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,~~September 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

(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,~~November 5, 2021, there were ~~15,104,661~~16,802,080 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,~~September 30, 2021 and December 31, 2020	3

	Consolidated Statements of Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2021 and 2020	4

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2021 and 2020	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended ~~March 31,~~September 30, 2021 and 2020	6

	Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 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	3641

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4956

Item 4.	Controls and Procedures	4956

PART II – OTHER INFORMATION		5057

Item 1.	Legal Proceedings	5057

Item 1A.	Risk Factors	5057

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5057

Item 3.	Defaults Upon Senior Securities	5057

Item 4.	Mine Safety Disclosures	5158

Item 5.	Other Information	5158

Item 6.	Exhibits	5259

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,		September 30,		December 31,
	2021		2020*		2021		2020*
ASSETS:
Cash and due from banks	$	46,594	$	50,460	$	79,827	$	50,460
Interest-bearing deposits with banks		442,793		364,846		969,929		364,846
Federal funds sold		67,314		66,413		41,404		66,413
Total cash and cash equivalents		556,701		481,719		1,091,160		481,719
Securities available-for-sale, at fair value		250,937		215,634		339,343		215,634
Other investments		14,728		14,794		14,972		14,794
Loans held for sale		7,870		11,721		3,418		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						2,652,663		2,382,243
Less: Allowance for loan and lease losses						(19,295)		(18,346)
Loans and leases, net						2,633,368		2,363,897
Premises and equipment, net		72,697		72,682		85,346		72,682
Other real estate owned		3,946		4,619		2,415		4,619
Goodwill and core deposit intangible, net		86,350		86,471
Goodwill and other intangibles, net						104,930		86,471
Bank owned life insurance		71,586		31,215		79,145		31,215
Other assets		23,629		22,197		29,934		22,197
Total assets	$	3,557,203	$	3,304,949	$	4,384,031	$	3,304,949

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	777,968	$	685,957	$	977,180	$	685,957
Interest-bearing demand		683,887		649,129		847,007		649,129
Money market and savings		1,073,941		919,631		1,389,393		919,631
Time deposits		512,417		550,498		585,692		550,498
Total deposits		3,048,213		2,805,215		3,799,272		2,805,215
Borrowings		82,642		81,199		88,748		81,199
Subordinated debt		39,367		39,346		41,909		39,346
Other liabilities		22,923		22,021		29,382		22,021
Total liabilities		3,193,145		2,947,781		3,959,311		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; 16,801,447 and 15,107,214 shares issued and outstanding, respectively						16,801		15,107
Additional paid-in capital		251,836		252,693		292,760		252,693
Retained earnings		96,034		87,185		112,600		87,185
Accumulated other comprehensive income		1,083		2,183		2,559		2,183
Total shareholders' equity		364,058		357,168		424,720		357,168
Total liabilities and shareholders' equity	$	3,557,203	$	3,304,949	$	4,384,031	$	3,304,949

* Derived from audited financial statements.

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

Three Months Ended

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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Interest income:
Loans and leases, including fees	$	31,674	$	28,621	$	88,015	$	83,718
Securities available-for-sale:
Taxable		832		546		2,472		1,813
Tax-exempt		331		364		894		1,064
Federal funds sold and other earning assets		474		327		1,074		1,206
Total interest income		33,311		29,858		92,455		87,801
Interest expense:
Deposits		2,153		2,897		6,733		11,016
Borrowings		121		334		360		674
Subordinated debt		655		584		1,823		1,751
Total interest expense		2,929		3,815		8,916		13,441
Net interest income		30,382		26,043		83,539		74,360
Provision for loan and lease losses		1,149		2,634		1,211		8,683
Net interest income after provision for loan and lease losses		29,233		23,409		82,328		65,677
Noninterest income:
Service charges on deposit accounts		1,220		892		3,278		2,370
Gain (loss) on sale of securities		45		(9)		45		6
Mortgage banking		994		1,029		3,238		2,544
Investment services		448		359		1,546		1,159
Insurance commissions		745		560		2,768		1,302
Interchange and debit card transaction fees, net		1,078		868		2,839		1,652
Other		1,779		422		3,429		1,417
Total noninterest income		6,309		4,121		17,143		10,450
Noninterest expense:
Salaries and employee benefits		13,594		11,032		36,666		31,395
Occupancy and equipment		2,536		2,186		7,170		6,093
FDIC insurance		525		534		1,266		894
Other real estate and loan related expense		407		643		1,514		1,535
Advertising and marketing		235		253		654		653
Data processing and technology		1,753		1,131		4,642		3,293
Professional services		810		594		2,300		2,172
Amortization of intangibles		711		402		1,597		1,169
Merger related and restructuring expenses		464		290		939		3,863
Other		2,274		2,102		6,822		5,699
Total noninterest expense		23,309		19,167		63,570		56,766
Income before income tax expense		12,233		8,363		35,901		19,361
Income tax expense		2,633		1,968		7,767		4,059
Net income	$	9,600	$	6,395	$	28,134	$	15,302
Earnings per common share:
Basic	$	0.62	$	0.42	$	1.85	$	1.03
Diluted	$	0.61	$	0.42	$	1.84	$	1.02
Weighted average common shares outstanding:
Basic		15,557,528		15,160,579		15,192,919		14,903,757
Diluted		15,691,126		15,210,611		15,312,755		14,965,455

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

Three Months Ended

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				Nine Months Ended
	September 30,				September 30,
		2021		2020	2021		2020
Net income	$	9,600	$	6,395	$	28,134	$	15,302
Other comprehensive income:
Unrealized holding gains (losses) on securities available-for-sale arising during the period		284		77		(971)		2,980
Tax effect		(74)		(142)		264		(779)
Reclassification adjustment for realized (gains) losses included in net income		(45)		(9)		(45)		6
Tax effect		12		2		12		(2)
Unrealized gains (losses) on securities available-for-sale arising during the period, net of tax		177		(72)		(740)		2,205
Unrealized gains (losses) on fair value municipal security hedges		59		538		1,510		(1,843)
Tax effect		(15)		(46)		(394)		482
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		44		492		1,116		(1,361)

Total other comprehensive income		221		420		376		844
Comprehensive income	$	9,821	$	6,815	$	28,510	$	16,146

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

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

For the Three and Nine Months Ended ~~March 31,~~September 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	—		—		—		15,302		—		15,302
Other comprehensive income	—		—		—		—		844		844
Common stock issued pursuant to:
Exercise of stock options	27,858		28		254		—		—		282
Restricted stock	36,113		36		(36)		—		—		—
Shareholders' of Progressive Financial Group, Inc.	1,292,578		1,293		23,254		—		—		24,547
Stock compensation expense	—		—		365		—		—		365
Common stock dividend ($0.15 per share)	—		—		—		(2,223)		—		(2,223)
Repurchases of common stock	(131,555)		(132)		(1,943)		—		—		(2,075)
Balance, September 30, 2020	15,233,227	$	15,233	$	254,626	$	78,918	$	1,012	$	349,789

Balance, December 31, 2020	15,107,214	$	15,107	$	252,693	$	87,185	$	2,183	$	357,168
Net income	—		—		—		28,134		—		28,134
Other comprehensive income	—		—		—		—		376		376
Common stock issued pursuant to:
Exercise of stock options	19,165		19		175		—		—		194
Restricted stock	43,143		43		(43)		—		—		—
Shareholders' of Sevier County Bancshares, Inc.	1,691,535		1,691		40,563		—		—		42,254
Stock compensation expense	—		—		521		—		—		521
Common stock dividend ($0.18 per share)	—		—		—		(2,719)		—		(2,719)
Repurchases of common stock	(59,610)		(59)		(1,149)		—		—		(1,208)
Balance, September 30, 2021	16,801,447	$	16,801	$	292,760	$	112,600	$	2,559	$	424,720

Balance, June 30, 2020	15,216,932	$	15,217	$	254,396	$	73,283	$	592	$	343,488
Net income	—		—		—		6,395		—		6,395
Other comprehensive income	—		—		—		—		420		420
Common stock issued pursuant to:
Exercise of stock options	12,500		12		92		—		—		104
Restricted stock	3,795		4		(4)		—		—		—
Stock compensation expense	—		—		142		—		—		142
Common stock dividend ($0.05 per share)	—		—		—		(760)		—		(760)
Repurchases of common stock	—		—		—		—		—		—
Balance, September 30, 2020	15,233,227	$	15,233	$	254,626	$	78,918	$	1,012	$	349,789

Balance, June 30, 2021	15,109,736	$	15,110	$	252,039	$	103,906	$	2,338	$	373,393
Net income	—		—		—		9,600		—		9,600
Other comprehensive income	—		—		—		—		221		221
Common stock issued pursuant to:
Stock awards	—		—		—		—		—		—
Exercise of stock options	—		—		—		—		—		—
Restricted stock	176		—		—		—		—		—
Shareholders' of Sevier County Bancshares, Inc.	1,691,535		1,691		40,563		—		—		42,254
Stock compensation expense	—		—		158		—		—		158
Common stock dividends ($0.06 per share)	—		—		—		(906)		—		(906)
Balance, September 30, 2021	16,801,447	$	16,801	$	292,760	$	112,600	$	2,559	$	424,720

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

Table of Contents

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


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	28,134	$	15,302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,739		4,437
Accretion of fair value purchase accounting adjustments, net		(4,086)		(3,689)
Provision for loan and lease losses		1,211		8,683
Stock compensation expense		521		365
Gain from redemption and sale of securities available-for-sale		(45)		(6)
Deferred income tax expense (benefit)		731		(37)
Increase in cash surrender value of bank owned life insurance		(1,240)		(526)
Net losses from sale and write downs of other real estate owned		176		142
Net gains from mortgage banking		(3,238)		(2,544)
Origination of loans held for sale		(97,360)		(99,223)
Proceeds from sales of loans held for sale		108,901		96,330
Net (gain) from sale of branch		(137)		—
Net change in:
Accrued interest receivable		2,074		(3,221)
Accrued interest payable		(125)		807
Other assets		(414)		1,850
Other liabilities		5,709		3,556
Net cash provided by operating activities		45,551		22,226
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		16,771		11,759
Proceeds from maturities and calls of securities available-for-sale		43,551		45,800
Proceeds from paydowns of securities available-for-sale		21,550		18,622
Proceeds from sales of other investments		436		—
Purchases of securities available-for-sale		(145,316)		(81,893)
Purchases of other investments		(80)		(1,223)
Purchases of bank owned life insurance		(40,000)		—
Proceeds from bank owned life insurance benefits		427		—
Net (increase) decrease in loans and leases		4,444		(316,075)
Purchases of premises and equipment		(603)		(4,450)
Proceeds from sale of other real estate owned		2,171		875
Proceeds received from branch sale		83,745		—
Net cash received from business combinations		15,364		46,132
Net cash provided by (used in) investing activities		2,460		(280,453)
Cash flows from financing activities:
Net increase in deposits		558,410		332,319
Net (increase) decrease in securities sold under agreements to repurchase		(351)		9
Proceeds from borrowings		7,500		338,340
Repayment borrowings		(396)		(50,581)
Cash dividends paid		(2,719)		(2,223)
Issuance of common stock		194		282
Repurchases of common stock		(1,208)		(2,075)
Net cash provided by financing activities		561,430		616,071
Net change in cash and cash equivalents		609,441		357,844
Cash and cash equivalents, beginning of period		481,719		183,971
Cash and cash equivalents, end of period	$	1,091,160	$	541,815
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	8,745	$	12,633
Cash paid during the period for income taxes		8,223		5,778
Noncash investing and financing activities:
Acquisition of real estate through foreclosure		580		971
Change in goodwill due to acquisitions and sale of a portfolio of loans		15,849		9,316

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

SmartFinancial, Inc. (the "Company" or “SmartFinancial”) is a bank holding company whose principal activity is the ownership and management of its ~~wholly-owned~~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~~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~~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~~intra-period 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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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 ~~all~~SRCs and other entities, the Board decided that CECL will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The Company does not plan to adopt this standard early and being that the Company is an SRC, adoption is required for fiscal years beginning after December 15, 2022.

In 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 Act (“~~CARES”~~CARES Act”) ~~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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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~~Regarding 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

Sevier County Bancshares, Inc.

On September 1, 2021, the Company completed the acquisition of Sevier County Bancshares, Inc., a Tennessee corporation (“SCB”), pursuant to an Agreement and Plan of Merger dated April 13, 2021 (the “Merger Agreement”).

In connection with the merger, the Company acquired $484.9 million of assets and assumed $443.1 million of liabilities. Pursuant to the Merger Agreement, at the effective time of the merger, SCB shareholders were entitled to receive for each share of SCB common stock, 0 par value per share, outstanding immediately prior to the Merger, either (i) $10.17 in cash (the “Per Share Cash Consideration”), or (ii) 0.4116 shares of Company common stock, par value $1.00 (the “Per Share Stock Consideration”). Pursuant to the terms of the Merger Agreement, (i) each SCB shareholder holding 20,000 shares or more of SCB common stock will receive the Per Share Stock Consideration and (ii) each SCB shareholder holding fewer than 20,000 shares of SCB common stock may elect to receive either the Per Share Stock Consideration or the Per Share Cash Consideration.SmartFinancial issued 1,691,535 shares of SmartFinancial common stock and paid $9.6 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 $15.6 million, representing the intangible value of SCB’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 $1.6 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

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


			Initial
	As recorded		Fair value		Subsequent		As recorded
	by SCB		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	84,313	$	—	$	—	$	84,313
Investment securities available-for-sale		64,219		(614)		—		63,605
Restricted investments		533		—		—		533
Loans		304,620		(4,551)		—		300,069
Allowance for loan losses		(3,644)		3,644		—		—
Premises and equipment, net		15,579		(295)		—		15,284
Bank owned life insurance		7,116		—		—		7,116
Deferred tax asset, net		10,340		(4,007)		—		6,333
Core deposit intangible		—		1,550		—		1,550
Interest Receivable		884		—		—		884
Other assets		920		(272)		—		648
Total assets acquired	$	484,880	$	(4,545)	$	—	$	480,335

Liabilities:
Deposits	$	435,036	$	—		—	$	435,036
Time deposit premium		—		888		—		888
Subordinated debt		2,500		—		—		2,500
Payables and other liabilities		5,563		115		—		5,678
Total liabilities assumed		443,099		1,003		—		444,102
Excess of assets acquired over liabilities assumed	$	41,781
Aggregate fair value adjustments			$	(5,548)	$	—
Total identifiable net assets								36,233
Consideration transferred:
Cash								9,568
Common stock issued (1,691,535 shares)								42,254
Total fair value of consideration transferred								51,822

Goodwill							$	15,589

⁽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):


	September 1, 2021
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest	$	25,932
Non-accretable differences		4,203
Cash flows expected to be collected		21,729
Accretable yield		3,480
Fair value	$	18,249

The following table discloses the impact of the merger with SCB since the acquisition date through the three and nine months ended September 30, 2021. The table also presents certain pro-forma information (net interest income plus total noninterest income (“Revenue”) and net income) as if the SCB 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 for the three and nine months ended September 30, 2021, were $445 thousand and $683 thousand, respectively, 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				Nine Months Ended
	September 30,				September 30,
	Revenue		Net Income		Revenue		Net Income
2021:
Actual SCB results included in statement of income since acquisition date	$	1,090	$	343	$	1,090	$	343
Supplemental consolidation pro-forma as if SCB had been acquired January 1, 2021		39,207		10,516		110,745		30,984

2020:
Supplemental consolidation pro-forma as if SCB had been acquired January 1, 2020	$	32,965	$	6,624	$	93,213	$	16,473

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).

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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).


	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.

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 nine months ended September 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 for the three and nine months ended September 30, 2021, were $18 thousand and $159 thousand, respectively, 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				Nine Months Ended
	September 30,				September 30,
	Revenue		Net Income		Revenue		Net Income
2021:
Actual Fountain results included in statement of income since acquisition date	$	1,696	$	357	$	2,834	$	702
Supplemental consolidation pro-forma as if Fountain had been acquired January 1, 2021		36,690		9,614		102,470		28,101

2020:
Supplemental consolidation pro-forma as if Fountain had been acquired January 1, 2020	$	31,566	$	6,744	$	89,016	$	16,274

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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).

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

Initial


As recorded

Fair value

Subsequent

As recorded

by PFG

adjustments

Adjustments

by the Company
Assets:






Cash & cash equivalents

$
55,971

$
—

$
—

$
55,971
Investment securities available-for-sale

27,054

203

—

27,257
Restricted investments

692

—

—

692
Loans

191,672

(3,691)

—

187,981
Allowance for loan losses

(2,832)

2,832

—

—
Premises and equipment, net

15,681

(2,919)

—

12,762
Bank owned life insurance

5,560

—

—

5,560
Deferred tax asset, net

—

813

193

1,006
Intangibles

—

1,370

1,127

2,497
Other real estate owned

3,695

(100)

(1,862)

1,733
Interest Receivable

1,061

(280)

—

781
Prepaids

375

(174)

—

201
Goodwill

231

(231)

—

—
Other assets

1,881

—

—

1,881
Total assets acquired

$
301,041

$
(2,177)

$
(542)

$
298,322

Liabilities:






Deposits

$
271,276

$
—

—

$
271,276
Time deposit premium

—

729

—

729
Payables and other liabilities

776

—

—

776
Total liabilities assumed

272,052

729

—

272,781
Excess of assets assumed over liabilities assumed

$
28,989




Aggregate fair value adjustments



$
(2,906)

$
(542)


Total identifiable net assets





25,541
Consideration transferred:






Cash





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





24,547
Total fair value of consideration transferred





34,385

Goodwill





$
8,844


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

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

Goodwill							$	8,844

⁽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.~~

1114

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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~~and nine months ended ~~March 31,~~September 30, 2021. There were 64114 thousand and 85 thousand antidilutive shares for the three ~~month period~~and nine months ended ~~March 31, 2020.~~September 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				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020
Basic earnings per share computation:
Net income available to common shareholders	$	9,756	$	2,732	$	9,600	$	6,395	$	28,134	$	15,302
Average common shares outstanding – basic		15,011,573		14,395,103		15,557,528		15,160,579		15,192,919		14,903,757
Basic earnings per share	$	0.65	$	0.19	$	0.62	$	0.42	$	1.85	$	1.03
Diluted earnings per share computation:
Net income available to common shareholders	$	9,756	$	2,732	$	9,600	$	6,395	$	28,134	$	15,302
Average common shares outstanding – basic		15,011,573		14,395,103		15,557,528		15,160,579		15,192,919		14,903,757
Incremental shares from assumed conversions:
Stock options and restricted stock		100,374		84,568		133,598		50,032		119,836		61,698
Average common shares outstanding - diluted		15,111,947		14,479,671		15,691,126		15,210,611		15,312,755		14,965,455
Diluted earnings per common share	$	0.65	$	0.19	$	0.61	$	0.42	$	1.84	$	1.02

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								September 30, 2021
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. Treasury									$	93,910	$	176	$	(61)	$	94,025
U.S. Government-sponsored enterprises (GSEs)	$	73,905	$	41	$	(1,689)	$	72,257		54,175		201		(913)		53,463
Municipal securities		88,509		1,626		(6)		90,129		93,422		2,179		(31)		95,570
Other debt securities		26,019		154		(118)		26,055		25,996		367		(72)		26,291
Mortgage-backed securities (GSEs)		61,294		1,354		(152)		62,496		68,837		1,339		(182)		69,994
Total	$	249,727	$	3,175	$	(1,965)	$	250,937	$	336,340	$	4,262	$	(1,259)	$	339,343

1215

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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,~~September 30, 2021 and December 31, 2020, securities with a carrying value totaling approximately ~~$117.6~~$161.4 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~~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 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,~~available-for-sale, gross gains and gross losses on sales and redemptions for the three and nine months ended ~~March 31,~~September 30, 2021, and 2020 were as follows (in thousands):


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020
Proceeds from sales	$	-	$	2,115	$	16,771	$	4,884	$	16,771	$	11,759
Gross gains	$	-	$	-	$	64	$	17	$	64	$	43
Gross losses	$	-	$	-	$	(19)	$	(26)	$	(19)	$	(37)

Proceeds from maturities and calls	$	9,097	$	3,250	$	32,275	$	30,350	$	43,551	$	45,800

The amortized cost and estimated fair value of securities at ~~March 31,~~September 30, 2021, by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2021
	Amortized		Fair
	Cost		Value
Due in one year or less	$	61,259	$	61,267
Due from one year to five years		3,817		3,843
Due from five years to ten years		90,688		91,409
Due after ten years		111,739		112,830
		267,503		269,349
Mortgage-backed securities		68,837		69,994
Total	$	336,340	$	339,343

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

1316

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	September 30, 2021
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	76,626	$	(61)	4	$	—	$	—	—	$	76,626	$	(61)	4
U.S. Government-sponsored enterprises (GSEs)		37,469		(910)	10		841		(3)	3		38,310		(913)	13
Municipal securities		3,929		(31)	3		—		—	—		3,929		(31)	3
Other debt securities		5,982		(72)	6		—		—	—		5,982		(72)	6
Mortgage-backed securities (GSEs)		8,891		(59)	8		8,780		(123)	6		17,671		(182)	14
Total	$	132,897	$	(1,133)	31	$	9,621	$	(126)	9	$	142,518	$	(1,259)	40

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															December 31, 2020
	Less than 12 Months					12 Months or Greater					Total					Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	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	$	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		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		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	$	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,~~September 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 ~~March 31,~~September 30, 2021, the Company does not intend, ~~to sell any of the securities, does not expect to~~or 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,		September 30,		December 31,
	2021		2020		2021		2020
Federal Reserve Bank stock	$	8,460	$	8,606	$	8,171	$	8,606
Federal Home Loan Bank stock		5,918		5,838		6,451		5,838
First National Bankers Bank stock		350		350		350		350
Total	$	14,728	$	14,794	$	14,972	$	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 September 30, 2021, the Company determined that there was 0 impairment on its other investments.

1417

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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 Leases and Allowance for Loan and Lease Losses

Portfolio Segmentation:

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


	March 31, 2021						December 31, 2020						September 30, 2021						December 31, 2020
	PCI		All Other				PCI		All Other				PCI		All Other				PCI		All Other
	Loans¹		Loans		Total		Loans¹		Loans		Total		Loans and Leases¹		Loans and Leases		Total		Loans and Leases¹		Loans and Leases		Total
Commercial real estate	$	13,877	$	1,056,764	$	1,070,641	$	16,123	$	996,853	$	1,012,976	$	23,156	$	1,290,091	$	1,313,247	$	16,123	$	996,853	$	1,012,976
Consumer real estate		9,597		422,889		432,486		10,258		433,672		443,930		10,863		467,298		478,161		10,258		433,672		443,930
Construction and land development		5,350		280,623		285,973		5,348		272,727		278,075		2,904		323,470		326,374		5,348		272,727		278,075
Commercial and industrial		303		685,707		686,010		308		634,138		634,446		2,871		466,868		469,739		308		634,138		634,446
Leases														3,748		49,648		53,396		—		—		—
Consumer and other		21		11,998		12,019		27		12,789		12,816		87		11,659		11,746		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
Total loans and leases														43,629		2,609,034		2,652,663		32,064		2,350,179		2,382,243
Less: Allowance for loan and lease losses														(427)		(18,868)		(19,295)		(309)		(18,037)	��	(18,346)
Loans and leases, net													$	43,202	$	2,590,166	$	2,633,368	$	31,755	$	2,332,142	$	2,363,897

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

For purposes of the disclosures required pursuant to ~~the adoption of~~ 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 56 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.

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 ~~March~~September 30, 2021, the net deferred fees outstanding was $3.8 million for the 2021 PPP loans and 0 net deferred fees were outstanding for the 2020 PPP loans. At December 31, ~~2021,~~2020, the net deferred fees outstanding for the 2020 PPP loans ~~is $1.9 million and $5.4 million for the 2021 PPP loans, respectively.~~was $4.2 million. PPP loans are included in the Commercial and Industrial loan ~~class.~~segments. As of ~~March 31,~~September 30, 2021, the Company had ~~3,710~~1,126 PPP loans outstanding, with an outstanding principal balance of ~~$338.3~~$87.1 million and as of December 31, 2020, the Company had 2,863 PPP loans outstanding, with an outstanding principal balance of $288.9 million.

1518

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The composition of loans and leases by loan classification for performing, impaired and ~~performing~~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

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


					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
September 30, 2021:
Performing loans and leases	$	1,289,233	$	464,881	$	323,470	$	466,769	$	49,648	$	11,659	$	2,605,660
Impaired loans and leases		858		2,417		—		99		—		—		3,374
		1,290,091		467,298		323,470		466,868		49,648		11,659		2,609,034
PCI loans and leases		23,156		10,863		2,904		2,871		3,748		87		43,629
Total loans and leases	$	1,313,247	$	478,161	$	326,374	$	469,739	$	53,396	$	11,746	$	2,652,663

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

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

Construction

Commercial

Consumer

Commercial

Consumer

and Land

and

and

Real Estate

Real Estate

Development

Industrial

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

~~Table of Contents~~

~~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, 2021, and December 31, 2020, our allowance for loan losses was $18.4 million and $18.3 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for loan loss as a percentage of total loans was 0.74% at March 31, 2021 and 0.77% at December 31, 2020.

~~The following tables outline the 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


					Construction		Commercial				Consumer
	Commercial		Consumer		and Land		and				and
	Real Estate		Real Estate		Development		Industrial		Leases		Other		Total
September 30, 2021:
Performing loans and leases	$	8,927	$	3,316	$	2,218	$	3,493	$	225	$	103	$	18,282
Impaired loans and leases		417		70		—		99		—		—		586
		9,344		3,386		2,218		3,592		225		103		18,868
PCI loans and leases		61		155		—		209		—		2		427
Total loans and leases	$	9,405	$	3,541	$	2,218	$	3,801	$	225	$	105	$	19,295

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

1719

Table of Contents

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

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


	Three Months Ended September 30, 2021
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	8,382	$	3,323	$	2,061	$	4,442	$	—	$	102	$	18,310
Charged-off loans and leases		—		—		—		(41)		(68)		(132)		(241)
Recoveries of charge-offs		23		13		—		3		5		33		77
Provision charged to expense		1,000		205		157		(603)		288		102		1,149
Ending balance	$	9,405	$	3,541	$	2,218	$	3,801	$	225	$	105	$	19,295


	Three Months Ended September 30, 2020
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	6,595	$	3,313	$	1,795	$	4,443	$	—	$	108	$	16,254
Charged-off loans and leases		—		(21)		—		(60)		—		(89)		(170)
Recoveries of charge-offs		11		17		—		55		—		16		99
Provision charged to expense		1,123		135		265		1,025		—		86		2,634
Ending balance	$	7,729	$	3,444	$	2,060	$	5,463	$	—	$	121	$	18,817


	Nine Months Ended September 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)		—		(45)		(68)		(341)		(514)
Recoveries of charge-offs		29		34		—		13		5		171		252
Provision charged to expense		1,797		96		142		(1,274)		288		162		1,211
Ending balance	$	9,405	$	3,541	$	2,218	$	3,801	$	225	$	105	$	19,295


	Nine Months Ended September 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		—		(23)		—		(77)		—		(231)		(331)
Recoveries of charge-offs		16		34		2		103		—		67		222
Provision charged to expense		3,205		857		931		3,480		—		210		8,683
Ending balance	$	7,729	$	3,444	$	2,060	$	5,463	$	—	$	121	$	18,817

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 nine months ended September 30, 2021, is $1.1 million and $1.2 million, respectively, and $2.6 million $8.7 million, during the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, and December 31, 2020, our allowance for loan and lease losses was $19.3 million and $18.3 million, respectively, 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 0.73% at September 30, 2021 and 0.77% at December 31, 2020.

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):


	September 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	$	1,245,064	$	461,422	$	323,156	$	460,588	$	49,648	$	11,591	$	2,551,469
Watch		40,106		1,490		240		5,767		—		45		47,648
Special mention		3,841		1,527		—		244		—		—		5,612
Substandard		1,080		2,859		74		224		—		23		4,260
Doubtful		—		—		—		45		—		—		45
Total		1,290,091		467,298		323,470		466,868		49,648		11,659		2,609,034

PCI Loans and Leases:
Pass		11,769		8,473		2,344		2,824		3,748		69		29,227
Watch		7,719		754		91		1		—		18		8,583
Special mention		579		70		—		—		—		—		649
Substandard		3,089		1,566		469		46		—		—		5,170
Doubtful		—		—		—		—		—		—		—
Total		23,156		10,863		2,904		2,871		3,748		87		43,629
Total loans and leases	$	1,313,247	$	478,161	$	326,374	$	469,739	$	53,396	$	11,746	$	2,652,663


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

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

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

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

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

March 31, 2021


30-60 Days

61-89 Days

Past Due 90



Total






Past Due and

Past Due and

Days��or More

Past Due and

PCI

Current

Total

Accruing

Accruing

and Accruing

Nonaccrual

Nonaccrual

Loans

Loans

Loans
Commercial real estate

$
565

$
—

$
1,495

$
3,155

$
5,215

$
13,877

$
1,051,549

$
1,070,641
Consumer real estate

968

1,336

—

1,481

3,785

9,597

419,104

432,486
Construction and land development

643

—

—

11

654

5,350

279,969

285,973
Commercial and industrial

666

12

—

60

738

303

684,969

686,010
Consumer and other

3

—

—

32

35

21

11,963

12,019
Total

$
2,845

$
1,348

$
1,495

$
4,739

$
10,427

$
29,148

$
2,447,554

$
2,487,129

December 31, 2020


30-60 Days

61-89 Days

Past Due 90



Total






Past Due and

Past Due and

Days or More

Past Due and

PCI

Current

Total

Accruing

Accruing

and Accruing

Nonaccrual

Nonaccrual

Loans

Loans

Loans
Commercial real estate

$
134

$
—

$
67

$
3,740

$
3,941

$
16,123

$
992,912

$
1,012,976
Consumer real estate

1,916

51

82

1,823

3,872

10,258

429,800

443,930
Construction and land development

245

—

—

12

257

5,348

272,470

278,075
Commercial and industrial

12

76

—

36

124

308

634,014

634,446
Consumer and other

14

5

—

22

41

27

12,748

12,816
Total

$
2,321

$
132

$
149

$
5,633

$
8,235

$
32,064

$
2,341,944

$
2,382,243

1821

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):


	September 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	$	1,599	$	—	$	—	$	858	$	2,457	$	23,156	$	1,287,634	$	1,313,247
Consumer real estate		170		—		—		2,564		2,734		10,863		464,564		478,161
Construction and land development		45		—		—		—		45		2,904		323,425		326,374
Commercial and industrial		342		214		—		125		681		2,871		466,187		469,739
Leases		377		42		—		—		419		3,748		49,229		53,396
Consumer and other		193		—		—		20		213		87		11,446		11,746
Total	$	2,726	$	256	$	—	$	3,567	$	6,549	$	43,629	$	2,602,485	$	2,652,663


	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,								September 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		2,156		2,157		—		888		888		—
Construction and land development		—		—		577		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—		—		—		—
Leases										—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—		—		—		—		—
		3,385		13		1,323		7		2,156		2,157		—		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		858		858		417		—		—		—
Consumer real estate		444		5		984		9		261		263		70		428		428		116
Construction and land development		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		128		2		159		2		99		99		99		146		146		121
Leases										—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—		—		—		—		—
		2,149		109		1,341		13		1,218		1,220		586		574		574		237
PCI loans:
PCI loans and leases:
Commercial real estate		—		—		964		1		1,206		1,500		61		—		—		—
Consumer real estate		1,215		22		456		1		1,196		1,318		155		1,827		2,086		88
Construction and land development		—		—		231		—		—		—		—		—		—		—
Commercial and industrial		268		1		355		—		255		228		209		270		234		218
Consumer real estate		19		—		11		—
Leases										—		—		—		—		—		—
Consumer and other										6		5		2		21		20		3
		1,502		23		2,017		2		2,663		3,051		427		2,118		2,340		309

Total impaired loans	$	7,036	$	145	$	4,681	$	22
Total impaired loans and leases									$	6,037	$	6,428	$	1,013	$	7,451	$	7,674	$	546

1922

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended September 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	$	—	$	—	$	552	$	3
Consumer real estate		2,171		19		758		3
Construction and land development		—		—		—		—
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
		2,171		19		1,310		6
Impaired loans and leases with a valuation allowance:
Commercial real estate		858		—		198		—
Consumer real estate		261		3		440		4
Construction and land development		—		—		—		—
Commercial and industrial		154		2		379		2
Leases		—		—		—		—
Consumer and other		—		—		—		—
		1,273		5		1,017		6
PCI loans and leases:
Commercial real estate		1,230		27		8		—
Consumer real estate		1,176		21		1,869		38
Construction and land development		—		—		—		—
Commercial and industrial		258		1		305		2
Leases		—		—		—		—
Consumer and other		10		—		27		—
		2,674		49		2,209		40
Total impaired loans and leases	$	6,118	$	73	$	4,536	$	52



	Nine Months Ended September 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	$	1,000	$	1	$	374	$	7
Consumer real estate		1,778		39		653		17
Construction and land development		—		—		289		—
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
		2,778		40		1,316		24
Impaired loans and leases with a valuation allowance:
Commercial real estate		1,218		104		198		2
Consumer real estate		352		11		712		18
Construction and land development		—		—		—		—
Commercial and industrial		141		7		269		7
Leases		—		—		—		—
Consumer and other		—		—		—		—
		1,711		122		1,179		27
PCI loans and leases:
Commercial real estate		410		27		250		1
Consumer real estate		1,169		64		1,344		77
Construction and land development		—		—		58		—
Commercial and industrial		263		3		343		5
Leases		—		—		—		—
Consumer and other		15		—		29		—
		1,857		94		2,024		83
Total impaired loans and leases	$	6,346	$	256	$	4,519	$	134

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,~~September 30, 2021 and December 31, 2020, management had approximately ~~$250~~$212 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 period~~nine months ended ~~March 31,~~September 30, 2021, and 1 loan that was modified during the ~~three month period~~nine months ended ~~March 31,~~September 30, 2020. There were 0 loans that were modified as TDRs during the past ~~three~~nine 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”)~~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,~~September 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,~~September 30, 2021, there ~~was~~were 0 residential ~~property~~properties secured by real estate included in other real estate owned and there ~~were 3~~was one residential real estate ~~loans~~loan totaling ~~$448~~$33 thousand in the process of foreclosure.

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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,		September 30,		December 31,
	2021		2020		2021		2020
Commercial real estate	$	21,221	$	23,787	$	31,664	$	23,787
Consumer real estate		12,011		12,692		13,211		12,692
Construction and land development		968		1,812		3,686		1,812
Commercial and industrial		6,463		6,521		3,794		6,521
Leases						4,133		—
Consumer and other		122		161		154		161
Total loans		40,785		44,973
Total loans and leases						56,642		44,973
Less: Remaining purchase discount		(11,637)		(12,909)		(13,013)		(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						43,629		32,064
Less: Allowance for loan and leases losses						(427)		(309)
Carrying amount, net of allowance	$	28,772	$	31,755	$	43,202	$	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				Nine Months Ended
	March 31,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020
Accretable yield, beginning of period	$	16,889	$	8,454	$	14,522	$	11,777	$	16,889	$	8,454
Additions		—		2,515		4,072		—		4,721		2,515
Accretion income		(1,931)		(2,077)		(2,151)		(1,267)		(5,180)		(4,401)
Reclassification		337		1,916		254		265		1,931		2,428
Other changes, net		(590)		171		(1,034)		7,405		(2,698)		9,184
Accretable yield, end of period	$	14,705	$	10,979	$	15,663	$	18,180	$	15,663	$	18,180

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~~On September 30, 2021, the Company entered into a Purchase and Assumption Agreement and completed the sale of a portfolio of loans and certain assets ~~consist~~associated (the “Sale”) with its branch office located in Richmond, Virginia to Strasburg, Virginia-based First Bank. In accordance with GAAP, the Company allocated a proportionate share of ~~core deposit intangibles, insurance agency customer relationships and insurance agency tradename. They are initially recognized based~~its goodwill balance to the Sale on a ~~valuation~~relative fair value basis. Based on a relative fair value analysis performed asthrough the date of the ~~consummation date. The core deposit intangible is amortized over~~sale, goodwill adjustment in the ~~average remaining life~~amount of $2.5 million related to the ~~acquired customer deposits,~~Sale was recorded during the ~~insurance agency customer relationships are amortized over ten years and the insurance agency tradename is amortized over five years.~~third quarter of 2021.

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The Company’s other intangible assets consist of core deposit, customer relationships and 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 customer relationships are amortized over a weighted average of 8.6 years and the tradename is amortized over five years.

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


	March 31,		December 31,		September 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		—
Acquisition of SCB						15,589		—
Adjustment, due to Sale						(2,463)		—
Balance, end of the period	$	74,458	$	74,135	$	89,984	$	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
Acquisition of SCB										1,550		-		-		1,550
Balance, September 30, 2021, other intangible assets, gross										17,470		3,722		63		21,255
Less: accumulated amortization		(4,935)		(206)		(14)		(5,155)		(5,748)		(541)		(20)		(6,309)
Balance, March 31, 2021, other intangible assets, net	$	10,985	$	858	$	49	$	11,892
Balance, September 30, 2021, other intangible assets, net									$	11,722	$	3,181	$	43	$	14,946

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 periods~~and nine months ended ~~March 31,~~September 30, 2021, was $711 thousand and $1.6 million, respectively, and for the three and nine months ended September 30, 2020, was ~~$397~~$402 thousand and ~~$362 thousand,~~$1.2 million, respectively.

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


Remainder of 2021	$	1,316	$	660
2022		1,697		2,521
2023		1,636		2,356
2024		1,588		2,203
2025		1,531		2,041
Thereafter		4,124		5,165
Total	$	11,892	$	14,946

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

Borrowings:

At ~~March 31,~~September 30, 2021, total borrowings were ~~$82.6~~$88.7 million compared to $81.2 million at December 31, 2020. Borrowings consist of the following (dollars in thousands):


	March 31,		December 31,		September 30,		December 31,
	2021		2020		2021		2020
Securities sold under customer repurchase agreements	$	7,250	$	5,803	$	6,248	$	5,803
FHLB borrowings		75,000		75,000		75,000		75,000
Other borrowings		392		396		7,500		396
Total	$	82,642	$	81,199	$	88,748	$	81,199

Securities Sold Under Agreements to Repurchase:

~~At March 31, 2021 and December 31, 2020, the~~The 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,~~September 30, 2021 and December 31, 2020, respectively.

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~~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 March 24, 2023. At September ~~24, 2021. At March 31,~~30, 2021, ~~there~~$7.5 million was 0 outstanding ~~balance~~ under the line of credit, and ~~the entire amount~~$17.5 million 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 September 30, 2021 and December 31, 2020. Unamortized debt issuance cost was $591 thousand and $654 thousand at September 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 $63 thousand for the three and nine months ended September 30, 2021 and September 30, 2020, respectively

On September 1, 2021, the Company acquired $2.5 million of subordinated notes (“sub-debt”) from the acquisition of SCB. The sub-debt bears interest at a rate of 6.75% per annum until August 14, 2024, with the interest during this period payable semi-annually in arrears. From and including August 14, 2024, 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 sub-debt if three-month LIBOR cannot be determined, plus 530.25 basis points, with interest during this period payable quarterly in arrears. The sub-debt is redeemable by the Company, in whole or in part, on or after August 14, 2024, and at any time, in whole but not in part, upon the occurrence

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of certain events. The sub-debt has been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes.

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 periods~~and nine months ending ~~March 31,~~September 30, 2021, ~~and 2020, respectively,~~ was ~~$288~~$287 thousand and ~~$251 thousand.~~$925 thousand, respectively. The Company’s contribution to the Plan for the three and nine months ending September 30, 2020, was $282 thousand and $840 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,~~September 30, 2021, the Company had 1 active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which ~~had 21,886 rights issued and 1,834,427~~has 1,830,260 Rights available for future grants or awards.

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

Stock Options:

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


		Weighted			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 September 30, 2021				80,577	$	10.19

The Company did 0t recognize any stock option-based compensation expense during the three and nine months ended September 30, 2021 and 2020, respectively, as all stock options issued are fully vested.

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

Information pertaining to stock options outstanding at ~~March 31,~~September 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	0.45 years	$	6.60	19,250	$	6.60
	9.48	18,000	1.95 years		9.48	18,000		9.48	9.48	18,000	1.45 years		9.48	18,000		9.48
	9.60	22,250	2.75 years		9.60	22,250		9.60	9.60	22,250	2.25 years		9.60	22,250		9.60
	11.76	2,266	1.25 years		11.76	2,266		11.76	11.76	2,266	0.75 years		11.76	2,266		11.76
	15.05	21,886	4.28 years		15.05	21,886		15.05	15.05	18,811	3.75 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	1.95 years	$	10.19	80,577	$	10.19

NaN stock options were exercised during the three months ended September 30, 2021. The intrinsic value of options exercised during nine months ended September 30, 2021, was $220 thousand, and $75 thousand and $141 thousand, during the three ~~month periods~~and nine months ended ~~March 31, 2021 and~~September 30, 2020, ~~was $192 thousand and $65 thousand,~~ respectively. The aggregate intrinsic value of total options outstanding and exercisable options at ~~March 31,~~September 30, 2021, was ~~$944 thousand.~~$1.3 million. Cash received from options exercised under all share-based payment arrangements for the ~~three month period~~nine months ended ~~March 31,~~September 30, 2021 was ~~$147~~$194 thousand.

NaN options vested during the ~~periods~~nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively. NaN stock options were exercised during the three months ended September 30, 2021. The income tax expense/benefit recognized for the exercise of options during the ~~three~~nine months ended ~~March 31,~~September 30, 2021, ~~and 2020,~~ was a benefit of $1$9 thousand and ~~$23~~for the three and nine months ended September 30, 2020, was an expense of $3 thousand and a benefit of $19 thousand, respectively.

As of ~~March 31,~~September 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,~~September 30, 2021 is presented below:


		Weighted			Weighted
		Average			Average
		Grant-Date			Grant-Date
	Number	Fair Value		Number	Fair Value
Balance at December 31, 2020	100,218	$	19.07	100,218	$	19.07
Granted	48,967		20.08	53,134		20.43
Vested	(3,918)		22.44	(7,185)		21.42
Forfeited/expired	—		—	(1,800)		16.37
Balance at March 31, 2021	145,267	$	19.32
Balance at September 30, 2021				144,367	$	19.49

The Company measures the fair value of restricted stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. The compensation expense for restricted stock awards during the three and nine months ended ~~March 31,~~September 30, 2021, ~~and 2020,~~ was ~~$201~~$163 thousand and ~~$110~~$525 thousand, respectively, and was $142 thousand and $365 thousand, during the three and nine months ended September 30, 2020, respectively. As of ~~March 31,~~September 30, 2021, there was ~~$1.8~~$1.6 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.~~2.74 years. The grant-date fair value of restricted stock awards vested was ~~$88~~$154 thousand for the ~~period~~nine months ended ~~March 31,~~September 30, 2021.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Stock Appreciation Rights ("SARs"):

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


		Weighted			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	—		—	(23,500)		21.61
Forfeited	—		—	(6,000)		18.00
Outstanding at March 31, 2021	95,000	$	19.41
Outstanding at September 30, 2021				65,500	$	18.75

Information pertaining to SARs outstanding at ~~March 31,~~September 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	2.25 years	$	15.19	—	$	—
	18.12	21,000	1.75 years		18.12	—		—	18.12	19,000	1.25 years		18.12	—		—
	20.70	22,000	3.76 years		20.70	—		—	20.70	20,000	3.25 years		20.70	—		—
	21.61	34,000	0.75 years		21.61	34,000		21.61	21.61	10,500	0.25 years		21.61	10,500		21.61
	Outstanding, end of period	95,000	2.05 years	$	19.41	34,000	$	21.61	Outstanding, end of period	65,500	1.95 years	$	18.75	10,500	$	21.61

SARs compensation expense of $49 thousand and ~~($118)~~$162 thousand was recognized for the three ~~month periods~~and nine months ended ~~March 31,~~September 30, 2021, respectively, and ~~2020, respectively.~~($63) thousand and ($89) thousand for the three and nine months ended September 30, 2020. The credit in expense for the three ~~month period~~and nine months ended ~~March 31,~~September 30, 2020, was due to adjustments related to the fair value evaluation of SARs.

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~~(in thousands):


	March 31,		December 31,		September 30,		December 31,
	2021		2020		2021		2020
Commitments to extend credit	$	542,825	$	476,841	$	616,271	$	476,841
Standby letters of credit		6,920		5,261		10,439		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

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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,~~September 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.

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

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

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

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:
September 30, 2021:
Assets:
Securities available-for-sale:
U.S. Treasury										94,025		—		94,025		—
U.S. Government-sponsored enterprises (GSEs)	$	72,257	$	—	$	72,257	$	—	$	53,463	$	—	$	53,463	$	—
Municipal securities		90,129		—		90,129		—		95,570		—		95,570		—
Other debt securities		26,055		—		26,055		—		26,291		—		26,291		—
Mortgage-backed securities (GSEs)		62,496		—		62,496		—		69,994		—		69,994		—
Total securities available-for-sale	$	250,937	$	—	$	250,937	$	—	$	339,343	$	—	$	339,343	$	—

Liabilities:
Derivative financial instruments	$	4,008	$	—	$	4,008	$	—	$	4,180	$	—	$	4,180	$	—

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 period~~nine months ending ~~March 31,~~September 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.

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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.

Assets Measured at Fair Value on a Nonrecurring Basis:

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


			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:
Impaired loans	$	4,348	$	—	$	—	$	4,348
September 30, 2021:
Collateral dependent loans									$	2,868	$	—	$	—	$	2,868
Other real estate owned		3,946		—		—		3,946		2,415		—		—		2,415

December 31, 2020:
Impaired loans	$	2,455	$	—	$	—	$	2,455
Collateral dependent loans									$	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:
Impaired loans	$	4,348	Appraisal	Appraisal discounts	17	%
September 30, 2021:
Collateral dependent loans							$	2,868	Appraisal	Appraisal discounts	26	%
Other real estate owned		3,946	Appraisal	Appraisal discounts	27	%		2,415	Appraisal	Appraisal discounts	10	%

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

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

~~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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Other real estate owned: Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The 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~~the difference is recognized in noninterest expense.

Carrying value and estimated fair value:

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


	Fair Value Measurements Using										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:
September 30, 2021:
Assets:
Cash and cash equivalents	$	556,701	$	556,701	$	—	$	—	$	556,701	$	1,091,160	$	1,091,160	$	—	$	—	$	1,091,160
Securities available-for-sale		250,937		—		250,937		—		250,937		339,343		—		339,343		—		339,343
Other investments		14,728		N/A		N/A		N/A		N/A		14,972		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												2,636,786		—		—		2,630,239		2,630,239

Liabilities:
Noninterest-bearing demand deposits		777,968		—		777,968		—		777,968		977,180		—		977,180		—		977,180
Interest-bearing demand deposits		683,887		—		683,887		—		683,887		847,007		—		847,007		—		847,007
Money market and savings deposits		1,073,941		—		1,073,941		—		1,073,941		1,389,393		—		1,389,393		—		1,389,393
Time deposits		512,417		—		515,440		—		515,440		585,692		—		587,954		—		587,954
Borrowings		82,642		—		83,743		—		83,743		88,748		—		89,669		—		89,669
Subordinated debt		39,367		—		—		40,866		40,866		41,909		—		—		43,645		43,645
Derivative financial instruments		4,008		—		4,008		—		4,008		4,180		—		4,180		—		4,180

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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

Note 11.Derivatives Financial Instruments

Derivatives designated as fair value hedges:

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

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

Weighted

Average

Balance

Remaining

Weighted

Balance

Remaining

Weighted

Sheet

Maturity

Average

Receive

Notional

Estimated

Sheet

Maturity

Average

Receive

Notional

Estimated

Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

March 31, 2021:

September 30, 2021:

Interest rate swap agreements - securities

Other liabilities

6.18

3.09

3 month LIBOR

36,000

(4,008)

Other liabilities

5.74

3.09

3 month LIBOR

36,000

(4,180)

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)

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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				Nine Months Ended
	March 31,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020
Interest income on tax-exempt securities	$	564	$	440	$	549	$	565	$	1,675	$	1,586
Effects of fair value hedge relationships		(305)		(157)		(218)		(201)		(781)		(522)
Reported interest income on tax-exempt securities	$	259	$	283	$	331	$	364	$	894	$	1,064


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
Gain (loss) on fair value hedging relationship	2021		2020		2021		2020		2021		2020
Interest rate swap agreements - securities:
Hedged items	$	(4,008)	$	(6,885)	$	288	$	299	$	1,994	$	(3,345)
Derivative designated as hedging instruments	$	4,008	$	6,885	$	(288)	$	(299)	$	(1,994)	$	3,345

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


			Cumulative Amount of Fair
			Value Hedging Adjustment
	Carrying Amount		Included in Other Comprehensive
Line item on the balance sheet	of the Hedged Assets		Income
September 30, 2021:
Securities available-for-sale	$	43,258	$	448
December 31, 2020:
Securities available-for-sale	$	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 September 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):


	September 30, 2021				December 31, 2020
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	14,718	$	250	$	-	$	-
Liabilities		14,718		(250)		-		-
Total	$	29,436	$	-	$	-	$	-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The ~~following amounts~~Company establishes limits and monitors exposures for customer swap positions. Any fees received to enter the swap agreements at inception are recognized in earnings when received and is included in noninterest income. Such fees were ~~recorded on the balance sheet related to cumulative basis adjustments for fair value hedges~~ as follows (in thousands):

Cumulative Amount of Fair

Value Hedging Adjustment

Carrying Amount

Included in Other Comprehensive
Line item on the balance sheet

of the Hedged Assets

Income
March 31, 2021:




Securities available-for-sale

$
43,073

$
250
December 31, 2020:




Securities available-for-sale

$
44,017

$
(1,063)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Interest rate swap agreements	$	479	$	—	$	489	$	—

Note 12. Leases

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

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

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


		March 31,		December 31,			September 30,		December 31,
	Classification	2021		2020		Classification	2021		2020
Assets:
Operating lease right-of-use assets	Other assets	$	4,588	$	4,797	Other assets	$	6,104	$	4,797
Liabilities:
Operating lease liabilities	Other liabilities	$	4,625	$	4,827	Other liabilities	$	6,154	$	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,~~September 30, 2021, the weighted average remaining lease term was ~~11.32~~10.80 years and the weighted average discount rate was ~~2.73%~~2.39%.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020
Lease costs:
Operating lease costs	$	240	$	237	$	270	$	272	$	764	$	779
Variable lease costs		24		26		18		29		66		84
Total	$	264	$	263	$	288	$	301	$	830	$	863
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	233	$	230	$	257	$	264	$	740	$	759

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~March 31,~~September 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
September 30, 2022			$	253
September 30, 2023				985
September 30, 2024				744
September 30, 2025				528
September 30, 2026				515
Thereafter		3,032		4,059
Total future minimum lease payments		5,425		7,084
Amounts representing interest		(800)		(930)
Present value of net future minimum lease payments	$	4,625	$	6,154

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,~~September 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 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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

During the three months ended ~~March 31,~~September 30, 2021, the Bank did not pay a dividend to the Company and the Company paid a quarterly common stock dividend of $0.06 per share. During the nine months ended September 30, 2021, the Bank paid ~~$5.0~~$10.0 million in dividends to the ~~Company and~~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.

Regulatory Capital Levels:

Actual and required capital levels at ~~March 31,~~September 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
September 30, 2021
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	337,484	13.62	%	$	198,250	8.00	%		N/A	N/A		$	381,766	12.92	%	$	236,367	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			320,562	10.85	%		177,275	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			320,562	10.85	%		132,956	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			320,562	8.36	%		153,417	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	%	$	371,740	12.59	%	$	236,244	8.00	%	$	295,304	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		304,918	12.31	%		148,631	6.00	%		198,174	8.00	%		352,445	11.94	%		177,183	6.00	%		236,244	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		304,918	12.31	%		111,473	4.50	%		161,017	6.50	%		352,445	11.94	%		132,887	4.50	%		191,948	6.50	%
Tier 1 Capital (to Average Assets)²		304,918	9.33	%		130,783	4.00	%		163,479	5.00	%		352,445	9.20	%		153,185	4.00	%		191,481	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 September 30, 2021
					Accumulated
	Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)
Beginning balance, June 30, 2021	$	2,051	$	287	$	2,338

Other comprehensive income		210		44		254
Reclassification of amounts included in net income		(33)		—		(33)
Net other comprehensive income during period		177		44		221

Ending balance, September 30, 2021	$	2,228	$	331	$	2,559

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

Other comprehensive income		(65)		492		427
Reclassification of amounts included in net income		(7)		—		(7)
Net other comprehensive income during period		(72)		492		420

Ending balance, September 30, 2020	$	2,596	$	(1,584)	$	1,012


	Three Months Ended March 31, 2021						Nine Months Ended September 30, 2021
					Accumulated						Accumulated
	Securities		Fair Value		Other		Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive		Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)		Sale		Security Hedges		Income (Loss)
Beginning balance, December 31, 2020	$	2,968	$	(785)	$	2,183	$	2,968	$	(785)	$	2,183

Other comprehensive income (loss)		(2,070)		970		(1,100)		(707)		1,116		409
Reclassification of amounts included in net income		—		—		—		(33)		—		(33)
Net other comprehensive income (loss) during period		(2,070)		970		(1,100)		(740)		1,116		376

Ending balance, March 31, 2021	$	898	$	185	$	1,083
Ending balance, September 30, 2021							$	2,228	$	331	$	2,559

	Three Months Ended March 31, 2020						Nine Months Ended September 30, 2020
					Accumulated						Accumulated
	Securities		Fair Value		Other		Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive		Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)		Sale		Security Hedges		Income (Loss)
Beginning balance, December 31, 2019	$	391	$	(223)	$	168	$	391	$	(223)	$	168

Other comprehensive income (loss)		851		(2,266)		(1,415)		2,201		(1,361)		840
Reclassification of amounts included in net income		—		—		—		4		—		4
Net other comprehensive income (loss) during period		851		(2,266)		(1,415)		2,205		(1,361)		844

Ending balance, March 31, 2020	$	1,242	$	(2,489)	$	(1,247)
Ending balance, September 30, 2020							$	2,596	$	(1,584)	$	1,012

~~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”~~"Company" or “SmartFinancial”) is a bank holding company whose principal activity is the ownership and management of its ~~wholly-owned~~wholly owned subsidiary, SmartBank (the "Bank"). ~~SmartBank~~The Company provides a ~~comprehensive suite~~variety of ~~commercial and consumer banking~~financial services to ~~clients~~individuals and corporate customers through ~~35 full-service bank branches and one loan production office in select markets~~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.

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 (and the variants thereof) 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;~~pandemic, including the risk of inflation and interest rate increases resulting from monetary and fiscal stimulus responses, and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

●

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;

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●

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~~acquisitions of SCB and Fountain with customers, suppliers or employees or other business partners’ relationships;

●

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

●

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

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●

~~SmartFinancial’s~~The Company’s ability to manage the combined company’s growth following the ~~acquisitions;~~acquisitions of SCB and Fountain;

●

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

●

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.~~us;

●

risks associated with widespread inflation or deflation.

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~~The Company disclaims any obligation to update or revise any forward-looking statements contained in this release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.

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

Executive Summary

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

●

Successfully completed the hiring of an experienced banking ~~team~~teams in the Gulf Coast ~~Region.~~Region and Auburn, Dothan, Montgomery and Birmingham Alabama and Tallahassee, Florida.

●

Announced and completed the acquisition of SCB.

●

Announced and completed the acquisition of Fountain.

●

Originated ~~1,231~~1,801 Paycheck Protection Program (“PPP”) loans totaling ~~$119.5~~$138.4 million.

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●

Net income totaled ~~$9.8~~$9.6 million, or ~~$0.65~~$0.61 per diluted common share, during the third quarter of 2021 compared to $6.4 million, or $0.42 per diluted common share, for the same period in 2020.

●

Net income totaled $28.1 million, or $1.84 per diluted common share, during the first ~~quarter~~nine months of 2021 compared to ~~$2.7~~$15.3 million, or ~~$0.19~~$1.02 per diluted common share, for the same period in 2020.

●

Annualized return on average assets for the three months ended September 30, 2021 and 2020 was ~~1.18% at March 31, 2021 compared to 0.43% at March 31, 2020.~~0.97% and 0.76%, respectively.

●

~~On December 21,~~Annualized return on average assets for the nine months ended September 30, 2021 and 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~~1.04% 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.0.68%, respectively.

Analysis of Results of Operations

~~First~~Third quarter of 2021 compared to 2020

Net income was ~~$9.8~~$9.6 million, or ~~$0.65~~$0.61 per diluted common share, for the ~~first~~third quarter of 2021, compared to ~~$2.7~~$6.4 million, or ~~$0.19~~$0.42 per diluted common share, for the ~~first~~third quarter of 2020. The increase in net income for this period was primarily from the increase of $5.8 million in net interest income after provision for loan and lease losses and $2.2 million in noninterest income, offset by increases of $4.1 million in noninterest expense and $665 thousand in income tax expense. The tax equivalent net interest margin was ~~3.48%~~3.35% for the ~~first~~third quarter of 2021, compared to ~~3.90%~~3.39% for the ~~first~~third quarter of 2020. Noninterest income to average assets was ~~0.69%~~0.64% for the ~~first~~third quarter of 2021, increasing from ~~0.44%~~0.49% for the third quarter of 2020. Noninterest expense to average assets increased to 2.35% in the third quarter of 2021, from 2.28% in the third quarter of 2020.

First nine months of 2021 compared to 2020

Net income was $28.1 million, or $1.84 per diluted common share, for the first ~~quarter~~nine months of 2021, compared to $15.3 million, or $1.02 per diluted common share, for the first nine months of 2020. The increase in net income for this period was primarily from the increase of $16.7 million in net interest income after provision for loan and lease losses and $6.7 million in noninterest income, offset by increases of $6.8 million in noninterest expense and $3.7 million in income tax expense. The tax equivalent net interest margin was 3.37% for the first nine months of 2021 compared to 3.62% for the first nine months of 2020. Noninterest income to average assets was 0.63% for the first nine months of 2021, increasing from 0.46% for the first nine months of 2020. Noninterest expense to average assets decreased to ~~2.35%~~2.34% in the first ~~quarter~~nine months of 2021, from ~~2.96%~~2.52% in the first ~~quarter~~nine months of 2020.

Net Interest Income and Yield Analysis

~~First~~Third quarter of 2021 compared to 2020

Net interest income, taxable equivalent, increased to ~~$26.4~~$30.5 million for the ~~first~~third quarter of 2021, up from ~~$22.7~~$26.2 million for the ~~first~~third 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, PPP and loan fees accretion and the reduction in interest expense on interest bearing liabilities. Average interest-earning assets increased from ~~$2.34~~$3.08 billion for the ~~first~~third quarter of 2020, to ~~$3.08~~$3.61 billion for the ~~first~~third quarter of 2021, primarily ~~as a result~~because of the Company’s continued organic loan and lease growth, acquisition of ~~PFG being~~Fountain completed on ~~March~~May 3, 2021, acquisition of SCB completed September 1, ~~2020, the Company’s~~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~~$122.4 million, average federal funds sold and other interest earning assets increased by $363.9 million, average interest-bearing deposits increased

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by ~~$415.9~~$562.7 million, average noninterest-bearing deposits increased ~~$327.8~~$228.3 million and average borrowings ~~increased $29.9~~decreased $239.1 million. The tax equivalent net interest margin decreased to ~~3.48%~~3.35% for the ~~first~~third quarter of 2021, compared to ~~3.90%~~3.39% for the ~~first~~third quarter of 2020. The yield on earning assets decreased from ~~4.83%~~3.88% for the ~~first~~third quarter of 2020, to ~~3.88%~~3.67% for the ~~first~~third quarter of 2021, primarily due to ~~rate cuts by the Federal Reserve over the past year and, to a lesser extent, loan yields declining from market competition.~~lower yielding excess liquidity. The cost of average interest-bearing deposits decreased from ~~1.10%~~0.59% for the ~~first~~third quarter of 2020, to ~~0.44%~~0.34% for the ~~first~~third quarter of 2021, primarily due to a lower interest rate environment during the period.

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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,												Three Months Ended September 30,
	2021						2020						2021						2020
	Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate		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 and leases, including fees¹													$	2,532,604		31,623	4.95	%	$	2,410,173		28,508	4.71	%
Loans held for sale		7,913		75	3.82	%		4,294		45	4.24	%		3,987		51	5.09	%		8,048		113	5.57	%
Taxable securities		136,492		724	2.15	%		116,837		679	2.34	%		187,032		832	1.77	%		132,642		546	1.64	%
Tax-exempt securities²		90,849		409	1.82	%		70,397		400	2.28	%		87,621		477	2.16	%		88,129		515	2.32	%
Federal funds sold and other earning assets		417,144		291	0.28	%		165,512		602	1.46	%		802,712		474	0.23	%		438,785		327	0.30	%
Total interest-earning assets		3,080,897		29,442	3.88	%		2,340,037		28,115	4.83	%		3,613,956		33,457	3.67	%		3,077,777		30,009	3.88	%
Noninterest-earning assets		275,272						216,498						323,067						262,764
Total assets	$	3,356,169					$	2,556,535					$	3,937,023					$	3,340,541

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	641,214	$	256	0.16	%	$	389,500	$	434	0.45	%	$	763,613	$	414	0.21	%	$	509,999	$	199	0.16	%
Money market and savings deposits		983,893		821	0.34	%		664,983		1,389	0.84	%		1,233,533		854	0.27	%		833,022		704	0.34	%
Time deposits		526,062		1,254	0.97	%		680,830		2,931	1.73	%		524,327		885	0.67	%		615,714		1,994	1.29	%
Total interest-bearing deposits		2,151,169		2,331	0.44	%		1,735,313		4,754	1.10	%		2,521,473		2,153	0.34	%		1,958,735		2,897	0.59	%
Borrowings		81,837		117	0.58	%		51,921		89	0.69	%
Borrowings³														80,188		121	0.60	%		319,265		334	0.42	%
Subordinated debt		39,354		584	6.01	%		39,269		584	5.98	%		40,211		654	6.47	%		39,311		584	5.91	%
Total interest-bearing liabilities		2,272,360		3,032	0.54	%		1,826,503		5,427	1.20	%		2,641,872		2,928	0.44	%		2,317,311		3,815	0.65	%
Noninterest-bearing deposits		700,962						373,125						877,831						649,489
Other liabilities		21,928						27,215						24,522						25,834
Total liabilities		2,995,250						2,226,843						3,544,225						2,992,634
Shareholders' equity		360,919						329,692						392,798						347,907
Total liabilities and shareholders’ equity	$	3,356,169					$	2,556,535					$	3,937,023					$	3,340,541
Net interest income, taxable equivalent			$	26,410					$	22,689					$	30,529					$	26,194
Interest rate spread					3.33	%					3.63	%					3.23	%					3.22	%
Tax equivalent net interest margin					3.48	%					3.90	%					3.35	%					3.39	%

Percentage of average interest-earning assets to average interest-bearing liabilities					135.58	%					128.12	%					136.80	%					132.82	%
Percentage of average equity to average assets					10.75	%					12.90	%					9.98	%					10.41	%

¹Loans and leases include PPP loans with an average balance of ~~$312.6~~$128.4 million and $295.0 million for the three ~~month period~~months 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,September 30, 2021, and 2020, respectively. Loan and lease fees included in loan and lease income was $3.5 million and $2.7 million for the three months ended September 30, 2021, and 2020, respectively. Loan and lease fee income for the three ~~month period~~months ended ~~March 31,~~September 30, 2021 and 2020, includes ~~$2.4~~$2.9 million and $1.8 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~~$146 thousand for the three ~~month period~~months ended ~~March 31,~~September 30, 2021 and ~~$117~~$151 thousand for the three ~~month~~months ended September 30, 2020.

³Includes average balance of $237.8 million in Paycheck Protection Liquidity Facility (“PPPLF”) funding for the quarter ended September 30, 2020. No PPPLF funding was used for the quarter ended September 30, 2021.

First nine months of 2021 compared to 2020

Net interest income, taxable equivalent, increased to $84.0 million for the first nine months of 2021, up from $74.8 million for the first nine months of 2020. Net interest income was positively impacted, compared to the prior year, primarily due to increases in loan and lease balances, PPP and loan fees accretion and reduction in interest expense on interest-bearing liabilities. Average interest-earning assets increased from $2.76 billion for the first nine months of 2020, to $3.33 billion for the first nine months of 2021, primarily as a result of the acquisition of PFG completed March 1, 2020, the acquisition of Fountain completed on May 3, 2021, acquisition of SCB completed September 1, 2021, participation in the PPP and

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continued organic growth. Over this period, average loan and lease balances increased by $237.8 million, average interest-bearing deposits increased by $460.4 million, average noninterest-bearing deposits increased $245.1 million and average borrowings decreased $122.0 million. The tax equivalent net interest margin decreased to 3.37% for the first nine months of 2021, compared to 3.62% for the first nine months of 2020. The yield on earning assets decreased from 4.27% for the first nine months of 2020, to 3.73% for the first nine months of 2021, primarily due to rate cuts by the Federal Reserve during the first quarter of 2020, to a lesser extent loan and lease yields declining from market competition and lower yielding excess liquidity, offset by PPP and loan fees accretion. The cost of average interest-bearing deposits decreased from 0.79% for the first nine months of 2020, to 0.39% for the first nine months of 2021, primarily due to a lower interest rate environment during the period.


	Nine Months Ended September 30,
	2021						2020

	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
Assets:
Loans and leases, including fees¹	$	2,489,843	$	87,823	4.72	%	$	2,252,075	$	83,487	4.95	%
Loans held for sale		5,724		192	4.49	%		6,409		231	4.81	%
Taxable Securities		163,005		2,472	2.03	%		123,895		1,813	1.95	%
Tax-exempt securities²		89,244		1,339	2.01	%		81,604		1,486	2.43	%
Federal funds and other earning assets		584,970		1,074	0.25	%		296,449		1,206	0.54	%
Total interest-earning assets		3,332,786		92,900	3.73	%		2,760,432		88,223	4.27	%
Noninterest-earning assets		295,074						248,293
Total assets	$	3,627,860					$	3,008,725

Liabilities and Stockholders’ Equity:
Interest-bearing demand deposits	$	698,148		974	0.19	%	$	451,074		782	0.23	%
Money market and savings deposits		1,112,342		2,580	0.31	%		749,316		2,707	0.48	%
Time deposits		517,566		3,179	0.82	%		667,303		7,527	1.51	%
Total interest-bearing deposits		2,328,056		6,733	0.39	%		1,867,693		11,016	0.79	%
Borrowings³		81,177		360	0.59	%		203,202		674	0.44	%
Subordinated debt		39,650		1,823	6.15	%		39,290		1,751	5.95	%
Total interest-bearing liabilities		2,448,883		8,916	0.49	%		2,110,185		13,441	0.85	%
Noninterest-bearing deposits		782,960						537,860
Other liabilities		21,553						23,826
Total liabilities		3,253,396						2,671,871
Stockholders’ equity		374,464						336,854
Total liabilities and stockholders’ equity	$	3,627,860					$	3,008,725
Net interest income, taxable equivalent			$	83,984					$	74,782
Interest rate spread					3.24	%					3.42	%
Tax equivalent net interest margin					3.37	%					3.62	%

Percentage of average interest-earning assets to average interest-bearing liabilities					136.09	%					130.81	%
Percentage of average equity to average assets					10.32	%					11.20	%

¹Loans and leases include PPP loans with an average balance of $235.0 million and $169.6 million for the nine months ended ~~March 31,~~September 30, 2021, and 2020, respectively. Loan and lease fees included in loan and lease income was $9.0 million and $6.3 million for the nine months ended September 30, 2021, and 2020, respectively. Loan lease fee income for the nine months ended September 30, 2021 and 2020, includes $7.4 million and $3.7 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 $445 thousand for the nine months ended September 30, 2021 and $422 thousand for the nine months ended September 30, 2020.

³Includes average balance of $115.7 million in PPPLF funding for the nine months ended September 30, 2020. No PPPLF funding was used for the nine months ended September 30, 2021.

3945

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Noninterest Income

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


	Three Months Ended				Three Months Ended						Nine Months Ended
	March 31,				September 30,						September 30,
	2021		2020		2021		2020			Change	2021		2020			Change
Service charges on deposit accounts	$	1,009	$	770	$	1,220	$	892	$	328	$	3,278	$	2,370	$	908
Gain (loss) on sale of securities						45		(9)		54		45		6		39
Mortgage banking		1,139		584		994		1,029		(35)		3,238		2,544		694
Investment services		531		437		448		359		89		1,546		1,159		387
Insurance commissions		1,466		269		745		560		185		2,768		1,302		1,466
Interchange and debit card transaction fees, net		839		276		1,078		868		210		2,839		1,652		1,187
Other		707		482		1,779		422		1,357		3,429		1,417		2,012
Total noninterest income	$	5,691	$	2,818	$	6,309	$	4,121	$	2,188	$	17,143	$	10,450	$	6,693

~~First~~Third quarter of 2021 compared to 2020

Noninterest income increased by ~~$2.9~~$2.2 million, or ~~102.0%~~53.1%, during the ~~first~~third 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 the SCB acquisition, deposit growth and transaction volume;

●

Increase insurance commissions due to increased activity;

●

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

●

Increase in other, primarily from new fee income from the acquisition of ~~$239 thousand,~~Fountain, cash surrender value of bank owned life insurance (“BOLI”) from the additional BOLI purchased during the first quarter of 2021 and SWAP fee income from the newly created capital markets program in the second quarter of 2021.

First nine months of 2021 compared to 2020

Noninterest income increased by $6.7 million, or 64.0%, during the first nine 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,~~and SCB acquisitions, 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 a full nine months of insurance commissions ~~of $815 thousand from the~~in 2021 and placement of life insurance policies ~~and an insurance agency acquired in~~during the ~~PFG acquisition;~~first quarter of 2021;

●

Increase in interchange and debit card transaction fees, ~~net of $563 thousand,~~ related to increased volume, deposit growth and the PFG ~~acquisition:~~and SCB acquisitions; and

●

Increase in other, ~~of $225 thousand,~~ primarily from new fee income from the ~~increase in~~acquisition of Fountain, cash surrender value of bank owned life insurance ~~(“BOLI”) of $208 thousand~~ from the additional BOLI purchased during the first quarter of 2021 and SWAP fee income from the newly created capital markets program in the second quarter of 2021.

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Noninterest Expense

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


	Three Months Ended				Three Months Ended						Nine Months Ended
	March 31,				September 30,						September 30,
	2021		2020		2021		2020			Change	2021		2020			Change
Salaries and employee benefits	$	10,869	$	10,006	$	13,594	$	11,032	$	2,562	$	36,666	$	31,395	$	5,271
Occupancy and equipment		2,341		1,911		2,536		2,186		350		7,170		6,093		1,077
FDIC insurance		371		180		525		534		(9)		1,266		894		372
Other real estate and loan related expense		602		545		407		643		(236)		1,514		1,535		(21)
Advertising and marketing		190		198		235		253		(18)		654		653		1
Data processing and technology		1,379		1,008		1,753		1,131		622		4,642		3,293		1,349
Professional services		641		711		810		594		216		2,300		2,172		128
Amortization of intangibles		444		362		711		402		309		1,597		1,169		428
Merger related and restructuring expenses		103		2,096		464		290		174		939		3,863		(2,924)
Other		2,524		1,776		2,274		2,102		172		6,822		5,699		1,123
Total noninterest expense	$	19,464	$	18,793	$	23,309	$	19,167	$	4,142	$	63,570	$	56,766	$	6,804

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~~First~~Third quarter of 2021 compared to 2020

Noninterest expense increased by ~~$671 thousand,~~$4.1 million, or ~~3.6%~~21.6%, in the ~~first~~third 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, due~~related to the Fountain acquisition completed May 3, 2021, SCB acquisition completed September 1, 2021, and overall franchise growth ~~including the acquisition of PFG;~~from talent hired in Auburn, Dothan, Montgomery and Birmingham, Alabama and Tallahassee, Florida;

●

Increase in occupancy and equipment, ~~of $430 thousand,~~ due to ongoing infrastructure and facilities added to accommodate growth in ~~operations~~operations; and ~~the additional branches of the PFG acquisition;~~

●

~~Increase in FDIC insurance of $191 thousand, related to asset growth stemming from our acquisition of PFG, deposit growth and production of PPP loans.~~

●

Increase in data processing and technology, ~~of $371 thousand,~~ primarily ~~due~~from continued infrastructure build and overall growth.

First nine months of 2021 compared to 2020

Noninterest expense increased by $6.8 million, or 12.0%, in the first nine 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, related to ~~implementation of new contactless chip card~~the PFG acquisition, Fountain acquisition completed May 3, 2021, SCB acquisition completed September 1, 2021, and ~~tier pricing adjustments~~overall franchise growth from ~~our core system provider;~~talent hired in Auburn, Dothan, Montgomery and Birmingham Alabama, and Tallahassee, Florida;

●

Increase in ~~other noninterest expenses of $748 thousand,~~occupancy and equipment, due to ongoing infrastructure and facilities added to accommodate growth in operations;

●

Increase in FDIC insurance, related to continued asset growth;

●

Increase in data processing and technology, primarily from continued infrastructure build and overall growth; and

●

Other increased, primarily from an ~~equity method~~ investment in a start-up fintech ~~company.~~company and other expenses related to continued franchise growth.

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Taxes

~~First~~Third quarter of 2021 compared to 2020

In the ~~first~~third quarter of 2021 income tax expense totaled ~~$2.7~~$2.6 million compared to ~~$664 thousand a year ago.~~$2.0 million in the third quarter of 2020. The effective tax rate was approximately ~~21.5%~~22.0% in the ~~first~~third quarter of 2021 compared to ~~19.6% a year ago.~~23.5% third quarter of 2020. The ~~higher~~lower effective tax rate for the ~~first~~third quarter of 2021 compared to same quarter in 2020 was due to ~~utilization~~a proportional higher amount of ~~an NOL carryforward~~non-taxable income in ~~March~~relation to income taxes.

First nine months of 2021 compared to 2020 ~~that~~

In the first nine months of 2021 income tax expense totaled $7.8 million compared to $4.1 million in the first nine months of 2020. The effective tax rate was ~~available~~approximately 21.6% for first nine months of 2021 compared to 21.0% a year ago. The higher effective tax rate for the first nine 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 ~~purchased~~acquired loans and leases, of approximately ~~$2.47~~$2.63 billion at ~~March 31,~~September 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~~$132.2 million, or ~~7.2%~~6.7%, from December 31, 2020, to ~~$2.12~~$2.11 billion at ~~March 31,~~September 30, 2021. Included in the growth was ~~$119.5~~$138.4 million of PPP loans that were originated and funded during the first ~~quarter~~nine months of 2021 and offset by ~~$82.0~~$341.5 million in forgiven PPP ~~loans.~~loans originated in 2020 and 2021. Total net deferred fees associated with the PPP loans originated during the first ~~quarter~~nine months of 2021 was approximately ~~$5.6~~$7.0 million with ~~$116 thousand~~$3.2 million accreted into income.

~~Purchased~~Acquired Loans and Leases

Purchased non-credit impaired loans ~~net~~and leases of ~~$315.8~~$476.5 million at ~~March 31,~~September 30, 2021 ~~decreased~~increased by ~~$34.9~~$125.8 million from December 31, 2020. Since December 31, 2020, our net purchased credit impaired (“PCI”) loans and leases, net ~~decreased~~increased by ~~$3.0~~$11.4 million to ~~$28.8~~$43.2 million at ~~March 31,~~September 30, 2021. The ~~decrease~~increase in purchased non-credit impaired loans and leases and PCI loans and leases is related to the acquisition of Fountain and SCB and offset by maturities, paydowns and payoffs.

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


	March 31, 2021
			Purchased		Purchased						September 30, 2021
			Non-Credit		Credit				% of				Purchased		Purchased				% of
	Organic		Impaired		Impaired		Total		Gross				Non-Credit		Credit		Total		Gross
	Loans		Loans		Loans		Amount		Total		Organic		Impaired		Impaired		Amount		Total
Commercial real estate-mortgage	$	883,521	$	173,243	$	13,877	$	1,070,641	43.0	%	$	1,038,286	$	251,805	$	23,156	$	1,313,247	49.5	%
Consumer real estate-mortgage		315,709		107,180		9,597		432,486	17.4	%		339,503		127,795		10,863		478,161	18.0	%
Construction and land development		269,575		11,048		5,350		285,973	11.5	%		303,540		19,930		2,904		326,374	12.3	%
Commercial and industrial		662,337		23,370		303		686,010	27.6	%		426,168		40,700		2,871		469,739	17.7	%
Leases												11,625		38,023		3,748		53,396	2.0	%
Consumer and other		9,459		2,539		21		12,019	0.5	%		9,980		1,679		87		11,746	0.4	%
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
Total gross loans and leases receivable, net of deferred fees												2,129,102		479,932		43,629		2,652,663	100.0	%
Allowance for loan and leases losses												(15,443)	$	(3,425)		(427)		(19,295)
Total loans and leases, net											$	2,113,659	$	476,507	$	43,202	$	2,633,368

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

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	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,~~September 30, 2021, including the interest rate sensitivity for loans and leases maturing after one year (in thousands):


									Rate Structure for Loans												Rate Structure for Loans and Leases
									Maturing Over One Year												Maturing Over One Year
	One Year		One through		Over Five				Fixed		Floating		One Year		One through		Over Five				Fixed		Floating
	or Less		Five Years		Years		Total		Rate		Rate		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	$	112,664	$	487,065	$	713,518	$	1,313,247	$	833,575	$	367,008
Consumer real estate-mortgage		30,112		169,217		233,157		432,486		202,830		199,544		32,951		171,718		273,492		478,161		214,867		230,343
Construction and land development		51,168		129,351		105,454		285,973		109,451		125,354		73,654		153,507		99,213		326,374		120,573		132,147
Commercial and industrial		79,939		546,200		59,871		686,010		562,078		43,993		103,351		267,296		99,092		469,739		303,865		62,523
Leases														2,248		51,148		—		53,396		51,148		—
Consumer and other		4,491		6,861		667		12,019		7,149		379		4,656		6,481		609		11,746		6,921		169
Total Loans	$	274,676	$	1,317,316	$	895,137	$	2,487,129	$	1,633,040	$	579,413
Total loans and leases													$	329,524	$	1,137,215	$	1,185,924	$	2,652,663	$	1,530,949	$	792,190

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%~~0.13% as of ~~March 31,~~September 30, 2021, and 0.24% as of December 31, 2020, respectively. Total nonperforming assets as a percentage of total assets as of ~~March 31,~~September 30, 2021, totaled ~~0.29%~~0.14% 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,		September 30,		December 31,
	2021		2020		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
Nonaccrual loans and leases					$	3,567	$	5,633
Accruing loans and leases past due 90 days or more						—		149
Total nonperforming loans and leases						3,567		5,782
Other real estate owned		3,946		4,619		2,415		4,619
Other repossessed property						77		—
Total nonperforming assets	$	10,180	$	10,401	$	6,059	$	10,401
Restructured loans not included above	$	250	$	257	$	212	$	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,~~September 30, 2021, the Company had 10no loans remaining under COVID-19 ~~modifications that amounted to $1.7 million, or 0.07%~~modifications.

Table of ~~the total loans outstanding.~~ Contents

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 ~~three~~nine months ended ~~March 31,~~September 30, 2021, is ~~$67 thousand~~$1.2 million compared to ~~$3.2~~$8.7 million in the same period of 2020, a decrease of ~~$3.1~~$7.5 million. The allowance for loan and lease loss provision for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2020, increased due to the onset of the COVID-19 pandemic and related economic uncertainty. As of ~~March 31,~~September 30, 2021 and December 31, 2020, our allowance for loan and lease losses was ~~$18.4~~$19.3 million and $18.3 million, respectively, 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%~~0.73% at ~~March 31,~~September 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,~~September 30, 2021, the notional balances on PCI loans and leases was ~~$40.8~~$56.6 million while the carrying value was ~~$29.1~~$43.6 million. At ~~March 31,~~September 30, 2021, there was an allowance on PCI loans and leases of ~~$376~~$427 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				September 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial real estate-mortgage	$	7,637	43.0	%	$	7,579	42.5	%	$	9,405	49.5	%	$	7,579	42.5	%
Consumer real estate-mortgage		3,308	17.4	%		3,471	18.6	%		3,541	18.0	%		3,471	18.6	%
Construction and land development		1,968	11.5	%		2,076	11.7	%		2,218	12.3	%		2,076	11.7	%
Commercial and industrial		5,347	27.6	%		5,107	26.6	%		3,801	17.7	%		5,107	26.6	%
Leases										225	2.0	%		—	—	%
Consumer and other		110	0.5	%		113	0.5	%		105	0.4	%		113	0.5	%
Total allowance for loan losses	$	18,370	100.0	%	$	18,346	100.0	%
Total allowance for loan and lease losses									$	19,295	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 $586 thousand at September 30, 2021, compared to $237 thousand at December 31, ~~2020, compared to $492 thousand at March 31, 2021.~~2020.

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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,						Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020			2021			2020
Balance at beginning of period	$	18,346		$	10,243		$	18,310		$	16,254		$	18,346		$	10,243
Provision for loan losses		67			3,200
Charged-off loans:
Provision for loan and lease losses								1,149			2,634			1,211			8,683
Charged-off loans and leases:
Commercial real estate-mortgage		—			—			—			—			—			—
Consumer real estate-mortgage		—			(2)			—			(21)			(60)			(23)
Construction and land development		—			—			—			—			—			—
Commercial and industrial		—			(8)			(41)			(60)			(45)			(77)
Leases								(68)			—			(68)			—
Consumer and other		(120)			(76)			(132)			(89)			(341)			(231)
Total charged-off loans		(120)			(86)
Recoveries of previously charged-off loans:
Total charged-off loans and leases								(241)			(170)			(514)			(331)
Recoveries of previously charged-off loans and leases:
Commercial real estate-mortgage		3			2			23			11			29			16
Consumer real estate-mortgage		16			6			13			17			34			34
Construction and land development		—			2			—			—			—			2
Commercial and industrial		3			42			3			55			13			103
Leases								5			—			5			—
Consumer and other		55			22			33			16			171			67
Total recoveries of previously charged-off loans		77			74
Net loan charge-offs		(43)			(12)
Total recoveries of previously charged-off loans and leases								77			99			252			222
Net loan and lease charge-offs								(164)			(71)			(262)			(109)
Balance at end of period	$	18,370		$	13,431		$	19,295		$	18,817		$	19,295		$	18,817
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		—	%		—	%
Ratio of allowance for loan and lease losses to total loans and leases outstanding at end of period								0.73	%	��	0.78	%		0.73	%		0.78
Ratio of net loan and lease charge-offs to average loans and leases outstanding for the period								0.03	%		—	%		0.01	%		—

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~~$339.3 million and $215.6 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. Our investments to assets ratio increased from 6.5% at December 31, 2020 to ~~7.1%~~7.7% at ~~March 31,~~September 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,		September 30,		December 31,
	2021		2020		2021		2020
U.S. Treasury					$	93,910	$	—
U.S. Government-sponsored enterprises (GSEs)	$	73,905	$	30,526		54,175		30,526
Municipal securities		88,509		89,644		93,422		89,644
Other debt securities		26,019		25,019		25,996		25,019
Mortgage-backed securities		61,294		66,425		68,837		66,425
Total securities	$	249,727	$	211,614	$	336,340	$	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,~~September 30, 2021. The composition and ~~maturity /~~ 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															Maturity By Years
	1 or Less			1 to 5			5 to 10			Over 10			Total			1 or Less			1 to 5			5 to 10			Over 10			Total
U.S. Treasury																$	59,999		$	—		$	33,911		$	—		$	93,910
U.S. Government agencies	$	—		$	124		$	26,130		$	47,651		$	73,905			—			—			25,590			28,585			54,175
State and political subdivisions		4,947			3,460			6,324			73,778			88,509			1,261			2,830			6,677			82,654			93,422
Other debt securities		—			985			24,534			500			26,019			—			987			24,509			500			25,996
Mortgage-backed securities		—			4,017			12,354			44,923			61,294			—			2,653			11,173			55,011			68,837
Total securities	$	4,947		$	8,586		$	69,342		$	166,852		$	249,727		$	61,260		$	6,470		$	101,860		$	166,750		$	336,340
Weighted average yield⁽¹⁾		1.90	%		1.43	%		2.92	%		2.46	%		2.54	%		0.08	%		1.56	%		2.25	%		2.51	%		1.97	%

(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,~~September 30, 2021, brokered deposits represented approximately ~~1.7%~~1.4% 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,~~September 30, 2021 and 2020, was ~~0.44% compared~~0.34% and 0.59%, respectively. The decrease cost was primarily due to ~~1.10%~~maturing and repricing of time deposits, which decreased by 62 basis points. The average cost of interest-bearing deposits for the ~~same period in 2020.~~nine months ended September 30, 2021 and 2020, was 0.39% and 0.79%, respectively. The decreased cost of interest-bearing deposits was due to the maturing and changes in rates caused by federal rate-changes during the periods.

Total deposits as of ~~March 31,~~September 30, 2021, were ~~$3.05~~$3.80 billion, which was an increase of ~~$243.0~~$994.1 million from December 31, 2020. This increase was primarily from organic deposit ~~growth.~~growth and the acquisition of SCB. As of ~~March 31,~~September 30, 2021, the Company had outstanding time deposits under $250,000 with balances of ~~$383.5~~$432.8 million and time deposits over $250,000 with balances of ~~$129.0~~$152.9 million.

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


	March 31,		September 30,
	2021		2021
Three months or less	$	32,161	$	39,165
Three to six months		26,770		30,888
Six to twelve months		36,117		42,425
More than twelve months		33,906		40,427
Total	$	128,954	$	152,905

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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~~$88.7 million at ~~March 31,~~September 30, 2021, and ~~primarily~~ consisted of $75.0 million in FHLB ~~borrowings~~borrowing and short-term borrowings totaled ~~$7.2~~$13.7 million and consisted ~~entirely~~of $7.5 million with ServisFirst Bank and $6.3 million of securities sold under repurchase agreements. Long-term debt totaled ~~$39.4~~$41.9 million at ~~March 31,~~September 30, 2021, and $39.3 million at December 31, 2020, and consisted entirely of subordinated debt. For more

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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,~~September 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,~~September 30, 2021, we had ~~$542.8~~$616.3 million of pre-approved but unused lines of credit and ~~$6.9~~$10.4 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~~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

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periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from our dynamic interest rate forecast over the next 12 and 24 months, limits in the decline in net interest income are as follows:

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Maximum Percentage Decline

in Net Interest

Income from the Budgeted

Estimated % Change in Net

or Base Case

Estimated % Change in Net

or Base Case

Interest Income Over 12

Projection of Net Interest

Interest Income Over 12

Projection of Net Interest

Months

Income

Months

Income

March 31, 2021:

Increase +

Decrease -

Next 12 Months

September 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

6.22%

(0.81)%

7.57%

(0.69)%

± 200 basis points

12.66%

(1.23)%

14%

15.37%

(1.40)%

14%

At September 30, 2021, our model results indicated that we were within our policy limits, except for the increase of plus 200 basis points, due to excess cash on the balance sheet.

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

Current Estimated Instantaneous

at Currently

Rate Change

Prevailing

Rate Change

Prevailing

March 31, 2021:

Increase +

Decrease -

Interest Rates

September 30, 2021:

Increase +

Decrease -

Interest Rates

Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:

±100 basis points

5.29%

(7.48)%

10%

5.36%

(8.98)%

10%

±200 basis points

9.26%

(8.03)%

15%

10.79%

(10.69)%

15%

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

Liquidity Risk Management

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

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

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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 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~~$61.3 million in investments that mature throughout the next 12 months. The Company also anticipates ~~$16.7~~$11.2 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~~$263.8 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,~~September 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,~~September 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,~~September 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
July 1, 2021 to July 31, 2021							—	$	—	—	$	4,484
August 1, 2021 to August 31, 2021							—		—	—		4,484
September 1, 2021 to September 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
10.1	First Amendment to Loan and Security Agreement, dated as of September 23, 2021, by and between SmartFinancial, Inc. and ServisFirst Bank	Incorporated by reference to Exhibit 10.1 to Form 8-K filed September 28, 2021
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,~~November 9, 2021	/s/ William Y. Carroll, Jr.
		William Y. Carroll, Jr.
		President and Chief Executive Officer
		(principal executive officer)

Date:	~~May 10,~~November 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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