SmartFinancial(US:SMBK)2023-05-10 21:05PART I – FINANCIAL INFORMATION This section covers the company's unaudited consolidated financial statements, management's analysis, market risk, and internal controls Item 1. Consolidated Financial Statements (Unaudited) The unaudited consolidated financial statements for Q1 2023 reflect increased assets and net income, alongside the significant impact of CECL adoption Consolidated Balance Sheets Total assets increased to $4.77 billion by March 31, 2023, driven by deposit growth, with modest increases in loans and equity Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $4,769,805 | $4,637,498 | | Loans and leases, net | $3,249,508 | $3,230,293 | | Total Deposits | $4,229,546 | $4,077,100 | | Total Liabilities | $4,326,406 | $4,205,046 | | Total Shareholders' Equity | $443,399 | $432,452 | Consolidated Statements of Income Net income for Q1 2023 rose to $11.5 million, a 39.2% increase, primarily due to higher net interest income and diluted EPS growth Income Statement Summary (in thousands, except per share data) | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $35,982 | $30,118 | | Provision for Credit Losses | $550 | $1,006 | | Noninterest Income | $6,925 | $7,111 | | Noninterest Expense | $27,529 | $25,718 | | Net Income | $11,500 | $8,259 | | Diluted EPS | $0.68 | $0.49 | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for Q1 2023 reached $18.2 million, a significant turnaround from a prior-year loss, driven by net income and unrealized gains Comprehensive Income (Loss) (in thousands) | Component | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Net Income | $11,500 | $8,259 | | Other Comprehensive Income (Loss) | $6,704 | $(16,999) | | Comprehensive Income (Loss) | $18,204 | $(8,740) | Consolidated Statement of Changes in Shareholders' Equity Shareholders' equity increased to $443.4 million, influenced by CECL adoption, net income, and comprehensive income, partially offset by dividends - Effective January 1, 2023, the company adopted ASU 2016-13 (CECL), resulting in a cumulative-effect adjustment that decreased retained earnings by $6.6 million, net of tax16 - Common stock dividends of $0.08 per share, totaling $1.35 million, were paid during the first quarter of 202316 Consolidated Statements of Cash Flows Net cash increased by $40.5 million in Q1 2023, driven by financing activities and deposit growth, despite significant investing outflows Cash Flow Summary (in thousands) | Activity | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $11,354 | $10,694 | | Net Cash from Investing Activities | $(96,834) | $(409,562) | | Net Cash from Financing Activities | $125,990 | $117,759 | | Net Change in Cash | $40,510 | $(281,109) | Notes to Consolidated Financial Statements Notes detail accounting policies, including CECL adoption which increased the allowance for credit losses, and confirm the company exceeds regulatory capital requirements - The company adopted ASU 2016-13 (CECL) on January 1, 2023, using the modified retrospective method, resulting in a $6.6 million decrease to retained earnings, net of tax, an $8.7 million increase in the allowance for credit losses (ACL), and a $3.0 million increase in the liability for unfunded commitments2441 Impact of ASU 2016-13 Adoption (in thousands) | Item | Dec 31, 2022 Balance (in thousands) | Adoption Impact (in thousands) | Jan 1, 2023 Balance (in thousands) | | :--- | :--- | :--- | :--- | | Total allowance for credit losses | $23,334 | $8,655 | $31,989 | | Unfunded lending commitments liability | $0 | $3,029 | $3,029 | - The company's allowance for credit losses (ACL) as a percentage of total loans increased from 0.72% at December 31, 2022, to 0.98% at March 31, 2023, primarily due to the CECL adoption81 - At March 31, 2023, the company and SmartBank exceeded all minimum regulatory capital requirements to be considered "well capitalized"162166 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q1 2023 performance, highlighting increased net income, deposit growth despite industry volatility, and the impact of CECL on credit losses - Despite negative industry developments and high-profile bank failures in Q1 2023, the company's total deposits increased by 3.7% ($152.4 million) from year-end 2022177179 - Uninsured/uncollateralized deposits were $1.4 billion, representing 32.9% of total deposits at March 31, 2023, a stable percentage compared to 32.8% at December 31, 2022177 - Net interest margin (tax equivalent) increased to 3.31% for Q1 2023, up from 2.91% in Q1 2022, benefiting from rising interest rates182183 - The allowance for credit losses to total loans increased to 0.98% at March 31, 2023, from 0.72% at December 31, 2022, primarily due to the adoption of CECL, which added $8.7 million to the allowance197 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using earnings simulation, showing sensitivity to rate changes, and maintains strong liquidity with significant available borrowing capacity Estimated % Change in Net Interest Income Over 12 Months (as of March 31, 2023) | Instantaneous Rate Change | % Change in NII | | :--- | :--- | | +200 bps | (3.87)% | | +100 bps | (1.88)% | | -100 bps | 1.93% | | -200 bps | 2.98% | - The company has significant available liquidity, including $211.0 million in securities maturing in the next 12 months and $781.3 million in unused borrowing capacity from various sources225 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal controls - Management concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective228 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls229 PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other miscellaneous disclosures Item 1. Legal Proceedings The company is involved in routine legal actions, with management expecting no material adverse impact on financial condition or operations - Management does not anticipate that pending or threatened legal proceedings will have a material adverse impact on the Company's financial condition231 Item 1A. Risk Factors A new material risk factor highlights the adverse impacts of recent banking industry developments on customer confidence, competition, and regulatory scrutiny - A new risk factor was added regarding recent negative developments in the banking industry, such as bank failures and market volatility233234 - Potential impacts include negative effects on customer confidence, increased competition and cost for deposits, potential losses on securities if sold, and increased regulatory scrutiny234235 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common stock was repurchased in Q1 2023, with $4.5 million remaining under the authorized stock repurchase plan - The company did not repurchase any of its common stock during the three months ended March 31, 2023241 - As of March 31, 2023, approximately $4.5 million remained available for repurchase under the company's authorized stock repurchase plan239241 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - There were no defaults upon senior securities242 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not Applicable243 Item 5. Other Information No other material information is reported under this item - There is no other information to report for this item244 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements, corporate documents, officer certifications, and XBRL data - Exhibits filed include amendments to loan agreements, CEO/CFO certifications (31.1, 31.2, 32.1, 32.2), and Interactive Data Files (101)248