Table of Contents

.

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31,June 30, 2021

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

For the transition period from __________ to __________

Commission File Number: 001-37661

GraphicGraphic

(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 May 05,August 04, 2021, there were 15,104,66115,109,736 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 March 31,June 30, 2021 and December 31, 2020

3

Consolidated Statements of Income for the Three and Six Months Ended March 31,June 30, 2021 and 2020

4

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31,June 30, 2021 and 2020

5

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended March 31,June 30, 2021 and 2020

6

Consolidated Statements of Cash Flows for the ThreeSix Months Ended March 31,June 30, 2021 and 2020

7

Notes to Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

3639

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

4954

Item 4.

Controls and Procedures

4954

PART II – OTHER INFORMATION

5055

Item 1.

Legal Proceedings

5055

Item 1A.

Risk Factors

5055

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

5055

Item 3.

Defaults Upon Senior Securities

5055

Item 4.

Mine Safety Disclosures

5156

Item 5.

Other Information

5156

Item 6.

Exhibits

5257

2

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)

    

    

(Unaudited)

    

    

March 31, 

    

December 31, 

    

June 30, 

    

December 31, 

2021

2020*

2021

2020*

ASSETS:

 

  

 

  

 

  

 

  

Cash and due from banks

$

46,594

$

50,460

$

59,305

$

50,460

Interest-bearing deposits with banks

 

442,793

 

364,846

 

544,095

 

364,846

Federal funds sold

 

67,314

 

66,413

 

70,115

 

66,413

Total cash and cash equivalents

 

556,701

 

481,719

 

673,515

 

481,719

Securities available-for-sale, at fair value

 

250,937

 

215,634

 

250,817

 

215,634

Other investments

 

14,728

 

14,794

 

14,584

 

14,794

Loans held for sale

 

7,870

 

11,721

 

4,334

 

11,721

Loans

 

2,487,129

 

2,382,243

Less: Allowance for loan losses

 

(18,370)

 

(18,346)

Loans, net

 

2,468,759

 

2,363,897

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

 

72,697

 

72,682

 

72,314

 

72,682

Other real estate owned

 

3,946

 

4,619

 

2,499

 

4,619

Goodwill and core deposit intangible, net

 

86,350

 

86,471

Goodwill and other intangibles, net

 

90,966

 

86,471

Bank owned life insurance

 

71,586

 

31,215

 

72,013

 

31,215

Other assets

 

23,629

 

22,197

 

23,306

 

22,197

Total assets

$

3,557,203

$

3,304,949

$

3,654,356

$

3,304,949

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

  

 

  

 

  

 

  

Deposits:

 

  

 

  

 

  

 

  

Noninterest-bearing demand

$

777,968

$

685,957

$

807,560

$

685,957

Interest-bearing demand

 

683,887

 

649,129

 

702,470

 

649,129

Money market and savings

 

1,073,941

 

919,631

 

1,140,029

 

919,631

Time deposits

 

512,417

 

550,498

 

489,413

 

550,498

Total deposits

 

3,048,213

 

2,805,215

 

3,139,472

 

2,805,215

Borrowings

 

82,642

 

81,199

 

78,834

 

81,199

Subordinated debt

 

39,367

 

39,346

 

39,388

 

39,346

Other liabilities

 

22,923

 

22,021

 

23,269

 

22,021

Total liabilities

 

3,193,145

 

2,947,781

 

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

 

0

 

0

Common stock, $1 par value; 40,000,000 shares authorized; 15,104,536 and 15,107,214 shares issued and outstanding, respectively

 

15,105

 

15,107

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

 

251,836

 

252,693

 

252,039

 

252,693

Retained earnings

 

96,034

 

87,185

 

103,906

 

87,185

Accumulated other comprehensive income

 

1,083

 

2,183

 

2,338

 

2,183

Total shareholders' equity

 

364,058

 

357,168

 

373,393

 

357,168

Total liabilities and shareholders' equity

$

3,557,203

$

3,304,949

$

3,654,356

$

3,304,949

* Derived from audited financial statements.

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

3

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

Three Months Ended

March 31, 

    

2021

    

2020

Interest income:

 

  

 

  

Loans, including fees

$

28,018

$

26,434

Securities available-for-sale:

 

 

  

Taxable

 

724

 

679

Tax-exempt

 

259

 

283

Federal funds sold and other earning assets

 

291

 

602

Total interest income

 

29,292

 

27,998

Interest expense:

 

  

 

  

Deposits

 

2,331

 

4,754

Borrowings

 

117

 

89

Subordinated debt

 

584

 

584

Total interest expense

 

3,032

 

5,427

Net interest income

 

26,260

 

22,571

Provision for loan losses

 

67

 

3,200

Net interest income after provision for loan losses

 

26,193

 

19,371

Noninterest income:

 

  

 

  

Service charges on deposit accounts

1,009

770

Mortgage banking

 

1,139

 

584

Investment services

 

531

 

437

Insurance commissions

1,466

269

Interchange and debit card transaction fees, net

839

276

Other

 

707

 

482

Total noninterest income

 

5,691

 

2,818

Noninterest expense:

 

  

 

  

Salaries and employee benefits

 

10,869

 

10,006

Occupancy and equipment

 

2,341

 

1,911

FDIC insurance

 

371

 

180

Other real estate and loan related expense

 

602

 

545

Advertising and marketing

 

190

 

198

Data processing and technology

 

1,379

 

1,008

Professional services

 

641

 

711

Amortization of intangibles

 

444

 

362

Merger related and restructuring expenses

 

103

 

2,096

Other

 

2,524

 

1,776

Total noninterest expense

 

19,464

 

18,793

Income before income tax expense

 

12,420

 

3,396

Income tax expense

 

2,664

 

664

Net income

$

9,756

$

2,732

Earnings per common share:

 

  

 

  

Basic

$

0.65

$

0.19

Diluted

$

0.65

$

0.19

Weighted average common shares outstanding:

 

  

 

  

Basic

 

15,011,573

 

14,395,103

Diluted

 

15,111,947

 

14,479,671

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.

4

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

    

Three Months Ended

March 31, 

2021

2020

Net income

$

9,756

$

2,732

Other comprehensive income:

 

  

 

  

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

 

(2,808)

 

1,095

Tax effect

 

738

 

(244)

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

 

(2,070)

 

851

Unrealized gains (losses) on fair value municipal security hedges

 

1,313

 

(3,072)

Tax effect

 

(343)

 

806

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

 

970

 

(2,266)

Total other comprehensive (loss)

 

(1,100)

 

(1,415)

Comprehensive income

$

8,656

$

1,317

    

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.

5

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

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

For the Three and Six Months Ended March 31,June 30, 2021 and 2020

(Dollars in thousands, except for share data)

    

    

    

    

    

Accumulated

    

Other

Common Stock

 

Additional

 

Retained

 

Comprehensive

 

Shares

Amount

Paid-in Capital

Earnings

 

(Loss) Income

Total

Balance, December 31, 2019

 

14,008,233

$

14,008

$

232,732

$

65,839

$

168

$

312,747

Net income

 

 

 

 

2,732

 

 

2,732

Other comprehensive loss

 

 

 

 

 

(1,415)

 

(1,415)

Common stock issued pursuant to:

 

 

  

 

  

 

  

 

  

 

Exercise of stock options

 

14,858

 

15

 

158

 

 

 

173

Restricted stock

31,900

32

(32)

Shareholders' of Progressive Financial Group, Inc.

1,292,578

1,293

23,254

24,547

Stock compensation expense

 

 

 

110

 

 

 

110

Common stock dividend ($0.05 per share)

(702)

(702)

Repurchases of common stock

(125,579)

(126)

(1,866)

(1,992)

Balance, March 31, 2020

 

15,221,990

$

15,222

$

254,356

$

67,869

$

(1,247)

$

336,200

Balance, December 31, 2020

 

15,107,214

$

15,107

$

252,693

$

87,185

$

2,183

$

357,168

Net income

 

 

 

 

9,756

 

 

9,756

Other comprehensive loss

 

 

 

 

 

(1,100)

 

(1,100)

Common stock issued pursuant to:

 

  

 

  

 

  

 

  

 

  

 

Exercise of stock options

 

15,965

 

16

 

131

 

 

 

147

Restricted stock

 

40,967

 

41

 

(41)

 

 

 

Stock compensation expense

 

 

 

201

 

 

 

201

Common stock dividend ($0.06 per share)

 

 

 

 

(907)

 

 

(907)

Repurchases of common stock

(59,610)

(59)

(1,148)

(1,207)

Balance, March 31, 2021

 

15,104,536

$

15,105

$

251,836

$

96,034

$

1,083

$

364,058

    

    

    

    

    

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)

    

Three Months Ended March 31, 

2021

2020

Cash flows from operating activities:

 

  

 

  

Net income

$

9,756

$

2,732

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Depreciation and amortization

 

1,499

 

1,634

Accretion of fair value purchase accounting adjustments, net

 

(1,636)

 

(1,841)

Provision for loan losses

 

67

 

3,200

Stock compensation expense

 

201

 

110

Deferred income tax expense

 

446

 

90

Increase in cash surrender value of bank owned life insurance

 

(370)

 

(162)

Net losses from sale of other real estate owned

 

151

 

14

Net gains from mortgage banking

 

(1,139)

 

(576)

Origination of loans held for sale

 

(35,229)

 

(15,195)

Proceeds from sales of loans held for sale

 

40,219

 

15,582

Net change in:

 

  

 

  

Accrued interest receivable

 

(86)

 

35

Accrued interest payable

 

367

 

784

Other assets

 

(1,234)

 

685

Other liabilities

 

3,078

 

2,010

Net cash provided by operating activities

 

16,090

 

9,102

Cash flows from investing activities:

 

  

 

  

Proceeds from sales of securities available-for-sale

 

 

2,115

Proceeds from maturities and calls of securities available-for-sale

 

9,097

 

3,250

Proceeds from paydowns of securities available-for-sale

 

7,144

 

3,816

Proceeds from sales of other investments

147

Purchases of securities available-for-sale

 

(55,757)

 

(3,377)

Purchases of other investments

 

(80)

 

(507)

Purchases of bank owned life insurance

(40,000)

Net increase in loans

 

(103,308)

 

(52,721)

Purchases of premises and equipment

 

(1,009)

 

(2,429)

Proceeds from sale of other real estate owned

 

98

 

120

Net cash and cash equivalents received from business combination

 

 

46,132

Net cash used in investing activities

 

(183,668)

 

(3,601)

Cash flows from financing activities:

 

  

 

  

Net increase in deposits

 

243,084

 

22,158

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

 

1,447

 

(20)

Proceeds from borrowings

 

 

100,000

Repayment borrowings

(4)

Cash dividends paid

 

(907)

 

(702)

Issuance of common stock

 

147

 

173

Repurchase of common stock

 

(1,207)

 

(1,992)

Net cash provided by financing activities

 

242,560

 

119,617

Net change in cash and cash equivalents

 

74,982

 

125,118

Cash and cash equivalents, beginning of period

 

481,719

 

183,971

Cash and cash equivalents, end of period

$

556,701

$

309,089

Supplemental disclosures of cash flow information:

 

  

 

  

Cash paid during the period for interest

$

2,665

$

4,643

Noncash investing and financing activities:

 

  

 

  

Acquisition of real estate through foreclosure

 

14

 

676

Change in goodwill due to acquisitions

 

324

 

8,302

    

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.

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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, 2020.

Recently Issued and Adopted Accounting Pronouncements:

In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.”  This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.  The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.  Finally, it clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so.  ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020.  ASU 2019-12 did not have a material impact on the Company’s Consolidated Financial Statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

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

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

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

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

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

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

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 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.

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

Fountain Leasing, LLC

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

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

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

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

    

As recorded

    

Fair value

Subsequent

    

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 $8.8 million, representing the intangible value of Progressive’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.4 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.  The Company also established two intangible assets related to the insurance agency acquired as part of the PFG acquisition; 1.) Customer relationships of $1.1 million, amortizing sum-of-the-years digits over 120 months (10 years), 2.) Tradename of $63 thousand, amortizing straight-line over 60 months (5 years).

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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

Initial

    

As recorded

    

Fair value

Subsequent

    

As recorded

    

As recorded

    

Fair value

Subsequent

    

As recorded

by PFG

adjustments

Adjustments

by the Company

by PFG

adjustments

Adjustments

by the Company

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

Cash & cash equivalents

$

55,971

$

$

$

55,971

$

55,971

$

$

$

55,971

Investment securities available-for-sale

 

27,054

 

203

 

27,257

 

27,054

 

203

 

27,257

Restricted investments

 

692

 

 

692

 

692

 

 

692

Loans

 

191,672

 

(3,691)

 

187,981

 

191,672

 

(3,691)

 

187,981

Allowance for loan losses

 

(2,832)

 

2,832

 

 

(2,832)

 

2,832

 

Premises and equipment, net

 

15,681

 

(2,919)

 

12,762

 

15,681

 

(2,919)

 

12,762

Bank owned life insurance

 

5,560

 

 

5,560

 

5,560

 

 

5,560

Deferred tax asset, net

 

 

813

193

 

1,006

 

 

813

193

 

1,006

Intangibles

 

 

1,370

1,127

 

2,497

 

 

1,370

1,127

 

2,497

Other real estate owned

 

3,695

 

(100)

(1,862)

 

1,733

 

3,695

 

(100)

(1,862)

 

1,733

Interest Receivable

 

1,061

 

(280)

 

781

 

1,061

 

(280)

 

781

Prepaids

 

375

 

(174)

 

201

 

375

 

(174)

 

201

Goodwill

 

231

 

(231)

 

 

231

 

(231)

 

Other assets

 

1,881

 

 

1,881

 

1,881

 

 

1,881

Total assets acquired

$

301,041

$

(2,177)

$

(542)

$

298,322

$

301,041

$

(2,177)

$

(542)

$

298,322

Liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Deposits

$

271,276

$

$

271,276

$

271,276

$

$

271,276

Time deposit premium

 

 

729

 

729

 

 

729

 

729

Payables and other liabilities

 

776

 

 

776

 

776

 

 

776

Total liabilities assumed

 

272,052

 

729

 

 

272,781

 

272,052

 

729

 

 

272,781

Excess of assets assumed over liabilities assumed

$

28,989

 

  

 

  

Excess of assets acquired over liabilities assumed

$

28,989

 

  

 

  

Aggregate fair value adjustments

 

  

$

(2,906)

$

(542)

 

  

 

  

$

(2,906)

$

(542)

 

  

Total identifiable net assets

 

  

 

  

 

25,541

 

  

 

  

 

25,541

Consideration transferred:

 

  

 

  

 

  

 

  

 

  

 

  

Cash

 

  

 

  

 

9,838

 

  

 

  

 

9,838

Common stock issued (1,292,578 shares)

 

  

 

  

 

24,547

 

  

 

  

 

24,547

Total fair value of consideration transferred

 

  

 

  

 

34,385

 

  

 

  

 

34,385

Goodwill

 

  

 

  

$

8,844

 

  

 

  

$

8,844

(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 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

Note 3. Earnings Per Share

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

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

Three Months Ended

March 31, 

    

2021

    

2020

Basic earnings per share computation:

 

  

 

  

Net income available to common shareholders

$

9,756

$

2,732

Average common shares outstanding – basic

 

15,011,573

 

14,395,103

Basic earnings per share

$

0.65

$

0.19

Diluted earnings per share computation:

 

  

 

  

Net income available to common shareholders

$

9,756

$

2,732

Average common shares outstanding – basic

 

15,011,573

 

14,395,103

Incremental shares from assumed conversions:

 

  

 

  

Stock options and restricted stock

 

100,374

 

84,568

Average common shares outstanding - diluted

 

15,111,947

 

14,479,671

Diluted earnings per common share

$

0.65

$

0.19

Note 4. Securities

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

March 31, 2021

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

U.S. Government-sponsored enterprises (GSEs)

$

73,905

$

41

$

(1,689)

$

72,257

Municipal securities

 

88,509

 

1,626

 

(6)

 

90,129

Other debt securities

 

26,019

 

154

 

(118)

 

26,055

Mortgage-backed securities (GSEs)

 

61,294

 

1,354

 

(152)

 

62,496

Total

$

249,727

$

3,175

$

(1,965)

$

250,937

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2020

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

U.S. Government-sponsored enterprises (GSEs)

$

30,526

$

10

$

(6)

$

30,530

Municipal securities

 

89,644

 

2,345

 

 

91,989

Other debt securities

 

25,019

 

112

 

(13)

 

25,118

Mortgage-backed securities (GSEs)

 

66,425

 

1,754

 

(182)

 

67,997

Total

$

211,614

$

4,221

$

(201)

$

215,634

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

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

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

Three Months Ended

March 31, 

2021

    

2020

Proceeds from sales

$

-

$

2,115

Gross gains

$

-

$

-

Gross losses

$

-

$

-

Proceeds from maturities and calls

$

9,097

$

3,250

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

March 31, 2021

    

Amortized

    

Fair

Cost

Value

Due in one year or less

$

4,947

$

4,972

Due from one year to five years

 

4,569

 

4,596

Due from five years to ten years

 

56,988

 

56,896

Due after ten years

 

121,929

 

121,977

 

188,433

 

188,441

Mortgage-backed securities

 

61,294

 

62,496

Total

$

249,727

$

250,937

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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 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 six months ended June 30, 2020, respectively.

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

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

2021

    

2020

Basic earnings per share computation:

 

  

 

  

  

 

  

Net income available to common shareholders

$

8,778

$

6,174

$

18,534

$

8,907

Average common shares outstanding – basic

 

15,003,657

 

15,152,768

 

15,007,593

 

14,773,935

Basic earnings per share

$

0.59

$

0.41

$

1.24

$

0.60

Diluted earnings per share computation:

 

  

 

  

 

  

 

  

Net income available to common shareholders

$

8,778

$

6,174

$

18,534

$

8,907

Average common shares outstanding – basic

 

15,003,657

 

15,152,768

 

15,007,593

 

14,773,935

Incremental shares from assumed conversions:

 

  

 

  

 

  

 

  

Stock options and restricted stock

 

122,527

 

49,567

 

111,331

 

68,551

Average common shares outstanding - diluted

 

15,126,184

 

15,202,335

 

15,118,924

 

14,842,486

Diluted earnings per common share

$

0.58

$

0.41

$

1.23

$

0.60

Note 4. Securities

The following tables present theamortized cost, gross unrealized gains and 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):

March 31, 2021

Less than 12 Months

12 Months or Greater

Total

    

    

Gross

Number

    

    

Gross

Number

    

    

Gross

Number

Fair

Unrealized

of

Fair

Unrealized

of

Fair

Unrealized

of

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

Securities

U.S. Government-sponsored enterprises (GSEs)

$

60,310

$

(1,687)

14

$

585

$

(2)

2

$

60,895

$

(1,689)

16

Municipal securities

 

1,125

 

(6)

2

 

 

 

1,125

 

(6)

2

Other debt securities

 

12,882

 

(118)

6

 

 

 

12,882

 

(118)

6

Mortgage-backed securities (GSEs)

 

2,095

 

(2)

2

 

11,745

 

(150)

6

 

13,840

 

(152)

8

Total

$

76,412

$

(1,813)

24

$

12,330

$

(152)

8

$

88,742

$

(1,965)

32

December 31, 2020

Less than 12 Months

12 Months or Greater

Total

    

    

Gross

Number

    

    

Gross

Number

    

    

Gross

Number

Fair

Unrealized

of

Fair

Unrealized

of

Fair

Unrealized

of

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

Securities

U.S. Government-sponsored enterprises (GSEs)

$

15,510

$

(5)

3

$

132

$

(1)

1

$

15,642

$

(6)

4

Municipal securities

 

 

 

 

 

 

Other debt securities

 

1,495

 

(5)

1

 

977

 

(8)

1

 

2,472

 

(13)

2

Mortgage-backed securities (GSEs)

 

9,790

 

(87)

6

 

6,083

 

(95)

3

 

15,873

 

(182)

9

Total

$

26,795

$

(97)

10

$

7,192

$

(104)

5

$

33,987

$

(201)

15

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

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

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

March 31, 

December 31, 

    

2021

    

2020

Federal Reserve Bank stock

$

8,460

 

$

8,606

Federal Home Loan Bank stock

 

5,918

 

5,838

First National Bankers Bank stock

 

350

 

350

Total

$

14,728

$

14,794

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

Note 5. Loans and Allowance for Loan Losses

Portfolio Segmentation:

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

March 31, 2021

December 31, 2020

PCI

All Other

PCI

All Other

    

Loans1

    

Loans

    

Total

    

Loans1

    

Loans

    

Total

Commercial real estate

$

13,877

$

1,056,764

$

1,070,641

$

16,123

$

996,853

$

1,012,976

Consumer real estate

 

9,597

 

422,889

 

432,486

 

10,258

 

433,672

 

443,930

Construction and land development

 

5,350

 

280,623

 

285,973

 

5,348

 

272,727

 

278,075

Commercial and industrial

 

303

 

685,707

 

686,010

 

308

 

634,138

 

634,446

Consumer and other

 

21

 

11,998

 

12,019

 

27

 

12,789

 

12,816

Total loans

 

29,148

 

2,457,981

 

2,487,129

 

32,064

 

2,350,179

 

2,382,243

Less: Allowance for loan losses

 

(376)

 

(17,994)

 

(18,370)

 

(309)

 

(18,037)

 

(18,346)

Loans, net

$

28,772

$

2,439,987

$

2,468,759

$

31,755

$

2,332,142

$

2,363,897

June 30, 2021

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

U.S. Treasury

$

6,381

$

57

$

$

6,438

U.S. Government-sponsored enterprises (GSEs)

73,503

191

(1,074)

72,620

Municipal securities

 

86,720

 

2,188

 

 

88,908

Other debt securities

 

29,019

 

414

 

(82)

 

29,351

Mortgage-backed securities (GSEs)

 

52,430

 

1,201

 

(131)

 

53,500

Total

$

248,053

$

4,051

$

(1,287)

$

250,817

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

December 31, 2020

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

U.S. Government-sponsored enterprises (GSEs)

$

30,526

$

10

$

(6)

$

30,530

Municipal securities

 

89,644

 

2,345

 

 

91,989

Other debt securities

 

25,019

 

112

 

(13)

 

25,118

Mortgage-backed securities (GSEs)

 

66,425

 

1,754

 

(182)

 

67,997

Total

$

211,614

$

4,221

$

(201)

$

215,634

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

15

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

March 31, 2021:

    

    

    

    

    

Performing loans

    

$

1,053,610

$

420,419

$

280,623

$

685,598

$

11,998

$

2,452,248

Impaired loans

 

3,154

 

2,470

 

 

109

 

 

5,733

 

1,056,764

 

422,889

 

280,623

 

685,707

 

11,998

 

2,457,981

PCI loans

 

13,877

 

9,597

 

5,350

 

303

 

21

 

29,148

Total loans

$

1,070,641

$

432,486

$

285,973

$

686,010

$

12,019

$

2,487,129

December 31, 2020:

    

    

    

    

    

    

Performing loans

    

$

992,982

$

432,356

$

272,727

$

633,992

$

12,789

$

2,344,846

Impaired loans

 

3,871

 

1,316

 

 

146

 

 

5,333

 

996,853

 

433,672

 

272,727

 

634,138

 

12,789

 

2,350,179

PCI loans

 

16,123

 

10,258

 

5,348

 

308

 

27

 

32,064

Total loans

$

1,012,976

$

443,930

$

278,075

$

634,446

$

12,816

$

2,382,243

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

Construction

Commercial

Consumer

Commercial

Consumer

and Land

and

and

Real Estate

Real Estate

Development

Industrial

Other

Total

March 31, 2021:

Performing loans

    

$

7,386

    

$

3,018

    

$

1,968

    

$

5,022

    

$

108

    

$

17,502

Impaired loans

 

251

 

132

 

 

109

 

 

492

 

7,637

 

3,150

 

1,968

 

5,131

 

108

 

17,994

PCI loans

 

 

158

 

 

216

 

2

 

376

Total loans

$

7,637

$

3,308

$

1,968

$

5,347

$

110

$

18,370

December 31, 2020:

Performing loans

    

$

7,579

    

$

3,267

    

$

2,076

    

$

4,768

    

$

110

    

$

17,800

Impaired loans

 

 

116

 

 

121

 

 

237

 

7,579

 

3,383

 

2,076

 

4,889

 

110

 

18,037

PCI loans

 

 

88

 

 

218

 

3

 

309

Total loans

$

7,579

$

3,471

$

2,076

$

5,107

$

113

$

18,346

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

Three Months Ended March 31, 2021

Consumer

Construction

Commercial

Commercial

Real

and Land

and

Consumer

Real Estate

Estate

 

Development

Industrial

and Other

Total

Beginning balance

    

$

7,579

    

$

3,471

    

$

2,076

    

$

5,107

    

$

113

    

$

18,346

Charged-off loans

 

 

 

 

 

(120)

 

(120)

Recoveries of charge-offs

 

3

 

16

 

 

3

 

55

 

77

Provision charged to expense

 

55

 

(179)

 

(108)

 

237

 

62

 

67

Ending balance

$

7,637

$

3,308

$

1,968

$

5,347

$

110

$

18,370

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended March 31, 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

Charged-off loans

 

 

(2)

 

 

(8)

 

(76)

 

(86)

Recoveries of charge-offs

 

2

 

6

 

2

 

42

 

22

 

74

Provision charged to expense

 

1,453

 

721

 

355

 

566

 

105

 

3,200

Ending balance

$

5,963

$

3,301

$

1,484

$

2,557

$

126

$

13,431

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio. Our provision for loan losses for the three months ended March 31, 2021, is $67 thousand compared to $3.2 million in the same period of 2020, a decrease of $3.1 million.  As of March 31,June 30, 2021 and December 31, 2020, our allowance for loan losses was $18.4securities with a carrying value totaling approximately $122.4 million and $18.3$80.2 million, respectively, which we deemedwere pledged to be adequate at eachsecure public funds and securities sold under agreements to repurchase.

The Company has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair values of available for sale securities. See Note 11 – Derivatives Financial Instruments for disclosure of the respective dates.  Our allowance for loan loss as a percentage of total loans was 0.74% at March 31, 2021gains and 0.77% at December 31, 2020.

The following tables outlinelosses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of each loan classification and the amount categorized into each risk rating (in thousands):

March 31, 2021

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Non PCI Loans:

Real Estate

Real Estate

 

Development

Industrial

and Other

Total

Pass

    

$

1,011,291

    

$

418,604

    

$

280,299

    

$

680,635

    

$

11,908

    

$

2,402,737

Watch

 

38,170

 

1,234

 

245

 

4,489

 

52

 

44,190

Special mention

 

3,922

 

44

 

 

297

 

 

4,263

Substandard

 

3,381

 

3,007

 

79

 

238

 

38

 

6,743

Doubtful

 

 

 

 

48

 

 

48

Total

1,056,764

422,889

280,623

685,707

11,998

2,457,981

PCI Loans:

Pass

    

11,088

    

8,173

    

1,430

    

257

    

20

    

20,968

Watch

 

1,592

 

206

 

3,405

 

 

1

 

5,204

Special mention

 

17

 

58

 

 

 

 

75

Substandard

 

1,180

 

1,160

 

515

 

46

 

 

2,901

Doubtful

 

 

 

 

 

 

Total

13,877

9,597

5,350

303

21

29,148

Total loans

$

1,070,641

$

432,486

$

285,973

$

686,010

$

12,019

$

2,487,129

hedged securities.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2020

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Non PCI Loans:

Real Estate

Real Estate

 

Development

Industrial

and Other

Total

Pass

    

$

922,153

    

$

417,302

    

$

269,350

    

$

625,836

    

$

12,622

    

$

2,247,263

Watch

 

66,287

 

14,218

 

3,296

 

7,673

 

137

 

91,611

Special mention

 

4,446

 

46

 

 

320

 

 

4,812

Substandard

 

3,967

 

2,020

 

81

 

261

 

30

 

6,359

Doubtful

 

 

86

 

 

48

 

 

134

Total

996,853

433,672

272,727

634,138

12,789

2,350,179

PCI Loans:

Pass

    

11,072

    

8,382

    

1,008

    

262

    

25

    

20,749

Watch

 

3,381

 

224

 

3,820

 

 

2

 

7,427

Special mention

 

19

 

57

 

 

 

 

76

Substandard

 

1,651

 

1,595

 

520

 

46

 

 

3,812

Doubtful

 

 

 

 

 

 

Total

16,123

10,258

5,348

308

27

32,064

Total loans

$

1,012,976

$

443,930

$

278,075

$

634,446

$

12,816

$

2,382,243

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 Past Due Loans:(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

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

The following tables present an aging analysisthe gross unrealized losses and fair value, aggregated by investment category and length of our loan portfoliotime that individual securities available-for-sale have been in a continuous unrealized loss position (in thousands):

March 31, 2021

June 30, 2021

    

30-60 Days

    

61-89 Days

    

Past Due 90

    

    

Total

    

    

    

Less than 12 Months

12 Months or Greater

Total

 

Past Due and

 

Past Due and

 

Days��or More

 

Past Due and

 

PCI

 

Current

 

Total

    

    

Gross

Number

    

    

Gross

Number

    

    

Gross

Number

 

Accruing

 

Accruing

 

and Accruing

Nonaccrual

Nonaccrual

Loans

Loans

Loans

Fair

Unrealized

of

Fair

Unrealized

of

Fair

Unrealized

of

Commercial real estate

$

565

$

$

1,495

$

3,155

$

5,215

$

13,877

$

1,051,549

$

1,070,641

Consumer real estate

 

968

 

1,336

 

 

1,481

 

3,785

 

9,597

 

419,104

 

432,486

Construction and land development

 

643

 

 

 

11

 

654

 

5,350

 

279,969

 

285,973

Commercial and industrial

 

666

 

12

 

 

60

 

738

 

303

 

684,969

 

686,010

Consumer and other

 

3

 

 

 

32

 

35

 

21

 

11,963

 

12,019

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

$

2,845

$

1,348

$

1,495

$

4,739

$

10,427

$

29,148

$

2,447,554

$

2,487,129

$

46,815

$

(1,153)

15

$

10,703

$

(134)

9

$

57,518

$

(1,287)

24

December 31, 2020

December 31, 2020

    

30-60 Days

    

61-89 Days

    

Past Due 90

    

    

Total

    

    

    

Less than 12 Months

12 Months or Greater

Total

 

Past Due and

 

Past Due and

 

Days or More

 

Past Due and

 

PCI

 

Current

 

Total

    

    

Gross

Number

    

    

Gross

Number

    

    

Gross

Number

 

Accruing

 

Accruing

 

and Accruing

Nonaccrual

Nonaccrual

Loans

Loans

Loans

Fair

Unrealized

of

Fair

Unrealized

of

Fair

Unrealized

of

Commercial real estate

$

134

$

$

67

$

3,740

$

3,941

$

16,123

$

992,912

$

1,012,976

Consumer real estate

 

1,916

 

51

 

82

 

1,823

 

3,872

 

10,258

 

429,800

 

443,930

Construction and land development

 

245

 

 

 

12

 

257

 

5,348

 

272,470

 

278,075

Commercial and industrial

 

12

 

76

 

 

36

 

124

 

308

 

634,014

 

634,446

Consumer and other

 

14

 

5

 

 

22

 

41

 

27

 

12,748

 

12,816

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

$

2,321

$

132

$

149

$

5,633

$

8,235

$

32,064

$

2,341,944

$

2,382,243

$

26,795

$

(97)

10

$

7,192

$

(104)

5

$

33,987

$

(201)

15

15

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

18The Company reviews the securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

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

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

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

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

For purposes of the disclosures required pursuant to ASC 310, the loan and lease portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are 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.

16

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 (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

17

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):

Three 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

    

$

7,636

    

$

3,309

    

$

1,968

    

$

5,347

    

$

    

$

110

    

$

18,370

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

$

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 three and six months ended June 30, 2021, is ($5) thousand and $62 thousand, respectively, and $2.9 million $6.0 million, during the three and six months ended June 30, 2020, respectively.  As of June 30, 2021, and December 31, 2020, our allowance for loan and lease losses was $18.3 million, which we deemed to be adequate at each of the respective dates.  Our allowance for loan and lease losses as a percentage of total loans and leases was 0.74% at June 30, 2021 and 0.77% at December 31, 2020.

18

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 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.

19

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):

 

March 31, 2021

 

December 31, 2020

 

 

Unpaid

 

 

 

Unpaid

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Principal

 

Related

Investment

 

Balance

Allowance

Investment

 

Balance

Allowance

Impaired loans without a valuation allowance:

    

  

    

  

    

  

    

  

    

  

    

  

Commercial real estate

$

130

$

130

$

$

3,871

$

3,872

$

Consumer real estate

 

1,880

 

1,882

 

 

888

 

888

 

Construction and land development

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

Consumer and other

 

 

 

 

 

 

 

2,010

 

2,012

 

 

4,759

 

4,760

 

Impaired loans with a valuation allowance:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

3,155

 

3,155

 

251

 

 

 

Consumer real estate

 

459

 

462

 

132

 

428

 

428

 

116

Construction and land development

 

 

 

 

 

 

Commercial and industrial

 

109

 

109

 

109

 

146

 

146

 

121

Consumer and other

 

 

 

 

 

 

 

3,723

 

3,726

 

492

 

574

 

574

 

237

PCI loans:  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

 

 

 

 

 

Consumer real estate

 

1,210

 

1,347

 

158

 

1,827

 

2,086

 

88

Construction and land development

 

 

 

 

 

 

Commercial and industrial

 

266

 

233

 

216

 

270

 

234

 

218

Consumer and other

 

17

 

16

 

2

 

21

 

20

 

3

 

1,493

 

1,596

 

376

 

2,118

 

2,340

 

309

Total impaired loans

$

7,226

$

7,334

$

868

$

7,451

$

7,674

$

546

 

Three Months Ended March 31, 

 

June 30, 2021

 

December 31, 2020

2021

2020

 

 

Unpaid

 

 

 

Unpaid

 

    

Average

    

Interest

    

Average

    

Interest

 

Recorded

 

Principal

 

Related

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

Recorded

 

Income

Investment

 

Balance

Allowance

Investment

 

Balance

Allowance

Investment

Recognized

 

Investment

 

Recognized

Impaired loans without a valuation allowance:

 

  

 

  

 

  

 

  

Impaired loans and leases without a valuation allowance:

    

  

    

  

    

  

    

  

    

  

    

  

Commercial real estate

$

2,001

$

1

$

196

$

3

$

$

$

$

3,871

$

3,872

$

Consumer real estate

 

1,384

 

12

 

550

 

4

 

2,186

 

2,187

 

 

888

 

888

 

Construction and land development

 

 

 

577

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

Leases

Consumer and other

 

 

 

 

 

 

 

 

 

 

 

3,385

 

13

 

1,323

 

7

 

2,186

 

2,187

 

 

4,759

 

4,760

 

Impaired loans with a valuation allowance:

 

  

 

  

 

  

 

  

Impaired loans and leases with a valuation allowance:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

1,577

 

102

 

198

 

2

 

859

 

859

 

417

 

 

 

Consumer real estate

 

444

 

5

 

984

 

9

 

261

 

264

 

71

 

428

 

428

 

116

Construction and land development

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

128

 

2

 

159

 

2

 

208

 

208

 

208

 

146

 

146

 

121

Leases

Consumer and other

 

 

 

 

 

 

 

 

 

 

 

2,149

 

109

 

1,341

 

13

 

1,328

 

1,331

 

696

 

574

 

574

 

237

PCI loans:

 

  

 

  

 

  

 

  

PCI loans and leases:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

 

 

964

 

1

 

 

 

 

 

 

Consumer real estate

 

1,215

 

22

 

456

 

1

 

1,201

 

1,332

 

156

 

1,827

 

2,086

 

88

Construction and land development

 

 

 

231

 

 

 

 

 

 

 

Commercial and industrial

 

268

 

1

 

355

 

 

261

 

231

 

213

 

270

 

234

 

218

Consumer real estate

 

19

 

 

11

 

Leases

Consumer and other

 

14

 

12

 

2

 

21

 

20

 

3

 

1,502

 

23

 

2,017

 

2

 

1,476

 

1,575

 

371

 

2,118

 

2,340

 

309

Total impaired loans

$

7,036

$

145

$

4,681

$

22

Total impaired loans and leases

$

4,990

$

5,093

$

1,067

$

7,451

$

7,674

$

546

20

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Three 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

$

65

$

$

345

$

1

Consumer real estate

 

2,033

 

8

 

633

 

10

Construction and land development

 

 

 

304

 

Commercial and industrial

 

 

 

 

Leases

Consumer and other

 

 

 

 

 

2,098

 

8

 

1,282

 

11

Impaired loans and leases with a valuation allowance:

 

  

 

  

 

  

 

  

Commercial real estate

 

2,007

 

2

 

396

 

Consumer real estate

 

360

 

3

 

827

 

5

Construction and land development

 

 

 

 

Commercial and industrial

 

159

 

3

 

158

 

3

Leases

Consumer and other

 

 

 

 

 

2,526

 

8

 

1,381

 

8

PCI loans and leases:  

 

  

 

  

 

  

 

  

Commercial real estate

 

 

 

490

 

Consumer real estate

 

1,115

 

21

 

1,168

 

38

Construction and land development

 

 

 

116

 

Commercial and industrial

 

263

 

1

 

338

 

3

Leases

Consumer and other

 

16

 

 

22

 

 

1,394

 

22

 

2,134

 

41

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

1921

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Troubled Debt Restructurings:

At March 31, 2021, and December 31, 2020,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 March 31,June 30, 2021 and December 31, 2020, management had approximately $250$219 thousand and $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 were 0 loans that were modified as a TDR during the three month periodsix months ended March 31,June 30, 2021, and 1 loan that was modified during the three month periodsix months ended March 31,June 30, 2020. There were 0 loans that were modified as TDRs during the past threesix months and for which there was a subsequent payment default.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid Relief and Economic Security (“CARES”) Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 Presentation of Financial Information for more information.  At March 31,June 30, 2021, the Company had 100 loans remaining under COVID-19 modifications that amounted to $1.7 million, or 0.07% of the total loans outstanding.modifications. 

Foreclosure Proceedings and Balances:

As of March 31,June 30, 2021, there was 01 residential property secured by real estate included in other real estate owned and there were 32 residential real estate loans totaling $448$103 thousand in the process of foreclosure.

2022

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):

    

March 31, 

    

December 31, 

    

June 30, 

    

December 31, 

    

2021

    

2020

    

2021

    

2020

Commercial real estate

$

21,221

$

23,787

$

18,456

$

23,787

Consumer real estate

 

12,011

 

12,692

 

11,342

 

12,692

Construction and land development

 

968

 

1,812

 

858

 

1,812

Commercial and industrial

 

6,463

 

6,521

 

6,313

 

6,521

Leases

4,603

Consumer and other

 

122

 

161

 

94

 

161

Total loans

 

40,785

 

44,973

Total loans and leases

 

41,666

 

44,973

Less: Remaining purchase discount

 

(11,637)

 

(12,909)

 

(11,564)

 

(12,909)

Total loans, net of purchase discount

 

29,148

 

32,064

Less: Allowance for loan losses

 

(376)

 

(309)

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

$

28,772

$

31,755

$

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

    

Three Months Ended

Six Months Ended

March 31, 

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

Accretable yield, beginning of period

$

16,889

$

8,454

$

14,705

$

10,979

$

16,889

$

8,454

Additions

 

 

2,515

 

649

 

 

649

 

2,515

Accretion income

 

(1,931)

 

(2,077)

 

(1,098)

 

(1,057)

 

(3,029)

 

(3,134)

Reclassification

 

337

 

1,916

 

1,340

 

247

 

1,677

 

2,163

Other changes, net

 

(590)

 

171

 

(1,074)

 

1,608

 

(1,664)

 

1,779

Accretable yield, end of period

$

14,705

$

10,979

$

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. Considering the recent economic conditions resulting from the COVID-19 pandemic the Company performed a Step 1 goodwill impairment test (which compares the fair value of a reporting unit with its carrying amount, including goodwill) at December 31, 2020, the results indicated that there was 0 impairment. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

The Company’s other intangible assets consist of core deposit, intangibles, insurance agency customer relationships and insurance agency tradename.  They are initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer deposits, the insurance agency customer relationships are amortized over tena weighted average of 8.6 years and the insurance agency tradename is amortized over five years.

2123

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):

    

March 31, 

    

December 31, 

    

June 30, 

    

December 31, 

2021

2020

2021

2020

Goodwill:

 

  

 

  

 

  

 

  

Balance, beginning of period

$

74,135

$

65,614

$

74,135

$

65,614

Acquisition of PFG

 

323

 

8,521

 

323

 

8,521

Acquisition of Fountain

 

2,400

 

Balance, end of the period

$

74,458

$

74,135

$

76,858

$

74,135

Core Deposit

    

Insurance Agency

    

Insurance Agency

 

Core Deposit

    

Customer Relationships

    

Tradename

 

Amortized other intangible assets:

Intangibles

Customer Relationships

Tradename

Total

Intangibles

Intangibles

Intangibles

Total

Beginning balance January 1, 2021, gross

$

15,920

$

1,064

$

63

$

17,047

$

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

(4,935)

(206)

(14)

(5,155)

(5,330)

(250)

(17)

(5,597)

Balance, March 31, 2021, other intangible assets, net

$

10,985

$

858

$

49

$

11,892

Balance, June 30, 2021, other intangible assets, net

$

10,590

$

3,472

$

46

$

14,108

Beginning balance January 1, 2020

$

14,550

$

-

$

-

$

14,550

Beginning balance January 1, 2020, gross

$

14,550

$

-

$

-

$

14,550

Acquisition of PFG

1,370

1,064

63

2,497

1,370

1,064

63

2,497

Balance, December 31, 2020, other intangible assets, gross

15,920

1,064

63

17,047

15,920

1,064

63

17,047

Less: accumulated amortization

(4,540)

(161)

(10)

(4,711)

(4,540)

(161)

(10)

(4,711)

Balance, December 31, 2020, other intangible assets, net

$

11,380

$

903

$

53

$

12,336

$

11,380

$

903

$

53

$

12,336

The aggregate amortization of core deposit intangibles expense for other intangible assets for the three month periodsand six months ended March 31,June 30, 2021 was $441 thousand and $886 thousand, respectively, and for the three and six months ended June 30, 2020, was $397$405 thousand and $362$767 thousand, respectively.

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

Remainder of 2021

    

$

1,316

    

$

1,270

2022

 

1,697

 

2,238

2023

 

1,636

 

2,103

2024

 

1,588

 

1,981

2025

1,531

1,850

Thereafter

 

4,124

 

4,666

Total

$

11,892

$

14,108

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

Borrowings:

At March 31,June 30, 2021, total borrowings were $82.6$78.8 million compared to $81.2 million at December 31, 2020.  Borrowings consist of the following (dollars in thousands):

March 31, 

December 31, 

June 30, 

December 31, 

2021

2020

2021

2020

Securities sold under customer repurchase agreements

    

$

7,250

$

5,803

    

$

3,834

$

5,803

FHLB borrowings

75,000

75,000

75,000

75,000

Other borrowings

392

396

396

Total

    

$

82,642

$

81,199

    

$

78,834

$

81,199

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Securities Sold Under Agreements to Repurchase:

At March 31, 2021 and December 31, 2020, theThe Company had securities sold under agreements to repurchase of $7.3 million and $5.8 million, respectively, with commercial checking customers which were secured by government agency securities.  The carrying value of investment securities pledged as collateral under repurchase agreements was $6.8$5.6 million and $7.6 million at March 31,June 30, 2021 and December 31, 2020, respectively.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 March 31,June 30, 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 month periodsand six months ending March 31,June 30, 2021, and 2020, respectively, was $288$350 thousand and $251 thousand.$638 thousand, respectively.  The Company’s contribution to the Plan for the three and six months ending June 30, 2020, was $307 thousand and $558 thousand, respectively.    

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At March 31,June 30, 2021, the Company had 1 active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which had 21,88618,811 rights issued and 1,834,4271,832,427 Rights available for future grants or awards.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

Stock Options:

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

    

    

Weighted

    

    

Weighted

Average

Average

Exercisable

Exercisable

Number

Price

Number

Price

Outstanding at December 31, 2020

 

99,617

$

10.19

 

99,617

$

10.19

Granted

 

 

 

 

Exercised

 

(15,965)

 

9.24

 

(19,040)

 

10.18

Forfeited

 

 

 

 

Outstanding at March 31, 2021

 

83,652

$

10.37

Outstanding at June 30, 2021

 

80,577

$

10.19

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company did not recognize any stock option-based compensation expense during the three and six months ended March 31,June 30, 2021 and 2020, respectively, as all stock options issued are fully vested.

Information pertaining to stock options outstanding at March 31,June 30, 2021, is as follows:

Options Outstanding

Options Exercisable

Options Outstanding

Options Exercisable

    

    

Weighted-

    

    

    

    

    

Weighted-

    

    

    

Average

Weighted-

Weighted-

Average

Weighted-

Weighted-

Remaining

Average

Average

Remaining

Average

Average

Exercise

Exercise

Number

Contractual

Exercise

Number

Exercise

Exercise

Number

Contractual

Exercise

Number

Exercise

Prices

Prices

Outstanding

Life

Price

Exercisable

Price

Prices

Outstanding

Life

Price

Exercisable

Price

$

6.60

 

19,250

 

0.95 years

$

6.60

 

19,250

$

6.60

6.60

 

19,250

 

0.70 years

$

6.60

 

19,250

$

6.60

9.48

 

18,000

 

1.95 years

 

9.48

 

18,000

 

9.48

9.48

 

18,000

 

1.70 years

 

9.48

 

18,000

 

9.48

9.60

 

22,250

 

2.75 years

 

9.60

 

22,250

 

9.60

9.60

 

22,250

 

2.50 years

 

9.60

 

22,250

 

9.60

11.76

 

2,266

 

1.25 years

 

11.76

 

2,266

 

11.76

11.76

 

2,266

 

1.00 years

 

11.76

 

2,266

 

11.76

15.05

 

21,886

 

4.28 years

 

15.05

 

21,886

 

15.05

15.05

 

18,811

 

4.00 years

 

15.05

 

18,811

 

15.05

Outstanding, end of period

Outstanding, end of period

 

83,652

 

2.52 years

$

10.37

83,652

$

10.37

Outstanding, end of period

 

80,577

 

2.20 years

$

10.19

80,577

$

10.19

The intrinsic value of options exercised during the three month periodsand six months ended March 31,June 30, 2021 and 2020, was $192$27 thousand and $65$220 thousand, and $2 thousand and $66 thousand, during the three and six months ended June 30, 2020, respectively.  The aggregate intrinsic value of total options outstanding and exercisable options at March 31,June 30, 2021, was $944 thousand.$1.1 million. Cash received from options exercised under all share-based payment arrangements for the three month periodsix months ended March 31,June 30, 2021 was $147$194 thousand.

NaN options vested during the periodssix months ended March 31,June 30, 2021 and 2020, respectively. The income tax expense/benefit recognized for the exercise of options during the three and six months ended March 31,June 30, 2021, and 2020, was a benefit of $1$8 thousand and $23$9 thousand, respectively, and for the three and six months ended June 30, 2020, was an expense of $2 thousand and a benefit of $22 thousand, respectively.

As of March 31,June 30, 2021, all options were fully vested and currently 0 future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

Restricted Stock Awards:

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

    

    

Weighted

Average

Grant-Date

Number

Fair Value

Balance at December 31, 2020

 

100,218

$

19.07

Granted

 

48,967

 

20.08

Vested

 

(3,918)

 

22.44

Forfeited/expired

 

 

Balance at March 31, 2021

 

145,267

$

19.32

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Restricted Stock Awards:

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

    

    

Weighted

Average

Grant-Date

Number

Fair Value

Balance at December 31, 2020

 

100,218

$

19.07

Granted

 

50,967

 

20.23

Vested

 

(5,985)

 

22.29

Forfeited/expired

 

 

Balance at June 30, 2021

 

145,200

$

19.34

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

Stock Appreciation Rights ("SARs"):

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

Weighted   

Weighted   

Average

Average

    

Number

    

 Exercisable Price

    

Number

    

 Exercisable Price

Outstanding at December 31, 2020

73,000

$

19.02

73,000

$

19.02

Granted

22,000

20.70

22,000

20.70

Exercised

 

 

 

(11,500)

 

21.61

Forfeited

 

 

 

(6,000)

 

18.00

Outstanding at March 31, 2021

 

95,000

$

19.41

Outstanding at June 30, 2021

 

77,500

$

19.19

Information pertaining to SARs outstanding at March 31,June 30, 2021, is as follows:

SARs Outstanding

SARs Exercisable

SARs Outstanding

SARs Exercisable

Weighted-

Weighted-

Average

Weighted-

Average

Weighted-

 Remaining

Average

Weighted- Average

 Remaining

Average

Weighted- Average

Exercise

Exercise

Number

Contractual

Exercise

Number

Exercise

Exercise

Number

Contractual

Exercise

Number

Exercise

Prices

Prices

 

Outstanding

 

Life

Price

Exercisable

Price

Prices

 

Outstanding

 

Life

Price

Exercisable

Price

$

15.19

    

18,000

    

2.75 years

    

$

15.19

    

    

$

15.19

    

16,000

    

2.50 years

    

$

15.19

    

    

$

18.12

 

21,000

 

1.75 years

 

18.12

 

 

18.12

 

19,000

 

1.50 years

 

18.12

 

 

20.70

 

22,000

 

3.76 years

 

20.70

 

 

20.70

 

20,000

 

3.51 years

 

20.70

 

 

21.61

 

34,000

 

0.75 years

 

21.61

 

34,000

 

21.61

21.61

 

22,500

 

0.50 years

 

21.61

 

22,500

 

21.61

Outstanding, end of period

 

95,000

 

2.05 years

$

19.41

 

34,000

$

21.61

Outstanding, end of period

 

77,500

 

1.94 years

$

19.19

 

22,500

$

21.61

SARs compensation expense of $49$64 thousand and ($118)$113 thousand was recognized for the three month periodsand six months ended March 31,June 30, 2021, respectively, and 2020, respectively.$92 thousand and ($26) thousand for the three and six months ended June 30, 2020. The credit in expense for the three month periodsix months ended March 31,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.

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

March 31, 

December 31, 

June 30, 

December 31, 

2021

2020

2021

2020

Commitments to extend credit

    

$

542,825

$

476,841

    

$

640,269

$

476,841

Standby letters of credit

 

6,920

 

5,261

 

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include 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 March 31,June 30, 2021 and December 31, 2020, the carrying amount of liabilities related to the Company’s obligation to perform under standby letters of credit was insignificant.

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

Note 10. Fair Value Disclosures

Determination of Fair Value:

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

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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.

Fair Value Hierarchy:

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

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

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

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

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

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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

    

    

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

Description

Fair Value

(Level 1)

(Level 2)

(Level 3)

Fair Value

(Level 1)

(Level 2)

(Level 3)

March 31, 2021:

 

  

June 30, 2021:

 

  

Assets:

 

  

 

  

Securities available-for-sale:

 

  

 

  

U.S. Treasury

6,438

6,438

U.S. Government-sponsored enterprises (GSEs)

$

72,257

$

$

72,257

$

$

72,620

$

$

72,620

$

Municipal securities

 

90,129

 

 

90,129

 

 

88,908

 

 

88,908

 

Other debt securities

 

26,055

 

 

26,055

 

 

29,351

 

 

29,351

 

Mortgage-backed securities (GSEs)

 

62,496

 

 

62,496

 

 

53,500

 

 

53,500

 

Total securities available-for-sale

$

250,937

$

$

250,937

$

$

250,817

$

$

250,817

$

Liabilities:

 

  

 

  

Derivative financial instruments

$

4,008

$

$

4,008

$

$

4,468

$

$

4,468

$

December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Securities available-for-sale:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government-sponsored enterprises (GSEs)

$

30,530

$

$

30,530

$

$

30,530

$

$

30,530

$

Municipal securities

 

91,989

 

 

91,989

 

 

91,989

 

 

91,989

 

Other debt securities

 

25,118

 

 

25,118

 

 

25,118

 

 

25,118

 

Mortgage-backed securities (GSEs)

 

67,997

 

 

67,997

 

 

67,997

 

 

67,997

 

Total securities available-for-sale

$

215,634

$

$

215,634

$

$

215,634

$

$

215,634

$

Liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Derivative financial instruments

$

6,174

$

6,174

$

6,174

$

6,174

During the three month periodsix months ending March 31,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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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)

March 31, 2021:

 

  

 

  

 

  

 

  

June 30, 2021:

 

  

 

  

 

  

 

  

Impaired loans

$

4,348

$

$

$

4,348

$

1,737

$

$

$

1,737

Other real estate owned

 

3,946

 

 

 

3,946

 

2,499

 

 

 

2,499

December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Impaired loans

$

2,455

$

$

$

2,455

$

2,455

$

$

$

2,455

Other real estate owned

 

4,619

 

 

 

4,619

 

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

March 31, 2021:

June 30, 2021:

Impaired loans

$

4,348

 

Appraisal

 

Appraisal discounts

 

17

%

$

1,737

 

Appraisal

 

Appraisal discounts

 

38

%

Other real estate owned

 

3,946

 

Appraisal

 

Appraisal discounts

 

27

%

 

2,499

 

Appraisal

 

Appraisal discounts

 

25

%

December 31, 2020:

Impaired loans

$

2,455

 

Appraisal

 

Appraisal discounts

 

9

%

$

2,455

 

Appraisal

 

Appraisal discounts

 

9

%

Other real estate owned

 

4,619

 

Appraisal

 

Appraisal discounts

 

22

%

 

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

March 31, 2021:

June 30, 2021:

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

556,701

 

$

556,701

 

$

 

$

$

556,701

$

673,515

 

$

673,515

 

$

 

$

$

673,515

Securities available-for-sale

 

250,937

 

 

250,937

 

 

250,937

 

250,817

 

 

250,817

 

 

250,817

Other investments

 

14,728

 

N/A

 

N/A

 

N/A

 

N/A

 

14,584

 

N/A

 

N/A

 

N/A

 

N/A

Loans, net and loans held for sale

 

2,476,629

 

 

 

2,477,120

 

2,477,120

Loans and leases, net and loans held for sale

 

2,454,342

 

 

 

2,455,130

 

2,455,130

Liabilities:

 

 

  

 

  

 

  

 

  

 

 

  

 

  

 

  

 

  

Noninterest-bearing demand deposits

 

777,968

 

 

777,968

 

 

777,968

 

807,560

 

 

807,560

 

 

807,560

Interest-bearing demand deposits

 

683,887

 

 

683,887

 

 

683,887

 

702,470

 

 

702,470

 

 

702,470

Money market and savings deposits

 

1,073,941

 

 

1,073,941

 

 

1,073,941

 

1,140,029

 

 

1,140,029

 

 

1,140,029

Time deposits

 

512,417

 

 

515,440

 

 

515,440

 

489,413

 

 

492,243

 

 

492,243

Borrowings

82,642

83,743

83,743

78,834

79,847

79,847

Subordinated debt

 

39,367

 

 

 

40,866

 

40,866

 

39,388

 

 

 

41,302

 

41,302

Derivative financial instruments

 

4,008

 

 

4,008

 

 

4,008

 

4,468

 

 

4,468

 

 

4,468

December 31, 2020:

    

    

    

    

    

    

    

    

    

    

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

481,719

 

$

481,719

 

$

 

$

$

481,719

$

481,719

 

$

481,719

 

$

 

$

$

481,719

Securities available-for-sale

 

215,634

 

 

215,634

 

 

215,634

 

215,634

 

 

215,634

 

 

215,634

Other investments

 

14,794

 

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

 

2,375,618

 

 

 

2,377,581

 

2,377,581

Loans and leases, net and loans held for sale

 

2,375,618

 

 

 

2,377,581

 

2,377,581

Liabilities:

 

 

  

 

  

 

  

 

  

 

 

  

 

  

 

  

 

  

Noninterest-bearing demand deposits

 

685,957

 

 

685,957

 

 

685,957

 

685,957

 

 

685,957

 

 

685,957

Interest-bearing demand deposits

 

649,129

 

 

649,129

 

 

649,129

 

649,129

 

 

649,129

 

 

649,129

Money market and savings deposits

 

919,631

 

 

919,631

 

 

919,631

 

919,631

 

 

919,631

 

 

919,631

Time deposits

 

550,498

 

 

554,120

 

 

554,120

 

550,498

 

 

554,120

 

 

554,120

Borrowings

81,199

82,892

82,892

81,199

82,892

82,892

Subordinated debt

 

39,346

 

 

 

40,550

 

40,550

 

39,346

 

 

 

40,550

 

40,550

Derivative financial instruments

 

6,174

 

 

6,174

 

 

6,174

 

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

    

    

    

    

 

    

    

Weighted

    

    

    

    

 

Average

 

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

March 31, 2021:

June 30, 2021:

Interest rate swap agreements - securities

 

Other liabilities

 

6.18

 

3.09

%

3 month LIBOR

$

36,000

 

$

(4,008)

 

Other liabilities

 

5.96

 

3.09

%

3 month LIBOR

$

36,000

 

$

(4,468)

 

 

December 31, 2020:

Interest rate swap agreements - securities

 

Other liabilities

 

7.13

 

3.08

%

3 month LIBOR

$

36,000

$

(6,174)

 

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

Three Months Ended

Six Months Ended

March 31, 

June 30, 

June 30, 

2021

2020

    

2021

2020

2021

2020

Interest income on tax-exempt securities

$

564

$

440

 

$

562

$

580

$

1,126

$

1,020

Effects of fair value hedge relationships

 

(305)

 

(157)

 

(258)

 

(164)

 

(563)

 

(321)

Reported interest income on tax-exempt securities

$

259

$

283

$

304

$

416

$

563

$

699

Three Months Ended

March 31, 

Gain (loss) on fair value hedging relationship

2021

2020

Interest rate swap agreements - securities:

 

  

  

Hedged items

$

(4,008)

$

(6,885)

Derivative designated as hedging instruments

$

4,008

$

6,885

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

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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

March 31, 2021:

 

 

  

  

June 30, 2021:

 

 

  

  

Securities available-for-sale

 

$

43,073

$

250

 

$

43,580

$

1,072

December 31, 2020:

 

  

 

  

 

  

 

  

Securities available-for-sale

$

44,017

$

(1,063)

$

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.

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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):

    

    

    

March 31, 

December 31, 

    

    

    

June 30, 

December 31, 

Classification

2021

2020

Classification

2021

2020

Assets:

 

  

 

  

  

 

  

 

  

  

Operating lease right-of-use assets

 

Other assets

$

4,588

$

4,797

 

Other assets

$

4,536

$

4,797

Liabilities:

 

  

 

 

  

 

  

 

 

  

Operating lease liabilities

 

Other liabilities

$

4,625

$

4,827

 

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 March 31,June 30, 2021, the weighted average remaining lease term was 11.3211.04 years and the weighted average discount rate was 2.73%2.69%.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

    

Three Months Ended

Six Months Ended

March 31, 

June 30, 

June 30, 

    

2021

2020

    

2021

2020

2021

2020

Lease costs:

 

  

  

 

  

  

  

  

Operating lease costs

$

240

$

237

$

254

$

270

$

494

$

507

Variable lease costs

 

24

 

26

 

24

 

29

 

48

 

55

Total

$

264

$

263

$

278

$

299

$

542

$

562

Other information:

 

  

 

  

 

  

 

  

 

  

 

  

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

 

  

 

  

 

  

 

  

 

  

 

  

Operating cash flows from operating leases

$

233

$

230

$

250

$

265

$

483

$

495

35

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31,June 30, 2021, were as follows (in thousands):

    

Amounts

    

Amounts

March 31, 2022

    

$

571

March 31, 2023

 

623

March 31, 2024

 

485

March 31, 2025

 

366

March 31, 2026

 

348

June 30, 2022

    

$

414

June 30, 2023

 

689

June 30, 2024

 

496

June 30, 2025

 

368

June 30, 2026

 

348

Thereafter

 

3,032

 

3,033

Total future minimum lease payments

 

5,425

 

5,348

Amounts representing interest

 

(800)

 

(770)

Present value of net future minimum lease payments

$

4,625

$

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. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital).  As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer. At March 31,June 30, 2021, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the "well capitalized" regulatory classification.

Regulatory Restrictions on Dividends:

Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (the “TDFI”), pay any dividends to the Company in a calendar year in excess of the total of the Bank’s retained net income for that year plus the retained net income for the preceding two years.  Because this test involves a measure of net income, any charge on the Bank’s income statement, such as an impairment of goodwill, could impair the Bank’s ability to pay dividends to the Company. Under Tennessee corporate law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, the Company’s board of directors must consider its and the Bank’s current and prospective capital, liquidity, and other needs. In addition to state law limitations on the Company’s ability to pay dividends, the Federal Reserve imposes limitations on the Company’s ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

During the three months ended June 30, 2021, the Bank paid $5.0 million in dividends to the Company and the Company paid a quarterly common stock dividend of $0.06 per share.   During the six months ended June 30, 2021, the Bank paid $10.0 million in dividends to the Company. Since the first quarter of 2021, the Company has paid a quarterly common stock dividend of $0.06 per share. The amount and timing of all future dividend payments by the Company, if any, is subject to discretion of the Company’s board of directors and will depend on the Company’s earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

During the three months ended March 31, 2021, the Bank paid $5.0 million in dividends to the Company and the Company paid a quarterly common stock dividend of $0.06 per share. The amount and timing of all future dividend payments by the Company, if any, is subject to discretion of the Company’s board of directors and will depend on the Company’s earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to the Company.

Regulatory Capital Levels:

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

Minimum to be

Minimum to be

well

well

capitalized under

capitalized under

Minimum for

prompt

Minimum for

prompt

capital

corrective action

capital

corrective action

Actual

adequacy purposes

provisions1

Actual

adequacy purposes

provisions1

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

March 31, 2021

June 30, 2021

SmartFinancial:

Total Capital (to Risk Weighted Assets)

$

337,484

 

13.62

%  

$

198,250

 

8.00

%  

N/A

 

N/A

$

340,809

 

12.80

%  

$

213,089

 

8.00

%  

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

279,747

 

11.29

%  

 

148,687

 

6.00

%  

N/A

 

N/A

 

283,118

 

10.63

%  

 

159,816

 

6.00

%  

N/A

 

N/A

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

279,747

 

11.29

%  

 

111,515

 

4.50

%  

N/A

 

N/A

 

283,118

 

10.63

%  

 

119,862

 

4.50

%  

N/A

 

N/A

Tier 1 Capital (to Average Assets)2

 

279,747

 

8.55

%  

 

130,918

 

4.00

%  

N/A

 

N/A

 

283,118

 

8.10

%  

 

139,893

 

4.00

%  

N/A

 

N/A

SmartBank:

Total Capital (to Risk Weighted Assets)

$

323,288

 

13.05

%  

$

198,174

 

8.00

%  

$

247,718

 

10.00

%

$

324,013

 

12.19

%  

$

212,702

 

8.00

%  

$

265,878

 

10.00

%

Tier 1 Capital (to Risk Weighted Assets)

 

304,918

 

12.31

%  

 

148,631

 

6.00

%  

 

198,174

 

8.00

%

 

305,703

 

11.50

%  

 

159,527

 

6.00

%  

 

212,702

 

8.00

%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

304,918

 

12.31

%  

 

111,473

 

4.50

%  

 

161,017

 

6.50

%

 

305,703

 

11.50

%  

 

119,645

 

4.50

%  

 

172,821

 

6.50

%

Tier 1 Capital (to Average Assets)2

 

304,918

 

9.33

%  

 

130,783

 

4.00

%  

 

163,479

 

5.00

%

 

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

$

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

 

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

 

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

 

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

%

$

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

%

 

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

%

 

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

%

 

299,314

 

9.58

%  

 

124,969

 

4.00

%  

 

156,212

 

5.00

%

1The prompt corrective action provisions are applicable at the Bank level only.

2Average assets for the above calculations were based on the most recent quarter.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 14. Other Comprehensive Income (Loss)

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

    

Three Months Ended June 30, 2021

    

    

    

Accumulated

Securities

Fair Value

Other

Available-for-

Municipal

Comprehensive

    

Sale

    

Security Hedges

    

Income (Loss)

Beginning balance, March 31, 2021

 

$

898

$

185

$

1,083

 

Other comprehensive income

 

1,153

 

102

 

1,255

Reclassification of amounts included in net income

 

 

 

Net other comprehensive income during period

 

1,153

 

102

 

1,255

Ending balance, June 30, 2021

$

2,051

$

287

$

2,338

    

Three Months Ended June 30, 2020

    

    

    

Accumulated

Securities

Fair Value

Other

Available-for-

Municipal

Comprehensive

    

Sale

    

Security Hedges

    

Income (Loss)

Beginning balance, March 31, 2020

$

1,242

$

(2,489)

$

(1,247)

Other comprehensive income

 

1,414

 

413

 

1,827

Reclassification of amounts included in net income

 

12

 

 

12

Net other comprehensive income during period

 

1,426

 

413

 

1,839

Ending balance, June 30, 2020

$

2,668

$

(2,076)

$

592

Three Months Ended March 31, 2021

    

    

    

Accumulated

Securities

Fair Value

Other

Available-for-

Municipal

Comprehensive

    

Sale

    

Security Hedges

    

Income (Loss)

Beginning balance, December 31, 2020

 

$

2,968

$

(785)

$

2,183

 

Other comprehensive income (loss)

 

(2,070)

 

970

 

(1,100)

Reclassification of amounts included in net income

 

 

 

Net other comprehensive income (loss) during period

 

(2,070)

 

970

 

(1,100)

Ending balance, March 31, 2021

$

898

$

185

$

1,083

Three Months Ended March 31, 2020

    

    

    

Accumulated

Securities

Fair Value

Other

Available-for-

Municipal

Comprehensive

    

Sale

    

Security Hedges

    

Income (Loss)

Beginning balance, December 31, 2019

$

391

$

(223)

$

168

Other comprehensive income (loss)

 

851

 

(2,266)

 

(1,415)

Reclassification of amounts included in net income

 

 

 

Net other comprehensive income (loss) during period

 

851

 

(2,266)

 

(1,415)

Ending balance, March 31, 2020

$

1,242

$

(2,489)

$

(1,247)

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

Note 15. Subsequent Events

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

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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

On May 2, 2021, the Bank entered into a Purchase Agreement (the “Purchase Agreement”) with the members of Fountain Leasing, LLC, a Tennessee limited liability Company (“Fountain”), pursuant to which SmartBank will acquire all of the membership interests of Fountain (the “Acquisition”). The Acquisition was subsequently completed on May 3, 2021.  In accordance with the Purchase Agreement, the Bank paid $14 million in cash to the members of Fountain at closing, and repaid approximately $45 million of Fountain’s indebtedness. In addition to the closing consideration, the Purchase Agreement contains a performance-based earnout, pursuant to which the former members of Fountain could be entitled to up to $6 million in future cash payments from the Bank. Following the completion of the Acquisition, the Bank changed the name of Fountain to “Fountain Equipment Finance, LLC”.

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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"). SmartBankThe Company provides a comprehensive suite of commercial and consumer banking services to clients through 35 full-service bank branches and one loan production office in select markets in East and Middle Tennessee, Alabama and the Florida Panhandle.

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

Forward-Looking Statement

SmartFinancial, Inc. (“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 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 Fountain Leasing,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 SCB’s and Fountain’s businesses with our business;

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

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Table of Contents

SmartFinancial’sThe Company’s ability to manage the combined company’s growth following the acquisitions;
the dilution caused by SmartFinancial’s issuance of additional shares of its common stock in connection with the SCB merger;
cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems we operate or rely upon for services to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems and negatively impact our operations and our reputation in the market;
results of examinations by our primary regulators, the TDFI, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, require us to reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve;
our inability to pay dividends at current levels, or at all, because of inadequate future earnings, impairments to goodwill, regulatory restrictions or limitations, and changes in the composition of qualifying regulatory capital and minimum capital requirements;
the relatively greater credit risk of commercial real estate loans and construction and land development loans in our loan 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 second quarter and first quartersix months of 2021:

Successfully completed the hiring of an experienced banking team in the Gulf Coast Region.
Originated 1,231 Paycheck Protection Program (“PPP”) loans totaling $119.5 million.

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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 $9.8$8.8 million, or $0.65$0.58 per diluted common share, during the second quarter of 2021 compared to $6.2 million, or $0.41 per diluted common share, for the same period in 2020.  
Net income totaled $18.5 million, or $1.23 per diluted common share, during the first quartersix months of 2021 compared to $2.7$8.9 million, or $0.19$0.60 per diluted common share, for the same period in 2020.  
Annualized return on average assets was 1.18%0.98% at March 31,June 30, 2021 compared to 0.43%0.79% at March 31,June 30, 2020.
On December 21, 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, was passed by Congress to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID-19 pandemic. Among other things, the legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a $300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to transportation, education, agriculture, nutrition and other public health measures, and (v) approximately $325 billion for small business relief, including approximately $284 billion for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.

Analysis of Results of Operations

FirstSecond quarter of 2021 compared to 2020

Net income was $9.8$8.8 million, or $0.65$0.58 per diluted common share, for the firstsecond quarter of 2021, compared to $2.7$6.2 million, or $0.19$0.41 per diluted common share, for the firstsecond quarter of 2020.  The tax equivalent net interest margin was 3.48%3.29% for the firstsecond quarter of 2021 compared to 3.90%3.63% for the firstsecond quarter of 2020. Noninterest income to average assets was 0.69%0.58% for the firstsecond quarter of 2021, increasing from 0.44%0.45% for the firstsecond quarter of 2020. Noninterest expense to average assets decreased to 2.35%2.33% in the firstsecond quarter of 2021, from 2.96%2.41% in the second quarter of 2020.

First six months of 2021 compared to 2020

Net income was $18.5 million, or $1.23 per diluted common share, for the first six months of 2021, compared to $8.9 million, or $0.60 per diluted common share, for the first six months of 2020. The increase in net income for this period was primarily from the increase of $10.8 million in net interest income after provision for loan and lease losses and $4.5 million in noninterest income, offset by increases of $2.7 million in noninterest expense and $3.0 million in income tax expense. The tax equivalent net interest margin was 3.38% for the first six months of 2021 compared to 3.75% for the first six months of 2020. Noninterest income to average assets was 0.63% for the first six months of 2021, increasing from 0.45% for the first six months of 2020. Noninterest expense to average assets decreased to 2.34% in the first quartersix months of 2021, from 2.66% in the first six months of 2020.

Net Interest Income and Yield Analysis

FirstSecond quarter of 2021 compared to 2020

Net interest income, taxable equivalent, increased to $26.4$27.0 million for the firstsecond quarter of 2021, up from $22.7$25.9 million for the firstsecond quarter of 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 $2.34$2.87 billion for the firstsecond quarter of 2020, to $3.08$3.30 billion for the firstsecond quarter of 2021, primarily as a result of the Company’s continued organic loan and lease growth, acquisition of PFG beingFountain completed on March 1, 2020, the Company’sMay 3, 2021, participation in the PPP, and the increase in our overall liquidity position. Over this period, average loan and lease balances increased by $445.5$149.3 million, average federal funds sold and other interest earning assets increased by $233.4 million, average interest-bearing deposits increased by $415.9$404.9 million, average noninterest-bearing deposits increased $327.8$181.1 million and average borrowings increased $29.9decreased $155.6 million. The tax equivalent net interest margin decreased to 3.48%3.29% for the firstsecond quarter of 2021, compared to 3.90%3.63% for the firstsecond quarter of 2020. The yield on earning assets decreased from 4.83%4.22% for the firstsecond quarter of 2020, to 3.88%3.65% for the firstsecond quarter of 2021, primarily due to rate cuts by the Federal Reserve overduring the past yearfirst quarter of 2020 and, to a lesser extent, loan and lease yields declining from market

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competition. The cost of average interest-bearing deposits decreased from 1.10%0.71% for the firstsecond quarter of 2020, to 0.44%0.39% for the firstsecond quarter of 2021, primarily due to a lower interest rate environment during the period.

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Table of Contents

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 March 31, 

2021

2020

    

Average

    

  

    

Yield/

    

Average

    

  

    

Yield/

    

Balance

Interest

Rate

Balance

Interest

Rate

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

Loans, including fees1

$

2,428,499

27,943

 

4.67

%  

$

1,982,997

26,389

 

5.35

%  

Loans held for sale

7,913

75

3.82

%  

4,294

45

 

4.24

%  

Taxable securities

 

136,492

 

724

 

2.15

%  

 

116,837

679

 

2.34

%  

Tax-exempt securities2

 

90,849

 

409

 

1.82

%  

 

70,397

400

 

2.28

%  

Federal funds sold and other earning assets

 

417,144

 

291

 

0.28

%  

 

165,512

602

 

1.46

%  

Total interest-earning assets

 

3,080,897

 

29,442

 

3.88

%  

 

2,340,037

 

28,115

 

4.83

%  

Noninterest-earning assets

 

275,272

 

  

 

  

 

216,498

 

  

 

  

Total assets

$

3,356,169

 

  

 

  

$

2,556,535

 

  

 

  

Liabilities and Shareholders' Equity:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing demand deposits

$

641,214

$

256

 

0.16

%  

$

389,500

$

434

 

0.45

%  

Money market and savings deposits

 

983,893

 

821

 

0.34

%  

 

664,983

 

1,389

 

0.84

%  

Time deposits

 

526,062

 

1,254

 

0.97

%  

 

680,830

 

2,931

 

1.73

%  

Total interest-bearing deposits

 

2,151,169

 

2,331

 

0.44

%  

 

1,735,313

 

4,754

 

1.10

%  

Borrowings

 

81,837

 

117

 

0.58

%  

 

51,921

 

89

 

0.69

%  

Subordinated debt

 

39,354

 

584

 

6.01

%  

 

39,269

 

584

 

5.98

%  

Total interest-bearing liabilities

 

2,272,360

 

3,032

 

0.54

%  

 

1,826,503

 

5,427

 

1.20

%  

Noninterest-bearing deposits

 

700,962

 

  

 

  

 

373,125

 

  

 

  

Other liabilities

 

21,928

 

  

 

  

 

27,215

 

  

 

  

Total liabilities

 

2,995,250

 

  

 

  

 

2,226,843

 

  

 

  

Shareholders' equity

 

360,919

 

  

 

  

 

329,692

 

  

 

  

Total liabilities and shareholders’ equity

$

3,356,169

 

  

 

  

$

2,556,535

 

  

 

  

Net interest income, taxable equivalent

 

  

$

26,410

 

  

 

  

$

22,689

 

  

Interest rate spread

 

  

 

  

 

3.33

%  

 

  

 

  

 

3.63

%  

Tax equivalent net interest margin

 

  

 

  

 

3.48

%  

 

  

 

  

 

3.90

%  

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

 

  

 

 

135.58

%  

 

  

 

  

 

128.12

%  

Percentage of average equity to average assets

 

  

 

  

 

10.75

%  

 

  

 

  

 

12.90

%  

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

%  

1Loans and leases include PPP loans with an average balance of $312.6$266.1 million and $208.8 million for the three month periodmonths ended March 31, 2021.  No PPP loans are included in the three month period ended March 31, 2020. Loan fees included in loan income was $2.9 million and $886 thousand for the three month periods ended March 31,June 30, 2021 and 2020, respectively.  Loan and lease fees included in loan and lease income was $2.4 million and $2.7 million for the three months ended June 30, 2021 and 2020, respectively. Loan and lease fee income for the three month periodmonths ended March 31,June 30, 2021 and 2020, includes $2.4$2.1 million and $1.9 million accretion of loan fees on PPP loans.  No loan fees on PPP loans, are included in the three month period ended March 31, 2020.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 $150$149 thousand for the three month periodmonths ended March 31,June 30, 2021 and $117$154 thousand for the three monthmonths ended June 30, 2020.

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

First six months of 2021 compared to 2020

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

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Table of Contents

first quarter of 2020 and, to a lesser extent loan and lease yields declining from market competition. The cost of average interest-bearing deposits decreased from 0.90% for the first six months of 2020, to 0.41% for the first six months of 2021, primarily due to a lower interest rate environment during the period.

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

%  

1Loans and leases include PPP loans with an average balance of $289.2 million and $106.2 million for the six months ended March 31,June 30, 2021 and 2020, respectively.  Loan and lease fees included in loan and lease income was $5.3 million and $3.6 million for the six months ended June 30, 2021 and 2020, respectively. Loan lease fee income for the six months ended June 30, 2021 and 2020, includes $4.5 million and $1.9 million accretion of loan fees on PPP loans, respectively.    

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

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

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Table of Contents

Noninterest Income

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

Three Months Ended

March 31, 

    

2021

    

2020

Service charges on deposit accounts

$

1,009

$

770

Mortgage banking

 

1,139

 

584

Investment services

531

437

Insurance commissions

1,466

269

Interchange and debit card transaction fees, net

 

839

 

276

Other

 

707

 

482

Total noninterest income

$

5,691

$

2,818

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

FirstSecond quarter of 2021 compared to 2020

Noninterest income increased by $2.9$1.6 million, or 102.0%46.5%, during the firstsecond quarter of 2021 compared to the same period in 2020. This quarterly change in total noninterest income primarily resulted from the following:

Increase in service charges on deposit accounts, related to deposit growth and transaction volume;
Increase in mortgage banking, from increased volume due to low rate environment;
Increase in investment services, stemming from increased 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 $239 thousand,Fountain and cash surrender value of bank owned life insurance (“BOLI”) from the additional BOLI purchased during the first quarter of 2021.

First six months of 2021 compared to 2020

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

Increase in service charges on deposit accounts, related to the PFG acquisition, deposit growth and transaction volume;
Increase in mortgage banking, of $555 thousand, from increased volume due to low rate environment;
Increase in investment services, stemming from increased production;
Increase in insurance commissions, of $1.2 million, primarily from commissions of $815 thousand from the placement of life insurance policies and an insurance agency acquired in the PFG acquisition;acquisition and placement of life insurance policies;
Increase in interchange and debit card transaction fees, net of $563 thousand, related to increased volume, deposit growth and the PFG acquisition: and
Increase in other, of $225 thousand, primarily from new fee income from the increase inacquisition of Fountain and cash surrender value of bank owned life insurance (“BOLI”) of $208 thousand from the additional BOLI purchased during the first quarter of 2021.

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Table of Contents

Noninterest Expense

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

Three Months Ended

March 31, 

    

2021

    

2020

Salaries and employee benefits

$

10,869

$

10,006

Occupancy and equipment

 

2,341

 

1,911

FDIC insurance

 

371

 

180

Other real estate and loan related expense

 

602

 

545

Advertising and marketing

 

190

 

198

Data processing and technology

 

1,379

 

1,008

Professional services

 

641

 

711

Amortization of intangibles

 

444

 

362

Merger related and restructuring expenses

 

103

 

2,096

Other

 

2,524

 

1,776

Total noninterest expense

$

19,464

$

18,793

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

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Table of Contents

FirstSecond quarter of 2021 compared to 2020

Noninterest expense increased by $671 thousand,$2.0 million, or 3.6%10.6%, in the firstsecond quarter of 2021 as compared to the same period in 2020. The quarterly increase in total noninterest expense primarily resulted from the following:

Increase in salary and employee benefits, of $863 thousand, duerelated to the PFG acquisition and the overall franchise growth, including the acquisition of PFG;Fountain completed May 3, 2021;
Increase in occupancy and equipment, of $430 thousand, due to ongoing infrastructure and facilities added to accommodate growth in operations and the additional branches of the PFG acquisition;operations;
Increase in FDIC insurance, of $191 thousand, related to asset growth stemming from our acquisition of PFG, deposit growth and production of PPP loans.loans; and
Increase in data processing and technology, of $371 thousand, 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 implementationthe overall franchise growth, including the acquisition of new contactless chip card and tier pricing adjustments from our core system provider; andFountain completed May 3, 2021;
Increase in other noninterest expensesoccupancy 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 $748 thousand,PFG, deposit growth and production of PPP loans;
Increase in data processing and technology, primarily from continued infrastructure build; and
Other increased, primarily from an equity method investment in a start-up fintech company.

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Table of Contents

Taxes

FirstSecond quarter of 2021 compared to 2020

In the firstsecond quarter of 2021 income tax expense totaled $2.7$2.5 million compared to $664 thousand$1.4 million a year ago. The effective tax rate was approximately 21.5%22.0% in the firstsecond quarter of 2021 compared to 19.6%18.8% a year ago. The higher effective tax rate for the firstsecond quarter of 2021 compared to same quarter in 2020 was due to utilization2020 having a proportionately higher amount of an NOL carryforwardnon-taxable income in Marchrelation to income before taxes, as well as tax benefit derived from the reconciliation of our tax rates from operations.

First six months of 2021 compared to 2020 that

In the first six months of 2021 income tax expense totaled $5.1 million compared to $2.1 million a year ago. The effective tax rate was availableapproximately 21.7% for first six months of 2021 compared to 19.0% a year ago. The higher effective tax rate for the first six months of 2021 compared to same period in 2020 was due to 2020 having a proportionately higher amount of non-taxable income in relation to income before taxes and, as part of the CARES Act.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 purchasedacquired loans and leases, of approximately $2.47$2.45 billion at March 31,June 30, 2021 compared to $2.36 billion at December 31, 2020. Loans secured by real estate, consisting of commercial and residential property, are the principal component of our loan and lease portfolio.

Organic Loans and Leases

Our organic net loans and leases, which excludes loans and leases purchased through acquisitions, increased by $142.8$115.3 million, or 7.2%5.8%, from December 31, 2020, to $2.12$2.10 billion at March 31,June 30, 2021.  Included in the growth was $119.5$138.4 million of PPP loans that were originated and funded during the first quartersix months of 2021 and offset by $82.0$247.6 million in forgiven PPP loans.loans originated in 2020. Total net deferred fees associated with the PPP loans originated during the first quartersix months of 2021 was approximately $5.6$7.0 million with $116$470 thousand accreted into income.

PurchasedAcquired Loans and Leases

Purchased non-credit impaired loans and leases, net of $315.8$323.6 million at March 31,June 30, 2021 decreased by $34.9$27.1 million from December 31, 2020.  Since December 31, 2020, our net purchased credit impaired (“PCI”) loans and leases, net decreased by $3.0$2.0 million to $28.8$29.7 million at March 31,June 30, 2021. The decrease in purchased non-credit impaired loans and leases and PCI loans and leases is related to maturities, paydowns and payoffs.

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Table of Contents

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

March 31, 2021

 

Purchased

Purchased

 

Non-Credit

Credit

% of

 

Organic

Impaired

Impaired

Total

Gross

 

    

Loans

    

Loans

    

Loans

    

Amount

    

Total

 

Commercial real estate-mortgage

$

883,521

$

173,243

$

13,877

$

1,070,641

43.0

%

Consumer real estate-mortgage

 

315,709

 

107,180

 

9,597

 

432,486

 

17.4

%

Construction and land development

 

269,575

 

11,048

 

5,350

 

285,973

 

11.5

%

Commercial and industrial

 

662,337

 

23,370

 

303

 

686,010

 

27.6

%

Consumer and other

 

9,459

 

2,539

 

21

 

12,019

 

0.5

%

Total gross loans receivable, net of deferred fees

 

2,140,601

 

317,380

 

29,148

 

2,487,129

 

100.0

%

Allowance for loan losses

 

(16,411)

$

(1,583)

 

(376)

 

(18,370)

 

  

Total loans, net

$

2,124,190

$

315,797

$

28,772

$

2,468,759

 

  

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, 2020

 

Purchased

Purchased

 

Non-Credit

Credit

% of

 

Organic

Impaired

Impaired

Total

Gross

 

    

Loans

    

Loans

    

Loans

    

Amount

    

Total

 

Commercial real estate-mortgage

$

807,913

$

188,940

$

16,123

$

1,012,976

42.5

%

Consumer real estate-mortgage

 

313,582

 

120,090

 

10,258

 

443,930

 

18.6

%

Construction and land development

 

259,622

 

13,105

 

5,348

 

278,075

 

11.7

%

Commercial and industrial

 

607,212

 

26,926

 

308

 

634,446

 

26.6

%

Consumer and other

 

9,250

 

3,539

 

27

 

12,816

 

0.5

%

Total gross loans receivable, net of deferred fees

 

1,997,579

 

352,600

 

32,064

 

2,382,243

 

100.0

%

Allowance for loan losses

 

(16,154)

 

(1,883)

 

(309)

 

(18,346)

 

  

Total loans, net

$

1,981,425

$

350,717

$

31,755

$

2,363,897

 

  

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 March 31,June 30, 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

    

$

108,966

    

$

465,687

    

$

495,988

    

$

1,070,641

    

$

751,532

    

$

210,143

Consumer real estate-mortgage

 

30,112

 

169,217

 

233,157

 

432,486

 

202,830

 

199,544

Construction and land development

 

51,168

 

129,351

 

105,454

 

285,973

 

109,451

 

125,354

Commercial and industrial

 

79,939

 

546,200

 

59,871

 

686,010

 

562,078

 

43,993

Consumer and other

 

4,491

 

6,861

 

667

 

12,019

 

7,149

 

379

Total Loans

$

274,676

$

1,317,316

$

895,137

$

2,487,129

$

1,633,040

$

579,413

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 0.25%0.15% as of March 31,June 30, 2021, and 0.24% as of December 31, 2020, respectively. Total nonperforming assets as a percentage of total assets as of March 31,June 30, 2021 totaled 0.29%0.18% compared to 0.31% as of December 31, 2020. Acquired PCI loans and leases that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets.

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

March 31, 

December 31, 

    

2021

    

2020

Nonaccrual loans

$

4,739

$

5,633

Accruing loans past due 90 days or more

 

1,495

 

149

Total nonperforming loans

 

6,234

 

5,782

Other real estate owned

 

3,946

 

4,619

Total nonperforming assets

$

10,180

$

10,401

Restructured loans not included above

$

250

$

257

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

COVID-19 Loan Modifications

As a result of the CARES Act, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic.  At March 31,June 30, 2021, the Company had 10no loans remaining under COVID-19 modifications that amounted to $1.7 million, or 0.07% of the total loans outstanding.modifications. 

Allocation of the Allowance for Loan and Lease Losses

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the threesix months ended March 31,June 30, 2021, is $67$62 thousand compared to $3.2$6.0 million in the same period of 2020, a decrease of $3.1$6.1 million.  The allowance for loan and lease loss provision for the quartersix months ended March 31,June 30, 2020, increased due to the onset of the COVID-19 pandemic and related economic uncertainty.   As of March 31,June 30, 2021 and December 31, 2020, our allowance for loan and lease losses was $18.4 million and $18.3 million respectively,for each period, which we deemed to be adequate at each of the respective dates.  Our allowance for loan and lease loss as a percentage of total loans and leases was 0.74% at March 31,June 30, 2021 and 0.77% at December 31, 2020.

Our purchased loans and leases were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans and leases will be accreted into income over the life of the loans.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 March 31,June 30, 2021, the notional balances on PCI loans and leases was $40.8$41.7 million while the carrying value was $29.1$29.7 million. At March 31,June 30, 2021, there was an allowance on PCI loans and leases of $376$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):

March 31, 2021

December 31, 2020

    

Amount

    

Percent

    

Amount

    

Percent

    

Commercial real estate-mortgage

$

7,637

    

43.0

%  

$

7,579

    

42.5

%  

Consumer real estate-mortgage

 

3,308

 

17.4

%  

 

3,471

 

18.6

%  

Construction and land development

 

1,968

 

11.5

%  

 

2,076

 

11.7

%  

Commercial and industrial

 

5,347

 

27.6

%  

 

5,107

 

26.6

%  

Consumer and other

 

110

 

0.5

%  

 

113

 

0.5

%  

Total allowance for loan losses

$

18,370

 

100.0

%  

$

18,346

 

100.0

%  

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

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allowance allocation. Specific valuation allowances related to impaired, non PCI, loans and leases were approximately $237 thousand at December 31, 2020, compared to $492$696 thousand at March 31,June 30, 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 March 31, 

    

    

2021

    

2020

    

Balance at beginning of period

$

18,346

$

10,243

Provision for loan losses

 

67

 

3,200

Charged-off loans:

 

 

  

Commercial real estate-mortgage

 

 

Consumer real estate-mortgage

 

 

(2)

Construction and land development

 

 

Commercial and industrial

 

 

(8)

Consumer and other

 

(120)

 

(76)

Total charged-off loans

 

(120)

 

(86)

Recoveries of previously charged-off loans:

 

  

 

  

Commercial real estate-mortgage

 

3

 

2

Consumer real estate-mortgage

 

16

 

6

Construction and land development

 

 

2

Commercial and industrial

 

3

 

42

Consumer and other

 

55

 

22

Total recoveries of previously charged-off loans

 

77

 

74

Net loan charge-offs

 

(43)

 

(12)

Balance at end of period

$

18,370

$

13,431

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

 

0.74

%  

 

0.63

%  

Ratio of net loan charge-offs to average loans outstanding for the period

 

%  

 

%  

    

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 $250.9$250.8 million and $215.6 million at March 31,June 30, 2021 and December 31, 2020, respectively. Our investments to assets ratio increased from 6.5% at December 31, 2020 to 7.1%6.9% at March 31,June 30, 2021. Our securities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income. All of the Company’s securities are designated as available-for-sale.

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

    

March 31, 

    

December 31, 

2021

2020

U.S. Government-sponsored enterprises (GSEs)

$

73,905

$

30,526

Municipal securities

 

88,509

 

89,644

Other debt securities

 

26,019

 

25,019

Mortgage-backed securities

 

61,294

 

66,425

Total securities

$

249,727

$

211,614

    

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 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 March 31,June 30, 2021. The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs (dollars in thousands):

Maturity By Years

 

    

1 or Less

    

1 to 5

    

5 to 10

    

Over 10

    

Total

 

U.S. Government agencies

$

$

124

$

26,130

$

47,651

$

73,905

State and political subdivisions

 

4,947

 

3,460

 

6,324

 

73,778

 

88,509

Other debt securities

 

 

985

 

24,534

 

500

 

26,019

Mortgage-backed securities

 

 

4,017

 

12,354

 

44,923

 

61,294

Total securities

$

4,947

$

8,586

$

69,342

$

166,852

$

249,727

Weighted average yield (1)

 

1.90

%  

 

1.43

%  

 

2.92

%  

 

2.46

%  

 

2.54

%

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 March 31,June 30, 2021, brokered deposits represented approximately 1.7% of total deposits.

The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three months ended March 31,June 30, 2021 was 0.44%0.39% compared to 1.10%0.71% for the same period in 2020.2020 and 0.41% and 0.90% for the six months ended June 30, 2021 and June 30, 2020, respectively. The decreased cost of interest-bearing deposits was due to changes in rates caused by federal rate-changes during the periods.

Total deposits as of March 31,June 30, 2021 were $3.05$3.14 billion, which was an increase of $243.0$334.3 million from December 31, 2020. This increase was primarily from organic deposit growth. As of March 31,June 30, 2021, the Company had outstanding time deposits under $250,000 with balances of $383.5$364.6 million and time deposits over $250,000 with balances of $129.0$124.9 million.

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

    

March 31, 

2021

Three months or less

$

32,161

Three to six months

 

26,770

Six to twelve months

 

36,117

More than twelve months

 

33,906

Total

$

128,954

    

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 $82.6$78.8 million at March 31,June 30, 2021, and primarily consisted entirely of $75.0 million in FHLB borrowings and short-term borrowings

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totaled $7.2$3.8 million and consisted entirely of securities sold under repurchase agreements. Long-term debt totaled $39.4 million at March 31,June 30, 2021, and $39.3 million at December 31, 2020, and consisted entirely of subordinated debt.  For more

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Table of Contents

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 March 31,June 30, 2021 and December 31, 2020, our capital ratios, including our Bank’s capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank subsidiary. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary. For more information regarding our capital, leverage and total capital ratios, see “Part I - Item 1. Consolidated Financial Statements - Note 13 - Regulatory Matters.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 March 31,June 30, 2021, we had $542.8$640.3 million of pre-approved but unused lines of credit and $6.9$7.5 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions.  For more information regarding our off balance sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements - Note 9 – Commitments and Contingent Liabilities.Liabilities.

Market Risk and Liquidity Risk Management

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

Interest Rate Sensitivity

Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and leases and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. The primary measurements we use to help us manage interest rate sensitivity are an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.

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

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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:

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Table of Contents

Maximum Percentage Decline

in Net Interest

Income from the Budgeted

Estimated % Change in Net

or Base Case

Interest Income Over 12

Projection of Net Interest

Months

Income

March 31, 2021:

    

Increase +

    

Decrease -

    

Next 12 Months

An instantaneous, parallel rate increase or decrease of the following at the beginning of the third quarter:

± 100 basis points

 

6.22%

  

(0.81)%

  

8%

± 200 basis points

 

12.66%

(1.23)%

14%

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

March 31, 2021:

Increase +

Decrease -

Interest Rates

Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:

    

    

    

±100 basis points

 

5.29%

(7.48)%

10%

±200 basis points

 

9.26%

(8.03)%

15%

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 March 31,June 30, 2021, our model results indicated that we were within these policy limits.

Liquidity Risk Management

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

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

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

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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.

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The Company has $4.9$5.0 million in investments that mature throughout the next 12 months. The Company also anticipates $16.7$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 $276.7$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 March 31,June 30, 2021 (the “Evaluation Date”). Based on such evaluation, SmartFinancial’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, SmartFinancial’s disclosure controls and procedures were effective to ensure that information required to be disclosed by SmartFinancial in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to SmartFinancial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding the required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended March 31,June 30, 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.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in our Form 10-K for the year ended December 31, 2020. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Please be aware that these risks may change over time and other risks may prove to be important in the future.  In addition, these risks may be heightened by the continued disruption and uncertainty resulting from COVID-19. There have been no material changes from the risk factors described in our Form 10-K for the year ended December 31, 2020.

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

(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 March 31,June 30, 2021, we have purchased $5.5 million of the authorized $10.0 million and may purchase up to an additional $4.5 million in the Company’s outstanding common stock.

The following table summarizes the Company’s repurchase activity during the three months ended March 31,June 30, 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

Weighted

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)

January 1, 2021 to January 31, 2021

28,189

$

20.15

28,189

$

5,124

February 1, 2021 to February 28, 2021

 

31,421

20.37

31,421

4,484

March 1, 2021 to March 31, 2021

 

4,484

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

59,610

$

20.26

59,610

$

4,484

$

$

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:

May 10,August 9, 2021

/s/ William Y. Carroll, Jr.

William Y. Carroll, Jr.

President and Chief Executive Officer

(principal executive officer)

Date:

May 10,August 9, 2021

/s/ Ronald J. Gorczynski

Ronald J. Gorczynski

Executive Vice President and Chief Financial Officer

(principal financial officer and accounting officer)

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