SmartFinancial
Annual Report 2020

Plain-text annual report

L A U N N A T R O P E R 2020SMARTBANK, known for its progressive and innovative style of banking, was organized in 2006 and has been building a foundation of strong leadership, forward thinking and a sincere desire to provide incomparable client service. 2 Billy Carroll & Miller Welborn We begin our annual letter with a thank you to our shareholders, clients, and associates for their support in helping our company accomplish another year of outstanding performance. The word “unprecedented” was used many times during 2020 and that is exactly what was experienced in most all businesses at some point during the year. While challenging in many ways there were numerous bright spots, and our company effectively utilized a very unusual year to achieve solid results. Our performance for 2020 was strong with net income for the year totaling $24.3 million, equating to a diluted earnings per share of $1.62. We experienced outstanding growth of $856 million and finished the year with assets over $3.3 billion. We also maintained our quarterly dividend, an important part of our shareholder return strategy. We continued expansion of our franchise with the acquisition of Progressive Financial Group during the first quarter of 2020. This positioned us with new offices in the Cumberland Plateau region in Tennessee, $3.3+ Billion in Assets 35 Full Service Branches 475 Associates LETTER TO THE SHAREHOLDERS We also utilized the year to focus on continued efficiency gains and expense reduction initiatives to better leverage the acquisitions we have made over the past couple of years. This work is showing outstanding results and will prove very valuable as we continue to scale the company. Our team remains diligent on growing the core earnings with a key focus on earnings per share. We now have a foundation in place we can leverage to accomplish those goals and look forward to watching this company become even stronger. The future continues to be very bright for SmartFinancial. Our resilient and growing markets coupled with our outstanding associates and loyal clients make this an extremely unique organization. The culture of our company is strong, as evidenced by our fourth consecutive regional Top Workplace Award, and the passion of our team to grow this company is tremendous. On behalf of our fellow board members, our management team and our 475 associates, thank you for your support and loyalty to SmartFinancial and SmartBank. connecting our East and Middle Tennessee branches. It also moved us into a new line of business – Insurance. We now have a full service, independent insurance brokerage business, The Rains Agency, that allows us to offer clients a wide range of insurance products including home and auto, commercial business coverage, as well as life and health products. In addition to the expansion in the Cumberland Plateau, we opened a new branch in Murfreesboro and a second in Alcoa, Tennessee. Another highlight for the year was the tremendous work our team did with the Small Business Administration’s Paycheck Protection Program (PPP) which was created to help businesses manage the disruptions caused by the 2020 pandemic. Our team’s focus was utilizing the program to help our existing clients, and a number of new clients, access funds to help their businesses weather financial impacts during the year. Our team originated approximately 2,950 PPP loans totaling over $300 million during the initial rounds of the program. These loans provided businesses critical funding during a very uncertain time and we were very proud to be able to assist with this program. Sincerely, Miller Welborn Chairman of the Board SmartFinancial, Inc. Billy Carroll President & CEO SmartFinancial, Inc. 3 VISION Our vision is to build exceptional value for our brand and for our SHAREHOLDERS, ASSOCIATES, CLIENTS, and COMMUNITIES by delivering more than they think possible. MISSION We build exceptional value for our SHAREHOLDERS by managing growth and maximizing profitability, return on investment, stock value, dividends, and liquidity. We build exceptional value for our ASSOCIATES by fostering a more fulfilling environment that respects individual needs, establishes high expectations and recognizes achievement. We build exceptional value for our CLIENTS by demonstrating incomparable care for their needs and increasing their financial wealth. We build exceptional value in our COMMUNITIES by providing lasting solutions to their problems and protecting their greatest assets. 4 We’ve achieved this through the integrity and innovation of our Associates and Directors – it’s THE SMARTBANK WAY. BOARD OF DIRECTORS MILLER WELBORN Chairman BILL CARROLL Vice-Chairman BILLY CARROLL President & CEO VIC BARRETT Co-founder and Partner of The Track Recreation Center MONIQUE BERKE Vice President of Community and Corporate Engagement for the United Way TED MILLER Business Manager & Partner of Dolly Parton Productions DAVID OGLE President and Co-founder of Five Oaks Development Group OTTIS PHILLIPS Managing Partner of Phillips Properties Partnership and Eagle Properties STEVE TUCKER Principal in TriCo Resources and BTI Real Estate DR. KEITH WHALEY Founder of Whaley Family Eyecare GEOFF WOLPERT Owner of The Park Grill and The Peddler Steakhouse 5 2020 HIGHLIGHTS 5 Successfully completed the acquisition and integration of Progressive Savings Bank which added five new branches in the Cumberland Plateau region in Tennessee Processed approximately 2,950 Paycheck Protection Program (“PPP”) loans totaling over $300 million Implemented Digital Transformation Initiative including the launch of Zelle, a person to person payment feature within the SmartBank app 2 Opened two new branches in Murfreesboro and Alcoa, Tennessee Awarded a Top Workplace designation for the fourth year in a row Managed through an unprecedented COVID pandemic and responded quickly by adapting to several changes. Closely monitored branches to keep them open safely whenever possible. Implemented work-from-home procedures and granted extra COVID sick pay for SmartBank associates. Assisted clients with short term loan modifications and other requests as needed due to the country’s shutdown which began in March. Continued to add talent to SmartBank’s team with key leadership hires which positioned us to gain efficiencies in our processes and launch several new initiatives throughout the year 6 COOKEVILLE CROSSVILLE MURFREESBORO TEAM ALCOA 7 2020 2019 2018 2017 2016 2015 2014 2013 8 Completed acquisition & integration of Tennessee-based Progressive Savings Bank and opened a new branch in Alcoa and a second in Murfreesboro, Tennessee. Completed acquisition & integration of Maryville, TN-based Foothills Bank & Trust. Opened a LPO in Tallahassee, FL. Named to Fortune’s annual 100 Fastest-Growing Companies List. Completed acquisition & integration of Tuscaloosa-based Capstone Bank, and Tullahoma-based Southern Community Bank. Closed the acquisition of Maryville-based Foothills Bank and Trust. Completed acquisition & integration of an FSG Bank branch in Cleveland, TN. Closed the acquisition of Tuscaloosa, AL-based Capstone Bank. Completed merger & integration with Chattanooga-based Cornerstone Community Bank, becoming a $1 billion combined company. SmartFinancial, Inc. announced trading on the Nasdaq Capital Market under the ticker symbol: SMBK. SmartFinancial, Inc. and Cornerstone Bancshares, Inc. jointly announced a definitive agreement to merge, creating a combined company that will operate under the name SmartFinancial, Inc. Opened the Panama City, FL LPO and a newly designed second location in Knoxville, TN. STRATEGIC GROWTH SmartBank organized in 2006 with the goal to build an innovative and dynamic bank with unmatched client service. SmartBank opened its first office in January 2007 in Pigeon Forge, Tennessee and has expanded its footprint to total 35 branches across East and Middle Tennessee, Alabama, and the Florida Panhandle and growing. Pairing these strong and dynamic markets with the best people, advanced technology and innovative products will continue to drive the company’s expansion and future growth opportunities. Acquired Destin-based GulfSouth Private Bank, adding branches in the Florida Panhandle Assets grew to over $325 million through organic growth Formation of SmartFinancial, Inc. holding company Expanded into the Knoxville market with its fourth branch SmartBank opened its third branch in Gatlinburg, TN Opened its corporate office in Pigeon Forge, TN and a second branch four months later in Sevierville, TN Organization of SmartBank 2012 2011 2010 2009 2008 2007 2006 9 CULTURE CREATE POSITIVITY EMBRACE CHANGE DEMONSTRATE ACCOUNTABILITY CORE VALUES ACT WITH INTEGRITY BE ENTHUSIASTIC We will achieve our desired position to be the Southeast’s next great community bank by: CREATING “WOW” EXPERIENCES EXHIBITING OVER-THE-TOP ENTHUSIASM & POSITIVITY DELIVERING EXCEPTIONAL, PROFESSIONAL & KNOWLEDGEABLE SERVICE Proud to be recognized as a Top Workplace FOUR YEARS IN A ROW! 2017 2018 2019 10 2020 “WOW” AWARD WINNER Emily Rodriguez Assistant Branch Manager University Boulevard (Tuscaloosa) SENIOR LEADERSHIP BILLY CARROLL President Chief Executive Officer BEVERLY ATCHLEY Senior Vice President Senior Deposit Operations & Administrative Officer BECCA BOYD Executive Vice President Chief People Officer CYNTHIA CAIN Executive Vice President Director of Financial Planning & Analysis GREG DAVIS Executive Vice President Chief Lending Officer KELLEY FOWLER Senior Vice President Director of Marketing & Public Relations RON GORCZYNSKI Executive Vice President Chief Financial Officer MONTY HATCHER CFP®, AAMS® Executive Vice President Director of SmartBank Investment Services DANIEL HEREFORD Executive Vice President Chief Information Officer MIKE HONEYCUTT Regional President Northeast Tennessee RHETT JORDAN Executive Vice President Chief Credit Officer ROBERT KUHN Regional President Alabama and Florida TRAVIS LYTLE Senior Vice President Director of Community Development & Community Reinvestment Act Officer GARY PETTY Executive Vice President Chief Risk Officer BRYAN STUBBLEFIELD Senior Vice President Retail Sales BARRY WATSON Regional President Southeast Tennessee 11 2020 FINANCIAL HIGHLIGHTS 0.31% Asset quality was outstanding with nonperforming assets to total assets of just 0.31% $24.3M Net income of $24.3 million $3.3B Record high total assets of $3.3 billion, net loans of $2.4 billion, and deposits of $2.8 billion 25.55% Annual loan growth of $485 million, or 25.55% $23.64 Book value of common stock, up 5.87% in 2020 12 2020 FINANCIAL SUMMARY 13 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The following selected historical consolidated financial data as of and for the years ended December 31, 2020 and 2019 is derived from the audited consolidated financial statements of the company. (Amounts are in thousands, except ratios, per share data, and other data.) SUMMARY OF OPERATIONS Total interest income Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before income taxes Income tax expense Consolidated net income YEARS ENDED DECEMBER 31, 2019 2020 $117,613 16,747 100,866 8,683 92,183 15,426 76,719 30,890 6,558 $108,455 24,575 83,880 2,599 81,281 15,315 63,151 33,445 6,897 $ 24,332 $ 26,548 SHARE AND PER COMMON SHARE DATA: Basic earnings per share Diluted earnings per share Common equity per common share outstanding Tangible book value per share1 Dividends per common share Actual common shares outstanding Weighted average common shares outstanding Diluted weighted average common shares outstanding $ 1.63 1.62 $ 1.90 1.89 23.64 17.92 0.20 15,107 14,955 15,019 22.33 16.82 0.05 14,008 13,953 14,046 14 1 Tangible book value per share equals stockholders’ equity minus goodwill and other intangible assets divided by common shares outstanding. YEARS ENDED DECEMBER 31, 2019 2020 BALANCE SHEET DATA: Average total assets Average gross loans, net of deferred loan fees Average interest-earning assets Average deposits Average interest-bearing deposits Average interest-bearing liabilities Average total shareholders’ equity SELECTED FINANCIAL RATIOS: Return on average assets Return on average equity Average equity to average total assets Efficiency ratio Net interest margin1 Net interest spread2 CAPITAL RATIOS:3 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets) ASSET QUALITY RATIOS: Net charge-offs to average loans Allowance to period end loans Allowance for loan losses to non-performing loans Non-performing assets to total assets OTHER DATA: Branches Loan production offices Operation centers Total Associates $3,063,435 2,289,612 2,812,480 2,481,985 1,910,703 2,127,208 341,170 0.79% 7.13% 11.14% 65.97% 3.61% 3.41% 13.57% 12.78% 12.78% 9.58% 0.03% 0.77% 315.16% 0.31% 35 1 1 475 $2,339,340 1,836,963 2,137,364 1,964,017 1,620,406 1,681,148 298,729 1.13% 8.89% 12.77% 63.66% 3.95% 3.64% 13.31% 12.81% 12.81% 11.41% 0.03% 0.54% 305.76% 0.21% 29 2 2 399 Table Assumptions 1 Net interest margin is the result of net interest income calculated on a tax-equivalent basis divided by average interest earning assets for the period. 2 Net interest spread is calculated as the yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. 3 For SmartBank 15 MARKETS ALABAMA SmartBank completed the integration of Tuscaloosa-based Capstone Bank in early 2018, adding eight branches, including three in the Tuscaloosa region, and five spanning Southwest Alabama to the coast. Later in the same year, SmartBank added a branch in Huntsville through the acquisition of Southern Community Bank. Alabama is a great banking market with tremendous growth in Fairhope, Huntsville and Tuscaloosa, several of the Southeast’s most desirable markets. Huntsville’s growth exceeds a population boom, with the area attracting several high-profile development projects including Mazda Toyota Manufacturing, the MidCity project, expanded Facebook Data Center and the newly built FBI campus on Redstone Arsenal to name a few. Tuscaloosa continues to prove its economic value with the successes of Mercedes-Benz U.S. International and top employer, The University of Alabama. Fairhope, a vibrant town nestled in Baldwin County that lies on Alabama’s Gulf Coast, has long been known for its lovely parks and its sweeping panoramic views of Mobile Bay. Fairhope is the second fastest-growing city in the state of Alabama (June 2020). FLORIDA SmartBank’s expansion into the Florida Panhandle by way of its first acquisition (2012) of GulfSouth Private Bank has proven that growth in this thriving market continues to be strong with lots of opportunities for continued success. SmartBank operates full services branches in Pensacola, Destin and Panama City, and a Loan Production Office in Tallahassee. Northwest Florida is home to six major military installations, all with aviation/aerospace-related missions which have huge impact on the industries, R&D and talent pool in the region. The Panhandle also includes strong tourism markets which account for one of the state’s biggest economic drivers. TENNESSEE SmartBank opened its first office in January 2007 in Pigeon Forge, Tennessee and has since expanded its footprint across several of the Southeast’s strongest and most desired markets with 35 full-service branches in total. The Middle and East Tennessee regions are home to 23 SmartBank branches, with the company headquartered in Knoxville, TN. From the beautiful Smoky Mountains to the Tennessee River, commerce-attracting cities Chattanooga, Knoxville and Murfreesboro continue to thrive. In Chattanooga alone, Erlanger Health System, the Hamilton County Board of Education, and Blue Cross Blue Shield of Tennessee employ a combined 14,000+ Tennessee residents. According to WalletHub, Murfreesboro ranks the 19th fastest growing city in the U.S. (Oct 2020) and Knoxville is home to Oak Ridge National Laboratory, Denso Manufacturing, Discovery Communications, and many others. 16 TENNESSEE HUNTSVILLE TUSCALOOSA DOWNTOWN NORTHPORT INDIAN HILLS SOUTHWEST ALABAMA JACKSON THOMASVILLE CHATOM MCINTOSH BALDWIN COUNTY FAIRHOPE SEVIER COUNTY SEVIERVILLE (2) GATLINBURG PIGEON FORGE BLOUNT COUNTY ALCOA MARYVILLE KNOXVILLE BEARDEN CEDAR BLUFF FARRAGUT CHATTANOOGA DOWNTOWN GUNBARREL OOLTEWAH EAST RIDGE HIXSON CLEVELAND MURFREESBORO (2) TULLAHOMA CUMBERLAND PLATEAU COOKEVILLE JAMESTOWN CROSSVILLE (2) WARTBURG FLORIDA DESTIN PENSACOLA PANAMA CITY 17 A L A B A M A FLORIDA CORPORATE SOCIAL RESPONSIBILITY On September 11, 2020, SmartBank associates showed appreciation to first responders across our footprint in Alabama, Florida & Tennessee. The challenges of 2020 didn’t slow down SmartBank giving, and to date, we have donated $126,550 to Friends of the Smokies. In December, associates gave back by collecting gifts for Angel Trees, gathering coats for the cold, delivering goodies to the elderly, and spearheading food drives and empty stocking funds. 18 Despite the social challenges of 2020, SmartBank Associates continued to safely support our communities in 2020. Stock Symbol Nasdaq Capital Market: SMBK SmartFinancial, Inc. Annual Shareholders’ Meeting Thursday, May 27, 2021 at 3:00 pm SmartBank - Pigeon Forge Branch 2430 Teaster Lane Pigeon Forge, TN 37863 Meeting contact: Frank Hughes frank.hughes@smartbank.com Electronic Voting To vote electronically, please go to www.smartfinancialinc.com You may also download a copy of the 2020 SmartFinancial, Inc. Annual Report. INVESTOR RELATIONS Investor Relations Contact Ron Gorczynski EVP, Chief Financial Officer 5401 Kingston Pike, Suite 600 Knoxville, TN 37919 865.437.5724 ron.gorczynski@smartbank.com SmartFinancial, Inc. 5401 Kingston Pike #600 Knoxville, TN 37919 866.290.2554 Market Makers Virtu Financial USB AG Raymond James & Associates Analyst Coverage Keefe, Bruyette & Woods, Inc Credit Swiss 1st Boston Raymond James & Associates Merrill Lynch Citi Group Hovde Group Stephens Inc. J.P. Morgan Securities Inc. Piper Sandler Companies Cowen Inc. Wells Fargo Janney Montgomery Scott LLC D.A. Davidson & Co. Stock Transfer Agent Info American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 800.937.5449 Forward-Looking Statements This annual report may contain statements that are based on management’s current estimates or expectations of future events or future results, and that may be deemed to constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements, including statements regarding the potential effects of the COVID-19 pandemic on the Company’s business and financial results and conditions, are not historical in nature and can generally be identified by such words as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “may,” “estimate,” and similar expressions. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results of SmartFinancial to differ materially from future results expressed or implied by such forward-looking statements. Such risks, uncertainties, and other factors include, among others, (1) risks associated with our growth strategy, including a failure to implement our growth plans or an inability to manage our growth effectively; (2) claims and litigation arising from our business activities and from the companies we acquire, which may relate to contractual issues, environmental laws, fiduciary responsibility, and other matters; (3) the risk that cost savings and revenue synergies from recently completed acquisitions may not be realized or may take longer than anticipated to realize; (4) disruption from recently completed acquisitions with customer, supplier, employee, or other business relationships; (5) our ability to successfully integrate the businesses acquired as part of previous acquisitions with the business of SmartBank; (6) risks related to the completed acquisition of Progressive Financial Group, Inc. (“PFG”); (7) the risk that the anticipated benefits from the completed acquisition of PFG may not be realized in the time frame anticipated; (8) changes in management’s plans for the future; (9) prevailing, or changes in, economic or political conditions, particularly in our market areas; (10) credit risk associated with our lending activities; (11) changes in interest rates, loan demand, real estate values, or competition; (12) changes in accounting principles, policies, or guidelines; (13) changes in applicable laws, rules, or regulations, including changes to statutes, regulations or regulatory policies or practices as a result of, or in response to COVID-19; (14) adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of the Company’s participation in and execution of government programs related to the COVID-19 pandemic; (15) the impact of the COVID-19 pandemic on the Company’s assets, business, cash flows, financial condition, liquidity, prospects and results of operations; (16) potential increases in the provision for loan losses resulting from the COVID-19 pandemic; and (17) other general competitive, economic, political, and market factors, including those affecting our business, operations, pricing, products, or services. These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in SmartFinancial’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, in each case filed with or furnished to the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website (www.sec.gov). Undue reliance should not be placed on forward-looking statements. SmartFinancial disclaims any obligation to update or revise any forward-looking statements contained in this release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise. We report our results in accordance with United States generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP performance measures used in managing the business may provide meaningful information about underlying trends in its business. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Non-GAAP Financial Measures www.smartbank.com 19 

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