee benefit accruals. These increases were offset by deferred salary cost related to the origination of PPP loans; and
- Decrease of $619 thousand in merger related and restructuring expenses relating to the PFG Acquisition.
Income Tax Expense
Income tax expense was $1.4 million for the second quarter of 2020, an increase of $763 thousand, compared to $664 thousand for the first quarter of 2020.
For the second quarter of 2020, the effective tax rate was 18.8% compared to 19.6% for the first quarter of 2020.
Balance Sheet Trends
Total assets at June 30, 2020, were $3.27 billion compared with $2.45 billion at December 31, 2019. The increase of $816.9 million is primarily attributable to assets acquired from the PFG Acquisition of approximately $307.2 million, increase in cash and cash equivalents of $215.5 million and the origination of $292.8 million of PPP loans.
Total liabilities increased to $2.92 billion at June 30, 2020 from $2.14 billion at December 31, 2019. The increase of $786.1 million was primarily from deposit growth of $220.5 million, acquired deposits from the PFG Acquisition in the amount of $272.0 million and an increase in borrowings of $287.2 million.
Shareholders’ equity at June 30, 2020, totaled $343.5 million, an increase of $30.7 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 $8.9 million for the six months ended June 30, 2020 and a net change in accumulated other comprehensive income of $424 thousand, which was offset by the repurchase of the Company’s common stock of $2.1 million and $1.5 million of dividends paid. Tangible book value per share (Non-GAAP) was $16.90 at June 30, 2020, an increase from $16.82 at December 31, 2019. Tangible common equity (Non-GAAP) as a percentage of tangible assets (Non-GAAP) was 8.09% at June 30, 2020, compared with 9.93% at December 31, 2019.
Conference Call Information
SmartFinancial issued this earnings release for the second quarter of 2020 on Tuesday, July 21, 2020, and will host a conference call on Wednesday, July 22, 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, 5925756. A replay of the conference call will be available through July 22, 2021, by dialing (877) 344-7529 or (412) 317-0088 and entering the confirmation number, 10146072. 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 36 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.