SmartFinancial(SMBK) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Presents SmartFinancial's unaudited consolidated financial statements and related notes for Q2 and H1 2024 Item 1. Consolidated Financial Statements (Unaudited) Details SmartFinancial's unaudited consolidated financial statements: balance sheets, income, equity, and cash flows Consolidated Balance Sheets Presents SmartFinancial's financial position, detailing assets, liabilities, and equity as of June 30, 2024, and December 31, 2023 Consolidated Balance Sheets (Dollars in thousands) | ASSETS (Dollars in thousands) | June 30, 2024 (Unaudited) | December 31, 2023* | | :---------------------------- | :------------------------ | :----------------- | | Total cash and cash equivalents | $342,835 | $352,271 | | Securities available-for-sale | 500,821 | 408,410 | | Securities held-to-maturity | 128,996 | 281,236 | | Loans and leases, net | 3,539,468 | 3,409,396 | | Total assets | $4,891,009 | $4,829,387 | | LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in thousands) | | | | Total deposits | $4,316,656 | $4,267,854 | | Total liabilities | 4,418,544 | 4,369,501 | | Total shareholders' equity | 472,465 | 459,886 | | Total liabilities and shareholders' equity | $4,891,009 | $4,829,387 | Consolidated Statements of Income Reports SmartFinancial's revenues, expenses, and net income for Q2 and H1 2024 and 2023 Consolidated Statements of Income (Dollars in thousands, except share and per share data) | Income Statement (Dollars in thousands, except share and per share data) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total interest income | $61,285 | $52,094 | $121,067 | $105,273 | | Total interest expense | 28,471 | 20,519 | 56,532 | 37,716 | | Net interest income | 32,814 | 31,575 | 64,535 | 67,557 | | Provision for credit losses | 883 | 113 | 443 | 663 | | Total noninterest income | 7,604 | 7,130 | 15,984 | 14,055 | | Total noninterest expense | 29,201 | 27,410 | 57,754 | 54,939 | | Net income | $8,003 | $8,836 | $17,360 | $20,336 | | Basic earnings per common share | $0.48 | $0.53 | $1.03 | $1.21 | | Diluted earnings per common share | $0.48 | $0.52 | $1.03 | $1.20 | Consolidated Statements of Comprehensive Income (Loss) Details SmartFinancial's net income and other comprehensive income (loss) for Q2 and H1 2024 and 2023 Consolidated Statements of Comprehensive Income (Loss) (Dollars in thousands) | Comprehensive Income (Dollars in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $8,003 | $8,836 | $17,360 | $20,336 | | Total other comprehensive income (loss) | 1,627 | (6,397) | 109 | 307 | | Comprehensive income | $9,630 | $2,439 | $17,469 | $20,643 | Consolidated Statements of Changes in Shareholders' Equity Outlines changes in SmartFinancial's shareholders' equity, including net income, dividends, and stock transactions, for H1 2024 Consolidated Statements of Changes in Shareholders' Equity (Dollars in thousands) | Shareholders' Equity (Dollars in thousands) | Balance, December 31, 2023 | Net Income | Other Comprehensive Loss | Common Stock Issued | Restricted Stock Withheld for Taxes | Stock Compensation Expense | Common Stock Dividend | Repurchases of Common Stock | Balance, June 30, 2024 | | :------------------------------------------ | :------------------------- | :--------- | :----------------------- | :------------------ | :---------------------------------- | :------------------------- | :-------------------- | :-------------------------- | :--------------------- | | Common Stock Amount | $16,989 | — | — | $79 | $(6) | — | — | $(136) | $16,926 | | Additional Paid-in Capital | 295,699 | — | — | (36) | (139) | 894 | — | (2,832) | 293,586 | | Retained Earnings | 173,105 | 17,360 | — | — | — | — | (2,714) | — | 187,751 | | Accumulated Other Comprehensive Income (Loss) | (25,907) | — | 109 | — | — | — | — | — | (25,798) | | Total | $459,886 | $17,360 | $109 | $43 | $(145) | $894 | $(2,714) | $(2,968) | $472,465 | Consolidated Statements of Cash Flows Summarizes SmartFinancial's cash flows from operating, investing, and financing activities for H1 2024 and 2023 Consolidated Statements of Cash Flows (Dollars in thousands) | Cash Flows (Dollars in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $23,619 | $21,329 | | Net cash used in investing activities | (75,765) | (142,511) | | Net cash provided by financing activities | 42,710 | 93,656 | | Net change in cash and cash equivalents | (9,436) | (27,526) | | Cash and cash equivalents, end of period | $342,835 | $238,898 | Condensed Notes Consolidated Financial Statements Provides detailed explanations and disclosures supporting the unaudited consolidated financial statements Note 1. Presentation of Financial Information Describes SmartFinancial's business, accounting principles, and impact of recent accounting pronouncements - SmartFinancial, Inc. is a bank holding company operating SmartBank, providing financial services in East and Middle Tennessee, Alabama, and Florida[16] - The Company's interim consolidated financial statements are unaudited and prepared in accordance with U.S. GAAP, with all material intercompany balances eliminated[16][17] - Recently issued accounting pronouncements (ASU 2022-03, ASU 2023-01, ASU 2023-02) had no impact on the Company's Consolidated Financial Statements. ASU 2023-07 and ASU 2023-09 are being assessed but are not expected to have a significant impact. The SEC's climate-related disclosure rule (SEC Release No. 33-11275) is currently stayed pending judicial review[18][19][20][22][23][24] Note 2. Earnings Per Share Details basic and diluted earnings per common share calculation, showing a decrease compared to prior year Earnings Per Common Share | Earnings Per Common Share | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic | $0.48 | $0.53 | $1.03 | $1.21 | | Diluted | $0.48 | $0.52 | $1.03 | $1.20 | | Net income available to common shareholders (in thousands) | $8,003 | $8,836 | $17,360 | $20,336 | | Average common shares outstanding – basic | 16,770,819 | 16,806,389 | 16,810,277 | 16,798,939 | | Average common shares outstanding – diluted | 16,850,250 | 16,898,091 | 16,887,374 | 16,897,444 | - Basic and diluted earnings per common share for the three months ended June 30, 2024, were $0.48, down from $0.53 and $0.52 respectively in the prior year. For the six months ended June 30, 2024, both basic and diluted EPS were $1.03, a decrease from $1.21 and $1.20 in the prior year[9][27] Note 3. Securities Discusses SmartFinancial's AFS and HTM securities, noting unrealized losses primarily due to interest rate changes - Available-for-sale (AFS) securities are carried at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss)[28][29] Securities Portfolio (Dollars in thousands) | Securities (Dollars in thousands) | June 30, 2024 Amortized Cost | June 30, 2024 Fair Value | December 31, 2023 Amortized Cost | December 31, 2023 Fair Value | | :-------------------------------- | :--------------------------- | :----------------------- | :------------------------------- | :----------------------------- | | Available-for-sale: | | | | | | U.S. Treasury | $83,822 | $75,439 | $84,307 | $76,033 | | U.S. Government-sponsored enterprises (GSEs) | 45,426 | 46,035 | 46,983 | 48,093 | | Municipal securities | 18,364 | 17,818 | 18,616 | 18,276 | | Other debt securities | 42,229 | 38,993 | 36,863 | 33,069 | | Mortgage-backed securities (GSEs) | 344,087 | 322,536 | 254,288 | 232,939 | | Total AFS | $533,928 | $500,821 | $441,057 | $408,410 | | Held-to-maturity: | | | | | | U.S. Government-sponsored enterprises (GSEs) | $48,730 | $41,297 | $49,336 | $42,193 | | Municipal securities | 52,171 | 45,333 | 52,680 | 46,502 | | Mortgage-backed securities (GSEs) | 28,095 | 24,193 | 29,154 | 25,259 | | Total HTM | $128,996 | $110,823 | $281,236 | $262,538 | - Unrealized losses in both AFS and HTM portfolios are primarily due to changes in interest rates, not credit deterioration. Management does not intend to sell these securities before recovery of amortized cost, and all HTM debt securities are rated AA- or higher, leading to no allowance for credit losses[37][38][39] Note 4. Loans and Leases and Allowance for Credit Losses Analyzes SmartFinancial's loan and lease portfolio growth, credit loss allowance, and segment risk characteristics Loans and Leases Composition (Dollars in thousands) | Loans and Leases (Dollars in thousands) | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :---------------- | | Commercial real estate | $1,815,363 | $1,739,205 | | Consumer real estate | 678,331 | 649,867 | | Construction and land development | 294,575 | 327,185 | | Commercial and industrial | 701,460 | 645,918 | | Leases | 70,299 | 68,752 | | Consumer and other | 14,130 | 13,535 | | Total loans and leases | $3,574,158 | $3,444,462 | | Less: Allowance for credit losses | (34,690) | (35,066) | | Loans and leases, net | $3,539,468 | $3,409,396 | - The allowance for credit losses (ACL) was $34.7 million at June 30, 2024, down from $35.1 million at December 31, 2023. The ACL as a percentage of total loans and leases was 0.97% at June 30, 2024, compared to 1.02% at December 31, 2023, which management deems adequate[48][155] Loan Modifications (Dollars in thousands) | Loan Modifications (Dollars in thousands) | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :---------------------------------------- | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Commercial real estate | $228 | $428 | $451 | $451 | | Commercial and industrial | — | — | 219 | 219 | | Total | $228 | $428 | $670 | $670 | Note 5. Goodwill and Intangible Assets Reports SmartFinancial's goodwill and other intangible assets, including amortization expense, for H1 2024 - The carrying amount of goodwill was $96.1 million at both June 30, 2024, and December 31, 2023. The Company performs its annual goodwill impairment test as of December 31 each year[65] Other Intangible Assets (Dollars in thousands) | Other Intangible Assets (Dollars in thousands) | June 30, 2024, Net | December 31, 2023, Net | | :--------------------------------------------- | :----------------- | :--------------------- | | Core Deposit Intangibles | $6,866 | $7,712 | | Customer Relationships Intangibles | 2,918 | 3,291 | | Tradename Intangibles | - | - | | Total other intangible assets, net | $9,784 | $11,003 | - Aggregate amortization expense for other intangible assets was $608 thousand for the three months and $1.2 million for the six months ended June 30, 2024[66] Note 6. Borrowings, Line of Credit and Subordinated Debt Details SmartFinancial's borrowings, line of credit, and subordinated debt, including terms and amounts Borrowings (Dollars in thousands) | Borrowings (Dollars in thousands) | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Securities sold under customer repurchase agreements | $4,732 | $5,078 | | Other borrowings | 8,000 | 8,000 | | Total | $12,732 | $13,078 | - The Company has a $35 million revolving line of credit, with $8.0 million outstanding and $27.0 million available at June 30, 2024. The maturity of this line is February 1, 2025[71] - Subordinated debt includes $40 million in 5.625% fixed-to-floating rate notes (resetting to SOFR-based after October 2, 2023) and $2.5 million from an acquisition (6.75% fixed until August 14, 2024, then LIBOR/SOFR-based). The $2.5 million sub-debt is anticipated to be redeemed in full on August 14, 2024[72][73][74] Note 7. Employee Benefit Plans Describes SmartFinancial's 401(k) and equity incentive plans, including compensation costs and awards - The Company's 401(k) plan matches 100% of employee contributions up to 3% of compensation and 50% on the next 2%. Contributions were $455 thousand for the three months and $955 thousand for the six months ended June 30, 2024[75] Equity Incentive Plans (Number) | Equity Incentive Plans | Stock Options (Number) | Restricted Stock Awards (Number) | SARs (Number) | | :--------------------- | :--------------------- | :------------------------------- | :------------ | | Outstanding at Dec 31, 2023 | 16,340 | 171,770 | 20,000 | | Granted | — | 75,643 | — | | Exercised | (4,500) | — | (4,000) | | Vested | — | (42,076) | — | | Forfeited/expired | — | (886) | — | | Outstanding at June 30, 2024 | 11,840 | 204,451 | 16,000 | - As of June 30, 2024, there was $2.3 million of unrecognized compensation cost related to non-vested restricted stock awards, expected to be recognized over a weighted average period of 2.31 years. SARs compensation expense was $22 thousand for the three months and ($34) thousand for the six months ended June 30, 2024, with the six-month credit due to fair value adjustments[83][85] Note 8. Commitments and Contingent Liabilities Outlines SmartFinancial's off-balance sheet commitments, including credit extensions, letters of credit, and legal proceedings Off-Balance Sheet Commitments (Dollars in thousands) | Off-Balance Sheet Commitments (Dollars in thousands) | June 30, 2024 | December 31, 2023 | | :--------------------------------------------------- | :------------ | :---------------- | | Commitments to extend credit | $720,006 | $716,951 | | Standby letters of credit | 18,386 | 7,611 | - The allowance for credit losses for off-balance sheet commitments was $2.0 million at June 30, 2024, compared to $2.4 million at December 31, 2023. The expense (credit) related to this allowance was ($13) thousand for the three months and ($375) thousand for the six months ended June 30, 2024[87] - The Company is involved in various legal proceedings in the normal course of business, but management does not expect these to have a material adverse impact on the Company's consolidated financial position, financial statements, or results of operations[90] Note 9. Fair Value Disclosures Explains SmartFinancial's fair value measurements for financial instruments using a three-level hierarchy - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 quoted prices), and Level 3 (unobservable inputs)[94] Recurring Fair Value Measurements (Dollars in thousands) | Recurring Fair Value Measurements (Dollars in thousands) | June 30, 2024 Fair Value | Level 1 | Level 2 | Level 3 | | :------------------------------------------------------- | :----------------------- | :------ | :------ | :------ | | Assets: | | | | | | Securities available-for-sale | $500,821 | $— | $500,821| $— | | Derivative financial instruments and interest rate swap agreements | 13,225 | — | 13,225 | — | | Total assets at fair value | $514,046 | $— | $514,046| $— | | Liabilities: | | | | | | Derivative financial instruments and interest rate swap agreements | $14,020 | $— | $14,020 | $— | Nonrecurring Fair Value Measurements (Dollars in thousands) | Nonrecurring Fair Value Measurements (Dollars in thousands) | June 30, 2024 Fair Value | Level 1 | Level 2 | Level 3 | | :---------------------------------------------------------- | :----------------------- | :------ | :------ | :------ | | Collateral dependent loans | $654 | $— | $— | $654 | | Other real estate owned | — | — | — | — | Note 10. Derivatives Financial Instruments Discusses SmartFinancial's use of derivatives for fair value, cash flow, and customer loan hedging programs - The Company uses interest rate swaps designated as fair value hedges to convert fixed interest rates on certain available-for-sale securities to SOFR-based variable rates, recognizing gains/losses in current earnings[103] - Cash flow hedges are used to mitigate exposure to variability in future cash flows from interest rate changes. Changes in fair value are recorded in AOCI and reclassified to earnings as the hedged asset or liability affects income[106] - Non-hedged 'back-to-back' interest rate swaps are used for customer loan hedging programs, where the Company originates a variable rate loan and enters into offsetting fixed-rate swaps with the customer and a dealer bank. Changes in fair value for these are recognized in other noninterest income[109] Note 11. Leases Details SmartFinancial's operating leases for real estate, including ROU assets, liabilities, and costs - Substantially all of the Company's leases are operating leases for real estate, with terms extending through 2044. The Company elected not to include short-term leases or immaterial equipment leases on the consolidated balance sheet[112][113] Lease Balances (Dollars in thousands) | Lease Balances (Dollars in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------------------ | :------------ | :---------------- | | Operating lease right-of-use assets | $12,085 | $9,894 | | Operating lease liabilities | $12,555 | $10,303 | - As of June 30, 2024, the weighted average remaining lease term was 10.71 years, and the weighted average discount rate was 3.46%. Operating lease costs for the six months ended June 30, 2024, totaled $919 thousand[114][115] Note 12. Regulatory Matters Confirms SmartFinancial's compliance with regulatory capital requirements and discusses dividend limitations - As of June 30, 2024, SmartFinancial and SmartBank exceeded all minimum regulatory capital requirements and the 'well capitalized' regulatory classification thresholds under Basel III Rules[117][121] Regulatory Capital Ratios (June 30, 2024) | Regulatory Capital Ratios (June 30, 2024) | SmartFinancial Actual Ratio | SmartBank Actual Ratio | Minimum Capital Adequacy Ratio | | :---------------------------------------- | :-------------------------- | :--------------------- | :----------------------------- | | Total Capital (to Risk Weighted Assets) | 11.68% | 11.79% | 8.00% | | Tier 1 Capital (to Risk Weighted Assets) | 10.06% | 11.02% | 6.00% | | Common Equity Tier 1 Capital (to Risk Weighted Assets) | 10.06% | 11.02% | 4.50% | | Tier 1 Capital (to Average Assets) | 8.32% | 9.11% | 4.00% | - The Bank paid $12.5 million in dividends to the Company during the six months ended June 30, 2024, and the Company paid a quarterly common stock dividend of $0.08 per share. Future dividends are subject to the board's discretion and regulatory limitations[119][120] Note 13. Other Comprehensive Income (Loss) Explains changes in SmartFinancial's AOCI, primarily from available-for-sale securities Accumulated Other Comprehensive Income (Loss) (Dollars in thousands) | Accumulated Other Comprehensive Income (Loss) (Dollars in thousands) | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :------------------------------------------------------------------- | :------------------------------- | :----------------------------- | | Beginning balance, March 31, 2024 / December 31, 2023 | $(27,425) | $(25,907) | | Net other comprehensive income (loss) during period | 1,627 | 109 | | Ending balance, June 30, 2024 | $(25,798) | $(25,798) | - For the three months ended June 30, 2024, net other comprehensive income was $1.6 million, a positive change compared to a loss of ($6.4) million in the same period of 2023. This was largely due to unrealized holding gains on available-for-sale securities[10][122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's analysis of SmartFinancial's financial performance, condition, and risk management for H1 2024 Nature of Business Describes SmartFinancial's operations as a bank holding company, offering diverse financial services via SmartBank - SmartFinancial, Inc. is a bank holding company that owns and manages SmartBank, providing diverse financial services to individuals and corporate customers in East and Middle Tennessee, Alabama, and Florida[124] - The Company focuses on commercial real estate loans, other secured/unsecured commercial loans to small and medium-sized businesses, and various individual loans. Primary funding sources are deposits and, to a lesser extent, borrowings[125] Forward-Looking Statement Highlights inherent risks and uncertainties in forward-looking statements, cautioning against reliance on future projections - The report contains forward-looking statements based on assumptions and estimates, which are not guarantees of future performance. These statements involve known and unknown risks and uncertainties that could cause actual results to differ materially[126] - Key risk factors include economic and market conditions (inflation, interest rates), banking industry developments (bank failures, liquidity), asset quality decline, competition, regulatory changes, real estate market weakness, cyber-attacks, and the ability to retain key personnel[126][127] - The Company disclaims any obligation to update or revise forward-looking statements, which speak only as of the report date[128] Critical Accounting Estimates Discusses SmartFinancial's critical accounting policies involving significant management judgments and estimates - The Company's financial statements are prepared under GAAP, requiring estimates, assumptions, and judgments. Critical accounting policies involve difficult, subjective, and complex judgments where materially different amounts could be reported under different conditions or assumptions[129] - There have been no significant changes in the Company's application of critical accounting policies since December 31, 2023[129] Executive Summary Presents key financial highlights for SmartFinancial, including net income, EPS, loan, and deposit growth for H1 2024 Financial Highlights (Dollars in millions, except EPS) | Financial Highlights (Dollars in millions, except EPS) | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :----------------------------------------------------- | :------ | :------ | :------ | :------ | | Net income | $8.0 | $8.8 | $17.4 | $20.3 | | Diluted EPS | $0.48 | $0.52 | $1.03 | $1.20 | | Annualized return on average assets | 0.66% | 0.75% | 0.72% | 0.87% | - Net organic loan and lease increased by $130.1 million year-to-date for 2024 from December 31, 2023[130][133] - Deposit growth of $48.8 million from December 31, 2023[130][133] Analysis of Results of Operations Analyzes SmartFinancial's net income changes for Q2 and H1 2024, driven by noninterest expense, net interest income, and noninterest income - Net income for Q2 2024 decreased by $833 thousand to $8.0 million ($0.48 diluted EPS) compared to Q2 2023, primarily due to a $1.8 million increase in noninterest expense, partially offset by increases in net interest income after provision for loan losses and noninterest income[134] - For the first six months of 2024, net income decreased by $3.0 million to $17.4 million ($1.03 diluted EPS) compared to H1 2023, mainly due to a $2.8 million decrease in net interest income after provision for credit losses and a $2.8 million increase in noninterest expense, partially offset by a $1.9 million increase in noninterest income[135] - | Performance Ratios | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :----------------- | :------ | :------ | :------ | :------ | | Tax equivalent net interest margin | 2.97% | 2.93% | 2.91% | 3.12% | | Noninterest income to average assets | 0.63% | 0.61% | 0.66% | 0.60% | | Noninterest expense to average assets | 2.41% | 2.34% | 2.38% | 2.34% |[134][135] Net Interest Income and Yield Analysis Examines SmartFinancial's net interest income and margin trends, highlighting earning asset yields and liability costs - Net interest income, taxable equivalent, increased to $33.2 million for Q2 2024 (up from $31.7 million in Q2 2023) due to higher loan and lease balances and increased yields on earning assets, despite higher interest-bearing liability costs. The tax equivalent net interest margin rose to 2.97% from 2.93%[136] - For the first six months of 2024, net interest income, taxable equivalent, decreased to $65.0 million (down from $67.7 million in H1 2023). While earning asset yields increased, the cost of interest-bearing liabilities rose significantly, leading to a decrease in tax equivalent net interest margin to 2.91% from 3.12%[138] - | Key Interest Metrics | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :------------------- | :------ | :------ | :------ | :------ | | Yield on earning assets | 5.52% | 4.82% | 5.44% | 4.85% | | Cost of average interest-bearing deposits | 3.23% | 2.46% | 3.19% | 2.25% |[136][137][138][139] Noninterest Income Details SmartFinancial's noninterest income components, noting increases from service charges, investment services, and property sales Noninterest Income (Dollars in thousands) | Noninterest Income (Dollars in thousands) | Q2 2024 | Q2 2023 | Change (QoQ) | H1 2024 | H1 2023 | Change (YoY) | | :---------------------------------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Service charges on deposit accounts | $1,692 | $1,657 | $35 | $3,304 | $3,102 | $202 | | Mortgage banking | 348 | 332 | 16 | 628 | 504 | 124 | | Investment services | 1,302 | 1,300 | 2 | 2,682 | 2,305 | 377 | | Insurance commissions | 1,284 | 1,139 | 145 | 2,387 | 2,398 | (11) | | Interchange and debit card transaction fees, net | 1,343 | 1,347 | (4) | 2,596 | 2,730 | (134) | | Other | 1,635 | 1,355 | 280 | 4,387 | 3,016 | 1,371 | | Total noninterest income | $7,604 | $7,130 | $474 | $15,984 | $14,055 | $1,929 | - Noninterest income increased by $474 thousand in Q2 2024 compared to Q2 2023, driven by organic growth in insurance commissions and a $283 thousand gain on sale of a bank-owned property[141] - For the first six months of 2024, noninterest income increased by $1.9 million compared to H1 2023, primarily due to increased service charges on deposit accounts, organic growth in investment services, and a $1.6 million gain on sale of bank-owned properties[142] Noninterest Expense Analyzes SmartFinancial's noninterest expense increases, primarily due to salaries, technology, and professional services Noninterest Expense (Dollars in thousands) | Noninterest Expense (Dollars in thousands) | Q2 2024 | Q2 2023 | Change (QoQ) | H1 2024 | H1 2023 | Change (YoY) | | :----------------------------------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Salaries and employee benefits | $17,261 | $15,947 | $1,314 | $33,900 | $32,689 | $1,211 | | Occupancy and equipment | 3,324 | 3,318 | 6 | 6,720 | 6,526 | 194 | | FDIC insurance | 825 | 875 | (50) | 1,740 | 1,416 | 324 | | Other real estate and loan related expense | 538 | 441 | 97 | 1,123 | 1,013 | 110 | | Advertising and marketing | 295 | 305 | (10) | 597 | 660 | (63) | | Data processing and technology | 2,452 | 2,235 | 217 | 4,916 | 4,398 | 518 | | Professional services | 1,064 | 764 | 300 | 1,989 | 1,572 | 417 | | Amortization of intangibles | 608 | 675 | (67) | 1,220 | 1,334 | (114) | | Other | 2,834 | 2,850 | (16) | 5,549 | 5,331 | 218 | | Total noninterest expense | $29,201 | $27,410 | $1,791 | $57,754 | $54,939 | $2,815 | - Noninterest expense increased by $1.8 million in Q2 2024 compared to Q2 2023, primarily due to higher salary and employee benefits (incentive accruals, health insurance), increased data processing and technology costs, and higher professional services fees[144][145] - For the first six months of 2024, noninterest expense increased by $2.8 million compared to H1 2023, driven by overall franchise growth impacting salaries and employee benefits, increased FDIC insurance due to asset growth, continued infrastructure build in data processing and technology, and higher professional services expenses[146] Taxes Reports SmartFinancial's income tax expense and effective tax rates for Q2 and H1 2024 versus prior periods - Income tax expense for Q2 2024 was $2.3 million, with an effective tax rate of approximately 22.6%, compared to 21.0% in Q2 2023[147] - For the first six months of 2024, income tax expense totaled $5.0 million, down from $5.7 million in H1 2023. The effective tax rate was approximately 22.2% for H1 2024, compared to 21.8% for H1 2023[148] Loan and Lease Portfolio Reviews SmartFinancial's loan and lease portfolio composition, growth, and nonperforming asset trends - Total net loans and leases outstanding increased to $3.54 billion at June 30, 2024, from $3.41 billion at December 31, 2023, with commercial real estate being the largest component[149] Loan and Lease Composition (Dollars in thousands) | Loan and Lease Composition (Dollars in thousands) | June 30, 2024 | % of Gross Total | December 31, 2023 | % of Gross Total | | :------------------------------------------------ | :------------ | :--------------- | :---------------- | :--------------- | | Commercial real estate | $1,815,363 | 50.8% | $1,739,205 | 50.4% | | Consumer real estate | 678,331 | 19.0% | 649,867 | 18.9% | | Construction and land development | 294,575 | 8.2% | 327,185 | 9.5% | | Commercial and industrial | 701,460 | 19.6% | 645,918 | 18.8% | | Leases | 70,299 | 2.0% | 68,752 | 2.0% | | Consumer and other | 14,130 | 0.4% | 13,535 | 0.4% | | Total loans and leases | $3,574,158 | 100.0% | $3,444,462 | 100.0% | - Nonperforming loans and leases as a percentage of total gross loans and leases decreased to 0.19% at June 30, 2024, from 0.24% at December 31, 2023. Total nonperforming assets as a percentage of total assets remained at 0.20% for both periods[151] Securities Portfolio Discusses SmartFinancial's securities portfolio, including AFS and HTM holdings, and its asset ratio - The securities portfolio, comprising available-for-sale and held-to-maturity securities, decreased from $689.6 million at December 31, 2023, to $629.8 million at June 30, 2024, primarily due to Treasury securities maturities[158] - The securities to asset ratio decreased from 14.3% at December 31, 2023, to 12.9% at June 30, 2024[158] Securities Portfolio (Dollars in thousands) | Securities Portfolio (Dollars in thousands) | June 30, 2024 Amortized Cost | Weighted Average Yield | | :------------------------------------------ | :--------------------------- | :--------------------- | | Available-for-sale: | | | | U.S. Treasury | $83,822 | 1.27% | | U.S. Government agencies | 45,426 | 6.77% | | State and political subdivisions | 18,364 | 3.41% | | Other debt securities | 42,229 | 5.32% | | Mortgage-backed securities | 344,087 | 3.82% | | Total AFS | $533,928 | 3.77% | | Held-to-maturity: | | | | U.S. Government agencies | $48,730 | 1.86% | | State and political subdivisions | 52,171 | 2.13% | | Mortgage-backed securities | 28,095 | 2.12% | | Total HTM | $128,996 | 2.03% | Deposits Details SmartFinancial's deposit growth and increasing cost of interest-bearing deposits due to market conditions - Total deposits increased by $48.8 million to $4.32 billion at June 30, 2024, from December 31, 2023, primarily driven by organic deposit growth[163] Average Deposits (Dollars in thousands) | Average Deposits (Dollars in thousands) | Q2 2024 Average Balance | Q2 2024 Average Rate | H1 2024 Average Balance | H1 2024 Average Rate | | :-------------------------------------- | :---------------------- | :------------------- | :---------------------- | :------------------- | | Noninterest-bearing demand | $888,693 | —% | $880,767 | —% | | Interest-bearing demand | 983,433 | 2.43% | 989,790 | 2.44% | | Money market and savings | 1,909,125 | 3.48% | 1,906,990 | 3.45% | | Time deposits | 528,985 | 3.77% | 535,389 | 3.68% | | Total average deposits | $4,310,236 | 2.56% | $4,312,936 | 2.54% | - The average cost of interest-bearing deposits increased to 3.23% for Q2 2024 (from 2.46% in Q2 2023) and to 3.19% for H1 2024 (from 2.25% in H1 2023), primarily due to Federal Reserve rate increases and increased pricing competition[136][138][163] Borrowings Summarizes SmartFinancial's short-term borrowings, repurchase agreements, and subordinated debt outstanding - Borrowings totaled $12.7 million at June 30, 2024, consisting of $8.0 million in short-term borrowings and $4.7 million in securities sold under repurchase agreements. Long-term debt, entirely subordinated debt, remained at $42.1 million[165] Capital Resources Confirms SmartFinancial's and SmartBank's compliance with regulatory capital requirements and available capital raising techniques - At June 30, 2024, the Company's and the Bank's capital ratios exceeded regulatory minimum capital requirements, including Common Equity Tier 1, Tier 1, leverage, and total capital ratios[165] - The Company believes it has various capital raising techniques available to support the capital needs of its bank subsidiary if necessary[165] Liquidity and Off-Balance Sheet Arrangements Outlines SmartFinancial's liquidity position, including unused credit lines, standby letters of credit, and borrowing capacity - As of June 30, 2024, the Company had $720.0 million in pre-approved but unused lines of credit and $18.4 million in standby letters of credit[166] - The Company anticipates adequate liquidity to meet expected obligations, supported by the ability to liquidate Federal funds sold or available-for-sale securities, and unused borrowing capacity of $933.8 million from various institutions[166][173] Market Risk and Liquidity Risk Management Describes SmartFinancial's strategies for managing market and liquidity risks, including interest rate sensitivity - The Bank's Asset Liability Management Committee (ALCO) oversees market risk management, setting risk measures and limits for interest rate risk's effect on net interest income and capital. An earnings simulation model is used to quantify effects of interest rate scenarios on projected net interest income over 12-24 months[167][168] Earnings Simulation Model (June 30, 2024) | Earnings Simulation Model (June 30, 2024) | Instantaneous, Parallel Change in Prevailing Interest Rates Equal to: | | :---------------------------------------- | :------------------------------------------------------------------ | | 100 basis points increase | (1.92)% | | 200 basis points increase | (3.59)% | | 100 basis points decrease | 1.18% | | 200 basis points decrease | 1.69% | - Liquidity risk management ensures sufficient cash flows for loan demand, deposit withdrawals, and other needs, relying on asset maturities, core deposit growth, and borrowing capacity. At June 30, 2024, the Company had $2.8 million in securities maturing within 12 months and $933.8 million in unused borrowing capacity[171][173] Item 3. Quantitative and Qualitative Disclosures About Market Risk Refers to the detailed market and liquidity risk disclosures provided in Item 2 of the report - The disclosures regarding quantitative and qualitative aspects of market risk are incorporated by reference from the 'Market Risk and Liquidity Risk Management' section within Item 2 of this report[175] Item 4. Controls and Procedures Confirms effectiveness of SmartFinancial's disclosure controls, with no material changes in internal control over financial reporting - As of June 30, 2024, SmartFinancial's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective[176] - There were no changes in SmartFinancial's internal control over financial reporting during the fiscal quarter ended June 30, 2024, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[177] PART II – OTHER INFORMATION Contains additional information not covered in financial statements, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings States SmartFinancial is involved in routine legal actions, with no anticipated material adverse impact on its financial position - SmartFinancial and SmartBank are periodically involved in legal actions in the ordinary course of business. Management does not expect these to have a material adverse impact on the Company's financial condition, statements, or results[179] Item 1A. Risk Factors Directs readers to comprehensive risk factors in the Company's latest Form 10-K, with no new material changes - Readers should consider the risk factors discussed in the Company's Form 10-K for the year ended December 31, 2023. These factors could materially and adversely affect the business, financial condition, liquidity, results of operations, and capital position[180] - There are no material changes to the previously disclosed risk factors during the period covered by this report[180] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details SmartFinancial's stock repurchase plan, including shares repurchased and remaining authorization - The Company has a stock repurchase plan authorized for up to $10.0 million. As of June 30, 2024, $8.5 million has been purchased, with $1.5 million remaining available[181] Shares Repurchased | Period | Total Number of Shares Repurchased | Weighted Average Price Paid Per Share | | :-------------------------- | :--------------------------------- | :------------------------------------ | | April 1, 2024 to April 30, 2024 | 28,035 | $20.76 | | May 1, 2024 to May 31, 2024 | 94,900 | 21.72 | | June 1, 2024 to June 30, 2024 | 13,260 | 22.19 | | Total | 136,195 | $21.57 | Item 3. Defaults Upon Senior Securities Confirms that SmartFinancial reported no defaults on senior securities during the reporting period - There were no defaults upon senior securities[184] Item 4. Mine Safety Disclosures States that this disclosure item is not applicable to SmartFinancial's operations - This item is not applicable[185] Item 5. Other Information Reports no adoption, termination, or modification of Rule 10b5-1 trading arrangements by directors or executive officers - None of the Company's directors or executive officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2024[185] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including agreements, corporate documents, and certifications Exhibits List | Exhibit No. | Description | Location | | :------------ | :----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :----------------------------------------------------------------------------------------------- | | 2.1 | Asset Purchase Agreement, dated as of September 1, 2022, by Sunbelt Group, LLC, A. Mark Slater., and Rains Agency Inc. | Incorporated by reference to Exhibit 2.1 to Form 8-K filed September 6, 2022 | | 3.1 | Second Amended and Restated Charter of SmartFinancial, Inc. | Incorporated by reference to Exhibit 3.3 to Form 8-K filed September 2, 2015 | | 3.2 | Second Amended and Restated Bylaws of SmartFinancial, Inc. | Incorporated by reference to Exhibit 3.1 to Form 8-K filed October 26, 2015 | | 31.1 | Certification pursuant to Rule 13a -14(a)/15d-14(a) | Filed herewith. | | 31.2 | Certification pursuant to Rule 13a -14(a)/15d-14(a) | Filed herewith. | | 32.1 | Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002 | Furnished herewith. | | 32.2 | Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002 | Furnished herewith. | | 101 | Interactive Data Files (formatted as Inline XBRL) | Filed herewith. | | 104 | Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101) | Filed herewith |