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Section 1: 10-Q (10-Q)

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false2020Q1SMARTFINANCIAL INC.--12-310001038773Subsequent EventsOn April 23, 2020, the Company declared a regular quarterly cash dividend in the amount of $0.05 per share of the Company's common stock payable on May 25, 2020, to shareholders of record as of the close of business on May 8, 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United States Securities and Exchange Commission
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to               

Commission File Number: 001-37661
403949848_smbk-20200331_g1.jpg 

(Exact name of registrant as specified in its charter) 
Tennessee 62-1173944
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
5401 Kingston Pike, Suite 600 Knoxville, Tennessee
 37919
(Address of principal executive offices) (Zip Code)
   
865-437-5700
 Not Applicable
(Registrant’s telephone number, including area code) (Former name, former address and former fiscal
  year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol(s)Name of Exchange on which Registered
Common Stock, par value $1.00SMBKThe Nasdaq Stock Market

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.
Yes     No  
 
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).
Yes      No  
 
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  
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      No  

As of May 8, 2020 there were 15,216,932 shares of common stock, $1.00 par value per share, issued and outstanding.
1


TABLE OF CONTENTS
 
 
   
6
  
  
  
  
  
  
  
  
  
  
  
 

2


PART I –FINANCIAL INFORMATION 
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED BALANCE SHEETS 
(Dollars in thousands, except for share data)
(Unaudited) March 31,
2020
December 31,
2019
ASSETS:  
Cash and due from banks$38,802  $33,205  
Interest-bearing deposits with banks194,454  127,329  
Federal funds sold75,833  23,437  
Total cash and cash equivalents309,089  183,971  
Securities available-for-sale, at fair value201,002  178,348  
Other investments14,113  12,913  
Loans held for sale6,045  5,856  
Loans2,139,247  1,897,392  
  Less: Allowance for loan losses(13,431) (10,243) 
    Loans, net2,125,816  1,887,149  
Premises and equipment, net73,801  59,433  
Other real estate owned5,894  1,757  
Goodwill and core deposit intangible, net86,503  77,193  
Bank owned life insurance30,671  24,949  
Other assets20,781  17,554  
Total assets$2,873,715  $2,449,123  
LIABILITIES AND SHAREHOLDERS' EQUITY:  
Deposits:  
Noninterest-bearing demand $431,781  $364,155  
Interest-bearing demand 444,141  380,234  
Money market and savings 730,392  623,284  
Time deposits735,616  679,541  
Total deposits
2,341,930  2,047,214  
Securities sold under agreement to repurchase6,164  6,184  
Federal Home Loan Bank advances and other borrowings125,439  25,439  
Subordinated debt39,283  39,261  
Other liabilities24,699  18,278  
Total liabilities2,537,515  2,136,376  
Shareholders' equity:  
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding
    
Common stock, $1 par value; 40,000,000 shares authorized; 15,221,990 and 14,008,233 shares issued and outstanding, respectively
15,222  14,008  
Additional paid-in capital254,356  232,732  
Retained earnings67,869  65,839  
Accumulated other comprehensive income (loss)(1,247) 168  
Total shareholders' equity336,200  312,747  
Total liabilities and shareholders' equity$2,873,715  $2,449,123  

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,
 20202019
Interest income:  
Loans, including fees$26,434  $24,975  
Securities available-for-sale:
  Taxable679  971  
  Tax-exempt283  424  
Federal funds sold and other earning assets602  573  
Total interest income27,998  26,943  
Interest expense:  
Deposits4,754  5,251  
Securities sold under agreements to repurchase5  8  
Federal Home Loan Bank advances and other borrowings84  103  
Subordinated debt584  584  
Total interest expense5,427  5,946  
Net interest income
22,571  20,997  
Provision for loan losses3,200  797  
Net interest income after provision for loan losses19,371  20,200  
Noninterest income:  
Service charges on deposit accounts770  654  
Mortgage banking584  282  
Investment services437  169  
Insurance commissions269    
Interchange and debit card transaction fees276  175  
Other 482  418  
Total noninterest income2,818  1,698  
Noninterest expense:  
Salaries and employee benefits10,006  8,398  
Occupancy and equipment 1,911  1,640  
FDIC insurance180  179  
Other real estate and loan related expense545  490  
Advertising and marketing198  295  
Data processing538  615  
Professional services711  662  
Amortization of intangibles 362  344  
Software as service contracts470  567  
Merger related and restructuring expenses2,096  923  
Other1,776  1,466  
Total noninterest expense18,793  15,579  
Income before income tax expense3,396  6,319  
Income tax expense664  1,588  
Net income $2,732  $4,731  
Earnings per common share:  
Basic$0.19  $0.34  
Diluted$0.19  $0.34  
Weighted average common shares outstanding:  
Basic14,395,103  13,942,016  
Diluted14,479,671  14,018,163  
The accompanying notes are an integral part of the financial statements.
4


SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited) 
(Dollars in thousands)

Three Months Ended
March 31,
 20202019
Net income $2,732  $4,731  
Other comprehensive income:  
Unrealized holding gains and hedge effects on securities available-for-sale arising during the period1,095  2,851  
Tax effect(244) (748) 
Unrealized gains on securities available-for-sale arising during the period, net of tax851  2,103  
Unrealized gains (losses) on fair value municipal security hedges(3,072) 309  
Tax effect806  (81) 
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax(2,266) 228  
Total other comprehensive income (loss)(1,415) 2,331  
Comprehensive income$1,317  $7,062  

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, 2020 and 2019
(Dollars in thousands, except for share data)

Common Stock
SharesAmountAdditional Paid-in CapitalRetained
Earnings
Accumulated Other Comprehensive (Loss) IncomeTotal
Balance, December 31, 201813,933,504  $13,934  $231,852  $39,991  $(2,765) $283,011  
Net income
—  —  —  4,731  —  4,731  
Other comprehensive income
—  —  —  —  2,331  2,331  
Common stock issued pursuant to:
Stock awards3,298  3  61  —  —  65  
Exercise of stock options14,788  15  184  —  —  199  
Stock compensation expense
—  —  143  —  —  143  
Balance, March 31, 201913,951,590  $13,952  $232,241  $44,722  $(434) $290,481  

Balance, December 31, 201914,008,233  $14,008  $232,732  $65,839  $168  $312,747  
Net income
—  —  —  2,732  —  2,732  
Other comprehensive loss
—  —  —  —  (1,415) (1,415) 
Common stock issued pursuant to:
Exercise of stock options14,858  15  158  —  —  173  
Restricted stock, net of forfeitures31,900  32  (32) —  —    
Shareholders of Progressive Financial Group, Inc.1,292,578  1,293  23,254  —  —  24,547  
Stock compensation expense
—  —  110  —  —  110  
Common stock dividend ($0.05 per share)
—  —  —  (702) —  (702) 
Purchase of common stock(125,579) (126) (1,866) —  —  (1,992) 
Balance, March 31, 202015,221,990  $15,222  $254,356  $67,869  $(1,247) $336,200  

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)
Three Months Ended March 31,
 20202019
Cash flows from operating activities:
Net income$2,732  $4,731  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,634  1,156  
Accretion of fair value purchase accounting adjustments, net(1,841) (1,717) 
Provision for loan losses3,200  797  
Stock compensation expense110  143  
Deferred income tax expense90  1,039  
Increase in cash surrender value of bank owned life insurance(162) (158) 
Loss on disposal of fixed assets  7  
Net losses from sale of other real estate owned14  26  
Net gains from sale of loans (576) (282) 
Origination of loans held for sale(15,195) (16,805) 
Proceeds from sales of loans held for sale15,582  16,061  
Net change in:
Accrued interest receivable35  (1,093) 
Accrued interest payable784  748  
Other assets 685  (1,660) 
Other liabilities2,010  4,702  
Net cash provided by operating activities9,102  7,695  
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale2,115    
Proceeds from maturities and calls of securities available-for-sale3,250  5,000  
Proceeds from paydowns of securities available-for-sale3,816  3,173  
Purchases of securities available-for-sale(3,377) (1,054) 
Purchases of other investments(507) (899) 
Net increase in loans(52,721) (61,011) 
Purchases of premises and equipment(2,429) (1,296) 
Proceeds from sale of other real estate owned120  458  
Net cash and cash equivalents received from business combination46,132    
Net cash used in investing activities(3,601) (55,629) 
Cash flows from financing activities:
Net increase in deposits22,158  72,166  
Net decrease in securities sold under agreements to repurchase(20) (4,686) 
Proceeds from Federal Home Loan Bank advances and other borrowings100,000  50,094  
Repayment of Federal Home Loan Bank advances and other borrowings  (52,732) 
Cash dividends paid(702)   
Issuance of common stock173  264  
Purchase of common stock(1,992)   
Net cash provided by financing activities119,617  65,106  
Net change in cash and cash equivalents125,118  17,172  
Cash and cash equivalents, beginning of period183,971  115,822  
Cash and cash equivalents, end of period$309,089  $132,994  
Supplemental disclosures of cash flow information:
Cash paid during the period for interest$4,643  $5,198  
Cash paid during the period for income taxes    
Noncash investing and financing activities:
Acquisition of real estate through foreclosure676  55  
Change in goodwill due to acquisitions8,302    
Initial recognition of operating lease right-of-use assets222  2,344  
Initial recognition of operating lease liabilities222  2,344  
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") 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 SmartFinancial (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 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, 2019.
 
Recently Issued and Adopted Accounting Pronouncements:

As of January 1, 2020, the Company adopted ASU 2019-01, Leases: Codification Improvements (“ASU 2019-01”). ASU 2019-01 provides clarification to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. The adoption of ASU 2019-01 did 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, 2019 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 CECL 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, 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 a SRC.  For all 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.  


8

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not plan to adopt this standard early and adoption should not have a material impact on the Company's consolidated financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of March 31, 2020, the Bank had provided modifications to approximately $70.1 million in loans, per the guidance stated above. This interagency guidance could have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

Reclassifications:

Certain captions and amounts in the 2019 consolidated financial statements were reclassified to conform to the 2020 financial statement presentation. These reclassifications had no impact on net income or shareholders' equity as previously reported. 


9

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 2. Business Combinations

Acquisition of Progressive Financial Inc.

On March 1, 2020, the Company completed the merger of Progressive Financial Group, Inc., a Tennessee corporation ("PFG"), pursuant to an Agreement and Plan of Merger dated October 29, 2019 (the "Merger Agreement").

In connection with the merger, the Company acquired $301 million of assets and assumed $272 million of liabilities. Pursuant to the Merger Agreement, each outstanding share of Progressive common stock was converted into and cancelled in exchange to the right to receive $474.82 in cash, and 62.3808 shares of SmartFinancial common stock. SmartFinancial issued 1,292,578 shares of SmartFinancial common stock and paid $9.8 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $8.3 million, representing the intangible value of Progressive's business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.4 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

The Company's operating results for the period ended March 31, 2020, include the operating results of the acquired business for the period subsequent to the merger date of March 1, 2020.

The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands).
As recordedFair valueAs recorded
by PFG
adjustments (1)
by the Company
Assets:
Cash & cash equivalents$55,971  $  $55,971  
Investment securities available-for-sale27,054  203  27,257  
Restricted investments 692    692  
Loans191,672  (3,691) 187,981  
Allowance for loan losses(2,832) 2,832    
Premises and equipment, net15,681  (2,919) 12,762  
Bank owned life insurance5,560    5,560  
Deferred tax asset, net  813  813  
Intangibles  1,370  1,370  
Other real estate owned3,695  (