United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September~~June 30, ~~2020~~2021



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

For the transition period from __________ to __________

Commission File Number: 001-37661

(Exact name of registrant as specified in its charter)



Tennessee		62-1173944
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5401 Kingston Pike, Suite 600 Knoxville, Tennessee		37919
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:



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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check market if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of ~~November 06, 2020,~~August 04, 2021, there were ~~15,235,227~~15,109,736 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)	3

	Consolidated Balance Sheets at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020	3

	Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	4

	Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	6

	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3839

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	54

PART II – OTHER INFORMATION		55

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5655

Item 3.	Defaults Upon Senior Securities	5655

Item 4.	Mine Safety Disclosures	56

Item 5.	Other Information	56

Item 6.	Exhibits	57

Table of Contents

PART I –FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share data)

(Unaudited)



September 30,

December 31,

2020

2019
ASSETS:




Cash and due from banks

$
63,884

$
33,205
Interest-bearing deposits with banks

411,625

127,329
Federal funds sold

66,306

23,437
Total cash and cash equivalents

541,815

183,971
Securities available-for-sale, at fair value

214,634

178,348
Other investments

14,829

12,913
Loans held for sale

11,292

5,856
Loans

2,404,057

1,897,392
Less: Allowance for loan losses

(18,817)

(10,243)
Loans, net

2,385,240

1,887,149
Premises and equipment, net

73,934

59,433
Other real estate owned

3,932

1,757
Goodwill and core deposit intangible, net

86,710

77,193
Bank owned life insurance

31,034

24,949
Other assets

24,168

17,554
Total assets

$
3,387,588

$
2,449,123

LIABILITIES AND SHAREHOLDERS' EQUITY:




Deposits:




Noninterest-bearing demand

$
669,733

$
364,155
Interest-bearing demand

534,128

380,234
Money market and savings

871,098

623,284
Time deposits

577,064

679,541
Total deposits

2,652,023

2,047,214
Borrowings

319,391

31,623
Subordinated debt

39,325

39,261
Other liabilities

27,060

18,278
Total liabilities

3,037,799

2,136,376
Shareholders' equity:




Preferred stock, $1 par value; 2,000,000 shares authorized; NaN shares issued and outstanding

0

0
Common stock, $1 par value; 40,000,000 shares authorized; 15,233,227 and 14,008,233 shares issued and outstanding, respectively

15,233

14,008
Additional paid-in capital

254,626

232,732
Retained earnings

78,918

65,839
Accumulated other comprehensive income

1,012

168
Total shareholders' equity

349,789

312,747
Total liabilities and shareholders' equity

$
3,387,588

$
2,449,123


	(Unaudited)
	June 30,		December 31,
	2021		2020*
ASSETS:
Cash and due from banks	$	59,305	$	50,460
Interest-bearing deposits with banks		544,095		364,846
Federal funds sold		70,115		66,413
Total cash and cash equivalents		673,515		481,719
Securities available-for-sale, at fair value		250,817		215,634
Other investments		14,584		14,794
Loans held for sale		4,334		11,721
Loans and leases		2,468,318		2,382,243
Less: Allowance for loan and lease losses		(18,310)		(18,346)
Loans and leases, net		2,450,008		2,363,897
Premises and equipment, net		72,314		72,682
Other real estate owned		2,499		4,619
Goodwill and other intangibles, net		90,966		86,471
Bank owned life insurance		72,013		31,215
Other assets		23,306		22,197
Total assets	$	3,654,356	$	3,304,949

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	807,560	$	685,957
Interest-bearing demand		702,470		649,129
Money market and savings		1,140,029		919,631
Time deposits		489,413		550,498
Total deposits		3,139,472		2,805,215
Borrowings		78,834		81,199
Subordinated debt		39,388		39,346
Other liabilities		23,269		22,021
Total liabilities		3,280,963		2,947,781
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding		0		0
Common stock, $1 par value; 40,000,000 shares authorized; 15,109,736 and 15,107,214 shares issued and outstanding, respectively		15,110		15,107
Additional paid-in capital		252,039		252,693
Retained earnings		103,906		87,185
Accumulated other comprehensive income		2,338		2,183
Total shareholders' equity		373,393		357,168
Total liabilities and shareholders' equity	$	3,654,356	$	3,304,949

* Derived from audited financial statements.

The accompanying notes are an integral part of the financial statements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019
Interest income:








Loans, including fees

$
28,621

$
25,515

$
83,718

$
75,768
Securities available-for-sale:




Taxable

546

748

1,813

2,591
Tax-exempt

364

338

1,064

1,173
Federal funds sold and other earning assets

327

743

1,206

2,059
Total interest income

29,858

27,344

87,801

81,591
Interest expense:








Deposits

2,897

5,605

11,016

16,644
Borrowings

334

15

674

250
Subordinated debt

584

584

1,751

1,757
Total interest expense

3,815

6,204

13,441

18,651
Net interest income

26,043

21,140

74,360

62,940
Provision for loan losses

2,634

724

8,683

1,914
Net interest income after provision for loan losses

23,409

20,416

65,677

61,026
Noninterest income:








Service charges on deposit accounts

892

767

2,370

2,129
Gain (loss) on sale of securities

(9)

1

6

34
Mortgage banking

1,029

518

2,544

1,192
Investment services

359

260

1,159

684
Insurance commissions

560

0

1,302

0
Interchange and debit card transaction fees

868

148

1,652

467
Merger termination fee

0

0

0

6,400
Other

422

502

1,417

1,405
Total noninterest income

4,121

2,196

10,450

12,311
Noninterest expense:








Salaries and employee benefits

11,032

9,072

31,395

26,357
Occupancy and equipment

2,186

1,635

6,093

4,967
FDIC insurance

534

(219)

894

140
Other real estate and loan related expense

643

335

1,535

1,067
Advertising and marketing

253

263

653

817
Data processing

558

273

1,689

1,465
Professional services

594

573

2,172

1,724
Amortization of intangibles

402

341

1,169

1,027
Software as service contracts

573

560

1,604

1,696
Merger related and restructuring expenses

290

73

3,863

2,792
Other

2,102

1,802

5,699

5,045
Total noninterest expense

19,167

14,708

56,766

47,097
Income before income tax expense

8,363

7,904

19,361

26,240
Income tax expense

1,968

1,941

4,059

6,425
Net income

$
6,395

$
5,963

$
15,302

$
19,815
Earnings per common share:








Basic

$
0.42

$
0.43

$
1.03

$
1.42
Diluted

0.42

0.42

$
1.02

$
1.41
Weighted average common shares outstanding:








Basic

15,160,579

13,955,859

14,903,757

13,949,325
Diluted

15,210,611

14,053,432

14,965,455

14,038,414


		Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Interest income:
Loans and leases, including fees	$	28,323	$	28,663	$	56,341	$	55,097
Securities available-for-sale:
Taxable		916		589		1,640		1,268
Tax-exempt		304		416		563		699
Federal funds sold and other earning assets		309		277		600		879
Total interest income		29,852		29,945		59,144		57,943
Interest expense:
Deposits		2,248		3,366		4,579		8,120
Borrowings		123		249		241		339
Subordinated debt		584		584		1,167		1,167
Total interest expense		2,955		4,199		5,987		9,626
Net interest income		26,897		25,746		53,157		48,317
Provision for loan and lease losses		(5)		2,850		62		6,049
Net interest income after provision for loan and lease losses		26,902		22,896		53,095		42,268
Noninterest income:
Service charges on deposit accounts		1,048		709		2,057		1,479
Gain on sale of securities		—		16		—		16
Mortgage banking		1,105		931		2,244		1,515
Investment services		567		363		1,098		801
Insurance commissions		557		473		2,023		742
Interchange and debit card transaction fees, net		922		508		1,761		784
Other		944		511		1,652		993
Total noninterest income		5,143		3,511		10,835		6,330
Noninterest expense:
Salaries and employee benefits		12,203		10,357		23,072		20,363
Occupancy and equipment		2,294		1,996		4,635		3,906
FDIC insurance		371		180		741		360
Other real estate and loan related expense		506		346		1,108		892
Advertising and marketing		230		202		419		400
Data processing and technology		1,509		1,155		2,889		2,163
Professional services		849		868		1,490		1,578
Amortization of intangibles		441		405		886		767
Merger related and restructuring expenses		372		1,477		475		3,573
Other		2,022		1,820		4,547		3,598
Total noninterest expense		20,797		18,806		40,262		37,600
Income before income tax expense		11,248		7,601		23,668		10,998
Income tax expense		2,470		1,427		5,134		2,091
Net income	$	8,778	$	6,174	$	18,534	$	8,907
Earnings per common share:
Basic	$	0.59	$	0.41	$	1.24	$	0.60
Diluted	$	0.58	$	0.41	$	1.23	$	0.60
Weighted average common shares outstanding:
Basic		15,003,657		15,152,768		15,007,593		14,773,935
Diluted		15,126,184		15,202,335		15,118,924		14,842,486

The accompanying notes are an integral part of the financial statements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019
Net income

$
6,395

$
5,963

$
15,302

$
19,815
Other comprehensive income:








Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period

77

(2,078)

2,980

3,383
Tax effect

(142)

543

(779)

(888)
Reclassification adjustment for realized gains (losses) included in net income

(9)

1

6

34
Tax effect

2

—

(2)

(9)
Unrealized gains (losses) on securities available-for-sale arising during the period, net of tax

(72)

(1,534)

2,205

2,520
Unrealized gains (losses) on fair value municipal security hedges

538

2,451

(1,843)

(70)
Tax effect

(46)

(643)

482

18
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax

492

1,808

(1,361)

(52)

Total other comprehensive income

420

274

844

2,468
Comprehensive income

$
6,815

$
6,237

$
16,146

$
22,283


	Three Months Ended				Six Months Ended
	June 30,				June 30,
		2021		2020	2021		2020
Net income	$	8,778	$	6,174	$	18,534	$	8,907
Other comprehensive income:
Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period		1,554		1,808		(1,255)		2,903
Tax effect		(401)		(394)		338		(638)
Reclassification adjustment for realized (gains) losses included in net income		—		16		—		16
Tax effect		—		(4)		—		(4)
Unrealized gains (losses) on securities available-for-sale arising during the period, net of tax		1,153		1,426		(917)		2,277
Unrealized gains (losses) on fair value municipal security hedges		139		691		1,451		(2,381)
Tax effect		(37)		(278)		(379)		528
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		102		413		1,072		(1,853)

Total other comprehensive income		1,255		1,839		155		424
Comprehensive income	$	10,033	$	8,013	$	18,689	$	9,331

The accompanying notes are an integral part of the financial statements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - (Unaudited)

For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~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, 2018

13,933,504

$
13,933

$
231,852

$
39,991

$
(2,765)

$
283,011
Net income

0

0

0

19,815

0

19,815
Other comprehensive gain

0

0

0

0

2,468

2,468
Common stock issued pursuant to:









Stock awards

3,298

3

61

0

0

64
Exercise of stock options

21,171

22

228

0

0

250
Stock compensation expense

0

0

432

0

0

432
Balance, September 30, 2019

13,957,973

$
13,958

$
232,573

$
59,806

$
(297)

$
306,040

Balance, December 31, 2019

14,008,233

$
14,008

$
232,732

$
65,839

$
168

$
312,747
Net income

0

0

0

15,302

0

15,302
Other comprehensive gain

0

0

0

0

844

844
Common stock issued pursuant to:











Exercise of stock options

27,858

28

254

0

0

282
Restricted stock, net of forfeitures

36,113

36

(36)

0

0

0
Shareholders of Progressive Financial Group, Inc.

1,292,578

1,293

23,254

0

0

24,547
Stock compensation expense

0

0

365

0

0

365
Common stock dividend ($0.15 per share)

0

0

0

(2,223)

0

(2,223)
Repurchase of common stock

(131,555)

(132)

(1,943)

0

0

(2,075)
Balance, September 30, 2020

15,233,227

$
15,233

$
254,626

$
78,918

$
1,012

$
349,789

Balance, June 30, 2019

13,953,209

$
13,953

$
232,386

$
53,843

$
(571)

$
299,611
Net income

0

0

0

5,963

0

5,963
Other comprehensive gain

0

0

0

0

274

274
Common stock issued pursuant to:












Exercise of stock options

4,764

5

33

0

0

38
Restricted stock

0

0

0

0

0

0
Stock compensation expense

0

0

154

0

0

154
Balance, September 30, 2019

13,957,973

$
13,958

$
232,573

$
59,806

$
(297)

$
306,040

Balance, June 30, 2020

15,216,932

$
15,217

$
254,396

$
73,283

$
592

$
343,488
Net income

0

0

0

6,395

0

6,395
Other comprehensive gain

0

0

0

0

420

420
Common stock issued pursuant to:












Exercise of stock options

12,500

12

92

0

0

104
Restricted stock

3,795

4

(4)

0

0

0
Stock compensation expense

0

0

142

0

0

142
Common stock dividends ($0.05 per share)

0

0

0

(760)

0

(760)
Repurchase of common stock

0

0

0

0

0

0
Balance, September 30, 2020

15,233,227

$
15,233

$
254,626

$
78,918

$
1,012

$
349,789


								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	—		—		—		8,907		—		8,907
Other comprehensive income	—		—		—		—		424		424
Common stock issued pursuant to:
Exercise of stock options	15,358		16		162		—		—		178
Restricted stock	32,318		32		(32)		—		—		—
Shareholders' of Progressive Financial Group, Inc.	1,292,578		1,293		23,254		—		—		24,547
Stock compensation expense	—		—		223		—		—		223
Common stock dividend ($0.10 per share)	—		—		—		(1,463)		—		(1,463)
Repurchases of common stock	(131,555)		(132)		(1,943)		—		—		(2,075)
Balance, June 30, 2020	15,216,932	$	15,217	$	254,396	$	73,283	$	592	$	343,488

Balance, December 31, 2020	15,107,214	$	15,107	$	252,693	$	87,185	$	2,183	$	357,168
Net income	—		—		—		18,534		—		18,534
Other comprehensive income	—		—		—		—		155		155
Common stock issued pursuant to:
Exercise of stock options	19,165		19		175		—		—		194
Restricted stock	42,967		43		(43)		—		—		—
Stock compensation expense	—		—		363		—		—		363
Common stock dividend ($0.12 per share)	—		—		—		(1,813)		—		(1,813)
Repurchases of common stock	(59,610)		(59)		(1,149)		—		—		(1,208)
Balance, June 30, 2021	15,109,736	$	15,110	$	252,039	$	103,906	$	2,338	$	373,393

Balance, March 31, 2020	15,221,990	$	15,222	$	254,356	$	67,869	$	(1,247)	$	336,200
Net income	—		—		—		6,174		—		6,174
Other comprehensive income	—		—		—		—		1,839		1,839
Common stock issued pursuant to:
Exercise of stock options	500		1		4		—		—		5
Restricted stock	418		—		—		—		—		—
Stock compensation expense	—		—		113		—		—		113
Common stock dividend ($0.05 per share)	—		—		—		(760)		—		(760)
Repurchases of common stock	(5,976)		(6)		(77)		—		—		(83)
Balance, June 30, 2020	15,216,932	$	15,217	$	254,396	$	73,283	$	592	$	343,488

Balance, March 31, 2021	15,104,536	$	15,105	$	251,836	$	96,034	$	1,083	$	364,058
Net income	—		—		—		8,778		—		8,778
Other comprehensive income	—		—		—		—		1,255		1,255
Common stock issued pursuant to:
Exercise of stock options	3,200		3		43		—		—		46
Restricted stock	2,000		2		(2)		—		—		—
Stock compensation expense	—		—		162		—		—		162
Common stock dividends ($0.06 per share)	—		—		—		(906)		—		(906)
Balance, June 30, 2021	15,109,736	$	15,110	$	252,039	$	103,906	$	2,338	$	373,393

The accompanying notes are an integral part of the financial statements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Nine Months Ended September 30,

2020

2019
Cash flows from operating activities:




Net income

$
15,302

$
19,815
Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization

4,437

3,296
Accretion of fair value purchase accounting adjustments, net

(3,689)

(4,337)
Provision for loan losses

8,683

1,914
Stock compensation expense

365

432
Gain from redemption and sale of securities available-for-sale

(6)

(34)
Deferred income tax expense

(37)

1,178
Increase in cash surrender value of bank owned life insurance

(526)

(415)
Loss on disposal of fixed assets

0

14
Net (gains) losses from sale of other real estate owned

142

(43)
Net gains from sale of loans

(2,544)

(1,192)
Origination of loans held for sale

(99,223)

(49,333)
Proceeds from sales of loans held for sale

96,330

49,435
Net change in:




Accrued interest receivable

(3,221)

(207)
Accrued interest payable

807

900
Other assets

1,850

(330)
Other liabilities

3,556

5,029
Net cash provided by operating activities

22,226

26,122
Cash flows from investing activities:




Proceeds from sales of securities available-for-sale

11,759

16,515
Proceeds from maturities and calls of securities available-for-sale

45,800

15,555
Proceeds from paydowns of securities available-for-sale

18,622

10,166
Purchases of securities available-for-sale

(81,893)

(6,074)
Purchases of other investments

(1,223)

(1,414)
Net increase in loans

(316,075)

(85,424)
Purchases of premises and equipment

(4,450)

(4,506)
Proceeds from sale of other real estate owned

875

1,395
Net cash and cash equivalents received from business combination

46,132

0
Net cash used in investing activities

(280,453)

(53,787)
Cash flows from financing activities:




Net increase in deposits

332,319

75,634
Net increase (decrease) in securities sold under agreements to repurchase

9

(7,388)
Proceeds from borrowings

338,340

145,176
Repayment borrowings

(50,581)

(130,959)
Cash dividends paid

(2,223)

0
Issuance of common stock

282

314
Purchase of common stock

(2,075)

0
Net cash provided by financing activities

616,071

82,777
Net change in cash and cash equivalents

357,844

55,112
Cash and cash equivalents, beginning of period

183,971

115,822
Cash and cash equivalents, end of period

$
541,815

$
170,934
Supplemental disclosures of cash flow information:




Cash paid during the period for interest

$
12,633

$
17,751
Cash paid during the period for income taxes

5,778

3,635
Noncash investing and financing activities:




Acquisition of real estate through foreclosure

971

417
Change in goodwill due to acquisitions

9,316

(473)
Initial recognition of operating lease right-of-use assets

484

2,344
Initial recognition of operating lease liabilities

484

2,344


	Six Months Ended June 30,
	2021		2020
Cash flows from operating activities:
Net income	$	18,534	$	8,907
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,132		2,788
Accretion of fair value purchase accounting adjustments, net		(2,397)		(2,729)
Provision for loan and lease losses		62		6,049
Stock compensation expense		363		223
Gain from redemption and sale of securities available-for-sale		—		(16)
Deferred income tax expense		147		209
Increase in cash surrender value of bank owned life insurance		(797)		(345)
Net losses from sale of other real estate owned		170		81
Net gains from mortgage banking		(2,244)		(1,515)
Origination of loans held for sale		(65,896)		(49,888)
Proceeds from sales of loans held for sale		75,528		50,929
Net change in:
Accrued interest receivable		1,309		(5,236)
Accrued interest payable		(218)		318
Other assets		(1,015)		(10,018)
Other liabilities		4,503		1,523
Net cash provided by operating activities		31,181		1,280
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		—		6,875
Proceeds from maturities and calls of securities available-for-sale		11,275		15,450
Proceeds from paydowns of securities available-for-sale		15,989		9,144
Proceeds from sales of other investments		290		—
Purchases of securities available-for-sale		(65,180)		(41,958)
Purchases of other investments		(80)		(1,223)
Purchases of bank owned life insurance		(40,000)		—
Net increase in loans and leases		(31,545)		(321,192)
Purchases of premises and equipment		(1,633)		(3,417)
Proceeds from sale of other real estate owned		1,662		406
Net cash (paid) received from business combination		(59,381)		46,132
Net cash used in investing activities		(168,603)		(289,783)
Cash flows from financing activities:
Net increase in deposits		334,410		220,128
Net decrease in securities sold under agreements to repurchase		(1,969)		(527)
Proceeds from borrowings		—		338,340
Repayment borrowings		(396)		(50,581)
Cash dividends paid		(1,813)		(1,463)
Issuance of common stock		194		178
Repurchases of common stock		(1,208)		(2,075)
Net cash provided by financing activities		329,218		504,000
Net change in cash and cash equivalents		191,796		215,497
Cash and cash equivalents, beginning of period		481,719		183,970
Cash and cash equivalents, end of period	$	673,515	$	399,467
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	6,205	$	9,308
Cash paid during the period for income taxes		7,720		2,948
Noncash investing and financing activities:
Acquisition of real estate through foreclosure		151		971
Change in goodwill due to acquisitions		2,723		8,532

The accompanying notes are an integral part of 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") is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the "Bank"). The Company provides a variety of financial services to individuals and corporate customers through its offices in East and Middle Tennessee, Alabama, and the Florida Panhandle. The Bank’s primary deposit products are noninterest-bearing and interest-bearing demand deposits, savings and money market deposits, and time deposits. Its primary lending products are commercial, residential, and consumer loans.

Basis of Presentation and Accounting Estimates:

The accounting and financial reporting policies of the Company and its wholly-owned subsidiary conform to U.S. generally accepted accounting principles (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements for the Company and its wholly-owned subsidiary have not been audited. All material intercompany balances and transactions have been eliminated.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired and liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company’s annual report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Recently Issued and Adopted Accounting Pronouncements:

AsIn 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 ~~January 1, 2020, the Company adopted ASU 2019-01,~~ ~~Leases: Codification Improvements~~ ~~(“ASU 2019-01”). ASU 2019-01 provides clarification to increase transparency and comparability among organizations by recognizing lease assets and~~deferred tax liabilities ~~on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value~~for outside basis differences. The new guidance also simplifies aspects of the ~~underlying asset reported by lessors~~accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Finally, it clarifies that single-member limited liability companies and similar disregarded entities that are not ~~manufacturers or dealers~~subject to ~~continue~~income tax are not required to ~~be its cost~~recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for interim and not fair value as measured under the fair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. The adoption ofannual reporting periods beginning after December 15, 2020. ASU ~~2019-01~~2019-12 did not have a material impact on the Company’s ~~consolidated financial statements.~~Consolidated Financial Statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, ~~2019~~2020 as filed in its Annual Report on Form 10-K with the Securities and Exchange Commission ("SEC"). The following is a summary of recent authoritative pronouncements issued but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In October 2019, the Financial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that ~~CECL~~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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

periods within those fiscal years. For calendar-year-end companies that are not SRCs, this will be January 1, 2020. The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations and the Company meets the regulations as an SRC.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

For ~~all~~SRCs and other entities, the Board decided that CECL will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The Company does not plan to adopt this standard early and being that the Company is an SRC, adoption is required for fiscal years beginning after December 15, 2022.

In ~~December 2019, the FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740)~~: Simplifying the Accounting for Income Taxes. The amendments in this update simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not plan to adopt this standard early and adoption should not have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”). It is intended to help stakeholders during the global market-wide reference rate transition period. The ~~guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The~~ Company is implementing a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the transition away from LIBOR for its loan and other financial instruments.

In August 2020, the SEC issued amendments to its disclosure rules to modernize the requirements in Regulation S-K, Item 101 on description of a business, Item 103 on legal proceedings, and Item 105 on risk factors. These amendments are intended to improve the readability of disclosures, reduce repetition, and eliminate immaterial information, thereby simplifying compliance for registrants and making disclosures more meaningful for investors. The amendments to the disclosure requirements related to a registrant’s description of its business and risk factors are intended to expand the use of a principles-based approach that gives registrants more flexibility to tailor disclosures. The amendments to the disclosure requirements related to legal proceedings continue to reflect the current, more prescriptive approach because those requirements depend less on a registrant’s specific characteristics. Further, additional human capital disclosures are required as part of the amendments to the description of the business. The final rule is effective on November 9, 2020, and the Company will incorporate these changes as part of our annual filing on Form 10-K.

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

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

●

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 Leases and Allowance for Loan and Lease 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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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 Leases and Allowance for Loan and Lease Lossesfor more information.

●

~~Mortgage Forbearance~~ - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. A multifamily borrower with a federally backed multifamily mortgage loan that was current as of February 1, 2020, and is experiencing financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.

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

●

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 Leases and Allowance for Loan and Lease Lossesfor 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.~~nonaccrual.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Company offered deferral options of: 1) three months deferral of payment and then three months of interest only, 2) three months of interest only, 3) three months deferral of payment, 4) six months of interest only. These modifications generally meet the criteria of both Section 4013 of the CARES Act and the joint interagency statement, and therefore, the Company does not account for such loan modifications as TDRs. On August 3, 2020, the Federal Financial Institutions Examination Council on behalf of its members (collectively “the FFIEC members”) issued a joint statement on additional loan accommodations related to COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. To be eligible, each loan modification must be (1) related to the COVID event; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The December 31, 2020 deadline was subsequently extended to January 1, 2022, by the CAA. All of the Company’s loan modifications granted under Section 4013 of the CARES Act are in compliance with the aforementioned FFIEC requirements. Accordingly, the Company does not account for such loan modifications as TDRs.

Reclassifications:

Certain captions and amounts in the ~~2019~~2020 consolidated financial statements were reclassified to conform to the ~~2020~~2021 financial statement presentation. These reclassifications had no impact on net income or shareholders’ equity as previously reported.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

~~Acquisition~~Fountain Leasing, LLC

On May 3, 2021, the Company completed the acquisition of Fountain Leasing, LLC, a Tennessee limited liability company, pursuant to the Purchase Agreement (the “Purchase Agreement”), dated May 2, 2021, by and among the Bank and the members of Fountain Leasing, LLC.

Following the closing of the acquisition, on May 4, 2021, the Company changed the name of Fountain Leasing, LLC to Fountain Equipment Finance, LLC (“Fountain”).

In connection with the acquisition, the Company acquired $54.1 million of assets and assumed $683 thousand of liabilities. Pursuant to the Purchase Agreement, the Company paid an aggregate amount of consideration to the Fountain members of $14.0 million in cash at closing, and the Company repaid approximately $45.8 million of Fountain’s indebtedness. In addition to the closing consideration, the Purchase Agreement contains a performance-based earnout, pursuant to which the former members of Fountain could be entitled to up to $6.0 million, which is excluded from consideration pursuant to ASC 805, in future cash payments from the Company based on future results of the acquired business over various periods through December 31, 2026. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $2.4 million, representing the intangible value of Fountains business and reputation within the markets it served. The goodwill recognized is expected to be deductible for income tax purposes. The Company established an intangible asset related to customer relationships of $2.7 million, amortizing sum-of-the-years digits over 96 months (8 years).

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


	As recorded		Fair value		Subsequent		As recorded
	by Fountain		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	413	$	—	$	—	$	413
Leases		54,945		(720)		—		54,225
Allowance for lease losses		(1,796)		1,796		—		—
Customer list intangible		—		2,658		—		2,658
Other repossessed assets		319		—		—		319
Other assets		233		—		—		233
Total assets acquired	$	54,114	$	3,734	$	—	$	57,848

Liabilities:
Payables and other liabilities		683		(229)		—		454
Total liabilities assumed		683		(229)		—		454
Excess of assets acquired over liabilities assumed	$	53,431
Aggregate fair value adjustments			$	3,963	$	—
Total identifiable net assets								57,394
Consideration transferred:
Cash								59,794
Total fair value of consideration transferred								59,794

Goodwill							$	2,400

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents additional information related to the purchased credit impaired financing leases (ASC 310-30) of the acquired lease portfolio at the acquisition date (in thousands):


	May 3, 2021
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest	$	6,018
Non-accretable differences		447
Cash flows expected to be collected		5,571
Accretable yield		649
Fair value	$	4,922

The following table discloses the impact of the merger with Fountain since the acquisition date through the three and six months June 30, 2021. The table also presents certain pro-forma information (net interest income plus total noninterest income (“Revenue”) and net income) as if the Fountain acquisition had occurred on January 1, 2020. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

Merger-related costs from the three and six months ended June 30, 2021, were $140 thousand for both periods and have been excluded from the pro-forma information presented below. The actual results and pro-forma information were as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	Revenue		Net Income		Revenue		Net Income
2021:
Actual Fountain results included in statement of income since acquisition date	$	1,137	$	345	$	1,137	$	345
Supplemental consolidation pro-forma as if Fountain had been acquired January 1, 2021		32,487		8,844		65,780		18,487

2020:
Supplemental consolidation pro-forma as if Fountain had been acquired January 1, 2020	$	30,659	$	6,434	$	57,451	$	9,530

Progressive Financial Inc.

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

In connection with the merger, the Company acquired ~~$301~~$301.0 million of assets and assumed ~~$272~~$272.1 million of liabilities. Pursuant to the Merger Agreement, each outstanding share of Progressive common stock was converted into and cancelled in exchange to the right to receive $474.82 in cash, and 62.3808 shares of SmartFinancial common stock. SmartFinancial issued 1,292,578 shares of SmartFinancial common stock and paid $9.8 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of ~~$9.3~~$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’s operating results for~~Company also established two intangible assets related to the ~~three and nine month periods ended September 30, 2020, include the operating results~~insurance agency acquired as part of the ~~acquired business for the period subsequent to the merger date~~PFG acquisition; 1.) Customer relationships of ~~March 1, 2020.~~

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

As recorded

Fair value

As recorded

by PFG

adjustments ⁽¹⁾

by the Company
Assets:






Cash & cash equivalents

$
55,971

$
0

$
55,971
Investment securities available-for-sale

27,054

203

27,257
Restricted investments

692

0

692
Loans

191,672

(3,691)

187,981
Allowance for loan losses

(2,832)

2,832

0
Premises and equipment, net

15,681

(2,919)

12,762
Bank owned life insurance

5,560

0

5,560
Deferred tax asset, net

0

1,173

1,173
Intangibles

0

1,370

1,370
Other real estate owned

3,695

(1,474)

2,221
Interest Receivable

1,061

(280)

781
Prepaids

375

(174)

201
Goodwill

231

(231)

0
Other assets

1,881

0

1,881
Total assets acquired

$
301,041

$
(3,191)

$
297,850

Liabilities:






Deposits

$
271,276

$
0

$
271,276
Time deposit premium

0

729

729
Payables and other liabilities

776

0

776
Total liabilities assumed

272,052

729

272,781
Excess of assets assumed over liabilities assumed

$
28,989




Aggregate fair value adjustments



$
(3,920)


Total identifiable net assets





25,069
Consideration transferred:






Cash





9,838
Common stock issued (1,292,578 shares)





24,547
Total fair value of consideration transferred





34,385

Goodwill





$
9,316

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

1112

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 acquired 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

The following table presents additional information related to the purchased credit impaired loans (ASC 310-30) of the acquired loan portfolio at the acquisition date (in thousands):


	March 1, 2020
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

The following table discloses the impact of the merger with PFG since the acquisition date through the three and nine month periods ended September 30, 2020. The table also presents certain pro-forma information (net interest income and noninterest income (“Revenue”) and net income) as if the PFG acquisition had occurred on January 1, 2019. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

Merger-related costs from the PFG acquisition for the three and nine month periods ended September 30, 2020, were $290 thousand and $3.9 million, respectively, have been excluded from the pro-forma information presented below. The actual results and pro-forma information were as follows ~~(in thousands)~~:

Three Months Ended

Nine Months Ended

September 30,

September 30,

Revenue

Net Income

Revenue

Net Income

2020:









Actual PFG results included in statement of income since acquisition date

$
3,029

$
1,228

$
7,189

$
2,707

Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019

30,163

6,609

87,852

17,887

2019:









Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019

$
27,409

$
8,989

$
87,464

$
20,868

Note 3. Earnings Per Share

Basic earnings per common share is computed by dividing net income available to common ~~stockholders~~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~~

1213

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

incremental shares from the assumed conversions for net income per share-basic and net income per share-diluted are presented below. There were ~~114~~0 antidilutive shares for the three and six months ended June 30, 2021. There were 116 thousand and 85 thousand antidilutive shares for the three and ~~nine month periods~~six months ended ~~September~~June 30, 2020, ~~respectively, and NaN for the three and nine month periods ended September 30, 2019.~~respectively.

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Basic earnings per share computation:
Net income available to common stockholders	$	6,395	$	5,963	$	15,302	$	19,815
Net income available to common shareholders									$	8,778	$	6,174	$	18,534	$	8,907
Average common shares outstanding – basic		15,160,579		13,955,859		14,903,757		13,949,325		15,003,657		15,152,768		15,007,593		14,773,935
Basic earnings per share	$	0.42	$	0.43	$	1.03	$	1.42	$	0.59	$	0.41	$	1.24	$	0.60
Diluted earnings per share computation:
Net income available to common stockholders	$	6,395	$	5,963	$	15,302	$	19,815
Net income available to common shareholders									$	8,778	$	6,174	$	18,534	$	8,907
Average common shares outstanding – basic		15,160,579		13,955,859		14,903,757		13,949,325		15,003,657		15,152,768		15,007,593		14,773,935
Incremental shares from assumed conversions:
Stock options and restricted stock		50,032		97,573		61,698		89,089		122,527		49,567		111,331		68,551
Average common shares outstanding - diluted		15,210,611		14,053,432		14,965,455		14,038,414		15,126,184		15,202,335		15,118,924		14,842,486
Diluted earnings per common share	$	0.42	$	0.42	$	1.02	$	1.41	$	0.58	$	0.41	$	1.23	$	0.60

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):


			Gross		Gross				June 30, 2021
	Amortized		Unrealized		Unrealized		Fair				Gross		Gross
	Cost		Gains		Losses		Value		Amortized		Unrealized		Unrealized		Fair
September 30, 2020:
									Cost		Gains		Losses		Value
U.S. Treasury									$	6,381	$	57	$	—	$	6,438
U.S. Government-sponsored enterprises (GSEs)	$	30,311	$	49	$	(150)	$	30,210		73,503		191		(1,074)		72,620
Municipal securities		88,864		1,948		(3)		90,809		86,720		2,188		—		88,908
Other debt securities		17,519		49		(66)		17,502		29,019		414		(82)		29,351
Mortgage-backed securities (GSEs)		74,424		1,938		(249)		76,113		52,430		1,201		(131)		53,500
Total	$	211,118	$	3,984	$	(468)	$	214,634	$	248,053	$	4,051	$	(1,287)	$	250,817


December 31, 2019:
									December 31, 2020
											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		Losses		Value
U.S. Government-sponsored enterprises (GSEs)	$	19,015	$	41	$	(56)	$	19,000	$	30,526	$	10	$	(6)	$	30,530
Municipal securities		63,792		618		(19)		64,391		89,644		2,345		—		91,989
Other debt securities		3,481		22		(33)		3,470		25,019		112		(13)		25,118
Mortgage-backed securities (GSEs)		91,531		382		(426)		91,487		66,425		1,754		(182)		67,997
Total	$	177,819	$	1,063	$	(534)	$	178,348	$	211,614	$	4,221	$	(201)	$	215,634

At ~~September~~June 30, ~~2020,~~2021 and December 31, ~~2019,~~2020, securities with a carrying value totaling approximately ~~$74.9~~$122.4 million and ~~$92.3~~$80.2 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

~~Table~~The Company has entered into various fair value hedging transactions to mitigate the impact of ~~Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

~~Proceeds from sale~~changing interest rates on the fair values of ~~securities~~ available for sale ~~gross~~securities. See Note 11 – Derivatives Financial Instruments for disclosure of the gains and ~~gross~~ losses recognized on ~~sales~~derivative instruments and ~~redemptions for~~ the ~~three and nine months ended September 30, 2020 and 2019 were as follows~~ ~~(in thousands)~~:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019
Proceeds from sales

$
4,884

$
-

$
11,759

$
16,515
Gross gains

$
17

$
-

$
43

$
35
Gross losses

$
(26)

$
-

$
(37)

$
(1)

Proceeds from redemptions

$
30,350

$
5,250

$
45,800

$
15,555

~~The amortized cost and estimated~~cumulative fair value hedging adjustments to the carrying amount of ~~securities at September 30, 2020, 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.~~

Amortized

Fair

Cost

Value
Due in one year or less

$
4,623

$
4,679
Due from one year to five years

5,009

5,025
Due from five years to ten years

26,195

26,386
Due after ten years

100,867

102,431

136,694

138,521
Mortgage-backed securities

74,424

76,113
Total

$
211,118

$
214,634

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

Less than 12 Months

12 Months or Greater

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
September 30, 2020:

U.S. Government-sponsored enterprises (GSEs)

$
20,985

$
(149)

5

$
140

$
(1)

1

$
21,125

$
(150)

6
Municipal securities

3,892

(3)

3

0

0

—

3,892

(3)

3
Other debt securities

3,980

(55)

2

973

(11)

1

4,953

(66)

3
Mortgage-backed securities (GSEs)

10,456

(114)

7

7,636

(135)

3

18,092

(249)

10
Total

$
39,313

$
(321)

17

$
8,749

$
(147)

5

$
48,062

$
(468)

22

December 31, 2019:

U.S. Government-sponsored enterprises (GSEs)

$
2,972

$
(43)

2

$
5,987

$
(13)

2

$
8,959

$
(56)

4
Municipal securities

3,656

(16)

4

527

(3)

1

4,183

(19)

5
Other debt securities

0

0

—

947

(33)

1

947

(33)

1
Mortgage-backed securities (GSEs)

13,208

(194)

10

19,988

(232)

31

33,196

(426)

41
Total

$
19,836

$
(253)

16

$
27,449

$
(281)

35

$
47,285

$
(534)

51

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 whichhedged securities.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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 September 30, 2020, 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 September 30, 2020, 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)~~:

September 30,

December 31,

2020

2019
Federal Reserve Bank stock

$
8,641

$
7,917
Federal Home Loan Bank stock

5,838

4,646
First National Bankers Bank stock

350

350
Total

$
14,829

$
12,913

Our restricted investments consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of September 30, 2020, the Company determined that there was no impairment on its other investments.

~~Note 5. Loans and Allowance for Loan Losses~~

~~Portfolio Segmentation:~~

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

September 30, 2020

December 31, 2019

PCI

All Other

PCI

All Other


Loans¹

Loans

Total

Loans¹

Loans

Total
Commercial real estate

$
16,469

$
1,014,182

$
1,030,651

$
15,255

$
890,051

$
905,306
Consumer real estate

10,801

429,509

440,310

6,541

410,941

417,482
Construction and land development

6,409

268,763

275,172

4,458

223,168

227,626
Commercial and industrial

317

644,181

644,498

407

336,668

337,075
Consumer and other

87

13,339

13,426

326

9,577

9,903
Total loans

34,083

2,369,974

2,404,057

26,987

1,870,405

1,897,392
Less: Allowance for loan losses

0

(18,817)

(18,817)

(156)

(10,087)

(10,243)

Loans, net

$
34,083

$
2,351,157

$
2,385,240

$
26,831

$
1,860,318

$
1,887,149

¹~~Purchased 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 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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

(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 in the following amounts: (1) five percent for loans of not more than $350,000; (2) three percent for loans of more than $350,000 and less than $2,000,000; and (3) one percent for loans of at least $2,000,000. These processing fees are accounted for as loan origination fees and recognized over the contractual loan term as a yield adjustment on the loans. PPP loans are included in the Commercial and Industrial loan class. As of September 30, 2020, the Company had approximately 2,950 PPP loans outstanding, with an outstanding principal balance of $300.8 million.

~~The composition of loans by loan classification for impaired and performing loan status is summarized in the tables below~~ ~~(in thousands)~~:

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Real Estate

Real Estate

Development

Industrial

and Other

Total
September 30, 2020:











Performing loans

$
1,013,631

$
428,514

$
268,763

$
643,581

$
13,339

$
2,367,828
Impaired loans

551

995

0

600

0

2,146

1,014,182

429,509

268,763

644,181

13,339

2,369,974
PCI loans

16,469

10,801

6,409

317

87

34,083
Total loans

$
1,030,651

$
440,310

$
275,172

$
644,498

$
13,426

$
2,404,057

December 31, 2019:












Performing loans

$
889,795

$
409,394

$
222,621

$
336,508

$
9,577

$
1,867,895
Impaired loans

256

1,547

547

160

0

2,510

890,051

410,941

223,168

336,668

9,577

1,870,405
PCI loans

15,255

6,541

4,458

407

326

26,987
Total loans

$
905,306

$
417,482

$
227,626

$
337,075

$
9,903

$
1,897,392

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Proceeds from sale of securities available for sale, gross gains and gross losses on sales and redemptions for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Proceeds from sales	$	-	$	4,760	$	-	$	6,875
Gross gains	$	-	$	16	$	-	$	16
Gross losses	$	-	$	-	$	-	$	-

Proceeds from maturities and calls	$	2,178	$	12,200	$	11,275	$	15,450

The amortized cost and estimated fair value of securities at June 30, 2021, by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	June 30, 2021
	Amortized		Fair
	Cost		Value
Due in one year or less	$	5,025	$	5,041
Due from one year to five years		4,039		4,058
Due from five years to ten years		66,493		67,152
Due after ten years		120,066		121,066
		195,623		197,317
Mortgage-backed securities		52,430		53,500
Total	$	248,053	$	250,817


	June 30, 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)	$	35,861	$	(1,071)	9	$	841	$	(3)	3	$	36,702	$	(1,074)	12
Municipal securities		—		—	—		—		—	—		—		—	—
Other debt securities		10,918		(82)	5		—		—	—		10,918		(82)	5
Mortgage-backed securities (GSEs)		36		—	1		9,862		(131)	6		9,898		(131)	7
Total	$	46,815	$	(1,153)	15	$	10,703	$	(134)	9	$	57,518	$	(1,287)	24


	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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Based on this evaluation, the Company concluded that any unrealized losses at June 30, 2021, represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of June 30, 2021, the Company does not intend to sell any of the securities, does not expect to be required to sell any of the securities, and expects to recover the entire amortized cost of all of the securities.

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


	June 30,		December 31,
	2021		2020
Federal Reserve Bank stock	$	8,316	$	8,606
Federal Home Loan Bank stock		5,918		5,838
First National Bankers Bank stock		350		350
Total	$	14,584	$	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 par value rather than recognizing temporary declines in value. As of June 30, 2021, the Company determined that there was 0 impairment on its other investments.

Note 5. Loans and Leases and Allowance for Loan and Lease Losses

Portfolio Segmentation:

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


	June 30, 2021						December 31, 2020
	PCI		All Other				PCI		All Other
	Loans and Leases¹		Loans and Leases		Total		Loans and Leases¹		Loans and Leases		Total
Commercial real estate	$	11,371	$	1,151,120	$	1,162,491	$	16,123	$	996,853	$	1,012,976
Consumer real estate		8,975		435,665		444,640		10,258		433,672		443,930
Construction and land development		5,265		295,439		300,704		5,348		272,727		278,075
Commercial and industrial		261		495,853		496,114		308		634,138		634,446
Leases		4,214		48,824		53,038		—		—		—
Consumer and other		16		11,315		11,331		27		12,789		12,816
Total loans and leases		30,102		2,438,216		2,468,318		32,064		2,350,179		2,382,243
Less: Allowance for loan and lease losses		(371)		(17,939)		(18,310)		(309)		(18,037)		(18,346)
Loans and leases, net	$	29,731	$	2,420,277	$	2,450,008	$	31,755	$	2,332,142	$	2,363,897

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

For purposes of the disclosures required pursuant to ASC 310, the loan and lease portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are 6 loan and lease portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, and consumer and other.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As previously mentioned in Note 1 – Presentation of Financial Information, the CARES Act established the PPP, administered directly by the SBA. The PPP provides loans of up to $10 million to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. PPP loans carry an interest rate of one percent, and a maturity of two or five years. These loans are fully guaranteed by the SBA and are not included in the Company’s loan and lease loss allowance calculations. The loans may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA pays the Company fees for processing PPP loans and the fees are accounted for as loan origination fees and recognized over the contractual loan term as a yield adjustment on the loans. At June 30, 2021, the net deferred fees outstanding for the 2020 PPP loans is $131 thousand and $6.5 million for the 2021 PPP loans, respectively. At December 31, 2020, the net deferred fees outstanding for the 2020 PPP loans is $4.2 million. PPP loans are included in the Commercial and Industrial loan segments. As of June 30, 2021, the Company had 2,015 PPP loans outstanding, with an outstanding principal balance of $178.9 million and as of December 31, 2020, the Company had 2,863 PPP loans outstanding, with an outstanding principal balance of $288.9 million.

The composition of loans and leases by loan classification for performing, impaired and PCI loan and leases status is summarized in the tables below (in thousands):


					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
June 30, 2021:
Performing loans and leases	$	1,150,261	$	433,218	$	295,439	$	495,645	$	48,824	$	11,315	$	2,434,702
Impaired loans and leases		859		2,447		—		208		—		—		3,514
		1,151,120		435,665		295,439		495,853		48,824		11,315		2,438,216
PCI loans and leases		11,371		8,975		5,265		261		4,214		16		30,102
Total loans and leases	$	1,162,491	$	444,640	$	300,704	$	496,114	$	53,038	$	11,331	$	2,468,318

December 31, 2020:
Performing loans and leases	$	992,982	$	432,356	$	272,727	$	633,992	$	—	$	12,789	$	2,344,846
Impaired loans and leases		3,871		1,316		—		146		—		—		5,333
		996,853		433,672		272,727		634,138		—		12,789		2,350,179
PCI loans and leases		16,123		10,258		5,348		308		—		27		32,064
Total loans and leases	$	1,012,976	$	443,930	$	278,075	$	634,446	$	—	$	12,816	$	2,382,243

The following tables show the allowance for loan and lease losses allocation by loan and lease classification for impaired, PCI, and performing ~~loans~~ (in thousands):


					Construction		Commercial				Consumer
	Commercial		Consumer		and Land		and				and
	Real Estate		Real Estate		Development		Industrial		Leases		Other		Total
June 30, 2021:
Performing loans and leases	$	7,965	$	3,096	$	2,061	$	4,021	$	—	$	100	$	17,243
Impaired loans and leases		417		71		—		208		—		—		696
		8,382		3,167		2,061		4,229		—		100		17,939
PCI loans and leases		—		156		—		213		—		2		371
Total loans and leases	$	8,382	$	3,323	$	2,061	$	4,442	$	—	$	102	$	18,310

December 31, 2020:
Performing loans and leases	$	7,579	$	3,267	$	2,076	$	4,768	$	—	$	110	$	17,800
Impaired loans and leases		—		116		—		121		—		—		237
		7,579		3,383		2,076		4,889		—		110		18,037
PCI loans and leases		—		88		—		218		—		3		309
Total loans and leases	$	7,579	$	3,471	$	2,076	$	5,107	$	—	$	113	$	18,346

Construction

Commercial

Consumer

Commercial

Consumer

and Land

and

and

Real Estate

Real Estate

Development

Industrial

Other

Total
September 30, 2020:

Performing loans

$
7,729

$
3,366

$
2,060

$
5,055

$
121

$
18,331
Impaired loans

0

78

0

408

0

486

7,729

3,444

2,060

5,463

121

18,817
PCI loans

0

0

0

0

0

0
Total loans

$
7,729

$
3,444

$
2,060

$
5,463

$
121

$
18,817

December 31, 2019:

Performing loans

$
4,491

$
2,159

$
1,127

$
1,766

$
69

$
9,612
Impaired loans

0

343

0

132

0

475

4,491

2,502

1,127

1,898

69

10,087
PCI loans

17

74

0

59

6

156
Total loans

$
4,508

$
2,576

$
1,127

$
1,957

$
75

$
10,243

~~The following tables detail the changes in the allowance for loan losses by loan classification~~ ~~(in thousands)~~:

Three Months Ended September 30, 2020

Consumer

Construction

Commercial

Commercial

Real

and Land

and

Consumer

Real Estate

Estate

Development

Industrial

and Other

Total
Beginning balance

$
6,595

$
3,313

$
1,795

$
4,443

$
108

$
16,254
Charged-off loans

0

(21)

0

(60)

(89)

(170)
Recoveries of charge-offs

11

17

0

55

16

99
Provision (reallocation) charged to expense

1,123

135

265

1,025

86

2,634
Ending balance

$
7,729

$
3,444

$
2,060

$
5,463

$
121

$
18,817

Three Months Ended September 30, 2019

Consumer

Construction

Commercial

Commercial

Real

and Land

and

Consumer

Real Estate

Estate

Development

Industrial

and Other

Total
Beginning balance

$
4,102

$
2,189

$
946

$
1,746

$
114

$
9,097
Charged-off loans

(36)

(1)

0

(20)

(50)

(107)
Recoveries of charge-offs

39

17

3

12

7

78
Provision (reallocation) charged to expense

155

65

94

410

0

724
Ending balance

$
4,260

$
2,270

$
1,043

$
2,148

$
71

$
9,792

Nine Months Ended September 30, 2020

Consumer

Construction

Commercial

Commercial

Real

and Land

and

Consumer

Real Estate

Estate

Development

Industrial

and Other

Total
Beginning balance

$
4,508

$
2,576

$
1,127

$
1,957

$
75

$
10,243
Loans charged-off

0

(23)

0

(77)

(231)

(331)
Recoveries of loans charged-off

16

34

2

103

67

222
Provision (reallocation) charged to expense

3,205

857

931

3,480

210

8,683
Ending balance

$
7,729

$
3,444

$
2,060

$
5,463

$
121

$
18,817

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables detail the changes in the allowance for loan and lease losses by loan and lease classification (in thousands):


	Nine Months Ended September 30, 2019												Three Months Ended June 30, 2021
			Consumer		Construction		Commercial								Consumer		Construction		Commercial
	Commercial		Real		and Land		and		Consumer				Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		and Other		Total		Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	3,639	$	1,789	$	795	$	1,746	$	306	$	8,275	$	7,636	$	3,309	$	1,968	$	5,347	$	—	$	110	$	18,370
Loans charged-off		(36)		(3)		0		(353)		(260)		(652)
Recoveries of loans charged-off		63		37		7		66		82		255
Provision (reallocation) charged to expense		594		447		241		689		(57)		1,914
Charged-off loans and leases														—		(60)		—		(4)		—		(89)		(153)
Recoveries of charge-offs														3		5		—		7		—		83		98
Provision charged to expense														743		69		93		(908)		—		(2)		(5)
Ending balance	$	4,260	$	2,270	$	1,043	$	2,148	$	71	$	9,792	$	8,382	$	3,323	$	2,061	$	4,442	$	—	$	102	$	18,310


	Three Months Ended June 30, 2020
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	5,963	$	3,301	$	1,484	$	2,557	$	—	$	126	$	13,431
Charged-off loans and leases		—		—		—		(9)		—		(66)		(75)
Recoveries of charge-offs		3		11		—		6		—		28		48
Provision charged to expense		629		1		311		1,889		—		20		2,850
Ending balance	$	6,595	$	3,313	$	1,795	$	4,443	$	—	$	108	$	16,254


	Six Months Ended June 30, 2021
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	7,579	$	3,471	$	2,076	$	5,107	$	—	$	113	$	18,346
Charged-off loans and leases		—		(60)		—		(4)		—		(209)		(273)
Recoveries of charge-offs		6		21		—		10		—		138		175
Provision charged to expense		797		(109)		(15)		(671)		—		60		62
Ending balance	$	8,382	$	3,323	$	2,061	$	4,442	$	—	$	102	$	18,310


	Six Months Ended June 30, 2020
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	4,508	$	2,576	$	1,127	$	1,957	$	—	$	75	$	10,243
Charged-off loans and leases		—		(2)		—		(17)		—		(142)		(161)
Recoveries of charge-offs		5		17		2		49		—		50		123
Provision charged to expense		2,082		722		666		2,454		—		125		6,049
Ending balance	$	6,595	$	3,313	$	1,795	$	4,443	$	—	$	108	$	16,254

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the ~~nine~~three and six months ended ~~September~~June 30, 2021, is ($5) thousand and $62 thousand, respectively, and $2.9 million $6.0 million, during the three and six months ended June 30, 2020, ~~is $8.7 million compared to $1.9 million in the same period of 2019, an increase of $6.8 million.~~respectively. As of ~~September~~June 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, our allowance for loan and lease losses was ~~$18.8~~$18.3 million, ~~and $10.2 million, respectively,~~ which we deemed to be adequate at each of the respective dates. The increase in the allowance for loan losses at September 30, 2020, as compared to December 31, 2019, is primarily attributable to the ongoing economic uncertainties related to the COVID-19 pandemic. Also, during 2020, the Company updated the Allowance for Loan Loss policy to increase the additional basis points allowed for the unallocated risk portion from 100 basis points to 125 basis points. In addition, the Company added a new qualitative factor based on the percentage of COVID modified loans / total loans. The qualitative factors were also expanded to provide additional granularity related to the hospitality and restaurant industries which are most impacted by the pandemic within our footprint. The changes in our economic factors and the addition of the COVID modified factors equated to an additional $8.3 million in reserve. Our allowance for loan ~~loss~~and lease losses as a percentage of total loans and leases was ~~0.78%~~0.74% at ~~September~~June 30, ~~2020~~2021 and ~~0.54%~~0.77% at December 31, ~~2019.~~2020.

~~The following tables outline the amount of each loan classification and the amount categorized into each risk rating~~ ~~(in thousands)~~:

September 30, 2020

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Non PCI Loans:

Real Estate

Real Estate

Development

Industrial

and Other

Total
Pass

$
666,865

$
394,794

$
247,424

$
619,308

$
13,004

$
1,941,395
Watch

336,122

32,578

21,269

23,655

294

413,918
Special mention

10,547

463

0

385

0

11,395
Substandard

648

1,588

70

728

17

3,051
Doubtful

0

86

0

105

24

215
Total

1,014,182

429,509

268,763

644,181

13,339

2,369,974

PCI Loans:

Pass


8,248


8,974


1,383


222


70


18,897
Watch

6,819

255

4,491

0

12

11,577
Special mention

19

56

0

0

0

75
Substandard

1,383

1,516

535

95

5

3,534
Doubtful

0

0

0

0

0

0
Total

16,469

10,801

6,409

317

87

34,083
Total loans

$
1,030,651

$
440,310

$
275,172

$
644,498

$
13,426

$
2,404,057

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2019

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Non PCI Loans:

Real Estate

Real Estate

Development

Industrial

and Other

Total
Pass

$
860,447

$
407,336

$
216,459

$
328,564

$
9,462

$
1,822,268
Watch

25,180

989

6,089

6,786

40

39,084
Special mention

4,057

738

0

1,033

0

5,828
Substandard

367

1,713

620

228

51

2,979
Doubtful

0

165

0

57

24

246
Total

890,051

410,941

223,168

336,668

9,577

1,870,405

PCI Loans:

Pass


12,473


5,258


902


41


300


18,974
Watch

2,234

38

3,556

0

13

5,841
Special mention

139

60

0

0

0

199
Substandard

409

1,185

0

366

13

1,973
Doubtful

0

0

0

0

0

0
Total

15,255

6,541

4,458

407

326

26,987
Total loans

$
905,306

$
417,482

$
227,626

$
337,075

$
9,903

$
1,897,392

The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating (in thousands):


	June 30, 2021
					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
Non PCI Loans and Leases:	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
Pass	$	1,109,079	$	431,122	$	295,119	$	490,144	$	48,824	$	11,241	$	2,385,529
Watch		37,077		1,637		243		5,087		—		49		44,093
Special mention		3,881		42		—		271		—		—		4,194
Substandard		1,083		2,864		77		306		—		25		4,355
Doubtful		—		—		—		45		—		—		45
Total		1,151,120		435,665		295,439		495,853		48,824		11,315		2,438,216

PCI Loans and Leases:
Pass		8,699		7,593		1,342		215		4,214		15		22,078
Watch		1,570		234		3,449		—		—		1		5,254
Special mention		17		57		—		—		—		—		74
Substandard		1,085		1,091		474		46		—		—		2,696
Doubtful		—		—		—		—		—		—		—
Total		11,371		8,975		5,265		261		4,214		16		30,102
Total loans and leases	$	1,162,491	$	444,640	$	300,704	$	496,114	$	53,038	$	11,331	$	2,468,318


	December 31, 2020
					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
Non PCI Loans and Leases:	Real Estate		Real Estate		Development		Industrial		Leases		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 and Leases:
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 and leases	$	1,012,976	$	443,930	$	278,075	$	634,446	$	—	$	12,816	$	2,382,243

Past Due ~~Loans:~~Loans and Leases:

A loan or lease is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan or lease agreement. Generally, management places a loan or lease on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan or lease is 90 days past due.

~~The following tables present an aging analysis of our loan portfolio~~ ~~(in thousands)~~:

September 30, 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

$
561

$
616

$
0

$
418

$
1,595

$
16,469

$
1,012,587

$
1,030,651
Consumer real estate

975

124

0

1,586

2,685

10,801

426,824

440,310
Construction and land development

10

0

0

0

10

6,409

268,753

275,172
Commercial and industrial

16

6

0

204

226

317

643,955

644,498
Consumer and other

70

522

0

40

632

87

12,707

13,426
Total

$
1,632

$
1,268

$
0

$
2,248

$
5,148

$
34,083

$
2,364,826

$
2,404,057

December 31, 2019


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

$
466

$
22

$
0

$
124

$
612

$
15,255

$
889,439

$
905,306
Consumer real estate

1,564

30

0

1,872

3,466

6,541

407,475

417,482
Construction and land development

507

0

607

620

1,734

4,458

221,434

227,626
Commercial and industrial

559

53

0

57

669

407

335,999

337,075
Consumer and other

86

14

0

70

170

326

9,407

9,903
Total

$
3,182

$
119

$
607

$
2,743

$
6,651

$
26,987

$
1,863,754

$
1,897,392

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables present an aging analysis of our loan and lease portfolio (in thousands):


	June 30, 2021
	30-60 Days		61-89 Days		Past Due 90				Total
	Past Due and		Past Due and		Days or More				Past Due and
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		PCI		Current		Total
Commercial real estate	$	—	$	—	$	—	$	859	$	859	$	11,371	$	1,150,261	$	1,162,491
Consumer real estate		258		13		—		2,676		2,947		8,975		432,718		444,640
Construction and land development		95		—		—		—		95		5,265		295,344		300,704
Commercial and industrial		1,346		296		64		138		1,844		261		494,009		496,114
Leases		45		40		—		—		85		4,214		48,739		53,038
Consumer and other		151		2		—		21		174		16		11,141		11,331
Total	$	1,895	$	351	$	64	$	3,694	$	6,004	$	30,102	$	2,432,212	$	2,468,318


	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
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		PCI		Current		Total
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
Leases		—		—		—		—		—		—		—		—
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

Impaired ~~Loans:~~Loans and Leases:

The following is an analysis of the impaired loan and lease portfolio, including PCI loans and leases, detailing the related allowance recorded (in thousands):

September 30, 2020

December 31, 2019

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance
Impaired loans without a valuation allowance:


















Commercial real estate

$
551

$
551

$
—

$
256

$
261

$
—
Consumer real estate

795

795

—

553

553

—
Construction and land development

0

0

—

547

547

—
Commercial and industrial

0

0

—

0

0

—
Consumer and other

0

0

—

0

0

—

1,346

1,346

—

1,356

1,361

—

Impaired loans with a valuation allowance:












Commercial real estate

0

0

0

0

0

0
Consumer real estate

200

200

78

994

994

343
Construction and land development

0

0

0

0

0

0
Commercial and industrial

600

600

408

160

160

132
Consumer and other

0

0

0

0

0

0

800

800

486

1,154

1,154

475
PCI loans:












Commercial real estate

0

0

0

17

99

17
Consumer real estate

1,852

2,113

0

1,205

1,371

74
Construction and land development

0

0

0

0

0

0
Commercial and industrial

279

242

0

396

534

59
Consumer and other

26

24

0

45

51

6

2,157

2,379

0

1,663

2,055

156

Total impaired loans

$
4,303

$
4,525

$
486

$
4,173

$
4,570

$
631


	June 30, 2021						December 31, 2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	—	$	—	$	—	$	3,871	$	3,872	$	—
Consumer real estate		2,186		2,187		—		888		888		—
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Leases		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—
		2,186		2,187		—		4,759		4,760		—
Impaired loans and leases with a valuation allowance:
Commercial real estate		859		859		417		—		—		—
Consumer real estate		261		264		71		428		428		116
Construction and land development		—		—		—		—		—		—
Commercial and industrial		208		208		208		146		146		121
Leases		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—
		1,328		1,331		696		574		574		237
PCI loans and leases:
Commercial real estate		—		—		—		—		—		—
Consumer real estate		1,201		1,332		156		1,827		2,086		88
Construction and land development		—		—		—		—		—		—
Commercial and industrial		261		231		213		270		234		218
Leases		—		—		—		—		—		—
Consumer and other		14		12		2		21		20		3
		1,476		1,575		371		2,118		2,340		309
Total impaired loans and leases	$	4,990	$	5,093	$	1,067	$	7,451	$	7,674	$	546

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended September 30,

2020

2019


Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

Impaired loans without a valuation allowance:









Commercial real estate

$
552

$
3

$
258

$
3

Consumer real estate

758

3

568

4

Construction and land development

0

0

701

3

Commercial and industrial

0

0

0

0

Consumer and other

0

0

0

0

1,310

6

1,527

10

Impaired loans with a valuation allowance:









Commercial real estate

198

0

0

0

Consumer real estate

440

4

396

4

Construction and land development

0

0

0

0

Commercial and industrial

379

2

352

1

Consumer and other

0

0

0

0

1,017

6

748

5

PCI loans:









Commercial real estate

8

0

2,520

0

Consumer real estate

1,869

38

1,151

0

Construction and land development

0

0

0

0

Commercial and industrial

305

2

0

0

Consumer real estate

27

0

0

0

2,209

40

3,671

0

Total impaired loans

$
4,536

$
52

$
5,946

$
15


	Nine Months Ended September 30,								Three Months Ended June 30,
	2020				2019				2021				2020
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	374	$	7	$	435	$	28	$	65	$	—	$	345	$	1
Consumer real estate		653		17		768		8		2,033		8		633		10
Construction and land development		289		0		637		5		—		—		304		—
Commercial and industrial		0		0		25		1		—		—		—		—
Leases										—		—		—		—
Consumer and other		0		0		14		1		—		—		—		—
		1,316		24		1,879		43		2,098		8		1,282		11
Impaired loans with a valuation allowance:
Impaired loans and leases with a valuation allowance:
Commercial real estate		198		2		12		1		2,007		2		396		—
Consumer real estate		712		18		248		6		360		3		827		5
Construction and land development		0		0		14		0		—		—		—		—
Commercial and industrial		269		7		498		10		159		3		158		3
Leases										—		—		—		—
Consumer and other		0		0		28		0		—		—		—		—
		1,179		27		800		17		2,526		8		1,381		8
PCI loans:
PCI loans and leases:
Commercial real estate		250		1		1,894		(10)		—		—		490		—
Consumer real estate		1,344		77		851		3		1,115		21		1,168		38
Construction and land development		58		0		0		0		—		—		116		—
Commercial and industrial		343		5		0		0		263		1		338		3
Leases										—		—		—		—
Consumer and other		29		0		0		0		16		—		22		—
		2,024		83		2,745		(7)		1,394		22		2,134		41

Total impaired loans	$	4,519	$	134	$	5,424	$	53
Total impaired loans and leases									$	6,018	$	38	$	4,797	$	60



	Six Months Ended June 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	1,334	$	1	$	315	$	4
Consumer real estate		1,651		20		606		14
Construction and land development		—		—		385		—
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
		2,985		21		1,306		18
Impaired loans and leases with a valuation allowance:
Commercial real estate		1,338		104		264		2
Consumer real estate		383		8		882		14
Construction and land development		—		—		—		—
Commercial and industrial		154		5		158		5
Leases		—		—		—		—
Consumer and other		—		—		—		—
		1,875		117		1,304		21
PCI loans and leases:
Commercial real estate		—		—		333		1
Consumer real estate		1,165		43		1,174		39
Construction and land development		—		—		77		—
Commercial and industrial		266		2		361		3
Leases		—		—		—		—
Consumer and other		18		—		31		—
		1,449		45		1,976		43
Total impaired loans and leases	$	6,309	$	183	$	4,586	$	82

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Troubled Debt Restructurings:

~~At September 30, 2020, and December 31, 2019,~~For the periods presented, impaired loans included loans that were classified as TDRs. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

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

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

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

As of ~~September~~June 30, ~~2020,~~2021 and December 31, ~~2019,~~2020, management had approximately $8$219 thousand and ~~$61~~$257 thousand, respectively, in loans that met the criteria for TDR, NaN of which were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current, and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

There ~~was 1 loan~~were 0 loans that ~~was~~were modified as a TDR during the ~~nine month period~~six months ended ~~September~~June 30, ~~2020,~~2021, and ~~0 loans were~~1 loan that was modified during the ~~nine month period~~six months ended ~~September~~June 30, ~~2019.~~2020. There were 0 loans that were modified as TDRs during the past ~~nine~~six months and for which there was a subsequent payment default.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid Relief and Economic Security (“CARES”) Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 Presentation of Financial Information for more information. At ~~September~~June 30, ~~2020,~~2021, the Company had ~~289~~0 loans remaining under COVID-19 ~~modifications that amounted to $232.5 million, or 9.7% of the total loans outstanding.~~modifications.

Foreclosure Proceedings and Balances:

As of ~~September~~June 30, ~~2020,~~2021, there was ~~only~~ 1 residential property secured by real estate included in other real estate owned and there ~~was one consumer mortgage loan collateralized by~~were 2 residential real estate ~~property that was~~loans totaling $103 thousand in the process of foreclosure.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Purchased Credit Impaired ~~Loans:~~Loans and Leases:

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


	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Commercial real estate	$	24,179	$	21,570	$	18,456	$	23,787
Consumer real estate		13,353		8,411		11,342		12,692
Construction and land development		1,910		5,394		858		1,812
Commercial and industrial		7,567		2,540		6,313		6,521
Leases						4,603		—
Consumer and other		199		504		94		161
Total loans		47,208		38,419
Total loans and leases						41,666		44,973
Less: Remaining purchase discount		(13,125)		(11,432)		(11,564)		(12,909)
Total loans, net of purchase discount		34,083		26,987
Less: Allowance for loan losses		0		(156)
Total loans and leases, net of purchase discount						30,102		32,064
Less: Allowance for loan and leases losses						(371)		(309)
Carrying amount, net of allowance	$	34,083	$	26,831	$	29,731	$	31,755

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Accretable yield, beginning of period	$	11,777	$	8,280	$	8,454	$	7,052	$	14,705	$	10,979	$	16,889	$	8,454
Additions		0		0		2,515		0		649		—		649		2,515
Accretion income		(1,267)		(1,073)		(4,401)		(3,353)		(1,098)		(1,057)		(3,029)		(3,134)
Reclassification		265		1,033		2,428		2,392		1,340		247		1,677		2,163
Other changes, net		7,405		390		9,184		2,539		(1,074)		1,608		(1,664)		1,779
Accretable yield, end of period	$	18,180	$	8,630	$	18,180	$	8,630	$	14,522	$	11,777	$	14,522	$	11,777

Note 6. Goodwill and Intangible Assets

In accordance with FASB ASC 350, Goodwill and Other, regarding testing goodwill for impairment provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company performs its annual goodwill impairment test as of December 31 of each year and at December 31, 2019, the results of the qualitative assessment provided no indication of potential impairment. Goodwill will continue to be monitored for triggering events that may indicate impairment prior to the next scheduled annual impairment test.year. Considering the recent economic conditions resulting from the COVID-19 pandemic ~~as of September 30, 2020,~~ the Company performed a Step 1 goodwill impairment test (which compares the fair value of a reporting unit with its carrying amount, including goodwill)~~. The~~ at December 31, 2020, the results indicated that there was ~~no impairment as of September 30, 2020.~~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,~~customer relationships and istradename. They are initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer ~~deposits.~~deposits, the customer relationships are amortized over a weighted average of 8.6 years and the tradename is amortized over five years.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands):


	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Goodwill:
Balance, beginning of period	$	65,614	$	66,087	$	74,135	$	65,614
Adjustment to values initially recorded for Acquisition of Foothills Bancorp, Inc.		0		(473)
Acquisition of PFG		8,302		0		323		8,521
Adjustment to values initially recorded for Acquisition of PFG		1,014		0
Acquisition of Fountain						2,400		—
Balance, end of the period	$	74,930	$	65,614	$	76,858	$	74,135


	September 30,		December 31,		Core Deposit		Customer Relationships		Tradename
Amortized other intangible assets:					Intangibles		Intangibles		Intangibles		Total
Beginning balance January 1, 2021, gross					$	15,920	$	1,064	$	63	$	17,047
Acquisition of Fountain						-		2,658		-		2,658
Balance, June 30, 2021, other intangible assets, gross						15,920		3,722		63		19,705
Less: accumulated amortization						(5,330)		(250)		(17)		(5,597)
Balance, June 30, 2021, other intangible assets, net					$	10,590	$	3,472	$	46	$	14,108
	2020		2019
Core deposit intangible:
Balance, beginning of period	$	14,550	$	14,550
Beginning balance January 1, 2020, gross					$	14,550	$	-	$	-	$	14,550
Acquisition of PFG		1,370		0		1,370		1,064		63		2,497
Balance, gross core deposit intangible		15,920		14,550
Balance, December 31, 2020, other intangible assets, gross						15,920		1,064		63		17,047
Less: accumulated amortization		(4,140)		(2,971)		(4,540)		(161)		(10)		(4,711)
Net core deposit intangible, net	$	11,780	$	11,579
Balance, December 31, 2020, other intangible assets, net					$	11,380	$	903	$	53	$	12,336

The aggregate amortization ~~of core deposit intangibles~~ expense for other intangible assets for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2020,~~2021 was ~~$402~~$441 thousand and ~~$1.2 million,~~$886 thousand, respectively, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~$341~~$405 thousand and ~~$1.0 million,~~$767 thousand, respectively.

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


Remainder of 2020	$	400
2021		1,570
Remainder of 2021			$	1,270
2022		1,526		2,238
2023		1,485		2,103
2024		1,456		1,981
2025				1,850
Thereafter		5,343		4,666
Total	$	11,780	$	14,108

Note 7. Borrowings, ~~and~~ Line of Credit and Subordinated Debt

Borrowings:

At ~~September~~June 30, ~~2020,~~2021, total borrowings were ~~$319.4~~$78.8 million compared to ~~$31.6~~$81.2 million at December 31, 2019. The $287.8 million increase was primarily due to borrowings from the Federal Reserve Bank Payroll Protection Program Liquidity Facility (“PPPLF”) of $237.8 million in the second quarter of 2020 and an increase in Federal Home Loan Bank (“FHLB”) borrowings of $50.0 million.2020. Borrowings consist of the following (dollars in thousands):


	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Securities sold under customer repurchase agreements	$	6,193	$	6,184	$	3,834	$	5,803
FHLB borrowings		75,000		25,000		75,000		75,000
PPPLF borrowings		237,780		—
Other borrowings		418		439		—		396
Total	$	319,391	$	31,623	$	78,834	$	81,199

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Securities Sold Under Agreements to Repurchase:

The Company had securities sold under agreements to repurchase with commercial checking customers which were secured by government agency securities. The carrying value of investment securities pledged as collateral under repurchase agreements was $5.6 million and $7.6 million at June 30, 2021 and December 31, 2020, respectively.

Line of Credit:

The Company has a Loan and Security Agreement and revolving note with ServisFirst Bank, pursuant to which ServisFirst Bank has made a $25.0 million revolving line of credit available to the Company. The maturity of the line of credit is September 24, 2021. At ~~September~~June 30, ~~2020,~~2021, there was 0 outstanding balance under the line of credit, and the entire amount of the line of credit remained available to the Company.

Subordinated Debit:

On September 28, 2018, the Company issued $40 million of 5.625% fixed-to-floating rate subordinated notes (the "Notes"), which was outstanding as of June 30, 2021 and December 31, 2020. Unamortized debt issuance cost was $612 thousand and $654 thousand at June 30, 2021 and December 31, 2020, respectively.

The Notes initially bears interest at a rate of 5.625% per annum from and including September 28, 2018, to but excluding October 2, 2023, with interest during this period payable semi-annually in arrears. From and including October 2, 2023, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month LIBOR, or an alternative rate determined in accordance with the terms of the Notes if three-month LIBOR cannot be determined, plus 255 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company, in whole or in part, on or after October 2, 2023, and at any time, in whole but not in part, upon the occurrence of certain events. The Notes have been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes.

The Notes debt issuance costs totaled $842 thousand and will be amortized through the Notes’ maturity date. Amortization expense totaled $21 thousand and $42 thousand for the three and six months ended June 30, 2021 and June 30, 2020, respectively.

Note 8. Employee Benefit Plans

401(k) Plan:

The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After 90 days of service the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The Company’s contribution to the Plan for the three and ~~nine month periods~~six months ending ~~September~~June 30, ~~2020,~~2021, was ~~$282~~$350 thousand and ~~$840~~$638 thousand, respectively. The Company’s contribution to the Plan for the three and ~~nine~~six months ~~periods~~ ending ~~September~~June 30, ~~2019,~~2020, was ~~$187~~$307 thousand and ~~$602~~$558 thousand, respectively.

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At ~~September~~June 30, ~~2020,~~2021, the Company had 1 active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which had ~~28,549~~18,811 rights issued and ~~1,878,894~~1,832,427 Rights available for future grants or awards.

In addition, the Company has 33,250 Rights issued from the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan, 41,250 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, 2019

136,658

$
10.29
Granted

0

0
Exercised

(27,858)

10.13
Forfeited

(3,485)

15.05
Outstanding at September 30, 2020

105,315

$
10.18

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Information pertaining to~~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 ~~options outstanding at September 30, 2020,~~option plans is ~~as follows:~~presented in the following table:


		Options Outstanding				Options Exercisable				Weighted
			Weighted-							Average
			Average	Weighted-			Weighted-			Exercisable
			Remaining	Average			Average		Number	Price
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	6.60	20,000	1.45 years	$	6.60	20,000	$	6.60
	6.80	13,250	0.42 years		6.80	13,250		6.80
	9.48	18,500	2.45 years		9.48	18,500		9.48
	9.60	22,750	3.25 years		9.60	22,750		9.60
	11.76	2,266	1.75 years		11.76	2,266		11.76
	15.05	28,549	4.83 years		15.05	28,549		15.05
Outstanding, end of period		105,315	2.81 years	$	10.18	105,315	$	10.18
Outstanding at December 31, 2020									99,617	$	10.19
Granted									—		—
Exercised									(19,040)		10.18
Forfeited									—		—
Outstanding at June 30, 2021									80,577	$	10.19

The Company did not recognize any stock option-based compensation expense during the three and ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, respectively, as all stock options issued are fully vested. ~~During the three and nine month periods ended September~~

Information pertaining to stock options outstanding at June 30, ~~2019, stock option-based compensation expense was $58 thousand and $122 thousand, respectively.~~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	0.70 years	$	6.60	19,250	$	6.60
	9.48	18,000	1.70 years		9.48	18,000		9.48
	9.60	22,250	2.50 years		9.60	22,250		9.60
	11.76	2,266	1.00 years		11.76	2,266		11.76
	15.05	18,811	4.00 years		15.05	18,811		15.05
Outstanding, end of period		80,577	2.20 years	$	10.19	80,577	$	10.19

The intrinsic value of options exercised during the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$75~~$27 thousand and ~~$141~~$220 thousand, ~~respectively. The intrinsic value of options exercised~~and $2 thousand and $66 thousand, during the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2019 was $53 thousand and $165 thousand,~~2020, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at ~~September~~June 30, ~~2020,~~2021, was ~~$401 thousand.~~$1.1 million. Cash received from options exercised under all share-based payment arrangements for the ~~nine month period~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$282~~$194 thousand.

NaN options vested during the ~~periods~~six months ended ~~September~~June 30, ~~2020,~~2021 and ~~2019,~~2020, respectively. The income tax expense/benefit recognized for the exercise of options during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, was ~~an expense of $3 thousand and~~ a benefit of ~~$19~~$8 thousand and $9 thousand, respectively, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was an expense of $2 thousand and a benefit of ~~$10 thousand and $37~~$22 thousand, respectively.

As of ~~September~~June 30, ~~2020,~~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.

~~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, 2019

67,000

$
20.54
Granted

18,000

15.19
Exercised

0

0
Forfeited

0

0
Outstanding at September 30, 2020

85,000

$
19.40

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Information pertaining to SARs outstanding at September 30, 2020, 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

3.25 years

$
15.19

—

$
—

18.12

21,000

2.25 years

18.12

—

—

21.61

34,000

1.25 years

21.61

—

—

21.72

12,000

0.25 years

21.72

12,000

21.72

Outstanding, end of period

85,000

1.78 years

$
19.40

12,000

$
21.72

SARs compensation expense of ($63) thousand and ($89) thousand was recognized for the three and nine month periods ended September 30, 2020, respectively, and ($7) thousand and $73 thousand for three and nine month periods ended September 30, 2019, respectively. The credit in expense for the three and nine month period ended September 30, 2020, and the three month period ended September 30, 2019, was due to adjustments related to the fair value evaluation of SARs.

Restricted Stock Awards:

A summary of the activity of the Company’s unvested restricted stock awards for the period ended ~~September~~June 30, ~~2020~~2021 is presented below:


		Weighted			Weighted
		Average			Average
		Grant-Date			Grant-Date
	Number	Fair Value		Number	Fair Value
Balance at December 31, 2019	65,400	$	21.04
Balance at December 31, 2020				100,218	$	19.07
Granted	41,613		16.04	50,967		20.23
Vested	(7,295)		18.32	(5,985)		22.29
Forfeited/expired	(1,500)		18.12	—		—
Balance at September 30, 2020	98,218	$	19.17
Balance at June 30, 2021				145,200	$	19.34

The Company measures the fair value of restricted stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. The compensation expense for restricted stock awards during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, was ~~$142~~$162 thousand and ~~$365~~$363 thousand, respectively, and was ~~$95~~$113 thousand and ~~$310~~$223 thousand, during the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. As of ~~September~~June 30, ~~2020,~~2021, there was ~~$1.1~~$1.7 million, respectively, of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of ~~3.10 years.~~2.99 years. The grant-date fair value of restricted stock awards vested was ~~$134~~$133 thousand for the ~~period~~six months ended ~~September~~June 30, ~~2020.~~2021.

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	(11,500)		21.61
Forfeited	(6,000)		18.00
Outstanding at June 30, 2021	77,500	$	19.19

Information pertaining to SARs outstanding at June 30, 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	16,000	2.50 years	$	15.19	—	$	—
	18.12	19,000	1.50 years		18.12	—		—
	20.70	20,000	3.51 years		20.70	—		—
	21.61	22,500	0.50 years		21.61	22,500		21.61
	Outstanding, end of period	77,500	1.94 years	$	19.19	22,500	$	21.61

SARs compensation expense of $64 thousand and $113 thousand was recognized for the three and six months ended June 30, 2021, respectively, and $92 thousand and ($26) thousand for the three and six months ended June 30, 2020. The credit in expense for the six months ended June 30, 2020, was due to adjustments related to the fair value evaluation of SARs.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9. Commitments and Contingent Liabilities

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized on the balance sheet. The majority of all commitments to extend credit are variable rate instruments while the standby letters of credit are primarily fixed rate instruments. The Company’s exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

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~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

A summary of the Company’s total contractual amount for all off-balance sheet commitments are as follows (in thousands):


	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Commitments to extend credit	$	468,447	$	384,411	$	640,269	$	476,841
Standby letters of credit		5,530		11,727		7,540		5,261

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At ~~September~~June 30, ~~2020,~~2021 and December 31, ~~2019,~~2020, the carrying amount of liabilities related to the Company’s obligation to perform under standby letters of credit was insignificant.

The Company is subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company will be material to the Company’s consolidated financial position. On an on-going basis, the Company assesses any potential liabilities or contingencies in connection with such legal proceedings. For those matters where it is deemed probable that the Company will incur losses and the amount of the losses can be reasonably estimated, the Company would record an expense and corresponding liability in its consolidated financial statements.

Note 10. Fair Value Disclosures

Determination of Fair Value:

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.

28Fair Value Hierarchy:

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~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

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

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

~~The 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)
September 30, 2020:



Assets:



Securities available-for-sale:



U.S. Government-sponsored enterprises (GSEs)

$
30,210

$
0

$
30,210

$
0
Municipal securities

90,809

0

90,809

0
Other debt securities

17,502

0

17,502

0
Mortgage-backed securities (GSEs)

76,113

—

76,113

0
Total securities available-for-sale

$
214,634

$
0

$
214,634

$
0

Liabilities:



Derivative financial instruments

$
6,791

$
0

$
6,791

$
0

December 31, 2019:








Assets:








Securities available-for-sale:








U.S. Government-sponsored enterprises (GSEs)

$
19,000

$
0

$
19,000

$
0
Municipal securities

64,391

0

64,391

0
Other debt securities

3,470

0

3,470

0
Mortgage-backed securities (GSEs)

91,487

0

91,487

0
Total securities available-for-sale

$
178,348

$
0

$
178,348

$
0

Liabilities:








Derivative financial instruments

$
3,446

0

$
3,446

0

~~During the nine month period ending September 30, 2020, there were 0~~ ~~transfers~~ ~~between~~ ~~Level 1~~ ~~and~~ ~~Level 2~~ ~~in the fair value hierarchy.~~

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Recurring Measurements of Fair Value:

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


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2021:
Assets:
Securities available-for-sale:
U.S. Treasury		6,438		—		6,438		—
U.S. Government-sponsored enterprises (GSEs)	$	72,620	$	—	$	72,620	$	—
Municipal securities		88,908		—		88,908		—
Other debt securities		29,351		—		29,351		—
Mortgage-backed securities (GSEs)		53,500		—		53,500		—
Total securities available-for-sale	$	250,817	$	—	$	250,817	$	—

Liabilities:
Derivative financial instruments	$	4,468	$	—	$	4,468	$	—

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 six months ending June 30, 2021, there were 0 transfers between Level 1 and Level 2 in the fair value hierarchy.

Securities available-for-sale - The fair value of U.S. Treasury, U.S. Government-sponsored enterprises, municipal securities, other debt securities and mortgage-backed securities, is estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2.

Derivative financial instruments - The fair value for derivative financial instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters. The derivative financial instruments are generally classified Level 2.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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):


			Quoted Prices in		Significant		Significant				Quoted Prices in		Significant		Significant
			Active Markets		Other		Other				Active Markets		Other		Other
			for Identical		Observable		Unobservable				for Identical		Observable		Unobservable
			Assets		Inputs		Inputs				Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020:
June 30, 2021:
Impaired loans	$	3,817	$	0	$	0	$	3,817	$	1,737	$	—	$	—	$	1,737
Other real estate owned		3,932		0		0		3,932		2,499		—		—		2,499

December 31, 2019:
December 31, 2020:
Impaired loans	$	2,185	$	0	$	0	$	2,185	$	2,455	$	—	$	—	$	2,455
Other real estate owned		1,757		0		0		1,757		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						Weighted
			Valuation	Significant Other	Average of				Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input		Fair Value		Technique	Unobservable Input	Input
September 30, 2020:
June 30, 2021:
Impaired loans	$	3,817	Appraisal	Appraisal discounts	11	%	$	1,737	Appraisal	Appraisal discounts	38	%
Other real estate owned		3,932	Appraisal	Appraisal discounts	23	%		2,499	Appraisal	Appraisal discounts	25	%

December 31, 2019:
December 31, 2020:
Impaired loans	$	2,185	Appraisal	Appraisal discounts	22	%	$	2,455	Appraisal	Appraisal discounts	9	%
Other real estate owned		1,757	Appraisal	Appraisal discounts	29	%		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.~~loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

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

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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										Fair Value Measurements Using
	Carrying								Estimated		Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value		Amount		Level 1		Level 2		Level 3		Fair Value
September 30, 2020:
June 30, 2021:
Assets:
Cash and cash equivalents	$	541,815	$	541,815	$	0	$	0	$	541,815	$	673,515	$	673,515	$	—	$	—	$	673,515
Securities available-for-sale		214,634		0		214,634		0		214,634		250,817		—		250,817		—		250,817
Other investments		14,829		N/A		N/A		N/A		N/A		14,584		N/A		N/A		N/A		N/A
Loans and loans held for sale		2,415,349		0		0		2,406,262		2,406,262
Loans and leases, net and loans held for sale												2,454,342		—		—		2,455,130		2,455,130

Liabilities:
Noninterest-bearing demand deposits		669,733		0		669,733		0		669,733		807,560		—		807,560		—		807,560
Interest-bearing demand deposits		534,128		0		534,128		0		534,128		702,470		—		702,470		—		702,470
Money market and savings deposits		871,098		0		871,098		0		871,098		1,140,029		—		1,140,029		—		1,140,029
Time deposits		577,064		0		581,389		0		581,389		489,413		—		492,243		—		492,243
Borrowings		319,391		0		315,340		0		315,340		78,834		—		79,847		—		79,847
Subordinated debt		39,325		0		0		33,644		33,644		39,388		—		—		41,302		41,302
Derivative financial instruments		6,791		0		6,791		0		6,791		4,468		—		4,468		—		4,468

December 31, 2019:
December 31, 2020:
Assets:
Cash and cash equivalents	$	183,971	$	183,971	$	0	$	0	$	183,971	$	481,719	$	481,719	$	—	$	—	$	481,719
Securities available-for-sale		178,348		0		178,348		0		178,348		215,634		—		215,634		—		215,634
Other investments		12,913		N/A		N/A		N/A		N/A		14,794		N/A		N/A		N/A		N/A
Loans, net and loans held for sale		1,893,005		0		0		1,879,825		1,879,825
Loans and leases, net and loans held for sale												2,375,618		—		—		2,377,581		2,377,581

Liabilities:
Noninterest-bearing demand deposits		364,155		0		364,155		0		364,155		685,957		—		685,957		—		685,957
Interest-bearing demand deposits		380,234		0		380,234		0		380,234		649,129		—		649,129		—		649,129
Money market and savings deposits		623,284		0		623,284		0		623,284		919,631		—		919,631		—		919,631
Time deposits		679,541		0		681,902		0		681,902		550,498		—		554,120		—		554,120
Borrowings		31,623		0		31,029		0		31,029		81,199		—		82,892		—		82,892
Subordinated debt		39,261		0		0		35,868		35,868		39,346		—		—		40,550		40,550
Derivative financial instruments		3,446		0		3,446		0		3,446		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.

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.

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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 Instruments

Derivatives designated as fair value hedges:

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

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

Weighted

Average

Balance

Remaining

Weighted

Balance

Remaining

Weighted

Sheet

Maturity

Average

Receive

Notional

Estimated

Sheet

Maturity

Average

Receive

Notional

Estimated

Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

September 30, 2020:

June 30, 2021:

Interest rate swap agreements - securities

Other liabilities

7.38

3.08

3 month LIBOR

36,000

(6,791)

Other liabilities

5.96

3.09

3 month LIBOR

36,000

(4,468)

December 31, 2019:

December 31, 2020:

Interest rate swap agreements - securities

Other liabilities

8.20

3.09

3 month LIBOR

36,000

(3,446)

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				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Interest income on tax-exempt securities	$	565	$	400	$	1,586	$	1,305	$	562	$	580	$	1,126	$	1,020
Effects of fair value hedge relationships		(201)		(62)		(522)		(132)		(258)		(164)		(563)		(321)
Reported interest income on tax-exempt securities	$	364	$	338	$	1,064	$	1,173	$	304	$	416	$	563	$	699

Three Months Ended

Nine Months Ended

September 30,

September 30,
Gain (loss) on fair value hedging relationship

2020

2019

2020

2019
Interest rate swap agreements - securities:








Hedged items

$
299

$
(1,045)

$
(3,345)

$
(3,282)
Derivative designated as hedging instruments

$
(299)

$
1,045

$
3,345

$
3,282


	Three Months Ended				Six Months Ended
	June 30,				June 30,
Gain (loss) on fair value hedging relationship	2021		2020		2021		2020
Interest rate swap agreements - securities:
Hedged items	$	(459)	$	(205)	$	1,706	$	(3,644)
Derivative designated as hedging instruments	$	459	$	205	$	(1,706)	$	3,644

3233

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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				Cumulative Amount of Fair
			Value Hedging Adjustment				Value Hedging Adjustment
	Carrying Amount		Included in Other Comprehensive		Carrying Amount		Included in Other Comprehensive
Line item on the balance sheet	of the Hedged Assets		Income		of the Hedged Assets		Income
September 30, 2020:
June 30, 2021:
Securities available-for-sale	$	43,643	$	(2,145)	$	43,580	$	1,072
December 31, 2019:
December 31, 2020:
Securities available-for-sale	$	42,710	$	3,446	$	44,017	$	(1,063)

Non-hedged derivatives:

During the second quarter of 2021, the Company initiated a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a dealer bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Since the income statement impact of the offsetting positions is limited, any changes in fair value is recognized as other noninterest income in the current period.

At June 30, 2021 and December 31, 2020, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):


	June 30, 2021				December 31, 2020
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	750	$	12	$	-	$	-
Liabilities		750		(12)		-		-
Total	$	1,500	$	-	$	-	$	-

The Company establishes limits and monitors exposures for customer swap positions. Any fees received to enter the swap agreements at inception are recognized in earnings when received. Such fees were as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Interest rate swap agreements	$	10	$	—	$	10	$	—

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.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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):


		September 30,		December 31,			June 30,		December 31,
	Classification	2020		2019		Classification	2021		2020
Assets:
Operating lease right-of-use assets	Other assets	$	5,286	$	5,470	Other assets	$	4,536	$	4,797
Liabilities:
Operating lease liabilities	Other liabilities	$	5,315	$	5,479	Other liabilities	$	4,578	$	4,827

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

As of ~~September~~June 30, ~~2020,~~2021, the weighted average remaining lease term was ~~10.78~~11.04 years and the weighted average discount rate was ~~2.72%~~2.69%.

The following table represents lease costs and other lease ~~information, in thousands.~~information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Lease costs:
Operating lease costs	$	254	$	270	$	494	$	507
Variable lease costs		24		29		48		55
Total	$	278	$	299	$	542	$	562
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	250	$	265	$	483	$	495

3335

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~lease component, the variable lease cost primarily represents variable payments such as common area maintenance~~ ~~(in thousands)~~.

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019
Lease costs:








Operating lease costs

$
272

$
149

$
779

$
464
Short-term lease costs

0

2

0

13
Variable lease costs

29

23

84

69
Total

$
301

$
174

$
863

$
546
Other information:








Cash paid for amounts included in the measurement of lease liabilities:








Operating cash flows from operating leases

$
264

$
145

$
759

$
447

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~September~~June 30, ~~2020,~~2021, were as follows (in thousands):


	Amounts		Amounts
September 30, 2021	$	1,006
September 30, 2022		760
September 30, 2023		571
September 30, 2024		385
September 30, 2025		348
June 30, 2022			$	414
June 30, 2023				689
June 30, 2024				496
June 30, 2025				368
June 30, 2026				348
Thereafter		3,119		3,033
Total future minimum lease payments		6,189		5,348
Amounts representing interest		(874)		(770)
Present value of net future minimum lease payments	$	5,315	$	4,578

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, subject to a phase-in period for certain aspects of the new rules.~~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). ~~The capital conservation buffer was phased in incrementally over time, beginning January 1, 2016 and became fully effective on January 1, 2019.~~ As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer. At ~~September~~June 30, ~~2020,~~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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

During the three months ended ~~September~~June 30, ~~2020,~~2021, the Bank paid ~~$1.4~~$5.0 million in dividends to the ~~Company.~~Company and the Company paid a quarterly common stock dividend of $0.06 per share. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Bank paid ~~$8.9~~$10.0 million in dividends to the Company. Since the ~~fourth~~first quarter of ~~2019,~~2021, the Company has paid a quarterly common stock dividend of ~~$0.05~~$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 September 30, 2020, and December 31, 2019 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

September 30, 2020

SmartFinancial:

Total Capital (to Risk Weighted Assets)

$
323,297

13.81
%
$
187,225

8.00
%

N/A

N/A

Tier 1 Capital (to Risk Weighted Assets)

265,155

11.33
%

140,419

6.00
%

N/A

N/A

Common Equity Tier 1 Capital (to Risk Weighted Assets)

265,155

11.33
%

105,314

4.50
%

N/A

N/A

Tier 1 Capital (to Average Assets)²

265,155

8.78
%

120,766

4.00
%

N/A

N/A

SmartBank:

Total Capital (to Risk Weighted Assets)

$
312,869

13.37
%
$
187,217

8.00
%
$
234,022

10.00
%
Tier 1 Capital (to Risk Weighted Assets)

294,052

12.57
%

140,413

6.00
%

187,217

8.00
%
Common Equity Tier 1 Capital (to Risk Weighted Assets)

294,052

12.57
%

105,310

4.50
%

152,114

6.50
%
Tier 1 Capital (to Average Assets)²

294,052

9.74
%

120,762

4.00
%

150,953

5.00
%

December 31, 2019

SmartFinancial:

Total Capital (to Risk Weighted Assets)

$
287,937

14.02
%
$
164,313

8.00
%

N/A

N/A

Tier 1 Capital (to Risk Weighted Assets)

238,433

11.61
%

123,235

6.00
%

N/A

N/A

Common Equity Tier 1 Capital (to Risk Weighted Assets)

238,433

11.61
%

92,426

4.50
%

N/A

N/A

Tier 1 Capital (to Average Assets)

238,433

10.34
%

92,258

4.00
%

N/A

N/A

SmartBank:

Total Capital (to Risk Weighted Assets)

$
273,432

13.31
%
$
164,305

8.00
%
$
205,382

10.00
%
Tier 1 Capital (to Risk Weighted Assets)

263,189

12.81
%

123,229

6.00
%

164,305

8.00
%
Common Equity Tier 1 Capital (to Risk Weighted Assets)

263,189

12.81
%

92,422

4.50
%

133,498

6.50
%
Tier 1 Capital (to Average Assets)

263,189

11.41
%

92,254

4.00
%

115,317

5.00
%

3536

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Regulatory Capital Levels:

Actual and required capital levels at June 30, 2021, and December 31, 2020 are presented below (dollars in thousands):


									Minimum to be
									well
									capitalized under
					Minimum for				prompt
					capital				corrective action
		Actual			adequacy purposes				provisions¹
	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2021
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	340,809	12.80	%	$	213,089	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		283,118	10.63	%		159,816	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		283,118	10.63	%		119,862	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)²		283,118	8.10	%		139,893	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	324,013	12.19	%	$	212,702	8.00	%	$	265,878	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		305,703	11.50	%		159,527	6.00	%		212,702	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		305,703	11.50	%		119,645	4.50	%		172,821	6.50	%
Tier 1 Capital (to Average Assets)²		305,703	8.75	%		139,706	4.00	%		174,632	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.

Table of Contents

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 September 30, 2020						Three Months Ended June 30, 2021
					Accumulated						Accumulated
	Securities		Fair Value		Other		Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive		Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)		Sale		Security Hedges		Income (Loss)
Beginning balance, June 30, 2020	$	2,668	$	(2,076)	$	592
Beginning balance, March 31, 2021							$	898	$	185	$	1,083

Other comprehensive income (loss)		(64)		492		428
Other comprehensive income								1,153		102		1,255
Reclassification of amounts included in net income		(8)		0		(8)		—		—		—
Net other comprehensive income (loss) during period		(72)		492		420
Net other comprehensive income during period								1,153		102		1,255

Ending balance, September 30, 2020	$	2,596	$	(1,584)	$	1,012
Ending balance, June 30, 2021							$	2,051	$	287	$	2,338

	Three Months Ended September 30, 2019						Three Months Ended June 30, 2020
					Accumulated						Accumulated
	Securities		Fair Value		Other		Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive		Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)		Sale		Security Hedges		Income (Loss)
Beginning balance, June 30, 2019	$	2,075	$	(2,646)	$	(571)
Beginning balance, March 31, 2020							$	1,242	$	(2,489)	$	(1,247)

Other comprehensive income (loss)		(1,535)		1,808		273
Other comprehensive income								1,414		413		1,827
Reclassification of amounts included in net income		1		0		1		12		—		12
Net other comprehensive income (loss) during period		(1,534)		1,808		274
Net other comprehensive income during period								1,426		413		1,839

Ending balance, September 30, 2019	$	541	$	(838)	$	(297)
Ending balance, June 30, 2020							$	2,668	$	(2,076)	$	592

Nine Months Ended September 30, 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)

2,201

(1,361)

840
Reclassification of amounts included in net income

4

0

4
Net other comprehensive income (loss) during period

2,205

(1,361)

844

Ending balance, September 30, 2020

$
2,596

$
(1,584)

$
1,012

Nine Months Ended September 30, 2019






Accumulated

Securities

Fair Value

Other

Available-for-

Municipal

Comprehensive


Sale

Security Hedges

Income (Loss)
Beginning balance, December 31, 2018

$
(1,979)

$
(786)

$
(2,765)

Other comprehensive income (loss)

2,495

(52)

2,443
Reclassification of amounts included in net income

25

0

25
Net other comprehensive income (loss) during period

2,520

(52)

2,468

Ending balance, September 30, 2019

$
541

$
(838)

$
(297)


	Six Months Ended June 30, 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)		(917)		1,072		155
Reclassification of amounts included in net income		—		—		—
Net other comprehensive income (loss) during period		(917)		1,072		155

Ending balance, June 30, 2021	$	2,051	$	287	$	2,338

	Six Months Ended June 30, 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)		2,265		(1,853)		412
Reclassification of amounts included in net income		12		—		12
Net other comprehensive income (loss) during period		2,277		(1,853)		424

Ending balance, June 30, 2020	$	2,668	$	(2,076)	$	592

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

~~Note 15. Subsequent Events~~

On October 8, 2020 the Company repaid $237.8 million to the Federal Reserve Bank (“FRB”) relating to the outstanding borrowings from the PPPLF. These borrowings were used to assist with the funding of PPP loans. The Company utilized its excess liquidity to fund the repayment.

3738

Table of Contents

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

SmartFinancial, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the "Bank"). ~~SmartBank~~The Company provides a comprehensive suite of commercial and consumer banking services to clients through 3635 full-service bank branches and ~~two~~one loan production ~~offices~~office in select markets in East and Middle Tennessee, Alabama and the Florida Panhandle.

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

Forward-Looking Statement

SmartFinancial, Inc. ~~(“SmartFinancial”~~(the “Company”) may from time to time make written or oral statements, including statements contained in this report and information incorporated by reference herein (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2), that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements, including statements regarding the ~~potential~~ 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 and lease 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 ~~Progressive Financial Group, Inc ("PFG"~~Fountain Equipment Finance, 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 ~~the PFG’s~~SCB’s and Fountain’s businesses with our business;

●

~~lower than expected revenue following these mergers;~~

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●

~~SmartFinancial’s~~lower than expected revenue following the acquisitions of SCB and Fountain;

●

The Company’s ability to manage the combined company’s growth following the ~~mergers;~~acquisitions;

●

the dilution caused by SmartFinancial’s issuance of additional shares of its common stock in connection with the ~~PFG~~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 and lease portfolio;

●

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

●

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

●

unanticipated loan and lease 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 and lease 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~~second quarter and first ~~nine~~six months of ~~2020:~~2021:

●

~~Completed~~Successfully completed the ~~acquisition and integration~~hiring of ~~Progressive Financial Group, Inc. ("PFG").~~

●

~~Originated approximately 2,950 Paycheck Protection Program (“PPP”) loans totaling $300.8 million.~~an experienced banking team in the Gulf Coast Region.

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●

Announced the proposed acquisition of SCB, with an estimated closing date in the third quarter of 2021.

●

Announced and completed the acquisition, on May 3, 2021, of Fountain.

●

Originated 1,801 Paycheck Protection Program (“PPP”) loans totaling $138.4 million.

●

Net income totaled ~~$6.4~~$8.8 million, or ~~$0.42~~$0.58 per diluted common share, during the ~~third~~second quarter of ~~2020~~2021 compared to ~~$6.0~~$6.2 million, or ~~$0.42~~$0.41 per diluted common share, for the same period in ~~2019.~~2020.

●

Net income totaled ~~$15.3~~$18.5 million, or ~~$1.02~~$1.23 per diluted common share, during the first ~~nine~~six months of ~~2020~~2021 compared to ~~$19.8~~$8.9 million, or ~~$1.41~~$0.60 per diluted common share, for the same period in ~~2019.~~2020.

●

Annualized return on average assets was ~~0.76%~~0.98% at ~~September~~June 30, ~~2020~~2021 compared to ~~1.01%~~0.79% at ~~September~~June 30, ~~2019.~~2020.

●

~~Allowance for loan losses increased~~On December 21, 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, was passed by Congress to ~~$18.8 million, an increase of 40.1% from the first quarter of 2020,~~provide economic stimulus to individuals and businesses in further response to the ~~current~~ economic ~~conditions related to COVID-19.~~

●

~~The COVID-19 pandemic has~~distress caused economic and social disruption on an unprecedented scale. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. On March 27, 2020, the CARES Act was signed into law. It contained substantial tax and spending provisions intended to address the impact ofby the COVID-19 pandemic. ~~The CARES Act included~~Among other things, the ~~PPP,~~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 ~~nearly $350 billion~~$300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, ~~designed~~and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to ~~aid small and medium-sized businesses through federally guaranteed loans distributed through banks. These loans were intended to guarantee eight weeks of payroll~~transportation, education, agriculture, nutrition and other ~~costs to help those businesses remain viable~~public health measures, and ~~allow their workers to pay their bills. The initial $350~~(v) approximately $325 billion program was supplemented in late April 2020 with $310 billion in additional funding. On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “new Act”) was signed into law and made significant changes to the PPP to provide additional relief for small ~~businesses. The~~business relief, including approximately $284 billion for a second round of PPP loans and a new Act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability or have been unable to operate as normal due to COVID-19 related restrictions. It extended the period that businesses have to use PPP funds to qualify for loansimplified forgiveness to 24 weeks, up from 8 weeks under the original rules. The new Act also relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness. In addition, the new Act extended the payment deferral periodprocedure for PPP loans ~~until~~of $150,000 or less. We are continuing to monitor the ~~date when~~potential development of additional legislation and further actions taken by the amount of loan forgiveness is determined and remitted to the lender. For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends. The PPP program expired August 8, 2020.U.S. government.

Analysis of Results of Operations

~~Third~~Second quarter of ~~2020~~2021 compared to ~~2019~~2020

Net income was ~~$6.4~~$8.8 million, or ~~$0.42~~$0.58 per diluted common share, for the ~~third~~second quarter of ~~2020,~~2021, compared to ~~$6.0~~$6.2 million, or ~~$0.42~~$0.41 per diluted common share, for the ~~third~~second quarter of ~~2019.~~2020. The tax equivalent net interest margin was ~~3.39%~~3.29% for the ~~third~~second quarter of ~~2020~~2021 compared to ~~3.91%~~3.63% for the ~~third~~second quarter of ~~2019.~~2020. Noninterest income to average assets was ~~0.49%~~0.58% for the ~~third~~second quarter of ~~2020,~~2021, increasing from ~~0.37%~~0.45% for the ~~third~~second quarter of ~~2019.~~2020. Noninterest expense to average assets decreased to ~~2.28%~~2.33% in the ~~third~~second quarter of ~~2020,~~2021, from ~~2.48%~~2.41% in the ~~third~~second quarter of ~~2019.~~2020.

First ~~nine~~six months of ~~2020~~2021 compared to ~~2019~~2020

Net income was ~~$15.3~~$18.5 million, or ~~$1.02~~$1.23 per diluted common share, for the first ~~nine~~six months of ~~2020,~~2021, compared to ~~$19.8~~$8.9 million, or ~~$1.41~~$0.60 per diluted common share, for the first ~~nine~~six months of ~~2019.~~2020. The ~~decrease~~increase in net income for this period was primarily from the ~~$6.4~~increase of $10.8 million ~~termination fee recognized~~ in ~~the second quarter~~net interest income after provision for loan and lease losses and $4.5 million in noninterest income, offset by increases of ~~2019.~~$2.7 million in noninterest expense and $3.0 million in income tax expense. The tax equivalent net interest margin was ~~3.62%~~3.38% for the first ~~nine~~six months of ~~2020~~2021 compared to ~~3.99%~~3.75% for the first ~~nine~~six months of ~~2019.~~2020. Noninterest income to average assets was ~~0.46%~~0.63% for the first ~~nine~~six months of ~~2020, decreasing~~2021, increasing from ~~0.71%~~0.45% for the first ~~nine~~six months of ~~2019.~~2020. Noninterest expense to average assets decreased to ~~2.52%~~2.34% in the first ~~nine~~six months of ~~2020,~~2021, from ~~2.71%~~2.66% in the first ~~nine~~six months of ~~2019. The results above include operating effects of the PFG acquisition, which was completed on March 1,~~ 2020.

Net Interest Income and Yield Analysis

~~Third~~Second quarter of ~~2020~~2021 compared to ~~2019~~2020

Net interest income, taxable equivalent, increased to ~~$26.2~~$27.0 million for the ~~third~~second quarter of ~~2020,~~2021, up from ~~$21.3~~$25.9 million for the ~~third~~second quarter of ~~2019.~~2020. Net interest income was positively impacted, compared to the prior year, primarily by the ~~full-quarters effects of the Company’s March 1, 2020 acquisition of PFG, the~~ increase in loan and lease balances and the reduction in interest expense on interest bearing liabilities. Average interest-earning assets increased from ~~$2.16~~$2.87 billion for the ~~third~~second quarter of ~~2019,~~2020, to ~~$3.08~~$3.30 billion for the ~~third~~second quarter of ~~2020,~~2021, primarily as a result of the Company’s continued organic loan and lease growth, acquisition of ~~PFG being~~Fountain completed on ~~March 1, 2020, and the Company’s~~May 3, 2021, participation in the ~~PPP.~~PPP, and the increase in our overall liquidity position. Over this period, average loan and lease balances increased by $149.3 million, average federal funds sold and other interest earning assets increased by $233.4 million, average interest-bearing deposits increased by $404.9 million, average noninterest-bearing deposits increased $181.1 million and average borrowings decreased $155.6 million. The tax equivalent net interest margin decreased to 3.29% for the second quarter of 2021, compared to 3.63% for the second quarter of 2020. The yield on earning assets decreased from 4.22% for the second quarter of 2020, to 3.65% for the second quarter of 2021, primarily due to rate cuts by the Federal Reserve during the first quarter of 2020 and, to a lesser extent, loan and lease yields declining from market

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increased by $568.2 million, average interest-bearing deposits increased by $336.9 million, average noninterest-bearing deposits increased $296.2 million and average borrowings increased $306.0 million. The tax equivalent net interest margin decreased to 3.39% for the third quarter of 2020, compared to 3.91% for the third quarter of 2019. The yield on earning assets decreased from 5.05% for the third quarter of 2019, to 3.88% for the third quarter of 2020, primarily due to rate cuts by the Federal Reserve over the past year and, to a lesser extent, loan yields declining from market competition. The cost of average interest-bearing deposits decreased from ~~1.37%~~0.71% for the ~~third~~second quarter of ~~2019,~~2020, to ~~0.59%~~0.39% for the ~~third~~second quarter of ~~2020,~~2021, primarily due to a lower interest rate environment during the period.

The following tables summarizes the major components of net interest income and the related yields and costs for the periods presented (dollars in thousands):

Three Months Ended September 30,

2020

2019


Average




Yield/

Average




Yield/


Balance

Interest

Rate

Balance

Interest

Rate

Assets:













Loans, including fees¹

$
2,410,173

28,508

4.71
%
$
1,842,007

25,471

5.49
%
Loans held for sale

8,048

113

5.57
%

4,189

44

4.17
%
Taxable securities

132,642

546

1.64
%

118,955

748

2.49
%
Tax-exempt securities²

88,129

515

2.32
%

56,598

448

3.14
%
Federal funds sold and other earning assets

438,785

327

0.30
%

135,444

743

2.18
%
Total interest-earning assets

3,077,777

30,009

3.88
%

2,157,193

27,454

5.05
%
Noninterest-earning assets

262,764





191,940





Total assets

$
3,340,541





$
2,349,133





Liabilities and Stockholders’ Equity:













Interest-bearing demand deposits

$
509,999

$
199

0.16
%
$
343,827

$
511

0.59
%
Money market and savings deposits

833,022

704

0.34
%

637,290

1,829

1.14
%
Time deposits

615,714

1,994

1.29
%

640,679

3,265

2.02
%
Total interest-bearing deposits

1,958,735

2,897

0.59
%

1,621,796

5,605

1.37
%
Borrowings

319,265

334

0.42
%

13,310

15

0.45
%
Subordinated debt

39,311

584

5.91
%

39,226

584

5.91
%
Total interest-bearing liabilities

2,317,311

3,815

0.65
%

1,674,332

6,204

1.47
%
Noninterest-bearing deposits

649,489





353,315





Other liabilities

25,834





18,286





Total liabilities

2,992,634





2,045,933





Stockholders’ equity

347,907





303,200





Total liabilities and stockholders’ equity

$
3,340,541





$
2,349,133





Net interest income, taxable equivalent



$
26,194





$
21,250



Interest rate spread





3.22
%





3.58
%
Tax equivalent net interest margin





3.39
%





3.91
%

Percentage of average interest-earning assets to average interest-bearing liabilities



132.82
%





128.84
%
Percentage of average equity to average assets





10.41
%





12.91
%


	Three Months Ended June 30,
	2021						2020
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Assets:
Loans and leases, including fees¹	$	2,508,388		28,256	4.52	%	$	2,359,101		28,590	4.87	%
Loans held for sale		5,315		67	5.03	%		6,868		73	4.28	%
Taxable securities		164,935		916	2.23	%		122,135		589	1.94	%
Tax-exempt securities²		89,296		453	2.04	%		86,227		570	2.66	%
Federal funds sold and other earning assets		531,125		309	0.23	%		297,696		277	0.37	%
Total interest-earning assets		3,299,059		30,001	3.65	%		2,872,027		30,099	4.22	%
Noninterest-earning assets		286,211						260,089
Total assets	$	3,585,270					$	3,132,116

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	688,756	$	304	0.18	%	$	453,795	$	148	0.13	%
Money market and savings deposits		1,117,290		905	0.32	%		748,673		614	0.33	%
Time deposits		502,755		1,039	0.83	%		701,390		2,604	1.49	%
Total interest-bearing deposits		2,308,801		2,248	0.39	%		1,903,858		3,366	0.71	%
Borrowings³		81,525		123	0.61	%		237,143		249	0.42	%
Subordinated debt		39,375		584	5.95	%		39,290		584	5.98	%
Total interest-bearing liabilities		2,429,701		2,955	0.49	%		2,180,291		4,199	0.77	%
Noninterest-bearing deposits		768,399						587,322
Other liabilities		17,845						24,642
Total liabilities		3,215,945						2,792,255
Shareholders' equity		369,325						339,861
Total liabilities and shareholders’ equity	$	3,585,270					$	3,132,116
Net interest income, taxable equivalent			$	27,046					$	25,900
Interest rate spread					3.16	%					3.44	%
Tax equivalent net interest margin					3.29	%					3.63	%

Percentage of average interest-earning assets to average interest-bearing liabilities					135.78	%					131.73	%
Percentage of average equity to average assets					10.30	%					10.85	%

¹~~Includes nonaccrual~~Loans and leases include PPP loans with an average balance of $266.1 million and ~~accretion income on acquired loans of $960 thousand and $1.2~~$208.8 million for the ~~quarters~~three months ended ~~September~~June 30, 2021 and 2020, respectively. Loan and ~~2019,~~lease fees included in loan and lease income was $2.4 million and $2.7 million for the three months ended June 30, 2021 and 2020, respectively. ~~Also~~Loan and lease fee income for the three months ended June 30, 2021 and 2020, includes $2.1 million and $1.9 million accretion of loan fees on PPP loans, ~~of $1.8 million for the quarter ended September 30, 2020. No loan fees on PPP loans are included for the quarter ended September 30, 2019.~~respectively.

²Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0%. The taxable-equivalent adjustment was ~~$151~~$149 thousand for the three ~~month period~~months ended ~~September~~June 30, ~~2020~~2021 and ~~$110~~$154 thousand for the three ~~month period~~months ended ~~September~~June 30, ~~2019.~~2020.

³Includes average balance of $108.1 million in Paycheck Protection Liquidity Facility (“PPPLF”) funding for the quarter ended June 30, 2020. No PPPLF funding was used for the quarter ended June 30, 2021.

First ~~nine~~six months of ~~2020~~2021 compared to ~~2019~~2020

Net interest income, taxable equivalent, increased to ~~$88.2~~$53.5 million for the first ~~nine~~six months of ~~2020,~~2021, up from ~~$81.9~~$48.6 million for the first ~~nine~~six months of ~~2019.~~2020. Net interest income was positively impacted, compared to the prior year, primarily due to increases in loan and lease balances and a reduction in interest expense on ~~deposits.~~interest-bearing liabilities. Average interest-earning assets increased from ~~$2.12~~$2.60 billion for the first ~~nine~~six months of ~~2019,~~2020, to ~~$2.76~~$3.19 billion for the first ~~nine~~six months of ~~2020,~~2021, primarily as a result of the acquisition of PFG completed March 1, 2020, ~~organic loan growth and the Company’s~~ participation in the ~~PPP.~~PPP and continued organic growth. Over this period, average loan and lease balances increased by ~~$428.6~~$296.5 million, average interest-bearing deposits increased by ~~$200.9~~$408.7 million, average noninterest-bearing deposits increased ~~$246.6~~$253.4 million and average borrowings ~~increased $184.8~~decreased $62.9 million. The tax equivalent net interest margin decreased to 3.38% for the first six months of 2021, compared to 3.75% for the first six months of 2020. The yield on earning assets decreased from 4.50% for the first six months of 2020, to 3.76% for the first six months of 2021, primarily due to rate cuts by the Federal Reserve during the

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~~The tax equivalent net interest margin decreased to 3.62% for the~~ first ~~nine months~~quarter of 2020 compared to 3.99% for the first nine months of 2019. The yield on earning assets decreased from 5.17% for the first nine months of 2019, to 4.27% for the first nine months of 2020, primarily due to rate cuts by the Federal Reserve over the past year and, to a lesser extent loan and lease yields declining from market competition. The cost of average interest-bearing deposits decreased from ~~1.37%~~0.90% for the first ~~nine~~six months of ~~2019,~~2020, to ~~0.79%~~0.41% for the first ~~nine~~six months of ~~2020,~~2021, primarily due to a lower interest rate environment during the period.

Nine Months Ended September 30,

2020

2019


Average




Yield/

Average




Yield/


Balance

Interest

Cost

Balance

Interest

Cost

Assets:













Loans, including fees¹

$
2,252,075

$
83,487

4.95
%
$
1,823,523

$
75,645

5.55
%
Loans held for sale

6,409

231

4.81
%

3,589

123

4.58
%
Taxable Securities

123,895

1,813

1.95
%

134,230

2,591

2.58
%
Tax-exempt securities²

81,604

1,486

2.43
%

55,585

1,512

3.64
%
Federal funds and other earning assets

296,449

1,206

0.54
%

102,528

2,056

2.68
%
Total interest-earning assets

2,760,432

88,223

4.27
%

2,119,455

81,927

5.17
%
Noninterest-earning assets

248,293





205,984





Total assets

$
3,008,725





$
2,325,439





Liabilities and Stockholders’ Equity:













Interest-bearing demand deposits

$
451,074

782

0.23
%
$
326,764

1,397

0.57
%
Money market and savings deposits

749,316

2,707

0.48
%

669,067

4,302

1.30
%
Time deposits

667,303

7,527

1.51
%

633,601

5,850

1.86
%
Total interest-bearing deposits

1,867,693

11,016

0.79
%

1,621,108

16,644

1.37
%
Borrowings

203,202

674

0.44
%

18,377

250

1.82
%
Subordinated debt

39,290

1,751

5.95
%

39,205

1,757

5.99
%
Total interest-bearing liabilities

2,110,185

13,441

0.85
%

1,678,690

18,651

1.49
%
Noninterest-bearing deposits

537,860





336,895





Other liabilities

23,826





14,509





Total liabilities

2,671,871





2,030,094





Stockholders’ equity

336,854





295,345





Total liabilities and stockholders’ equity

$
3,008,725





$
2,325,439





Net interest income, taxable equivalent



$
74,782





$
63,276



Interest rate spread





3.42
%





3.68
%
Tax equivalent net interest margin





3.62
%





3.99
%

Percentage of average interest-earning assets to average interest-bearing liabilities



130.81
%





126.26
%
Percentage of  average equity to average assets





11.20
%





12.70
%


	Six Months Ended June 30,
	2021						2020

	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
Assets:
Loans and leases, including fees¹	$	2,468,665	$	56,200	4.59	%	$	2,172,158	$	54,979	5.09	%
Loans held for sale		6,607		141	4.31	%		5,581		118	4.26	%
Taxable Securities		150,792		1,640	2.19	%		119,474		1,268	2.13	% ��
Tax-exempt securities²		90,068		862	1.93	%		78,306		970	2.49	%
Federal funds and other earning assets		474,449		600	0.26	%		226,726		879	0.78	%
Total interest-earning assets		3,190,581		59,443	3.76	%		2,602,245		58,214	4.50	%
Noninterest-earning assets		280,772						238,749
Total assets	$	3,471,353					$	2,840,994

Liabilities and Stockholders’ Equity:
Interest-bearing demand deposits	$	665,116		560	0.17	%	$	421,288		583	0.28	%
Money market and savings deposits		1,050,961		1,726	0.33	%		707,003		2,003	0.57	%
Time deposits		514,344		2,293	0.90	%		693,382		5,534	1.61	%
Total interest-bearing deposits		2,230,421		4,579	0.41	%		1,821,673		8,120	0.90	%
Borrowings³		81,680		241	0.59	%		144,532		339	0.47	%
Subordinated debt		39,364		1,167	5.98	%		39,279		1,167	5.97	%
Total interest-bearing liabilities		2,351,465		5,987	0.51	%		2,005,484		9,626	0.97	%
Noninterest-bearing deposits		734,867						481,432
Other liabilities		19,876						22,812
Total liabilities		3,106,208						2,509,728
Stockholders’ equity		365,145						331,266
Total liabilities and stockholders’ equity	$	3,471,353					$	2,840,994
Net interest income, taxable equivalent			$	53,456					$	48,588
Interest rate spread					3.25	%					3.53	%
Tax equivalent net interest margin					3.38	%					3.75	%

Percentage of average interest-earning assets to average interest-bearing liabilities					135.68	%					129.76	%
Percentage of average equity to average assets					10.52	%					11.66	%

¹~~Includes nonaccrual~~Loans and leases include PPP loans ~~and accretion income on acquired loans~~with an average balance of ~~$3.7~~$289.2 million and ~~$4.3~~$106.2 million for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, respectively. Loan and ~~2019,~~lease fees included in loan and lease income was $5.3 million and $3.6 million for the six months ended June 30, 2021 and 2020, respectively. ~~Also~~Loan lease fee income for the six months ended June 30, 2021 and 2020, includes $4.5 million and $1.9 million accretion of loan fees on PPP loans, ~~of $3.7 million for the nine months ended September 30, 2020. No loan fees on PPP loans are included for the nine months ended September 30, 2019.~~respectively.

²Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0%. The taxable-equivalent adjustment was ~~$422~~$299 thousand for the ~~nine month period~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~$336~~$271 thousand for the ~~nine month period~~six months ended ~~September~~June 30, ~~2019.~~2020.

³Includes average balance of $54.0 million in Paycheck Protection Liquidity Facility (“PPPLF”) funding for the six months ended June 30, 2020. No PPPLF funding was used for the six months ended June 30, 2021.

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Noninterest Income

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019
Service charges on deposit accounts

$
892

$
767

$
2,370

$
2,129
Gain on sale of securities, net

(9)

1

6

34
Mortgage banking

1,029

518

2,544

1,192
Investment services

359

260

1,159

684
Insurance commissions

560

—

1,302

—
Interchange and debit card transaction fees

868

148

1,652

467
Merger termination fee

—

—

—

6,400
Other

422

502

1,417

1,405
Total noninterest income

$
4,121

$
2,196

$
10,450

$
12,311


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021		2020			Change	2021		2020			Change
Service charges on deposit accounts	$	1,048	$	709	$	339	$	2,057	$	1,479	$	578
Gain on sale of securities		—		16		(16)		—		16		(16)
Mortgage banking		1,105		931		174		2,244		1,515		729
Investment services		567		363		204		1,098		801		297
Insurance commissions		557		473		84		2,023		742		1,281
Interchange and debit card transaction fees, net		922		508		414		1,761		784		977
Other		944		511		433		1,652		993		659
Total noninterest income	$	5,143	$	3,511	$	1,632	$	10,835	$	6,330	$	4,505

~~Third~~Second quarter of ~~2020~~2021 compared to ~~2019~~2020

Noninterest income increased by ~~$1.9~~$1.6 million, or ~~87.7%~~46.5%, during the ~~third~~second quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. This quarterly change in total noninterest income primarily resulted from the following:

●

Increase in service charges on deposit accounts, related to ~~the PFG acquisition~~deposit growth and ~~deposit growth;~~transaction volume;

●

Increase in mortgage banking, from increased volume due to low rate environment;

●

Increase in investment services, stemming from increased ~~production from personnel hires in 2019;~~

●

~~Addition of insurance commissions from the PFG acquisition; and~~production;

●

Increase in interchange and debit card transaction fees, related to increased volume, deposit growth and the PFG acquisition: and

●

Increase in other, primarily from new fee income from the acquisition of Fountain and ~~deposit growth.~~cash surrender value of bank owned life insurance (“BOLI”) from the additional BOLI purchased during the first quarter of 2021.

First ~~nine~~six months of ~~2020~~2021 compared to ~~2019~~2020

Noninterest income ~~decreased~~increased by ~~$1.9~~$4.5 million, or ~~15.1%~~71.2%, during the first ~~nine~~six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. This change in total noninterest income primarily resulted from the following:

●

~~Decrease in merger termination fee recognized in the second quarter of 2019;~~

●

Increase in service charges on deposit accounts, related to the PFG acquisition, deposit growth and ~~deposit growth;~~transaction volume;

●

Increase in mortgage banking, from increased volume due to low rate environment;

●

Increase in investment services, stemming from increased ~~production from personnel hires in 2019;~~production;

●

~~Addition of~~Increase in insurance commissions, primarily from commissions from an insurance agency acquired in the PFG ~~acquisition;~~acquisition and placement of life insurance policies;

●

Increase in interchange and debit card transaction fees, related to increased volume, deposit growth and the PFG ~~acquisition~~acquisition: and ~~deposit growth.~~

●

Increase in other, primarily from new fee income from the acquisition of Fountain and cash surrender value of bank owned life insurance from the additional BOLI purchased during the first quarter of 2021.

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Noninterest Expense

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019
Salaries and employee benefits

$
11,032

$
9,072

$
31,395

$
26,357
Occupancy and equipment

2,186

1,635

6,093

4,967
FDIC insurance

534

(219)

894

140
Other real estate and loan related expense

643

335

1,535

1,067
Advertising and marketing

253

263

653

817
Data processing

558

273

1,689

1,465
Professional services

594

573

2,172

1,724
Amortization of intangibles

402

341

1,169

1,027
Software as service contracts

573

560

1,604

1,696
Merger related and restructuring expenses

290

73

3,863

2,792
Other

2,102

1,802

5,699

5,045
Total noninterest expense

$
19,167

$
14,708

$
56,766

$
47,097


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021		2020			Change	2021		2020			Change
Salaries and employee benefits	$	12,203	$	10,357	$	1,846	$	23,072	$	20,363	$	2,709
Occupancy and equipment		2,294		1,996		298		4,635		3,906		729
FDIC insurance		371		180		191		741		360		381
Other real estate and loan related expense		506		346		160		1,108		892		216
Advertising and marketing		230		202		28		419		400		19
Data processing and technology		1,509		1,155		354		2,889		2,163		726
Professional services		849		868		(19)		1,490		1,578		(88)
Amortization of intangibles		441		405		36		886		767		119
Merger related and restructuring expenses		372		1,477		(1,105)		475		3,573		(3,098)
Other		2,022		1,820		202		4,547		3,598		949
Total noninterest expense	$	20,797	$	18,806	$	1,991	$	40,262	$	37,600	$	2,662

~~Third~~Second quarter of ~~2020~~2021 compared to ~~2019~~2020

Noninterest expense increased by ~~$4.5~~$2.0 million, or ~~30.3%~~10.6%, in the ~~third~~second quarter of ~~2020~~2021 as compared to the same period in ~~2019.~~2020. The quarterly increase in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits, related to the PFG acquisition and the overall franchise growth, including the acquisition of Fountain completed May 3, 2021;

●

Increase in occupancy and equipment, due to ongoing infrastructure and facilities added to accommodate growth in operations;

●

Increase in FDIC insurance, related to asset growth stemming from our acquisition of PFG, deposit growth and production of PPP loans; and

●

Increase in data processing and technology, primarily from continued infrastructure build.

First six months of 2021 compared to 2020

Noninterest expense increased by $2.7 million, or 7.1%, in the first six months of 2021 as compared to the same period in 2020. The change in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits, due to the overall franchise growth, including the acquisition of ~~PFG;~~Fountain completed May 3, 2021;

●

Increase in occupancy and equipment, ~~associated with~~due to ongoing infrastructure and facilities added to accommodate ~~our~~ growth in ~~operations and the additional branches of the PFG acquisition;~~operations;

●

Increase in FDIC insurance, is related to ~~increase in assets due to overall assets~~asset growth stemming from our acquisition of PFG, deposit growth and production of PPP ~~loans. The Company recognized a credit in the third quarter of 2019 from the FDIC, as result of the FDIC Insurance exceeding 1.38% of insured deposits as of June 30, 2019;~~

●

~~Increase in other real estate and loan related expenses, primarily attributable to increased activity in loan related production and an evaluation adjustment on other real estate owned;~~loans;

●

Increase in data processing ~~is attributable to credit recognized~~and technology, primarily from ~~core processor in third quarter of 2019;~~

●

~~Increase in merger related and restructure expenses from the acquisition of PFG;~~continued infrastructure build; and

●

~~Increase~~Other increased, primarily from an investment in ~~other noninterest expenses due to overall franchise growth.~~a start-up fintech company.

~~First nine months of 2020 compared to 2019~~

Noninterest expense increased by $9.7 million, or 20.5%, in the first nine months of 2020 as compared to the same period in 2019. The quarterly increase in total noninterest expense primarily resulted from the following:

●

~~Increase in salary and employee benefits due to the overall franchise growth, including the acquisition of PFG;~~

●

~~Increase in occupancy and equipment associated with ongoing infrastructure and facilities added to accommodate our growth in operations and the additional branches of the PFG acquisition;~~

●

Increase in FDIC insurance related to increase in assets due to overall assets growth stemming from our acquisition of PFG, deposit growth and production of PPP loans. The Company recognized a credit in the third quarter of 2019 from the FDIC, as result of the FDIC Insurance exceeding 1.38% of insured deposits as of June 30, 2019;

●

~~Increase in other real estate and loan related expenses, primarily attributable to increased activity in loan related production;~~

●

~~Increase in data processing is attributable to credit recognized from core processor in third quarter of 2019;~~

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●

~~Increase in professional services from increases in legal and auditing services;~~

●

~~Increase in merger related and restructure expenses from the acquisition of PFG; and~~

●

~~Increase in other noninterest expenses due to overall franchise growth.~~

Taxes

~~Third~~Second quarter of ~~2020~~2021 compared to ~~2019~~2020

In the ~~third~~second quarter of ~~2020~~2021 income tax expense totaled ~~$2.0~~$2.5 million compared to ~~$1.9~~$1.4 million a year ago. The effective tax rate was approximately ~~23.5%~~22.0% in the ~~third~~second quarter of ~~2020~~2021 compared to ~~24.6%~~18.8% a year ago. The ~~lower~~higher effective tax rate for the ~~third~~second quarter of ~~2020~~2021 compared to same quarter in ~~2019~~2020 was due to 2020 having a proportionately higher amount of non-taxable income in relation to income before taxes, as well as tax benefit derived from the reconciliation of our tax rates from operations.

First ~~nine~~six months of ~~2020~~2021 compared to ~~2019~~2020

In the first ~~nine~~six months of ~~2020~~2021 income tax expense totaled ~~$4.6~~$5.1 million compared to ~~$6.4~~$2.1 million a year ago. The effective tax rate was approximately ~~21.0%~~21.7% for first ~~nine~~six months of ~~2020~~2021 compared to ~~24.5%~~19.0% a year ago. The ~~lower~~higher effective tax rate for the first ~~nine~~six months of ~~2020~~2021 compared to same period in ~~2019~~2020 was ~~primarily from the CARES Act legislation and~~due to 2020 having a proportionately higher amount of non-taxable income in relation to income before taxes and, as part of the CARES Act legislation, a tax benefit realized from the recognition of net operating loss carryforwards from past acquisitions.

Loan and Lease Portfolio

The Company had total net loans and leases outstanding, including organic and ~~purchased~~acquired loans and leases, of approximately ~~$2.39~~$2.45 billion at ~~September~~June 30, ~~2020~~2021 compared to ~~$1.89~~$2.36 billion at December 31, ~~2019.~~2020. Loans secured by real estate, consisting of commercial orand residential property, are the principal component of our loan and lease portfolio.

Organic Loans and Leases

Our organic net loans and leases, which excludes loans and leases purchased through acquisitions, increased by ~~$440.9~~$115.3 million, or ~~29.1%~~5.8%, from December 31, ~~2019,~~2020, to ~~$1.96~~$2.10 billion at ~~September~~June 30, ~~2020.~~2021. Included in the growth was ~~$300.8~~$138.4 million of PPP loans that were originated and funded during the ~~second~~first six months of 2021 and ~~third quarters of~~offset by $247.6 million in forgiven PPP loans originated in 2020. Total net deferred fees associated with the PPP loans originated during the first six months of 2021 was approximately ~~$11.0~~$7.0 million ~~and $3.7 million was~~with $470 thousand accreted into ~~income during the second~~income.

Acquired Loans and ~~third quarters of 2020.~~

~~Purchased Loans~~Leases

Purchased non-credit impaired loans and leases, net of ~~$393.1~~$323.6 million at ~~September~~June 30, ~~2020 increased~~2021 decreased by ~~$44.0~~$27.1 million from December 31, ~~2019.~~2020. Since December 31, ~~2019,~~2020, our net purchased credit impaired (“PCI”) loans ~~increased~~and leases, net decreased by ~~$7.3~~$2.0 million to ~~$34.1~~$29.7 million at ~~September~~June 30, ~~2020.~~2021. The ~~increase~~decrease in purchased non-credit impaired loans and leases and PCI loans and leases is related to ~~the acquisition of PFG and offset by~~ maturities, paydowns and payoffs.

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

September 30, 2020

Purchased

Purchased

Non-Credit

Credit

% of

Organic

Impaired

Impaired

Total

Gross


Loans

Loans

Loans

Amount

Total

Commercial real estate-mortgage

$
812,191

$
201,993

$
16,469

$
1,030,653

42.9
%
Consumer real estate-mortgage

295,912

133,596

10,801

440,309

18.3
%
Construction and land development

246,112

22,650

6,409

275,171

11.4
%
Commercial and industrial

611,439

32,742

317

644,498

26.8
%
Consumer and other

9,119

4,220

87

13,426

0.6
%
Total gross loans receivable, net of deferred fees

1,974,773

395,201

34,083

2,404,057

100.0
%
Allowance for loan losses

(16,704)

$
(2,113)

—

(18,817)



Total loans, net

$
1,958,069

$
393,088

$
34,083

$
2,385,240


	June 30, 2021
			Purchased		Purchased				% of
			Non-Credit		Credit		Total		Gross
	Organic		Impaired		Impaired		Amount		Total
Commercial real estate-mortgage	$	998,806	$	152,314	$	11,371	$	1,162,491	47.1	%
Consumer real estate-mortgage		340,663		95,002		8,975		444,640	18.0	%
Construction and land development		285,167		10,272		5,265		300,704	12.2	%
Commercial and industrial		474,729		21,124		261		496,114	20.1	%
Leases		4,856		43,968		4,214		53,038	2.1	%
Consumer and other		9,145		2,170		16		11,331	0.5	%
Total gross loans and leases receivable, net of deferred fees		2,113,366		324,850		30,102		2,468,318	100.0	%
Allowance for loan and leases losses		(16,663)	$	(1,276)		(371)		(18,310)
Total loans and leases, net	$	2,096,703	$	323,574	$	29,731	$	2,450,008

December 31, 2019

Purchased

Purchased

Non-Credit

Credit

% of

Organic

Impaired

Impaired

Total

Gross


Loans

Loans

Loans

Amount

Total

Commercial real estate-mortgage

$
705,691

$
184,360

$
15,255

$
905,306

47.7
%
Consumer real estate-mortgage

295,915

115,026

6,541

417,482

22.0
%
Construction and land development

210,421

12,747

4,458

227,626

12.0
%
Commercial and industrial

306,521

30,147

407

337,075

17.8
%
Consumer and other

2,817

6,760

326

9,903

0.5
%
Total gross loans receivable, net of deferred fees

1,521,365

349,040

26,987

1,897,392

100.0
%
Allowance for loan losses

(10,087)

—

(156)

(10,243)



Total loans, net

$
1,511,278

$
349,040

$
26,831

$
1,887,149


	December 31, 2020
			Purchased		Purchased				% of
			Non-Credit		Credit		Total		Gross
	Organic		Impaired		Impaired		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	%
Leases		—		—		—		—	—	%
Consumer and other		9,250		3,539		27		12,816	0.5	%
Total gross loans and leases receivable, net of deferred fees		1,997,579		352,600		32,064		2,382,243	100.0	%
Allowance for loan and lease losses		(16,154)		(1,883)		(309)		(18,346)
Total loans and leases, net	$	1,981,425	$	350,717	$	31,755	$	2,363,897

Loan and Lease Portfolio Maturities

The following table sets forth the maturity distribution of our loans and leases at ~~September~~June 30, ~~2020,~~2021, including the interest rate sensitivity for loans and leases maturing after one 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

$
114,310

$
422,885

$
494,121

$
1,031,316

$
668,389

$
248,617
Consumer real estate-mortgage

27,080

169,931

243,299

440,310

209,880

203,350
Construction and land development

83,912

96,043

95,216

275,171

91,711

99,548
Commercial and industrial

86,276

476,926

82,421

645,623

520,240

39,107
Consumer and other

4,591

6,658

388

11,637

6,738

308
Total Loans

$
316,169

$
1,172,443

$
915,445

$
2,404,057

$
1,496,958

$
590,930


									Rate Structure for Loans and Leases
									Maturing Over One Year
	One Year		One through		Over Five				Fixed		Floating
	or Less		Five Years		Years		Total		Rate		Rate
Commercial real estate-mortgage	$	124,138	$	485,500	$	552,853	$	1,162,491	$	821,895	$	216,458
Consumer real estate-mortgage		29,667		171,171		243,802		444,640		210,278		204,695
Construction and land development		66,671		129,863		104,170		300,704		113,830		120,203
Commercial and industrial		108,437		323,661		64,016		496,114		348,146		39,531
Leases		2,127		50,911		—		53,038		50,911		—
Consumer and other		3,818		6,865		648		11,331		7,263		250
Total loans and leases	$	334,858	$	1,167,971	$	965,489	$	2,468,318	$	1,552,323	$	581,137

Nonaccrual, Past Due, and Restructured Loans and Leases

Nonperforming loans and leases as a percentage of total gross loans and leases, net of deferred fees, was ~~0.09%~~0.15% as of ~~September~~June 30, ~~2020, which decreased from 0.18%~~2021, and 0.24% as of December 31, ~~2019.~~2020, respectively. Total nonperforming assets as a percentage of total assets as of ~~September~~June 30, ~~2020~~2021 totaled 0.18% compared to ~~0.21%~~0.31% as of December 31, ~~2019.~~2020. Acquired PCI loans and leases that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets.

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The following table summarizes the Company’s nonperforming assets for the periods presented (in thousands):

September 30,

December 31,

2020

2019
Nonaccrual loans

$
2,248

$
2,743
Accruing loans past due 90 days or more

—

607
Total nonperforming loans

2,248

3,350
Other real estate owned

3,932

1,757
Total nonperforming assets

$
6,180

$
5,107
Restructured loans not included above

$
8

$
61


	June 30,		December 31,
	2021		2020
Nonaccrual loans and leases	$	3,694	$	5,633
Accruing loans and leases past due 90 days or more		64		149
Total nonperforming loans and leases		3,758		5,782
Other real estate owned		2,499		4,619
Other repossessed property		199		—
Total nonperforming assets	$	6,456	$	10,401
Restructured loans not included above	$	219	$	257

~~Potential Problem Loans~~

At September 30, 2020 potential problem loans amounted to approximately $1.1 million or 0.04% 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 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 ~~September~~June 30, ~~2020,~~2021, the Company had no loans remaining under COVID-19 ~~modified loans amounted to $232.5 million, or 9.7% of the total loans outstanding.~~modifications.

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, and approximately all of the $232.5 million remaining COVID-19 modified loans will mature during the fourth quarter of 2020.

Included in the COVID-19 modified loans were $56.2 million and $30.4 million of hospitality and restaurant loans, respectively. These sectors had increased vulnerability from COVID-19. At September 30, 2020, the short-term loan modifications were still expected to mature on the original maturity schedule. All of the COVID-19 modified loans were transitioned into watchlist categories internally.

Allocation of the Allowance for Loan and Lease Losses

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, is ~~$8.7 million~~$62 thousand compared to ~~$1.9~~$6.0 million in the same period of ~~2019, an increase~~2020, a decrease of ~~$6.8~~$6.1 million. The allowance for loan and lease loss provision for the six months ended June 30, 2020, increased due to the onset of the COVID-19 pandemic and related economic uncertainty. As of ~~September~~June 30, ~~2020,~~2021 and December 31, ~~2019,~~2020, our allowance for loan and lease losses was ~~$18.8~~$18.3 million ~~and $10.2 million, respectively,~~for each period, which we deemed to be adequate at each of the respective dates. ~~The increase in the~~Our allowance for loan losses at September 30, 2020, as compared to December 31, 2019, is primarily attributable to the ongoing economic uncertainties related to the COVID-19 pandemic. Also, during 2020, the Company updated the Allowance for Loan Loss policy to increase the additional basis points allowed for the unallocated risk portion from 100 basis points to 125 basis points. In addition, the Company added a new qualitative factor based on the percentage of COVID modified loans / total loans. The qualitative factors were also expanded to provide additional granularity related to the hospitality and restaurant industries which are most impacted by the pandemic within our footprint. The changes in our economic factors and the addition of the COVID modified factors equated to an additional $8.3 million in reserve. Our allowance for loanlease loss as a percentage of total loans and leases was ~~0.78%~~0.74% at ~~September~~June 30, ~~2020~~2021 and ~~0.54%~~0.77% at December 31, ~~2019.~~2020.

Our purchased loans and leases were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans and leases will be accreted into income over the life of the ~~loans.~~loans and leases. A provision for loan and lease losses is recorded for any deterioration in these loans and leases subsequent to the acquisition. As of ~~September~~June 30, ~~2020,~~2021, the notional balances on PCI loans and leases was ~~$47.2~~

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$41.7 million while the carrying value was ~~$34.1~~$29.7 million. At ~~September~~June 30, ~~2020,~~2021, there ~~were no loan loss allowances~~was an allowance on PCI ~~loans.~~loans and leases of $371 thousand.

The following table sets forth, based on our best estimate, the allocation of the allowance to types of loans and leases for the periods presented, and the percentage of loans and leases in each category to total loans and leases (dollars in thousands):

September 30, 2020

December 31, 2019


Amount

Percent

Amount

Percent

Commercial real estate-mortgage

$
7,729

42.9
%
$
4,508

47.7
%
Consumer real estate-mortgage

3,444

18.3
%

2,576

22.0
%
Construction and land development

2,060

11.4
%

1,127

12.0
%
Commercial and industrial

5,463

26.8
%

1,957

17.8
%
Consumer and other

121

0.6
%

75

0.5
%
Total allowance for loan losses

$
18,817

100.0
%
$
10,243

100.0
%


	June 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
Commercial real estate-mortgage	$	8,382	47.1	%	$	7,579	42.5	%
Consumer real estate-mortgage		3,323	18.0	%		3,471	18.6	%
Construction and land development		2,061	12.2	%		2,076	11.7	%
Commercial and industrial		4,442	20.1	%		5,107	26.6	%
Leases		—	2.1	%		—	—	%
Consumer and other		102	0.5	%		113	0.5	%
Total allowance for loan and lease losses	$	18,310	100.0	%	$	18,346	100.0	%

The allocation by category is determined based on the loans and leases individually assigned risk rating, if applicable, and environmental factors applicable to each category of ~~loans.~~loan and lease. For impaired loans and leases, those loans and leases are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired, non PCI, loans and leases were approximately ~~$475~~$237 thousand at December 31, ~~2019~~2020, compared to ~~$486~~$696 thousand at ~~September~~June 30, ~~2020.~~2021.

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Analysis of the Allowance for Loan and Lease Losses

The following is a summary of changes in the allowance for loan and lease losses for the periods presented including the ratio of the allowance for loan and lease losses to total loans and leases as of the end of each period (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,



2020

2019

2020

2019

Balance at beginning of period

$
16,254

$
9,097

$
10,243

$
8,275

Provision for loan losses

2,634

724

8,683

1,914

Charged-off loans:





Commercial real estate-mortgage

—

(36)

—

(36)

Consumer real estate-mortgage

(21)

(1)

(23)

(3)

Construction and land development

—

—

—

—

Commercial and industrial

(60)

(20)

(77)

(353)

Consumer and other

(89)

(50)

(231)

(260)

Total charged-off loans

(170)

(107)

(331)

(652)

Recoveries of previously charged-off loans:









Commercial real estate-mortgage

11

39

16

63

Consumer real estate-mortgage

17

17

34

37

Construction and land development

—

3

2

7

Commercial and industrial

55

12

103

66

Consumer and other

16

7

67

82

Total recoveries of previously charged-off loans

99

78

222

255

Net loan charge-offs

(71)

(29)

(109)

(397)

Balance at end of period

$
18,817

$
9,792

$
18,817

$
9,792

Ratio of allowance for loan losses to total loans outstanding at end of period

0.78
%

0.53
%

0.78
%

0.53
%
Ratio of net loan charge-offs to average loans outstanding for the period (annualized)

—
%

0.01
%

—
%

0.03
%


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Balance at beginning of period	$	18,370		$	13,431		$	18,346		$	10,243
Provision for loan and lease losses		(5)			2,850			62			6,049
Charged-off loans and leases:
Commercial real estate-mortgage		—			—			—			—
Consumer real estate-mortgage		(60)			—			(60)			(2)
Construction and land development		—			—			—			—
Commercial and industrial		(4)			(9)			(4)			(17)
Leases		—			—			—			—
Consumer and other		(89)			(66)			(209)			(142)
Total charged-off loans and leases		(153)			(75)			(273)			(161)
Recoveries of previously charged-off loans and leases:
Commercial real estate-mortgage		3			3			6			5
Consumer real estate-mortgage		5			11			21			17
Construction and land development		—			—			—			2
Commercial and industrial		7			6			10			49
Leases		—			—			—			—
Consumer and other		83			28			138			50
Total recoveries of previously charged-off loans and leases		98			48			175			123
Net loan and lease charge-offs		(55)			(27)			(98)			(38)
Balance at end of period	$	18,310		$	16,254		$	18,310		$	16,254
Ratio of allowance for loan and lease losses to total loans and leases outstanding at end of period		0.74	%		0.67	%		0.74	%		0.67
Ratio of net loan and lease charge-offs to average loans and leases outstanding for the period		—	%		—	%		—	%		—

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

Securities Portfolio

Our securities portfolio, consisting primarily of Federal agency bonds, state and municipal securities, and mortgage-backed securities, amounted to fair values of ~~$214.6~~$250.8 million and ~~$178.3~~$215.6 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Our investments to assets ratio ~~decreased~~increased from ~~7.3%~~6.5% at December 31, ~~2019~~2020 to ~~6.3%~~6.9% at ~~September~~June 30, ~~2020.~~2021. Our securities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income. All of the Company’s securities are designated as available-for-sale.

The following table shows the amortized cost of the Company’s securities, all investment securities were classified as available for sale (in thousands):


	June 30,		December 31,
	2021		2020
U.S. Treasury	$	6,381	$	—
U.S. Government-sponsored enterprises (GSEs)		73,503		30,526
Municipal securities		86,720		89,644
Other debt securities		29,019		25,019
Mortgage-backed securities		52,430		66,425
Total securities	$	248,053	$	211,614

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~~The following table shows the amortized cost of the Company’s securities by investment categories~~ ~~(in thousands)~~:

September 30,

December 31,

2020

2019
U.S. Government-sponsored enterprises (GSEs)

$
30,311

$
19,015
Municipal securities

88,864

63,792
Other debt securities

17,519

3,481
Mortgage-backed securities

74,424

91,531
Total securities

$
211,118

$
177,819

The following table presents the contractual maturity of the Company’s securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at ~~September~~June 30, ~~2020.~~2021. The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs (dollars in thousands):

Maturity By Years


1 or Less

1 to 5

5 to 10

Over 10

Total

U.S. Government agencies

$
—

$
641

$
7,402

$
22,268

$
30,311

State and political subdivisions

4,624

3,385

4,757

76,098

88,864

Other debt securities

—

983

14,036

2,500

17,519

Mortgage-backed securities

—

3,569

13,524

57,331

74,424

Total securities

$
4,624

$
8,578

$
39,719

$
158,197

$
211,118

Weighted average yield⁽¹⁾

1.92
%

1.22
%

3.24
%

2.56
%

2.62
%


	Maturity By Years
	1 or Less			1 to 5			5 to 10			Over 10			Total
U.S. Treasury	$	—		$	—		$	6,381		$	—		$	6,381
U.S. Government agencies		—			116			25,885			47,502			73,503
State and political subdivisions		5,025			2,937			6,694			72,064			86,720
Other debt securities		—			986			27,533			500			29,019
Mortgage-backed securities		—			3,400			9,952			39,078			52,430
Total securities	$	5,025		$	7,439		$	76,445		$	159,144		$	248,053
Weighted average yield⁽¹⁾		1.95	%		1.43	%		2.89	%		2.71	%		2.71	%

(1)	Based on amortized cost, taxable equivalent basis

Deposits

Deposits are the primary source of funds for the Company’s lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company’s primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of ~~September~~June 30, ~~2020,~~2021, brokered deposits represented approximately ~~3.0%~~1.7% of total deposits.

The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three months ended ~~September~~June 30, ~~2020~~2021 was ~~0.59%~~0.39% compared to ~~1.37%~~0.71% for the same period in ~~2019~~2020 and ~~0.79%~~0.41% and ~~1.37%~~0.90% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~September~~June 30, ~~2019,~~2020, respectively. The decreased cost of interest-bearing deposits was due to changes in rates caused by federal rate-changes during the periods.

Total deposits as of ~~September~~June 30, ~~2020~~2021 were ~~$2.65~~$3.14 billion, which was an increase of ~~$604.8~~$334.3 million from December 31, ~~2019.~~2020. This increase was primarily from ~~the completed acquisition of PFG and deposits related to the PPP loans.~~organic deposit growth. As of ~~September~~June 30, ~~2020,~~2021, the Company had outstanding time deposits under $250,000 with balances of ~~$437.1~~$364.6 million and time deposits over $250,000 with balances of ~~$140.0~~$124.9 million.

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The following table summarizes the maturities of time deposits $250,000 or more (in thousands).

September 30,

2020
Three months or less

$
31,107
Three to six months

31,974
Six to twelve months

44,221
More than twelve months

32,681
Total

$
139,983


	June 30,
	2021
Three months or less	$	30,740
Three to six months		30,225
Six to twelve months		25,668
More than twelve months		38,224
Total	$	124,857

Borrowings

The Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital using debt at the Company level which can be downstreamed as Tier 1 capital to the Bank. Borrowings totaled ~~$319.4~~$78.8 million at ~~September~~June 30, ~~2020,~~2021, and ~~primarily~~ consisted entirely of $75.0 million in FHLB borrowings ~~$237.8 million from the PPPLF~~ and short-term borrowings

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totaled ~~$6.2~~$3.8 million and consisted entirely of securities sold under repurchase agreements. Long-term debt totaled $39.4 million at June 30, 2021, and $39.3 million at ~~September 30, 2020 and~~ December 31, ~~2019, respectively~~2020, and consisted entirely of subordinated debt. For more information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 – Borrowings and Line of ~~Credit.~~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~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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.~~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~~June 30, ~~2020,~~2021, we had ~~$468.4~~$640.3 million of pre-approved but unused lines of credit and ~~$5.5~~$7.5 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. For more information regarding our ~~off-balanc8e~~off balance sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements - Note 9 – Commitments and Contingent ~~Liabilities.~~Liabilities.”

Market Risk and Liquidity Risk Management

The Bank’s Asset Liability Management Committee (“ALCO”) is responsible for making decisions regarding liquidity and funding solutions based upon approved liquidity, loan and lease, capital and investment policies. The ALCO must consider interest rate sensitivity and liquidity risk management when rendering a decision on funding solutions and loan and lease pricing. To assist in this process the Bank has contracted with an independent third party to prepare quarterly reports that summarize several key asset-liability measurements. In addition, the third party will also provide recommendations to the Bank’s ALCO regarding future balance sheet structure, earnings and liquidity strategies. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.

Interest Rate Sensitivity

Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest

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rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and leases and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. The primary measurements we use to help us manage interest rate sensitivity are an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.

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

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time. For changes up or down in rates from our dynamic interest rate forecast over the next 12 and 24 months, limits in the decline in net interest income are as follows:

Maximum Percentage Decline

in Net Interest

Income from the Budgeted

Estimated % Change in Net

or Base Case

Interest Income Over 12

Projection of Net Interest

Months

Income
September 30, 2020:

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

4.15%

0.68%

8%
± 200 basis points

6.36%

1.01%

14%


			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
June 30, 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	5.01%	(0.26)%	8%
± 200 basis points	10.11%	(0.81)%	14%

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

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

Maximum

Percentage

Decline in

Economic Value

of Equity from

the Economic

Value of Equity

Current Estimated Instantaneous

at Currently

Rate Change

Prevailing
September 30, 2020:

Increase +

Decrease -

Interest Rates
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:




±100 basis points

7.07%

(3.35)%

10%
±200 basis points

8.86%

14.17%

15%


			Maximum
			Percentage
			Decline in
			Economic Value
			of Equity from
			the Economic
			Value of Equity
	Current Estimated Instantaneous		at Currently
	Rate Change		Prevailing
June 30, 2021:	Increase +	Decrease -	Interest Rates

Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
±100 basis points	4.71%	(8.06)%	10%
±200 basis points	8.46%	(5.53)%	15%

At ~~September~~June 30, ~~2020,~~2021, our model results indicated that we were within these policy limits.

Liquidity Risk Management

The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan and lease demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.

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Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and intend to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

Scheduled loan and lease payments are a relatively stable source of funds, but loan and lease payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market

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conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.

The Company has ~~$4.6~~$5.0 million in investments that mature throughout the next 12 months. The Company also anticipates ~~$17.8~~$9.5 million of principal payments from mortgage-backed securities over the same period. The Company also has unused borrowing capacity in the amount of ~~$304.2~~$240.3 million available with the Federal Reserve, FHLB, several correspondent banks and a line of credit. With these sources of funds, the Company currently anticipates adequate liquidity to meet the expected obligations of its customers.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

This item is not required for a Smaller Reporting Company.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of ~~September~~June 30, ~~2020~~2021 (the “Evaluation Date”). Based on such evaluation, SmartFinancial’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, SmartFinancial’s disclosure controls and procedures were effective to ensure that information required to be disclosed by SmartFinancial in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to SmartFinancial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding the required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended ~~September~~June 30, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

SmartFinancial, Inc. and its wholly owned subsidiary, SmartBank, are periodically involved as a plaintiff or a defendant in various legal actions in the ordinary course of business. While the outcome of these matters is not currently determinable, management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial condition, financial statements or results of operations.

Item 1A. Risk Factors.

~~The Company disclosed risk~~In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in ~~its Annual Report on~~our Form 10-K for the year ended December 31, ~~2019. The risks described may not be the only risks facing us. Additional risks~~2020. These factors could materially and ~~uncertainties not currently known to us or that are currently considered to not be material also may materially~~ adversely affect our business, financial condition, and/or operating results. The following risk factors have been included in this Quarterly Report on Form 10-Q in response to the global market disruptions that have resulted from the COVID-19 pandemic.

~~The ongoing COVID-19 pandemic and measures implemented to prevent its spread could have a material adverse effect on our business,~~liquidity, results of operations and ~~financial condition,~~capital position, and ~~such effects will depend on future developments, which are highly uncertain~~could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Please be aware that these risks may change over time and ~~are difficult~~other risks may prove to ~~predict.~~

~~Global health concerns relating to~~be important in the ~~COVID-19 outbreak~~future. In addition, these risks may be heightened by the continued disruption and ~~related government actions taken to reduce the spread of the virus~~uncertainty resulting from COVID-19. There have been ~~weighing on~~no material changes from the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operationalrisk factors ~~impacting us or our borrowers, customers or business partners, including but not limited to:~~

●

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries;

●

~~declines in collateral values;~~

●

~~third party disruptions, including outages at network providers and other suppliers;~~

●

~~increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;~~

●

~~risk of litigation or other third-party claims, including with respect to our participation in the Payroll Protection Program and any other government-sponsored stimulus programs; and~~

●

~~operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.~~

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

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The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in ~~the “Risk Factors” section of~~ our ~~Annual Report on~~ Form 10-K for the year ended December 31, ~~2019.~~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

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 ~~September~~June 30, ~~2020,~~2021, we have purchased ~~$2.1~~$5.5 million of the authorized $10.0 million and may purchase up to an additional ~~$7.9~~$4.5 million in the Company’s outstanding common stock.

The following table summarizes the Company’s repurchase activity during the three months ended ~~September~~June 30, ~~2020.~~2021.


					Maximum						Maximum
					Number (or						Number (or
					Approximate						Approximate
					Dollar Value) of						Dollar Value) of
					Shares That May						Shares That May
				Total Number of Shares	Yet Be Purchased					Total Number of Shares	Yet Be Purchased
	Total Number of			Purchased as Part of	Under the Plans		Total Number of	Weighted		Purchased as Part of	Under the Plans
	Shares	Average Price Paid		Publicly Announced	or Programs (in		Shares	Average Price Paid		Publicly Announced	or Programs (in
Period	Repurchased	Per Share		Plans or Programs	thousands)		Repurchased	Per Share		Plans or Programs	thousands)
July 1, 2020 to July 31, 2020	—	$	—	—	$	7,925
August 1, 2020 to August 31, 2020	—		—	—		7,925
September 1, 2020 to September 31, 2020	—		—	—		7,925
April 1, 2021 to April 30, 2021							—	$	—	—	$	4,484
May 1, 2021 to May 31, 2021							—		—	—		4,484
June 1, 2021 to June 30, 2021							—		—	—		4,484
Total	—	$	—	—	$	7,925	—	$	—	—	$	4,484

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits


Exhibit No.	Description	Location
2.1	Agreement and Plan of Merger, dated April 13, 2021, by and between SmartFinancial, Inc. and Sevier County Bancshares, Inc.	Incorporated by reference to Exhibit 2.1 to Form 8-K filed April 14, 2021
2.2	Purchase Agreement, dated as of May 2, 2021, by and among Warren Payne, G. Price Cooper, B. Wade West, Craig Phillipy, and SmartBank	Incorporated by reference to Exhibit 2.1 to Form 8-K filed May 3, 2021
3.1	Second Amended and Restated Charter of SmartFinancial, Inc.	Incorporated by reference to Exhibit 3.3 to Form 8-K filed September 2, 2015
3.2	Second Amended and Restated Bylaws of SmartFinancial, Inc.	Incorporated by reference to Exhibit 3.1 to Form 8-K filed October 26, 2015
31.1	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
31.2	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
32.1	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
32.2	Certification pursuant to 18 USC Section 1350 -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

* Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule to the Securities and Exchange Commission upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SmartFinancial, Inc.

Date:	~~November 6, 2020~~August 9, 2021	/s/ William Y. Carroll, Jr.
		William Y. Carroll, Jr.
		President and Chief Executive Officer
		(principal executive officer)

Date:	~~November 6, 2020~~August 9, 2021	/s/ Ronald J. Gorczynski
		Ronald J. Gorczynski
		Executive Vice President and Chief Financial Officer
		(principal financial officer and accounting officer)


	September 30, 2020						December 31, 2019
	PCI		All Other				PCI		All Other
	Loans¹		Loans		Total		Loans¹		Loans		Total
Commercial real estate	$	16,469	$	1,014,182	$	1,030,651	$	15,255	$	890,051	$	905,306
Consumer real estate		10,801		429,509		440,310		6,541		410,941		417,482
Construction and land development		6,409		268,763		275,172		4,458		223,168		227,626
Commercial and industrial		317		644,181		644,498		407		336,668		337,075
Consumer and other		87		13,339		13,426		326		9,577		9,903
Total loans		34,083		2,369,974		2,404,057		26,987		1,870,405		1,897,392
Less: Allowance for loan losses		0		(18,817)		(18,817)		(156)		(10,087)		(10,243)

Loans, net	$	34,083	$	2,351,157	$	2,385,240	$	26,831	$	1,860,318	$	1,887,149


	Three Months Ended September 30,
	2020				2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	552	$	3	$	258	$	3
Consumer real estate		758		3		568		4
Construction and land development		0		0		701		3
Commercial and industrial		0		0		0		0
Consumer and other		0		0		0		0
		1,310		6		1,527		10
Impaired loans with a valuation allowance:
Commercial real estate		198		0		0		0
Consumer real estate		440		4		396		4
Construction and land development		0		0		0		0
Commercial and industrial		379		2		352		1
Consumer and other		0		0		0		0
		1,017		6		748		5
PCI loans:
Commercial real estate		8		0		2,520		0
Consumer real estate		1,869		38		1,151		0
Construction and land development		0		0		0		0
Commercial and industrial		305		2		0		0
Consumer real estate		27		0		0		0
		2,209		40		3,671		0

Total impaired loans	$	4,536	$	52	$	5,946	$	15


									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	$	114,310	$	422,885	$	494,121	$	1,031,316	$	668,389	$	248,617
Consumer real estate-mortgage		27,080		169,931		243,299		440,310		209,880		203,350
Construction and land development		83,912		96,043		95,216		275,171		91,711		99,548
Commercial and industrial		86,276		476,926		82,421		645,623		520,240		39,107
Consumer and other		4,591		6,658		388		11,637		6,738		308
Total Loans	$	316,169	$	1,172,443	$	915,445	$	2,404,057	$	1,496,958	$	590,930