Table of Contents
.
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 June 30, 2021
☐
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
(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 $1.00
SMBK
The 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).
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 August 04, 2021, there were 15,109,736 shares of common stock, $1.00 par value per share, issued and outstanding.
TABLE OF CONTENTS
PART I –FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (Unaudited)
3
Consolidated Balance Sheets at June 30, 2021 and December 31, 2020
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2021 and 2020
4
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020
5
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020
6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020
7
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
55
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
56
Item 5.
Other Information
Item 6.
Exhibits
57
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share data)
(Unaudited)
June 30,
December 31,
2021
2020*
ASSETS:
Cash and due from banks
$
59,305
50,460
Interest-bearing deposits with banks
544,095
364,846
Federal funds sold
70,115
66,413
Total cash and cash equivalents
673,515
481,719
Securities available-for-sale, at fair value
250,817
215,634
Other investments
14,584
14,794
Loans held for sale
4,334
11,721
Loans and leases
2,468,318
2,382,243
Less: Allowance for loan and lease losses
(18,310)
(18,346)
Loans and leases, net
2,450,008
2,363,897
Premises and equipment, net
72,314
72,682
Other real estate owned
2,499
4,619
Goodwill and other intangibles, net
90,966
86,471
Bank owned life insurance
72,013
31,215
Other assets
23,306
22,197
Total assets
3,654,356
3,304,949
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand
807,560
685,957
Interest-bearing demand
702,470
649,129
Money market and savings
1,140,029
919,631
Time deposits
489,413
550,498
Total deposits
3,139,472
2,805,215
Borrowings
78,834
81,199
Subordinated debt
39,388
39,346
Other liabilities
23,269
22,021
Total liabilities
3,280,963
2,947,781
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; 15,109,736 and 15,107,214 shares issued and outstanding, respectively
15,110
15,107
Additional paid-in capital
252,039
252,693
Retained earnings
103,906
87,185
Accumulated other comprehensive income
2,338
2,183
Total shareholders' equity
373,393
357,168
Total liabilities and shareholders' equity
* Derived from audited financial statements.
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
Three Months Ended
Six Months Ended
2020
Interest income:
Loans and leases, including fees
28,323
28,663
56,341
55,097
Securities available-for-sale:
Taxable
916
589
1,640
1,268
Tax-exempt
304
416
563
699
Federal funds sold and other earning assets
309
277
600
879
Total interest income
29,852
29,945
59,144
57,943
Interest expense:
Deposits
2,248
3,366
4,579
8,120
123
249
241
339
584
1,167
Total interest expense
2,955
4,199
5,987
9,626
Net interest income
26,897
25,746
53,157
48,317
Provision for loan and lease losses
(5)
2,850
62
6,049
Net interest income after provision for loan and lease losses
26,902
22,896
53,095
42,268
Noninterest income:
Service charges on deposit accounts
1,048
709
2,057
1,479
Gain on sale of securities
16
Mortgage banking
1,105
931
2,244
1,515
Investment services
567
363
1,098
801
Insurance commissions
557
473
2,023
742
Interchange and debit card transaction fees, net
922
508
1,761
784
Other
944
511
1,652
993
Total noninterest income
5,143
3,511
10,835
6,330
Noninterest expense:
Salaries and employee benefits
12,203
10,357
23,072
20,363
Occupancy and equipment
2,294
1,996
4,635
3,906
FDIC insurance
371
180
741
360
Other real estate and loan related expense
506
346
1,108
892
Advertising and marketing
230
202
419
400
Data processing and technology
1,509
1,155
2,889
2,163
Professional services
849
868
1,490
1,578
Amortization of intangibles
441
405
886
767
Merger related and restructuring expenses
372
1,477
475
3,573
2,022
1,820
4,547
3,598
Total noninterest expense
20,797
18,806
40,262
37,600
Income before income tax expense
11,248
7,601
23,668
10,998
Income tax expense
2,470
1,427
5,134
2,091
Net income
8,778
6,174
18,534
8,907
Earnings per common share:
Basic
0.59
0.41
1.24
0.60
Diluted
0.58
1.23
Weighted average common shares outstanding:
15,003,657
15,152,768
15,007,593
14,773,935
15,126,184
15,202,335
15,118,924
14,842,486
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive income:
Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period
1,554
1,808
(1,255)
2,903
Tax effect
(401)
(394)
338
(638)
Reclassification adjustment for realized (gains) losses included in net income
(4)
Unrealized gains (losses) on securities available-for-sale arising during the period, net of tax
1,153
1,426
(917)
2,277
Unrealized gains (losses) on fair value municipal security hedges
139
691
1,451
(2,381)
(37)
(278)
(379)
528
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax
102
413
1,072
(1,853)
Total other comprehensive income
1,255
1,839
155
424
Comprehensive income
10,033
8,013
18,689
9,331
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - (Unaudited)
For the Three and Six Months Ended June 30, 2021 and 2020
Accumulated
Common Stock
Additional
Retained
Comprehensive
Shares
Amount
Paid-in Capital
Earnings
(Loss) Income
Total
Balance, December 31, 2019
14,008,233
14,008
232,732
65,839
168
312,747
Other comprehensive income
Common stock issued pursuant to:
Exercise of stock options
15,358
162
178
Restricted stock
32,318
32
(32)
Shareholders' of Progressive Financial Group, Inc.
1,292,578
1,293
23,254
24,547
Stock compensation expense
223
Common stock dividend ($0.10 per share)
(1,463)
Repurchases of common stock
(131,555)
(132)
(1,943)
(2,075)
Balance, June 30, 2020
15,216,932
15,217
254,396
73,283
592
343,488
Balance, December 31, 2020
15,107,214
19,165
19
175
194
42,967
43
(43)
Common stock dividend ($0.12 per share)
(1,813)
(59,610)
(59)
(1,149)
(1,208)
Balance, June 30, 2021
15,109,736
Balance, March 31, 2020
15,221,990
15,222
254,356
67,869
(1,247)
336,200
500
1
418
113
Common stock dividend ($0.05 per share)
(760)
(5,976)
(6)
(77)
(83)
Balance, March 31, 2021
15,104,536
15,105
251,836
96,034
1,083
364,058
3,200
46
2,000
(2)
Common stock dividends ($0.06 per share)
(906)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
3,132
2,788
Accretion of fair value purchase accounting adjustments, net
(2,397)
(2,729)
Gain from redemption and sale of securities available-for-sale
(16)
Deferred income tax expense
147
209
Increase in cash surrender value of bank owned life insurance
(797)
(345)
Net losses from sale of other real estate owned
170
81
Net gains from mortgage banking
(2,244)
(1,515)
Origination of loans held for sale
(65,896)
(49,888)
Proceeds from sales of loans held for sale
75,528
50,929
Net change in:
Accrued interest receivable
1,309
(5,236)
Accrued interest payable
(218)
318
(1,015)
(10,018)
4,503
1,523
Net cash provided by operating activities
31,181
1,280
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
6,875
Proceeds from maturities and calls of securities available-for-sale
11,275
15,450
Proceeds from paydowns of securities available-for-sale
15,989
9,144
Proceeds from sales of other investments
290
Purchases of securities available-for-sale
(65,180)
(41,958)
Purchases of other investments
(80)
(1,223)
Purchases of bank owned life insurance
(40,000)
Net increase in loans and leases
(31,545)
(321,192)
Purchases of premises and equipment
(1,633)
(3,417)
Proceeds from sale of other real estate owned
1,662
406
Net cash (paid) received from business combination
(59,381)
46,132
Net cash used in investing activities
(168,603)
(289,783)
Cash flows from financing activities:
Net increase in deposits
334,410
220,128
Net decrease in securities sold under agreements to repurchase
(1,969)
(527)
Proceeds from borrowings
338,340
Repayment borrowings
(396)
(50,581)
Cash dividends paid
Issuance of common stock
Net cash provided by financing activities
329,218
504,000
Net change in cash and cash equivalents
191,796
215,497
Cash and cash equivalents, beginning of period
183,970
Cash and cash equivalents, end of period
399,467
Supplemental disclosures of cash flow information:
Cash paid during the period for interest
6,205
9,308
Cash paid during the period for income taxes
7,720
2,948
Noncash investing and financing activities:
Acquisition of real estate through foreclosure
151
971
Change in goodwill due to acquisitions
2,723
8,532
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 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 and lease 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, 2020.
Recently Issued and Adopted Accounting Pronouncements:
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Finally, it clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020. ASU 2019-12 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, 2020 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 the Current Expected Credit Loss (“CECL”) model 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 that are not SRCs, 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 an SRC. For SRCs and 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.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”). It is intended to help stakeholders during the global market-wide reference rate transition period. The Company is implementing a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the transition away from LIBOR for its loan and other financial instruments.
Operating, Accounting and Reporting Considerations related to COVID-19:
The COVID-19 pandemic has negatively impacted the global economy. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:
Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:
9
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Company offered deferral options of: 1) three months deferral of payment and then three months of interest only, 2) three months of interest only, 3) three months deferral of payment, 4) six months of interest only. These modifications generally meet the criteria of both Section 4013 of the CARES Act and the joint interagency statement, and therefore, the Company does not account for such loan modifications as TDRs. On August 3, 2020, the Federal Financial Institutions Examination Council on behalf of its members (collectively “the FFIEC members”) issued a joint statement on additional loan accommodations related to COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. To be eligible, each loan modification must be (1) related to the COVID event; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The December 31, 2020 deadline was subsequently extended to January 1, 2022, by the CAA. All of the Company’s loan modifications granted under Section 4013 of the CARES Act are in compliance with the aforementioned FFIEC requirements. Accordingly, the Company does not account for such loan modifications as TDRs.
Reclassifications:
Certain captions and amounts in the 2020 consolidated financial statements were reclassified to conform to the 2021 financial statement presentation. These reclassifications had no impact on net income or shareholders’ equity as previously reported.
10
Note 2. Business Combinations
Fountain Leasing, LLC
On May 3, 2021, the Company completed the acquisition of Fountain Leasing, LLC, a Tennessee limited liability company, pursuant to the Purchase Agreement (the “Purchase Agreement”), dated May 2, 2021, by and among the Bank and the members of Fountain Leasing, LLC.
Following the closing of the acquisition, on May 4, 2021, the Company changed the name of Fountain Leasing, LLC to Fountain Equipment Finance, LLC (“Fountain”).
In connection with the acquisition, the Company acquired $54.1 million of assets and assumed $683 thousand of liabilities. Pursuant to the Purchase Agreement, the Company paid an aggregate amount of consideration to the Fountain members of $14.0 million in cash at closing, and the Company repaid approximately $45.8 million of Fountain’s indebtedness. In addition to the closing consideration, the Purchase Agreement contains a performance-based earnout, pursuant to which the former members of Fountain could be entitled to up to $6.0 million, which is excluded from consideration pursuant to ASC 805, in future cash payments from the Company based on future results of the acquired business over various periods through December 31, 2026. 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 $2.4 million, representing the intangible value of Fountains business and reputation within the markets it served. The goodwill recognized is expected to be deductible for income tax purposes. The Company established an intangible asset related to customer relationships of $2.7 million, amortizing sum-of-the-years digits over 96 months (8 years).
The purchased assets and assumed liabilities were recorded at their acquisition date fair values (1) and are summarized in the table below (in thousands).
As recorded
Fair value
Subsequent
by Fountain
adjustments
Adjustments
by the Company
Assets:
Cash & cash equivalents
Leases
54,945
(720)
54,225
Allowance for lease losses
(1,796)
1,796
Customer list intangible
2,658
Other repossessed assets
319
233
Total assets acquired
54,114
3,734
57,848
Liabilities:
Payables and other liabilities
683
(229)
454
Total liabilities assumed
Excess of assets acquired over liabilities assumed
53,431
Aggregate fair value adjustments
3,963
Total identifiable net assets
57,394
Consideration transferred:
Cash
59,794
Total fair value of consideration transferred
Goodwill
2,400
(1) Fair values are preliminary and are subject to refinement for a period of one year after the closing date of an acquisition as information relative to the closing date fair value becomes available.
11
The following table presents additional information related to the purchased credit impaired financing leases (ASC 310-30) of the acquired lease portfolio at the acquisition date (in thousands):
May 3, 2021
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest
6,018
Non-accretable differences
447
Cash flows expected to be collected
5,571
Accretable yield
649
4,922
The following table discloses the impact of the merger with Fountain since the acquisition date through the three and six months June 30, 2021. The table also presents certain pro-forma information (net interest income plus total noninterest income (“Revenue”) and net income) as if the Fountain acquisition had occurred on January 1, 2020. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.
Merger-related costs from the three and six months ended June 30, 2021, were $140 thousand for both periods and have been excluded from the pro-forma information presented below. The actual results and pro-forma information were as follows (in thousands):
Revenue
Net Income
2021:
Actual Fountain results included in statement of income since acquisition date
1,137
345
Supplemental consolidation pro-forma as if Fountain had been acquired January 1, 2021
32,487
8,844
65,780
18,487
2020:
Supplemental consolidation pro-forma as if Fountain had been acquired January 1, 2020
30,659
6,434
57,451
9,530
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 $301.0 million of assets and assumed $272.1 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 $8.8 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 also established two intangible assets related to the insurance agency acquired as part of the PFG acquisition; 1.) Customer relationships of $1.1 million, amortizing sum-of-the-years digits over 120 months (10 years), 2.) Tradename of $63 thousand, amortizing straight-line over 60 months (5 years).
12
Initial
by PFG
55,971
Investment securities available-for-sale
27,054
203
27,257
Restricted investments
692
Loans
191,672
(3,691)
187,981
Allowance for loan losses
(2,832)
2,832
15,681
(2,919)
12,762
5,560
Deferred tax asset, net
813
193
1,006
Intangibles
1,370
1,127
2,497
3,695
(100)
(1,862)
1,733
Interest Receivable
1,061
(280)
781
Prepaids
375
(174)
201
231
(231)
1,881
301,041
(2,177)
(542)
298,322
271,276
Time deposit premium
729
776
272,052
272,781
28,989
(2,906)
25,541
9,838
Common stock issued (1,292,578 shares)
34,385
The following table presents additional information related to the purchased credit impaired loans (ASC 310-30) of the acquired loan portfolio at the acquisition date (in thousands):
March 1, 2020
21,107
4,706
16,401
2,515
13,886
Note 3. Earnings Per Share
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock options and restricted stock. The effect from the stock options and restricted stock on
13
incremental shares from the assumed conversions for net income per share-basic and net income per share-diluted are presented below. There were no antidilutive shares for the three and six months ended June 30, 2021. There were 116 thousand and 85 thousand antidilutive shares for the three and six months ended June 30, 2020, respectively.
The following is a summary of the basic and diluted earnings per share computation (dollars in thousands, except per share data):
Basic earnings per share computation:
Net income available to common shareholders
Average common shares outstanding – basic
Basic earnings per share
Diluted earnings per share computation:
Incremental shares from assumed conversions:
Stock options and restricted stock
122,527
49,567
111,331
68,551
Average common shares outstanding - diluted
Diluted earnings per common share
Note 4. Securities
The amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale are summarized as follows (in thousands):
June 30, 2021
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. Treasury
6,381
6,438
U.S. Government-sponsored enterprises (GSEs)
73,503
191
(1,074)
72,620
Municipal securities
86,720
2,188
88,908
Other debt securities
29,019
414
(82)
29,351
Mortgage-backed securities (GSEs)
52,430
1,201
(131)
53,500
248,053
4,051
(1,287)
December 31, 2020
30,526
30,530
89,644
2,345
91,989
25,019
112
(13)
25,118
66,425
1,754
(182)
67,997
211,614
4,221
(201)
At June 30, 2021 and December 31, 2020, securities with a carrying value totaling approximately $122.4 million and $80.2 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.
The Company has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair values of available for sale securities. See Note 11 – Derivatives Financial Instruments for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.
14
Proceeds from sale of securities available for sale, gross gains and gross losses on sales and redemptions for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands):
Proceeds from sales
-
4,760
Gross gains
Gross losses
Proceeds from maturities and calls
2,178
12,200
The amortized cost and estimated fair value of securities at June 30, 2021, by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
5,025
5,041
Due from one year to five years
4,039
4,058
Due from five years to ten years
66,493
67,152
Due after ten years
120,066
121,066
195,623
197,317
Mortgage-backed securities
The following tables present the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities available-for-sale have been in a continuous unrealized loss position (in thousands):
Less than 12 Months
12 Months or Greater
Number
of
Securities
35,861
(1,071)
841
(3)
36,702
10,918
36
9,862
9,898
46,815
(1,153)
15
10,703
(134)
57,518
24
15,510
132
(1)
15,642
1,495
977
(8)
2,472
9,790
(87)
6,083
(95)
15,873
26,795
(97)
7,192
(104)
33,987
The Company reviews the securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.
Based on this evaluation, the Company concluded that any unrealized losses at June 30, 2021, represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of June 30, 2021, the Company does not intend to sell any of the securities, does not expect to be required to sell any of the securities, and expects to recover the entire amortized cost of all of the securities.
The following is the amortized cost and carrying value of other investments (in thousands):
Federal Reserve Bank stock
8,316
8,606
Federal Home Loan Bank stock
5,918
5,838
First National Bankers Bank stock
350
Our restricted investments consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of June 30, 2021, the Company determined that there was no impairment on its other investments.
Note 5. Loans and Leases and Allowance for Loan and Lease Losses
Portfolio Segmentation:
Major categories of loans and leases are summarized as follows (in thousands):
PCI
All Other
Loans and Leases1
Loans and Leases
Commercial real estate
11,371
1,151,120
1,162,491
16,123
996,853
1,012,976
Consumer real estate
8,975
435,665
444,640
10,258
433,672
443,930
Construction and land development
5,265
295,439
300,704
5,348
272,727
278,075
Commercial and industrial
261
495,853
496,114
308
634,138
634,446
4,214
48,824
53,038
Consumer and other
11,315
11,331
27
12,789
12,816
Total loans and leases
30,102
2,438,216
32,064
2,350,179
(371)
(17,939)
(309)
(18,037)
29,731
2,420,277
31,755
2,332,142
1 Purchased Credit Impaired loans and leases (“PCI loans and leases”) are loans and leases with evidence of credit deterioration at purchase.
For purposes of the disclosures required pursuant to ASC 310, the loan and lease portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are six loan and lease portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, and consumer and other.
As previously mentioned in Note 1 – Presentation of Financial Information, the CARES Act established the PPP, administered directly by the SBA. The PPP provides loans of up to $10 million to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. PPP loans carry an interest rate of one percent, and a maturity of two or five years. These loans are fully guaranteed by the SBA and are not included in the Company’s loan and lease loss allowance calculations. The loans may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA pays the Company fees for processing PPP loans and the fees are accounted for as loan origination fees and recognized over the contractual loan term as a yield adjustment on the loans. At June 30, 2021, the net deferred fees outstanding for the 2020 PPP loans is $131 thousand and $6.5 million for the 2021 PPP loans, respectively. At December 31, 2020, the net deferred fees outstanding for the 2020 PPP loans is $4.2 million. PPP loans are included in the Commercial and Industrial loan segments. As of June 30, 2021, the Company had 2,015 PPP loans outstanding, with an outstanding principal balance of $178.9 million and as of December 31, 2020, the Company had 2,863 PPP loans outstanding, with an outstanding principal balance of $288.9 million.
The composition of loans and leases by loan classification for performing, impaired and PCI loan and leases status is summarized in the tables below (in thousands):
Construction
Commercial
Consumer
and Land
and
Real Estate
Development
Industrial
and Other
June 30, 2021:
Performing loans and leases
1,150,261
433,218
495,645
2,434,702
Impaired loans and leases
859
2,447
208
3,514
PCI loans and leases
December 31, 2020:
992,982
432,356
633,992
2,344,846
3,871
1,316
146
5,333
The following tables show the allowance for loan and lease losses allocation by loan and lease classification for impaired, PCI, and performing (in thousands):
7,965
3,096
2,061
4,021
100
17,243
417
71
696
8,382
3,167
4,229
17,939
156
213
3,323
4,442
18,310
7,579
3,267
2,076
4,768
110
17,800
116
121
237
3,383
4,889
18,037
88
218
3,471
5,107
18,346
17
The following tables detail the changes in the allowance for loan and lease losses by loan and lease classification (in thousands):
Three Months Ended June 30, 2021
Real
Estate
Beginning balance
7,636
3,309
1,968
5,347
18,370
Charged-off loans and leases
(60)
(89)
(153)
Recoveries of charge-offs
83
98
Provision charged to expense
743
69
93
(908)
Ending balance
Three Months Ended June 30, 2020
5,963
3,301
1,484
2,557
126
13,431
(9)
(66)
(75)
28
48
629
311
1,889
20
6,595
3,313
1,795
4,443
108
16,254
Six Months Ended June 30, 2021
(209)
(273)
21
138
797
(109)
(15)
(671)
60
Six Months Ended June 30, 2020
4,508
2,576
1,957
75
10,243
(17)
(142)
(161)
49
50
2,082
722
666
2,454
125
We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the three and six months ended June 30, 2021, is ($5) thousand and $62 thousand, respectively, and $2.9 million $6.0 million, during the three and six months ended June 30, 2020, respectively. As of June 30, 2021, and December 31, 2020, our allowance for loan and lease losses was $18.3 million, which we deemed to be adequate at each of the respective dates. Our allowance for loan and lease losses as a percentage of total loans and leases was 0.74% at June 30, 2021 and 0.77% at December 31, 2020.
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The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating (in thousands):
Non PCI Loans and Leases:
Pass
1,109,079
431,122
295,119
490,144
11,241
2,385,529
Watch
37,077
1,637
243
5,087
44,093
Special mention
3,881
42
271
4,194
Substandard
2,864
77
306
25
4,355
Doubtful
45
PCI Loans and Leases:
8,699
7,593
1,342
215
22,078
1,570
234
3,449
5,254
74
1,085
1,091
474
2,696
922,153
417,302
269,350
625,836
12,622
2,247,263
66,287
14,218
3,296
7,673
137
91,611
4,446
320
4,812
3,967
2,020
30
6,359
86
134
11,072
1,008
262
20,749
3,381
224
3,820
7,427
76
1,651
1,595
520
3,812
Past Due Loans and Leases:
A loan or lease is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan or lease agreement. Generally, management places a loan or lease on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan or lease is 90 days past due.
The following tables present an aging analysis of our loan and lease portfolio (in thousands):
30-60 Days
61-89 Days
Past Due 90
Past Due and
Days or More
Accruing
and Accruing
Nonaccrual
Current
258
2,676
2,947
432,718
95
295,344
1,346
296
64
1,844
494,009
40
85
48,739
174
11,141
1,895
351
3,694
6,004
2,432,212
67
3,740
3,941
992,912
1,916
51
82
1,823
3,872
429,800
245
257
272,470
124
634,014
22
41
12,748
2,321
149
5,633
8,235
2,341,944
Impaired Loans and Leases:
The following is an analysis of the impaired loan and lease portfolio, including PCI loans and leases, detailing the related allowance recorded (in thousands):
Unpaid
Recorded
Principal
Related
Investment
Balance
Allowance
Impaired loans and leases without a valuation allowance:
2,186
2,187
888
4,759
Impaired loans and leases with a valuation allowance:
264
428
1,328
1,331
574
PCI loans and leases:
1,332
1,827
2,086
270
1,476
1,575
2,118
2,340
Total impaired loans and leases
4,990
5,093
1,067
7,451
7,674
546
Three Months Ended June 30,
Average
Interest
Income
Recognized
65
2,033
633
2,098
1,282
2,007
396
827
159
158
2,526
1,381
490
1,115
1,168
38
263
1,394
2,134
4,797
1,334
315
606
385
2,985
1,306
1,338
104
383
882
154
1,875
117
1,304
333
1,165
1,174
266
361
31
1,449
1,976
6,309
183
4,586
Troubled Debt Restructurings:
For the periods presented, impaired loans included loans that were classified as TDRs. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.
In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor’s projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.
The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan.
The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan.
As of June 30, 2021 and December 31, 2020, management had approximately $219 thousand and $257 thousand, respectively, in loans that met the criteria for TDR, none of which were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current, and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
There were no loans that were modified as a TDR during the six months ended June 30, 2021, and one loan that was modified during the six months ended June 30, 2020. There were no loans that were modified as TDRs during the past six months and for which there was a subsequent payment default.
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid Relief and Economic Security (“CARES”) Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 Presentation of Financial Information for more information. At June 30, 2021, the Company had no loans remaining under COVID-19 modifications.
Foreclosure Proceedings and Balances:
As of June 30, 2021, there was one residential property secured by real estate included in other real estate owned and there were two residential real estate loans totaling $103 thousand in the process of foreclosure.
Purchased Credit Impaired Loans and Leases:
The Company has acquired loans and leases where there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans and leases are as follows (in thousands):
18,456
23,787
11,342
12,692
858
1,812
6,313
6,521
4,603
94
161
41,666
44,973
Less: Remaining purchase discount
(11,564)
(12,909)
Total loans and leases, net of purchase discount
Less: Allowance for loan and leases losses
Carrying amount, net of allowance
Activity related to the accretable yield on loans and leases acquired with deteriorated credit quality is as follows (in thousands):
Accretable yield, beginning of period
14,705
10,979
16,889
8,454
Additions
Accretion income
(1,098)
(1,057)
(3,029)
(3,134)
Reclassification
1,340
247
1,677
Other changes, net
1,608
(1,664)
1,779
Accretable yield, end of period
14,522
11,777
Note 6. Goodwill and Intangible Assets
In accordance with FASB ASC 350, Goodwill and Other, regarding testing goodwill for impairment provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company performs its annual goodwill impairment test as of December 31 of each year. Considering the recent economic conditions resulting from the COVID-19 pandemic the Company performed a Step 1 goodwill impairment test (which compares the fair value of a reporting unit with its carrying amount, including goodwill) at December 31, 2020, the results indicated that there was no impairment. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.
The Company’s other intangible assets consist of core deposit, customer relationships and tradename. They are initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer deposits, the customer relationships are amortized over a weighted average of 8.6 years and the tradename is amortized over five years.
23
The carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands):
Goodwill:
Balance, beginning of period
74,135
65,614
Acquisition of PFG
323
8,521
Acquisition of Fountain
Balance, end of the period
76,858
Core Deposit
Customer Relationships
Tradename
Amortized other intangible assets:
Beginning balance January 1, 2021, gross
15,920
1,064
63
17,047
Balance, June 30, 2021, other intangible assets, gross
3,722
19,705
Less: accumulated amortization
(5,330)
(250)
(5,597)
Balance, June 30, 2021, other intangible assets, net
10,590
3,472
14,108
Beginning balance January 1, 2020, gross
14,550
Balance, December 31, 2020, other intangible assets, gross
(4,540)
(10)
(4,711)
Balance, December 31, 2020, other intangible assets, net
11,380
903
53
12,336
The aggregate amortization expense for other intangible assets for the three and six months ended June 30, 2021 was $441 thousand and $886 thousand, respectively, and for the three and six months ended June 30, 2020, was $405 thousand and $767 thousand, respectively.
The estimated aggregate amortization expense for future periods for core deposit intangibles is as follows (in thousands):
Remainder of 2021
1,270
2022
2,238
2023
2,103
2024
1,981
2025
1,850
Thereafter
4,666
Note 7. Borrowings, Line of Credit and Subordinated Debt
Borrowings:
At June 30, 2021, total borrowings were $78.8 million compared to $81.2 million at December 31, 2020. Borrowings consist of the following (dollars in thousands):
Securities sold under customer repurchase agreements
3,834
5,803
FHLB borrowings
75,000
Other borrowings
Securities Sold Under Agreements to Repurchase:
The Company had securities sold under agreements to repurchase with commercial checking customers which were secured by government agency securities. The carrying value of investment securities pledged as collateral under repurchase agreements was $5.6 million and $7.6 million at June 30, 2021 and December 31, 2020, respectively.
Line of Credit:
The Company has a Loan and Security Agreement and revolving note with ServisFirst Bank, pursuant to which ServisFirst Bank has made a $25.0 million revolving line of credit available to the Company. The maturity of the line of credit is September 24, 2021. At June 30, 2021, there was no outstanding balance under the line of credit, and the entire amount of the line of credit remained available to the Company.
Subordinated Debit:
On September 28, 2018, the Company issued $40 million of 5.625% fixed-to-floating rate subordinated notes (the "Notes"), which was outstanding as of June 30, 2021 and December 31, 2020. Unamortized debt issuance cost was $612 thousand and $654 thousand at June 30, 2021 and December 31, 2020, respectively.
The Notes initially bears interest at a rate of 5.625% per annum from and including September 28, 2018, to but excluding October 2, 2023, with interest during this period payable semi-annually in arrears. From and including October 2, 2023, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month LIBOR, or an alternative rate determined in accordance with the terms of the Notes if three-month LIBOR cannot be determined, plus 255 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company, in whole or in part, on or after October 2, 2023, and at any time, in whole but not in part, upon the occurrence of certain events. The Notes have been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes.
The Notes debt issuance costs totaled $842 thousand and will be amortized through the Notes’ maturity date. Amortization expense totaled $21 thousand and $42 thousand for the three and six months ended June 30, 2021 and June 30, 2020, respectively.
Note 8. Employee Benefit Plans
401(k) Plan:
The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After 90 days of service the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The Company’s contribution to the Plan for the three and six months ending June 30, 2021, was $350 thousand and $638 thousand, respectively. The Company’s contribution to the Plan for the three and six months ending June 30, 2020, was $307 thousand and $558 thousand, respectively.
Equity Incentive Plans:
The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At June 30, 2021, the Company had one active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which had 18,811 rights issued and 1,832,427 Rights available for future grants or awards.
In addition, the Company has 19,250 Rights issued from the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan, 40,250 Rights issued from the Cornerstone Non-Qualified Plan Options, and 2,266 Rights issued from the Capstone Stock Option Plan. These plans do not have any Rights available for future grants or awards.
Stock Options:
A summary of the status of stock option plans is presented in the following table:
Weighted
Exercisable
Price
Outstanding at December 31, 2020
99,617
10.19
Granted
Exercised
(19,040)
10.18
Forfeited
Outstanding at June 30, 2021
80,577
The Company did not recognize any stock option-based compensation expense during the three and six months ended June 30, 2021 and 2020, respectively, as all stock options issued are fully vested.
Information pertaining to stock options outstanding at June 30, 2021, is as follows:
Options Outstanding
Options Exercisable
Weighted-
Remaining
Exercise
Contractual
Prices
Outstanding
Life
6.60
19,250
0.70 years
9.48
18,000
1.70 years
9.60
22,250
2.50 years
11.76
2,266
1.00 years
15.05
18,811
4.00 years
Outstanding, end of period
2.20 years
The intrinsic value of options exercised during the three and six months ended June 30, 2021 was $27 thousand and $220 thousand, and $2 thousand and $66 thousand, during the three and six months ended June 30, 2020, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at June 30, 2021, was $1.1 million. Cash received from options exercised under all share-based payment arrangements for the six months ended June 30, 2021 was $194 thousand.
No options vested during the six months ended June 30, 2021 and 2020, respectively. The income tax expense/benefit recognized for the exercise of options during the three and six months ended June 30, 2021, was a benefit of $8 thousand and $9 thousand, respectively, and for the three and six months ended June 30, 2020, was an expense of $2 thousand and a benefit of $22 thousand, respectively.
As of June 30, 2021, all options were fully vested and currently no future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.
26
Restricted Stock Awards:
A summary of the activity of the Company’s unvested restricted stock awards for the period ended June 30, 2021 is presented below:
Grant-Date
Fair Value
Balance at December 31, 2020
100,218
19.07
50,967
20.23
Vested
(5,985)
22.29
Forfeited/expired
Balance at June 30, 2021
145,200
19.34
The Company measures the fair value of restricted stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. The compensation expense for restricted stock awards during the three and six months ended June 30, 2021, was $162 thousand and $363 thousand, respectively, and was $113 thousand and $223 thousand, during the three and six months ended June 30, 2020, respectively. As of June 30, 2021, there was $1.7 million, respectively, of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of 2.99 years. The grant-date fair value of restricted stock awards vested was $133 thousand for the six months ended June 30, 2021.
Stock Appreciation Rights ("SARs"):
A summary of the status of SARs plans is presented in the following table:
Exercisable Price
73,000
19.02
22,000
20.70
(11,500)
21.61
(6,000)
18.00
77,500
19.19
Information pertaining to SARs outstanding at June 30, 2021, is as follows:
SARs Outstanding
SARs Exercisable
Weighted- Average
15.19
16,000
18.12
19,000
1.50 years
20,000
3.51 years
22,500
0.50 years
1.94 years
SARs compensation expense of $64 thousand and $113 thousand was recognized for the three and six months ended June 30, 2021, respectively, and $92 thousand and ($26) thousand for the three and six months ended June 30, 2020. The credit in expense for the six months ended June 30, 2020, was due to adjustments related to the fair value evaluation of SARs.
Note 9. Commitments and Contingent Liabilities
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized on the balance sheet. The majority of all commitments to extend credit are variable rate instruments while the standby letters of credit are primarily fixed rate instruments. The Company’s exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
A summary of the Company’s total contractual amount for all off-balance sheet commitments are as follows (in thousands):
Commitments to extend credit
640,269
476,841
Standby letters of credit
7,540
5,261
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At June 30, 2021 and December 31, 2020, the carrying amount of liabilities related to the Company’s obligation to perform under standby letters of credit was insignificant.
The Company is subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company will be material to the Company’s consolidated financial position. On an on-going basis, the Company assesses any potential liabilities or contingencies in connection with such legal proceedings. For those matters where it is deemed probable that the Company will incur losses and the amount of the losses can be reasonably estimated, the Company would record an expense and corresponding liability in its consolidated financial statements.
Note 10. Fair Value Disclosures
Determination of Fair Value:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact business at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy:
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
29
Recurring Measurements of Fair Value:
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
Quoted Prices in
Significant
Active Markets
for Identical
Observable
Unobservable
Assets
Inputs
Description
(Level 1)
(Level 2)
(Level 3)
Total securities available-for-sale
Derivative financial instruments
4,468
During the six months ending June 30, 2021, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.
Securities available-for-sale - The fair value of U.S. Treasury, U.S. Government-sponsored enterprises, municipal securities, other debt securities and mortgage-backed securities, is estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2.
Derivative financial instruments - The fair value for derivative financial instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters. The derivative financial instruments are generally classified Level 2.
Assets Measured at Fair Value on a Nonrecurring Basis:
Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):
Impaired loans
1,737
2,455
For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below (dollars in thousands):
Valuation
Significant Other
Average of
Technique
Unobservable Input
Input
Appraisal
Appraisal discounts
%
Impaired loans: Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. An impaired loan can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. The fair value of impaired loans was measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.
Other real estate owned: Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate.
Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.
Carrying value and estimated fair value:
The carrying amount and estimated fair value of the Company’s financial instruments are as follows (in thousands):
Fair Value Measurements Using
Carrying
Estimated
Level 1
Level 2
Level 3
Cash and cash equivalents
Securities available-for-sale
N/A
Loans and leases, net and loans held for sale
2,454,342
2,455,130
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market and savings deposits
492,243
79,847
41,302
2,375,618
2,377,581
554,120
82,892
40,550
Limitations:
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Note 11.Derivatives Financial Instruments
Derivatives designated as fair value hedges:
Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge instrument as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate tax-exempt callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. The Company has elected early adoption of ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, which allows such partial term hedge designations.
A summary of the Company’s fair value hedge relationships for the periods presented are as follows (dollars in thousands):
Sheet
Maturity
Receive
Notional
Liability derivatives
Location
(In Years)
Pay Rate
Rate
Interest rate swap agreements - securities
5.96
3.09
3 month LIBOR
36,000
(4,468)
7.13
3.08
(6,174)
The effects of the Company’s fair value hedge relationships reported in interest income on tax-exempt available-for-sale securities on the consolidated income statement were as follows (in thousands):
Interest income on tax-exempt securities
562
580
1,126
1,020
Effects of fair value hedge relationships
(258)
(164)
(563)
(321)
Reported interest income on tax-exempt securities
Gain (loss) on fair value hedging relationship
Interest rate swap agreements - securities:
Hedged items
(459)
(205)
1,706
(3,644)
Derivative designated as hedging instruments
459
205
(1,706)
3,644
33
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges (in thousands):
Cumulative Amount of Fair
Value Hedging Adjustment
Carrying Amount
Included in Other Comprehensive
Line item on the balance sheet
of the Hedged Assets
43,580
44,017
(1,063)
Non-hedged derivatives:
During the second quarter of 2021, the Company initiated a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a dealer bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Since the income statement impact of the offsetting positions is limited, any changes in fair value is recognized as other noninterest income in the current period.
At June 30, 2021 and December 31, 2020, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):
Interest rate swap agreements:
750
Liabilities
(12)
1,500
The Company establishes limits and monitors exposures for customer swap positions. Any fees received to enter the swap agreements at inception are recognized in earnings when received. Such fees were as follows (in thousands):
Interest rate swap agreements
Note 12. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 and all subsequent ASUs that modified this topic (collectively referred to as "Topic 842"). For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
34
Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2034. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.
The following table represents the consolidated balance sheet classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet (in thousands):
Classification
Operating lease right-of-use assets
4,536
Operating lease liabilities
4,578
4,827
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019, was used.
As of June 30, 2021, the weighted average remaining lease term was 11.04 years and the weighted average discount rate was 2.69%.
The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance (in thousands).
Lease costs:
Operating lease costs
254
494
507
Variable lease costs
278
299
542
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
250
265
483
495
35
Future minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, 2021, were as follows (in thousands):
Amounts
June 30, 2022
June 30, 2023
689
June 30, 2024
496
June 30, 2025
368
June 30, 2026
348
3,033
Total future minimum lease payments
Amounts representing interest
(770)
Present value of net future minimum lease payments
Note 13. Regulatory Matters
Regulatory Capital Requirements:
The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer. At June 30, 2021, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the "well capitalized" regulatory classification.
Regulatory Restrictions on Dividends:
Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (the “TDFI”), pay any dividends to the Company in a calendar year in excess of the total of the Bank’s retained net income for that year plus the retained net income for the preceding two years. Because this test involves a measure of net income, any charge on the Bank’s income statement, such as an impairment of goodwill, could impair the Bank’s ability to pay dividends to the Company. Under Tennessee corporate law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, the Company’s board of directors must consider its and the Bank’s current and prospective capital, liquidity, and other needs. In addition to state law limitations on the Company’s ability to pay dividends, the Federal Reserve imposes limitations on the Company’s ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.
During the three months ended June 30, 2021, the Bank paid $5.0 million in dividends to the Company and the Company paid a quarterly common stock dividend of $0.06 per share. During the six months ended June 30, 2021, the Bank paid $10.0 million in dividends to the Company. Since the first quarter of 2021, the Company has paid a quarterly common stock dividend of $0.06 per share. The amount and timing of all future dividend payments by the Company, if any, is subject to discretion of the Company’s board of directors and will depend on the Company’s earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to the Company.
Regulatory Capital Levels:
Actual and required capital levels at June 30, 2021, and December 31, 2020 are presented below (dollars in thousands):
Minimum to be
well
capitalized under
Minimum for
prompt
capital
corrective action
Actual
adequacy purposes
provisions1
Ratio
SmartFinancial:
Total Capital (to Risk Weighted Assets)
340,809
12.80
213,089
8.00
Tier 1 Capital (to Risk Weighted Assets)
283,118
10.63
159,816
6.00
Common Equity Tier 1 Capital (to Risk Weighted Assets)
119,862
4.50
Tier 1 Capital (to Average Assets)2
8.10
139,893
4.00
SmartBank:
324,013
12.19
212,702
265,878
10.00
305,703
11.50
159,527
119,645
172,821
6.50
8.75
139,706
174,632
5.00
329,431
14.07
187,303
271,739
11.61
140,477
105,358
Tier 1 Capital (to Average Assets)
8.70
125,002
317,660
13.57
187,294
234,117
299,314
12.78
140,470
105,353
152,176
9.58
124,969
156,212
1The prompt corrective action provisions are applicable at the Bank level only.
2Average assets for the above calculations were based on the most recent quarter.
37
Note 14. Other Comprehensive Income (Loss)
The changes in each component of accumulated other comprehensive income (loss), net of tax, were as follows (in thousands):
Available-for-
Municipal
Sale
Security Hedges
Income (Loss)
Beginning balance, March 31, 2021
898
185
Reclassification of amounts included in net income
Net other comprehensive income during period
Ending balance, June 30, 2021
2,051
287
Beginning balance, March 31, 2020
1,242
(2,489)
1,414
Ending balance, June 30, 2020
2,668
(2,076)
Beginning balance, December 31, 2020
2,968
(785)
Other comprehensive income (loss)
Net other comprehensive income (loss) during period
Beginning balance, December 31, 2019
391
(223)
2,265
412
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 comprehensive suite of commercial and consumer banking services to clients through 35 full-service bank branches and one loan production office in select markets in East and Middle Tennessee, Alabama and the Florida Panhandle.
While we offer a wide range of commercial banking services, we focus on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans to individuals for a variety of purposes. Our principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. We offer a broad range of deposit products, including checking (“NOW”), savings, money market accounts and certificates of deposit. We actively pursue business relationships by utilizing the business contacts of our senior management, other bank officers and our directors, thereby capitalizing on our knowledge of our local market areas.
Forward-Looking Statement
SmartFinancial, Inc. (the “Company”) may from time to time make written or oral statements, including statements contained in this report and information incorporated by reference herein (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2), that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements, including statements regarding the effects of the COVID-19 pandemic on the Company’s business and financial results and conditions, are based on assumptions and estimates and are not guarantees of future performance. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words (and their derivatives), such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, the negatives of such expressions, or the use of the future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of a current condition. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, financial condition, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to:
These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in SmartFinancial’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, in each case filed with or furnished to the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website (www.sec.gov). Undue reliance should not be placed on forward-looking statements. SmartFinancial disclaims any obligation to update or revise any forward-looking statements contained in this release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.
Certain captions and amounts in the prior periods presented were reclassified to conform to the current presentation. Such reclassifications had no effect on net income or shareholders’ equity.
Executive Summary
The following is a summary of the Company’s financial highlights and significant events during the second quarter and first six months of 2021:
Analysis of Results of Operations
Second quarter of 2021 compared to 2020
Net income was $8.8 million, or $0.58 per diluted common share, for the second quarter of 2021, compared to $6.2 million, or $0.41 per diluted common share, for the second quarter of 2020. The tax equivalent net interest margin was 3.29% for the second quarter of 2021 compared to 3.63% for the second quarter of 2020. Noninterest income to average assets was 0.58% for the second quarter of 2021, increasing from 0.45% for the second quarter of 2020. Noninterest expense to average assets decreased to 2.33% in the second quarter of 2021, from 2.41% in the second quarter of 2020.
First six months of 2021 compared to 2020
Net income was $18.5 million, or $1.23 per diluted common share, for the first six months of 2021, compared to $8.9 million, or $0.60 per diluted common share, for the first six months of 2020. The increase in net income for this period was primarily from the increase of $10.8 million in net interest income after provision for loan and lease losses and $4.5 million in noninterest income, offset by increases of $2.7 million in noninterest expense and $3.0 million in income tax expense. The tax equivalent net interest margin was 3.38% for the first six months of 2021 compared to 3.75% for the first six months of 2020. Noninterest income to average assets was 0.63% for the first six months of 2021, increasing from 0.45% for the first six months of 2020. Noninterest expense to average assets decreased to 2.34% in the first six months of 2021, from 2.66% in the first six months of 2020.
Net Interest Income and Yield Analysis
Net interest income, taxable equivalent, increased to $27.0 million for the second quarter of 2021, up from $25.9 million for the second quarter of 2020. Net interest income was positively impacted, compared to the prior year, primarily by the increase in loan and lease balances and the reduction in interest expense on interest bearing liabilities. Average interest-earning assets increased from $2.87 billion for the second quarter of 2020, to $3.30 billion for the second quarter of 2021, primarily as a result of the Company’s continued organic loan and lease growth, acquisition of Fountain completed on May 3, 2021, participation in the PPP, and the increase in our overall liquidity position. Over this period, average loan and lease balances increased by $149.3 million, average federal funds sold and other interest earning assets increased by $233.4 million, average interest-bearing deposits increased by $404.9 million, average noninterest-bearing deposits increased $181.1 million and average borrowings decreased $155.6 million. The tax equivalent net interest margin decreased to 3.29% for the second quarter of 2021, compared to 3.63% for the second quarter of 2020. The yield on earning assets decreased from 4.22% for the second quarter of 2020, to 3.65% for the second quarter of 2021, primarily due to rate cuts by the Federal Reserve during the first quarter of 2020 and, to a lesser extent, loan and lease yields declining from market
competition. The cost of average interest-bearing deposits decreased from 0.71% for the second quarter of 2020, to 0.39% for the second quarter of 2021, primarily due to a lower interest rate environment during the period.
The following tables summarizes the major components of net interest income and the related yields and costs for the periods presented (dollars in thousands):
Yield/
Loans and leases, including fees1
2,508,388
28,256
4.52
2,359,101
28,590
4.87
5,315
5.03
6,868
73
4.28
Taxable securities
164,935
2.23
122,135
1.94
Tax-exempt securities2
89,296
453
2.04
86,227
570
2.66
531,125
0.23
297,696
0.37
Total interest-earning assets
3,299,059
30,001
3.65
2,872,027
30,099
4.22
Noninterest-earning assets
286,211
260,089
3,585,270
3,132,116
Liabilities and Shareholders' Equity:
688,756
0.18
453,795
148
0.13
1,117,290
905
0.32
748,673
614
0.33
502,755
1,039
0.83
701,390
2,604
1.49
Total interest-bearing deposits
2,308,801
0.39
1,903,858
0.71
Borrowings3
81,525
0.61
237,143
0.42
39,375
5.95
39,290
5.98
Total interest-bearing liabilities
2,429,701
0.49
2,180,291
0.77
Noninterest-bearing deposits
768,399
587,322
17,845
24,642
3,215,945
2,792,255
Shareholders' equity
369,325
339,861
Total liabilities and shareholders’ equity
Net interest income, taxable equivalent
27,046
25,900
Interest rate spread
3.16
3.44
Tax equivalent net interest margin
3.29
3.63
Percentage of average interest-earning assets to average interest-bearing liabilities
135.78
131.73
Percentage of average equity to average assets
10.30
10.85
1Loans and leases include PPP loans with an average balance of $266.1 million and $208.8 million for the three months ended June 30, 2021 and 2020, respectively. Loan and lease fees included in loan and lease income was $2.4 million and $2.7 million for the three months ended June 30, 2021 and 2020, respectively. Loan and lease fee income for the three months ended June 30, 2021 and 2020, includes $2.1 million and $1.9 million accretion of loan fees on PPP loans, respectively.
2Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0%. The taxable-equivalent adjustment was $149 thousand for the three months ended June 30, 2021 and $154 thousand for the three months ended June 30, 2020.
3Includes average balance of $108.1 million in Paycheck Protection Liquidity Facility (“PPPLF”) funding for the quarter ended June 30, 2020. No PPPLF funding was used for the quarter ended June 30, 2021.
Net interest income, taxable equivalent, increased to $53.5 million for the first six months of 2021, up from $48.6 million for the first six months of 2020. Net interest income was positively impacted, compared to the prior year, primarily due to increases in loan and lease balances and reduction in interest expense on interest-bearing liabilities. Average interest-earning assets increased from $2.60 billion for the first six months of 2020, to $3.19 billion for the first six months of 2021, primarily as a result of the acquisition of PFG completed March 1, 2020, participation in the PPP and continued organic growth. Over this period, average loan and lease balances increased by $296.5 million, average interest-bearing deposits increased by $408.7 million, average noninterest-bearing deposits increased $253.4 million and average borrowings decreased $62.9 million. The tax equivalent net interest margin decreased to 3.38% for the first six months of 2021, compared to 3.75% for the first six months of 2020. The yield on earning assets decreased from 4.50% for the first six months of 2020, to 3.76% for the first six months of 2021, primarily due to rate cuts by the Federal Reserve during the
first quarter of 2020 and, to a lesser extent loan and lease yields declining from market competition. The cost of average interest-bearing deposits decreased from 0.90% for the first six months of 2020, to 0.41% for the first six months of 2021, primarily due to a lower interest rate environment during the period.
2,468,665
56,200
4.59
2,172,158
54,979
5.09
6,607
141
4.31
5,581
118
4.26
Taxable Securities
150,792
2.19
119,474
2.13
90,068
862
1.93
78,306
970
2.49
Federal funds and other earning assets
474,449
0.26
226,726
0.78
3,190,581
59,443
3.76
2,602,245
58,214
280,772
238,749
3,471,353
2,840,994
Liabilities and Stockholders’ Equity:
665,116
560
0.17
421,288
583
0.28
1,050,961
1,726
707,003
2,003
0.57
514,344
2,293
0.90
693,382
5,534
1.61
2,230,421
1,821,673
81,680
144,532
0.47
39,364
39,279
5.97
2,351,465
0.51
2,005,484
0.97
734,867
481,432
19,876
22,812
3,106,208
2,509,728
Stockholders’ equity
365,145
331,266
Total liabilities and stockholders’ equity
53,456
48,588
3.25
3.53
3.38
3.75
135.68
129.76
10.52
11.66
1Loans and leases include PPP loans with an average balance of $289.2 million and $106.2 million for the six months ended June 30, 2021 and 2020, respectively. Loan and lease fees included in loan and lease income was $5.3 million and $3.6 million for the six months ended June 30, 2021 and 2020, respectively. Loan lease fee income for the six months ended June 30, 2021 and 2020, includes $4.5 million and $1.9 million accretion of loan fees on PPP loans, respectively.
2Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0%. The taxable-equivalent adjustment was $299 thousand for the six months ended June 30, 2021 and $271 thousand for the six months ended June 30, 2020.
3Includes average balance of $54.0 million in Paycheck Protection Liquidity Facility (“PPPLF”) funding for the six months ended June 30, 2020. No PPPLF funding was used for the six months ended June 30, 2021.
Noninterest Income
The following table summarizes noninterest income by category (in thousands):
Change
578
204
297
84
1,281
433
659
1,632
4,505
Noninterest income increased by $1.6 million, or 46.5%, during the second quarter of 2021 compared to the same period in 2020. This quarterly change in total noninterest income primarily resulted from the following:
Noninterest income increased by $4.5 million, or 71.2%, during the first six months of 2021 compared to the same period in 2020. This change in total noninterest income primarily resulted from the following:
44
Noninterest Expense
The following table summarizes noninterest expense by category (in thousands):
1,846
2,709
298
381
160
216
354
726
(19)
(88)
119
(1,105)
(3,098)
949
1,991
2,662
Noninterest expense increased by $2.0 million, or 10.6%, in the second quarter of 2021 as compared to the same period in 2020. The quarterly increase in total noninterest expense primarily resulted from the following:
Noninterest expense increased by $2.7 million, or 7.1%, in the first six months of 2021 as compared to the same period in 2020. The change in total noninterest expense primarily resulted from the following:
Taxes
In the second quarter of 2021 income tax expense totaled $2.5 million compared to $1.4 million a year ago. The effective tax rate was approximately 22.0% in the second quarter of 2021 compared to 18.8% a year ago. The higher effective tax rate for the second quarter of 2021 compared to same quarter in 2020 was due to 2020 having a proportionately higher amount of non-taxable income in relation to income before taxes, as well as tax benefit derived from the reconciliation of our tax rates from operations.
In the first six months of 2021 income tax expense totaled $5.1 million compared to $2.1 million a year ago. The effective tax rate was approximately 21.7% for first six months of 2021 compared to 19.0% a year ago. The higher effective tax rate for the first six months of 2021 compared to same period in 2020 was due to 2020 having a proportionately higher amount of non-taxable income in relation to income before taxes and, as part of the CARES Act legislation, a tax benefit realized from the recognition of net operating loss carryforwards from past acquisitions.
Loan and Lease Portfolio
The Company had total net loans and leases outstanding, including organic and acquired loans and leases, of approximately $2.45 billion at June 30, 2021 compared to $2.36 billion at December 31, 2020. Loans secured by real estate, consisting of commercial and residential property, are the principal component of our loan and lease portfolio.
Organic Loans and Leases
Our organic net loans and leases, which excludes loans and leases purchased through acquisitions, increased by $115.3 million, or 5.8%, from December 31, 2020, to $2.10 billion at June 30, 2021. Included in the growth was $138.4 million of PPP loans that were originated and funded during the first six months of 2021 and offset by $247.6 million in forgiven PPP loans originated in 2020. Total net deferred fees associated with the PPP loans originated during the first six months of 2021 was approximately $7.0 million with $470 thousand accreted into income.
Acquired Loans and Leases
Purchased non-credit impaired loans and leases, net of $323.6 million at June 30, 2021 decreased by $27.1 million from December 31, 2020. Since December 31, 2020, our net purchased credit impaired (“PCI”) loans and leases, net decreased by $2.0 million to $29.7 million at June 30, 2021. The decrease in purchased non-credit impaired loans and leases and PCI loans and leases is related to maturities, paydowns and payoffs.
The following tables summarize the composition of our loan and lease portfolio for the periods presented (dollars in thousands):
Purchased
% of
Non-Credit
Credit
Organic
Impaired
Commercial real estate-mortgage
998,806
152,314
47.1
Consumer real estate-mortgage
340,663
95,002
18.0
285,167
10,272
12.2
474,729
21,124
20.1
4,856
43,968
2.1
9,145
2,170
0.5
Total gross loans and leases receivable, net of deferred fees
2,113,366
324,850
100.0
Allowance for loan and leases losses
(16,663)
(1,276)
Total loans and leases, net
2,096,703
323,574
807,913
188,940
42.5
313,582
120,090
18.6
259,622
13,105
11.7
607,212
26,926
26.6
9,250
3,539
1,997,579
352,600
Allowance for loan and lease losses
(16,154)
(1,883)
1,981,425
350,717
Loan and Lease Portfolio Maturities
The following table sets forth the maturity distribution of our loans and leases at June 30, 2021, including the interest rate sensitivity for loans and leases maturing after one year (in thousands):
Rate Structure for Loans and Leases
Maturing Over One Year
One Year
One through
Over Five
Fixed
Floating
or Less
Five Years
Years
124,138
485,500
552,853
821,895
216,458
29,667
171,171
243,802
210,278
204,695
66,671
129,863
104,170
113,830
120,203
108,437
323,661
64,016
348,146
39,531
2,127
50,911
3,818
6,865
648
7,263
334,858
1,167,971
965,489
1,552,323
581,137
Nonaccrual, Past Due, and Restructured Loans and Leases
Nonperforming loans and leases as a percentage of total gross loans and leases, net of deferred fees, was 0.15% as of June 30, 2021, and 0.24% as of December 31, 2020, respectively. Total nonperforming assets as a percentage of total assets as of June 30, 2021 totaled 0.18% compared to 0.31% as of December 31, 2020. Acquired PCI loans and leases that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets.
47
The following table summarizes the Company’s nonperforming assets for the periods presented (in thousands):
Nonaccrual loans and leases
Accruing loans and leases past due 90 days or more
Total nonperforming loans and leases
3,758
5,782
Other repossessed property
199
Total nonperforming assets
6,456
10,401
Restructured loans not included above
219
COVID-19 Loan Modifications
As a result of the CARES Act, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. At June 30, 2021, the Company had no loans remaining under COVID-19 modifications.
Allocation of the Allowance for Loan and Lease Losses
We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the six months ended June 30, 2021, is $62 thousand compared to $6.0 million in the same period of 2020, a decrease of $6.1 million. The allowance for loan and lease loss provision for the six months ended June 30, 2020, increased due to the onset of the COVID-19 pandemic and related economic uncertainty. As of June 30, 2021 and December 31, 2020, our allowance for loan and lease losses was $18.3 million for each period, which we deemed to be adequate at each of the respective dates. Our allowance for loan and lease loss as a percentage of total loans and leases was 0.74% at June 30, 2021 and 0.77% at December 31, 2020.
Our purchased loans and leases were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans and leases will be accreted into income over the life of the loans and leases. A provision for loan and lease losses is recorded for any deterioration in these loans and leases subsequent to the acquisition. As of June 30, 2021, the notional balances on PCI loans and leases was $41.7 million while the carrying value was $29.7 million. At June 30, 2021, there was an allowance on PCI loans and leases of $371 thousand.
The following table sets forth, based on our best estimate, the allocation of the allowance to types of loans and leases for the periods presented, and the percentage of loans and leases in each category to total loans and leases (dollars in thousands):
Percent
Total allowance for loan and lease losses
The allocation by category is determined based on the loans and leases individually assigned risk rating, if applicable, and environmental factors applicable to each category of loan and lease. For impaired loans and leases, those loans and leases are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired, non PCI, loans and leases were approximately $237 thousand at December 31, 2020, compared to $696 thousand at June 30, 2021.
Analysis of the Allowance for Loan and Lease Losses
The following is a summary of changes in the allowance for loan and lease losses for the periods presented including the ratio of the allowance for loan and lease losses to total loans and leases as of the end of each period (dollars in thousands):
Balance at beginning of period
Charged-off loans and leases:
Total charged-off loans and leases
Recoveries of previously charged-off loans and leases:
Total recoveries of previously charged-off loans and leases
Net loan and lease charge-offs
(55)
(27)
(98)
(38)
Balance at end of period
Ratio of allowance for loan and lease losses to total loans and leases outstanding at end of period
0.74
0.67
Ratio of net loan and lease charge-offs to average loans and leases outstanding for the period
We assess the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon our evaluation of the loan and lease portfolio, past loan and lease loss experience, known and inherent risks in the portfolio, the views of the Bank’s regulators, adverse situations that may affect borrowers’ ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan and lease portfolio, economic conditions, industry and peer bank loan and lease quality indications and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans and leases that may be susceptible to significant change.
Securities Portfolio
Our securities portfolio, consisting primarily of Federal agency bonds, state and municipal securities, and mortgage-backed securities, amounted to fair values of $250.8 million and $215.6 million at June 30, 2021 and December 31, 2020, respectively. Our investments to assets ratio increased from 6.5% at December 31, 2020 to 6.9% at June 30, 2021. Our securities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income. All of the Company’s securities are designated as available-for-sale.
The following table shows the amortized cost of the Company’s securities, all investment securities were classified as available for sale (in thousands):
Total securities
The following table presents the contractual maturity of the Company’s securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at June 30, 2021. The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs (dollars in thousands):
Maturity By Years
1 or Less
1 to 5
5 to 10
Over 10
U.S. Government agencies
25,885
47,502
State and political subdivisions
2,937
6,694
72,064
986
27,533
3,400
9,952
39,078
7,439
76,445
159,144
Weighted average yield (1)
1.95
1.43
2.89
2.71
Deposits are the primary source of funds for the Company’s lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company’s primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of June 30, 2021, brokered deposits represented approximately 1.7% of total deposits.
The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three months ended June 30, 2021 was 0.39% compared to 0.71% for the same period in 2020 and 0.41% and 0.90% for the six months ended June 30, 2021 and June 30, 2020, respectively. The decreased cost of interest-bearing deposits was due to changes in rates caused by federal rate-changes during the periods.
Total deposits as of June 30, 2021 were $3.14 billion, which was an increase of $334.3 million from December 31, 2020. This increase was primarily from organic deposit growth. As of June 30, 2021, the Company had outstanding time deposits under $250,000 with balances of $364.6 million and time deposits over $250,000 with balances of $124.9 million.
The following table summarizes the maturities of time deposits $250,000 or more (in thousands).
Three months or less
30,740
Three to six months
30,225
Six to twelve months
25,668
More than twelve months
38,224
124,857
The Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital using debt at the Company level which can be downstreamed as Tier 1 capital to the Bank. Borrowings totaled $78.8 million at June 30, 2021, and consisted entirely of $75.0 million in FHLB borrowings and short-term borrowings
totaled $3.8 million and consisted entirely of securities sold under repurchase agreements. Long-term debt totaled $39.4 million at June 30, 2021, and $39.3 million at December 31, 2020, and consisted entirely of subordinated debt. For more information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 – Borrowings and Line of Credit."
Capital Resources
The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Bank’s Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. At June 30, 2021 and December 31, 2020, our capital ratios, including our Bank’s capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank subsidiary. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary. For more information regarding our capital, leverage and total capital ratios, see “Part I - Item 1. Consolidated Financial Statements - Note 13 - Regulatory Matters.”
Liquidity and Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. At June 30, 2021, we had $640.3 million of pre-approved but unused lines of credit and $7.5 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. For more information regarding our off balance sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements - Note 9 – Commitments and Contingent Liabilities.”
Market Risk and Liquidity Risk Management
The Bank’s Asset Liability Management Committee (“ALCO”) is responsible for making decisions regarding liquidity and funding solutions based upon approved liquidity, loan and lease, capital and investment policies. The ALCO must consider interest rate sensitivity and liquidity risk management when rendering a decision on funding solutions and loan and lease pricing. To assist in this process the Bank has contracted with an independent third party to prepare quarterly reports that summarize several key asset-liability measurements. In addition, the third party will also provide recommendations to the Bank’s ALCO regarding future balance sheet structure, earnings and liquidity strategies. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.
Interest Rate Sensitivity
Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and leases and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. The primary measurements we use to help us manage interest rate sensitivity are an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.
Earnings Simulation Model We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over
time. For changes up or down in rates from our dynamic interest rate forecast over the next 12 and 24 months, limits in the decline in net interest income are as follows:
Maximum Percentage Decline
in Net Interest
Income from the Budgeted
Estimated % Change in Net
or Base Case
Interest Income Over 12
Projection of Net Interest
Months
Increase +
Decrease -
Next 12 Months
An instantaneous, parallel rate increase or decrease of the following at the beginning of the third quarter:
± 100 basis points
5.01%
(0.26)%
8%
± 200 basis points
10.11%
(0.81)%
14%
Economic Value of Equity Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.
To help monitor our related risk, we’ve established the following policy limits regarding simulated changes in our economic value of equity:
Maximum
Percentage
Decline in
Economic Value
of Equity from
the Economic
Value of Equity
Current Estimated Instantaneous
at Currently
Rate Change
Prevailing
Interest Rates
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
±100 basis points
4.71%
(8.06)%
10%
±200 basis points
8.46%
(5.53)%
15%
At June 30, 2021, our model results indicated that we were within these policy limits.
Liquidity Risk Management
The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan and lease demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and intend to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
Scheduled loan and lease payments are a relatively stable source of funds, but loan and lease payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market
52
conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.
The Company has $5.0 million in investments that mature throughout the next 12 months. The Company also anticipates $9.5 million of principal payments from mortgage-backed securities over the same period. The Company also has unused borrowing capacity in the amount of $240.3 million available with the Federal Reserve, FHLB, several correspondent banks and a line of credit. With these sources of funds, the Company currently anticipates adequate liquidity to meet the expected obligations of its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This item is not required for a Smaller Reporting Company.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of June 30, 2021 (the “Evaluation Date”). Based on such evaluation, SmartFinancial’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, SmartFinancial’s disclosure controls and procedures were effective to ensure that information required to be disclosed by SmartFinancial in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to SmartFinancial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding the required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
SmartFinancial, Inc. and its wholly owned subsidiary, SmartBank, are periodically involved as a plaintiff or a defendant in various legal actions in the ordinary course of business. While the outcome of these matters is not currently determinable, management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial condition, financial statements or results of operations.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in our Form 10-K for the year ended December 31, 2020. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Please be aware that these risks may change over time and other risks may prove to be important in the future. In addition, these risks may be heightened by the continued disruption and uncertainty resulting from COVID-19. There have been no material changes from the risk factors described in our Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On November 20, 2018, the Company announced that its board of directors has authorized a stock repurchase plan pursuant to which the Company may purchase up to $10.0 million in shares of the Company’s outstanding common stock. Stock repurchases under the plan will be made from time to time in the open market, at the discretion of the management of the Company, and in accordance with applicable legal requirements. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, amended, suspended, or discontinued at any time. As of June 30, 2021, we have purchased $5.5 million of the authorized $10.0 million and may purchase up to an additional $4.5 million in the Company’s outstanding common stock.
The following table summarizes the Company’s repurchase activity during the three months ended June 30, 2021.
Number (or
Approximate
Dollar Value) of
Shares That May
Total Number of Shares
Yet Be Purchased
Total Number of
Purchased as Part of
Under the Plans
Average Price Paid
Publicly Announced
or Programs (in
Period
Repurchased
Per Share
Plans or Programs
thousands)
April 1, 2021 to April 30, 2021
4,484
May 1, 2021 to May 31, 2021
June 1, 2021 to June 30, 2021
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Item 6. Exhibits
ExhibitNo.
Agreement and Plan of Merger, dated April 13, 2021, by and between SmartFinancial, Inc. and Sevier County Bancshares, Inc.
Incorporated by reference to Exhibit 2.1 to Form 8-K filed April 14, 2021
2.2
Purchase Agreement, dated as of May 2, 2021, by and among Warren Payne, G. Price Cooper, B. Wade West, Craig Phillipy, and SmartBank
Incorporated by reference to Exhibit 2.1 to Form 8-K filed May 3, 2021
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
32.1
Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002
Furnished herewith.
32.2
101
Interactive Data Files (formatted as Inline XBRL)
Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101
Filed herewith
* Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SmartFinancial, Inc.
Date:
August 9, 2021
/s/ William Y. Carroll, Jr.
William Y. Carroll, Jr.
President and Chief Executive Officer
(principal executive officer)
/s/ Ronald J. Gorczynski
Ronald J. Gorczynski
Executive Vice President and Chief Financial Officer
(principal financial officer and accounting officer)
58