United States Securities and Exchange Commission

Washington, D.C. 20549


☒
x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

March 31, 2021



¨ ☐	TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



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)

~~865-453-2650~~ 865-437-5700		Not Applicable
(Registrant’s telephone number, including area code)		(Former name, former address and former fiscal
		year, if ~~changes~~changed since last report)

☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit ~~and post~~ such files).

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or and emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” ~~and~~, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange ~~Act. (Check one):~~

Act:



Large accelerated filer ¨ ☐	Accelerated filer ¨ ☒	Non-accelerated filer ¨ ☐	Smaller reporting company x ☒	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).

☒

As of ~~October 31, 2017~~May 05, 2021, there were ~~8,243,717~~15,104,661 shares of common stock, $1.00 par value per share, issued and outstanding.

Table of Contents

TABLE OF CONTENTS



	PART I –FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	4 3

	Consolidated Balance Sheets at March 31, 2021 and December 31, 2020	3

	Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020	4

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2021 and 2020	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32 36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45 49

Item 4.	Controls and Procedures	45 49

		PART II – OTHER INFORMATION	50

Item 1.	Legal Proceedings	46 50

Item 1A.	Risk Factors	46 50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46 50

Item 3.	Defaults Upon Senior Securities	46 50

Item 4.	Mine Safety Disclosures	46 51

Item 5.	Other Information	46 51

Item 6.	Exhibits	47 52

Table of Contents

~~FORWARD-LOOKING STATEMENTS~~

~~SmartFinancial, Inc. (“SmartFinancial” or the "Company~~") may from time to time make written or oral statements, including statements contained in this report (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 21E of the Securities Exchange Act of 1934 (the “~~Exchange Act~~”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. SmartFinancial’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors include, without limitation, those specifically described in Item 1A of Part I of the Company’s most recent Annual Report on Form 10-K, as well as the following: the expected revenue synergies and cost savings from the merger with Capstone may not be fully realized or may take longer than anticipated to be realized; the disruption from the Capstone merger with customers, suppliers or employees or other business partners’ relationships; the risk of successful integration of our business with that of Capstone after consummation of the merger; the amount of costs, fees, expenses, and charges related to the merger; changes in management’s plans for the future, prevailing economic and political conditions, particularly in our market area; credit risk associated with our lending activities; changes in interest rates, loan demand, real estate values and competition; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. Many of such factors are beyond SmartFinancial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. SmartFinancial does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to SmartFinancial.

~~Non-GAAP Financial Measures~~

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled “Net Interest Income and Yield Analysis”), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

PART I –FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

Unaudited
September 30,
2017 December 31,
2016
ASSETS

Cash and due from banks $ 40,867,054
$ 34,290,617
Interest-bearing deposits at other financial institutions 24,833,385
34,457,691
Federal funds sold 18,398,000
—
Total cash and cash equivalents 84,098,439
68,748,308

Securities available for sale 115,534,979
129,421,914
Restricted investments, at cost 6,080,700
5,627,950
Loans, net of allowance for loan losses of $5,392,606 at September 30, 2017 and $5,105,255 at December 31, 2016 866,286,380
808,271,003
Bank premises and equipment, net 33,777,723
30,535,594
Foreclosed assets 2,887,556
2,386,239
Goodwill and core deposit intangible, net 7,414,120
6,635,655
Cash surrender value of life insurance 11,483,915
1,320,723
Other assets 8,258,028
9,508,899
Total assets $ 1,135,821,840
$ 1,062,456,285

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:

Noninterest-bearing demand deposits $ 185,385,953
$ 153,482,650
Interest-bearing demand deposits 156,953,397
162,702,457
Money market and savings deposits 306,357,476
274,604,724
Time deposits 311,490,253
316,275,340
Total deposits 960,187,079
907,065,171

Securities sold under agreement to repurchase 26,541,772
26,621,984
Federal Home Loan Bank advances and other borrowings 6,000,000
18,505,390
Accrued expenses and other liabilities 6,505,401
5,023,600
Total liabilities 999,234,252
957,216,145

Stockholders' equity:

Preferred stock - $1 par value; 2,000,000 shares authorized; None issued and outstanding as of 9/30/2017; 12,000 issued and outstanding in 2016. —
12,000
Common stock - $1 par value; 40,000,000 shares authorized; 8,243,256 and 5,896,033 shares issued and outstanding in 2017 and 2016, respectively 8,243,256
5,896,033
Additional paid-in capital 107,064,832
83,463,051
Retained earnings 21,653,303
16,871,296
Accumulated other comprehensive loss (373,803 ) (1,002,240 )
Total stockholders' equity 136,587,588
105,240,140

Total liabilities and stockholders' equity $ 1,135,821,840
$ 1,062,456,285

(Dollars in thousands, except for share data)


	(Unaudited)
	March 31,		December 31,
	2021		2020*
ASSETS:
Cash and due from banks	$	46,594	$	50,460
Interest-bearing deposits with banks		442,793		364,846
Federal funds sold		67,314		66,413
Total cash and cash equivalents		556,701		481,719
Securities available-for-sale, at fair value		250,937		215,634
Other investments		14,728		14,794
Loans held for sale		7,870		11,721
Loans		2,487,129		2,382,243
Less: Allowance for loan losses		(18,370)		(18,346)
Loans, net		2,468,759		2,363,897
Premises and equipment, net		72,697		72,682
Other real estate owned		3,946		4,619
Goodwill and core deposit intangible, net		86,350		86,471
Bank owned life insurance		71,586		31,215
Other assets		23,629		22,197
Total assets	$	3,557,203	$	3,304,949

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	777,968	$	685,957
Interest-bearing demand		683,887		649,129
Money market and savings		1,073,941		919,631
Time deposits		512,417		550,498
Total deposits		3,048,213		2,805,215
Borrowings		82,642		81,199
Subordinated debt		39,367		39,346
Other liabilities		22,923		22,021
Total liabilities		3,193,145		2,947,781
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding		0		0
Common stock, $1 par value; 40,000,000 shares authorized; 15,104,536 and 15,107,214 shares issued and outstanding, respectively		15,105		15,107
Additional paid-in capital		251,836		252,693
Retained earnings		96,034		87,185
Accumulated other comprehensive income		1,083		2,183
Total shareholders' equity		364,058		357,168
Total liabilities and shareholders' equity	$	3,557,203	$	3,304,949

* Derived from audited financial statements.

The ~~Notes to Consolidated Financial Statements~~accompanying notes are an integral part of ~~these~~the financial statements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

Unaudited
Three Months Ended
September 30, Unaudited
Nine Months Ended
September 30,
2017 2016 2017 2016
INTEREST INCOME

Loans, including fees $ 11,491,016
$ 10,110,680
$ 32,448,666
$ 29,439,355
Securities and interest-bearing deposits at other financial institutions 739,905
601,815
2,092,948
1,984,041
Federal funds sold and other earning assets 86,267
50,981
237,213
164,218
Total interest income 12,317,188
10,763,476
34,778,827
31,587,614

INTEREST EXPENSE

Deposits 1,373,236
1,065,092
3,712,326
3,039,044
Securities sold under agreements to repurchase 15,054
16,614
46,593
48,353
Federal Home Loan Bank advances and other borrowings 4,769
17,165
31,925
91,714
Total interest expense 1,393,059
1,098,871
3,790,844
3,179,111
Net interest income before provision for loan losses 10,924,129
9,664,605
30,987,983
28,408,503
Provision for loan losses 30,000
260,567
340,482
616,543
Net interest income after provision for loan losses 10,894,129
9,404,038
30,647,501
27,791,960
NONINTEREST INCOME

Customer service fees 294,315
295,951
849,614
850,632
Gain on sale of securities 143,508
18,224
143,508
199,587
Gain on sale of loans and other assets 224,494
286,966
910,250
706,371
(Loss) gain on sale of foreclosed assets (27,250 ) 130,383
(42,314 ) 184,626
Other noninterest income 584,621
472,300
1,543,018
1,294,318
Total noninterest income 1,219,688
1,203,824
3,404,076
3,235,534

NONINTEREST EXPENSES

Salaries and employee benefits 5,035,443
4,311,708
14,471,602
13,292,864
Net occupancy and equipment expense 1,113,542
965,159
3,054,594
3,120,234
Depository insurance 101,665
153,353
315,951
440,100
Foreclosed assets 19,928
78,988
30,449
199,419
Advertising 176,998
179,145
470,657
536,657
Data processing 483,411
450,289
1,291,969
1,333,082
Professional services 471,707
558,368
1,483,108
1,564,973
Amortization of intangible assets 78,057
79,761
191,705
266,467
Service contracts 363,114
271,921
971,648
873,160
Other operating expenses 1,703,338
1,000,924
4,239,594
2,846,886
Total noninterest expenses 9,547,203
8,049,616
26,521,277
24,473,842
Income before income tax expense 2,566,614
2,558,246
7,530,300
6,553,652
Income tax expense 881,745
947,354
2,553,293
2,402,267
Net income 1,684,869
1,610,892
4,977,007
4,151,385
Preferred stock dividends —
270,000
195,000
752,000
Net income available to common stockholders $ 1,684,869
$ 1,340,892
$ 4,782,007
$ 3,399,385

EARNINGS PER COMMON SHARE

Basic $ 0.20
$ 0.23
$ 0.60
$ 0.58
Diluted 0.20
0.22
0.59
0.56

Weighted average common shares outstanding

Basic 8,234,783
5,834,520
7,994,661
5,820,834
Diluted 8,332,680
6,096,333
8,086,346
6,092,035
Dividends per share —
—
—
—

(Unaudited)

(Dollars in thousands, except share and per share data)


		Three Months Ended
	March 31,
	2021		2020
Interest income:
Loans, including fees	$	28,018	$	26,434
Securities available-for-sale:
Taxable		724		679
Tax-exempt		259		283
Federal funds sold and other earning assets		291		602
Total interest income		29,292		27,998
Interest expense:
Deposits		2,331		4,754
Borrowings		117		89
Subordinated debt		584		584
Total interest expense		3,032		5,427
Net interest income		26,260		22,571
Provision for loan losses		67		3,200
Net interest income after provision for loan losses		26,193		19,371
Noninterest income:
Service charges on deposit accounts		1,009		770
Mortgage banking		1,139		584
Investment services		531		437
Insurance commissions		1,466		269
Interchange and debit card transaction fees, net		839		276
Other		707		482
Total noninterest income		5,691		2,818
Noninterest expense:
Salaries and employee benefits		10,869		10,006
Occupancy and equipment		2,341		1,911
FDIC insurance		371		180
Other real estate and loan related expense		602		545
Advertising and marketing		190		198
Data processing and technology		1,379		1,008
Professional services		641		711
Amortization of intangibles		444		362
Merger related and restructuring expenses		103		2,096
Other		2,524		1,776
Total noninterest expense		19,464		18,793
Income before income tax expense		12,420		3,396
Income tax expense		2,664		664
Net income	$	9,756	$	2,732
Earnings per common share:
Basic	$	0.65	$	0.19
Diluted	$	0.65	$	0.19
Weighted average common shares outstanding:
Basic		15,011,573		14,395,103
Diluted		15,111,947		14,479,671

The ~~Notes to Consolidated Financial Statements~~accompanying notes are an integral part of ~~these~~the financial statements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited
Three Months Ended
September 30,
2017 2016
Net income $ 1,684,869
$ 1,610,892

Other comprehensive income (loss), net of tax:

Unrealized holding gains (losses) arising during the period, net of tax (benefit) expense of $(23,286) and $114,925 in 2017 and 2016, respectively (37,312 ) 185,360

Reclassification adjustment for gains included in net income, net of tax expense of $54,533 and $6,925 in 2017 and 2016, respectively (88,975 ) (11,299 )

Total other comprehensive income (loss) (126,287 ) 174,061

Comprehensive income $ 1,558,582
$ 1,784,953

Unaudited
Nine Months Ended
September 30,
2017 2016
Net income $ 4,977,007
$ 4,151,385

Other comprehensive income, net of tax:

Unrealized holding gains arising during the period, net of tax expense of $444,467 and $573,073 in 2017 and 2016, respectively 717,412
924,675

Reclassification adjustment for gains included in net income, net of tax expense of $54,533 and $75,843 in 2017 and 2016, respectively (88,975 ) (123,744 )

Total other comprehensive income 628,437
800,931

Comprehensive income $ 5,605,444
$ 4,952,316

(Unaudited)

(Dollars in thousands)


	Three Months Ended
	March 31,
		2021		2020
Net income	$	9,756	$	2,732
Other comprehensive income:
Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period		(2,808)		1,095
Tax effect		738		(244)
Unrealized gains (losses) on securities available-for-sale arising during the period, net of tax		(2,070)		851
Unrealized gains (losses) on fair value municipal security hedges		1,313		(3,072)
Tax effect		(343)		806
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		970		(2,266)

Total other comprehensive (loss)		(1,100)		(1,415)
Comprehensive income	$	8,656	$	1,317

The ~~Notes to Consolidated Financial Statements~~accompanying notes are an integral part of ~~these~~the financial statements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN ~~STOCKHOLDERS'~~SHAREHOLDERS’ EQUITY - ~~UNAUDITED~~

(Unaudited)

For the ~~Nine~~Three Months Ended ~~September 30, 2017~~

Preferred
Shares Common
Shares Preferred
Stock Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total
Stockholders'
Equity

BALANCE, December 31, 2016 12,000
5,896,033
$ 12,000
$ 5,896,033
$ 83,463,051
$ 16,871,296
$ (1,002,240 ) $ 105,240,140

Net income —
—
—
—
—
4,977,007
—
4,977,007

Other comprehensive income —
—
—
—
—
—
628,437
628,437

Issuance of common stock —
1,840,000
—
1,840,000
31,094,676
—
—
32,934,676

Issuance of stock grants —
1,511
—
1,511
30,280
—
—
31,791

Exercise of stock options —
505,712
—
505,712
4,368,045
—
—
4,873,757

Cash dividend on preferred stock —
—
—
—
—
(195,000 ) —
(195,000 )

Redemption of preferred stock (12,000 ) —
(12,000 ) —
(11,988,000 ) —
—
(12,000,000 )

Restricted stock compensation expense —
—
—
—
22,532
—
—
22,532

Stock compensation expense —
—
—
—
74,248
—
—
74,248

BALANCE, September 30, 2017 —
8,243,256
$ —
$ 8,243,256
$ 107,064,832
$ 21,653,303
$ (373,803 ) $ 136,587,588

March 31, 2021 and 2020

(Dollars in thousands, except for share data)


								Accumulated
								Other
	Common Stock			Additional		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Earnings		(Loss) Income		Total
Balance, December 31, 2019	14,008,233	$	14,008	$	232,732	$	65,839	$	168	$	312,747
Net income	—		—		—		2,732		—		2,732
Other comprehensive loss	—		—		—		—		(1,415)		(1,415)
Common stock issued pursuant to:
Exercise of stock options	14,858		15		158		—		—		173
Restricted stock	31,900		32		(32)						—
Shareholders' of Progressive Financial Group, Inc.	1,292,578		1,293		23,254						24,547
Stock compensation expense	—		—		110		—		—		110
Common stock dividend ($0.05 per share)	—		—		—		(702)				(702)
Repurchases of common stock	(125,579)		(126)		(1,866)		—		—		(1,992)
Balance, March 31, 2020	15,221,990	$	15,222	$	254,356	$	67,869	$	(1,247)	$	336,200

Balance, December 31, 2020	15,107,214	$	15,107	$	252,693	$	87,185	$	2,183	$	357,168
Net income	—		—		—		9,756		—		9,756
Other comprehensive loss	—		—		—		—		(1,100)		(1,100)
Common stock issued pursuant to:
Exercise of stock options	15,965		16		131		—		—		147
Restricted stock	40,967		41		(41)		—		—		—
Stock compensation expense	—		—		201		—		—		201
Common stock dividend ($0.06 per share)	—		—		—		(907)		—		(907)
Repurchases of common stock	(59,610)		(59)		(1,148)		—		—		(1,207)
Balance, March 31, 2021	15,104,536	$	15,105	$	251,836	$	96,034	$	1,083	$	364,058

The ~~Notes to Consolidated Financial Statements~~accompanying notes are an integral part of ~~these~~the financial statements.

Table of Contents

~~SMARTFINANICAL,~~

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited
Nine Months Ended September 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,977,007
$ 4,151,385
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,776,958
1,624,809
Provision for loan losses 340,482
616,543
Stock compensation expense 74,248
99,635
Restricted stock compensation expense 22,532
—
Gains from sale of securities (143,508 ) (199,587 )
Net gains from sale of loans and other assets (910,250 ) (706,371 )
Net losses (gains) from sale of foreclosed assets 42,314
(184,626 )
Changes in other assets and liabilities:
Accrued interest receivable (38,985 ) 355,796
Accrued interest payable 38,172
(23,177 )
Other assets and liabilities 2,427,408
6,480,504
Net cash provided by operating activities 8,606,378
12,214,911

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from security sales, maturities, and paydowns 27,070,170
50,055,118
Purchase of securities (12,507,860 ) (21,351,789 )
Purchase of bank owned life insurance (10,000,000 ) —
Purchase of restricted investments (452,750 ) (200 )
Net cash for purchase of branch acquisition (1,049,878 ) —
Loan originations and principal collections, net (33,957,948 ) (66,811,239 )
Purchase of bank premises and equipment (1,693,323 ) (3,932,566 )
Proceeds from sale of foreclosed assets 41,636
1,152,775
Net cash used in investing activities (32,549,953 ) (40,887,901 )

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 26,234,084
2,359,290
Net decrease in securities sold under agreements to repurchase (80,212 ) (3,866,120 )
Issuance of common stock 37,840,224
693,092
Redemption of preferred stock (12,000,000 ) —
Payment of dividends on preferred stock (195,000 ) (752,000 )
Proceeds from Federal Home Loan Bank advances and other borrowings 95,804,205
38,100,000
Repayment of Federal Home Loan Bank advances and other borrowings (108,309,595 ) (29,239,039 )
Net cash provided by financing activities 39,293,706
7,295,223
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,350,131
(21,377,767 )
CASH AND CASH EQUIVALENTS, beginning of year 68,748,308
79,964,633
CASH AND CASH EQUIVALENTS, end of period $ 84,098,439
$ 58,586,866

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 3,742,255
$ 3,202,288
Cash paid during the period for taxes 2,795,584
1,570,558

NONCASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized losses on securities available for sale $ (1,018,370 ) $ (1,298,161 )
Acquisition of real estate through foreclosure 585,267
1,431,857
Financed sales of foreclosed assets —
3,286,138

(Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net income	$	9,756	$	2,732
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,499		1,634
Accretion of fair value purchase accounting adjustments, net		(1,636)		(1,841)
Provision for loan losses		67		3,200
Stock compensation expense		201		110
Deferred income tax expense		446		90
Increase in cash surrender value of bank owned life insurance		(370)		(162)
Net losses from sale of other real estate owned		151		14
Net gains from mortgage banking		(1,139)		(576)
Origination of loans held for sale		(35,229)		(15,195)
Proceeds from sales of loans held for sale		40,219		15,582
Net change in:
Accrued interest receivable		(86)		35
Accrued interest payable		367		784
Other assets		(1,234)		685
Other liabilities		3,078		2,010
Net cash provided by operating activities		16,090		9,102
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		—		2,115
Proceeds from maturities and calls of securities available-for-sale		9,097		3,250
Proceeds from paydowns of securities available-for-sale		7,144		3,816
Proceeds from sales of other investments		147		—
Purchases of securities available-for-sale		(55,757)		(3,377)
Purchases of other investments		(80)		(507)
Purchases of bank owned life insurance		(40,000)		—
Net increase in loans		(103,308)		(52,721)
Purchases of premises and equipment		(1,009)		(2,429)
Proceeds from sale of other real estate owned		98		120
Net cash and cash equivalents received from business combination		—		46,132
Net cash used in investing activities		(183,668)		(3,601)
Cash flows from financing activities:
Net increase in deposits		243,084		22,158
Net increase (decrease) in securities sold under agreements to repurchase		1,447		(20)
Proceeds from borrowings		—		100,000
Repayment borrowings		(4)		—
Cash dividends paid		(907)		(702)
Issuance of common stock		147		173
Repurchase of common stock		(1,207)		(1,992)
Net cash provided by financing activities		242,560		119,617
Net change in cash and cash equivalents		74,982		125,118
Cash and cash equivalents, beginning of period		481,719		183,971
Cash and cash equivalents, end of period	$	556,701	$	309,089
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	2,665	$	4,643
Noncash investing and financing activities:
Acquisition of real estate through foreclosure		14		676
Change in goodwill due to acquisitions		324		8,302

The ~~Notes to Consolidated Financial Statements~~accompanying notes are an integral part of ~~these~~the financial statements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

SmartFinancial, Inc. (the ~~“Company”~~"Company") is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the ~~“Bank”~~"Bank"). The Company provides a variety of financial services to individuals and corporate customers through its offices in ~~eastern~~East and Middle Tennessee, ~~northwest~~Alabama, and the Florida ~~and north Georgia.~~Panhandle. The ~~Company’s~~Bank’s primary deposit products are noninterest-bearing and interest-bearing demand deposits, savings and ~~certificates of deposit.~~money market deposits, and time deposits. Its primary lending products are commercial, residential, and consumer loans. ~~On May 22, 2017,~~

Basis of Presentation and Accounting Estimates:

The accounting and financial reporting policies of the Company ~~along with the Bank entered into an agreement~~ and ~~plan of merger with Capstone Bancshares, Inc., an Alabama corporation and Capstone Bank, an Alabama-chartered commercial bank and wholly owned~~its wholly-owned subsidiary of Capstone Bancshares, Inc. Under the terms of the merger agreement, Capstone Bancshares, Inc. will merge with the Company to be the surviving entity and Capstone Bank will merge with and into the Bank with the Bank surviving. The mergers were consummated on November 1, 2017.

~~Interim Financial Information (Unaudited):~~

The financial information in this report for September 30, 2017 and September 30, 2016 has not been audited. The information included herein should be read in conjunction with the Company’s annual consolidated financial statements and footnotes included in the Company's most recent Annual Report on Form 10-K. The consolidated financial statements presented herein conform to U.S. generally accepted accounting principles (“GAAP”) and ~~to general industry practices. In the opinion~~reporting guidelines of ~~SmartFinancial’s management, the~~banking regulatory authorities and regulators. The accompanying interim financial statements contain all material adjustments necessary to present fairly the financial condition, the results of operations, and cash flows for the interim period. Results for interim periods are not necessarily indicative of the results to be expected for a full year.

~~Basis of Presentation and Accounting Estimates:~~

All adjustments consisting of normal recurring accruals, that in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements ~~and related notes should be read in conjunction with those appearing in the most recent Annual Report previously filed on Form 10-K.~~

~~The consolidated financial statements include the accounts of~~for the Company and its wholly-owned ~~subsidiary.~~subsidiary have not been audited. All ~~significant~~material intercompany balances and transactions have been ~~eliminated in consolidation.~~

eliminated.

In ~~preparing~~management’s opinion, all accounting adjustments necessary to accurately reflect the ~~consolidated~~financial position and results of operations on the accompanying financial statements ~~in conformity with accounting principles generally accepted in the U.S, management is required to make estimates~~have been made. These adjustments are normal and ~~assumptions that affect the reported amounts of assets~~recurring accruals considered necessary for a fair and ~~liabilities as of the date of the balance sheet, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.~~

accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed assets and deferred taxes, ~~other-than-temporary~~other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired and liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial ~~instruments.~~

statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company’s annual report on Form 10-K for the year ended December 31, 2020.

Recently Issued and Adopted Accounting Pronouncements:

In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ~~determination~~new guidance also simplifies aspects of the ~~adequacy~~accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of ~~the allowance for loan losses is based on estimates~~goodwill. Finally, it clarifies that single-member limited liability companies and similar disregarded entities that are ~~particularly susceptible~~not subject to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.

~~The Company’s loans~~income tax are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions.

~~While management uses available information~~not required to recognize ~~losses~~an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020. ASU 2019-12 did not have a material impact on ~~loans, further reductions in~~ the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 1. Presentation of~~Company’s Consolidated Financial ~~Information, Continued~~

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, ~~2016~~2020 as filed in its Annual Report on Form 10-K with the Securities and Exchange ~~Commission.~~Commission ("SEC"). The following is a summary of recent authoritative pronouncements issued but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In October 2019, the Financial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that the Current Expected Credit Loss (“CECL”) model will be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as currently defined by the SEC, for fiscal years beginning after December 15, 2019, and interim

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

periods within those fiscal years. For calendar-year-end companies, this will be January 1, 2020. The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations and the Company ~~issued since December 31, 2016.~~

~~In January 2017, FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying~~meets the ~~Definition of a Business.~~ ~~The ASU clarifies~~regulations as an SRC. For all other entities, the ~~definition of a business to assist with evaluating whether transactions should~~Board decided that CECL will be ~~accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are~~ effective for fiscal years beginning after December 15, ~~2017,~~2022, including interim periods within those fiscal years. ~~The Company does not expect these amendments~~For all entities, early adoption will continue to ~~have a material effect on its financial statements.~~

~~In January 2017, FASB issued ASU No. 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be ~~recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The impairment charge~~permitted; that is, limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Earlyearly adoption is ~~permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.~~

~~In March 2017, FASB issued ASU No. 2017-08,~~ ~~Receivables - Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities.~~ The ASU shortens the amortization period for certain callable debt securities held at a premium. The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonably estimable. The amendments in this update are effectiveallowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal ~~years. Early adoption~~years (that is, ~~permitted. This update should be adopted on a modified retrospective basis with a cumulative-effect adjustment to retained earnings on the date of adoption.~~effective January 1, 2019, for calendar-year-end companies). The Company does not ~~expect these amendments~~plan to ~~have a material effect on its financial statements.~~

adopt this standard early and being that the Company is an SRC, adoption is required for fiscal years beginning after December 15, 2022.

In ~~August 2017,~~March 2020, the FASB issued ASU ~~2017-12,~~ ~~Targeted Improvements to Accounting for Hedging Activities~~2020-04, ~~which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (ASC) 815,~~ ~~Derivatives and Hedging. The goals~~Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU ~~are~~provides optional expedients and exceptions for applying generally accepted accounting principles to ~~(1) improve the transparency~~contract modifications and ~~understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for~~ hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”). It is intended to help stakeholders during the global market-wide reference rate transition period. The Company is implementing a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with ~~those risk management activities~~attributes that are either directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and ~~(2) reduce~~its impact on the ~~complexity~~transition away from LIBOR for its loan and other financial instruments.

Operating, Accounting and Reporting Considerations related to COVID-19:

The COVID-19 pandemic has negatively impacted the global economy. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of ~~and simplify~~relief. Some of the ~~application of hedge accounting by preparers~~. ~~The amendments will be effective for~~provisions applicable to the Company ~~for interim~~include, but are not limited to:

●

Accounting for Loan Modifications – Section 4013 of the CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR, and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. See Note 5 Loans and Allowance for Loan Losses for more information.

●

Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA provides several amendments to the PPP, including additional funding for first and second draws of PPP loans up to March 31, 2021. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extends the program to May 31, 2021. The Company is a participant in the PPP. See Note 5 Loans and Allowance for Loan Losses for more information.

Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and ~~annual periods beginning after December 15, 2018.~~the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

●

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. See Note 5 Loans and Allowance for Loan Losses for more information.

●

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

●

Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Company offered deferral options of: 1) three months deferral of payment and then three months of interest only, 2) three months of interest only, 3) three months deferral of payment, 4) six months of interest only. These modifications generally meet the criteria of both Section 4013 of the CARES Act and the joint interagency statement, and therefore, the Company does not ~~expect these amendments~~account for such loan modifications as TDRs. On August 3, 2020, the Federal Financial Institutions Examination Council on behalf of its members (collectively “the FFIEC members”) issued a joint statement on additional loan accommodations related to ~~have~~COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. To be eligible, each loan modification must be (1) related to the COVID event; (2) executed on a ~~material effect on its financial statements.~~

loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The December 31, 2020 deadline was subsequently extended to January 1, 2022, by the CAA. All of the Company’s loan modifications granted under Section 4013 of the CARES Act are in compliance with the aforementioned FFIEC requirements. Accordingly, the Company does not account for such loan modifications as TDRs.

Reclassifications:

Certain captions and amounts in the ~~2016~~2020 consolidated financial statements were reclassified to conform to the ~~2017~~2021 financial statement presentation. These reclassifications had no impact on net income or shareholders’ equity as previously reported.

~~Earnings per common share:~~

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by

Note 2. Business Combinations

Progressive Financial Inc.

On March 1, 2020, the Company ~~relate solely~~completed the merger of Progressive Financial Group, Inc., a Tennessee corporation (“PFG”), pursuant to an Agreement and Plan of Merger dated October 29, 2019 (the “Merger Agreement”).

In connection with the merger, the Company acquired $301 million of assets and assumed $272 million of liabilities. Pursuant to the Merger Agreement, each outstanding share of Progressive common stock ~~options, determined using~~was converted into and cancelled in exchange to the ~~treasury~~right to receive $474.82 in cash, and 62.3808 shares of SmartFinancial common stock. SmartFinancial issued 1,292,578 shares of SmartFinancial common stock ~~method.,~~ and ~~restricted stock awards, determined by~~paid $9.8 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the ~~Company's stock on~~identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $8.8 million, representing the intangible value of Progressive’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.4 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset. The Company also established two intangible assets related to the insurance agency acquired as part of the PFG acquisition; 1.) Customer relationships of $1.1 million, amortizing sum-of-the-years digits over 120 months (10 years), 2.) Tradename of $63 thousand, amortizing straight-line over 60 months (5 years).

The purchased assets and assumed liabilities were recorded at their acquisition date fair values ⁽¹⁾ and are summarized in the table below (in thousands).


			Initial
	As recorded		Fair value		Subsequent		As recorded
	by PFG		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	55,971	$	—	$	—	$	55,971
Investment securities available-for-sale		27,054		203		—		27,257
Restricted investments		692		—		—		692
Loans		191,672		(3,691)		—		187,981
Allowance for loan losses		(2,832)		2,832		—		—
Premises and equipment, net		15,681		(2,919)		—		12,762
Bank owned life insurance		5,560		—		—		5,560
Deferred tax asset, net		—		813		193		1,006
Intangibles		—		1,370		1,127		2,497
Other real estate owned		3,695		(100)		(1,862)		1,733
Interest Receivable		1,061		(280)		—		781
Prepaids		375		(174)		—		201
Goodwill		231		(231)		—		—
Other assets		1,881		—		—		1,881
Total assets acquired	$	301,041	$	(2,177)	$	(542)	$	298,322

Liabilities:
Deposits	$	271,276	$	—		—	$	271,276
Time deposit premium		—		729		—		729
Payables and other liabilities		776		—		—		776
Total liabilities assumed		272,052		729		—		272,781
Excess of assets assumed over liabilities assumed	$	28,989
Aggregate fair value adjustments			$	(2,906)	$	(542)
Total identifiable net assets								25,541
Consideration transferred:
Cash								9,838
Common stock issued (1,292,578 shares)								24,547
Total fair value of consideration transferred								34,385

Goodwill							$	8,844

⁽¹⁾Fair values are preliminary and are subject to refinement for a period of one year after the closing date of ~~grant.~~an acquisition as information relative to the closing date fair value becomes available.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 2. Earnings per share~~

The following ~~is a summary~~table presents additional information related to the purchased credit impaired loans (ASC 310-30) of the ~~basic and diluted earnings per share for~~acquired loan portfolio at the ~~three and nine month periods ended September 30, 2017 and September 30, 2016.~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income available to common shareholders $ 1,684,869
$ 1,340,892
$ 4,782,007
$ 3,399,385
Weighted average common shares outstanding 8,234,783
5,834,520
7,994,661
5,820,834
Effect of dilutive stock options 97,897
261,813
91,685
271,201
Diluted shares 8,332,680
6,096,333
8,086,346
6,092,035
Basic earnings per common share $ 0.20
$ 0.23
$ 0.60
$ 0.58
Diluted earnings per common share $ 0.20
$ 0.22
$ 0.59
$ 0.56

For the three and nine months ended September 30, 2017 and 2016, the effects of outstanding antidilutive stock options are excluded from the computation of diluted earnings per common share because the exercise price of such options is higher than the market price. There were 13,166 and 18,100 antidilutive stock options as of September 30, 2017 and 2016, respectively.

acquisition date (in thousands):


	March 1, 2020
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest	$	21,107
Non-accretable differences		4,706
Cash flows expected to be collected		16,401
Accretable yield		2,515
Fair value	$	13,886

~~Note 3. Securities~~

~~The amortized cost and fair value of securities available-for-sale at September 30, 2017 and December 31, 2016 are summarized as follows (in thousands):~~

September 30, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
U.S. Government-sponsored enterprises (GSEs) $ 16,217
$ 3
$ (309 ) $ 15,911
Municipal securities 8,341
63
(41 ) 8,363
Other debt securities 973
—
(35 ) 938
Mortgage-backed securities 90,610
208
(495 ) 90,323
$ 116,141
$ 274
$ (880 ) $ 115,535

December 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
U.S. Government-sponsored enterprises (GSEs) $ 18,279
$ 8
$ (564 ) $ 17,723
Municipal securities 8,182
16
(179 ) 8,019
Mortgage-backed securities 104,585
185
(1,090 ) 103,680
$ 131,046
$ 209
$ (1,833 ) $ 129,422

~~At September 30, 2017, securities with a fair value totaling approximately $77,000,000 were pledged to secure public funds and securities sold under agreements to repurchase.~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 3. Securities, Continued~~

For the three and nine months ended September 30, 2017, there were available-for-sale securities sold with proceeds totaling $12,363,748 which resulted in gross gains realized of $145,288 and gross losses realized of $1,780. For the three and nine months ended September 30, 2016 there were available-for-sale securities sold with proceeds totaling $5,578,023 and $13,748,623 which resulted in gross gains realized of $18,224 and $199,587, respectively.

The amortized cost and estimated fair value of securities at September 30, 2017, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

Fair
Value
Due in one year or less $ 2,173
$ 2,175
Due from one year to five years 11,607
11,374
Due from five years to ten years 8,311
8,206
Due after ten years 3,440
3,457
25,531
25,212
Mortgage-backed securities 90,610
90,323
$ 116,141
$ 115,535

The following tables present the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities available-for-sale have been in a continuous unrealized loss position, as of September 30, 2017 and December 31, 2016 (in thousands):

As of September 30, 2017
Less than 12 Months 12 Months or Greater Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses
U.S. Government- sponsored enterprises (GSEs) $ 6,110
$ (113 ) $ 7,804
$ (196 ) $ 13,914
$ (309 )
Municipal securities 1,839
(18 ) 1,305
(23 ) 3,144
(41 )
Other debt securities 938
(35 ) —
—
938
(35 )
Mortgage-backed securities 32,389
(175 ) 16,881
(320 ) 49,270
(495 )
$ 41,276
$ (341 ) $ 25,990
$ (539 ) $ 67,266
$ (880 )

As of December 31, 2016
Less than 12 Months 12 Months or Greater Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses
U.S. Government- sponsored enterprises (GSEs) $ 14,702
$ (564 ) $ —
$ —
$ 14,702
$ (564 )
Municipal securities 6,368
(179 ) —
—
6,368
(179 )
Mortgage-backed securities 67,063
(690 ) 8,948
(400 ) 76,011
(1,090 )
$ 88,133
$ (1,433 ) $ 8,948
$ (400 ) $ 97,081
$ (1,833 )

~~At September 30, 2017, the categories of temporarily impaired securities, and management’s evaluation of those securities, are as follows:~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 3. Securities, Continued~~

~~U.S. Government-sponsored enterprises~~: At September 30, 2017, 5 (or five) investment in U.S. GSE securities had unrealized losses. These unrealized losses related principally to changes in market interest rates. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Bank does not intend to sell the investments and it is more likely than not that the Bank will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider these investments to be other-than temporarily impaired at September 30, 2017.

~~Municipal securities~~: At September 30, 2017, 8 (or eight) investments in obligations of municipal securities had unrealized losses. The Bank believes the unrealized losses on those investments were caused by the interest rate environment and do not relate to the underlying credit quality of the issuers. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider these investments to be other-than temporarily impaired at September 30, 2017.

~~Other debt securities~~: At September 30, 2017, 1 (or one) investment in other debt securities had unrealized losses. The Bank believes the unrealized loss on this investment was caused by the interest rate environment and does not relate to the underlying credit quality of the issuer. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its amortized cost bases, which may be maturity, the Bank does not consider this investment to be other-than temporarily impaired at September 30, 2017.

~~Mortgage-backed securities~~: At September 30, 2017, 40 (or forty) investments in residential mortgage-backed securities had unrealized losses. This impairment is believed to be caused by the current interest rate environment. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not deem these investments to be other-than-temporarily impaired at September 30, 2017.

Note 3. Earnings Per Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock options and restricted stock. The effect from the stock options and restricted stock on incremental shares from the assumed conversions for net income per share-basic and net income per share-diluted are presented below. There were 0 antidilutive shares for the three month period ended March 31, 2021. There were 64 thousand antidilutive shares for the three month period ended March 31, 2020.

The following is a summary of the basic and diluted earnings per share computation (dollars in thousands, except per share data):


	Three Months Ended
	March 31,
	2021		2020
Basic earnings per share computation:
Net income available to common shareholders	$	9,756	$	2,732
Average common shares outstanding – basic		15,011,573		14,395,103
Basic earnings per share	$	0.65	$	0.19
Diluted earnings per share computation:
Net income available to common shareholders	$	9,756	$	2,732
Average common shares outstanding – basic		15,011,573		14,395,103
Incremental shares from assumed conversions:
Stock options and restricted stock		100,374		84,568
Average common shares outstanding - diluted		15,111,947		14,479,671
Diluted earnings per common share	$	0.65	$	0.19

Note 4. Securities

The amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale are summarized as follows (in thousands):


	March 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Government-sponsored enterprises (GSEs)	$	73,905	$	41	$	(1,689)	$	72,257
Municipal securities		88,509		1,626		(6)		90,129
Other debt securities		26,019		154		(118)		26,055
Mortgage-backed securities (GSEs)		61,294		1,354		(152)		62,496
Total	$	249,727	$	3,175	$	(1,965)	$	250,937

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Government-sponsored enterprises (GSEs)	$	30,526	$	10	$	(6)	$	30,530
Municipal securities		89,644		2,345		—		91,989
Other debt securities		25,019		112		(13)		25,118
Mortgage-backed securities (GSEs)		66,425		1,754		(182)		67,997
Total	$	211,614	$	4,221	$	(201)	$	215,634

At March 31, 2021, and December 31, 2020, securities with a carrying value totaling approximately $117.6 million and $80.2 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

The Company has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair values of available for sale securities. See Note 11 - Derivatives for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.

Proceeds from sale of securities available for sale, gross gains and gross losses on sales and redemptions for the three months ended March 31, 2021 and 2020 were as follows (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Proceeds from sales	$	-	$	2,115
Gross gains	$	-	$	-
Gross losses	$	-	$	-

Proceeds from maturities and calls	$	9,097	$	3,250

The amortized cost and estimated fair value of securities at March 31, 2021, by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2021
	Amortized		Fair
	Cost		Value
Due in one year or less	$	4,947	$	4,972
Due from one year to five years		4,569		4,596
Due from five years to ten years		56,988		56,896
Due after ten years		121,929		121,977
		188,433		188,441
Mortgage-backed securities		61,294		62,496
Total	$	249,727	$	250,937

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	March 31, 2021
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Government-sponsored enterprises (GSEs)	$	60,310	$	(1,687)	14	$	585	$	(2)	2	$	60,895	$	(1,689)	16
Municipal securities		1,125		(6)	2		—		—	—		1,125		(6)	2
Other debt securities		12,882		(118)	6		—		—	—		12,882		(118)	6
Mortgage-backed securities (GSEs)		2,095		(2)	2		11,745		(150)	6		13,840		(152)	8
Total	$	76,412	$	(1,813)	24	$	12,330	$	(152)	8	$	88,742	$	(1,965)	32


	December 31, 2020
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Government-sponsored enterprises (GSEs)	$	15,510	$	(5)	3	$	132	$	(1)	1	$	15,642	$	(6)	4
Municipal securities		—		—	—		—		—	—		—		—	—
Other debt securities		1,495		(5)	1		977		(8)	1		2,472		(13)	2
Mortgage-backed securities (GSEs)		9,790		(87)	6		6,083		(95)	3		15,873		(182)	9
Total	$	26,795	$	(97)	10	$	7,192	$	(104)	5	$	33,987	$	(201)	15

The Company reviews the securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

Based on this evaluation, the Company concluded that any unrealized losses at March 31, 2021, represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of March 31, 2021, the Company does not intend to sell any of the securities, does not expect to be required to sell any of the securities, and expects to recover the entire amortized cost of all of the securities.

The following is the amortized cost and carrying value of other investments (in thousands):


	March 31,		December 31,
	2021		2020
Federal Reserve Bank stock	$	8,460	$	8,606
Federal Home Loan Bank stock		5,918		5,838
First National Bankers Bank stock		350		350
Total	$	14,728	$	14,794

Our restricted investments consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

par value rather than recognizing temporary declines in value. As of March 31, 2021, the Company determined that there was 0 impairment on its other investments.

Note 5. Loans and Allowance for Loan Losses

Portfolio Segmentation:

~~At September 30, 2017 and December 31, 2016,~~

Major categories of loans are summarized as follows ~~(in~~(in thousands):


	March 31, 2021						December 31, 2020
	PCI		All Other				PCI		All Other
	Loans¹		Loans		Total		Loans¹		Loans		Total
Commercial real estate	$	13,877	$	1,056,764	$	1,070,641	$	16,123	$	996,853	$	1,012,976
Consumer real estate		9,597		422,889		432,486		10,258		433,672		443,930
Construction and land development		5,350		280,623		285,973		5,348		272,727		278,075
Commercial and industrial		303		685,707		686,010		308		634,138		634,446
Consumer and other		21		11,998		12,019		27		12,789		12,816
Total loans		29,148		2,457,981		2,487,129		32,064		2,350,179		2,382,243
Less: Allowance for loan losses		(376)		(17,994)		(18,370)		(309)		(18,037)		(18,346)

Loans, net	$	28,772	$	2,439,987	$	2,468,759	$	31,755	$	2,332,142	$	2,363,897

September 30, 2017 December 31, 2016
PCI Loans
All Other
Loans
Total
PCI
Loans

All Other
Loans
Total
Commercial real estate $ 13,202
$ 434,418
$ 447,620
$ 14,943
$ 400,265
$ 415,208
Consumer real estate 6,143
193,561
199,704
9,004
178,798
187,802
Construction and land development 1,576
96,636
98,212
1,678
116,191
117,869
Commercial and industrial 1,085
118,697
119,782
1,568
83,454
85,022
Consumer and other —
6,361
6,361
—
7,475
7,475
Total loans 22,006
849,673
871,679
27,193
786,183
813,376
Less: Allowance for loan losses —
(5,393 ) (5,393 ) —
(5,105 ) (5,105 )
Loans, net $ 22,006
$ 844,280
$ 866,286
$ 27,193
$ 781,078
$ 808,271

¹Purchased Credit Impaired loans (“PCI loans”) are loans with evidence of credit deterioration at purchase.

For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are ~~five~~5 loan portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, and consumer and other.

As previously mentioned in Note 1 – Presentation of Financial Information, the CARES Act established the PPP, administered directly by the SBA. The PPP provides loans of up to $10 million to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. PPP loans carry an interest rate of one percent, and a maturity of two or five years. These loans are fully guaranteed by the SBA and are not included in the Company’s loan loss allowance calculations. The loans may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA pays the Company fees for processing PPP loans and the fees are accounted for as loan origination fees and recognized over the contractual loan term as a yield adjustment on the loans. At March 31, 2021, the net deferred fees outstanding for the 2020 PPP loans is $1.9 million and $5.4 million for the 2021 PPP loans, respectively. PPP loans are included in the Commercial and Industrial loan class. As of March 31, 2021, the Company had 3,710 PPP loans outstanding, with an outstanding principal balance of $338.3 million and as of December 31, 2020, the Company had 2,863 PPP loans outstanding, with an outstanding principal balance of $288.9 million.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Portfolio Segmentation (continued):~~

~~Credit Risk Management:~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Credit Risk Management (continued):~~

September 30, 2017

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Performing loans $ 434,300
$ 192,628
$ 96,089
$ 118,570
$ 6,361
$ 847,948
Impaired loans 118
933
547
127
—
1,725
434,418
193,561
96,636
118,697
6,361
849,673
PCI loans 13,202
6,143
1,576
1,085
—
22,006
Total $ 447,620
$ 199,704
$ 98,212
$ 119,782
$ 6,361
$ 871,679

December 31, 2016

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Performing loans $ 400,146
$ 177,977
$ 115,326
$ 83,244
$ 7,475
$ 784,168
Impaired loans 119
821
865
210
—
2,015
400,265
178,798
116,191
83,454
7,475
786,183
PCI loans 14,943
9,004
1,678
1,568
—
27,193
Total loans $ 415,208
$ 187,802
$ 117,869
$ 85,022
$ 7,475
$ 813,376

September 30, 2017

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and
Other
Total
Performing loans $ 2,543
$ 1,315
$ 565
$ 670
$ 125
$ 5,218
Impaired loans —
100
—
75
—
175
Total $ 2,543
$ 1,415
$ 565
$ 745
$ 125
$ 5,393

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Credit Risk Management (continued):~~

December 31, 2016

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and
Other
Total
Performing loans $ 2,369
$ 1,382
$ 717
$ 516
$ 117
$ 5,101
Impaired loans —
—
—
4
—
4
Total $ 2,369
$ 1,382
$ 717
$ 520
$ 117
$ 5,105

September 30, 2017

Commercial
Real Estate

Consumer
Real
Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Beginning balance $ 2,369
$ 1,382
$ 717
$ 520
$ 117
$ 5,105
Loans charged off —
(110 ) —
(18 ) (106 ) (234 )
Recoveries of loans charged off 8
58
10
55
51
182
Provision (reallocation) charged to operating expense 166
85
(162 ) 188
63
340
Ending balance $ 2,543
$ 1,415
$ 565
$ 745
$ 125
$ 5,393

December 31, 2016

Commercial
Real Estate

Consumer
Real
Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Beginning balance $ 1,906
$ 1,015
$ 627
$ 777
$ 29
$ 4,354
Loans charged off —
(102 ) (14 ) (35 ) (155 ) (306 )
Recoveries of charge-offs 45
76
22
58
68
269
Provision (reallocation) charged to operating expense 418
393
82
(280 ) 175
788
Ending balance $ 2,369
$ 1,382
$ 717
$ 520
$ 117
$ 5,105

Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Credit Risk Management (continued):~~

Table of ~~September 30, 2017 and December 31, 2016 (amounts in thousands):~~

~~Non PCI Loans~~

September 30, 2017

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Pass $ 433,468
$ 191,969
$ 96,089
$ 117,633
$ 6,361
$ 845,520
Watch 828
727
—
898
—
2,453
Special mention —
15
—
—
—
15
Substandard 122
850
547
166
—
1,685
Doubtful —
—
—
—
—
—
Total $ 434,418
$ 193,561
$ 96,636
$ 118,697
$ 6,361
$ 849,673

~~PCI Loans~~

September 30, 2017

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Pass $ 10,416
$ 4,473
$ 916
$ 851
$ —
$ 16,656
Watch 841
1,081
648
14
—
2,584
Special mention —
—
—
196
—
196
Substandard 1,945
589
12
—
—
2,546
Doubtful —
—
—
24
—
24
Total $ 13,202
$ 6,143
$ 1,576
$ 1,085
$ —
$ 22,006
Total loans $ 447,620
$ 199,704
$ 98,212
$ 119,782
$ 6,361
$ 871,679

Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Credit Risk Management (continued):~~

~~Non PCI Loans~~

December 31, 2016

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Pass $ 399,505
$ 177,466
$ 115,237
$ 82,992
$ 7,238
$ 782,438
Watch 640
550
89
252
—
1,531
Special mention —
104
—
—
237
341
Substandard 120
678
865
210
—
1,873
Doubtful —
—
—
—
—
—
Total $ 400,265
$ 178,798
$ 116,191
$ 83,454
$ 7,475
$ 786,183

~~PCI Loans~~

December 31, 2016

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Pass $ 11,836
$ 6,811
$ 1,019
$ 1,507
$ —
$ 21,173
Watch 1,045
1,577
645
22
—
3,289
Special mention —
—
—
12
—
12
Substandard 2,062
616
14
—
—
2,692
Doubtful —
—
—
27
—
27
Total $ 14,943
$ 9,004
$ 1,678
$ 1,568
$ —
$ 27,193
Total loans $ 415,208
$ 187,802
$ 117,869
$ 85,022
$ 7,475
$ 813,376


	December 31, 2020
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
Non PCI Loans:	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	922,153	$	417,302	$	269,350	$	625,836	$	12,622	$	2,247,263
Watch		66,287		14,218		3,296		7,673		137		91,611
Special mention		4,446		46		—		320		—		4,812
Substandard		3,967		2,020		81		261		30		6,359
Doubtful		—		86		—		48		—		134
Total		996,853		433,672		272,727		634,138		12,789		2,350,179

PCI Loans:
Pass		11,072		8,382		1,008		262		25		20,749
Watch		3,381		224		3,820		—		2		7,427
Special mention		19		57		—		—		—		76
Substandard		1,651		1,595		520		46		—		3,812
Doubtful		—		—		—		—		—		—
Total		16,123		10,258		5,348		308		27		32,064
Total loans	$	1,012,976	$	443,930	$	278,075	$	634,446	$	12,816	$	2,382,243

Past Due Loans:

A loan 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 agreement. Generally, management places a loan 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 is 90 days past due.

The following tables present ~~the~~an aging analysis of ~~the recorded investment in loans as of September 30, 2017 and December 31, 2016 (amounts~~ our loan portfolio (in thousands):


	March 31, 2021
	30-60 Days		61-89 Days		Past Due 90				Total
	Past Due and		Past Due and		Days��or More				Past Due and		PCI		Current		Total
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		Loans		Loans		Loans
Commercial real estate	$	565	$	—	$	1,495	$	3,155	$	5,215	$	13,877	$	1,051,549	$	1,070,641
Consumer real estate		968		1,336		—		1,481		3,785		9,597		419,104		432,486
Construction and land development		643		—		—		11		654		5,350		279,969		285,973
Commercial and industrial		666		12		—		60		738		303		684,969		686,010
Consumer and other		3		—		—		32		35		21		11,963		12,019
Total	$	2,845	$	1,348	$	1,495	$	4,739	$	10,427	$	29,148	$	2,447,554	$	2,487,129


	December 31, 2020
	30-60 Days		61-89 Days		Past Due 90				Total
	Past Due and		Past Due and		Days or More				Past Due and		PCI		Current		Total
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		Loans		Loans		Loans
Commercial real estate	$	134	$	—	$	67	$	3,740	$	3,941	$	16,123	$	992,912	$	1,012,976
Consumer real estate		1,916		51		82		1,823		3,872		10,258		429,800		443,930
Construction and land development		245		—		—		12		257		5,348		272,470		278,075
Commercial and industrial		12		76		—		36		124		308		634,014		634,446
Consumer and other		14		5		—		22		41		27		12,748		12,816
Total	$	2,321	$	132	$	149	$	5,633	$	8,235	$	32,064	$	2,341,944	$	2,382,243

September 30, 2017

30-89 Days
Past Due and
Accruing

Past Due 90
Days or More
and Accruing
Nonaccrual
Total
Past Due
and NonAccrual
PCI Loans
Current
Loans

Total
Loans
Commercial real estate $ 414
$ —
$ 122
$ 536
$ 13,202
$ 433,882
$ 447,620
Consumer real estate 137
—
506
643
6,143
192,918
199,704
Construction and land development —
—
547
547
1,576
96,089
98,212
Commercial and industrial 114
—
85
199
1,085
118,498
119,782
Consumer and other 31
3
—
34
—
6,327
6,361
Total $ 696
$ 3
$ 1,260
$ 1,959
$ 22,006
$ 847,714
$ 871,679

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Past Due Loans (continued):~~

December 31, 2016

30-89 Days
Past Due and
Accruing

Past Due 90
Days or More
and Accruing
Nonaccrual
Total
Past Due
and NonAccrual

PCI
Loans

Current
Loans

Total
Loans
Commercial real estate $ 395
$ —
$ —
$ 395
$ 14,943
$ 399,870
$ 415,208
Consumer real estate 695
699
386
1,780
9,004
177,018
187,802
Construction and land development 690
—
865
1,555
1,678
114,636
117,869
Commercial and industrial 257
—
164
421
1,568
83,033
85,022
Consumer and other 17
—
—
17
—
7,458
7,475
Total $ 2,054
$ 699
$ 1,415
$ 4,168
$ 27,193
$ 782,015
$ 813,376

The following is an analysis of the impaired loan portfolio, ~~excluding~~including PCI loans, detailing the related allowance recorded as(in thousands):


	March 31, 2021						December 31, 2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans without a valuation allowance:
Commercial real estate	$	130	$	130	$	—	$	3,871	$	3,872	$	—
Consumer real estate		1,880		1,882		—		888		888		—
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—
		2,010		2,012		—		4,759		4,760		—

Impaired loans with a valuation allowance:
Commercial real estate		3,155		3,155		251		—		—		—
Consumer real estate		459		462		132		428		428		116
Construction and land development		—		—		—		—		—		—
Commercial and industrial		109		109		109		146		146		121
Consumer and other		—		—		—		—		—		—
		3,723		3,726		492		574		574		237
PCI loans:
Commercial real estate		—		—		—		—		—		—
Consumer real estate		1,210		1,347		158		1,827		2,086		88
Construction and land development		—		—		—		—		—		—
Commercial and industrial		266		233		216		270		234		218
Consumer and other		17		16		2		21		20		3
		1,493		1,596		376		2,118		2,340		309
Total impaired loans	$	7,226	$	7,334	$	868	$	7,451	$	7,674	$	546


	Three Months Ended March 31,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	2,001	$	1	$	196	$	3
Consumer real estate		1,384		12		550		4
Construction and land development		—		—		577		—
Commercial and industrial		—		—		—		—
Consumer and other		—		—		—		—
		3,385		13		1,323		7
Impaired loans with a valuation allowance:
Commercial real estate		1,577		102		198		2
Consumer real estate		444		5		984		9
Construction and land development		—		—		—		—
Commercial and industrial		128		2		159		2
Consumer and other		—		—		—		—
		2,149		109		1,341		13
PCI loans:
Commercial real estate		—		—		964		1
Consumer real estate		1,215		22		456		1
Construction and land development		—		—		231		—
Commercial and industrial		268		1		355		—
Consumer real estate		19		—		11		—
		1,502		23		2,017		2

Total impaired loans	$	7,036	$	145	$	4,681	$	22

Table of ~~September 30, 2017 and December 31, 2016 (amounts in thoudands):~~

For the nine months ended
At September 30, 2017 September 30, 2017

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized
Impaired loans without a valuation allowance:

Commercial real estate $ 118
$ 124
$ —
$ 149
$ 7
Consumer real estate 309
314
—
398
11
Construction and land development 547
547
—
648
—
Commercial and industrial 42
42
—
44
2
Consumer and other —
—
—
—
—
1,016
1,027
—
1,239
20

Impaired loans with a valuation allowance:

Commercial real estate —
—
—
—
—
Consumer real estate 624
649
100
499
24
Construction and land development —
—
—
—
—
Commercial and industrial 85
85
75
103
3
Consumer and other —
—
—
—
—
709
734
175
602
27
Total impaired loans $ 1,725
$ 1,761
$ 175
$ 1,841
$ 47

Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Impaired Loans (continued):~~

For the year ended
At December 31, 2016 December 31, 2016

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized
Impaired loans without a valuation allowance:

Commercial real estate $ 119
$ 119
$ —
$ 1,311
$ 73
Consumer real estate 821
849
—
2,334
100
Construction and land development 865
865
—
967
3
Commercial and industrial 46
46
—
47
4
Consumer and other —
—
—
—
—
1,851
1,879
—
4,659
180

Impaired loans with a valuation allowance:

Commercial real estate —
—
—
—
—
Consumer real estate —
—
—
—
—
Construction and land development —
—
—
—
—
Commercial and industrial 164
243
4
306
70
Consumer and other —
—
—
—
—
164
243
4
306
70
Total impaired loans $ 2,015
$ 2,122
$ 4
$ 4,965
$ 250

Troubled Debt Restructurings:

At ~~September 30, 2017~~March 31, 2021, and December 31, ~~2016,~~2020, impaired loans included loans that were classified as ~~Troubled Debt Restructurings ("TDRs").~~TDRs. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the ~~debtor's~~debtor’s projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.

The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the ~~debtor's~~debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan.

The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan.

As of ~~September 30, 2017~~March 31, 2021, and December 31, ~~2016,~~2020, management had approximately ~~$42,000~~$250 thousand and ~~$608,000,~~$257 thousand, respectively, in loans that met the criteria for ~~restructured,~~TDR, NaN of which ~~included approximately $0 and $442,000, respectively, of loans~~were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that ~~management~~the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Troubled Debt Restructurings (continued):~~

There were no0 loans that were modified as ~~troubled debt restructurings~~a TDR during the ~~nine~~three month period ended ~~September 30, 2017.~~

~~The following table presents a summary of~~March 31, 2021, and 1 loan that was modified during the three month period ended March 31, 2020. There were 0 loans that were modified as ~~troubled debt restructurings during the twelve month period ended December 31, 2016 (amounts in thousands):~~

Pre-Modification
Outstanding
Recorded

Post-Modification
Outstanding
Recorded
December 31, 2016 Number of Contracts Investment Investment
Construction and land development 1 $ 278
$ 278
Commercial and industrial 1 $ 164
$ 164

~~There were no loans that were modified as troubled debt restructurings~~TDRs during the past ~~twelve~~three months and for which there was a subsequent payment default.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid Relief and Economic Security (“CARES”) Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 Presentation of Financial Information for more information. At March 31, 2021, the Company had 10 loans remaining under COVID-19 modifications that amounted to $1.7 million, or 0.07% of the total loans outstanding.

Foreclosure Proceedings and Balances:

As of March 31, 2021, there was 0 residential property secured by real estate included in other real estate owned and there were 3 residential real estate loans totaling $448 thousand in the process of foreclosure.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Purchased Credit Impaired Loans:

The Company has acquired loans ~~which~~where there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans ~~as of is~~are as follows ~~(amounts~~ (in thousands):

September 30, 2017 December 31, 2016
Commercial real estate $ 16,036
$ 18,473
Consumer real estate 8,955
12,111
Construction and land development 1,920
2,553
Commercial and industrial 1,740
2,482
Consumer and other —
—
Total loans 28,651
35,619
Less remaining purchase discount (6,645 ) (8,426 )
Total loans, net of purchase discount 22,006
27,193
Less: Allowance for loan losses —
—
Carrying amount, net of allowance $ 22,006
$ 27,193

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 4. Loans and Allowance for Loan Losses, Continued~~

~~Purchased Credit Impaired Loans (continued):~~


	March 31,		December 31,
	2021		2020
Commercial real estate	$	21,221	$	23,787
Consumer real estate		12,011		12,692
Construction and land development		968		1,812
Commercial and industrial		6,463		6,521
Consumer and other		122		161
Total loans		40,785		44,973
Less: Remaining purchase discount		(11,637)		(12,909)
Total loans, net of purchase discount		29,148		32,064
Less: Allowance for loan losses		(376)		(309)
Carrying amount, net of allowance	$	28,772	$	31,755

Activity related to the accretable yield on loans acquired with deteriorated credit quality is as follows (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Accretable yield, beginning of period	$	16,889	$	8,454
Additions		—		2,515
Accretion income		(1,931)		(2,077)
Reclassification		337		1,916
Other changes, net		(590)		171
Accretable yield, end of period	$	14,705	$	10,979

Note 6. Goodwill and Intangible Assets

In accordance with FASB ASC 350, Goodwill and Other, regarding testing goodwill for impairment provides an entity the ~~three and nine months period ended September 30, 2017 and 2016:~~

Three Months Ended
September 30, 2017 Three Months Ended
September 30, 2016 Nine Months Ended
September 30, 2017 Nine Months Ended
September 30, 2016
Accretable yield, beginning of period $ 8,475
$ 10,209
$ 8,950
$ 10,216
Additions —
—
—
—
Accretion income (1,061 ) (661 ) (2,731 ) (1,876 )
Reclassification to accretable 134
174
743
1,511
Other changes, net 460
(334 ) 1,046
(463 )
Accretable yield $ 8,008
$ 9,388
$ 8,008
$ 9,388

~~Note 5. Employee Benefit Plans~~

~~401(k) Plan:~~

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 ~~provides~~performs its annual goodwill impairment test as of December 31 of each year. Considering the recent economic conditions resulting from the COVID-19 pandemic the Company performed a ~~deferred salary reduction plan (“Plan”) under Section 401(k)~~Step 1 goodwill impairment test (which compares the fair value of a reporting unit with its carrying amount, including goodwill) at December 31, 2020, the results indicated that there was 0 impairment. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

The Company’s other intangible assets consist of core deposit intangibles, insurance agency customer relationships and insurance agency tradename. They are initially recognized based on a valuation performed as of the ~~Internal Revenue Code covering substantially all employees. After one year of service~~consummation date. The core deposit intangible is amortized over the Company matches 100 percent of employee contributions up to 3 percent of compensation and 50 percent of employee contributions on the next 2 percent of compensation. The Company's contribution to the Plan for the three month period ending September 30, 2017 and 2016 respectively was $89,463 and $110,107 and for the nine month period ending September30, 2017 and 2016 respectively was $298,309 and $300,530

~~Stock Option Plans:~~

As of September 30, 2017, the Company had one currently active equity incentive plan administered by the Board of Directors, and three plans or programs, pursuant to which the Company has outstanding prior grants. These plans are described below:

~~Legacy Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan –~~ The plan provided Cornerstone Bancshares, Inc. officers and employees incentive stock options or non-qualified stock options to purchase shares of common stock. The exercise price for incentive stock options was not less than 100 percentaverage remaining life of the ~~fair market value~~acquired customer deposits, the insurance agency customer relationships are amortized over ten years and the insurance agency tradename is amortized over five years.

Table of the common stock on the date of the grant. The exercise price of the non-qualified stock options was equal to or more or less than the fair market value of the common stock on the date of the grant. This plan expired in 2012.

~~Legacy Cornerstone Non-Qualified Plan Options —~~ During 2013 and 2014, Cornerstone issued non-qualified options to employees and directors. The options were originally documented in 2013 as being issued out of the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan but that plan expired in 2012. The non-qualified options are governed by the grant document issued to the holders which incorporate the terms of the plan by reference.

~~Legacy SmartFinancial, Inc. 2010 Incentive Plan -~~ This plan was assumed by the Company on August 31, 2015. This plan provides for incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance awards, dividend equivalents and stock or other stock-based awards. The maximum number of common shares that could be sold or optioned under the plan is 525,000 shares. Under the plan, the exercise price of each option could not be less than 100 percent of the fair market value of the common stock on the date of grant.

Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 5. Employee Benefit Plans, Continued~~

~~Stock Option Plans (Continued):~~

~~2015 Stock Incentive Plan –~~ ~~This plan provides for incentive stock options, nonqualified stock options,~~

The carrying amount of goodwill and restricted stock. The maximum number of shares of common stock that can be sold or optioned under the plan is 2,000,000 shares. The term of each option shall be no more than ten years from the date of grant. In the case of an incentive stock option granted to a participant who, at the time the option is granted, owns stock representing more than ten percentother intangible assets as of the ~~voting power~~dates indicated is summarized below (in thousands):


	March 31,		December 31,
	2021		2020
Goodwill:
Balance, beginning of period	$	74,135	$	65,614
Acquisition of PFG		323		8,521
Balance, end of the period	$	74,458	$	74,135


	Core Deposit		Insurance Agency		Insurance Agency
Amortized other intangible assets:	Intangibles		Customer Relationships		Tradename		Total
Beginning balance January 1, 2021, gross	$	15,920	$	1,064	$	63	$	17,047
Less: accumulated amortization		(4,935)		(206)		(14)		(5,155)
Balance, March 31, 2021, other intangible assets, net	$	10,985	$	858	$	49	$	11,892

Beginning balance January 1, 2020	$	14,550	$	-	$	-	$	14,550
Acquisition of PFG		1,370		1,064		63		2,497
Balance, December 31, 2020, other intangible assets, gross		15,920		1,064		63		17,047
Less: accumulated amortization		(4,540)		(161)		(10)		(4,711)
Balance, December 31, 2020, other intangible assets, net	$	11,380	$	903	$	53	$	12,336

The aggregate amortization of ~~all classes~~core deposit intangibles expense for the three month periods ended March 31, 2021 and 2020, was $397 thousand and $362 thousand, respectively.

The estimated aggregate amortization expense for future periods for core deposit intangibles is as follows (in thousands):


Remainder of 2021	$	1,316
2022		1,697
2023		1,636
2024		1,588
2025		1,531
Thereafter		4,124
Total	$	11,892

Note 7. Borrowings and Line of ~~stock~~Credit

Borrowings:

At March 31, 2021, total borrowings were $82.6 million compared to $81.2 million at December 31, 2020. Borrowings consist of the following (dollars in thousands):


	March 31,		December 31,
	2021		2020
Securities sold under customer repurchase agreements	$	7,250	$	5,803
FHLB borrowings		75,000		75,000
Other borrowings		392		396
Total	$	82,642	$	81,199

Securities Sold Under Agreements to Repurchase:

At March 31, 2021 and December 31, 2020, the Company ~~or any parent or subsidiary thereof, the term~~had securities sold under agreements to repurchase of ~~the option shall be five years from the date~~$7.3 million and $5.8 million, respectively, with commercial checking customers which were secured by government agency securities. The carrying value of ~~grant or such shorter term~~investment securities pledged as ~~may be provided in the award agreement.~~collateral under repurchase agreements was $6.8 million and $7.6 million at March 31, 2021 and December 31, 2020, respectively.

The per share exercise price for the shares to be issued upon exercise of an option shall be such price as is determined by the plan administrator, subject to the following: In the case of an incentive stock option: (1) granted to an employee who, at the time of grant of such option, owns stock representing more than ten percent of the voting power of all classes of stock of the company or any parent or subsidiary thereof, the exercise price shall be no less than one hundred and ten percent of the fair market value per share on the date of grant; or (2) granted to any other employee, the per share exercise price shall be no less than one hundred percent of the fair market value per share on the date of grant. In the case of a nonstatutory stock option, the per share exercise price shall be no less than one hundred percent of the fair market value per share on the date of grant, unless otherwise determined by the Administrator.

Number Weighted
Average
Exercisable
Price
Outstanding at December 31, 2016 717,524
$ 10.57
Exercised (505,712 ) 9.64
Forfeited (24,496 ) 19.90
Outstanding at September 30, 2017 187,316
$ 11.85

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Note 5. Employee Benefit Plans, Continued~~

~~Stock Option Plans (continued):~~

Options Outstanding Options Exercisable
Weighted-
Average
Remaining Weighted-
Average Weighted-
Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
6.60
38,250
4.4 years 6.60
38,250
6.60
6.80
16,875
3.4 years 6.80
16,875
6.80
9.48
26,875
5.4 years 9.48
26,875
9.48
9.60
35,625
6.4 years 9.60
35,625
9.60
11.67
2,000
3.3 years 11.67
2,000
11.67
14.40
12,805
1.4 years 14.40
12,805
14.40
15.05
41,720
8.0 years 15.05
18,265
15.05
31.96
13,166
0.4 years 31.96
13,166
31.96
Outstanding, end of period 187,316
5.1 years 11.85
163,861
11.40

Number Weighted
Average
Grant-Date
Fair Value
Nonvested at December 31, 2016 47,970
$ 12.31
Granted —
—
Vested (14,469 ) 12.31
Forfeited/expired (10,046 ) 12.31
Nonvested at September 30, 2017 23,455
$ 12.31

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 5. Employee Benefit Plans, Continued~~

~~Restricted Stock Awards:~~

Note 6.8. Employee Benefit Plans

401(k) Plan:

The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After 90 days of service the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The Company’s contribution to the Plan for the three month periods ending March 31, 2021 and 2020, respectively, was $288 thousand and $251 thousand.

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 March 31, 2021, the Company had 1 active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which had 21,886 rights issued and 1,834,427 Rights available for future grants or awards.

In addition, the Company has 19,250 Rights issued from the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan, 40,250 Rights issued from the Cornerstone Non-Qualified Plan Options, and 2,266 Rights issued from the Capstone Stock Option Plan. These plans do not have any Rights available for future grants or awards.

Stock Options:

A summary of the status of stock option plans is presented in the following table:


		Weighted
		Average
		Exercisable
	Number	Price
Outstanding at December 31, 2020	99,617	$	10.19
Granted	—		—
Exercised	(15,965)		9.24
Forfeited	—		—
Outstanding at March 31, 2021	83,652	$	10.37

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company did not recognize any stock option-based compensation expense during the three months ended March 31, 2021 and 2020, respectively, as all stock options issued are fully vested.

Information pertaining to stock options outstanding at March 31, 2021, is as follows:


		Options Outstanding				Options Exercisable
			Weighted-
			Average	Weighted-			Weighted-
			Remaining	Average			Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	6.60	19,250	0.95 years	$	6.60	19,250	$	6.60
	9.48	18,000	1.95 years		9.48	18,000		9.48
	9.60	22,250	2.75 years		9.60	22,250		9.60
	11.76	2,266	1.25 years		11.76	2,266		11.76
	15.05	21,886	4.28 years		15.05	21,886		15.05
Outstanding, end of period		83,652	2.52 years	$	10.37	83,652	$	10.37

The intrinsic value of options exercised during the three month periods ended March 31, 2021 and 2020, was $192 thousand and $65 thousand, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at March 31, 2021, was $944 thousand. Cash received from options exercised under all share-based payment arrangements for the three month period ended March 31, 2021 was $147 thousand.

NaN options vested during the periods ended March 31, 2021, and 2020, respectively. The income tax expense/benefit recognized for the exercise of options during the three months ended March 31, 2021 and 2020, was a benefit of $1 thousand and $23 thousand, respectively.

As of March 31, 2021, all options were fully vested and currently 0 future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

Restricted Stock Awards:

A summary of the activity of the Company’s unvested restricted stock awards for the period ended March 31, 2021 is presented below:


		Weighted
		Average
		Grant-Date
	Number	Fair Value
Balance at December 31, 2020	100,218	$	19.07
Granted	48,967		20.08
Vested	(3,918)		22.44
Forfeited/expired	—		—
Balance at March 31, 2021	145,267	$	19.32

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 months ended March 31, 2021 and 2020, was $201 thousand and $110 thousand, respectively. As of March 31, 2021, there was $1.8 million, respectively, of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of 3.19 years. The grant-date fair value of restricted stock awards vested was $88 thousand for the period ended March 31, 2021.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Stock Appreciation Rights ("SARs"):

A summary of the status of SARs plans is presented in the following table:


		Weighted
		Average
	Number	Exercisable Price
Outstanding at December 31, 2020	73,000	$	19.02
Granted	22,000		20.70
Exercised	—		—
Forfeited	—		—
Outstanding at March 31, 2021	95,000	$	19.41

Information pertaining to SARs outstanding at March 31, 2021, is as follows:


		SARs Outstanding				SARs Exercisable
			Weighted-
			Average	Weighted-
			Remaining	Average			Weighted- Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life		Price	Exercisable	Price
$	15.19	18,000	2.75 years	$	15.19	—	$	—
	18.12	21,000	1.75 years		18.12	—		—
	20.70	22,000	3.76 years		20.70	—		—
	21.61	34,000	0.75 years		21.61	34,000		21.61
	Outstanding, end of period	95,000	2.05 years	$	19.41	34,000	$	21.61

SARs compensation expense of $49 thousand and ($118) thousand was recognized for the three month periods ended March 31, 2021 and 2020, respectively. The credit in expense for the three month period ended March 31, 2020, was due to adjustments related to the fair value evaluation of SARs.

Note 9. Commitments and Contingent Liabilities

~~Off Balance Sheet Arrangements~~ In

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the ~~Bank has entered into off-balance sheet~~financing and depository needs of its customers. These financial instruments ~~which~~ include commitments to extend credit ~~(i.e., including unfunded lines of 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):


	March 31,		December 31,
	2021		2020
Commitments to extend credit	$	542,825	$	476,841
Standby letters of credit		6,920		5,261

Commitments to extend credit are ~~usually~~agreements to lend to a customer as long as there is no violation of any condition established in the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions; thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers.contract. Commitments ~~to extend credit~~ generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Standby letters of credit are generally issued on behalf of an applicant (our client) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Bank under certain prescribed circumstances. Subsequently, the Bank would seek reimbursement from the applicant pursuant to the terms Since many of the ~~standby letter of credit.~~

~~The Bank follows~~commitments are expected to expire without being drawn upon, the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each client’s creditworthiness is evaluated on a case-by-case basis, and thetotal commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if ~~any,~~deemed

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include ~~cash,~~accounts receivable, inventory, property and equipment, residential real estate, and ~~improvements, marketable securities, accounts receivable, inventory, equipment~~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 ~~personal property.~~

private borrowing arrangements. The ~~contractual amounts~~credit risk involved in issuing letters of ~~these commitments are not reflected~~credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the ~~consolidated financial statements~~Company deems necessary. At March 31, 2021, and ~~would only be reflected if drawn upon. Since many~~December 31, 2020, the carrying amount of liabilities related to the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should customers default on their resultingCompany’s obligation to ~~the Bank the maximum exposure to~~perform under standby letters of credit ~~loss, without consideration of collateral,~~was insignificant.

The Company is ~~represented by the contractual amount of those instruments.~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 6. Commitments and Contingent Liabilities, Continued~~

~~A summary of the Bank’s total contractual amount for all off-balance sheet commitments at September 30, 2017 is as follows:~~

Commitments to extend credit $ 166.8 million
Standby letters of credit $ 3.2 million

~~Various legal claims also arise from time to time~~subject in the normal course of ~~business. In~~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 ~~opinion~~aggregate ultimate liability arising out of ~~management,~~litigation pending or threatened against the ~~resolution of claims outstanding at September 30, 2017~~Company will ~~not have a~~be material ~~effect on SmartFinancial’s~~to the Company’s consolidated financial ~~statements.~~

~~Note 7. 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 sellposition. On 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 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,~~on-going basis, the Company ~~groups its financial assets and financial~~assesses any potential liabilities ~~generally measured at fair value~~or contingencies 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~~connection with such legal proceedings. For those matters where it 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 I 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 methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 7. Fair Value Disclosures, Continued~~

~~Fair Value Hierarchy (continued):~~

~~Cash and Cash Equivalents:~~ For cash and due from banks, interest-bearing deposits, and federal funds sold, the carrying amount is a reasonable estimate of fair value based on the short-term nature of the assets and are considered Level 1 inputs.

~~Securities Available for Sale:~~ Where quoted prices are available in an active market, management classifies the securities within Level 1 of the valuation hierarchy. If quoted market prices are not available, management estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, including GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, management classifies those securities in Level 3.

~~Restricted Investments:~~ ~~It is not practicable to determine the fair value of restricted investments due the restrictions placed on its transferability.~~

~~Loans:~~ For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair value for fixed rate loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. These methods are considered Level 3 inputs.

~~Deposits:~~ The fair values disclosed for demand deposits (for example, interest and noninterest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts) and are considered Level 1 inputs. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits, and are considered Level 2 inputs.

~~Securities Sold Under Agreement to Repurchase:~~ ~~The carrying value of these liabilities approximates their fair value, and are considered Level 1 inputs.~~

~~Federal Home Loan Bank Advances and Other Borrowings:~~ The fair value of the FHLB fixed rate borrowings are estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements, and are considered Level 2 inputs.

~~Commitments to Extend Credit and Standby Letters of Credit:~~ ~~Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure.~~

~~Measurements of Fair Value:~~

~~Assets and liabilities recorded at fair value on a recurring basis are as follows (in thousands):~~

Balance as of
September 30,
2017
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)
Debt securities available-for-sale:

U.S. Government-sponsored enterprises (GSEs) $ 15,911
$ —
$ 15,911
$ —
Mortgage-backed securities 90,323
—
90,323
—
Other debt securities 938
—
938
—
Municipal securities 8,363
—
8,363
—
Total securities available-for-sale $ 115,535
$ —
$ 115,535
$ —

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 7. Fair Value Disclosures, Continued~~

~~Measurements of Fair Value (continued):~~

Balance as of
December 31,
2016
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)
Debt securities available-for-sale:

U.S. Government-sponsored enterprises (GSEs) $ 17,723
$ —
$ 17,723
$ —
Mortgage-backed securities: 103,680
—
103,680
—
Municipal securities 8,019
—
8,019
—
Total securities available-for-sale $ 129,422
$ —
$ 129,422
$ —

The Company has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

~~Assets Measured at Fair Value on a Nonrecurring Basis:~~

Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):

For Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2017 and December 31, 2016, the significant unobservable inputs used in the fair value measurements are presented below (in thousands).

Balance as of
September 30,
2017
Valuation
Technique

Significant Other
Unobservable Input

Weighted
Average of
Input
Impaired loans $ 534
Appraisal Appraisal Discounts 24.7 %
Foreclosed assets 2,888
Appraisal Appraisal Discounts 19.3 %

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 7. Fair Value Disclosures, Continued~~

~~Assets Measured at Fair Value on a Nonrecurring Basis (continued):~~

Balance as of
December 31,
2016
(in thousands)
Valuation
Technique

Significant Other
Unobservable Input

Weighted
Average of Input
Impaired loans $ 239
Cash Flow Discounted Cash Flow / Appraisal Discounts 2.4 %
Foreclosed assets 2,386
Appraisal Appraisal Discounts 12.2 %

~~Impaired Loans:~~ ~~Loans considered impaired under ASC 310-10-35,~~ ~~Receivables, are loans for which, based on current information and events, it is~~deemed probable that the Company will ~~be unable to collect all principal~~incur losses and ~~interest payments due in accordance with~~ the ~~contractual terms~~amount of the ~~loan agreement. Impaired loans~~losses can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

The fair value of impaired loans were measured based on the value of the collateral securing these loans or the discounted cash flows of the loans, as applicable. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

~~Foreclosed assets:~~ ~~Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less~~reasonably estimated, costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 7. Fair Value Disclosures, Continued~~

~~Carrying value and estimated fair value:~~

~~The carrying amount and estimated fair value of the Company’s financial instruments at September 30, 2017 and December 31, 2016 are as follows (in thousands):~~

September 30, 2017 December 31, 2016

Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value
Assets:

Cash and cash equivalents $ 84,098
$ 84,098
$ 68,748
$ 68,748
Securities available for sale 115,535
115,535
129,422
129,422
Restricted investments 6,081
N/A
5,628
N/A
Loans, net 866,286
855,882
808,271
803,057

Liabilities:

Noninterest-bearing demand deposits 185,386
185,386
153,483
153,483
Interest-bearing demand deposits 156,953
156,953
162,702
162,702
Money Market and Savings deposits 306,357
306,357
274,605
274,605
Time deposits 311,490
311,755
316,275
316,734
Securities sold under agreements to repurchase 26,542
26,542
26,622
26,622
Federal Home Loan Bank advances and other borrowings 6,000
6,000
18,505
18,505

~~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. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition,

~~the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~Note 8. Small Business Lending Fund~~

In connection with the Company's merger with Legacy SmartFinancial, Inc. in 2105, the company assumed Legacy SmartFinancial's obligations under that certain stock purchase agreement with the U.S. Department of the Treasury and issued 12,000 shares of preferred stock at $1,000 per share under the Small Business Lending Fund Program (the "~~SBLF Program~~").The Company paid cash dividends at a one percent rate or $120,000 for the year ended December 31, 2015 on the preferred shares. On February 4, 2016 the dividend rate for the preferred shares increased to nine percent and as a result the company incurred preferred stock dividends of $1,022,000 for the year ended December 31, 2016 .

~~On January 30, 2017,~~ the Company ~~completed a public offering of 2,010,084 shares of~~would record an expense and corresponding liability in its common stock with the net proceeds to the Company of approximately $33.2 million. On March 6, 2017 the Company used proceeds from the offering to redeem the $12 million of preferred stock and pay the $195 thousand accrued dividend.

consolidated financial statements.

Note ~~9. Business Combination~~10. Fair Value Disclosures

Determination of Fair Value:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact business at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy:

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.

Measurements of Fair Value:

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2021:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	72,257	$	—	$	72,257	$	—
Municipal securities		90,129		—		90,129		—
Other debt securities		26,055		—		26,055		—
Mortgage-backed securities (GSEs)		62,496		—		62,496		—
Total securities available-for-sale	$	250,937	$	—	$	250,937	$	—

Liabilities:
Derivative financial instruments	$	4,008	$	—	$	4,008	$	—

December 31, 2020:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	30,530	$	—	$	30,530	$	—
Municipal securities		91,989		—		91,989		—
Other debt securities		25,118		—		25,118		—
Mortgage-backed securities (GSEs)		67,997		—		67,997		—
Total securities available-for-sale	$	215,634	$	—	$	215,634	$	—

Liabilities:
Derivative financial instruments	$	6,174		—	$	6,174		—

During the three month period ending March 31, 2021, there were 0 transfers between Level 1 and Level 2 in the fair value hierarchy.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Assets Measured at Fair Value on a Nonrecurring Basis:


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2021:
Impaired loans	$	4,348	$	—	$	—	$	4,348
Other real estate owned		3,946		—		—		3,946

December 31, 2020:
Impaired loans	$	2,455	$	—	$	—	$	2,455
Other real estate owned		4,619		—		—		4,619

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):


					Weighted
			Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input
March 31, 2021:
Impaired loans	$	4,348	Appraisal	Appraisal discounts	17	%
Other real estate owned		3,946	Appraisal	Appraisal discounts	27	%

December 31, 2020:
Impaired loans	$	2,455	Appraisal	Appraisal discounts	9	%
Other real estate owned		4,619	Appraisal	Appraisal discounts	22	%

Impaired loans: Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. An impaired loan can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. The fair value of impaired loans was measured based on the value of the collateral securing these loans or the discounted cash flows of the loans, as applicable. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned: Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.

Carrying value and estimated fair value:

The carrying amount and estimated fair value of the Company’s financial instruments are as follows (in thousands):


	Fair Value Measurements Using
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
March 31, 2021:
Assets:
Cash and cash equivalents	$	556,701	$	556,701	$	—	$	—	$	556,701
Securities available-for-sale		250,937		—		250,937		—		250,937
Other investments		14,728		N/A		N/A		N/A		N/A
Loans, net and loans held for sale		2,476,629		—		—		2,477,120		2,477,120

Liabilities:
Noninterest-bearing demand deposits		777,968		—		777,968		—		777,968
Interest-bearing demand deposits		683,887		—		683,887		—		683,887
Money market and savings deposits		1,073,941		—		1,073,941		—		1,073,941
Time deposits		512,417		—		515,440		—		515,440
Borrowings		82,642		—		83,743		—		83,743
Subordinated debt		39,367		—		—		40,866		40,866
Derivative financial instruments		4,008		—		4,008		—		4,008

December 31, 2020:
Assets:
Cash and cash equivalents	$	481,719	$	481,719	$	—	$	—	$	481,719
Securities available-for-sale		215,634		—		215,634		—		215,634
Other investments		14,794		N/A		N/A		N/A		N/A
Loans, net and loans held for sale		2,375,618		—		—		2,377,581		2,377,581

Liabilities:
Noninterest-bearing demand deposits		685,957		—		685,957		—		685,957
Interest-bearing demand deposits		649,129		—		649,129		—		649,129
Money market and savings deposits		919,631		—		919,631		—		919,631
Time deposits		550,498		—		554,120		—		554,120
Borrowings		81,199		—		82,892		—		82,892
Subordinated debt		39,346		—		—		40,550		40,550
Derivative financial instruments		6,174		—		6,174		—		6,174

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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Note 11.Derivatives

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge instrument as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate tax-exempt callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. The Company has elected early adoption of ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, which allows such partial term hedge designations.

A summary of the Company’s fair value hedge relationships for the periods presented are as follows (dollars in thousands):

Weighted

Average

Balance

Remaining

Weighted

Sheet

Maturity

Average

Receive

Notional

Estimated

Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

March 31, 2021:

Interest rate swap agreements - securities

Other liabilities

6.18

3.09

3 month LIBOR

36,000

(4,008)

December 31, 2020:

Interest rate swap agreements - securities

Other liabilities

7.13

3.08

3 month LIBOR

36,000

(6,174)

The effects of the Company’s fair value hedge relationships reported in interest income on tax-exempt available-for-sale securities on the consolidated income statement were as follows (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Interest income on tax-exempt securities	$	564	$	440
Effects of fair value hedge relationships		(305)		(157)
Reported interest income on tax-exempt securities	$	259	$	283


	Three Months Ended
	March 31,
Gain (loss) on fair value hedging relationship	2021		2020
Interest rate swap agreements - securities:
Hedged items	$	(4,008)	$	(6,885)
Derivative designated as hedging instruments	$	4,008	$	6,885

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges (in thousands):


			Cumulative Amount of Fair
			Value Hedging Adjustment
	Carrying Amount		Included in Other Comprehensive
Line item on the balance sheet	of the Hedged Assets		Income
March 31, 2021:
Securities available-for-sale	$	43,073	$	250
December 31, 2020:
Securities available-for-sale	$	44,017	$	(1,063)

Note 12. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 and all subsequent ASUs that modified this topic (collectively referred to as "Topic 842"). For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2034. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.

The following table represents the consolidated balance sheet classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet (in thousands):


		March 31,		December 31,
	Classification	2021		2020
Assets:
Operating lease right-of-use assets	Other assets	$	4,588	$	4,797
Liabilities:
Operating lease liabilities	Other liabilities	$	4,625	$	4,827

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

As of March 31, 2021, the weighted average remaining lease term was 11.32 years and the weighted average discount rate was 2.73%.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table represents lease costs and other lease information, in thousands. 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).


	Three Months Ended
	March 31,
	2021		2020
Lease costs:
Operating lease costs	$	240	$	237
Variable lease costs		24		26
Total	$	264	$	263
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	233	$	230

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2021, were as follows (in thousands):


	Amounts
March 31, 2022	$	571
March 31, 2023		623
March 31, 2024		485
March 31, 2025		366
March 31, 2026		348
Thereafter		3,032
Total future minimum lease payments		5,425
Amounts representing interest		(800)
Present value of net future minimum lease payments	$	4,625

Note 13. Regulatory Matters

Regulatory Capital Requirements:

The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer. At March 31, 2021, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the "well capitalized" regulatory classification.

Regulatory Restrictions on Dividends:

Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (the “TDFI”), pay any dividends to the Company in a calendar year in excess of the total of the Bank’s retained net income for that year plus the retained net income for the preceding two years. Because this test involves a measure of net income, any charge on the Bank’s income statement, such as an impairment of goodwill, could impair the Bank’s ability to pay dividends to the Company. Under Tennessee corporate law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, the Company’s board of directors must consider its and the Bank’s current and prospective capital, liquidity, and other needs. In addition to state law limitations on the Company’s ability to pay dividends, the Federal Reserve imposes limitations on the Company’s ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

During the three months ended March 31, 2021, the Bank paid $5.0 million in dividends to the Company and the Company paid a quarterly common stock dividend of $0.06 per share. 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 March 31, 2021, and December ~~8, 2016,~~31, 2020 are presented below (dollars in thousands):


									Minimum to be
									well
									capitalized under
					Minimum for				prompt
					capital				corrective action
		Actual			adequacy purposes				provisions¹
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2021
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	337,484	13.62	%	$	198,250	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		279,747	11.29	%		148,687	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		279,747	11.29	%		111,515	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)²		279,747	8.55	%		130,918	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	323,288	13.05	%	$	198,174	8.00	%	$	247,718	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		304,918	12.31	%		148,631	6.00	%		198,174	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		304,918	12.31	%		111,473	4.50	%		161,017	6.50	%
Tier 1 Capital (to Average Assets)²		304,918	9.33	%		130,783	4.00	%		163,479	5.00	%

December 31, 2020
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	329,431	14.07	%	$	187,303	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		271,739	11.61	%		140,477	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		271,739	11.61	%		105,358	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)		271,739	8.70	%		125,002	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	317,660	13.57	%	$	187,294	8.00	%	$	234,117	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		299,314	12.78	%		140,470	6.00	%		187,294	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		299,314	12.78	%		105,353	4.50	%		152,176	6.50	%
Tier 1 Capital (to Average Assets)		299,314	9.58	%		124,969	4.00	%		156,212	5.00	%

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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 14. Other Comprehensive Income (Loss)

The changes in each component of accumulated other comprehensive income (loss), net of tax, were as follows (in thousands):


	Three Months Ended March 31, 2021
					Accumulated
	Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)
Beginning balance, December 31, 2020	$	2,968	$	(785)	$	2,183

Other comprehensive income (loss)		(2,070)		970		(1,100)
Reclassification of amounts included in net income		—		—		—
Net other comprehensive income (loss) during period		(2,070)		970		(1,100)

Ending balance, March 31, 2021	$	898	$	185	$	1,083

	Three Months Ended March 31, 2020
					Accumulated
	Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)
Beginning balance, December 31, 2019	$	391	$	(223)	$	168

Other comprehensive income (loss)		851		(2,266)		(1,415)
Reclassification of amounts included in net income		—		—		—
Net other comprehensive income (loss) during period		851		(2,266)		(1,415)

Ending balance, March 31, 2020	$	1,242	$	(2,489)	$	(1,247)

Note 15. Subsequent Events

On April 14, 2021, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sevier County Bancshares, Inc., a Tennessee corporation (“SCB”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, SCB will merge with and into the Company, with the Company continuing as the surviving entity (the "Merger"). Following the Merger, Sevier County Bank, a Tennessee state-chartered banking association and wholly-owned subsidiary of SCB, will merge with and into the Bank, with the Bank continuing as the surviving bank.

Subject to the terms, conditions and adjustments set forth in the Merger Agreement, at the effective time of the Merger, (i) each share of SCB common stock owned by a holder of 20,000 or more shares of SCB common stock will be converted into the right to receive 0.4116 of a share of SmartFinancial common stock (the “Per Share Stock Consideration”) and (ii) each share of SCB common stock owned by a holder of fewer than 20,000 shares of SCB common stock will, at the election of such holder, be entitled to receive either (A) the Per Share Stock Consideration, or (B) an amount of cash equal to the Per Share Stock Consideration multiplied by the average closing price of SmartFinancial common stock as reported on the NASDAQ for the 10 consecutive trading days ending on the trading day immediately prior to the date that is five business days prior to the closing date (the “Per Share Cash Consideration”). Further, if SCB’s consolidated shareholders’ equity (as calculated in accordance with the Merger Agreement) is less than $30,326,000, then the Per Share Stock Consideration and Per Share Cash Consideration shall automatically be adjusted downward by an amount that is reflective of the overall shortfall. Additionally, at the effective time of the Merger, each share of SCB common stock subject to vesting restrictions shall become fully vested and converted automatically into the right to receive the merger consideration. Based upon SmartFinancial’s closing share price of $21.25 on April 13, 2021 and assuming that SCB’s

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

consolidated shareholders’ equity is at least $30,326,000, the implied merger consideration per share of SCB common stock is $8.75, with an aggregate transaction value of approximately $38.2 million.

The Merger Agreement contains customary representations, warranties, and covenants of both SmartFinancial and SCB. The completion of the Merger is subject to approval of SCB shareholders, regulatory approvals, and other customary closing conditions, and is expected to be completed in the third quarter of 2021.

On May 2, 2021, the Bank entered into a ~~purchase and assumption agreement~~Purchase Agreement (the “Purchase Agreement”) with ~~Atlantic Capital Bank, N.A. that provided for~~ the ~~acquisition and assumption by~~members of Fountain Leasing, LLC, a Tennessee limited liability Company (“Fountain”), pursuant to which SmartBank will acquire all of the ~~Bank~~membership interests of ~~certain assets and liabilities associated with Atlantic Capital Bank’s branch office located at 3200 Keith Street NW, Cleveland, Tennessee 37312.~~Fountain (the “Acquisition”). The ~~purchase~~Acquisition was subsequently completed on May ~~19, 2017 for total~~3, 2021. In accordance with the Purchase Agreement, the Bank paid $14 million in cash to the members of Fountain at closing, and repaid approximately $45 million of Fountain’s indebtedness. In addition to the closing consideration, the Purchase Agreement contains a performance-based earnout, pursuant to which the former members of ~~$1,183,007.~~

~~The assets and liabilities as~~Fountain could be entitled to up to $6 million in future cash payments from the Bank. Following the completion of the ~~effective date~~Acquisition, the Bank changed the name of ~~the transaction were recorded at their respective estimated fair values. The excess~~Fountain to “Fountain Equipment Finance, LLC”.

Table of ~~the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill.~~Contents

In the periods following the acquisition, the financial statements will include the results attributable to the Cleveland branch purchase beginning on the date of purchase. For the nine months period ended September 30, 2017, the revenues and net income attributable to the Cleveland branch were $308,854 and $92,598, respectively. It is impracticable to determine the pro-forma impact to the 2016 revenues and net income if the acquisition had occurred on January 1, 2016 as the Company does not have access to those records for a single branch.

~~The following table details the financial impact of the transaction, including the allocation of the purchase price to the fair values of net assets assumed and goodwill recognized:~~

Allocation of Purchase Price (amounts in thousands)
Total consideration in cash
$ 1,183
Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents 133
Loans 24,073
Premises and equipment 2,839
Core deposit intangible 310
Prepaid and other assets 77
Deposits (26,888 )
Payables and other liabilities (21 )
Total fair value of net assets acquired 523
Goodwill $ 660

~~As of September 30, 2017 there have not been any changes to the initial fair values recorded as part of the business combination.~~

ITEM 2. ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SmartFinancial, Inc. (the “Company” ~~or “SmartFinancial”~~) is a bank holding company ~~incorporated under~~whose principal activity is the ~~laws~~ownership and management of ~~Tennessee and headquartered in Knoxville, Tennessee. The Company conducts its business operations primarily through~~ its wholly-owned subsidiary, SmartBank (the "Bank"). SmartBank provides a ~~Tennessee chartered community~~comprehensive suite of commercial and consumer banking services to clients through 35 full-service bank ~~providing services through fourteen~~ branches and one loan production office ~~and one mortgage production office located~~in select markets in East and Middle Tennessee, Alabama and the Florida ~~Panhandle,~~Panhandle.

While we offer a wide range of commercial banking services, we focus on making loans secured primarily by commercial real estate and ~~North Georgia.~~other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans to individuals for a variety of purposes. Our principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. We offer a broad range of deposit products, including checking (“NOW”), savings, money market accounts and certificates of deposit. We actively pursue business relationships by utilizing the business contacts of our senior management, other bank officers and our directors, thereby capitalizing on our knowledge of our local market areas.

Forward-Looking Statement

SmartFinancial, Inc. (“SmartFinancial”) may from time to time make written or oral statements, including statements contained in this report and information incorporated by reference herein (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2), that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements, including statements regarding the effects of the COVID-19 pandemic on the Company’s business and financial results and conditions, are based on assumptions and estimates and are not guarantees of future performance. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words (and their derivatives), such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, the negatives of such expressions, or the use of the future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of a current condition. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, financial condition, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to:

●

weakness or a decline in the U.S. economy, in particular in Tennessee, and other markets in which we operate;

●

the possibility that our asset quality would decline or that we experience greater loan losses than anticipated;

●

the impact of liquidity needs on our results of operations and financial condition;

●

competition from financial institutions and other financial service providers;

●

the impact of negative developments in the financial industry and U.S. and global capital and credit markets;

●

the impact of recently enacted and future legislation and regulation on our business, including changes to statutes, regulations or regulatory policies or practices as a result of, or in response to the COVID-19 pandemic;

●

negative changes in the real estate markets in which we operate and have our primary lending activities, which may result in an unanticipated decline in real estate values in our market area;

●

risks associated with our growth strategy, including a failure to implement our growth plans or an inability to manage our growth effectively;

●

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;

●

expected revenue synergies and cost savings from the proposed acquisition of Sevier County Bancshares, Inc. (“SCB”) and our recently completed acquisition of Fountain Leasing, LLC (“Fountain”) may not be fully realized or may take longer than anticipated to be realized;

●

disruption from the merger with customers, suppliers or employees or other business partners’ relationships;

●

the risk of successful integration of SCB’s and Fountain’s businesses with our business;

●

lower than expected revenue following the acquisitions of SCB and Fountain;

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●

SmartFinancial’s ability to manage the combined company’s growth following the acquisitions;

●

the dilution caused by SmartFinancial’s issuance of additional shares of its common stock in connection with the SCB merger;

●

cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems we operate or rely upon for services to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems and negatively impact our operations and our reputation in the market;

●

results of examinations by our primary regulators, the TDFI, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, require us to reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

●

government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve;

●

our inability to pay dividends at current levels, or at all, because of inadequate future earnings, impairments to goodwill, regulatory restrictions or limitations, and changes in the composition of qualifying regulatory capital and minimum capital requirements;

●

the relatively greater credit risk of commercial real estate loans and construction and land development loans in our loan portfolio;

●

unanticipated credit deterioration in our loan portfolio or higher than expected loan losses within one or more segments of our loan portfolio;

●

unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors;

●

unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;

●

changes in expected income tax expense or tax rates, including changes resulting from revisions in tax laws, regulations and case law;

●

our ability to retain the services of key personnel;

●

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;

●

the impact of the COVID-19 pandemic on the Company’s assets, business, cash flows, financial condition, liquidity, prospects and results of operations;

●

potential increases in the provision for loan losses resulting from the COVID-19 pandemic; and

●

the impact of Tennessee’s anti-takeover statutes and certain of our charter provisions on potential acquisitions of us.

These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in SmartFinancial’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, in each case filed with or furnished to the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website (www.sec.gov). Undue reliance should not be placed on forward-looking statements. SmartFinancial disclaims any obligation to update or revise any forward-looking statements contained in this release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.

Certain captions and amounts in the prior periods presented were reclassified to conform to the current presentation. Such reclassifications had no effect on net income or shareholders’ equity.

Executive Summary

The following is a summary of the Company’s financial highlights and significant events during the ~~third~~first quarter ~~and the first nine months~~ of ~~2017:~~2021:

●

Successfully completed the hiring of an experienced banking team in the Gulf Coast Region.

●

Originated 1,231 Paycheck Protection Program (“PPP”) loans totaling $119.5 million.

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●

Net income totaled $9.8 million, or $0.65 per diluted common share, during the first quarter of 2021 compared to $2.7 million, or $0.19 per diluted common share, for the same period in 2020.

●

Annualized return on average assets was 1.18% at March 31, 2021 compared to 0.43% at March 31, 2020.

●

On December 21, 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, was passed by Congress to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID-19 pandemic. Among other things, the legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a $300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to transportation, education, agriculture, nutrition and other public health measures, and (v) approximately $325 billion for small business relief, including approximately $284 billion for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.

Analysis of Results of Operations

First quarter of 2021 compared to 2020

Net income ~~available to common shareholders totaled $1.7~~was $9.8 million, or ~~$0.20~~$0.65 per diluted common share, ~~during~~for the ~~third~~first quarter of ~~2017~~2021, compared to ~~$1.3~~$2.7 million, or ~~$0.22~~$0.19 per diluted common share, ~~during~~for the ~~third~~first quarter of ~~2016.~~

~~Closed acquisition~~2020. The tax equivalent net interest margin was 3.48% for the first quarter of ~~Cleveland, Tennessee branch, purchasing approximately $24.4 million in loans and assuming $26.8 million in deposits, in book value, resulting in approximately $1.0 million in intangible assets.~~

~~Annualized return on average assets was 0.61 percent for first nine months of 2017,~~2021 compared to ~~0.55 percent~~3.90% for the ~~same period in 2016.~~

~~Gross loan growth of $58.3 million for~~ first ~~nine months of 2017, including loans purchased in 2017 which had a net carrying of approximately $20.6 million at quarter end.~~

~~Net interest margin, taxable equivalent, of 4.13 percent for first nine months of 2017, up from 4.06 percent for the same period in 2016.~~

~~Asset quality remains outstanding with nonperforming assets to total assets of just 0.37 percent.~~

~~Prepared for November 1 acquisition of Capstone Bancshares, Inc. of Tuscaloosa, Alabama, after which the Company will have assets in excess of $1.6 billion.~~

~~Analysis of Results of Operations~~

~~Third~~ quarter of ~~2017 compared to 2016~~

Net income was $1.7 million in the third quarter of 2017, which was up from $1.6 million in the third quarter of 2016. Net income available to common shareholders was $1.7 million, or $0.20 per diluted common share, in the third quarter of 2017, compared to $1.3 million, or $0.22 per diluted common share, in the third quarter of 2016. Net interest income to average assets of 3.81 percent in the third quarter of 2017 was up from 3.76 percent in the third quarter of 2016 as the average earning asset balances and yields increased compared to the prior year.2020. Noninterest income to average assets ~~of 0.43 percent~~ was ~~down from 0.47 percent in~~0.69% for the ~~third~~first quarter of ~~2016.~~2021, increasing from 0.44% for the first quarter of 2020. Noninterest expense to average assets ~~increased from 3.13 percent in the third quarter of 2016~~decreased to ~~3.33 percent in third quarter of 2017 primarily due to higher salaries and employee benefits and merger and conversion costs.~~

~~The first nine months of 2017 compared to 2016~~

~~Net income was $5.0 million~~2.35% in the first ~~nine months~~quarter of ~~2017, which was up~~2021, from ~~$4.2 million~~2.96% in the first ~~nine months~~quarter of ~~2016. Net income available to common shareholders was $4.8 million, or $0.59 per diluted common share, in the first nine~~ months of 2017, an increase from $3.4 million, or $0.56 per diluted common share, in the first nine months of 2016. Net interest income to average assets of 3.81 percent in the first nine months of 2017 was up from 3.76 percent in the first nine months of 2016 as the average earning asset balances and yields increased compared to the prior year. Noninterest income to average assets of 0.42 percent was down from 0.43 percent in the first nine months of 2016. Noninterest expense to average assets increased from 3.24 percent in the first nine months of 2016 to 3.26 percent in first nine months of 2017 primarily due to to higher salaries and employee benefits and merger and conversion costs.

2020.

Net Interest Income and Yield Analysis

~~Third~~

First quarter of ~~2017~~2021 compared to ~~2016~~

2020

Net interest income, taxable equivalent, ~~improved~~increased to ~~$10.9~~$26.4 million infor the ~~third~~first quarter of ~~2017~~2021, up from ~~$9.7~~$22.7 million infor the ~~third~~first quarter of ~~2016. The increase in net~~2020. Net interest income was positively impacted, compared to the prior year, primarily ~~due to increases~~by the full-quarters effects of the Company’s March 1, 2020 acquisition of PFG, the increase in loan balances and ~~increases~~the reduction in ~~the yields of the loan and securities portfolios.~~interest expense on interest bearing liabilities. Average ~~earning~~interest-earning assets increased from ~~$953.7 million~~$2.34 billion for the first quarter of 2020, to $3.08 billion for the first quarter of 2021, primarily as a result of the acquisition of PFG being completed on March 1, 2020, the Company’s participation in the ~~third quarter of 2016 to $1,042.3 million~~PPP, and the increase in ~~the third quarter of 2017.~~our overall liquidity position. Over this period, average loan balances increased by ~~$79.8~~$445.5 million, ~~primarily as a result of organic growth. In addition,~~ average interest-bearing deposits increased by ~~$67.1~~$415.9 million, ~~and~~ average noninterest-bearing deposits increased ~~$31.8~~$327.8 million ~~a result of organic growth combined with the acquired deposits. Net~~and average borrowings increased $29.9 million. The tax equivalent net interest ~~income~~margin decreased to ~~average assets of 3.81 percent~~3.48% for the ~~third~~first quarter ~~in 2017 was up from 3.76 percent during the same period in 2016. Net interest margin, taxable equivalent, was 4.17 percent in the quarter,~~of 2021, compared to ~~4.03 percent a year ago as a result a higher percentage~~3.90% for the first quarter of ~~average interest-earning assets to average interest-bearing liabilities and increases in the yield on earning assets.~~2020. The yield on earning assets ~~increased~~decreased from ~~4.48 percent a year ago~~4.83% for the first quarter of 2020, to ~~4.70 percent in~~3.88% for the first quarter of 2021, primarily due to ~~higher~~rate cuts by the Federal Reserve over the past year and, to a lesser extent, loan ~~balances and higher~~ yields ~~on loans and securities.~~declining from market competition. The cost of average interest-bearing deposits decreased from 1.10% for the first quarter of 2020, to 0.44% for the first quarter of 2021, primarily due to a lower interest rate environment during the period.

Table of Contents

The following ~~table~~tables summarizes the major components of net interest income and the related yields and costs for the periods ~~presented.~~

presented (dollars in thousands):


	Three Months Ended March 31,
	2021						2020
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Assets:
Loans, including fees¹	$	2,428,499		27,943	4.67	%	$	1,982,997		26,389	5.35	%
Loans held for sale		7,913		75	3.82	%		4,294		45	4.24	%
Taxable securities		136,492		724	2.15	%		116,837		679	2.34	%
Tax-exempt securities²		90,849		409	1.82	%		70,397		400	2.28	%
Federal funds sold and other earning assets		417,144		291	0.28	%		165,512		602	1.46	%
Total interest-earning assets		3,080,897		29,442	3.88	%		2,340,037		28,115	4.83	%
Noninterest-earning assets		275,272						216,498
Total assets	$	3,356,169					$	2,556,535

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	641,214	$	256	0.16	%	$	389,500	$	434	0.45	%
Money market and savings deposits		983,893		821	0.34	%		664,983		1,389	0.84	%
Time deposits		526,062		1,254	0.97	%		680,830		2,931	1.73	%
Total interest-bearing deposits		2,151,169		2,331	0.44	%		1,735,313		4,754	1.10	%
Borrowings		81,837		117	0.58	%		51,921		89	0.69	%
Subordinated debt		39,354		584	6.01	%		39,269		584	5.98	%
Total interest-bearing liabilities		2,272,360		3,032	0.54	%		1,826,503		5,427	1.20	%
Noninterest-bearing deposits		700,962						373,125
Other liabilities		21,928						27,215
Total liabilities		2,995,250						2,226,843
Shareholders' equity		360,919						329,692
Total liabilities and shareholders’ equity	$	3,356,169					$	2,556,535
Net interest income, taxable equivalent			$	26,410					$	22,689
Interest rate spread					3.33	%					3.63	%
Tax equivalent net interest margin					3.48	%					3.90	%

Percentage of average interest-earning assets to average interest-bearing liabilities					135.58	%					128.12	%
Percentage of average equity to average assets					10.75	%					12.90	%

¹Loans include PPP loans with an average balance of $312.6 million for the three month period ended March 31, 2021. No PPP loans are included in the three month period ended March 31, 2020. Loan fees included in loan income was $2.9 million and $886 thousand for the three month periods ended March 31, 2021 and 2020, respectively. Loan fee income for the three month period ended March 31, 2021, includes $2.4 million accretion of loan fees on PPP loans. No loan fees on PPP loans are included in the three month period ended March 31, 2020.

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 $150 thousand for the three month period ended March 31, 2021 and $117 thousand for the three month period ended March 31, 2020.

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Average Yield/ Average Yield/
Balance Interest * Cost* Balance Interest * Cost*
Assets

Loans (1) $ 868,352
$ 11,496
5.25 % $ 788,585
$ 10,112
5.09 %
Investment securities and interest-bearing due from banks (2) 142,089
757
2.11 % 159,683
615
1.53 %
Federal funds and other 31,864
86
1.07 % 5,442
51
3.72 %
Total interest-earning assets 1,042,305
12,339
4.70 % 953,710
10,778
4.48 %
Noninterest-earning assets 96,147
66,735

Total assets $ 1,138,452
$ 1,020,445

Liabilities and Stockholders’ Equity
Interest-bearing demand deposits $ 153,838
$ 118
0.30 % $ 147,102
$ 73
0.20 %
Money market and savings deposits 329,933
519
0.62 % 268,307
283
0.42 %
Time deposits 311,668
736
0.94 % 312,889
709
0.90 %
Total interest-bearing deposits 795,439
1,373
0.68 % 728,298
1,065
0.58 %
Securities sold under agreement to repurchase 20,589
15
0.29 % 22,471
17
0.30 %
Federal Home Loan Bank advances and other borrowings 381
5
5.21 % 11,187
17
0.60 %
Total interest-bearing liabilities 816,409
1,393
0.68 % 761,956
1,099
0.57 %
Noninterest-bearing deposits 179,968
148,178

Other liabilities 5,978
6,194

Total liabilities 1,002,355
916,328

Stockholders’ equity 136,097
104,117

Total liabilities and stockholders’ equity $ 1,138,452
$ 1,020,445

Net interest income, taxable equivalent $ 10,946
$ 9,679

Interest rate spread (3) 4.02 % 3.91 %
Tax equivalent net interest margin (4) 4.17 % 4.03 %

Percentage of average interest-earning assets to average interest-bearing liabilities 127.67 % 125.17 %
Percentage of average equity to average assets 11.95 % 10.20 %
* Taxable equivalent basis

Table of Contents

Noninterest Income

The following table summarizes noninterest income by category (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Service charges on deposit accounts	$	1,009	$	770
Mortgage banking		1,139		584
Investment services		531		437
Insurance commissions		1,466		269
Interchange and debit card transaction fees, net		839		276
Other		707		482
Total noninterest income	$	5,691	$	2,818

First quarter of 2021 compared to 2020

Noninterest income increased by $2.9 million, or 102.0%, during the first quarter of 2021 compared to the same period in 2020. This quarterly change in total noninterest income primarily resulted from the following:

~~(1)~~●

~~Loans include nonaccrual loans. Loan fees included~~Increase in ~~loan income was $624~~service charges on deposit accounts of $239 thousand, ~~and $556 thousand for the quarters ended September 30, 2017 and 2016, respectively. Yields~~ related to ~~loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $5 thousand for~~ the ~~period ended September 30, 2017~~PFG acquisition, deposit growth and ~~$1 thousand for the period ended September 30, 2016.~~transaction volume;

~~(2)~~●

~~Yields related~~Increase in mortgage banking of $555 thousand, from increased volume due to ~~investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax~~low rate ~~of 34.0 percent. The taxable-equivalent adjustment was $17 thousand for the period ended September 30, 2017 and $13 thousand for the period ended September 30, 2016.~~environment;


~~(3)~~●	~~Net interest spread represents~~Increase in insurance commissions of $1.2 million, primarily from commissions of $815 thousand from the ~~difference between~~placement of life insurance policies and an insurance agency acquired in the ~~average yield on interest-earning assets and the average cost of interest-bearing liabilities.~~PFG acquisition;


~~(4)~~●	~~Net interest margin represents~~Increase in interchange and debit card transaction fees, net ~~interest income divided by average interest-earning assets.~~of $563 thousand, related to increased volume, deposit growth and the PFG acquisition: and

~~The first nine months of 2017 compared to 2016~~

Net interest income, taxable equivalent, improved to $31.1 million in the first nine months of 2017 from $28.5 million in the first nine months of 2016. The increase in net interest income was primarily due to increases in average loan balances and higher yields on securities. Average earning assets increased from $936.4 million in the first nine months of 2016 to $1,004.9 million in the first nine months of 2017. Over this period, average loan balances increased by $80.0 million primarily as a result of organic growth. In addition, average interest-bearing deposits increased by $38.6 million and average noninterest-bearing deposits increased $27.7 million, a result of organic growth combined with the acquired deposits. Net interest income to average assets of 3.81 percent in the first nine months of 2017 was up from 3.76 percent in the first nine months of 2016 due to increases in the net interest spread and higher interest earning assets to interest bearing liabilites. Net interest margin, taxable equivalent, was 4.13 percent in the first nine months of 2017, compared to 4.06 percent a year ago due to higher yields on earning assets and increases in the balances of noninterest bearing deposits. The yield on earning assets increased from 4.51 percent a year ago to 4.64 percent due to higher loan balances and higher yields on securities.

●

Increase in other of $225 thousand, primarily from the increase in cash surrender value of bank owned life insurance (“BOLI”) of $208 thousand from the additional BOLI purchased during the first quarter of 2021.

Noninterest Expense

The following table summarizes ~~the major components of net interest income and the related yields and costs for the periods presented.~~ noninterest expense by category (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Salaries and employee benefits	$	10,869	$	10,006
Occupancy and equipment		2,341		1,911
FDIC insurance		371		180
Other real estate and loan related expense		602		545
Advertising and marketing		190		198
Data processing and technology		1,379		1,008
Professional services		641		711
Amortization of intangibles		444		362
Merger related and restructuring expenses		103		2,096
Other		2,524		1,776
Total noninterest expense	$	19,464	$	18,793

Table of Contents

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Average Yield/ Average Yield/
Balance Interest * Cost* Balance Interest * Cost*
Assets
Loans (1) $ 838,388
$ 32,463
5.18 % $ 758,420
$ 29,450
5.19 %
Investment securities and interest-bearing due from banks (2) 147,411
2,141
1.94 % 171,356
2,023
1.58 %
Federal funds and other 19,089
237
1.66 % 6,655
165
3.31 %
Total interest-earning assets 1,004,888
34,841
4.64 % 936,431
31,638
4.51 %
Noninterest-earning assets 82,746
69,202

Total assets $ 1,087,634
$ 1,005,633

Liabilities and Stockholders’ Equity
Interest-bearing demand deposits $ 156,473
$ 326
0.28 % $ 150,495
$ 208
0.18 %
Money market and savings deposits 302,185
1,271
0.56 % 253,000
854
0.45 %
Time deposits 306,400
2,115
0.92 % 322,935
1,977
0.82 %
Total interest-bearing deposits 765,058
3,712
0.65 % 726,430
3,039
0.56 %
Securities sold under agreement to repurchase 19,732
47
0.32 % 21,155
49
0.31 %
Federal Home Loan Bank advances and other borrowings 3,744
32
1.14 % 15,311
91
0.79 %
Total interest-bearing liabilities 788,534
3,791
0.64 % 762,896
3,179
0.56 %
Noninterest-bearing deposits 162,525
134,777

Other liabilities 3,744
5,209

Total liabilities 954,803
902,882

Stockholders’ equity 132,831
102,751

Total liabilities and stockholders’ equity $ 1,087,634
$ 1,005,633

Net interest income, taxable equivalent $ 31,050
$ 28,459

Interest rate spread (3) 4.00 % 3.95 %
Tax equivalent net interest margin (4) 4.13 % 4.06 %

Percentage of average interest-earning assets to average interest-bearing liabilities 127.44 % 122.75 %
Percentage of average equity to average assets 12.21 % 10.22 %
* Taxable equivalent basis

First quarter of 2021 compared to 2020

Noninterest expense increased by $671 thousand, or 3.6%, in the first quarter of 2021 as compared to the same period in 2020. The quarterly increase in total noninterest expense primarily resulted from the following:

~~(1)~~●

~~Loans include nonaccrual loans. Loan fees included~~Increase in ~~loan income was $1.8 million~~salary and ~~$1.9 million for~~employee benefits of $863 thousand, due to the ~~first nine months ended September 30, 2017 and 2016, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate~~overall franchise growth, including the acquisition of ~~34.0 percent. The taxable-equivalent adjustment was $14 thousand for the period ended September 30, 2017 and $12 thousand for the period ended September 30, 2016.~~PFG;

~~(2)~~●

~~Yields related~~Increase in occupancy and equipment of $430 thousand, due to ~~investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate~~ongoing infrastructure and facilities added to accommodate growth in operations and the additional branches of ~~34.0 percent. The taxable-equivalent adjustment was $48 thousand for~~ the ~~period ended September 30, 2017 and $39 thousand for the period ended September 30, 2016.~~PFG acquisition;


~~(3)~~●	~~Net interest spread represents the difference between the average yield on interest-earning assets~~Increase in FDIC insurance of $191 thousand, related to asset growth stemming from our acquisition of PFG, deposit growth and ~~the average cost~~production of ~~interest-bearing liabilities.~~PPP loans.


~~(4)~~●	~~Net interest margin represents net interest income divided by average interest-earning assets.~~

~~Rate and Volume Analysis~~

Changes in net interest income are attributed to changes in average balances (volume change), changes in average rates (rate change), and, when applicable, changes in the number of days (days change) in the period presented (for earning assets and sources of funds on which interest is received or paid. Days change is calculated as change in days times current interest per day, volume change is calculated as change in volume times the previous rate, and rate change is change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is considered as a change in volume.

~~Third quarter of 2017 compared to 2016~~

Net interest income, taxable equivalent, increased by $1.3 million between the quarters ended September 30, 2017 and 2016. The following is an analysis of the changes in net interest income comparing the changes attributable to days those attributable to rates and those attributable to volumes (in thousands):

Three Months Ended September 30,
2017 Compared to 2016
Increase (decrease) due to
Rate
Volume Net
Interest-earning assets:
Loans (1) $ 361
$ 1,023
$ 1,384
Investment securities and interest-bearing due from banks (2) 210
(68 ) 142
Federal funds and other (213 ) 248
35
Total interest-earning assets 358
1,203
1,561

Interest-bearing liabilities:
Interest-bearing demand deposits 42
3
45
Money market and savings deposits 171
65
236
Time deposits 30
(3 ) 27
Total interest-bearing deposits 243
65
308
Securities sold under agreement to repurchase (1 ) (1 ) (2 )
Federal Home Loan Bank advances and other borrowings 4
(16 ) (12 )
Total interest-bearing liabilities 246
48
294
Net interest income $ 112
$ 1,155
$ 1,267

~~(1)~~

~~Loans include nonaccrual loans.Yields related~~Increase in data processing and technology of $371 thousand, primarily due to ~~loans exempt~~implementation of new contactless chip card and tier pricing adjustments from ~~income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $5 thousand for the period ended September 30, 2017~~our core system provider; and ~~$1 thousand for the period ended September 30, 2016.~~

~~(2)~~●

~~Yields related to~~Increase in other noninterest expenses of $748 thousand, primarily from an equity method investment ~~securities exempt from income taxes are stated on~~in a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $17 thousand for the period ended September 30, 2017 and $13 thousand for the period ended September 30, 2016.start-up fintech company.

~~The first nine months~~

Taxes

First quarter of ~~2017~~2021 compared to ~~2016~~

~~Net interest income, taxable equivalent, increased by $2.6 million between~~2020

In the first nine months ended September 30, 2017 and 2016. The following is an analysis of the changes in net interest income comparing the changes attributable to days those attributable to rates and those attributable to volumes (in thousands):

Nine Months Ended September 30,
2017 Compared to 2016
Increase (decrease) due to
Rate
Days Volume Net
Interest-earning assets:
Loans (1) $ 5
$ (108 ) $ 3,116
$ 3,013
Investment securities and interest-bearing due from banks (2) 409
(7 ) (284 ) 118
Federal funds and other (236 ) (1 ) 309
72
Total interest-earning assets 178
(116 ) 3,141
3,203

Interest-bearing liabilities:
Interest-bearing demand deposits 111
(1 ) 8
118
Money market and savings deposits 254
(3 ) 166
417
Time deposits 247
(7 ) (102 ) 138
Total interest-bearing deposits 612
(11 ) 72
673
Securities sold under agreement to repurchase 1
—
(3 ) (2 )
Federal Home Loan Bank advances and other borrowings 10
—
(69 ) (59 )
Total interest-bearing liabilities 623
(11 ) —
612
Net interest income $ (445 ) $ (105 ) $ 3,141
$ 2,591

~~(1)~~

Loans include nonaccrual loans. Loan fees included in loan income was $1.8 million and $1.9 million for the first nine months ended September 30, 2017 and 2016, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $14 thousand for the period ended September 30, 2017 and $12 thousand for the period ended September 30, 2016.


~~(2)~~	Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $48 thousand for the period ended September 30, 2017 and $39 thousand for the period ended September 30, 2016.

~~Noninterest Income~~

~~Third~~ quarter of ~~2017 compared to 2016~~

Noninterest income totaled $1.2 million in the third quarter of 2017, compared to $1.2 million in the third quarter of 2016. Noninterest income to average assets of 0.43 percent for the quarter was down from 0.47 percent in 2016 primarily due to losses instead of gains on the sale of foreclosed assets.

Three months ended September 30,
(Dollars in thousands) 2017 2016
Service charges and fees on deposit accounts $ 294
$ 296
Gain on sale of securities 144
18
Gain on sale of loans and other assets 224
287
Gain (loss) on sale of foreclosed assets (27 ) 131
Other noninterest income 585
472
Total noninterest income $ 1,220
$ 1,204

~~The first nine months of 2017 compared to 2016~~

Noninterest income totaled $3.4 million in the first nine months of 2017, compared to $3.2 million in the first nine months of 2016. Noninterest income to average assets of 0.42 percent was down from 0.43 percent in the first nine months of 2016 primarily due to higher losses on the sale of foreclosed assets. Charges and fees on deposit accounts were unchanged from a year ago. Gains on the sale of loans, which includes mortgage and SBA loans, were $910 thousand, up from $706 thousand a year ago.

Nine months ended September 30,
(Dollars in thousands) 2017 2016
Service charges and fees on deposit accounts $ 850
$ 851
Gain on sale of securities 143
200
Gain on sale of loans and other assets 910
706
Gain (loss) on sale of foreclosed assets (42 ) 185
Other noninterest income 1,543
1,294
Total noninterest income $ 3,404
$ 3,236

~~Noninterest Expense~~

~~Third quarter of 2017 compared to 2016~~

Noninterest expense totaled $9.5 million in the third quarter of 2017 compared to $8.0 million in the third quarter of 2016. Noninterest expense to average assets decreased from 3.13 percent a year ago to 3.33 percent in the quarter. The increase in noninterest expense compared to the prior year was primarily due to higher salary and employee benefit expenses and merger and conversion costs of $303 thousand for the third quarter of 2017, which is included in other operating expenses.

Three months ended September 30,
(Dollars in thousands) 2017 2016
Salaries and employee benefits $ 5,035
$ 4,312
Net occupancy and equipment expense 1,114
965
Depository insurance 102
153
Foreclosed assets 20
79
Advertising 177
179
Data processing 483
450
Professional services 472
559
Amortization of intangible assets 78
80
Service contracts 363
272
Other operating expenses 1,703
1,001
Total noninterest expense $ 9,547
$ 8,050

~~The first nine months of 2017 compared to 2016~~

Noninterest expense totaled $26.5 million in the first nine months of 2017 compared to $24.5 million in the first nine months of 2016. Noninterest expense to average assets increased from 3.24 percent a year ago to 3.26 percent in the during the period. The increase in noninterest expense compared to the prior year was primarily due higher salary and employee benefit expenses and merger and conversion costs merger and conversion costs of $723 thousand for the first nine months of 2017, which is included in other operating expenses.

Nine months ended September 30,
(Dollars in thousands) 2017 2016
Salaries and employee benefits $ 14,472
$ 13,293
Net occupancy and equipment expense 3,054
3,120
Depository insurance 316
440
Foreclosed assets 30
199
Advertising 471
537
Data processing 1,292
1,333
Professional services 1,483
1,565
Amortization of intangible assets 192
267
Service contracts 972
873
Other operating expenses 4,239
2,847
Total noninterest expense $ 26,521
$ 24,474

~~Taxes~~

~~Third quarter of 2017 compared to 2016~~

~~In the third quarter of 2017~~2021 income tax expense totaled ~~$882 thousand~~$2.7 million compared to ~~$947~~$664 thousand a year ago. The effective tax rate was approximately ~~37.0 percent a year ago~~21.5% in the first quarter of 2021 compared to ~~approximately 34.4 percent in the third quarter of 2017.~~

~~The first nine months of 2017 compared to 2016~~

~~In the first nine months of 2017 income tax expense totaled $2.6 million compared to $2.4 million~~19.6% a year ago. The higher effective tax rate ~~was approximately 36.6 percent a year ago~~for the first quarter of 2021 compared to ~~approximately 33.9 percent~~same quarter in 2020 was due to utilization of an NOL carryforward in March 2020 that was available as part of the ~~first nine months of 2017.~~

CARES Act.

Loan Portfolio ~~Composition~~

The Company had total net loans outstanding, including organic and purchased loans, of approximately ~~$866.3 million~~$2.47 billion at ~~September 30, 2017 and $808.3 million~~March 31, 2021 compared to $2.36 billion at December 31, ~~2016.~~2020. Loans secured by real estate, consisting of commercial orand residential property, are the principal component of our loan portfolio. We do not generally originate traditional long-term residential fixed rate mortgages for our portfolio but we do originate and hold traditional second mortgage residential real estate loans, adjustable rate mortgages and home equity lines of credit. Even if the principal purpose of the loan is not to finance real estate, when reasonable, we attempt to obtain a security interest in the real estate in addition to any other available collateral to increase the likelihood of ultimate repayment or collection of the loan.

Organic Loans

Our organic net loans, which excludes loans purchased through acquisitions, increased by ~~$87.8~~$142.8 million, or ~~14.3 percent,~~7.2%, from December 31, ~~2016,~~2020, to ~~$699.7~~$2.12 billion at March 31, 2021. Included in the growth was $119.5 million ~~at September 30, 2017 as we continue to originate well underwritten~~of PPP loans that were originated and funded during the first quarter of 2021 and offset by $82.0 million in forgiven PPP loans. ~~Our goal~~Total net deferred fees associated with the PPP loans originated during the first quarter of streamlining the credit process has improved our efficiency and is a competitive advantage in many of our markets. In addition, the overall business environment continues to rebound from recessionary conditions. Organic loans include loans which were originally purchased non-credit impaired loans but have been renewed since purchase.

2021 was approximately $5.6 million with $116 thousand accreted into income.

Purchased Loans

Purchased non-credit impaired loans, net of ~~$144.6~~$315.8 million at ~~September 30, 2017 were down~~March 31, 2021 decreased by $34.9 million from ~~$169.2 million at~~ December 31, ~~2016 as a result of loan payoffs and renewals.~~2020. Since December 31, ~~2016,~~2020, our net purchased credit impaired (“PCI”) loans, net decreased by ~~$5.2~~$3.0 million to ~~$22.0~~$28.8 million at ~~September 30, 2017.~~March 31, 2021. The ~~activity within the~~decrease in purchased ~~credit~~non-credit impaired loans ~~will be impacted by how quickly these~~and PCI loans ~~are resolved and/or our future acquisition activity.~~is related to maturities, paydowns and payoffs.

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The following tables summarize the composition of our loan portfolio for the periods presented ~~(dollars~~(dollars in thousands):

September 30, 2017
Organic
Loans Purchased
Non-Credit
Impaired Loans Purchased
Credit
Impaired Loans Total Amount % of
Gross
Total
Commercial real estate-mortgage $ 344,282
$ 90,136
$ 13,202
$ 447,620
51.4 %
Consumer real estate-mortgage 154,974
38,587
6,143
199,704
22.9 %
Construction and land development 92,381
4,255
1,576
98,212
11.3 %
Commercial and industrial 107,930
10,767
1,085
119,782
13.7 %
Consumer and other 5,546
815
—
6,361
0.7 %
Total gross loans receivable, net of deferred fees 705,113
144,560
22,006
871,679
100.0 %
Allowance for loan and lease losses (5,393 ) —
—
(5,393 )
Total loans, net $ 699,720
$ 144,560
$ 22,006
$ 866,286

December 31, 2016
Organic
Loans Purchased
Non-Credit
Impaired Loans Purchased
Credit
Impaired Loans Total Amount % of
Gross
Total
Commercial real estate-mortgage $ 297,689
$ 102,576
$ 14,943
$ 415,208
51.0 %
Consumer real estate-mortgage 135,923
42,875
9,004
187,802
23.1 %
Construction and land development 108,390
7,801
1,678
117,869
14.5 %
Commercial and industrial 68,235
15,219
1,568
85,022
10.5 %
Consumer and other 6,786
689
—
7,475
0.9 %
Total gross loans receivable, net of deferred fees 617,023
169,160
27,193
813,376
100.0 %
Allowance for loan and lease losses (5,105 ) —
—
(5,105 )
Total loans, net $ 611,918
$ 169,160
$ 27,193
$ 808,271


	March 31, 2021
			Purchased		Purchased
			Non-Credit		Credit				% of
	Organic		Impaired		Impaired		Total		Gross
	Loans		Loans		Loans		Amount		Total
Commercial real estate-mortgage	$	883,521	$	173,243	$	13,877	$	1,070,641	43.0	%
Consumer real estate-mortgage		315,709		107,180		9,597		432,486	17.4	%
Construction and land development		269,575		11,048		5,350		285,973	11.5	%
Commercial and industrial		662,337		23,370		303		686,010	27.6	%
Consumer and other		9,459		2,539		21		12,019	0.5	%
Total gross loans receivable, net of deferred fees		2,140,601		317,380		29,148		2,487,129	100.0	%
Allowance for loan losses		(16,411)	$	(1,583)		(376)		(18,370)
Total loans, net	$	2,124,190	$	315,797	$	28,772	$	2,468,759


	December 31, 2020
			Purchased		Purchased
			Non-Credit		Credit				% of
	Organic		Impaired		Impaired		Total		Gross
	Loans		Loans		Loans		Amount		Total
Commercial real estate-mortgage	$	807,913	$	188,940	$	16,123	$	1,012,976	42.5	%
Consumer real estate-mortgage		313,582		120,090		10,258		443,930	18.6	%
Construction and land development		259,622		13,105		5,348		278,075	11.7	%
Commercial and industrial		607,212		26,926		308		634,446	26.6	%
Consumer and other		9,250		3,539		27		12,816	0.5	%
Total gross loans receivable, net of deferred fees		1,997,579		352,600		32,064		2,382,243	100.0	%
Allowance for loan losses		(16,154)		(1,883)		(309)		(18,346)
Total loans, net	$	1,981,425	$	350,717	$	31,755	$	2,363,897

Loan Portfolio Maturities

The following table sets forth the maturity distribution of our loans at March 31, 2021, including the interest rate sensitivity for loans maturing after one ~~year.~~

Rate Structure for Loans
Maturing Over One Year

One Year
or Less

One through
Five Years

Over Five
Years
Total
Fixed
Rate

Floating
Rate
Commercial real estate-mortgage $ 39,118
$ 233,750
$ 174,752
$ 447,620
$ 273,157
$ 135,345
Consumer real estate-mortgage 21,869
87,451
90,384
199,704
98,305
79,530
Construction and land development 24,512
38,087
35,613
98,212
38,322
35,378
Commercial and industrial 27,234
64,464
28,084
119,782
80,608
11,940
Consumer and other 2,913
2,782
666
6,361
2,038
1,410
Total Loans $ 115,646
$ 426,534
$ 329,499
$ 871,679
$ 492,430
$ 263,603

year (in thousands):


									Rate Structure for Loans
									Maturing Over One Year
	One Year		One through		Over Five				Fixed		Floating
	or Less		Five Years		Years		Total		Rate		Rate
Commercial real estate-mortgage	$	108,966	$	465,687	$	495,988	$	1,070,641	$	751,532	$	210,143
Consumer real estate-mortgage		30,112		169,217		233,157		432,486		202,830		199,544
Construction and land development		51,168		129,351		105,454		285,973		109,451		125,354
Commercial and industrial		79,939		546,200		59,871		686,010		562,078		43,993
Consumer and other		4,491		6,861		667		12,019		7,149		379
Total Loans	$	274,676	$	1,317,316	$	895,137	$	2,487,129	$	1,633,040	$	579,413

Nonaccrual, Past Due, and Restructured Loans

Nonperforming loans as a percentage of total gross loans, net of deferred fees, was ~~0.14 percent~~0.25% as of ~~September 30, 2017, which was down from 0.26 percent~~March 31, 2021, and 0.24% as of December 31, ~~2016.~~2020, respectively. Total nonperforming assets as a percentage of total assets as of ~~September 30, 2017~~March 31, 2021 totaled ~~0.37 percent~~0.29% compared to ~~0.42 percent~~0.31% as of December 31, ~~2016.~~2020. Acquired PCI loans that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming ~~assets unless the pools are 90 days or greater past due.~~assets.

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The following table summarizes the ~~Company's~~Company’s nonperforming assets for the periods ~~presented.~~

(Dollars in thousands) September 30, 2017 December 31, 2016
Nonaccrual loans $ 1,260
$ 1,415
Accruing loans past due 90 days or more (1) 3
699
Total nonperforming loans 1,263
2,114
Foreclosed assets 2,888
2,386
Total nonperforming assets $ 4,151
$ 4,500

Restructured loans not included above $ 42
$ 166

~~(1) Balances include PCI loans past due 90 days or more that are grouped~~ presented (in ~~pools which accrue interest based on pool yields.~~

thousands):


	March 31,		December 31,
	2021		2020
Nonaccrual loans	$	4,739	$	5,633
Accruing loans past due 90 days or more		1,495		149
Total nonperforming loans		6,234		5,782
Other real estate owned		3,946		4,619
Total nonperforming assets	$	10,180	$	10,401
Restructured loans not included above	$	250	$	257

Potential Problem Loans

At ~~September 30, 2017~~March 31, 2021 potential problem loans amounted to approximately ~~$471 thousand~~$6.9 million or ~~0.05 percent~~0.29% of total loans outstanding. Potential problem loans, which are not included in nonperforming loans, represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the ~~borrower's~~borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Bank’s primary regulators for loans classified as substandard or worse, but not considered nonperforming loans.

COVID-19 Loan Modifications

As a result of the CARES Act, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. At March 31, 2021, the Company had 10 loans remaining under COVID-19 modifications that amounted to $1.7 million, or 0.07% of the total loans outstanding.

Allocation of the Allowance for Loan Losses

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio. Our provision for loan losses for the three months ended March 31, 2021, is $67 thousand compared to $3.2 million in the same period of 2020, a decrease of $3.1 million. The allowance for loan loss provision for the quarter ended March 31, 2020, increased due to the onset of the COVID-19 pandemic and related economic uncertainty. As of ~~September 30, 2017~~March 31, 2021, and December 31, ~~2016,~~2020, our allowance for loan losses was ~~$5.4~~$18.4 million and ~~$5.1~~$18.3 million, respectively, which we deemed to be adequate at each of the respective dates. ~~The increase in the allowance for loan losses in 2017 as compared to 2016 is the result of increases in the organic loan portfolio.~~ Our allowance for loan loss as a percentage of total loans ~~has decreased slightly from 0.63 percent~~was 0.74% at March 31, 2021 and 0.77% at December 31, ~~2016 to 0.62 percent at September 30, 2017. As a percentage of organic loans the allowance for loan losses decreased from 0.83 percent at December 31, 2016 to 0.76 percent at September 30, 2017.~~

2020.

Our purchased loans were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans will be accreted into income over the life of the loans. A provision for loan losses is recorded for any deterioration in these loans subsequent to the acquisition. As of ~~September 30, 2017~~March 31, 2021, the ~~balance~~notional balances on PCI loans was ~~$28.7~~$40.8 million while the carrying value was ~~$22.0~~$29.1 million. ~~These loans are subject to the same~~At March 31, 2021, there was an allowance methodology as our legacy portfolio. The calculated allowance is compared to the remaining fair value discount to determine if additional provisioning should be recognized. At September 30, 2017, there were no allowances on PCI ~~loans.~~

loans of $376 thousand.

The following table sets forth, based on our best estimate, the allocation of the allowance to types of loans ~~as of September 30, 2017 and December 31, 2016~~for the periods presented, and the percentage of loans in each category to total loans ~~(in~~(dollars in thousands):

September 30, 2017 December 31, 2016
Amount Percent Amount Percent
Commercial real estate-mortgage $ 2,543
47.2 % $ 2,369
46.4 %
Consumer real estate-mortgage 1,415
26.2 % 1,382
27.1 %
Construction and land development 565
10.5 % 717
14.0 %
Commercial and industrial 745
13.8 % 520
10.2 %
Consumer and other 125
2.3 % 117
2.3 %
Total allowance for loan losses $ 5,393
100.0 % $ 5,105
100.0 %

The increase in the overall allowance for loan losses is due to the increased balance of organic loans offset by improvements of our loan portfolio and the reduction of nonperforming loans and net charge-offs, which is largely influenced by the overall improvement in the economies in our market areas.


	March 31, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
Commercial real estate-mortgage	$	7,637	43.0	%	$	7,579	42.5	%
Consumer real estate-mortgage		3,308	17.4	%		3,471	18.6	%
Construction and land development		1,968	11.5	%		2,076	11.7	%
Commercial and industrial		5,347	27.6	%		5,107	26.6	%
Consumer and other		110	0.5	%		113	0.5	%
Total allowance for loan losses	$	18,370	100.0	%	$	18,346	100.0	%

The allocation by category is determined based on the loans individually assigned risk rating, if applicable, and environmental factors applicable to each category of loans. For impaired loans, those loans are reviewed for a specific

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allowance allocation. Specific valuation allowances related to impaired, non PCI, loans were approximately $4$237 thousand at December 31, ~~2016~~2020, compared to ~~$175~~$492 thousand at ~~September 30, 2017.~~

March 31, 2021.

Analysis of the Allowance for Loan Losses

The following is a summary of changes in the allowance for loan losses for the periods ~~ended September 30, 2017 and December 31, 2016~~presented including the ratio of the allowance for loan losses to total loans as of the end of each period ~~(in~~(dollars in thousands):

September 30, 2017 December 31, 2016
Balance at beginning of period $ 5,105
$ 4,354
Provision for loan losses 340
788
Charged-off loans:

Commercial real estate-mortgage —
—
Consumer real estate-mortgage (110 ) (102 )
Construction and land development —
(14 )
Commercial and industrial (18 ) (35 )
Consumer and other (106 ) (155 )
Total charged-off loans (234 ) (306 )
Recoveries of previously charged-off loans:

Commercial real estate-mortgage 8
45
Consumer real estate-mortgage 58
76
Construction and land development 10
22
Commercial and industrial 55
58
Consumer and other 51
68
Total recoveries of previously charged-off loans 182
269
Net charge-offs (52 ) (37 )
Balance at end of period $ 5,393
$ 5,105

Ratio of allowance for loan losses to total loans outstanding at end of period 0.62 % 0.63 %
Ratio of net charge-offs (recoveries) to average loans outstanding for the period 0.01 % — %


	Three Months Ended March 31,
	2021			2020
Balance at beginning of period	$	18,346		$	10,243
Provision for loan losses		67			3,200
Charged-off loans:
Commercial real estate-mortgage		—			—
Consumer real estate-mortgage		—			(2)
Construction and land development		—			—
Commercial and industrial		—			(8)
Consumer and other		(120)			(76)
Total charged-off loans		(120)			(86)
Recoveries of previously charged-off loans:
Commercial real estate-mortgage		3			2
Consumer real estate-mortgage		16			6
Construction and land development		—			2
Commercial and industrial		3			42
Consumer and other		55			22
Total recoveries of previously charged-off loans		77			74
Net loan charge-offs		(43)			(12)
Balance at end of period	$	18,370		$	13,431
Ratio of allowance for loan losses to total loans outstanding at end of period		0.74	%		0.63	%
Ratio of net loan charge-offs to average loans outstanding for the period		—	%		—	%

We assess the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon our evaluation of the loan portfolio, past loan loss experience, known and inherent risks in the portfolio, the views of the Bank’s regulators, adverse situations that may affect ~~the borrower's~~borrowers’ ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

~~Investment~~

Securities Portfolio

Our ~~investment~~securities portfolio, consisting primarily of Federal agency bonds, ~~mortgage-backed~~state and municipal securities, and ~~state and municipal~~mortgage-backed securities, amounted to fair values of ~~$115.5~~$250.9 million and ~~$129.4~~$215.6 million at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively. Our investments to assets ratio ~~decreased~~increased from ~~12.2 percent~~6.5% at December 31, ~~2016~~2020 to ~~10.2 percent~~7.1% at ~~September 30, 2017 as we reduced reinvestments when the five year treasury rate, and other fixed income investments of a similar term, fell during the quarter.~~March 31, 2021. Our ~~investment~~securities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income.

All of the Company’s securities are designated as available-for-sale.

The following table shows the amortized cost of the Company’s ~~investment securities. In the periods ended September 30, 2017 and December 31, 2016~~securities, all investment securities were classified as available for ~~sale.~~sale (in thousands):


	March 31,		December 31,
	2021		2020
U.S. Government-sponsored enterprises (GSEs)	$	73,905	$	30,526
Municipal securities		88,509		89,644
Other debt securities		26,019		25,019
Mortgage-backed securities		61,294		66,425
Total securities	$	249,727	$	211,614

Book Value of Investment Securities
(in thousands) September 30, 2017 December 31, 2016
U.S. Government agencies $ 16,217
$ 18,279
State and political subdivisions 8,341
8,182
Mortgage-backed securities 90,610
104,585
Other debt securities 973
—
Total securities $ 116,141
$ 131,046

Contractual Maturity of Investment Securities
September 30, 2017
(in thousands) Maturity By Years
1 or Less 1 to 5 5 to 10 Over 10 Total
Available for Sale

U.S. Government agencies $ 1,995
$ 11,000
$ 3,222
$ —
$ 16,217
State and political subdivisions 178
607
4,116
3,440
8,341
Mortgage-backed securities —
6,076
28,474
56,060
90,610
Other debt securities —
—
973
—
973
Total securities available for sale $ 2,173
$ 17,683
$ 36,785
$ 59,500
$ 116,141
Weighted average yield (1)
1.55 % 1.75 % 1.94 % 2.08 % 2.00 %

~~(1) Based on amortized cost, taxable equivalent basis~~

Remaining maturity:
(Dollars in thousands)
September 30,
2017
Three months or less $ 41,770
Three to six months 97,105
Six to twelve months 28,063
More than twelve months 12,745
Total $ 179,683

(in thousands).


	March 31,
	2021
Three months or less	$	32,161
Three to six months		26,770
Six to twelve months		36,117
More than twelve months		33,906
Total	$	128,954

Borrowings

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information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 – Borrowings and ~~the remainder consisted~~Line of ~~Federal Funds purchased. There was no long-term debt outstanding at September 30, 2017 or December 31, 2016.~~

Credit."

Capital Resources

The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Bank’s Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. At ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, our capital ratios, including our Bank’s capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank subsidiary. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary.

For more information regarding our capital, leverage and total capital ratios, see “Part I - Item 1. Consolidated Financial Statements - Note 13 - Regulatory Matters.”

Liquidity and Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. At ~~September 30, 2017,~~March 31, 2021, we had ~~$166.8~~$542.8 million of pre-approved but unused lines of credit and ~~$3.2~~$6.9 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions.

For more information regarding our off balance sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements - Note 9 – Commitments and Contingent Liabilities.”

Market Risk and Liquidity Risk Management

The Bank’s Asset Liability Management Committee (“ALCO”) is responsible for making decisions regarding liquidity and funding solutions based upon approved liquidity, loan, capital and investment policies. The ALCO must consider interest rate sensitivity and liquidity risk management when rendering a decision on funding solutions and loan pricing. To assist in this process the Bank has contracted with an independent third party to prepare quarterly reports that summarize several key asset-liability measurements. In addition, the third party will also provide recommendations to the Bank’s ALCO regarding future balance sheet structure, earnings and liquidity strategies. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management. ~~We do not believe there have been any material changes~~

Interest Rate Sensitivity

Interest rate sensitivity refers to the ~~Company’s~~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 deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. The primary measurements we use to help us manage interest rate sensitivity are an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.

Earnings Simulation Model We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from our dynamic interest rate forecast over the next 12 and 24 months, limits in the decline in net interest income are as follows:

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			Maximum Percentage Decline
			in Net Interest
			Income from the Budgeted
	Estimated % Change in Net		or Base Case
	Interest Income Over 12		Projection of Net Interest
	Months		Income
March 31, 2021:	Increase +	Decrease -	Next 12 Months
An instantaneous, parallel rate increase or decrease of the following at the beginning of the third quarter:
± 100 basis points	6.22%	(0.81)%	8%
± 200 basis points	12.66%	(1.23)%	14%

Economic Value of Equity Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.

To help monitor our related risk, we’ve established the following policy limits regarding simulated changes in our economic value of equity:


			Maximum
			Percentage
			Decline in
			Economic Value
			of Equity from
			the Economic
			Value of Equity
	Current Estimated Instantaneous		at Currently
	Rate Change		Prevailing
March 31, 2021:	Increase +	Decrease -	Interest Rates

Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
±100 basis points	5.29%	(7.48)%	10%
±200 basis points	9.26%	(8.03)%	15%

At March 31, 2021, our model results indicated that we were within these policy limits.

Liquidity Risk Management

The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan 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 ~~December 31, 2016~~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 payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.

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The Company has $4.9 million in investments that mature throughout the ~~period ended September 30, 2017.~~next 12 months. The Company also anticipates $16.7 million of principal payments from mortgage-backed securities over the same period. The Company also has unused borrowing capacity in the amount of $276.7 million available with the Federal Reserve, FHLB, several correspondent banks and a line of credit. With these sources of funds, the Company currently anticipates adequate liquidity to meet the expected obligations of its customers.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

This ~~Item~~item is not ~~applicable to smaller reporting companies.~~

required for a Smaller Reporting Company.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of ~~September 30, 2017~~March 31, 2021 (the “Evaluation Date”). Based on such evaluation, ~~such officers~~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 ~~in alerting them on a timely basis~~ to ~~material~~ensure that information ~~relating to SmartFinancial (including its consolidated subsidiaries)~~ required to be ~~included~~disclosed by SmartFinancial in ~~SmartFinancial’s periodic filings~~the reports that it files or submits under the Exchange ~~Act.~~

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, 2017~~March 31, 2021 that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

~~There are various claims and lawsuits in which~~

SmartFinancial, ~~is periodically involved incidental to the Bank’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.~~

~~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, ~~neither SmartFinancial nor SmartBank is involved in~~management does not expect the disposition of any ~~litigation that is expected~~of these matters to have a material adverse impact on ~~our~~the Company’s financial ~~position,~~condition, financial statements or results of operations, or cash flow. Management believes that any claims pending against SmartFinancial or SmartBank are without merit or that the ultimate liability, if any, resulting from such claims will not materially affect SmartBank’s financial condition or SmartFinancial’s consolidated financial position.

operations.

Item 1A. Risk Factors.

~~SmartFinancial, as a smaller reporting company, is not required~~

In addition to ~~provide~~ the other information ~~required~~set forth in this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in our Form 10-K for the year ended December 31, 2020. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this ~~Item.~~

report. Please be aware that these risks may change over time and other risks may prove to be important in the future. In addition, these risks may be heightened by the continued disruption and uncertainty resulting from COVID-19. There have been no material changes from the risk factors described in our Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)

Not applicable

(b)

Not applicable

(c)

Issuer Purchases of Registered Equity Securities

~~None.~~

On November 20, 2018, the Company announced that its board of directors has authorized a stock repurchase plan pursuant to which the Company may purchase up to $10.0 million in shares of the Company’s outstanding common stock. Stock repurchases under the plan will be made from time to time in the open market, at the discretion of the management of the Company, and in accordance with applicable legal requirements. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, amended, suspended, or discontinued at any time. As of March 31, 2021, we have purchased $5.5 million of the authorized $10.0 million and may purchase up to an additional $4.5 million in the Company’s outstanding common stock.

The following table summarizes the Company’s repurchase activity during the three months ended March 31, 2021.


					Maximum
					Number (or
					Approximate
					Dollar Value) of
					Shares That May
				Total Number of Shares	Yet Be Purchased
	Total Number of	Weighted		Purchased as Part of	Under the Plans
	Shares	Average Price Paid		Publicly Announced	or Programs (in
Period	Repurchased	Per Share		Plans or Programs	thousands)
January 1, 2021 to January 31, 2021	28,189	$	20.15	28,189	$	5,124
February 1, 2021 to February 28, 2021	31,421		20.37	31,421		4,484
March 1, 2021 to March 31, 2021	—		—	—		4,484
Total	59,610	$	20.26	59,610	$	4,484

Item 3. Defaults Upon Senior Securities.

None.

~~None.~~

Table of Contents

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

~~On October 31, 2017, SmartFinancial entered into a Loan Agreement (the “Loan Agreement”) with CapStar Bank (the “Lender”), providing for a revolving line~~

Table of ~~credit in an amount up to $15,000,000 (the “Revolving Line of Credit~~”). SmartFinancial borrowed $10,000,000 under the Revolving Line of Credit on October 31, 2017, with the borrowings to be used to fund a portion of the cash consideration payable in the merger with Capstone Bancshares, Inc. ("~~Bancshares") to holders of Bancshares Class A voting common stock and general corporate purposes. SmartFinancial may borrow and re-borrow under the Revolving Line of Credituntil January 15, 2019, after which time there can be no further advances under the Revolving Line of Credit. The Revolving Line of Credit will convert to a term loan (the “Term Loan”) on January 16, 2019.~~

Borrowings under the Revolving Line of Credit and the Term Loan will be subject to a floating interest rate of the Lender’s prime rate minus 0.25%, subject to a floor of 3.50%. Interest on the Revolving Line of Credit and the Term Loan will be payable quarterly in arrears on January 15, April 15, July 15, and October 15. Additionally, upon conversion of the Revolving Line of Credit to the Term Loan, SmartFinancial must pay quarterly principal amortization payments of $262,500 on each interest payment date in 2019, quarterly principal amortization payments of $287,500 on each interest payment date in 2020, quarterly principal amortization payments of $312,500 on each interest payment date in 2021, and quarterly principal amortization payments of $337,500 for the first three fiscal quarters in 2022. The scheduled principal amortization payments are based on the assumption that the Revolving Line of Credit is fully drawn at the time it converts to the Term Loan, and the required payments will be reduced on a pro-rata basis relative to the amount of the Revolving Line of Credit if the Revolving Line of Credit is not fully drawn at such time. The Term Loan will mature on October 15, 2022, at which time all outstanding amounts under the Loan Agreement will become due and payable.

~~In connection with entering into the Loan Agreement, SmartFinancial executed in favor of the Lender a Line of Credit Note (the “Line of Credit Note”) dated as of October 31, 2017.~~

The Loan Agreement contains customary representations, warranties and covenants for a revolving line of credit that converts to a term loan, including certain financial covenants and capital ratio requirements. Pursuant to the Loan Agreement, no financial institution subsidiary of SmartFinancial (a “~~Financial Institution Subsidiary~~”) may permit its non-performing assets to exceed 3.25% of its total assets at the end of a fiscal quarter. Each Financial Institution Subsidiary must not permit its Texas ratio (nonperforming assets divided by the sum of tangible equity plus the allowance for loan and lease losses) to exceed 35.00% at the end of a fiscal quarter and must not permit its liquidity ratio to be less than 9.00% at the end of a fiscal quarter (or less than 10.00% for two consecutive fiscal quarters). Each Financial Institution Subsidiary must not permit its return on average assets to be less than 0.45% at the end of a fiscal quarter through September 30, 2018, and not less than 0.50% at the end of a fiscal quarter from December 31, 2018 and thereafter. In addition, SmartFinancial will not permit its debt service coverage ratio to be less than 1.25:1.00 as of June 30 or December 31 of a fiscal year (commencing December 31, 2017).

The Loan Agreement contains customary and commercially reasonable events of default, such as non-payment, failure to perform any covenant or agreement, breach of any representation or warranty, failure to pay other material indebtedness, bankruptcy, insolvency, any ERISA event, any material judgment, any material adverse effect, any change in control, any failure to be insured by the FDIC or any action by a governmental or regulatory authority, etc. The Lender has the right to accelerate the indebtedness upon an event of default. Additionally, under the Loan Agreement, SmartFinancial may not, and may not permit any of its subsidiaries to, pay dividends on its stock if an event of default has occurred and is continuing or would be caused by such payment.

The obligations of SmartFinancial under the Loan Agreement are secured by a pledge of all of the capital stock of SmartBank pursuant to a Stock Pledge and Security Agreement dated as of October 31, 2017, between SmartFinancial and the Lender (the “~~Pledge Agreement~~”). In the event of a default by SmartFinancial under the Loan Agreement, the Lender may terminate the commitments made under the Loan Agreement, declare all amounts outstanding to be payable immediately, and exercise or pursue any other remedy permitted under the Loan Agreement or the Pledge Agreement or conferred upon the Lender by law.

The descriptions contained herein of the Loan Agreement, the Line of Credit Note, and the Pledge Agreement are qualified in their entirety by reference to the terms of such documents, which are attached as Exhibits 2.2, 2.3, and 2.4, respectively, to this Quarterly Report on Form 10-Q and are incorporated herein by reference.

Contents

Item 6. Exhibits


Exhibit No.		Description		Location
2.1		Agreement and Plan of Merger, dated ~~as of May 22, 2017, by and among SmartFinancial, Inc., SmartBank, Capstone Bancshares, Inc. and Capstone Bank~~⁽¹⁾⁺
~~2.2~~	~~Loan Agreement, dated as of October 31, 2017,~~April 13, 2021, by and between SmartFinancial, Inc. and ~~CapStar Bank+~~ Sevier County Bancshares, Inc.		Incorporated by reference to Exhibit 2.1 to Form 8-K filed April 14, 2021
~~2.3~~ 2.2	~~Stock Pledge and Security~~	Purchase Agreement, dated as of ~~October 31, 2017,~~May 2, 2021, by and ~~between~~among Warren Payne, G. Price Cooper, B. Wade West, Craig Phillipy, and SmartBank		Incorporated by reference to Exhibit 2.1 to Form 8-K filed May 3, 2021
3.1		Second Amended and Restated Charter of SmartFinancial, Inc. ~~and CapStar Bank~~		Incorporated by reference to Exhibit 3.3 to Form 8-K filed September 2, 2015
~~2.4~~ 3.2	~~Line~~	Second Amended and Restated Bylaws of ~~Credit Note, dated as of October 31, 2017, executed by~~ SmartFinancial, Inc. ~~in favor of CapStar Bank~~		Incorporated by reference to Exhibit 3.1 to Form 8-K filed October 26, 2015
31.1		Certification pursuant to Rule ~~13a-14(a)~~13a -14(a)/15d-14(a)		Filed herewith.
31.2		Certification pursuant to Rule ~~13a-14(a)~~13a -14(a)/15d-14(a)		Filed herewith.
32.1		Certification pursuant to 18 USC Section 1350 ~~- Sarbanes-Oxley~~-Sarbanes-Oxley Act of 2002		Furnished herewith.
32.2		Certification pursuant to 18 USC Section 1350 ~~- Sarbanes-Oxley~~-Sarbanes-Oxley Act of 2002		Furnished herewith.
101		Interactive Data Files (formatted as Inline XBRL)		Filed herewith.
104		Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101		Filed herewith

~~+ The Schedules~~

* Certain schedules and similar attachments have been omitted pursuant to Item ~~601(b)(2)~~601(a)(5) of Regulation ~~S-K~~


~~(1)~~	~~Incorporated herein by reference to Exhibit 2.1 to the Company's Form 8-k filed on May 23, 2017~~

S-K. The registrant will furnish a copy of any omitted schedule to the Securities and Exchange Commission upon request.

~~SIGNATURES~~

Table of Contents

~~In accordance with~~

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.
		~~SmartFinancial, Inc.~~
Date:	May 10, 2021
~~Date:~~	~~November 14, 2017~~		/s/ William Y. Carroll, Jr.
			William Y. Carroll, Jr.
			President and Chief Executive Officer
			(principal executive officer)

Date:	~~November 14, 2017~~ May 10, 2021		/s/ ~~Christopher Bryan Johnson~~Ronald J. Gorczynski
			~~Christopher Bryan Johnson~~ Ronald J. Gorczynski
			Executive Vice President and Chief Financial Officer
			(principal financial officer and accounting officer)



Title of each class	Trading symbol(s)	Name of Exchange on which Registered
Common Stock, par value $1.00	SMBK	The Nasdaq Stock Market



	Unaudited September 30, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	40,867,054		$	34,290,617
Interest-bearing deposits at other financial institutions	24,833,385			34,457,691
Federal funds sold	18,398,000			—
Total cash and cash equivalents	84,098,439			68,748,308

Securities available for sale	115,534,979			129,421,914
Restricted investments, at cost	6,080,700			5,627,950
Loans, net of allowance for loan losses of $5,392,606 at September 30, 2017 and $5,105,255 at December 31, 2016	866,286,380			808,271,003
Bank premises and equipment, net	33,777,723			30,535,594
Foreclosed assets	2,887,556			2,386,239
Goodwill and core deposit intangible, net	7,414,120			6,635,655
Cash surrender value of life insurance	11,483,915			1,320,723
Other assets	8,258,028			9,508,899
Total assets	$	1,135,821,840		$	1,062,456,285

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits	$	185,385,953		$	153,482,650
Interest-bearing demand deposits	156,953,397			162,702,457
Money market and savings deposits	306,357,476			274,604,724
Time deposits	311,490,253			316,275,340
Total deposits	960,187,079			907,065,171

Securities sold under agreement to repurchase	26,541,772			26,621,984
Federal Home Loan Bank advances and other borrowings	6,000,000			18,505,390
Accrued expenses and other liabilities	6,505,401			5,023,600
Total liabilities	999,234,252			957,216,145

Stockholders' equity:
Preferred stock - $1 par value; 2,000,000 shares authorized; None issued and outstanding as of 9/30/2017; 12,000 issued and outstanding in 2016.	—			12,000
Common stock - $1 par value; 40,000,000 shares authorized; 8,243,256 and 5,896,033 shares issued and outstanding in 2017 and 2016, respectively	8,243,256			5,896,033
Additional paid-in capital	107,064,832			83,463,051
Retained earnings	21,653,303			16,871,296
Accumulated other comprehensive loss	(373,803		)	(1,002,240		)
Total stockholders' equity	136,587,588			105,240,140

Total liabilities and stockholders' equity	$	1,135,821,840		$	1,062,456,285



	Unaudited Three Months Ended September 30,					Unaudited Nine Months Ended September 30,
	2017			2016		2017			2016
INTEREST INCOME
Loans, including fees	$	11,491,016		$	10,110,680	$	32,448,666		$	29,439,355
Securities and interest-bearing deposits at other financial institutions	739,905			601,815		2,092,948			1,984,041
Federal funds sold and other earning assets	86,267			50,981		237,213			164,218
Total interest income	12,317,188			10,763,476		34,778,827			31,587,614

INTEREST EXPENSE
Deposits	1,373,236			1,065,092		3,712,326			3,039,044
Securities sold under agreements to repurchase	15,054			16,614		46,593			48,353
Federal Home Loan Bank advances and other borrowings	4,769			17,165		31,925			91,714
Total interest expense	1,393,059			1,098,871		3,790,844			3,179,111
Net interest income before provision for loan losses	10,924,129			9,664,605		30,987,983			28,408,503
Provision for loan losses	30,000			260,567		340,482			616,543
Net interest income after provision for loan losses	10,894,129			9,404,038		30,647,501			27,791,960
NONINTEREST INCOME
Customer service fees	294,315			295,951		849,614			850,632
Gain on sale of securities	143,508			18,224		143,508			199,587
Gain on sale of loans and other assets	224,494			286,966		910,250			706,371
(Loss) gain on sale of foreclosed assets	(27,250		)	130,383		(42,314		)	184,626
Other noninterest income	584,621			472,300		1,543,018			1,294,318
Total noninterest income	1,219,688			1,203,824		3,404,076			3,235,534

NONINTEREST EXPENSES
Salaries and employee benefits	5,035,443			4,311,708		14,471,602			13,292,864
Net occupancy and equipment expense	1,113,542			965,159		3,054,594			3,120,234
Depository insurance	101,665			153,353		315,951			440,100
Foreclosed assets	19,928			78,988		30,449			199,419
Advertising	176,998			179,145		470,657			536,657
Data processing	483,411			450,289		1,291,969			1,333,082
Professional services	471,707			558,368		1,483,108			1,564,973
Amortization of intangible assets	78,057			79,761		191,705			266,467
Service contracts	363,114			271,921		971,648			873,160
Other operating expenses	1,703,338			1,000,924		4,239,594			2,846,886
Total noninterest expenses	9,547,203			8,049,616		26,521,277			24,473,842
Income before income tax expense	2,566,614			2,558,246		7,530,300			6,553,652
Income tax expense	881,745			947,354		2,553,293			2,402,267
Net income	1,684,869			1,610,892		4,977,007			4,151,385
Preferred stock dividends	—			270,000		195,000			752,000
Net income available to common stockholders	$	1,684,869		$	1,340,892	$	4,782,007		$	3,399,385

EARNINGS PER COMMON SHARE
Basic	$	0.20		$	0.23	$	0.60		$	0.58
Diluted	0.20			0.22		0.59			0.56

Weighted average common shares outstanding
Basic	8,234,783			5,834,520		7,994,661			5,820,834
Diluted	8,332,680			6,096,333		8,086,346			6,092,035
Dividends per share	—			—		—			—



	Preferred Shares		Common Shares	Preferred Stock			Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity

BALANCE, December 31, 2016	12,000		5,896,033	$	12,000		$	5,896,033	$	83,463,051		$	16,871,296		$	(1,002,240	)	$	105,240,140

Net income	—		—	—			—		—			4,977,007			—			4,977,007

Other comprehensive income	—		—	—			—		—			—			628,437			628,437

Issuance of common stock	—		1,840,000	—			1,840,000		31,094,676			—			—			32,934,676

Issuance of stock grants	—		1,511	—			1,511		30,280			—			—			31,791

Exercise of stock options	—		505,712	—			505,712		4,368,045			—			—			4,873,757

Cash dividend on preferred stock	—		—	—			—		—			(195,000		)	—			(195,000		)

Redemption of preferred stock	(12,000	)	—	(12,000		)	—		(11,988,000		)	—			—			(12,000,000		)

Restricted stock compensation expense	—		—	—			—		22,532			—			—			22,532

Stock compensation expense	—		—	—			—		74,248			—			—			74,248

BALANCE, September 30, 2017	—		8,243,256	$	—		$	8,243,256	$	107,064,832		$	21,653,303		$	(373,803	)	$	136,587,588



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Net income available to common shareholders	$	1,684,869	$	1,340,892	$	4,782,007	$	3,399,385
Weighted average common shares outstanding	8,234,783		5,834,520		7,994,661		5,820,834
Effect of dilutive stock options	97,897		261,813		91,685		271,201
Diluted shares	8,332,680		6,096,333		8,086,346		6,092,035
Basic earnings per common share	$	0.20	$	0.23	$	0.60	$	0.58
Diluted earnings per common share	$	0.20	$	0.22	$	0.59	$	0.56



	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government-sponsored enterprises (GSEs)	$	16,217	$	3	$	(309	)	$	15,911
Municipal securities	8,341		63		(41		)	8,363
Other debt securities	973		—		(35		)	938
Mortgage-backed securities	90,610		208		(495		)	90,323
	$	116,141	$	274	$	(880	)	$	115,535



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government-sponsored enterprises (GSEs)	$	18,279	$	8	$	(564	)	$	17,723
Municipal securities	8,182		16		(179		)	8,019
Mortgage-backed securities	104,585		185		(1,090		)	103,680
	$	131,046	$	209	$	(1,833	)	$	129,422



	As of September 30, 2017
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Government- sponsored enterprises (GSEs)	$	6,110	$	(113	)	$	7,804	$	(196	)	$	13,914	$	(309	)
Municipal securities	1,839		(18		)	1,305		(23		)	3,144		(41		)
Other debt securities	938		(35		)	—		—			938		(35		)
Mortgage-backed securities	32,389		(175		)	16,881		(320		)	49,270		(495		)
	$	41,276	$	(341	)	$	25,990	$	(539	)	$	67,266	$	(880	)



	As of December 31, 2016
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Government- sponsored enterprises (GSEs)	$	14,702	$	(564	)	$	—	$	—		$	14,702	$	(564	)
Municipal securities	6,368		(179		)	—		—			6,368		(179		)
Mortgage-backed securities	67,063		(690		)	8,948		(400		)	76,011		(1,090		)
	$	88,133	$	(1,433	)	$	8,948	$	(400	)	$	97,081	$	(1,833	)



	September 30, 2017								December 31, 2016
	PCI Loans		All Other Loans			Total			PCI Loans		All Other Loans			Total
Commercial real estate	$	13,202	$	434,418		$	447,620		$	14,943	$	400,265		$	415,208
Consumer real estate	6,143		193,561			199,704			9,004		178,798			187,802
Construction and land development	1,576		96,636			98,212			1,678		116,191			117,869
Commercial and industrial	1,085		118,697			119,782			1,568		83,454			85,022
Consumer and other	—		6,361			6,361			—		7,475			7,475
Total loans	22,006		849,673			871,679			27,193		786,183			813,376
Less: Allowance for loan losses	—		(5,393		)	(5,393		)	—		(5,105		)	(5,105		)
Loans, net	$	22,006	$	844,280		$	866,286		$	27,193	$	781,078		$	808,271



	September 30, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	434,300	$	192,628	$	96,089	$	118,570	$	6,361	$	847,948
Impaired loans	118		933		547		127		—		1,725
	434,418		193,561		96,636		118,697		6,361		849,673
PCI loans	13,202		6,143		1,576		1,085		—		22,006
Total	$	447,620	$	199,704	$	98,212	$	119,782	$	6,361	$	871,679



	September 30, 2017
	Commercial Real Estate		Consumer Real Estate			Construction and Land Development			Commercial and Industrial			Consumer and Other			Total
Beginning balance	$	2,369	$	1,382		$	717		$	520		$	117		$	5,105
Loans charged off	—		(110		)	—			(18		)	(106		)	(234		)
Recoveries of loans charged off	8		58			10			55			51			182
Provision (reallocation) charged to operating expense	166		85			(162		)	188			63			340
Ending balance	$	2,543	$	1,415		$	565		$	745		$	125		$	5,393



	September 30, 2017
	30-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Past Due and NonAccrual		PCI Loans		Current Loans		Total Loans
Commercial real estate	$	414	$	—	$	122	$	536	$	13,202	$	433,882	$	447,620
Consumer real estate	137		—		506		643		6,143		192,918		199,704
Construction and land development	—		—		547		547		1,576		96,089		98,212
Commercial and industrial	114		—		85		199		1,085		118,498		119,782
Consumer and other	31		3		—		34		—		6,327		6,361
Total	$	696	$	3	$	1,260	$	1,959	$	22,006	$	847,714	$	871,679



							For the nine months ended
	At September 30, 2017						September 30, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	118	$	124	$	—	$	149	$	7
Consumer real estate	309		314		—		398		11
Construction and land development	547		547		—		648		—
Commercial and industrial	42		42		—		44		2
Consumer and other	—		—		—		—		—
	1,016		1,027		—		1,239		20

Impaired loans with a valuation allowance:
Commercial real estate	—		—		—		—		—
Consumer real estate	624		649		100		499		24
Construction and land development	—		—		—		—		—
Commercial and industrial	85		85		75		103		3
Consumer and other	—		—		—		—		—
	709		734		175		602		27
Total impaired loans	$	1,725	$	1,761	$	175	$	1,841	$	47



							For the year ended
	At December 31, 2016						December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	119	$	119	$	—	$	1,311	$	73
Consumer real estate	821		849		—		2,334		100
Construction and land development	865		865		—		967		3
Commercial and industrial	46		46		—		47		4
Consumer and other	—		—		—		—		—
	1,851		1,879		—		4,659		180

Impaired loans with a valuation allowance:
Commercial real estate	—		—		—		—		—
Consumer real estate	—		—		—		—		—
Construction and land development	—		—		—		—		—
Commercial and industrial	164		243		4		306		70
Consumer and other	—		—		—		—		—
	164		243		4		306		70
Total impaired loans	$	2,015	$	2,122	$	4	$	4,965	$	250



		Pre-Modification Outstanding Recorded		Post-Modification Outstanding Recorded
December 31, 2016	Number of Contracts	Investment		Investment
Construction and land development	1	$	278	$	278
Commercial and industrial	1	$	164	$	164



	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
Accretable yield, beginning of period	$	8,475		$	10,209		$	8,950		$	10,216
Additions	—			—			—			—
Accretion income	(1,061		)	(661		)	(2,731		)	(1,876		)
Reclassification to accretable	134			174			743			1,511
Other changes, net	460			(334		)	1,046			(463		)
Accretable yield	$	8,008		$	9,388		$	8,008		$	9,388



	Number		Weighted Average Exercisable Price
Outstanding at December 31, 2016	717,524		$	10.57
Exercised	(505,712	)	9.64
Forfeited	(24,496	)	19.90
Outstanding at September 30, 2017	187,316		$	11.85



	Number		Weighted Average Exercisable Price
Outstanding at December 31, 2015	817,414		$	10.62
Exercised	(89,556	)	8.98
Forfeited	(10,334	)	28.49
Outstanding at December 31, 2016	717,524		$	10.57



	Options Outstanding			Options Exercisable
		Weighted- Average Remaining	Weighted- Average		Weighted- Average
Exercise	Number	Contractual	Exercise	Number	Exercise
Prices	Outstanding	Life	Price	Exercisable	Price
6.60	38,250	4.4 years	6.60	38,250	6.60
6.80	16,875	3.4 years	6.80	16,875	6.80
9.48	26,875	5.4 years	9.48	26,875	9.48
9.60	35,625	6.4 years	9.60	35,625	9.60
11.67	2,000	3.3 years	11.67	2,000	11.67
14.40	12,805	1.4 years	14.40	12,805	14.40
15.05	41,720	8.0 years	15.05	18,265	15.05
31.96	13,166	0.4 years	31.96	13,166	31.96
Outstanding, end of period	187,316	5.1 years	11.85	163,861	11.40



	Number		Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2016	47,970		$	12.31
Granted	—		—
Vested	(14,469	)	12.31
Forfeited/expired	(10,046	)	12.31
Nonvested at September 30, 2017	23,455		$	12.31



		~~Number~~
~~Balance at December 31, 2016~~		—
~~Granted~~		~~27,500~~
~~Forfeited~~		—
~~Vested~~		—
~~Balance at September 30, 2017~~		~~27,500~~



Commitments to extend credit	$	166.8	million
Standby letters of credit	$	3.2	million



	Balance as of September 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Debt securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	15,911	$	—	$	15,911	$	—
Mortgage-backed securities	90,323		—		90,323		—
Other debt securities	938		—		938		—
Municipal securities	8,363		—		8,363		—
Total securities available-for-sale	$	115,535	$	—	$	115,535	$	—



	Balance as of December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Debt securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	17,723	$	—	$	17,723	$	—
Mortgage-backed securities:	103,680		—		103,680		—
Municipal securities	8,019		—		8,019		—
Total securities available-for-sale	$	129,422	$	—	$	129,422	$	—



	Balance as of September 30, 2017		Valuation Technique	Significant Other Unobservable Input	Weighted Average of Input
Impaired loans	$	534	Appraisal	Appraisal Discounts	24.7	%
Foreclosed assets	2,888		Appraisal	Appraisal Discounts	19.3	%



	September 30, 2017				December 31, 2016
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	$	84,098	$	84,098	$	68,748	$	68,748
Securities available for sale	115,535		115,535		129,422		129,422
Restricted investments	6,081		N/A		5,628		N/A
Loans, net	866,286		855,882		808,271		803,057

Liabilities:
Noninterest-bearing demand deposits	185,386		185,386		153,483		153,483
Interest-bearing demand deposits	156,953		156,953		162,702		162,702
Money Market and Savings deposits	306,357		306,357		274,605		274,605
Time deposits	311,490		311,755		316,275		316,734
Securities sold under agreements to repurchase	26,542		26,542		26,622		26,622
Federal Home Loan Bank advances and other borrowings	6,000		6,000		18,505		18,505



Allocation of Purchase Price (amounts in thousands)
Total consideration in cash	$	1,183
Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents	133
Loans	24,073
Premises and equipment	2,839
Core deposit intangible	310
Prepaid and other assets	77
Deposits	(26,888		)
Payables and other liabilities	(21		)
Total fair value of net assets acquired	523
Goodwill	$	660



	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016
	Average				Yield/		Average				Yield/
	Balance		Interest *		Cost*		Balance		Interest *		Cost*
Assets
Loans (1)	$	868,352	$	11,496	5.25	%	$	788,585	$	10,112	5.09	%
Investment securities and interest-bearing due from banks (2)	142,089		757		2.11	%	159,683		615		1.53	%
Federal funds and other	31,864		86		1.07	%	5,442		51		3.72	%
Total interest-earning assets	1,042,305		12,339		4.70	%	953,710		10,778		4.48	%
Noninterest-earning assets	96,147						66,735
Total assets	$	1,138,452					$	1,020,445

Liabilities and Stockholders’ Equity
Interest-bearing demand deposits	$	153,838	$	118	0.30	%	$	147,102	$	73	0.20	%
Money market and savings deposits	329,933		519		0.62	%	268,307		283		0.42	%
Time deposits	311,668		736		0.94	%	312,889		709		0.90	%
Total interest-bearing deposits	795,439		1,373		0.68	%	728,298		1,065		0.58	%
Securities sold under agreement to repurchase	20,589		15		0.29	%	22,471		17		0.30	%
Federal Home Loan Bank advances and other borrowings	381		5		5.21	%	11,187		17		0.60	%
Total interest-bearing liabilities	816,409		1,393		0.68	%	761,956		1,099		0.57	%
Noninterest-bearing deposits	179,968						148,178
Other liabilities	5,978						6,194
Total liabilities	1,002,355						916,328
Stockholders’ equity	136,097						104,117
Total liabilities and stockholders’ equity	$	1,138,452					$	1,020,445

Net interest income, taxable equivalent			$	10,946					$	9,679
Interest rate spread (3)					4.02	%					3.91	%
Tax equivalent net interest margin (4)					4.17	%					4.03	%

Percentage of average interest-earning assets to average interest-bearing liabilities					127.67	%					125.17	%
Percentage of average equity to average assets					11.95	%					10.20	%
* Taxable equivalent basis



	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2016
	Average				Yield/		Average				Yield/
	Balance		Interest *		Cost*		Balance		Interest *		Cost*
Assets
Loans (1)	$	838,388	$	32,463	5.18	%	$	758,420	$	29,450	5.19	%
Investment securities and interest-bearing due from banks (2)	147,411		2,141		1.94	%	171,356		2,023		1.58	%
Federal funds and other	19,089		237		1.66	%	6,655		165		3.31	%
Total interest-earning assets	1,004,888		34,841		4.64	%	936,431		31,638		4.51	%
Noninterest-earning assets	82,746						69,202
Total assets	$	1,087,634					$	1,005,633

Liabilities and Stockholders’ Equity
Interest-bearing demand deposits	$	156,473	$	326	0.28	%	$	150,495	$	208	0.18	%
Money market and savings deposits	302,185		1,271		0.56	%	253,000		854		0.45	%
Time deposits	306,400		2,115		0.92	%	322,935		1,977		0.82	%
Total interest-bearing deposits	765,058		3,712		0.65	%	726,430		3,039		0.56	%
Securities sold under agreement to repurchase	19,732		47		0.32	%	21,155		49		0.31	%
Federal Home Loan Bank advances and other borrowings	3,744		32		1.14	%	15,311		91		0.79	%
Total interest-bearing liabilities	788,534		3,791		0.64	%	762,896		3,179		0.56	%
Noninterest-bearing deposits	162,525						134,777
Other liabilities	3,744						5,209
Total liabilities	954,803						902,882
Stockholders’ equity	132,831						102,751
Total liabilities and stockholders’ equity	$	1,087,634					$	1,005,633

Net interest income, taxable equivalent			$	31,050					$	28,459
Interest rate spread (3)					4.00	%					3.95	%
Tax equivalent net interest margin (4)					4.13	%					4.06	%

Percentage of average interest-earning assets to average interest-bearing liabilities					127.44	%					122.75	%
Percentage of average equity to average assets					12.21	%					10.22	%
* Taxable equivalent basis



	Three Months Ended September 30,
	2017				Compared to			2016
	Increase (decrease) due to
		Rate			Volume				Net
Interest-earning assets:
Loans (1)		$	361		$	1,023			$	1,384
Investment securities and interest-bearing due from banks (2)		210			(68		)		142
Federal funds and other		(213		)	248				35
Total interest-earning assets		358			1,203				1,561

Interest-bearing liabilities:
Interest-bearing demand deposits		42			3				45
Money market and savings deposits		171			65				236
Time deposits		30			(3		)		27
Total interest-bearing deposits		243			65				308
Securities sold under agreement to repurchase		(1		)	(1		)		(2		)
Federal Home Loan Bank advances and other borrowings		4			(16		)		(12		)
Total interest-bearing liabilities		246			48				294
Net interest income		$	112		$	1,155			$	1,267