Table of Contents
.
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
☐
TRANSITION REPORT PURSUANT TO 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 New York Stock Exchange
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 November 05, 2024, there were 16,926,374 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 September 30, 2024 and December 31, 2023
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2024 and 2023
4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023
5
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023
6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023
7
Condensed Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
56
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
57
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
58
Item 5.
Other Information
Item 6.
Exhibits
2
PART I –FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share data)
(Unaudited)
September 30,
December 31,
2024
2023*
ASSETS:
Cash and due from banks
$
65,109
61,586
Interest-bearing deposits with banks
125,298
233,237
Federal funds sold
2,507
57,448
Total cash and cash equivalents
192,914
352,271
Securities available-for-sale, at fair value
501,336
408,410
Securities held-to-maturity, at amortized cost
127,779
281,236
Other investments
20,352
13,662
Loans held for sale
5,804
4,418
Loans and leases
3,717,478
3,444,462
Less: Allowance for credit losses
(35,609)
(35,066)
Loans and leases, net
3,681,869
3,409,396
Premises and equipment, net
91,055
92,963
Other real estate owned
179
517
Goodwill and other intangibles, net
105,324
107,148
Bank owned life insurance
105,025
83,434
Other assets
77,297
75,932
Total assets
4,908,934
4,829,387
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand
863,949
898,044
Interest-bearing demand
834,207
1,006,915
Money market and savings
1,854,777
1,812,427
Time deposits
769,558
550,468
Total deposits
4,322,491
4,267,854
Borrowings
8,997
13,078
Subordinated debt
39,663
42,099
Other liabilities
48,760
46,470
Total liabilities
4,419,911
4,369,501
Commitments and contingent liabilities - see Note 8
—
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; 16,926,374 and 16,988,879 shares issued and outstanding, respectively
16,926
16,989
Additional paid-in capital
293,909
295,699
Retained earnings
195,537
173,105
Accumulated other comprehensive income (loss)
(17,349)
(25,907)
Total shareholders' equity
489,023
459,886
Total liabilities and shareholders' equity
* Derived from audited financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
Three Months Ended
Nine Months Ended
2023
Interest income:
Loans and leases, including fees
54,738
47,539
155,611
137,712
Securities:
Taxable
5,233
4,335
15,101
12,322
Tax-exempt
350
356
1,056
1,066
Federal funds sold and other earning assets
3,635
3,045
13,255
9,448
Total interest income
63,956
55,275
185,023
160,548
Interest expense:
Deposits
27,350
23,433
81,824
59,333
709
210
985
775
865
626
2,647
1,877
Total interest expense
28,924
24,269
85,456
61,985
Net interest income
35,032
31,006
99,567
98,563
Provision for credit losses
2,575
795
3,018
1,458
Net interest income after provision for credit losses
32,457
30,211
96,549
97,105
Noninterest income:
Service charges on deposit accounts
1,780
1,736
5,084
4,838
Loss on sale of securities
(6,801)
Mortgage banking
410
309
1,038
813
Investment services
1,881
1,461
4,563
3,766
Insurance commissions
1,477
1,153
3,865
3,551
Interchange and debit card transaction fees, net
1,349
1,357
3,945
4,087
Other
2,242
1,476
6,627
4,492
Total noninterest income
9,139
691
25,122
14,746
Noninterest expense:
Salaries and employee benefits
18,448
16,785
52,348
49,474
Occupancy and equipment
3,423
3,547
10,144
10,073
FDIC insurance
825
2,565
2,241
Other real estate and loan related expense
460
603
1,582
1,616
Advertising and marketing
327
346
924
1,006
Data processing and technology
2,519
2,378
7,435
6,777
Professional services
1,201
735
3,190
2,307
Amortization of intangibles
604
647
1,824
1,981
Merger related and restructuring expenses
110
3,039
2,540
8,587
7,870
Total noninterest expense
30,846
28,516
88,599
83,455
Income before income tax expense
10,750
2,386
33,072
28,396
Income tax expense
1,610
319
6,572
5,993
Net income
9,140
2,067
26,500
22,403
Earnings per common share:
Basic
0.55
0.12
1.58
1.33
Diluted
0.54
1.57
Weighted average common shares outstanding:
16,726,658
16,807,548
16,782,200
16,801,840
16,839,998
16,918,635
16,874,316
16,907,325
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on securities available-for-sale
12,193
(5,830)
11,084
(5,178)
Tax effect
(3,150)
1,505
(2,863)
1,337
Amortization of unrealized gains (losses) on investment securities transferred from available-for-sale to held-to-maturity
33
37
101
115
(8)
(10)
(26)
(30)
Reclassification adjustment for realized losses (gains) included in net income
6,801
(1,757)
Unrealized gains (losses) on securities available-for-sale, net of tax
9,068
746
8,296
1,288
Fair value hedging activities:
Unrealized gains (losses) on fair value municipal security hedges
(928)
239
(142)
(391)
38
102
Unrealized gains (losses) on fair value hedged instruments arising during the period, net of tax
(793)
(311)
Cash flow hedging activities:
Unrealized gains (losses) on cash flow hedges
258
139
886
(273)
(68)
(36)
(229)
71
(24)
16
(114)
(4)
30
(28)
Unrealized gains (losses) on cash flow hedge instruments arising during the period, net of tax
174
573
(120)
Total other comprehensive income
8,449
861
8,558
1,168
Comprehensive income
17,589
2,928
35,058
23,571
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY – (Unaudited)
For the Three and Nine Months Ended September 30, 2024 and 2023
Accumulated
Common Stock
Additional
Retained
Comprehensive
Shares
Amount
Paid-in Capital
Earnings
Income (Loss)
Total
Balance, December 31, 2022
16,900,805
16,901
294,330
156,545
(35,324)
432,452
Cumulative effect adjustment for adoption of ASU 2016-13, net of tax
(6,606)
Balance, January 1, 2023, adjusted
149,939
425,846
Other comprehensive income
Common stock issued pursuant to:
Stock options exercised
15,705
149
165
Restricted stock, net of forfeitures
79,670
80
(80)
Restricted stock withheld for taxes
(1,637)
(2)
(33)
(35)
Stock compensation expense
1,176
Common stock dividend ($0.24 per share)
(4,071)
Balance, September 30, 2023
16,994,543
16,995
295,542
168,271
(34,156)
446,652
Balance, December 31, 2023
16,988,879
6,192
62
68
78,757
79
(79)
(11,259)
(12)
(208)
(220)
1,266
(4,068)
Repurchases of common stock
(136,195)
(136)
(2,831)
(2,967)
Balance, September 30, 2024
16,926,374
Balance, June 30, 2023
17,004,092
17,004
295,296
167,564
(35,017)
444,847
(7,912)
(7)
272
Common stock dividend ($0.08 per share)
(1,360)
Balance, June 30, 2024
16,925,902
293,586
187,751
(25,798)
472,465
1,692
24
26
4,000
(5,220)
(6)
(69)
(75)
372
Common stock dividends ($0.08 per share)
(1,354)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
6,900
8,372
Amortization of intangible assets
Loss on sale of securities available-for-sale
Deferred income tax expense
628
1,801
Increase in cash surrender value of bank-owned life insurance
(1,591)
(1,445)
Net losses from sale and write-downs of other real estate owned and other repossessed assets
569
12
Net gains from mortgage banking
(950)
(813)
Origination of loans held for sale
(41,010)
(28,585)
Proceeds from sales of loans held for sale
40,574
28,416
Net (gain) loss from sale/disposal of fixed assets
(1,647)
Net change in:
Accrued interest receivable
(198)
(919)
Accrued interest payable
250
3,361
(11,885)
(3,478)
(2,278)
Net cash provided by operating activities
36,016
28,009
Cash flows from investing activities:
Available-for-sale:
Proceeds from sales
152,775
Proceeds from maturities, calls and paydowns
36,816
32,404
Purchases
(119,935)
(94,424)
Held-to-maturity:
151,881
1,986
Proceeds from sales of other investments
348
2,669
Purchases of other investments
(7,407)
(944)
Purchases of bank-owned life insurance
(20,000)
Net increase in loans and leases
(279,709)
(148,006)
Proceeds from sale of fixed assets
4,698
633
Purchases of premises and equipment
(5,072)
(4,016)
Proceeds from sale of other real estate owned and other repossessed assets
2,083
326
Net cash used in investing activities
(236,297)
(56,597)
Cash flows from financing activities:
Net increase in deposits
54,693
169,521
Net (decrease) increase in securities sold under agreements to repurchase
(1,082)
1,342
Proceeds from borrowings
155,000
26,000
Repayment of borrowings
(160,500)
(30,500)
Cash dividends paid
Issuance of common stock
Restricted shares withheld for taxes
Net cash provided by financing activities
40,924
162,422
Net change in cash and cash equivalents
(159,357)
133,834
Cash and cash equivalents, beginning of period
266,424
Cash and cash equivalents, end of period
400,258
Supplemental disclosures of cash flow information:
Cash paid during the period for interest
85,207
60,437
Net cash paid during the period for income taxes
6,724
9,406
Noncash investing and financing activities:
Recognition of operating lease assets in exchange for lease liabilities
2,959
1,751
Acquisition of real estate through foreclosure
Acquisition of other repossessed assets
3,896
Financed sales of other repossessed assets
618
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Presentation of Financial Information
Nature of Business:
SmartFinancial, Inc. (the “Company,” “SmartFinancial,” “we,” “our” or “us”) 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 Florida. 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 credit losses, the valuation of foreclosed assets and deferred taxes, 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 following unaudited condensed financial statement notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. 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, 2023.
Recently Issued and Adopted Accounting Pronouncements:
In June 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and quantitative information about such securities. The guidance is effective for public companies for fiscal years beginning after December 15, 2023. All other entities have an extra year to adopt; early adoption is permitted. ASU 2022-03 did not have an impact on the Company’s Consolidated Financial Statements.
In March 2023, the FASB issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” ASU 2023-01 requires entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. ASU 2023-01 also provides certain practical expedients applicable to private companies and not-for-profit organizations. The guidance is effective for fiscal years beginning after December 15, 2023. ASU 2023-01 did not have an impact on the Company’s Consolidated Financial Statements.
In March 2023, the FASB issued ASU No. 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” ASU 2023-02 is intended to improve the accounting and disclosures for investments in tax credit structures. ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the
program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. The guidance is effective for fiscal years beginning after December 15, 2023. ASU 2023-02 did not have an 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, 2023, as filed in its Annual Report on Form 10-K with the 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 November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is assessing ASU 2023-07, and its adoption is not expected to have a significant impact on our Consolidated Financial Statements.
In December 2023, FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in certain categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. The guidance is effective for us for fiscal years beginning after December 15, 2024, though early adoption is permitted. The Company is assessing ASU 2023-09, and its adoption is not expected to have a significant impact on our Consolidated Financial Statements.
In March 2024, the SEC adopted the final rule under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This rule will require registrants to disclose certain climate-related information in registration statements and annual reports. Subsequent to adoption, a number of businesses and business groups filed petitions seeking a judicial review of the final rule, asserting that the SEC does not have the authority to promulgate it. In April 2024, the SEC issued an order staying its final rule pending completion of the judicial review of certain petitions consolidated in the U.S. Court of Appeals for the Eighth Circuit. The Company will continue to monitor the outcome of this judicial review.
Note 2. 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 incremental shares from the assumed conversions for net income per share-basic and net income per share-diluted are
9
presented below. There were no antidilutive shares for the three and nine months ended September 30, 2024, and September 30, 2023, respectively.
The following is a summary of the basic and diluted earnings per share computation (dollars in thousands, except share and 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
113,340
111,087
92,116
105,485
Average common shares outstanding - diluted
Diluted earnings per common share
Note 3. Securities
Available-for-sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell, but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in accumulated other comprehensive income (loss). Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the estimated life of the security. Prepayments are anticipated for mortgage-backed and Small Business Administration (“SBA”) securities. Premiums on callable securities are amortized to their earliest call date.
Held-to-maturity securities (“HTM”), which include any security for which the Company has both the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the security’s estimated life. Prepayments are anticipated for mortgage-backed and SBA securities. Premiums on callable securities are amortized to their earliest call date.
10
The amortized cost, gross unrealized gains and losses and fair value of securities AFS and HTM are summarized as follows (in thousands):
September 30, 2024
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. Treasury
83,576
(5,665)
77,911
U.S. Government-sponsored enterprises (GSEs)
41,964
710
(108)
42,566
Municipal securities
18,319
78
(300)
18,097
Other debt securities
42,254
243
(2,265)
40,232
Mortgage-backed securities (GSEs)
337,205
2,886
(17,561)
322,530
523,318
3,917
(25,899)
48,423
(5,643)
42,780
51,913
(5,779)
46,134
27,443
(3,090)
24,353
(14,512)
113,267
December 31, 2023
84,307
(8,274)
76,033
46,983
1,256
(146)
48,093
18,616
135
(475)
18,276
36,863
93
(3,887)
33,069
254,288
588
(21,937)
232,939
441,057
2,072
(34,719)
150,066
(1,482)
148,584
49,336
(7,143)
42,193
52,680
(6,178)
46,502
29,154
(3,895)
25,259
(18,698)
262,538
At September 30, 2024 and December 31, 2023, securities with a carrying value totaling approximately $452.5 million and $358.3 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.
For the three and nine months ended September 30, 2024, there were no gross gains or gross losses related to the sale of investment securities. For the three and nine months ended September 30, 2023, the Company recorded gross losses of $6.8 million related to the sale of securities.
11
The amortized cost and estimated fair value of securities at September 30, 2024, 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
1,478
1,451
Due from one year to five years
94,342
88,500
Due from five years to ten years
81,054
79,751
Due after ten years
9,239
9,104
186,113
178,806
Mortgage-backed securities
736
706
50,443
44,997
49,157
43,211
100,336
88,914
The following tables present the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities AFS and HTM have been in a continuous unrealized loss position (in thousands):
Less than 12 Months
12 Months or Greater
Number
of
Securities
5,494
(9)
5,217
(99)
10,711
546
1
11,582
(298)
17
12,128
18
5,340
28,687
(2,229)
25
34,027
28
44,736
(1,185)
20
171,441
(16,376)
83
216,177
103
56,116
(1,232)
294,838
(24,667)
138
350,954
164
13
35
53
9,743
(137)
1,482
11,225
2,786
9,849
(473)
12,635
19
2,986
(17)
29,057
(3,870)
32,043
16,401
176,351
(21,708)
88
192,752
96
31,916
(385)
15
292,772
(34,334)
143
324,688
158
42,194
46,500
25,258
262,536
For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether it intends to sell the security, or more likely than not will be required to sell the security before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because the Company currently does not intend to sell those available-for-sale securities that have an unrealized loss at September 30, 2024, and it is not likely that they we will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company has determined that no write-down is necessary. In addition, the Company evaluates whether any portion of the decline in fair value of available-for-sale securities is the result of credit deterioration, which would require the recognition of an allowance for credit losses. The unrealized losses associated with available-for-sale securities at September 30, 2024, are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at September 30, 2024. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.
The unrealized losses in the Company’s held-to-maturity portfolio were caused by changes in the interest rate environment. The Company has a zero-loss expectation for its U.S. Treasury securities in addition to U.S. Government-sponsored enterprises (GSEs) and mortgage-backed securities (GSEs), and accordingly, no allowance for credit losses is estimated for these securities. The held-to-maturity state and municipal securities are general obligation bonds, which have a very low historical default rate due to issuers generally having unlimited taxing authority to service the debt. All debt securities in an unrealized loss position as of September 30, 2024, continue to perform as scheduled and we do not believe an allowance for credit losses is necessary.
The Company utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity. At September 30, 2024, all debt securities classified as held-to-maturity were rated AA- or higher by the ratings agencies. Updated credit ratings are obtained as they become available from the ratings agencies.
Allowance for Credit Losses (“ACL”)
There were no past due or nonaccrual AFS or HTM securities at September 30, 2024, or December 31, 2023. Accrued interest receivable is excluded from the estimate of credit losses and based on the analysis of the underlying risk
characteristics of its AFS and HTM portfolios, including credit ratings and other qualitative factors, there was no provision for credit losses related to AFS or HTM securities recorded during the three or nine months ended September 30, 2024, and 2023, respectively, because the ACL was deemed immaterial.
Other Investments:
Our other investments consist of restricted 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 September 30, 2024, the Company determined that there was no impairment on its other investment securities.
The following is the amortized cost and carrying value of other investments (in thousands):
Federal Reserve Bank stock
9,184
9,526
Federal Home Loan Bank stock
10,818
3,786
First National Bankers Bank stock
Note 4. Loans and Leases and Allowance for Credit Losses
Portfolio Segmentation:
Major categories of loans and leases are summarized as follows (in thousands):
Commercial real estate
1,899,785
1,739,205
Consumer real estate
690,504
649,867
Construction and land development
315,006
327,185
Commercial and industrial
731,600
645,918
Leases
67,052
68,752
Consumer and other
13,531
13,535
Total loans and leases
The loan and lease portfolio is disaggregated into segments. There are six loan and lease portfolio segments which include commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, and consumer and other.
The following describe risk characteristics relevant to each of the portfolio segments:
Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
14
Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower’s income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
Construction and Land Development: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and financial loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.
Leases: The lease portfolio segment includes leases to small and mid-size companies for equipment financing leases. These leases are secured by a secured interest in the equipment being leased.
Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.
The following tables detail the changes in the allowance for credit losses by loan and lease classification (in thousands):
Three Months Ended September 30, 2024
Consumer
Construction
Commercial
Real
and Land
and
Real Estate
Estate
Development
Industrial
and Other
Beginning balance
15,630
7,543
3,496
7,234
670
117
34,690
Charged-off loans and leases
(430)
(924)
(72)
(1,426)
Recoveries of charge-offs
23
72
Provision charged to expense (1)
(57)
(14)
222
785
1,291
46
2,273
Ending balance
15,574
7,529
3,718
7,629
1,045
114
35,609
Three Months Ended September 30, 2023
14,314
6,748
5,446
5,504
586
32,747
(179)
(143)
(86)
(417)
48
73
Provision charged to expense (2)
413
(369)
307
201
41
1,284
15,007
7,156
5,077
5,680
644
123
33,687
Nine Months Ended September 30, 2024
15,264
7,249
4,874
6,924
640
35,066
(441)
(853)
(1,246)
(263)
(2,803)
34
136
255
276
(715)
1,422
1,643
189
3,091
Nine Months Ended September 30, 2023
10,821
4,028
3,059
3,997
1,293
23,334
Impact of adopting ASU 2016-13
879
1,952
2,145
(683)
5,757
Purchased credit-deteriorated gross up
2,652
166
27
2,898
(387)
(211)
(332)
(939)
153
187
383
650
(177)
439
217
119
2,254
We maintain the allowance for credit losses at a level that we deem appropriate to adequately cover the expected credit loss in the loan and lease portfolio. Our provision for credit losses on loan and lease for the three and nine months ended September 30, 2024, is $2.3 million and $3.1 million, respectively, and $1.3 million and $2.3 million, during the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, and December 31, 2023, our allowance for credit losses was $35.6 million and $35.1 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans and leases was 0.96% at September 30, 2024, and 1.02% at December 31, 2023.
A description of the general characteristics of the risk grades used by the Company is as follows:
Pass: Loans and leases in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan and lease obligations. Loans and leases in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.
Watch: Loans and leases in this risk category involve borrowers that exhibit characteristics, or are operating under conditions that, if not successfully mitigated as planned, have a reasonable risk of resulting in a downgrade within the next six to twelve months. Loans and leases may remain in this risk category for six months and then are either upgraded or downgraded upon subsequent evaluation.
Special Mention: Loans and leases in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans and leases in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company’s credit position.
Substandard: Loans and leases in this risk grade are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans and leases in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain
important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.
Uncollectible: Loans and leases in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan or lease has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan or lease, even though partial recovery may be obtained in the future. Charge-offs against the allowance for credit losses are taken in the period in which the loan or lease becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans or leases within this category.
The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis.
The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating based on year of origination as of September 30, 2024, and December 31, 2023 (in thousands):
Loans Amortized Cost Basis by Origination Year
Revolving
Loans
Converted
2022
2021
2020
Prior
to Term
Pass
236,517
264,292
599,952
392,605
158,693
200,108
14,092
899
1,867,158
Watch
-
7,293
5,192
1,883
2,600
6,911
557
24,436
Special mention
3,153
Substandard
485
342
3,317
303
591
5,038
Doubtful
Total commercial real estate
237,002
271,927
608,297
397,805
161,596
207,610
14,649
YTD gross charge-offs
85,179
112,549
159,602
85,817
49,505
68,295
122,522
1,463
684,932
82
105
1,157
1,704
51
176
3,225
227
3,817
Total consumer real estate
85,368
112,631
86,243
49,615
71,676
123,906
150,971
79,728
48,854
6,443
2,222
9,956
8,618
983
307,775
2,170
956
106
3,231
6,463
558
Total construction and land development
153,699
80,684
48,960
9,746
10,094
97,216
135,390
146,669
47,162
18,926
28,823
246,985
724,262
109
125
127
4,209
1,600
92
6,275
159
455
200
129
76
1,063
Total commercial and industrial
97,325
135,674
147,251
51,571
19,068
28,899
248,605
3,207
(618)
(235)
21,003
20,591
18,741
4,841
1,420
456
Total leases
(29)
(602)
(585)
(1)
3,966
2,585
1,121
470
282
4,853
13,520
Total consumer and other
3,971
1,123
247
(5)
(54)
(45)
Total loans
594,852
615,135
974,939
537,338
231,048
307,881
397,070
6,436
3,664,699
2,284
8,456
5,425
9,573
2,723
7,016
3,314
38,883
3,762
674
501
457
3,765
432
4,034
10,134
598,368
624,092
983,974
550,676
234,203
318,982
400,631
6,552
Total YTD gross charge-offs
(34)
(1,292)
(874)
(31)
(487)
(85)
2019
237,110
578,227
433,505
181,374
134,495
106,315
15,132
6,690
1,692,848
22,295
1,267
1,950
921
4,426
2,926
3,500
37,285
3,215
903
3,932
310
430
5,857
260,308
582,709
439,387
182,605
139,203
109,671
10,190
123,203
174,755
98,460
53,688
33,598
48,378
107,949
3,026
643,057
171
116
55
1,581
2,181
196
824
253
2,850
113
4,576
123,570
175,579
98,894
54,057
33,762
51,336
109,643
113,752
115,032
23,823
2,749
5,056
6,595
40,667
7,489
315,163
6,670
3,233
607
10,511
437
620
419
1,074
120,859
118,265
24,465
3,369
7,015
168,957
162,799
62,796
22,639
9,135
25,207
185,619
7,270
644,422
54
120
285
193
614
75
1,211
169,204
163,428
63,009
22,768
9,210
185,739
7,353
(274)
(50)
(183)
(584)
28,922
26,658
8,658
3,603
703
208
(122)
(193)
(18)
(345)
5,926
2,049
841
373
132
206
3,931
67
13,525
142
(40)
(135)
(74)
(89)
(425)
677,870
1,059,520
628,083
264,426
183,119
186,909
353,298
24,542
3,377,767
29,190
4,515
2,828
1,037
4,436
2,982
1,701
3,583
50,272
3,705
1,292
1,438
4,343
1,312
521
3,699
12,718
708,789
1,068,688
635,254
266,775
188,076
193,643
355,112
28,125
(237)
(98)
(1,363)
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):
90 Days
30-59 Days
60-89 Days
or More
Loans Not
Past Due
1,909
802
2,748
1,897,037
596
387
688,812
314,965
454
1,653
2,107
729,493
1,814
812
1,601
4,227
62,825
85
13,412
4,858
1,576
4,500
10,934
3,706,544
52
270
1,660
1,982
1,737,223
2,216
1,347
561
4,124
645,743
631
1,251
325,934
330
2,286
3,572
642,346
1,208
212
1,552
67,200
98
13,348
5,143
2,088
5,437
12,668
3,431,794
The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at September 30, 2024 and December 31, 2023. Also presented is the balance of loans on nonaccrual status at September 30, 2024 and December 31, 2023, for which there was no related allowance for credit losses is recorded (in thousands):
Nonaccrual
Loans Past Due
With No Allowance
Over 90 Days
for Credit Losses
Still Accruing
1,416
2,044
1,352
3,242
1,800
1,562
1,990
2,480
160
2,626
156
140
9,319
2,602
172
7,931
3,074
170
The following table presents the amortized cost basis of collateral-dependent loans, which are individually evaluated to determine expected credit losses (in thousands):
4,353
2,096
859
534
6,449
1,393
7,842
5,155
2,756
1,411
1,018
9,322
10,340
Loan Modifications to Borrowers Experiencing Financial Difficulty:
The table below shows the amortized cost of loans and leases made to borrowers experiencing financial difficulty that were modified during the three and nine months ended September 30, 2024 and 2023, respectively. (dollars in thousands):
Payment Delay
Payment
Term
and Term
Delay
Extension
226
336
21
528
514
748
1,790
403
566
969
63
216
466
1,828
2,447
The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 and 2023, respectively. (dollars in thousands):
Weighted-Average
Total Payment
(in months)
64
22
The table below shows an age analysis of loans and leases made to borrowers experiencing financial difficulty that were modified in the last twelve months, (in thousands):
30-89 Days
Current
637
398
1,090
354
530
169
185
743
4,112
Foreclosure Proceedings and Balances:
As of September 30, 2024, there was no residential real estate property secured by real estate included in other real estate owned and there were no residential real estate loans in the process of foreclosure.
Note 5. Goodwill and Intangible Assets
In accordance with FASB ASC No. 2021-03, “Goodwill and Other (Topic 350),” 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.
The Company’s other intangible assets consist of core deposit intangibles, insurance agency customer relationships and insurance agency 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 insurance agency customer relationships are amortized over 14 years and the insurance agency tradename is amortized over five years.
The carrying amount of goodwill at September 30, 2024, and December 31, 2023, was $96.1 million.
Other intangible assets as of the dates indicated is summarized below (in thousands):
Core Deposit
Customer Relationships
Tradename
Amortized other intangible assets:
Intangibles
September 30, 2024:
Beginning balance January 1, 2024, gross
17,470
5,670
23,203
Less: accumulated amortization
(11,021)
(2,940)
(63)
(14,024)
Balance, September 30, 2024, other intangible assets, net
2,730
9,179
December 31, 2023:
Beginning balance January 1, 2023, gross
(9,758)
(2,379)
(12,200)
Balance, December 31, 2023, other intangible assets, net
7,712
3,291
11,003
The aggregate amortization expense for other intangible assets for the three and nine months ended September 30, 2024, was $604 thousand and $1.8 million, respectively, and for the three and nine months ended September 30, 2023, was $647 thousand and $2.0 million, respectively.
As of September 30, 2024, the estimated aggregate amortization expense for future periods for intangibles is as follows (in thousands):
Remainder of 2024
600
2025
2,256
2026
2,086
2027
1,904
2028
1,139
Thereafter
1,194
Note 6. Borrowings, Line of Credit and Subordinated Debt
Borrowings:
At September 30, 2024, total borrowings were $9.0 million compared to $13.1 million at December 31, 2023. Borrowings consist of the following (in thousands):
Securities sold under customer repurchase agreements
5,078
Other borrowings
5,000
8,000
Securities Sold Under Agreements to Repurchase:
Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis.
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 $6.6 million and $7.6 million at September 30, 2024 and December 31, 2023, respectively. The average balance of repurchase agreements during the nine-month period ended September 30, 2024, and 2023 was $4.8 million and $5.0 million, respectively. The maximum month-end outstanding balance for the nine-month period ended September 30, 2024, and 2023 was $5.8 million and $6.1 million, respectively.
Other Borrowings:
The Company has a revolving line of credit for an aggregate amount of $35 million. The maturity of the line of credit is February 1, 2025. At September 30, 2024, $5.0 million was outstanding under the line of credit, and $30.0 million of the line of credit remained available to the Company.
Subordinated Debt:
On September 28, 2018, the Company issued $40 million of 5.625% fixed-to-floating rate subordinated notes (the "Notes"), which were outstanding as of September 30, 2024 and December 31, 2023. Unamortized debt issuance cost was $337 thousand and $401 thousand at September 30, 2024 and December 31, 2023, respectively.
The Notes initially bore 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. As of October 2, 2023, to but excluding the maturity date or early redemption date, the interest rate has, with the sunset of the London Inter-bank Offered Rate,
reset quarterly to an annual floating rate equal to three-month Chicago Mercantile Exchange published term Secured Overnight Financing Rate (“SOFR”), plus 281.161 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’ unamortized debt issuance costs totaled $337 thousand at September 30, 2024 and will be amortized through the Notes’ maturity date. Amortization expense totaled $21 thousand and $63 thousand for the three and nine months ended September 30, 2024, and 2023, respectively.
On September 1, 2021, the Company acquired $2.5 million of subordinated notes (“sub-debt”) from the acquisition of Sevier County Bancshares, Inc. The sub-debt bears interest at a rate of 6.75% per annum until August 14, 2024, with the interest during this period payable semi-annually in arrears. On August 14, 2024, the Company redeemed this sub-debt in whole.
Note 7. 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 nine month periods ending September 30, 2024, was $504 thousand and $1.5 million, respectively. The Company’s contribution to the Plan for the three and nine months ended September 30, 2023, was $475 thousand and $1.4 million, 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 September 30, 2024, the Company had one active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which has 1,595,020 Rights available for future grants or awards.
The Company’s 2015 Stock Incentive Plan has 10,148 Rights issued.
Stock Options:
A summary of the status of stock option plans is presented in the following table:
Weighted
Average
Exercisable
Price
Outstanding at December 31, 2023
16,340
13.55
Granted
Exercised
(6,192)
11.09
Forfeited
Outstanding at September 30, 2024
10,148
15.05
Information pertaining to stock options outstanding at September 30, 2024, is as follows:
Options Outstanding
Options Exercisable
Weighted-
Remaining
Exercise
Contractual
Prices
Outstanding
Life
1.00 years
Outstanding, end of period
The Company did not recognize any stock option-based compensation expense during the three and nine months ended September 30, 2024, and 2023, respectively, as all stock options issued are fully vested, and no future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plan.
Stock options of 1,692 and 6,192 shares were exercised during the three and nine month periods ended September 30, 2024, respectively. No stock options were exercised during the three months ended September 30, 2023. Stock options of 15,705 shares were exercised during the nine month period ended September 30, 2023. The income tax benefit recognized for the exercise of options during the three and nine months ended September 30, 2024, was a benefit of $0 and $14 thousand, respectively, and for the nine months ended September 30, 2023, a benefit of $60 thousand.
The intrinsic value of options exercised during the three and nine months ended September 30, 2024, was $15 thousand and $69 thousand, respectively. No stock options were exercised during the three months ended September 30, 2023. The intrinsic value of options exercised during the nine months ended September 30, 2023, was $242 thousand. The aggregate intrinsic value of total options outstanding and exercisable options at September 30, 2024, was $143 thousand. Cash received from options exercised under all share-based payment arrangements for the nine months ended September 30, 2024, was $68 thousand.
Restricted Stock Awards:
A summary of the activity of the Company’s unvested restricted stock awards for the period ended September 30, 2024, is presented below:
Grant-Date
Fair Value
Balance at December 31, 2023
171,770
22.22
79,643
24.04
Vested
(51,236)
21.74
Forfeited/expired
(3,309)
24.75
Balance at September 30, 2024
196,868
23.04
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 nine months ended September 30, 2024, was $372 thousand and $1.3 million, respectively, and was $271 thousand and $1.2 million, during the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, there was $2.1 million 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 2.15 years. The grant-date fair value of restricted stock awards vested was $1.1 million for the nine months ended September 30, 2024.
Stock Appreciation Rights (“SARs”):
A summary of the status of SARs plans is presented in the following table:
Exercisable Price
20,000
20.70
(16,000)
Information pertaining to SARs outstanding at September 30, 2024, is as follows:
SARs Outstanding
SARs Exercisable
Weighted- Average
0.25 years
SARs compensation expense of $41 thousand and $7 thousand was recognized for the three and nine months ended September 30, 2024, respectively, and $5 thousand and ($118) thousand for the three and nine months ended September 30, 2023. The credit adjustment for the nine month periods ended September 30, 2023, was due to adjustments related to the fair value evaluation of SARs.
Note 8. 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
780,576
716,951
Standby letters of credit
29,280
7,611
At September 30, 2024, and December 31, 2023, the allowance for credit losses for these off-balance sheet commitments was $2.3 million and $2.4 million, respectively. The expense (credit) related to the allowance for off-balance sheet commitments during the three and nine months ended September 30, 2024, was $302 thousand and ($73) thousand,
respectively, and was ($489) thousand and ($795) thousand, respectively, during the three and nine months ended September 30, 2023, respectively.
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 September 30, 2024 and December 31, 2023, 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 9. 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.
The following methodologies were used by the Company in estimating fair value disclosures for financial instruments measured on a recurring basis:
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 and interest rate swap agreements – The fair value for derivative financial instruments and interest rate swap agreements 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.
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 (in thousands):
Quoted Prices in
Significant
Active Markets
for Identical
Observable
Unobservable
Assets
Inputs
Description
(Level 1)
(Level 2)
(Level 3)
Assets:
Securities available-for-sale:
Total securities available-for-sale
Derivative financial instruments and interest rate swap agreements
12,387
Total assets at fair value
513,723
Liabilities:
14,023
12,821
421,231
14,807
During the nine months ending September 30, 2024, and twelve months ended December 31, 2023, there were no transfers between Level 1 and Level 2 or into our out of Level 3 in the fair value hierarchy.
Assets Measured at Fair Value on a Nonrecurring Basis:
Under certain circumstances management adjusts 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):
Collateral-dependent loans
656
1,295
279
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
%
Collateral-dependent loans: A collateral-dependent loan is measured based on the fair value of the collateral securing these loans, less selling costs. Collateral-dependent 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. Collateral-dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above. The amount of valuation allowance on all collateral-dependent loans was $3.2 million and $3.5 million as of September 30, 2024, and December 31, 2023, respectively.
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
31
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, the difference 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
Securities held-to-maturity
N/A
Loans and leases, net and loans held for sale
3,687,673
3,564,572
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market and savings deposits
769,621
37,860
3,413,814
3,308,980
548,397
39,822
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.
32
Note 10.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 certain fixed rate securities designated as available-for-sale. The hedging strategy converts the fixed interest rates to SOFR-based variable interest rates. These derivatives are designated as partial term hedges covering specified periods of time prior to the maturity date of the hedged securities. The Company adopted ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities” in 2018, 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):
Balance
Sheet
Maturity
Receive
Notional
Asset/Liability derivatives
Location
(In Years)
Pay Rate
Rate
Interest rate swap agreements - securities
2.03
4.30
SOFR
55,507
(955)
3.40
4.25
27,050
(536)
The effects of the Company’s fair value hedge relationships reported in interest income on taxable securities on the consolidated income statement were as follows (in thousands):
Interest income on taxable securities
5,091
14,710
7,986
Effects of fair value hedge relationships
391
Reported interest income on taxable securities
Gain (loss) on fair value hedging relationship
Interest rate swap agreements - securities:
Hedged items
(1,069)
Derivative designated as hedging instruments
1,069
955
Carry amount of hedged assets - mortgage-backed securities
48,886
Derivatives Designated as Cash Flow Hedges:
The Company enters into interest rate derivative contracts on assets and liabilities that are designated as qualifying cash flow hedges. The Company hedges the exposure to variability in expected future cash flows attributable to changes in contractual specified interest rates. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in offsetting cash flows attributable to the hedged risk. At inception, a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in accumulated other comprehensive income (“AOCI”) is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax, see – Consolidated Statements of Comprehensive Income (Loss). Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability, as future interest payments are made on the underlying assets. At September 30, 2024, the Company estimates that in the next 12 months an additional $126 thousand will be reclassified as a decrease in interest income and $634 thousand will be reclassified as an increase in interest expense.
At September 30, 2024 and December 31, 2023, cash flow hedges are as follows (in thousands):
Balance Sheet
Cash flow hedges:
50,000
(37)
100,000
(556)
Liabilities
150,000
(636)
(881)
25,000
The following table presents the effect of fair value and cash flow hedge accounting on AOCI (in thousands):
Derivatives in cash flow hedging relationships:
Amount of Gain (Loss) Recognized on OCI on Derivative
Location of Gain or (Loss) Recognized from AOCI into Income
Amount of Gain or (Loss) Reclassified from AOCI into Income
Interest rate swaps - Assets
1,177
Interest income
(203)
Interest rate swaps - Liabilities
(943)
Interest expense
(432)
(173)
587
157
532
(610)
240
724
(861)
(275)
698
The following table presents the effect of fair value and cash flow hedge accounting on the income statement (in thousands):
64,159
55,448
185,633
160,823
Effects of cash flow hedge relationships
Reported total interest income
29,151
24,426
86,180
62,150
(227)
(157)
(724)
(165)
Reported total interest expense
Non-hedged derivatives:
The Company provides 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 are recognized as other noninterest income in the current period.
At September 30, 2024 and December 31, 2023, 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:
360,003
12,373
294,133
12,813
(12,373)
(12,813)
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 and is included in noninterest income. Such fees were as follows (in thousands):
Interest rate swap agreements
1,103
1,378
823
Collateral requirements:
These derivative rate contracts have collateral requirements, both at inception of the trade and as the value of each derivative position changes. At September 30, 2024, collateral totaling $150 thousand and $390 thousand at December 31, 2023, was pledged to the derivative counterparties to comply with collateral requirements.
Note 11. 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. The Company follows the guidance of ASU Topic 842.
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 2044. All of our leases are classified as operating leases. 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
11,741
9,894
Operating lease liabilities
12,240
10,303
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 of 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.
As of September 30, 2024, the weighted average remaining lease term was 10.57 years and the weighted average discount rate was 3.48%.
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
492
438
1,247
Variable lease costs
87
508
468
1,483
1,334
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
462
393
1,322
1,142
36
Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2024, were as follows (in thousands):
Amounts
452
1,714
1,599
1,392
1,388
8,562
Total future minimum lease payments
15,107
Amounts representing interest
(2,867)
Present value of net future minimum lease payments
Note 12. 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 Basel III 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 (“CET1”), 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 September 30, 2024, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the “well capitalized” regulatory classification.
In December 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (“FDIC”) issued a final rule revising regulatory capital rules in anticipation of the adoption of ASU 2016-13, Financial Instruments—Credit Losses Measurement of Credit Losses on Financial Instruments (Topic 326), that provided an option to phase in over a three-year period on a straight line basis the day-one impact of the adoption on earnings and tier one capital. The Company adopted ASU 2016-13 on January 1, 2023, and has chosen the three-year phase in option.
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 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 nine months ended September 30, 2024, the Bank paid $17.5 million in dividends to the Company, and the Company has paid a quarterly common stock dividend of $0.08 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 September 30, 2024, and December 31, 2023 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)
469,276
11.62
323,034
8.00
Tier 1 Capital (to Risk Weighted Assets)
406,264
10.06
242,275
6.00
Common Equity Tier 1 Capital (to Risk Weighted Assets)
181,706
4.50
Tier 1 Capital (to Average Assets)2
8.44
192,472
4.00
SmartBank:
471,875
11.69
322,834
403,542
10.00
440,593
10.92
242,125
181,594
262,302
6.50
9.17
192,095
240,119
5.00
448,050
11.80
303,658
385,795
10.16
227,744
170,808
Tier 1 Capital (to Average Assets)
8.27
186,672
456,134
12.02
303,680
379,600
427,559
11.26
227,760
170,820
246,740
9.18
186,363
232,954
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.
Note 13. Other Comprehensive Income (Loss)
The changes in each component of accumulated other comprehensive income (loss), presented net of tax, were as follows (in thousands):
Available-for-
Transferred to
Municipal
Cash Flow
Sale
Held-to-Maturity
Security Hedges
Hedges
Beginning balance, June 30, 2024
(24,640)
(582)
(661)
Other comprehensive income (loss)
9,043
(689)
190
8,544
Reclassification of amounts included in net income
(104)
(16)
(95)
Net other comprehensive income (loss) during period
Ending balance, September 30, 2024
(15,597)
(557)
(708)
Beginning balance, June 30, 2023
(33,132)
(684)
(1,201)
(4,325)
(4,210)
5,044
5,071
719
Ending balance, September 30, 2023
(32,413)
(657)
(1,086)
Beginning balance, December 31, 2023
(23,818)
(632)
(397)
(1,060)
8,221
(22)
657
8,856
(289)
(84)
Beginning balance, December 31, 2022
(33,616)
(742)
(966)
(3,841)
(3,961)
5,129
1,203
39
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 time deposits. 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
The Company may from time to time make written or oral statements, including statements contained in this Quarterly Report on Form 10-Q (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 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. The Company 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.
Critical Accounting Estimates
Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no other significant changes in the Company’s application of critical accounting policies since December 31, 2023.
Executive Summary
The following is a summary of the Company’s financial highlights and significant events during the third quarter and first nine months of 2024:
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Selected Financial Information
The following is a summary of certain financial information for the three and nine month periods ended September 30, 2024 and 2023 and as of September 30, 2024 and December 31, 2023 (dollars in thousands, except per share data):
Change
Income Statement:
8,681
24,475
4,655
23,471
4,026
1,004
1,560
2,246
Noninterest income
8,448
10,376
Noninterest expense
2,330
5,144
Income before income taxes
8,364
4,676
579
7,073
4,097
Per Share Data:
Basic income per common share
0.42
0.25
Diluted income per common share
0.43
0.26
Performance Ratios:
Return on average assets
0.74
0.17
0.58
0.72
0.63
0.09
Return on average shareholders' equity
7.60
1.84
5.76
7.55
6.80
0.76
Balance Sheet:
272,473
54,637
Analysis of Results of Operations
Third quarter of 2024 compared to 2023
Net income was $9.1 million, or $0.54 per diluted common share, for the third quarter of 2024, compared to $2.1 million, or $0.12 per diluted common share, for the third quarter of 2023. For the three months ended September 30, 2024, when compared to the comparable period in 2023, the increase in net income of $7.1 million was due to an increase in noninterest income of $8.4 million and net interest income after provision for loan and lease losses of $2.2 million, offset by an increase in noninterest expense of $2.3 million and income tax expense of $1.3 million. The increase in noninterest income was associated with a $6.8 million pre-tax loss on the sale of available-for-sale securities, as a result of a balance sheet optimization transaction in September 2023. The tax equivalent net interest margin was 3.11% for the third quarter of 2024, compared to 2.81% for the third quarter of 2023. Noninterest income to average assets was 0.74% for the third quarter of 2024, increasing from 0.06% for the third quarter of 2023. Noninterest expense to average assets increased to 2.50% in the third quarter of 2024, from 2.37% in the third quarter of 2023.
First nine months of 2024 compared to 2023
Net income totaled $26.5 million, or $1.57 per diluted common share, for the nine months ended 2024, compared to $22.4 million, or $1.33 per diluted common share, for the nine months ended 2023. The increase in net income of $4.1 million for this period was primarily from the increase of $10.4 million in noninterest income, offset by an increase of $5.1 million in noninterest expense and $579 thousand in income tax expense. The increase in noninterest income was associated with a $6.8 million pre-tax loss on the sale of available-for-sale securities, as a result of a balance sheet optimization transaction in September 2023. The tax equivalent net interest margin was 2.97% for the first nine months of 2024, compared to 3.01% for the first nine months of 2023. Noninterest income to average assets was 0.69% for the first nine months of 2024,
43
increasing from 0.41% for the first nine months of 2023. Noninterest expense to average assets increased to 2.42% in the first nine months of 2024, from 2.35% in the first nine months of 2023.
Net Interest Income and Yield Analysis
Net interest income, taxable equivalent, increased to $35.4 million for the third quarter of 2024, up from $31.1 million for the third quarter of 2023. Net interest income was positively impacted by the increase in balances of loans and leases and the increase in yield/rate on these interest-earning assets, offset by the increase in the cost of interest-bearing liabilities. Average interest-earning assets increased from $4.40 billion for the third quarter of 2023, to $4.53 billion for the third quarter of 2024, primarily from the increase in our average loan and lease balances and average cash balances, which was offset by decreases in average securities. Over this period, average loan and lease balances increased by $274.1 million, average federal funds sold and other interest-earning assets increased by $37.8 million, average interest-bearing deposits increased by $129.3 million, and average borrowing increased by $37.4 million. Average securities decreased by $179.2 million and noninterest-bearing deposits decreased by $66.2 million. The tax equivalent net interest margin increased to 3.11% for the third quarter of 2024, compared to 2.81% for the third quarter of 2023. The yield on earning assets increased from 4.99% for the third quarter of 2023, to 5.65% for the third quarter of 2024, primarily due to the deployment of excess cash and cash equivalents into loans and leases and the increase in rates by the Federal Reserve. The cost of average interest-bearing deposits increased from 2.84% for the third quarter of 2023, to 3.20% for the third quarter of 2024, primarily due to the increase in rates by the Federal Reserve and increased pricing competition.
44
The following tables summarizes the major components of net interest income and the related yields and costs for the periods presented (dollars in thousands):
Three Months Ended September 30,
Yield/
Interest
Loans and leases, including fees1
3,634,808
54,993
6.02
3,360,678
5.61
Taxable securities
564,978
3.68
743,054
2.31
Tax-exempt securities2
63,561
443
2.77
64,707
451
267,252
3,634
5.41
229,487
5.26
Total interest-earning assets
4,530,599
64,303
5.65
4,397,926
55,370
4.99
Noninterest-earning assets
381,306
379,456
4,911,905
4,777,382
Liabilities and Shareholders' Equity:
925,307
5,289
2.27
969,122
5,463
2.24
1,917,301
16,608
3.45
1,753,671
13,744
3.11
560,699
5,453
3.87
551,191
4,226
3.04
Total interest-bearing deposits
3,403,307
3.20
3,273,984
2.84
53,592
16,228
5.13
40,846
8.42
42,065
5.90
Total interest-bearing liabilities
3,497,745
3.29
3,332,277
2.89
Noninterest-bearing deposits
884,938
951,179
50,580
48,494
4,433,263
4,331,950
Shareholders' equity
478,642
445,432
Total liabilities and shareholders’ equity
Net interest income, taxable equivalent
35,379
31,101
Interest rate spread
2.36
2.11
Tax equivalent net interest margin
2.81
Percentage of average interest-earning assets to average interest-bearing liabilities
129.53
131.98
Percentage of average equity to average assets
9.74
9.32
1Yields related to tax-exempt loans 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 $255 thousand for the three months ended September 30, 2024, and $0 thousand for the three months ended September 30, 2023.
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 $93 thousand and $95 thousand for the three months ended September 30, 2024, and 2023, respectively.
Net interest income, taxable equivalent, increased to $100.4 million for the first nine months of 2024, up from $98.9 million for the first nine months of 2023. Net interest income was positively impacted, compared to the prior year, primarily by the increase in balances of loans and leases and the increase in yield/rate on interest-earning assets, offset by the increase in the cost of interest-bearing liabilities. Average interest-earning assets increased from $4.39 billion for the first nine months of 2023 to $4.51 billion for the first nine months of 2024, primarily because of the Company’s continued organic loan and lease growth and the increase in our average cash balances, offset by a decrease in our securities. Over this period, average loan and lease balances increased by $223.2 million, federal funds sold and other interest earning assets increased by $120.0 million, average interest-bearing deposits increased by $189.1 million and average borrowings increased by $6.6 million. Average securities decreased by $158.4 million and noninterest-bearing deposits decreased by $90.3 million. The tax equivalent net interest margin decreased to 2.97% for the first nine months of 2024, compared to 3.01% for the first nine months of 2023. The yield on earning assets increased from 4.90% for the first nine months of 2023, to 5.51% for the first nine months of 2024, primarily due to the deployment of excess cash and cash equivalents into loans and leases and the increase in rates by the Federal Reserve. The cost of average interest-bearing deposits increased from 2.45% for the first nine months of 2023 to 3.19% for the first nine months of 2024, primarily due to the increase in rates by the Federal Reserve and increased pricing competition.
45
3,532,768
156,123
3,309,616
5.56
Taxable Securities
588,679
3.43
745,694
2.21
63,804
1,336
2.80
65,170
Federal funds and other earning assets
322,339
5.49
267,124
4.73
4,507,590
185,815
5.51
4,387,604
160,831
4.90
381,743
365,123
4,889,333
4,752,727
968,139
17,299
2.39
954,585
14,583
2.04
1,910,452
49,285
1,770,232
35,912
2.71
543,887
15,240
3.74
508,600
8,838
2.32
3,422,478
3.19
3,233,417
2.45
25,941
5.07
19,309
5.37
41,691
8.48
42,044
5.97
3,490,110
3.27
3,294,770
2.52
882,168
972,507
48,299
44,703
4,420,577
4,311,980
468,756
440,747
100,359
98,846
2.97
3.01
129.15
133.17
9.59
9.27
1Yields related to tax-exempt loans 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 $512 thousand for the nine months ended September 30, 2024, and $0 thousand for the nine months ended September 30, 2023.
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 $280 thousand for the nine months ended September 30, 2024, and $283 thousand for the nine months ended September 30, 2023.
Noninterest Income
The following table summarizes noninterest income by category (in thousands):
246
Gain (loss) on sale of securities
225
420
797
324
314
766
2,135
Noninterest income increased by $8.4 million during the third quarter of 2024 compared to the same period in 2023. This quarterly change in total noninterest income primarily resulted from the following:
Noninterest income increased by $10.4 million during the first nine months of 2024 compared to the same period in 2023. This change in total noninterest income primarily resulted from the following:
Noninterest Expense
The following table summarizes noninterest expense by category (in thousands):
1,663
2,874
(124)
Other real estate and loan-related expense
(19)
(82)
141
658
883
(43)
Merger-related and restructuring expenses
(110)
499
717
Noninterest expense increased by $2.3 million in the third quarter of 2024 as compared to the same period in 2023. The quarterly increase in total noninterest expense primarily resulted from the following:
47
Noninterest expense increased by $5.1 million in the first nine months of 2024 as compared to the same period in 2023. The change in total noninterest expense primarily resulted from the following:
Taxes
In the third quarter of 2024 income tax expense totaled $1.6 million as compared to $319 thousand in same period of 2023. The effective tax rate was approximately 15.0% in the third quarter of 2024 compared to 13.4% in the second quarter of 2023. During the third quarter of 2024 the Bank established a Real Estate Investment Trust (“REIT”) subsidiary. The REIT subsidiary is expected to result in a lower effective tax rate during future periods by lowering the Bank’s state income tax expense.
In the first nine months of 2024 income tax expense totaled $6.6 million compared to $6.0 million in the first nine months of 2023. The effective tax rate was approximately 19.9% for first nine months of 2024 compared to 21.1% for the nine months ended 2023.
Loan and Lease Portfolio
The Company had total net loans and leases outstanding of approximately $3.68 billion at September 30, 2024, compared to $3.41 billion at December 31, 2023. Loans secured by real estate, consisting of commercial and residential property, are the principal component of our loan and lease portfolio.
The following table summarizes the composition of our loan and lease portfolio for the periods presented (dollars in thousands):
% of
51.0
50.4
18.6
18.9
8.5
9.5
19.7
18.8
1.8
2.0
0.4
100.0
Loan and Lease Portfolio Maturities
The following table sets forth the maturity distribution of our loans and leases at September 30, 2024, 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
Five through
Over Fifteen
Fixed
Floating
or Less
Five Years
Fifteen Years
Years
Commercial real estate-mortgage
73,492
1,113,812
656,393
56,088
1,047,258
779,035
Consumer real estate-mortgage
35,597
201,756
101,646
351,505
267,094
387,813
73,806
154,284
39,415
47,501
90,508
150,692
203,073
429,444
75,356
23,727
361,518
167,009
2,206
64,692
154
64,846
7,637
5,594
269
5,639
395,811
1,969,582
873,233
478,852
1,836,863
1,484,804
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 0.26% as of September 30, 2024, and 0.24% December 31, 2023, respectively. Total nonperforming assets, as a percentage of total assets, was 0.26% as of September 30, 2024, and 0.20% as of December 31, 2023, respectively.
The following table is a summary of our loans and leases that were past due at least 30 days but less than 89 days, and 90 days or more past due, excluding nonaccrual loans for the periods presented (dollars in thousands):
Accruing Loans
90 Days or More
Total Accruing
Past Due Loans
Percentage of
Loans in
Category
1,673
740
0.11
0.06
1,446
2.16
0.23
1,602
99
0.73
0.85
4,412
4,584
322
0.02
2,229
0.34
0.19
1,286
0.20
1,340
1.95
0.10
1,412
2.05
89
0.66
1.38
5,897
6,067
0.18
49
The following table is a summary of our nonaccrual loans and leases for the periods presented (dollars in thousands):
Nonaccrual Loans
0.07
0.47
0.41
0.01
0.27
0.38
3.92
0.03
Allowance for credit losses to nonaccrual loans
382.11%
424.75%
Allocation of the Allowance for Credit Losses
We maintain the allowance at a level that we deem appropriate to adequately cover change in the loan and lease portfolio. Our provision for credit losses for loans and leases for the nine months ended September 30, 2024, is $3.1 million compared to $2.3 million in the same period of 2023, an increase of $837 thousand. As of September 30, 2024, and December 31, 2023, our allowance for credit losses was $35.6 million and $35.1 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for credit loss as a percentage of total loans and leases was 0.96% at September 30, 2024 and 1.02% at December 31, 2023, respectively.
The following table sets forth, based on management's best estimate, the allocation of the allowance for credit losses on loans and leases to categories of loans and leases and loan and lease balances by category and the percentage of loans and leases in each category to total loans and leases and allowance for credit losses as a percentage of total loans and leases within each loan and lease category for each period presented (dollars in thousands):
Percentage of Loans
Ratio of Allowance
Amount of
in Each Category
Allocated to Loans in
Allowance Allocated
to Total Loans
Each Category
0.82
1.09
1.18
1.04
1.56
0.84
0.96
0.88
1.12
1.49
1.07
0.93
1.02
The allowance associated with the individually evaluated loans and leases were approximately $3.2 million at September 30, 2024, compared to $3.5 million at December 31, 2023.
50
Analysis of the Allowance for Credit Losses
The following is a summary of changes in the allowance for credit losses for the periods presented including the ratio of the allowance for credit losses to total loans and leases as of the end of each period (dollars in thousands):
Ratio of Net (charge-offs)
Provision for
Net (charge-offs)
Recoveries to
Credit Losses
Recoveries
Average Loans
1,840,376
681,852
321,734
(390)
707,005
(0.06)
(916)
70,201
(1.30)
(49)
13,640
(0.36)
(0.04)
1,655,592
632,102
384,166
(131)
606,183
(0.02)
67,515
(0.21)
(67)
15,120
(0.44)
(344)
(0.01)
1,790,580
665,288
305,554
(0.14)
(717)
689,208
(0.10)
(1,238)
68,646
(1.80)
(190)
13,492
(1.41)
(2,548)
(0.07)
1,636,661
618,883
382,005
(234)
590,088
67,076
(0.31)
(145)
14,903
(0.97)
Securities Portfolio
Our available-for-sale securities portfolio is carried at fair market value and our held-to-maturity securities portfolio is carried at amortized cost, and consists primarily of Federal agency bonds, mortgage-backed securities, state and municipal securities and other debt securities. Our securities portfolio decreased from $689.6 million at December 31, 2023, to $629.1 million at September 30, 2024, primarily as a result of Treasury securities maturities. Our securities to asset ratio has decreased from 14.3% at December 31, 2023, to 12.8% at September 30, 2024.
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 September 30, 2024 (dollars in thousands).
The composition and maturity/repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.
Over Ten
Ten Years
Yield (1)
1.27
U.S. Government agencies
130
6.59
41,834
6.70
State and political subdivisions
480
2.53
3,708
2.92
5,391
3.30
8,740
3.72
998
4.15
6,928
7.23
33,828
500
5.40
15,586
123,661
197,958
3.88
3.81
Total securities
3.62
109,928
204,714
4.54
207,198
3.75
42,155
6,268
2.01
1.86
1.32
8,288
1.99
42,889
2.18
2.14
4,792
22,651
55,235
1.89
71,808
2.15
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 September 30, 2024, brokered deposits represented approximately 4.55% of total deposits.
The following tables summarize the average balances outstanding and average interest rates for each major category of deposits for the three and nine month periods ending September 30, 2024, and 2023, respectively (dollars in thousands):
September 30, 2023
20.6
22.5
21.6
22.9
44.7
41.5
13.1
13.0
Total average deposits
4,288,245
2.54
4,225,163
2.20
20.5
23.1
22.7
44.4
42.1
12.6
12.1
4,304,646
4,205,924
The Company believes its deposit product offerings are properly structured to attract and retain core deposit relationships. The average cost of interest-bearing deposits for the three months ended September 30, 2024, and 2023, was 3.20% and 2.84%, respectively. The cost increase was primarily attributable to the rate increases. The average cost of interest-bearing deposits for the nine months ended September 30, 2024, and 2023, was 3.19% and 2.45%, respectively. The cost increase was primarily attributable to the increases in rates and increased pricing competition.
Total deposits as of September 30, 2024, were $4.32 billion, which was an increase of $54.6 million from December 31, 2023. This overall increase was driven primarily by the issuance of brokered deposits of $174.8 million, increase in other time deposits of $44.3 million and savings deposits of $42.4 million, offset by a decline in interest-bearing demand deposits of $172.7 million and noninterest bearing deposits of $34 million. During the quarter, the Bank elected not to pursue a higher cost public funds depository relationship and utilized Federal Home Loan Advances temporarily, which was replaced with brokered deposits. As of September 30, 2024, the Company had outstanding time deposits under $250,000 with balances of $516.9 million and time deposits over $250,000 with balances of $252.7 million.
The following table summarizes the maturities of time deposits $250,000 or more (in thousands).
Three months or less
58,243
Three to six months
71,861
Six to twelve months
91,887
More than twelve months
30,676
252,667
The Company's estimated uninsured deposits totaled $1.86 billion at September 30, 2024, compared to $1.76 billion at December 31, 2023, representing 43.0% and 41.3% of total deposits at September 30, 2024, and December 31, 2023, respectively. These estimates were derived using the same methodologies and assumptions used for the Bank's regulatory reporting.
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 down-streamed as Tier 1 capital to the Bank. Borrowings totaled $9.0 million at September 30, 2024, and consisted of short-term borrowings of $5.0 million, and $4.0 million of securities sold under repurchase agreements. Long-term debt totaled $39.7 million and $42.1 million at September 30, 2024, and December 31, 2023, respectively, and consisted entirely of subordinated debt. For more information regarding our borrowings, see “Part I - Item 1. Consolidated Financial Statements – Note 6 – Borrowings, Line of Credit and Subordinated Debt” of this report.
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 September 30, 2024 and December 31, 2023, 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 12 – Regulatory Matters” of this report.
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 September 30, 2024, we had $780.6 million of pre-approved but unused lines of credit and $29.3 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 8 – Commitments and Contingent Liabilities” of this report.
Market Risk and Liquidity Risk Management
The Bank’s Asset Liability Management Committee (“ALCO”) oversees market risk management and establishes risk measures, limits on policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. A variety of measures are used to provide for a comprehensive overview of the Company’s magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships. We utilize an independent third-party earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12-24 months. The model measures the impact on net interest income relative to a flat-rate case scenario of hypothetical fluctuations in interest rates over the next 12-24 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered. In addition, third parties will join the meetings of ALCO to provide feedback regarding future balance sheet structure, earnings and liquidity strategies. ALCO continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. The objective is to manage the impact of fluctuating market rates on net interest income within acceptable levels. In order to meet this objective, management may lengthen or shorten the duration of assets or liabilities.
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. 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 static interest rate forecast over the next 12 months, limits in the decline in net interest income are as follows:
Estimated % Change in Net Interest Income Over 12 Months
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase
(1.43)%
200 basis points increase
(2.81)%
100 basis points decrease
0.80%
200 basis points decrease
1.21%
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:
Current Estimated Instantaneous Rate Change
(4.97)%
(10.00)%
5.32%
8.72%
At September 30, 2024, our model results indicated that we were within our 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 securities 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 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 $1.5 million in securities that mature throughout the next 12 months. The Company also has unused borrowing capacity in the amount of $917.7 million available with the Federal Reserve, Federal Home Loan Bank, 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.
The information presented in the Market Risk and Liquidity Risk Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report is incorporated herein by reference.
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 September 30, 2024 (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 September 30, 2024, 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, 2023. 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.
There are no material changes during the period covered by this report to the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On November 20, 2018, the Company announced that its board of directors had 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 September 30, 2024, we have purchased $8.5 million of the authorized $10.0 million and may purchase up to an additional $1.5 million in the Company’s outstanding common stock.
The following table summarizes the Company’s repurchase activity during the three months ended September 30, 2024.
Maximum
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)
July 1, 2024 to July 31, 2024
August 1, 2024 to August 31, 2024
September 1, 2024 to September 30, 2024
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Item 6. Exhibits
ExhibitNo.
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
Interactive Data Files (formatted as Inline XBRL)
104
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:
November 12, 2024
/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)
59