United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, ~~2021~~2022



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

For the transition period from __________ to __________

Commission File Number: 001-37661

(Exact name of registrant as specified in its charter)



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

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

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

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



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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒☐

Emerging growth company ☐

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

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

Yes ☐ No ☒

As of November ~~5, 2021,~~04, 2022, there were ~~16,802,080~~16,888,305 shares of common stock, $1.00 par value per share, issued and outstanding.

Table of Contents

TABLE OF CONTENTS


PART I –FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at September 30, ~~2021~~2022 and December 31, ~~2020~~2021	3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4145

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5662

Item 4.	Controls and Procedures	5662

PART II – OTHER INFORMATION		5763

Item 1.	Legal Proceedings	5763

Item 1A.	Risk Factors	5763

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5763

Item 3.	Defaults Upon Senior Securities	5763

Item 4.	Mine Safety Disclosures	5864

Item 5.	Other Information	5864

Item 6.	Exhibits	5965

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)
	September 30,		December 31,		September 30,		December 31,
	2021		2020*		2022		2021*
ASSETS:
Cash and due from banks	$	79,827	$	50,460	$	46,351	$	110,333
Interest-bearing deposits with banks		969,929		364,846		428,318		897,244
Federal funds sold		41,404		66,413		68,360		37,500
Total cash and cash equivalents		1,091,160		481,719		543,029		1,045,077
Securities available-for-sale, at fair value		339,343		215,634		519,723		482,453
Securities held-to-maturity, at amortized cost						287,104		76,969
Other investments		14,972		14,794		15,528		16,494
Loans held for sale		3,418		11,721		2,742		5,103
Loans and leases		2,652,663		2,382,243		3,099,116		2,693,397
Less: Allowance for loan and lease losses		(19,295)		(18,346)		(22,769)		(19,352)
Loans and leases, net		2,633,368		2,363,897		3,076,347		2,674,045
Premises and equipment, net		85,346		72,682		91,944		85,958
Other real estate owned		2,415		4,619		1,226		1,780
Goodwill and other intangibles, net		104,930		86,471		110,460		105,852
Bank owned life insurance		79,145		31,215		81,001		79,619
Other assets		29,934		22,197		67,807		38,229
Total assets	$	4,384,031	$	3,304,949	$	4,796,911	$	4,611,579

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	977,180	$	685,957	$	1,186,209	$	1,055,125
Interest-bearing demand		847,007		649,129		962,901		899,158
Money market and savings		1,389,393		919,631		1,663,355		1,493,007
Time deposits		585,692		550,498		467,944		574,648
Total deposits		3,799,272		2,805,215		4,280,409		4,021,938
Borrowings		88,748		81,199		18,423		87,585
Subordinated debt		41,909		39,346		41,994		41,930
Other liabilities		29,382		22,021		41,374		30,696
Total liabilities		3,959,311		2,947,781		4,382,200		4,182,149
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding		0		0		—		—
Common stock, $1 par value; 40,000,000 shares authorized; 16,801,447 and 15,107,214 shares issued and outstanding, respectively		16,801		15,107
Common stock, $1 par value; 40,000,000 shares authorized; 16,887,555 and 16,802,990 shares issued and outstanding, respectively						16,888		16,803
Additional paid-in capital		292,760		252,693		293,907		292,937
Retained earnings		112,600		87,185		144,723		118,247
Accumulated other comprehensive income		2,559		2,183
Accumulated other comprehensive income (loss)						(40,807)		1,443
Total shareholders' equity		424,720		357,168		414,711		429,430
Total liabilities and shareholders' equity	$	4,384,031	$	3,304,949	$	4,796,911	$	4,611,579

* Derived from audited financial statements.

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


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


		Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Interest income:
Loans and leases, including fees	$	35,127	$	31,674	$	96,300	$	88,015
Securities:
Taxable		3,135		832		8,463		2,472
Tax-exempt		561		331		1,369		894
Federal funds sold and other earning assets		3,474		474		5,389		1,074
Total interest income		42,297		33,311		111,521		92,455
Interest expense:
Deposits		4,866		2,153		9,384		6,733
Borrowings		97		121		371		360
Subordinated debt		626		655		1,877		1,823
Total interest expense		5,589		2,929		11,632		8,916
Net interest income		36,708		30,382		99,889		83,539
Provision for loan and lease losses		974		1,149		3,230		1,211
Net interest income after provision for loan and lease losses		35,734		29,233		96,659		82,328
Noninterest income:
Service charges on deposit accounts		1,611		1,220		4,376		3,278
Gain on sale of securities		—		45		—		45
Mortgage banking		170		994		1,475		3,238
Investment services		1,051		448		3,186		1,546
Insurance commissions		864		745		2,363		2,768
Interchange and debit card transaction fees, net		1,356		1,078		4,107		2,839
Other		1,198		1,779		5,083		3,429
Total noninterest income		6,250		6,309		20,590		17,143
Noninterest expense:
Salaries and employee benefits		16,317		13,594		47,036		36,666
Occupancy and equipment		3,167		2,536		9,020		7,170
FDIC insurance		705		525		2,022		1,266
Other real estate and loan related expense		565		407		1,930		1,514
Advertising and marketing		288		235		985		654
Data processing and technology		1,872		1,753		5,185		4,642
Professional services		822		810		2,809		2,300
Amortization of intangibles		650		711		1,919		1,597
Merger related and restructuring expenses		87		464		607		939
Other		2,757		2,274		7,361		6,822
Total noninterest expense		27,230		23,309		78,874		63,570
Income before income tax expense		14,754		12,233		38,375		35,901
Income tax expense		3,211		2,633		8,357		7,767
Net income	$	11,543	$	9,600	$	30,018	$	28,134
Earnings per common share:
Basic	$	0.69	$	0.62	$	1.79	$	1.85
Diluted	$	0.68	$	0.61	$	1.78	$	1.84
Weighted average common shares outstanding:
Basic		16,749,255		15,557,528		16,734,298		15,192,919
Diluted		16,872,022		15,691,126		16,867,970		15,312,755

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income	$	11,543	$	9,600	$	30,018	$	28,134
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on securities available-for-sale		(20,147)		284		(51,899)		(971)
Tax effect		5,205		(74)		13,406		264
Reclassification of unrealized loss on securities transferred from available-for-sale to held-to-maturity		—		—		(2,009)		—
Tax effect		—		—		519		—
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity		43		—		70		—
Tax effect		(12)		—		(18)		—
Reclassification adjustment for realized gains included in net income		—		(45)		—		(45)
Tax effect		—		12		—		12
Unrealized gains (losses) on securities available-for-sale, net of tax		(14,911)		177		(39,931)		(740)
Fair value hedging activities:
Unrealized gains (losses) on fair value municipal security hedges		92		59		(1,351)		1,510
Tax effect		(23)		(15)		349		(394)
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		69		44		(1,002)		1,116
Cash flow hedging activities:
Unrealized gains (losses) on cash flow hedges		(1,775)		—		(1,775)		—
Tax effect		458		—		458		—
Unrealized gains (losses) on cash flow hedge instruments arising during the period, net of tax		(1,317)		—		(1,317)		—

Total other comprehensive income (loss)		(16,159)		221		(42,250)		376
Comprehensive income (loss)	$	(4,616)	$	9,821	$	(12,232)	$	28,510

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 September 30, ~~2021~~2022 and ~~2020~~2021

(Dollars in thousands, except for share data)


								Accumulated											Accumulated
								Other											Other
	Common Stock			Additional		Retained		Comprehensive				Common Stock			Additional		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Earnings		(Loss) Income		Total		Shares	Amount		Paid-in Capital		Earnings		Income (Loss)		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	15,107,214	$	15,107	$	252,693	$	87,185	$	2,183	$	357,168
Net income	—		—		—		28,134		—		28,134	—		—		—		28,134		—		28,134
Other comprehensive income	—		—		—		—		376		376	—		—		—		—		376		376
Common stock issued pursuant to:
Exercise of stock options	19,165		19		175		—		—		194
Stock options exercised												19,165		19		175		—		—		194
Restricted stock	43,143		43		(43)		—		—		—	43,143		43		(43)		—		—		—
Shareholders' of Sevier County Bancshares, Inc.	1,691,535		1,691		40,563		—		—		42,254	1,691,535		1,691		40,563		—		—		42,254
Stock compensation expense	—		—		521		—		—		521	—		—		521		—		—		521
Common stock dividend ($0.18 per share)	—		—		—		(2,719)		—		(2,719)	—		—		—		(2,719)		—		(2,719)
Repurchases of common stock	(59,610)		(59)		(1,149)		—		—		(1,208)	(59,610)		(59)		(1,149)		—		—		(1,208)
Balance, September 30, 2021	16,801,447	$	16,801	$	292,760	$	112,600	$	2,559	$	424,720	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
Balance, December 31, 2021												16,802,990	$	16,803	$	292,937	$	118,247	$	1,443	$	429,430
Net income	—		—		—		6,395		—		6,395	—		—		—		30,018		—		30,018
Other comprehensive income	—		—		—		—		420		420
Other comprehensive (loss)												—		—		—		—		(42,250)		(42,250)
Common stock issued pursuant to:
Exercise of stock options	12,500		12		92		—		—		104
Restricted stock	3,795		4		(4)		—		—		—
Stock options exercised												32,003		32		238		—		—		270
Restricted stock, net of forfeitures												60,515		61		(61)		—		—		—
Shares withheld for payment of taxes												(7,953)		(8)		(198)		—		—		(206)
Stock compensation expense	—		—		142		—		—		142	—		—		991		—		—		991
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
Common stock dividend ($0.21 per share)												—		—		—		(3,542)		—		(3,542)
Balance, September 30, 2022												16,887,555	$	16,888	$	293,907	$	144,723	$	(40,807)	$	414,711

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

Balance, June 30, 2022												16,898,405	$	16,898	$	293,815	$	134,362	$	(24,648)	$	420,427
Net income												—		—		—		11,543		—		11,543
Other comprehensive (loss)												—		—		—		—		(16,159)		(16,159)
Common stock issued pursuant to:
Stock options exercised												603		1		6		—		—		7
Restricted stock, net of forfeitures												(3,500)		(3)		3		—		—		—
Restricted stock withheld for taxes												(7,953)		(8)		(198)		—		—		(206)
Stock compensation expense												—		—		281		—		—		281
Common stock dividends ($0.07 per share)												—		—		—		(1,182)		—		(1,182)
Balance, September 30, 2022												16,887,555	$	16,888	$	293,907	$	144,723	$	(40,807)	$	414,711

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Nine Months Ended September 30,

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


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	30,018	$	28,134
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,474		4,739
Accretion of fair value purchase accounting adjustments, net		(762)		(4,086)
Provision for loan and lease losses		3,230		1,211
Stock compensation expense		991		521
Gain from redemption and sale of securities available-for-sale		—		(45)
Deferred income tax expense (benefit)		(500)		731
Increase in cash surrender value of bank owned life insurance		(1,382)		(1,240)
Net losses from sale and write downs of other real estate owned		66		176
Net gains from mortgage banking		(1,475)		(3,238)
Origination of loans held for sale		(47,840)		(97,360)
Proceeds from sales of loans held for sale		51,676		108,901
Net gain from sale of loans		—		(137)
Net gain from sale of fixed assets		(261)		—
Net change in:
Accrued interest receivable		(2,062)		2,074
Accrued interest payable		(993)		(125)
Other assets		(25,079)		(414)
Other liabilities		28,480		5,709
Net cash provided by operating activities		41,581		45,551
Cash flows from investing activities:
Available-for-sale:
Proceeds from sales		—		16,771
Proceeds from maturities, calls and paydowns		32,143		65,101
Purchases		(295,347)		(145,316)
Held-to-maturity:
Proceeds from maturities, calls and paydowns		1,345		—
Purchases		(50,575)		—
Proceeds from sales of other investments		1,054		436
Purchases of other investments		(88)		(80)
Purchases of bank owned life insurance		—		(40,000)
Proceeds from bank owned life insurance benefits		—		427
Net (increase) decrease in loans and leases		(404,770)		4,444
Proceeds from sale of fixed assets		1,460		—
Purchases of premises and equipment		(10,690)		(603)
Proceeds from sale of other real estate owned		488		2,171
Proceeds received from sale of loans		—		83,745
Net cash (paid) received from business combinations		(4,881)		15,364
Net cash (used in) provided by investing activities		(729,861)		2,460
Cash flows from financing activities:
Net increase in deposits		258,872		558,410
Net increase (decrease) in securities sold under agreements to repurchase		838		(351)
Proceeds from borrowings		5,000		7,500
Repayment borrowings		(75,000)		(396)
Cash dividends paid		(3,542)		(2,719)
Issuance of common stock, net of restricted shares withheld for taxes		64		194
Repurchases of common stock		—		(1,208)
Net cash provided by financing activities		186,232		561,430
Net change in cash and cash equivalents		(502,048)		609,441
Cash and cash equivalents, beginning of period		1,045,077		481,719
Cash and cash equivalents, end of period	$	543,029	$	1,091,160
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	12,624	$	8,745
Net cash paid/received during the period for income taxes		8,255		8,223
Noncash investing and financing activities:
Acquisition of real estate through foreclosure		—		580
Transfer of securities from available-for-sale to held-to-maturity		162,378		—
Change in goodwill due to acquisitions and sale of a portfolio of loans		4,580		15,849

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

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

Basis of Presentation and Accounting Estimates:

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

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired, and liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company’s annual report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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 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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

periods within those fiscal years. For calendar-year-end companies that are not SRCs, this will be January 1, 2020. The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations and the Company meets the regulations as an SRC. For 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 guidance is effective for all entities as of March 12, 2020, through December 31, 2022. The Company ~~is implementing~~implemented 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. As of December 31, 2021, the Company ceased issuance of new LIBOR loans. Alternative reference rates at this time are predominantly Secured Overnight Funding Rate (“SOFR”) based. Remaining LIBOR transition project activities include remediation of remaining LIBOR products by June of 2023. ASU 2020-04 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, 2021, 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 Financial Accounting Standards Board decided that the Current

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Expected Credit Loss (“CECL”) model would be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as then defined by the SEC, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For calendar-year-end companies that were not SRCs, this was January 1, 2020. The determination of whether an entity is an SRC was based on an entity’s most recent assessment as of November 2019, in accordance with SEC regulations and the Company met the regulations as an SRC at that time. For 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 was 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 was an SRC at the applicable time, adoption is required for fiscal years beginning after December 15, 2022.

Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

A cross-functional working group comprised of individuals from credit administration, risk management and accounting and finance are in place implementing and developing the data, forecast, processes, and portfolio segmentation that will be used in the models that will estimate the expected credit loss for each loan segment. The Company has contracted with a third party vendor solution to assist us in the application, analysis, and model development required with implementation of ASU 2016-13.

During the third quarter of 2022, the Company analyzed the results of ongoing parallel runs and continue to monitor the impact of various model assumptions. The model has been validated and our CECL Steering Committee remains focused on developing the CECL policy, procedures, and internal control structure in preparation for adoption. SmartFinancial has concluded that an increase in the allowance for loan losses is likely upon adoption of CECL.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method, which allows multiple hedged layers to be designated for a single closed portfolio of financial assets resulting in a greater portion of the interest rate risk in the closed portfolio being eligible to be hedged. The amendments allow the flexibility to use different types of derivatives or combinations of derivatives to better align with risk management strategies. Furthermore, among other things, the amendments clarify that basis adjustments of hedged items in the closed portfolio should be allocated at the portfolio level and not the individual assets within the portfolio. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-01 prospectively. If an entity elects to early adopt ASU 2022-01 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company is assessing ASU ~~2020-04~~2022-01 and its impact on its accounting and disclosures.

In March 2022, the ~~transition away from LIBOR~~FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for ~~its~~troubled debt restructurings and requires entities to evaluate whether a modification provided to a borrower results in a new loan or continuation of an existing loan. The amendments enhance existing disclosures and ~~other~~require new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial ~~instruments.~~

~~Operating, Accounting and Reporting Considerations related~~difficulties. Additionally, the amendments require public business entities to ~~COVID-19:~~

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

●

~~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 Losses~~ ~~for more information.~~

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

●

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

●

~~Past Due Reporting~~ - 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.~~

disclosures. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-02 prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company ~~began offering short-term loan modifications~~will adopt ASU 2022-02 when adopting ASU 2016-13 in January 2023 and is assessing its impact on its accounting and disclosures

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to ~~assist borrowers during the COVID-19 national emergency.~~Contractual Sale Restrictions, which clarifies that a contractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and quantitative information about such securities. The guidance is effective for public companies for fiscal years beginning after December 15, 2023. All other entities have an extra year to adopt; early adoption is permitted. The Company ~~offered deferral options of: 1) three months deferral of payment~~is assessing ASU 2022-03 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 Actits impact on its accounting 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.disclosures.

~~Reclassifications:~~

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

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~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 2. Business Combinations

Sunbelt Group, LLC

On September 1, 2022, Rains Agency Inc. (“Rains Agency”), an indirect wholly-owned subsidiary of SmartFinancial, Inc., completed the acquisition of substantially all the assets of Sunbelt Group, LLC (“Sunbelt”), a Tennessee limited liability company, pursuant to the Asset Purchase Agreement (the “Purchase Agreement”), dated September 1, 2022, by and among Rains Agency, Sunbelt, and A. Mark Slater, the sole member of Sunbelt.

In connection with the acquisition, Rains Agency acquired $349 thousand of assets and assumed $364 thousand of liabilities from Sunbelt. Pursuant to the Purchase Agreement, Rains Agency paid an aggregate amount of consideration to Sunbelt of $6.5 million, of which $5.2 million was paid in cash at the closing and the remainder of which will be payable in equal cash installments on September 1, 2023, and September 1, 2024 (the “Deferred Payments”). The Deferred Payments are subject to acceleration in certain circumstances involving a change in control of Rains Agency and are subject to set-off for any indemnification or other obligations of the Sunbelt and its sole member to Rains Agency under the terms of the Purchase Agreement.

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 $4.6 million, representing the intangible value of Sunbelt’s 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 $1.9 million, amortizing sum-of-the-years digits over 168 months (14 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).

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


			Initial
	As recorded		Fair value		Subsequent		As recorded
	by Sunbelt		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	319	$	—	$	—	$	319
Customer list intangible		—		1,948		—		1,948
Equipment, net		13		(13)		—		—
Other assets		17		—		—		17
Total assets acquired	$	349	$	1,935	$	—	$	2,284

Liabilities:
Payables and other liabilities	$	364	$	—	$	—	$	364
Total liabilities assumed		364		—		—		364
Excess of liabilities acquired over assets assumed	$	(15)
Aggregate fair value adjustments			$	1,935	$	—
Total identifiable net assets								1,920
Consideration transferred:
Purchase price								6,500
Total fair value of consideration transferred								6,500

Goodwill							$	4,580

⁽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 discloses the impact of the purchase of Sunbelt since the acquisition date through the three and nine months ended September 30, 2022. The table also presents certain pro-forma information (net interest income plus total noninterest income (“Revenue”) and net income) as if the Sunbelt purchase had occurred on January 1, 2021. 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, 2022, were $20 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
2022:
Actual Sunbelt results included in statement of income since acquisition date	$	168	$	1	$	168	$	1
Supplemental consolidation pro-forma as if Sunbelt had been acquired January 1, 2022		43,008		11,548		120,681		29,992

2021:
Supplemental consolidation pro-forma as if Sunbelt had been acquired January 1, 2021	$	37,335	$	9,750	$	102,613	$	28,612

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, 0no 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~~1,692,168 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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

assets and liabilities acquired and resulted in the establishment of goodwill in the amount of ~~$15.6~~$17.2 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~~(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.~~

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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


			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)		(3,049)		297,020
Allowance for loan losses		(3,644)		3,644		—		—
Premises and equipment, net		15,579		(295)		(22)		15,262
Bank owned life insurance		7,116		—		—		7,116
Deferred tax asset, net		10,340		(4,007)		769		7,102
Core deposit intangible		—		1,550		—		1,550
Interest Receivable		884		—		—		884
Other assets		920		(272)		(533)		115
Total assets acquired	$	484,880	$	(4,545)	$	(2,835)	$	477,500

Liabilities:
Deposits	$	435,036	$	—	$	—	$	435,036
Time deposit premium		—		888		—		888
Subordinated debt		2,500		—		—		2,500
Payables and other liabilities		5,563		115		(1,254)		4,424
Total liabilities assumed		443,099		1,003		(1,254)		442,848
Excess of assets acquired over liabilities assumed	$	41,781
Aggregate fair value adjustments			$	(5,548)	$	(1,581)
Total identifiable net assets								34,652
Consideration transferred:
Cash								9,568
Common stock issued (1,692,168 shares)								42,255
Total fair value of consideration transferred								51,823

Goodwill							$	17,171

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 1, 2021
	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
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest									$	30,293
Non-accretable differences										7,609
Cash flows expected to be collected										22,684
Accretable yield										3,552
Fair value									$	19,132

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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).

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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


	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

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

~~Table of Contents~~

~~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 $301.0 million of assets and assumed $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 and are summarized in the table below~~ ~~(in thousands)~~.

Initial


As recorded

Fair value

Subsequent

As recorded

by PFG

adjustments

Adjustments

by the Company
Assets:






Cash & cash equivalents

$
55,971

$
—

$
—

$
55,971
Investment securities available-for-sale

27,054

203

—

27,257
Restricted investments

692

—

—

692
Loans

191,672

(3,691)

—

187,981
Allowance for loan losses

(2,832)

2,832

—

—
Premises and equipment, net

15,681

(2,919)

—

12,762
Bank owned life insurance

5,560

—

—

5,560
Deferred tax asset, net

—

813

193

1,006
Intangibles

—

1,370

1,127

2,497
Other real estate owned

3,695

(100)

(1,862)

1,733
Interest Receivable

1,061

(280)

—

781
Prepaids

375

(174)

—

201
Goodwill

231

(231)

—

—
Other assets

1,881

—

—

1,881
Total assets acquired

$
301,041

$
(2,177)

$
(542)

$
298,322

Liabilities:






Deposits

$
271,276

$
—

—

$
271,276
Time deposit premium

—

729

—

729
Payables and other liabilities

776

—

—

776
Total liabilities assumed

272,052

729

—

272,781
Excess of assets acquired over liabilities assumed

$
28,989




Aggregate fair value adjustments



$
(2,906)

$
(542)


Total identifiable net assets





25,541
Consideration transferred:






Cash





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





24,547
Total fair value of consideration transferred





34,385

Goodwill





$
8,844

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

March 1, 2020
Accounted for pursuant to ASC 310-30:

Contractually required principal and interest

$
21,107
Non-accretable differences

4,706
Cash flows expected to be collected

16,401
Accretable yield

2,515
Fair value

$
13,886

Note 3. Earnings Per Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock options and restricted stock. The effect from the stock options and restricted stock on incremental shares from the assumed conversions for net income per share-basic and net income per share-diluted are

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

presented below. There were 0no antidilutive shares for the three and nine months ended September 30, ~~2021. There were 114 thousand~~2022, and ~~85 thousand antidilutive shares for the three and nine months ended~~ September 30, ~~2020,~~2021, respectively.

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Basic earnings per share computation:
Net income available to common shareholders	$	9,600	$	6,395	$	28,134	$	15,302	$	11,543	$	9,600	$	30,018	$	28,134
Average common shares outstanding – basic		15,557,528		15,160,579		15,192,919		14,903,757		16,749,255		15,557,528		16,734,298		15,192,919
Basic earnings per share	$	0.62	$	0.42	$	1.85	$	1.03	$	0.69	$	0.62	$	1.79	$	1.85
Diluted earnings per share computation:
Net income available to common shareholders	$	9,600	$	6,395	$	28,134	$	15,302	$	11,543	$	9,600	$	30,018	$	28,134
Average common shares outstanding – basic		15,557,528		15,160,579		15,192,919		14,903,757		16,749,255		15,557,528		16,734,298		15,192,919
Incremental shares from assumed conversions:
Stock options and restricted stock		133,598		50,032		119,836		61,698		122,767		133,598		133,672		119,836
Average common shares outstanding - diluted		15,691,126		15,210,611		15,312,755		14,965,455		16,872,022		15,691,126		16,867,970		15,312,755
Diluted earnings per common share	$	0.61	$	0.42	$	1.84	$	1.02	$	0.68	$	0.61	$	1.78	$	1.84

Note 4. Securities

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


	September 30, 2021								September 30, 2022
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale:									Cost		Gains		Losses		Value
U.S. Treasury	$	93,910	$	176	$	(61)	$	94,025	$	242,018	$	—	$	(20,242)	$	221,776
U.S. Government-sponsored enterprises (GSEs)		54,175		201		(913)		53,463		1,650		—		(17)		1,633
Municipal securities		93,422		2,179		(31)		95,570		55,422		3		(1,308)		54,117
Other debt securities		25,996		367		(72)		26,291		30,967		—		(2,126)		28,841
Mortgage-backed securities (GSEs)		68,837		1,339		(182)		69,994		241,531		1		(28,176)		213,356
Total	$	336,340	$	4,262	$	(1,259)	$	339,343	$	571,588	$	4	$	(51,869)	$	519,723


	September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	150,353	$	—	$	(6,095)	$	144,258
U.S. Government-sponsored enterprises (GSEs)		50,838		—		(8,735)		42,103
Municipal securities		53,935		—		(10,330)		43,605
Mortgage-backed securities (GSEs)		31,978		—		(4,968)		27,010
Total	$	287,104	$	—	$	(30,128)	$	256,976

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	138,212	$	64	$	(518)	$	137,758
U.S. Government-sponsored enterprises (GSEs)		21,898		76		(173)		21,801
Municipal securities		67,310		512		(2)		67,820
Other debt securities		26,989		313		(82)		27,220
Mortgage-backed securities (GSEs)		228,011		971		(1,128)		227,854
Total	$	482,420	$	1,936	$	(1,903)	$	482,453


	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Government-sponsored enterprises (GSEs)	$	31,023	$	20	$	(87)	$	30,956
Municipal securities		45,946		63		(19)		45,990
Total	$	76,969	$	83	$	(106)	$	76,946

At September 30, 2022 and December 31, 2021, securities with a carrying value totaling approximately $299.3 million and $201.2 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

During the first quarter of 2022, the Company transferred $162.4 million of available-for-sale securities to the held-to-maturity category, reflecting the Company’s intent to hold those securities to maturity. Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The related $2.0 million of unrealized holding loss that was included in the transfer is retained in accumulated other comprehensive income, net of tax, and in the carrying value of the held-to-maturity securities. This amount will be amortized as an adjustment to interest income over the remaining life of the securities. This will offset the impact of amortization of the net premium created in the transfer. There were no gains or losses recognized as a result of this transfer.

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

Table of Contents

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020
Proceeds from sales

$
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

$
32,275

$
30,350

$
43,551

$
45,800

The amortized cost and estimated fair value of securities at September 30, ~~2021,~~2022 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				September 30, 2022
	Amortized		Fair		Amortized		Fair
	Cost		Value
Available-for-sale:					Cost		Value
Due in one year or less	$	61,259	$	61,267	$	270	$	270
Due from one year to five years		3,817		3,843		202,625		188,431
Due from five years to ten years		90,688		91,409		80,375		71,663
Due after ten years		111,739		112,830		46,787		46,003
		267,503		269,349		330,057		306,367
Mortgage-backed securities		68,837		69,994		241,531		213,356
Total	$	336,340	$	339,343	$	571,588	$	519,723

Held-to-maturity:
Due in one year or less					$	—	$	—
Due from one year to five years						150,353		144,257
Due from five years to ten years						38,311		32,465
Due after ten years						66,462		53,244
						255,126		229,966
Mortgage-backed securities						31,978		27,010
Total					$	287,104	$	256,976

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 and held-to-maturity have been in a continuous unrealized loss position (in thousands):


	September 30, 2022
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Available-for-sale:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	207,805	$	(17,749)	18	$	13,972	$	(2,493)	2	$	221,777	$	(20,242)	20
U.S. Government-sponsored enterprises (GSEs)		1,267		(13)	1		366		(4)	2		1,633		(17)	3
Municipal securities		53,565		(1,308)	43		—		—	—		53,565		(1,308)	43
Other debt securities		25,975		(1,877)	22		2,865		(249)	3		28,840		(2,126)	25
Mortgage-backed securities (GSEs)		198,452		(26,983)	102		14,833		(1,193)	14		213,285		(28,176)	116
Total	$	487,064	$	(47,930)	186	$	32,036	$	(3,939)	21	$	519,100	$	(51,869)	207

	September 30, 2022
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Held-to-maturity:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	144,257	$	(6,095)	4	$	—	$	—	—	$	144,257	$	(6,095)	4
U.S. Government-sponsored enterprises (GSEs)		19,613		(3,763)	5		22,491		(4,972)	8		42,104		(8,735)	13
Municipal securities		43,149		(10,233)	34		455		(97)	1		43,604		(10,330)	35
Mortgage-backed securities (GSEs)		27,010		(4,968)	5		—		—	—		27,010		(4,968)	5
Total	$	234,029	$	(25,059)	48	$	22,946	$	(5,069)	9	$	256,975	$	(30,128)	57

Table of Contents

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

December 31, 2020

Less than 12 Months

12 Months or Greater

Total




Gross

Number



Gross

Number



Gross

Number

Fair

Unrealized

of

Fair

Unrealized

of

Fair

Unrealized

of

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

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

$
15,510

$
(5)

3

$
132

$
(1)

1

$
15,642

$
(6)

4
Other debt securities

1,495

(5)

1

977

(8)

1

2,472

(13)

2
Mortgage-backed securities (GSEs)

9,790

(87)

6

6,083

(95)

3

15,873

(182)

9
Total

$
26,795

$
(97)

10

$
7,192

$
(104)

5

$
33,987

$
(201)

15


	December 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
Available-for-sale:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	99,959	$	(518)	11	$	—	$	—	—	$	99,959	$	(518)	11
U.S. Government-sponsored enterprises (GSEs)		14,156		(168)	2		579		(5)	2		14,735		(173)	4
Municipal securities		2,519		(2)	1		—		—	—		2,519		(2)	1
Other debt securities		5,983		(82)	6		—		—	—		5,983		(82)	6
Mortgage-backed securities (GSEs)		159,725		(1,002)	31		8,233		(126)	6		167,958		(1,128)	37
Total	$	282,342	$	(1,772)	51	$	8,812	$	(131)	8	$	291,154	$	(1,903)	59

	December 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
Held-to-maturity:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Government-sponsored enterprises (GSEs)	$	21,901	$	(87)	8	$	—	$	—	—	$	21,901	$	(87)	8
Municipal securities		4,173		(19)	6		—		—	—		4,173		(19)	6
Total	$	26,074	$	(106)	14	$	—	$	—	—	$	26,074	$	(106)	14

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 September 30, ~~2021,~~2022, represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of September 30, ~~2021,~~2022, the Company does not intend, orand will not 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:

Our other investments ~~(in thousands)~~:

September 30,

December 31,

2021

2020
Federal Reserve Bank stock

$
8,171

$
8,606
Federal Home Loan Bank stock

6,451

5,838
First National Bankers Bank stock

350

350
Total

$
14,972

$
14,794

~~Our restricted investments~~ consist of restricted 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,~~2022, the Company determined that there was 0no impairment on its other ~~investments.~~investment securities.

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


	September 30,		December 31,
	2022		2021
Federal Reserve Bank stock	$	9,781	$	9,693
Federal Home Loan Bank stock		5,397		6,451
First National Bankers Bank stock		350		350
Total	$	15,528	$	16,494

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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):


	September 30, 2021						December 31, 2020						September 30, 2022						December 31, 2021
	PCI		All Other				PCI		All Other				PCI		All Other				PCI		All Other
	Loans and Leases¹		Loans and Leases		Total		Loans and Leases¹		Loans and Leases		Total		Loans and Leases¹		Loans and Leases		Total		Loans and Leases¹		Loans and Leases		Total
Commercial real estate	$	23,156	$	1,290,091	$	1,313,247	$	16,123	$	996,853	$	1,012,976	$	16,148	$	1,520,903	$	1,537,051	$	20,875	$	1,363,281	$	1,384,156
Consumer real estate		10,863		467,298		478,161		10,258		433,672		443,930		8,695		553,713		562,408		11,833		465,439		477,272
Construction and land development		2,904		323,470		326,374		5,348		272,727		278,075		1,557		403,450		405,007		2,882		275,504		278,386
Commercial and industrial		2,871		466,868		469,739		308		634,138		634,446		2,523		511,757		514,280		2,516		485,508		488,024
Leases		3,748		49,648		53,396		—		—		—		1,472		63,326		64,798		3,170		50,538		53,708
Consumer and other		87		11,659		11,746		27		12,789		12,816		6		15,566		15,572		71		11,780		11,851
Total loans and leases		43,629		2,609,034		2,652,663		32,064		2,350,179		2,382,243		30,401		3,068,715		3,099,116		41,347		2,652,050		2,693,397
Less: Allowance for loan and lease losses		(427)		(18,868)		(19,295)		(309)		(18,037)	��	(18,346)		(167)		(22,602)		(22,769)		(179)		(19,173)		(19,352)
Loans and leases, net	$	43,202	$	2,590,166	$	2,633,368	$	31,755	$	2,332,142	$	2,363,897	$	30,234	$	3,046,113	$	3,076,347	$	41,168	$	2,632,877	$	2,674,045

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

For purposes of the disclosures required pursuant to ASC 310, the loan and lease portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for ~~credit~~loan and lease losses. There are 6six 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~~The following describe risk characteristics relevant to each of ~~Financial Information~~, the ~~CARES Act established the PPP, administered directly~~portfolio segments:

Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by ~~the SBA. The PPP provides~~income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing 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~~land 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.buildings. These loans are ~~fully guaranteed~~repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower’s income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Construction and Land Development: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and financial loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the ~~SBA~~creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.

Leases: The lease portfolio segment includes leases to small and mid-size companies for equipment financing leases. These leases are ~~not included~~secured by a secured interest in the equipment being leased.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

Credit Risk Management:

The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan and lease portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans and leases are individually underwritten, risk-rated, approved, and monitored.

Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently, as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status.

Credit quality and trends in the loan and lease portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by Director, Management and Loan Committees.

The allowance for loan and lease losses is a valuation reserve established through provisions for loan and lease losses charged against income. The allowance for loan and lease losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan and lease portfolio. Loans and leases deemed to be uncollectible are charged against the allowance for loan and lease losses, while recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses. The allowance for loan and lease losses is comprised of specific valuation allowances for loans and leases evaluated individually for impairment and general allocations for pools of homogeneous loans and leases with similar risk characteristics and trends.

The allowance for loan and lease losses related to specific loans and leases is based on management’s estimate of potential losses on impaired loans and leases as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan or lease is determined to be collateral dependent or (3) the loans’ or leases’ observable market price. The Company’s homogeneous loan and lease pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, leases and consumer and other loans. The general allocations to these loan and lease pools are based on the historical loss rates for specific loan and lease types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors.

The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan and lease portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan and lease structuring and pricing; (6) the impact of the regulatory environment and changes in laws; (7) effectiveness of the Company’s loan and lease policies, procedures and internal controls. The total allowance established for each homogeneous loan and lease pool represents the product of the historical loss ~~allowance calculations. The loans may be eligible~~ratio adjusted for ~~forgiveness by~~qualitative factors and the ~~SBA to~~total dollar amount of 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 leases in the ~~fees~~pool.

The determination of the adequacy of the allowance for loan and lease losses is based on estimates that are ~~accounted for as loan origination fees~~particularly susceptible to significant changes in the economic environment and ~~recognized over~~market conditions. In connection with the ~~contractual loan term as a yield adjustment~~determination of the estimated losses on ~~the loans. At September 30, 2021, the net deferred fees outstanding was $3.8 million for the 2021 PPP~~ loans and ~~0 net deferred fees were outstanding~~leases, management obtains independent appraisals for the 2020 PPP loans. At December 31, 2020, the net deferred fees outstanding for the 2020 PPP loans was $4.2 million. PPP loans are included in the Commercial and Industrial loan segments. As of September 30, 2021, the Company had 1,126 PPP loans outstanding, with an outstanding principal balance of $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.

significant collateral.

1819

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

While management uses available information to recognize losses on loans and leases, further reductions in the carrying amounts of loans and leases may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and leases. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and leases may change materially in the near term.

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

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Real Estate

Real Estate

Development

Industrial

Leases

and Other

Total
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


					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
September 30, 2022:
Performing loans and leases	$	1,520,598	$	552,076	$	402,592	$	511,757	$	63,326	$	15,566	$	3,065,915
Impaired loans and leases		305		1,637		858		—		—		—		2,800
		1,520,903		553,713		403,450		511,757		63,326		15,566		3,068,715
PCI loans and leases		16,148		8,695		1,557		2,523		1,472		6		30,401
Total loans and leases	$	1,537,051	$	562,408	$	405,007	$	514,280	$	64,798	$	15,572	$	3,099,116

December 31, 2021:
Performing loans and leases	$	1,362,423	$	463,374	$	275,504	$	485,411	$	50,538	$	11,780	$	2,649,030
Impaired loans and leases		858		2,065		—		97		—		—		3,020
		1,363,281		465,439		275,504		485,508		50,538		11,780		2,652,050
PCI loans and leases		20,875		11,833		2,882		2,516		3,170		71		41,347
Total loans and leases	$	1,384,156	$	477,272	$	278,386	$	488,024	$	53,708	$	11,851	$	2,693,397

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

Construction

Commercial

Consumer

Commercial

Consumer

and Land

and

and

Real Estate

Real Estate

Development

Industrial

Leases

Other

Total
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


					Construction		Commercial				Consumer
	Commercial		Consumer		and Land		and				and
	Real Estate		Real Estate		Development		Industrial		Leases		Other		Total
September 30, 2022:
Performing loans and leases	$	10,552	$	3,868	$	2,781	$	3,835	$	1,034	$	137	$	22,207
Impaired loans and leases		—		—		395		—		—		—		395
		10,552		3,868		3,176		3,835		1,034		137		22,602
PCI loans and leases		27		140		—		—		—		—		167
Total loans and leases	$	10,579	$	4,008	$	3,176	$	3,835	$	1,034	$	137	$	22,769

December 31, 2021:
Performing loans and leases	$	9,355	$	3,237	$	1,882	$	3,685	$	330	$	123	$	18,612
Impaired loans and leases		396		69		—		96		—		—		561
		9,751		3,306		1,882		3,781		330		123		19,173
PCI loans and leases		30		148		—		—		—		1		179
Total loans and leases	$	9,781	$	3,454	$	1,882	$	3,781	$	330	$	124	$	19,352

1920

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	Three Months Ended September 30, 2022
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	10,600	$	3,835	$	2,904	$	3,659	$	807	$	133	$	21,938
Charged-off loans and leases		—		—		—		(51)		—		(180)		(231)
Recoveries of charge-offs		—		7		—		19		29		33		88
Provision charged to expense		(21)		166		272		208		198		151		974
Ending balance	$	10,579	$	4,008	$	3,176	$	3,835	$	1,034	$	137	$	22,769


	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														Nine Months Ended September 30, 2022
			Consumer		Construction		Commercial										Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer				Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total		Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	6,595	$	3,313	$	1,795	$	4,443	$	—	$	108	$	16,254	$	9,781	$	3,454	$	1,882	$	3,781	$	330	$	124	$	19,352
Charged-off loans and leases		—		(21)		—		(60)		—		(89)		(170)		—		(33)		—		(240)		(108)		(482)		(863)
Recoveries of charge-offs		11		17		—		55		—		16		99		4		561		—		162		192		131		1,050
Provision charged to expense		1,123		135		265		1,025		—		86		2,634		794		26		1,294		132		620		364		3,230
Ending balance	$	7,729	$	3,444	$	2,060	$	5,463	$	—	$	121	$	18,817	$	10,579	$	4,008	$	3,176	$	3,835	$	1,034	$	137	$	22,769


	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,~~2022, is $974 thousand million and $3.2 million, respectively and $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,~~2021, respectively. As of September 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, our allowance for loan and lease losses was ~~$19.3~~$22.8 million and ~~$18.3~~$19.4 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~~2022 and ~~0.77%~~0.72% at December 31, ~~2020.~~

2021.

2021

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans and leases in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan and lease obligations. Loans and leases in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Watch: Loans and leases in this risk category involve borrowers that exhibit characteristics, or are operating under conditions that, if not successfully mitigated as planned, have a reasonable risk of resulting in a downgrade within the next six to twelve months. Loans and leases may remain in this risk category for six months and then are either upgraded or downgraded upon subsequent evaluation.

Special Mention: Loans and leases in this risk grade are the equivalent of the regulatory definition of "Other Assets Especially Mentioned" classification. Loans and leases in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company’s credit position.

Substandard: Loans and leases in this risk grade are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans and leases in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Uncollectible: Loans and leases in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan or lease has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan or lease, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan and lease losses are taken in the period in which the loan or lease becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans or leases within this category.

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes have been made.

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														September 30, 2022
					Construction		Commercial												Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer				Commercial		Consumer		and Land		and				Consumer
Non PCI Loans and Leases:	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total		Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
Pass	$	922,153	$	417,302	$	269,350	$	625,836	$	—	$	12,622	$	2,247,263	$	1,490,337	$	550,409	$	402,317	$	506,920	$	63,326	$	15,535	$	3,028,844
Watch		66,287		14,218		3,296		7,673		—		137		91,611		23,663		1,207		227		4,647		—		21		29,765
Special mention		4,446		46		—		320		—		—		4,812		6,519		36		—		73		—		—		6,628
Substandard		3,967		2,020		81		261		—		30		6,359		384		2,061		906		117		—		10		3,478
Doubtful		—		86		—		48		—		—		134		—		—		—		—		—		—		—
Total		996,853		433,672		272,727		634,138		—		12,789		2,350,179		1,520,903		553,713		403,450		511,757		63,326		15,566		3,068,715

PCI Loans and Leases:
Pass		11,072		8,382		1,008		262		—		25		20,749		12,901		7,299		1,075		2,523		1,472		6		25,276
Watch		3,381		224		3,820		—		—		2		7,427		1,437		194		47		—		—		—		1,678
Special mention		19		57		—		—		—		—		76		12		55		—		—		—		—		67
Substandard		1,651		1,595		520		46		—		—		3,812		1,798		1,147		435		—		—		—		3,380
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total		16,123		10,258		5,348		308		—		27		32,064		16,148		8,695		1,557		2,523		1,472		6		30,401
Total loans and leases	$	1,012,976	$	443,930	$	278,075	$	634,446	$	—	$	12,816	$	2,382,243	$	1,537,051	$	562,408	$	405,007	$	514,280	$	64,798	$	15,572	$	3,099,116


	December 31, 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	$	1,330,888	$	460,190	$	275,124	$	480,677	$	50,538	$	11,724	$	2,609,141
Watch		27,246		1,334		237		4,345		—		42		33,204
Special mention		4,120		1,525		70		228		—		—		5,943
Substandard		1,027		2,390		73		213		—		14		3,717
Doubtful		—		—		—		45		—		—		45
Total		1,363,281		465,439		275,504		485,508		50,538		11,780		2,652,050

PCI Loans and Leases:
Pass		16,019		9,714		2,335		2,516		3,170		71		33,825
Watch		1,271		539		91		—		—		—		1,901
Special mention		15		68		—		—		—		—		83
Substandard		3,570		1,512		456		—		—		—		5,538
Doubtful		—		—		—		—		—		—		—
Total		20,875		11,833		2,882		2,516		3,170		71		41,347
Total loans and leases	$	1,384,156	$	477,272	$	278,386	$	488,024	$	53,708	$	11,851	$	2,693,397

Past Due Loans and Leases:

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

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, 2022
	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	$	103	$	—	$	—	$	305	$	408	$	16,148	$	1,520,495	$	1,537,051
Consumer real estate		271		132		—		2,061		2,464		8,695		551,249		562,408
Construction and land development		—		—		—		858		858		1,557		402,592		405,007
Commercial and industrial		96		58		—		117		271		2,523		511,486		514,280
Leases		143		—		20		29		192		1,472		63,134		64,798
Consumer and other		175		27		—		9		211		6		15,355		15,572
Total	$	788	$	217	$	20	$	3,379	$	4,404	$	30,401	$	3,064,311	$	3,099,116


	December 31, 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	$	172	$	—	$	—	$	858	$	1,030	$	20,875	$	1,362,251	$	1,384,156
Consumer real estate		884		10		—		2,139		3,033		11,833		462,406		477,272
Construction and land development		91		—		—		—		91		2,882		275,413		278,386
Commercial and industrial		1,191		119		45		116		1,471		2,516		484,037		488,024
Leases		361		—		—		—		361		3,170		50,177		53,708
Consumer and other		99		4		19		11		133		71		11,647		11,851
Total	$	2,798	$	133	$	64	$	3,124	$	6,119	$	41,347	$	2,645,931	$	2,693,397

Impaired Loans and Leases:

A loan or lease held for investment is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan or lease agreement.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	September 30, 2022						December 31, 2021
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	305	$	305	$	—	$	—	$	—	$	—
Consumer real estate		1,637		1,638		—		1,805		1,806		—
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Leases		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—
		1,942		1,943		—		1,805		1,806		—
Impaired loans and leases with a valuation allowance:
Commercial real estate		—		—		—		858		859		396
Consumer real estate		—		—		—		260		262		69
Construction and land development		858		858		395		—		—		—
Commercial and industrial		—		—		—		97		96		96
Leases		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—
		858		858		395		1,215		1,217		561
PCI loans and leases:
Commercial real estate		522		597		27		707		926		30
Consumer real estate		873		835		140		1,129		1,251		148
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		��		—		—
Leases		—		—		—		—		—		—
Consumer and other		—		—		—		5		3		1
		1,395		1,432		167		1,841		2,180		179
Total impaired loans and leases	$	4,195	$	4,233	$	562	$	4,861	$	5,203	$	740

2125

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)~~:


	Three Months Ended September 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	304	$	—	$	—	$	—
Consumer real estate		1,742		72		2,171		19
Construction and land development		—		—		—		—
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
		2,046		72		2,171		19
Impaired loans and leases with a valuation allowance:
Commercial real estate		—		—		858		—
Consumer real estate		—		—		261		3
Construction and land development		858		—		—		—
Commercial and industrial		—		—		154		2
Leases		—		—		—		—
Consumer and other		—		—		—		—
		858		—		1,273		5
PCI loans and leases:
Commercial real estate		525		11		1,230		27
Consumer real estate		880		12		1,176		21
Construction and land development		—		—		—		—
Commercial and industrial		—		—		258		1
Leases		—		—		—		—
Consumer and other		—		—		10		—
		1,405		23		2,674		49
Total impaired loans and leases	$	4,309	$	95	$	6,118	$	73

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 and Leases:~~

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

September 30, 2021

December 31, 2020

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance
Impaired loans and leases without a valuation allowance:


















Commercial real estate

$
—

$
—

$
—

$
3,871

$
3,872

$
—
Consumer real estate

2,156

2,157

—

888

888

—
Construction and land development

—

—

—

—

—

—
Commercial and industrial

—

—

—

—

—

—
Leases

—

—

—

—

—

—
Consumer and other

—

—

—

—

—

—

2,156

2,157

—

4,759

4,760

—
Impaired loans and leases with a valuation allowance:












Commercial real estate

858

858

417

—

—

—
Consumer real estate

261

263

70

428

428

116
Construction and land development

—

—

—

—

—

—
Commercial and industrial

99

99

99

146

146

121
Leases

—

—

—

—

—

—
Consumer and other

—

—

—

—

—

—

1,218

1,220

586

574

574

237
PCI loans and leases:












Commercial real estate

1,206

1,500

61

—

—

—
Consumer real estate

1,196

1,318

155

1,827

2,086

88
Construction and land development

—

—

—

—

—

—
Commercial and industrial

255

228

209

270

234

218
Leases

—

—

—

—

—

—
Consumer and other

6

5

2

21

20

3

2,663

3,051

427

2,118

2,340

309
Total impaired loans and leases

$
6,037

$
6,428

$
1,013

$
7,451

$
7,674

$
546


	Nine Months Ended September 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	152	$	—	$	1,000	$	1
Consumer real estate		1,839		92		1,778		39
Construction and land development		—		—		—		—
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
		1,991		92		2,778		40
Impaired loans and leases with a valuation allowance:
Commercial real estate		429		—		1,218		104
Consumer real estate		87		—		352		11
Construction and land development		429		—		—		—
Commercial and industrial		32		—		141		7
Leases		—		—		—		—
Consumer and other		—		—		—		—
		977		—		1,711		122
PCI loans and leases:
Commercial real estate		765		46		410		27
Consumer real estate		879		40		1,169		64
Construction and land development		—		—		—		—
Commercial and industrial		—		—		263		3
Leases		—		—		—		—
Consumer and other		2		—		15		—
		1,646		86		1,857		94
Total impaired loans and leases	$	4,614	$	178	$	6,346	$	256

~~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

2326

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Troubled Debt Restructurings:

For the periods presented, impaired loans included loans that were classified as ~~TDRs.~~troubled debt restructurings (“TDRs”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

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

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

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

As of September 30, ~~2021~~2022, and December 31, ~~2020,~~2021, management had approximately ~~$212~~$108 thousand and ~~$257~~$206 thousand, respectively, in loans that met the criteria for TDR, ~~NaN~~none 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~~are no loans that were modified as a TDR during the nine months ended September 30, 2022 and 2021, ~~and 1 loan that was modified during the nine months ended September 30, 2020.~~respectively. There were 0no loans that were modified as TDRs during the past 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. CARES Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 ~~Presentation of Financial Information~~ ~~for more information. At September 30, 2021, the Company had 0 loans remaining under COVID-19 modifications.~~

Foreclosure Proceedings and Balances:

As of September 30, ~~2021,~~2022, there were 0no residential properties secured by real estate included in other real estate owned and there ~~was one~~were three residential real estate loan ~~totaling $33 thousand~~ in the process of foreclosure.

2427

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Purchased Credit Impaired Loans and Leases:

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


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
Commercial real estate	$	31,664	$	23,787	$	26,622	$	31,600
Consumer real estate		13,211		12,692		10,599		14,215
Construction and land development		3,686		1,812		3,052		3,699
Commercial and industrial		3,794		6,521		2,470		3,424
Leases		4,133		—		1,754		3,557
Consumer and other		154		161		34		125
Total loans and leases		56,642		44,973		44,531		56,620
Less: Remaining purchase discount		(13,013)		(12,909)		(14,130)		(15,273)
Total loans and leases, net of purchase discount		43,629		32,064		30,401		41,347
Less: Allowance for loan and leases losses		(427)		(309)		(167)		(179)
Carrying amount, net of allowance	$	43,202	$	31,755	$	30,234	$	41,168

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Accretable yield, beginning of period	$	14,522	$	11,777	$	16,889	$	8,454	$	15,736	$	14,522	$	14,618	$	16,889
Additions		4,072		—		4,721		2,515		—		4,072		—		4,721
Accretion income		(2,151)		(1,267)		(5,180)		(4,401)		(839)		(2,151)		(2,780)		(5,180)
Reclassification		254		265		1,931		2,428		1,729		254		2,127		1,931
Other changes, net		(1,034)		7,405		(2,698)		9,184		(415)		(1,034)		2,246		(2,698)
Accretable yield, end of period	$	15,663	$	18,180	$	15,663	$	18,180	$	16,211	$	15,663	$	16,211	$	15,663

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,For 2021, the results ~~indicated that there was 0~~of the qualitative assessment provided no indication of potential impairment. ~~Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.~~

~~On September 30, 2021, the Company entered into a Purchase~~The Company’s other intangible assets consist of core deposit, customer relationships and Assumption Agreement and completed the sale of a portfolio of loans and certain assets 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 its goodwill balance to the Saletradename. They are initially recognized based on a ~~relative fair value basis. Based on a relative fair value analysis~~valuation performed ~~through the date~~as of the ~~sale, goodwill adjustment in~~consummation date. The core deposit intangible is amortized over the ~~amount~~average remaining life of ~~$2.5 million related to~~ the ~~Sale was recorded during~~acquired customer deposits, the ~~third quarter~~customer relationships are amortized over a weighted average of ~~2021.~~

10.4 years and the tradename is amortized over five years.

2528

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
Goodwill:
Balance, beginning of period	$	74,135	$	65,614	$	91,565	$	74,135
Acquisition of PFG		323		8,521		—		323
Acquisition of Fountain		2,400		—		—		2,400
Acquisition of SCB		15,589		—		—		17,171
Adjustment, due to Sale		(2,463)		—
Acquisition of Sunbelt						4,580		—
Adjustment, due to sale						—		(2,464)
Balance, end of the period	$	89,984	$	74,135	$	96,145	$	91,565


	Core Deposit		Customer Relationships		Tradename				Core Deposit		Customer Relationships		Tradename
Amortized other intangible assets:	Intangibles		Intangibles		Intangibles		Total		Intangibles		Intangibles		Intangibles		Total
September 30, 2022:
Beginning balance January 1, 2022, gross									$	17,470	$	3,722	$	63	$	21,255
Acquisition of Sunbelt										-		1,948		-		1,948
Balance, September 30, 2022, other intangible assets, gross										17,470		5,670		63		23,203
Less: accumulated amortization										(7,575)		(1,280)		(33)		(8,888)
Balance, September 30, 2022, other intangible assets, net									$	9,895	$	4,390	$	30	$	14,315

December 31, 2021:
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		-		2,658		-		2,658
Acquisition of SCB		1,550		-		-		1,550		1,550		-		-		1,550
Balance, September 30, 2021, other intangible assets, gross		17,470		3,722		63		21,255
Balance, December 31, 2021, other intangible assets, gross										17,470		3,722		63		21,255
Less: accumulated amortization		(5,748)		(541)		(20)		(6,309)		(6,212)		(733)		(23)		(6,968)
Balance, September 30, 2021, other intangible assets, net	$	11,722	$	3,181	$	43	$	14,946
Balance, December 31, 2021, other intangible assets, net									$	11,258	$	2,989	$	40	$	14,287

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

The aggregate amortization expense for other intangible assets for the three and nine months ended September 30, ~~2021,~~2022, was ~~$711~~$650 thousand and ~~$1.6~~$1.9 million, respectively, and for the three and nine months ended September 30, ~~2020,~~2021, was ~~$402~~$711 thousand and ~~$1.2~~$1.6 million, ~~respectively.~~respectively,

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


Remainder of 2021	$	660
2022		2,521
Remainder of 2022			$	688
2023		2,356		2,609
2024		2,203		2,438
2025		2,041		2,258
2026				2,086
Thereafter		5,165		4,236
Total	$	14,946	$	14,315

2629

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7. Borrowings, Line of Credit and Subordinated Debt

Borrowings:

At September 30, ~~2021,~~2022, total borrowings were ~~$88.7~~$18.4 million compared to ~~$81.2~~$87.6 million at December 31, ~~2020.~~2021. During the nine month period ending September 30, 2022, the FHLB called two advances totaling $75 million. Borrowings consist of the following (dollars in thousands):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
Securities sold under customer repurchase agreements	$	6,248	$	5,803	$	5,923	$	5,085
FHLB borrowings		75,000		75,000		—		75,000
Other borrowings		7,500		396		12,500		7,500
Total	$	88,748	$	81,199	$	18,423	$	87,585

Securities Sold Under Agreements to Repurchase:

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis.

The Company had securities sold under agreements to repurchase with commercial checking customers which were secured by government agency securities. The carrying value of investment securities pledged as collateral under repurchase agreements was ~~$5.6~~$9.3 million and ~~$7.6~~$10.1 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The average balance during the nine month period September 30, 2022, and 2021 was $5.2 million and $5.4 million, respectively. The maximum month-end outstanding balance for the nine month period ended September 30, 2022, and 2021 was $5.9 million and $7.2 million, respectively.

~~Line of Credit:~~Other Borrowings:

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.~~for an aggregate amount of $25 million. The maturity of the line of credit is March 24, 2023. At September 30, ~~2021, $7.5~~2022, $12.5 million was outstanding under the line of credit, and ~~$17.5~~$12.5 million of the line of credit remained available to the Company.

Subordinated ~~Debit:~~Debt:

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~~2022 and December 31, ~~2020.~~2021. Unamortized debt issuance cost was ~~$591~~$506 thousand and ~~$654~~$570 thousand at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 unamortized debt issuance costs totaled ~~$842~~$506 thousand at September 30, 2022, 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, 2022, and 2021, ~~and September~~ respectively.

30 ~~2020, respectively~~

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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 and nine ~~months~~month periods ending September 30, ~~2021,~~2022, was ~~$287~~$419 thousand and ~~$925~~$1,266 thousand, respectively. The Company’s contribution to the Plan for the three and nine months ~~ending~~ended September 30, ~~2020,~~2021, was ~~$282~~$287 thousand and ~~$840~~$925 thousand, respectively.

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At September 30, ~~2021,~~2022, the Company had 1one active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which has ~~1,830,260~~1,766,245 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~~30,790 Rights issued from the Cornerstone Non-Qualified Plan ~~Options, and 2,266 Rights issued from the Capstone Stock Option Plan. These plans do~~Options. This plan does not have any Rights available for future grants or awards.

Stock Options:

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

Weighted

Average

Exercisable

Number

Price
Outstanding at December 31, 2020

99,617

$
10.19
Granted

—

—
Exercised

(19,040)

10.18
Forfeited

—

—
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.~~


		Weighted
		Average
		Exercisable
	Number	Price
Outstanding at December 31, 2021	79,667	$	10.17
Granted	—		—
Exercised	(32,003)		8.43
Forfeited	(2,369)		11.90
Outstanding at September 30, 2022	45,295	$	11.31

2831

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Information pertaining to stock options outstanding at September 30, ~~2021,~~2022, 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	0.45 years	$	6.60	19,250	$	6.60	9.48	14,290	0.45 years	$	9.48	14,290	$	9.48
	9.48	18,000	1.45 years		9.48	18,000		9.48	9.60	16,500	1.19 years		9.60	16,500		9.60
	9.60	22,250	2.25 years		9.60	22,250		9.60	15.05	14,505	2.67 years		15.05	14,505		15.05
	11.76	2,266	0.75 years		11.76	2,266		11.76
	15.05	18,811	3.75 years		15.05	18,811		15.05
Outstanding, end of period	Outstanding, end of period	80,577	1.95 years	$	10.19	80,577	$	10.19	Outstanding, end of period	45,295	1.43 years	$	11.31	45,295	$	11.31

~~NaN~~The Company did not recognize any stock option-based compensation expense during the three and nine months ended September 30, 2022 and 2021, respectively, as all stock options issued are fully vested, and no future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

The intrinsic value of options exercised during the three and nine months ended September 30, 2022, was $9 thousand and $565 thousand. No stock options were exercised during the three months ended September 30, 2021. The intrinsic value of options exercised during the nine months ended September 30, 2021, was $220 ~~thousand, and $75 thousand and $141 thousand, during the three and nine months ended September 30, 2020, respectively.~~thousand. The aggregate intrinsic value of total options outstanding and exercisable options at September 30, ~~2021,~~2022, was ~~$1.3 million.~~$607 thousand. Cash received from options exercised under all share-based payment arrangements for the nine months ended September 30, ~~2021~~2022, was ~~$194~~$270 thousand.

~~NaN~~Stock options ~~vested~~of 603 and 32,003 shares were exercised during the three and nine ~~months~~month periods ended September 30, ~~2021 and 2020,~~2022, respectively. ~~NaN~~No stock options were exercised during the three months ended September 30, 2021. Stock options of 19,040 shares were exercised during the nine month period ended September 30, 2021. The income tax ~~expense/~~benefit recognized for the exercise of options during the three and nine months ended September 30, 2022, was a benefit of $64 thousand and $147 thousand, respectively, and for the nine months ended September 30, 2021, was a benefit of $9 ~~thousand and 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 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.~~thousand.

Restricted Stock Awards:

A summary of the activity of the Company’s unvested restricted stock awards for the period ended September 30, ~~2021~~2022, 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
Balance at December 31, 2021				144,367	$	19.49
Granted	53,134		20.43	23,115		26.57
Vested	(7,185)		21.42	(34,146)		24.13
Forfeited/expired	(1,800)		16.37	(3,500)		16.44
Balance at September 30, 2021	144,367	$	19.49
Balance at September 30, 2022				129,836	$	19.61

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 September 30, ~~2021,~~2022, was $281 thousand and $991 thousand, respectively, and was $163 thousand and $525 ~~thousand, respectively, and was $142 thousand and $365~~ thousand, during the three and nine months ended September 30, ~~2020,~~2021, respectively. As of September 30, ~~2021,~~2022, there was ~~$1.6~~$1.2 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of ~~2.74 years~~2.08. years. The grant-date fair value of restricted stock awards vested was ~~$154~~$824 thousand for the nine months ended September 30, ~~2021.~~2022.

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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
Outstanding at December 31, 2021				55,000	$	18.21
Granted	22,000		20.70	—		—
Exercised	(23,500)		21.61	(12,500)		18.12
Forfeited	(6,000)		18.00	—		—
Outstanding at September 30, 2021	65,500	$	18.75
Outstanding at September 30, 2022				42,500	$	18.23

Information pertaining to SARs outstanding at September 30, ~~2021,~~2022, 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	16,000	2.25 years	$	15.19	—	$	—	15.19	16,000	1.25 years	$	15.19	—	$	—
	18.12	19,000	1.25 years		18.12	—		—	18.12	6,500	0.25 years		18.12	6,500		18.12
	20.70	20,000	3.25 years		20.70	—		—	20.70	20,000	2.25 years		20.70	—		—
	21.61	10,500	0.25 years		21.61	10,500		21.61	Outstanding, end of period	42,500	1.57 years	$	18.23	6,500	$	18.12
	Outstanding, end of period	65,500	1.95 years	$	18.75	10,500	$	21.61

SARs compensation expense of ~~$49~~$31 thousand and ~~$162~~($12) thousand was recognized for the three and nine months ended September 30, ~~2021,~~2022, respectively, and ~~($63)~~$49 thousand and ~~($89)~~$162 thousand for the three and nine months ended September 30, ~~2020.~~2021. The credit in expense for the ~~three and~~ nine ~~months~~month period ended September 30, ~~2020,~~2022, 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 thousands):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
Commitments to extend credit	$	616,271	$	476,841	$	885,945	$	669,770
Standby letters of credit		10,439		5,261		16,111		17,868

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total

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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 necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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.

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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~~following methodologies were used by the ~~recorded amount of assets and liabilities measured at~~Company in estimating fair value ~~on a recurring basis~~ ~~(in thousands)~~:

Quoted Prices in

Significant

Significant

Active Markets

Other

Other

for Identical

Observable

Unobservable

Assets

Inputs

Inputs
Description

Fair Value

(Level 1)

(Level 2)

(Level 3)
September 30, 2021:



Assets:



Securities available-for-sale:



U.S. Treasury

94,025

—

94,025

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

$
53,463

$
—

$
53,463

$
—
Municipal securities

95,570

—

95,570

—
Other debt securities

26,291

—

26,291

—
Mortgage-backed securities (GSEs)

69,994

—

69,994

—
Total securities available-for-sale

$
339,343

$
—

$
339,343

$
—

Liabilities:



Derivative financial instruments

$
4,180

$
—

$
4,180

$
—

December 31, 2020:








Assets:








Securities available-for-sale:








U.S. Government-sponsored enterprises (GSEs)

$
30,530

$
—

$
30,530

$
—
Municipal securities

91,989

—

91,989

—
Other debt securities

25,118

—

25,118

—
Mortgage-backed securities (GSEs)

67,997

—

67,997

—
Total securities available-for-sale

$
215,634

$
—

$
215,634

$
—

Liabilities:








Derivative financial instruments

$
6,174

—

$
6,174

—

~~During the nine months ending September 30, 2021, there were 0~~ ~~transfers~~ ~~between~~ ~~Level 1~~ ~~and~~ ~~Level 2~~ ~~in the fair value hierarchy.~~disclosures for financial instruments:

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

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

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Recurring Measurements of Fair Value:

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


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2022:
Assets:
Securities available-for-sale:
U.S. Treasury	$	221,776	$	—	$	221,776	$	—
U.S. Government-sponsored enterprises (GSEs)		1,633		—		1,633		—
Municipal securities		54,117		—		54,117		—
Other debt securities		28,841		—		28,841		—
Mortgage-backed securities (GSEs)		213,356		—		213,356		—
Total securities available-for-sale		519,723		—		519,723		—

Derivative financial instruments and interest rate swap agreements		12,433		—		12,433		—
Total assets at fair value	$	532,156	$	—	$	532,156	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	12,457	$	—	$	12,457	$	—

December 31, 2021:
Assets:
Securities available-for-sale:
U.S. Treasury	$	137,758			$	137,758	$	—
U.S. Government-sponsored enterprises (GSEs)		21,801		—		21,801		—
Municipal securities		67,820		—		67,820		—
Other debt securities		27,220		—		27,220		—
Mortgage-backed securities (GSEs)		227,854		—		227,854		—
Total securities available-for-sale		482,453		—		482,453		—

Interest rate swaps agreements for customer loans		1,326		—		1,326		—
Total assets at fair value	$	483,779	$	—	$	483,779	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	4,893	$	—	$	4,893	$	—

During the nine months ending September 30, 2022, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

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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 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)
September 30, 2021:
September 30, 2022:
Collateral dependent loans	$	2,868	$	—	$	—	$	2,868	$	1,691	$	—	$	—	$	1,691
Other real estate owned		2,415		—		—		2,415		27		—		—		27

December 31, 2020:
December 31, 2021:
Collateral dependent loans	$	2,455	$	—	$	—	$	2,455	$	2,280	$	—	$	—	$	2,280
Other real estate owned		4,619		—		—		4,619		367		—		—		367

For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below (dollars in thousands):


					Weighted						Weighted
			Valuation	Significant Other	Average of				Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input		Fair Value		Technique	Unobservable Input	Input
September 30, 2021:
September 30, 2022:
Collateral dependent loans	$	2,868	Appraisal	Appraisal discounts	26	%	$	1,691	Appraisal	Appraisal discounts	25	%
Other real estate owned		2,415	Appraisal	Appraisal discounts	10	%		27	Appraisal	Appraisal discounts	10	%

December 31, 2020:
December 31, 2021:
Collateral dependent loans	$	2,455	Appraisal	Appraisal discounts	9	%	$	2,280	Appraisal	Appraisal discounts	25	%
Other real estate owned		4,619	Appraisal	Appraisal discounts	22	%		367	Appraisal	Appraisal discounts	13	%

Collateral dependent loans: A collateral dependent loan is measured based on the fair value of the collateral securing these loans, 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. ~~Colleterial~~Collateral 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. 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

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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, 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
September 30, 2021:
September 30, 2022:
Assets:
Cash and cash equivalents	$	1,091,160	$	1,091,160	$	—	$	—	$	1,091,160	$	543,029	$	543,029	$	—	$	—	$	543,029
Securities available-for-sale		339,343		—		339,343		—		339,343		519,723		—		519,723		—		519,723
Securities held-to-maturity												287,104		—		256,976		—		256,976
Other investments		14,972		N/A		N/A		N/A		N/A		15,528		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		2,636,786		—		—		2,630,239		2,630,239		3,079,089		—		—		2,992,294		2,992,294
Derivative financial instruments and interest rate swap agreements												12,433		—		12,433		—		12,433

Liabilities:
Noninterest-bearing demand deposits		977,180		—		977,180		—		977,180		1,186,209		—		1,186,209		—		1,186,209
Interest-bearing demand deposits		847,007		—		847,007		—		847,007		962,901		—		962,901		—		962,901
Money market and savings deposits		1,389,393		—		1,389,393		—		1,389,393		1,663,355		—		1,663,355		—		1,663,355
Time deposits		585,692		—		587,954		—		587,954		467,944		—		466,371		—		466,371
Borrowings		88,748		—		89,669		—		89,669		18,423		—		18,423		—		18,423
Subordinated debt		41,909		—		—		43,645		43,645		41,994		—		—		40,202		40,202
Derivative financial instruments		4,180		—		4,180		—		4,180
Derivative financial instruments and interest rate swap agreements												12,457		—		12,457		—		12,457

December 31, 2020:
December 31, 2021:
Assets:
Cash and cash equivalents	$	481,719	$	481,719	$	—	$	—	$	481,719	$	1,045,077	$	1,045,077	$	—	$	—	$	1,045,077
Securities available-for-sale		215,634		—		215,634		—		215,634		482,453		—		482,453		—		482,453
Securities held-to-maturity												76,969		—		76,946				76,946
Other investments		14,794		N/A		N/A		N/A		N/A		16,494		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		2,375,618		—		—		2,377,581		2,377,581		2,679,148		—		—		2,676,181		2,676,181
Interest rate swaps agreements for customer loans												1,326		—		1,326		—		1,326

Liabilities:
Noninterest-bearing demand deposits		685,957		—		685,957		—		685,957		1,055,125		—		1,055,125		—		1,055,125
Interest-bearing demand deposits		649,129		—		649,129		—		649,129		899,158		—		899,158		—		899,158
Money market and savings deposits		919,631		—		919,631		—		919,631		1,493,007		—		1,493,007		—		1,493,007
Time deposits		550,498		—		554,120		—		554,120		574,648		—		576,598		—		576,598
Borrowings		81,199		—		82,892		—		82,892		87,585		—		88,082		—		88,082
Subordinated debt		39,346		—		—		40,550		40,550		41,930		—		—		43,374		43,374
Derivative financial instruments		6,174		—		6,174		—		6,174
Derivative financial instruments and interest rate swap agreements												4,893		—		4,893		—		4,893

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. 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.

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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~~adopted 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

September 30, 2021:

Asset/Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

September 30, 2022:

Interest rate swap agreements - securities

Other liabilities

5.74

3.09

3 month LIBOR

36,000

(4,180)

Other assets

5.45

3.09

3 month LIBOR

36,000

1,752

December 31, 2020:

December 31, 2021:

Interest rate swap agreements - securities

Other liabilities

7.13

3.08

3 month LIBOR

36,000

(6,174)

Other liabilities

6.20

3.09

3 month LIBOR

36,000

(3,567)

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Interest income on tax-exempt securities	$	403	$	549	$	1,183	$	1,675
Effects of fair value hedge relationships		(83)		(218)		(527)		(781)
Reported interest income on tax-exempt securities	$	320	$	331	$	656	$	894


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Gain (loss) on fair value hedging relationship	2022		2021		2022		2021
Interest rate swap agreements - securities:
Hedged items	$	1,808	$	288	$	5,319	$	1,994
Derivative designated as hedging instruments	$	(1,808)	$	(288)	$	(5,319)	$	(1,994)
Carry amount of hedged assets - securities available-for-sale	$	36,165	$	43,258	$	36,165	$	43,258

3539

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~The effects~~Derivatives Designated as Cash Flow Hedges:

During the third quarter of 2022, the Company entered into interest rate derivatives contracts that were designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. Specifically, the Company executed $100 million, notional amount, in interest rate collars to hedge the variable rate index on a portion of the Company’s commercial loan portfolio. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception, a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value ~~hedge relationships reported~~ in ~~interest income on tax-exempt available-for-sale securities~~other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax, see - Consolidated Statements of Comprehensive Income (Loss). Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset affects earnings and are presented in the same income statement ~~were~~line item as the earnings effect of the hedged asset, as future interest payments are made on the underlying assets. At September 30, 2022, no interest expense or interest income is expected to be reclassified from AOCI over the next 12 months.

At September 30, 2022, cash flow hedges are as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020
Interest income on tax-exempt securities

$
549

$
565

$
1,675

$
1,586
Effects of fair value hedge relationships

(218)

(201)

(781)

(522)
Reported interest income on tax-exempt securities

$
331

$
364

$
894

$
1,064

Three Months Ended

Nine Months Ended

September 30,

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

2021

2020

2021

2020
Interest rate swap agreements - securities:








Hedged items

$
288

$
299

$
1,994

$
(3,345)
Derivative designated as hedging instruments

$
(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)


		September 30, 2022				December 31, 2021
	Balance Sheet	Notional		Estimated		Notional		Estimated
	Location	Amount		Fair Value		Amount		Fair Value
Cash flow hedges:
Assets	Other assets	$	-	$	-	$	-	$	-
Liabilities	Other liabilities		100,000		(1,775)		-		-

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~~2022 and December 31, ~~2020,~~2021, 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

$
-

$
-

$
-

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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


	September 30, 2022				December 31, 2021
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	150,997	$	10,682	$	48,125	$	1,326
Liabilities		150,997		(10,682)		48,125		(1,326)

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020
Interest rate swap agreements

$
479

$
—

$
489

$
—


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Interest rate swap agreements	$	53	$	479	$	1,449	$	489

Collateral requirements:

These derivative rate contracts have collateral requirements, both at inception of the trade and as the value of each derivative position changes. At September 30, 2022 and December 31, 2021, collateral totaling $6.7 million and $2.4 million, respectively, was pledged to the derivative counterparties to comply with collateral requirements.

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 follows the ~~Company adopted~~guidance of 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~~leases. Operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.

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


		September 30,		December 31,			September 30,		December 31,
	Classification	2021		2020		Classification	2022		2021
Assets:
Operating lease right-of-use assets	Other assets	$	6,104	$	4,797	Other assets	$	8,889	$	9,812
Liabilities:
Operating lease liabilities	Other liabilities	$	6,154	$	4,827	Other liabilities	$	9,015	$	9,881

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

As of September 30, ~~2021,~~2022, the weighted average remaining lease term was ~~10.80~~9.48 years and the weighted average discount rate was ~~2.39%~~2.16%.

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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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Lease costs:
Operating lease costs	$	270	$	272	$	764	$	779	$	403	$	270	$	1,220	$	764
Variable lease costs		18		29		66		84		26		18		76		66
Total	$	288	$	301	$	830	$	863	$	429	$	288	$	1,296	$	830
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	257	$	264	$	740	$	759	$	385	$	257	$	1,163	$	740

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, ~~2021,~~2022, were as follows (in thousands):


	Amounts		Amounts
September 30, 2022	$	253
September 30, 2023		985
September 30, 2024		744
September 30, 2025		528
September 30, 2026		515
Remainder of 2022			$	391
2023				1,340
2024				1,116
2025				1,047
2026				946
Thereafter		4,059		5,250
Total future minimum lease payments		7,084		10,090
Amounts representing interest		(930)		(1,075)
Present value of net future minimum lease payments	$	6,154	$	9,015

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 September 30, ~~2021,~~2022, 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 limitations on the Company’s ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and

3842

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~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 and nine months ended September 30, ~~2021,~~2022, 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 $10.0 million in dividends to the Company. Since~~since the first quarter of ~~2021,~~2022, the Company has paid a quarterly common stock dividend of ~~$0.06~~$0.07 per share. The amount and timing of all future dividend payments by the Company, if any, is subject to discretion of the Company’s board of directors and will depend on the Company’s earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to the Company.

Regulatory Capital Levels:

Actual and required capital levels at September 30, ~~2021,~~2022, and December 31, ~~2020~~2021 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
September 30, 2021
September 30, 2022
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	381,766	12.92	%	$	236,367	8.00	%		N/A	N/A		$	412,647	11.44	%	$	288,445	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		320,562	10.85	%		177,275	6.00	%		N/A	N/A			347,884	9.65	%		216,334	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		320,562	10.85	%		132,956	4.50	%		N/A	N/A			347,884	9.65	%		162,250	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)²		320,562	8.36	%		153,417	4.00	%		N/A	N/A			347,884	7.40	%		188,070	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	371,740	12.59	%	$	236,244	8.00	%	$	295,304	10.00	%	$	411,529	11.41	%	$	288,523	8.00	%	$	360,653	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		352,445	11.94	%		177,183	6.00	%		236,244	8.00	%		388,760	10.78	%		216,392	6.00	%		288,523	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		352,445	11.94	%		132,887	4.50	%		191,948	6.50	%		388,760	10.78	%		162,294	4.50	%		234,425	6.50	%
Tier 1 Capital (to Average Assets)²		352,445	9.20	%		153,185	4.00	%		191,481	5.00	%		388,760	8.27	%		188,071	4.00	%		235,089	5.00	%

December 31, 2020
December 31, 2021
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	329,431	14.07	%	$	187,303	8.00	%		N/A	N/A		$	386,627	12.55	%	$	246,483	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			325,345	10.56	%		184,862	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			325,345	10.56	%		138,647	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)		271,739	8.70	%		125,002	4.00	%		N/A	N/A			325,345	7.45	%		174,578	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	%	$	378,055	12.29	%	$	246,053	8.00	%	$	307,566	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		299,314	12.78	%		140,470	6.00	%		187,294	8.00	%		358,703	11.66	%		184,539	6.00	%		246,053	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		299,314	12.78	%		105,353	4.50	%		152,176	6.50	%		358,703	11.66	%		138,405	4.50	%		199,918	6.50	%
Tier 1 Capital (to Average Assets)		299,314	9.58	%		124,969	4.00	%		156,212	5.00	%		358,703	8.23	%		174,384	4.00	%		217,980	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, 2022
															Accumulated
							Securities		Securities		Fair Value				Other
							Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
							Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, June 30, 2022							$	(23,526)	$	(804)	$	(318)	$	—	$	(24,648)

Other comprehensive income (loss)								(14,942)		—		69		(1,317)		(16,190)
Reclassification of amounts included in net income								—		31		—		—		31
Net other comprehensive income (loss) during period								(14,942)		31		69		(1,317)		(16,159)

Ending balance, September 30, 2022							$	(38,468)	$	(773)	$	(249)	$	(1,317)	$	(40,807)

	Three Months Ended September 30, 2021						Three Months Ended September 30, 2021
					Accumulated										Accumulated
	Securities		Fair Value		Other		Securities		Securities		Fair Value				Other
	Available-for-		Municipal		Comprehensive		Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Security Hedges		Income (Loss)		Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, June 30, 2021	$	2,051	$	287	$	2,338	$	2,051	$	—	$	287	$	—	$	2,338

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

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

Nine Months Ended September 30, 2021






Accumulated

Securities

Fair Value

Other

Available-for-

Municipal

Comprehensive


Sale

Security Hedges

Income (Loss)
Beginning balance, December 31, 2020

$
2,968

$
(785)

$
2,183

Other comprehensive income (loss)

(707)

1,116

409
Reclassification of amounts included in net income

(33)

—

(33)
Net other comprehensive income (loss) during period

(740)

1,116

376

Ending balance, September 30, 2021

$
2,228

$
331

$
2,559

Nine Months Ended September 30, 2020






Accumulated

Securities

Fair Value

Other

Available-for-

Municipal

Comprehensive


Sale

Security Hedges

Income (Loss)
Beginning balance, December 31, 2019

$
391

$
(223)

$
168

Other comprehensive income (loss)

2,201

(1,361)

840
Reclassification of amounts included in net income

4

—

4
Net other comprehensive income (loss) during period

2,205

(1,361)

844

Ending balance, September 30, 2020

$
2,596

$
(1,584)

$
1,012

��


	Nine Months Ended September 30, 2022
									Accumulated
	Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, December 31, 2021	$	25	$	665	$	753	$	—	$	1,443

Other comprehensive income (loss)		(38,493)		(1,490)		(1,002)		(1,317)		(42,302)
Reclassification of amounts included in net income		—		52		—		—		52
Net other comprehensive income (loss) during period		(38,493)		(1,438)		(1,002)		(1,317)		(42,250)

Ending balance, September 30, 2022	$	(38,468)	$	(773)	$	(249)	$	(1,317)	$	(40,807)

	Nine Months Ended September 30, 2021
									Accumulated
	Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, December 31, 2020	$	2,968	$	—	$	(785)	$	—	$	2,183

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

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

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

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.~~time deposits. 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

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, including a recession, in particular in Tennessee, and other markets in which we ~~operate;~~operate, which could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of rising interest rates, supply chain challenges and inflation;

●

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 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;

●

governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve, as well as legislative, tax and regulatory changes, ~~to statutes, regulations or regulatory policies or practices as a result of, or in response to~~including those that impact the ~~COVID-19 pandemic, including~~ money supply and inflation;

●

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;

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●

developments in our mortgage banking business, including loan modifications, general demand, and the effects of judicial or regulatory requirements or guidance;

●

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 acquisition of Sevier County Bancshares, Inc. (“SCB”) and our acquisition of~~ ~~Fountain Equipment Finance, LLC (“Fountain”)~~ ~~may not be fully realized or may take longer than anticipated to be realized;~~

●

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

●

the ~~risk~~risks relating to the recently completed acquisitions including, without limitation: unexpected transaction costs, including the costs of ~~successful~~integrating operations; the risks that the businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; the potential failure to fully or timely realize expected revenues and revenue synergies, including as the result of ~~SCB’s and Fountain’s businesses with our business;~~

●

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

●

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

●

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

●

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;

●

risks related to our reliance on third parties to provide key components of our business infrastructure, including the risks related to disruptions in services or financial difficulties of third-party vendors;

●

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;

●

significant turbulence or a disruption in the capital or financial markets and the effect of a fall in stock market prices on our investment securities;

●

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 continued 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;

●

disruptions to the financial markets as a result of the current or anticipated impact of military conflict, including Russia’s military action in Ukraine, terrorism or other geopolitical events; and

●

risks associated with widespread inflation or deflation.

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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. 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.

42Economic Conditions

~~Table~~The economic conditions and growth prospects for our markets, even against the headwinds of ~~Contents~~

~~Certain captions~~inflation and ~~amounts~~recessionary concerns, continue to reflect a solid and positive overall outlook with economic activity close to pre-pandemic levels. Increasing interest rates and rising building costs have caused some slowing of the highly robust single family housing market, however, there continues to be a shortage of housing in several Tennessee markets. Worker shortages especially in the ~~prior periods~~restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers.

Critical Accounting Estimates

Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented ~~were reclassified to conform~~in Note 1 to the ~~current presentation. Such reclassifications had~~Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no ~~effect on net income or shareholders’ equity.~~significant changes in the Company’s application of critical accounting policies since December 31, 2021.

Executive Summary

The following is a summary of the Company’s financial highlights and significant events during the third quarter and first nine months of ~~2021:~~2022:

●

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

●

Announced and completed the ~~acquisition~~asset purchase of ~~SCB.~~

●

~~Announced and completed the acquisition of Fountain.~~

●

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

●

Net income totaled ~~$9.6~~$11.5 million, or ~~$0.61~~$0.68 per diluted common share, during the third quarter of ~~2021~~2022 compared to ~~$6.4~~$9.6 million, or ~~$0.42~~$0.61 per diluted common share, for the same period in ~~2020.~~2021.

●

Net income totaled ~~$28.1~~$30.0 million, or ~~$1.84~~$1.78 per diluted common share, during the first nine months of ~~2021~~2022 compared to ~~$15.3~~$28.1 million, or ~~$1.02~~$1.84 per diluted common share, for the same period in ~~2020.~~ 2021.

●

Annualized return on average assets for the three months ended September 30, 2022, and 2021 was 0.95% and ~~2020 was~~ 0.97% ~~and 0.76%~~, respectively.

●

Annualized return on average assets for the nine months ended September 30, 2022, and 2021 was 0.85% and ~~2020 was~~ 1.04% ~~and 0.68%~~, respectively.

●

Net organic loans and leases is strong year-to-date for 2022, with net loans and leases increasing $517.2 million from December 31, 2021.

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Selected Financial Information

The following is a summary of certain financial information for the three and nine month periods ended September 30, 2022 and 2021 and as of September 30, 2022 and December 31, 2021 (dollars in thousands, except per share data):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2022			2021				Change		2022			2021				Change
Income Statement:
Interest income	$	42,297		$	33,311		$	8,986		$	111,521		$	92,455		$	19,066
Interest expense		5,589			2,929			2,660			11,632			8,916			2,716
Net interest income		36,708			30,382			6,326			99,889			83,539			16,350
Provision for loan and lease losses		974			1,149			(175)			3,230			1,211			2,019
Net interest income after provision for loan and lease losses		35,734			29,233			6,501			96,659			82,328			14,331
Noninterest income		6,250			6,309			(59)			20,590			17,143			3,447
Noninterest expense		27,230			23,309			3,921			78,874			63,570			15,304
Income before income taxes		14,754			12,233			2,521			38,375			35,901			2,474
Income tax expense		3,211			2,633			578			8,357			7,767			590
Net income	$	11,543		$	9,600		$	1,943		$	30,018		$	28,134		$	1,884

Per Share Data:
Basic income per common share	$	0.69		$	0.62		$	0.07		$	1.79		$	1.85		$	(0.06)
Diluted income per common share	$	0.68		$	0.61		$	0.07		$	1.78		$	1.84		$	(0.06)

Performance Ratios:
Return on average assets		0.95	%		0.97	%		(0.02)	%		0.85	%		1.04	%		(0.18)	%
Return on average shareholders' equity		10.77	%		9.70	%		1.07	%		9.46	%		10.05	%		(0.59)	%


	September 30,		December 31,
	2022		2021			Change
Balance Sheet:
Loans and leases, net	$	3,076,347	$	2,674,045	$	402,302
Deposits		4,280,409		4,021,938		258,471

Analysis of Results of Operations

Third quarter of ~~2021~~2022 compared to ~~2020~~2021

Net income was $11.5 million, or $0.68 per diluted common share, for the third quarter of 2022, compared to $9.6 million, or $0.61 per diluted common share, for the third quarter of ~~2021,~~2021. For the three months ended September 30, 2022, when compared to ~~$6.4~~the comparable period in 2021, the increase in net income of $1.9 million ~~or $0.42 per diluted common share,~~was due to an increase in net interest income after provision for loan and lease losses of $6.5 million, offset by increases in noninterest expense of $3.9 million and income tax expense of $578 thousand. The tax equivalent net interest margin was 3.29% for the third quarter of ~~2020.~~2022, compared to 3.35% for the third quarter of 2021. Noninterest income to average assets was 0.52% for the third quarter of 2022, decreasing from 0.64% for the third quarter of 2021. Noninterest expense to average assets decreased to 2.25% in the third quarter of 2022, from 2.35% in the third quarter of 2021.

First nine months of 2022 compared to 2021

Net income totaled $30.0 million, or $1.78 per diluted share, for the first nine months ended 2022, compared to $28.1 million, or $1.84 per diluted share, for the first nine months of 2021. The increase in net income for this period was primarily from the increase of ~~$5.8~~$14.3 million in net interest income after provision for loan and lease losses and ~~$2.2~~$3.4 million in noninterest income, offset by increases of ~~$4.1~~$15.3 million in noninterest ~~expense and $665 thousand in income tax~~ expense. The tax equivalent net interest margin was 3.35% for the third quarter of 2021, compared to 3.39% for the third quarter of 2020. Noninterest income to average assets was 0.64% for the third quarter of 2021, increasing from 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,~~3.10% for the first nine months of ~~2021,~~2022 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~~2021. Noninterest income to ~~3.62%~~average assets was 0.59% for the first nine months of ~~2020. Noninterest income to average assets was~~2022, decreasing from 0.63% for the first nine months of ~~2021, increasing from 0.46% for the first nine months~~2021.

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Noninterest expense to average assets decreased to 2.24% in the first nine months of 2022, from 2.34% in the first nine months of ~~2021, from 2.52% in the first nine months of 2020.~~2021.

Net Interest Income and Yield Analysis

Third quarter of ~~2021~~2022 compared to ~~2020~~2021

Net interest income, taxable equivalent, increased to $36.9 million for the third quarter of 2022, up from $30.5 million for the third quarter of ~~2021, up from $26.2 million for the third quarter of 2020.~~2021. Net interest income was positively impacted ~~compared to the prior year, primarily~~ by the increase in ~~loan~~balances of loans and ~~lease balances, PPP and loan fees accretion~~leases, securities, and the ~~reduction~~increase in ~~interest expense~~yield/rate on ~~interest bearing liabilities.~~federal funds sold and other earning assets. Average interest-earning assets increased from ~~$3.08 billion for the third quarter of 2020, to~~ $3.61 billion for the third quarter of 2021, to $4.45 billion for the third quarter of 2022, primarily ~~because of~~from the Company’s continued organic loan and lease growth, ~~acquisition of Fountain completed on May 3, 2021,~~the acquisition of SCB, which was completed September 1, 2021, ~~participation in the PPP,~~ and the increase in our securities, this was partially offset by a decrease in our overall liquidity position. Over this period, average loan and lease balances increased by ~~$122.4~~$500.5 million, average securities increased $547.0 million, average interest-bearing deposits increased by $579.4 million and average noninterest-bearing deposits increased $315.0 million. Average federal funds sold and other interest earning assets decreased by $215.0 million and average borrowings decreased $67.0 million. The tax equivalent net interest margin decreased to 3.29% for the third quarter of 2022, compared to 3.35% for the third quarter of 2021. The yield on earning assets increased from 3.67% for the third quarter of 2021, to 3.79% for the third quarter of 2022, primarily due the deployment of excess cash and cash equivalents into loans and leases and the increase in rates by ~~$363.9 million,~~the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The cost of average interest-bearing deposits increased from 0.34% for the third quarter of 2021, to 0.62% for the third quarter of 2022, primarily due to the increase in rates by the Federal Reserve.

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by $562.7 million, average noninterest-bearing deposits increased $228.3 million and average borrowings decreased $239.1 million. The tax equivalent net interest margin decreased to 3.35% for the third quarter of 2021, compared to 3.39% for the third quarter of 2020. The yield on earning assets decreased from 3.88% for the third quarter of 2020, to 3.67% for the third quarter of 2021, primarily due to lower yielding excess liquidity. The cost of average interest-bearing deposits decreased from 0.59% for the third quarter of 2020, to 0.34% for the third quarter of 2021, primarily due to a lower interest rate environment during the period.

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


	Three Months Ended September 30,												Three Months Ended September 30,
	2021						2020						2022						2021
	Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate
Assets:
Loans and leases, including fees¹	$	2,532,604		31,623	4.95	%	$	2,410,173		28,508	4.71	%	$	3,037,092	$	35,127	4.59	%	$	2,536,591	$	31,674	4.95	%
Loans held for sale		3,987		51	5.09	%		8,048		113	5.57	%
Taxable securities		187,032		832	1.77	%		132,642		546	1.64	%		720,114		3,135	1.73	%		187,032		832	1.77	%
Tax-exempt securities²		87,621		477	2.16	%		88,129		515	2.32	%		101,559		732	2.86	%		87,621		477	2.16	%
Federal funds sold and other earning assets		802,712		474	0.23	%		438,785		327	0.30	%		587,755		3,474	2.34	%		802,712		474	0.23	%
Total interest-earning assets		3,613,956		33,457	3.67	%		3,077,777		30,009	3.88	%		4,446,520		42,468	3.79	%		3,613,956		33,457	3.67	%
Noninterest-earning assets		323,067						262,764						362,869						323,067
Total assets	$	3,937,023					$	3,340,541					$	4,809,389					$	3,937,023

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	763,613	$	414	0.21	%	$	509,999	$	199	0.16	%	$	966,437		1,956	0.80	%	$	763,613		414	0.21	%
Money market and savings deposits		1,233,533		854	0.27	%		833,022		704	0.34	%		1,632,510		2,298	0.56	%		1,233,533		854	0.27	%
Time deposits		524,327		885	0.67	%		615,714		1,994	1.29	%		501,919		612	0.48	%		524,327		885	0.67	%
Total interest-bearing deposits		2,521,473		2,153	0.34	%		1,958,735		2,897	0.59	%		3,100,866		4,866	0.62	%		2,521,473		2,153	0.34	%
Borrowings³		80,188		121	0.60	%		319,265		334	0.42	%
Borrowings														13,141		97	2.93	%		80,188		121	0.60	%
Subordinated debt		40,211		654	6.47	%		39,311		584	5.91	%		41,980		626	5.91	%		40,211		654	6.47	%
Total interest-bearing liabilities		2,641,872		2,928	0.44	%		2,317,311		3,815	0.65	%		3,155,987		5,589	0.70	%		2,641,872		2,928	0.44	%
Noninterest-bearing deposits		877,831						649,489						1,192,813						877,831
Other liabilities		24,522						25,834						35,224						24,522
Total liabilities		3,544,225						2,992,634						4,384,024						3,544,225
Shareholders' equity		392,798						347,907						425,365						392,798
Total liabilities and shareholders’ equity	$	3,937,023					$	3,340,541					$	4,809,389					$	3,937,023
Net interest income, taxable equivalent			$	30,529					$	26,194					$	36,879					$	30,529
Interest rate spread					3.23	%					3.22	%					3.09	%					3.23	%
Tax equivalent net interest margin					3.35	%					3.39	%					3.29	%					3.35	%

Percentage of average interest-earning assets to average interest-bearing liabilities					136.80	%					132.82	%					140.89	%					136.80	%
Percentage of average equity to average assets					9.98	%					10.41	%					8.84	%					9.98	%

¹Loans and leases include PPP loans with an average balance of ~~$128.4~~$22.0 million and ~~$295.0~~$128.4 million for the three months ended September 30, ~~2021,~~2022, and ~~2020,~~2021, respectively. Loan and lease fees included in loan and lease income was ~~$3.5~~$660 thousand million and ~~$2.7~~$3.5 million for the three months ended September 30, ~~2021,~~2022, and ~~2020,~~2021, respectively. Loan and lease fee income for the three months ended September 30, 2022, and 2021, includes $166 thousand and ~~2020, includes~~ $2.9 ~~million and $1.8~~ 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 $171 thousand for the three months ended September 30, 2022, and $146 thousand for the three months ended September 30, ~~2021 and $151 thousand for the three months ended September 30, 2020.~~2021.

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~~2022 compared to ~~2020~~2021

Net interest income, taxable equivalent, increased to $100.4 million for the first nine months of 2022, up from $84.0 million for the first nine months of ~~2021, up from $74.8 million for the first nine months of 2020.~~2021. Net interest income was positively impacted, compared to the prior year, primarily ~~due to increases~~by the increase in ~~loan~~balances of loans and ~~lease balances, PPP~~leases, securities and ~~loan fees accretion~~federal funds sold and ~~reduction in interest expense on interest-bearing liabilities.~~other earning assets. 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, to $4.33 billion for the first nine months of 2022, primarily ~~as a result~~because of the Company’s continued organic loan and lease growth, the acquisition of ~~PFG completed March 1, 2020, the acquisition of~~ Fountain, which was completed on May 3, 2021, the acquisition of SCB, which was completed September 1, 2021, ~~participation~~and the increase in our securities and overall liquidity position. Over this period, average loan and lease balances increased by $384.9 million, average securities increased $534.5 million, average federal funds sold and other interest earning assets increased by $78.4 million, average interest-bearing deposits increased by $728.2 million, average noninterest-bearing deposits increased $328.9 million and average borrowings decreased $43.2 million. The tax equivalent net interest margin decreased to 3.10% for the first nine months of 2022, compared to 3.37% for the first nine months of 2021. The yield on earning assets decreased from 3.73% for the first nine months of 2021, to 3.46% for the first nine months of 2022, primarily due to a reduction in PPP fees and loan discount accretion. The cost of average interest-bearing deposits increased from 0.39% for the first nine months of 2021 to 0.41% for the first nine months of 2022, primarily due to the increase in rates by the Federal Reserve.

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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
%


	Nine Months Ended September 30,
	2022						2021

	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
Assets:
Loans and leases, including fees¹	$	2,880,444	$	96,300	4.47	%	$	2,495,567	$	88,015	4.72	%
Taxable Securities		683,926		8,463	1.65	%		163,005		2,472	2.03	%
Tax-exempt securities²		102,872		1,873	2.43	%		89,244		1,339	2.01	%
Federal funds and other earning assets		663,400		5,389	1.09	%		584,970		1,074	0.25	%
Total interest-earning assets		4,330,642		112,025	3.46	%		3,332,786		92,900	3.73	%
Noninterest-earning assets		373,081						295,074
Total assets	$	4,703,723					$	3,627,860

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	952,523		3,137	0.44	%	$	698,148		974	0.19	%
Money market and savings deposits		1,572,287		4,282	0.36	%		1,112,342		2,580	0.31	%
Time deposits		531,419		1,965	0.49	%		517,566		3,179	0.82	%
Total interest-bearing deposits		3,056,229		9,384	0.41	%		2,328,056		6,733	0.39	%
Borrowings³		37,933		371	1.31	%		81,177		360	0.59	%
Subordinated debt		41,959		1,877	5.98	%		39,650		1,823	6.15	%
Total interest-bearing liabilities		3,136,121		11,632	0.50	%		2,448,883		8,916	0.49	%
Noninterest-bearing deposits		1,111,854						782,960
Other liabilities		31,412						21,553
Total liabilities		4,279,387						3,253,396
Shareholders' equity		424,336						374,464
Total liabilities and shareholders’ equity	$	4,703,723					$	3,627,860
Net interest income, taxable equivalent			$	100,393					$	83,984
Interest rate spread					2.96	%					3.24	%
Tax equivalent net interest margin					3.10	%					3.37	%

Percentage of average interest-earning assets to average interest-bearing liabilities					138.09	%					136.09	%
Percentage of average equity to average assets					9.02	%					10.32	%

¹Loans and leases include PPP loans with an average balance of ~~$235.0~~$36.6 million and ~~$169.6~~$235.0 million for the nine months ended September 30, ~~2021,~~2022 and ~~2020,~~2021, respectively. Loan and lease fees included in loan and lease income was ~~$9.0~~$3.6 million and ~~$6.3~~$9.0 million for the nine months ended September 30, ~~2021,~~2022 and ~~2020,~~2021, respectively. Loan lease fee income for the nine months ended September 30, 2022, and 2021, ~~and 2020,~~ includes ~~$7.4~~$1.9 million and ~~$3.7~~$7.4 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~~$504 thousand for the nine months ended September 30, ~~2021~~2022, and ~~$422~~$445 thousand ~~for the nine months ended September 30, 2020.~~

³~~Includes 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.

~~Table of Contents~~

Noninterest Income

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2021		2020			Change	2021		2020			Change	2022		2021			Change	2022		2021			Change
Service charges on deposit accounts	$	1,220	$	892	$	328	$	3,278	$	2,370	$	908	$	1,611	$	1,220	$	391	$	4,376	$	3,278	$	1,098
Gain (loss) on sale of securities		45		(9)		54		45		6		39
Gain on sale of securities														—		45		(45)		—		45		(45)
Mortgage banking		994		1,029		(35)		3,238		2,544		694		170		994		(824)		1,475		3,238		(1,763)
Investment services		448		359		89		1,546		1,159		387		1,051		448		603		3,186		1,546		1,640
Insurance commissions		745		560		185		2,768		1,302		1,466		864		745		119		2,363		2,768		(405)
Interchange and debit card transaction fees, net		1,078		868		210		2,839		1,652		1,187		1,356		1,078		278		4,107		2,839		1,268
Other		1,779		422		1,357		3,429		1,417		2,012		1,198		1,779		(581)		5,083		3,429		1,654
Total noninterest income	$	6,309	$	4,121	$	2,188	$	17,143	$	10,450	$	6,693	$	6,250	$	6,309	$	(59)	$	20,590	$	17,143	$	3,447

Table of Contents

Third quarter of ~~2021~~2022 compared to ~~2020~~2021

Noninterest income ~~increased~~decreased by ~~$2.2 million,~~$59 thousand, or ~~53.1%~~0.9%, during the third quarter of ~~2021~~2022 compared to the same period in ~~2020.~~2021. 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~~Decrease in mortgage banking, related to increased ~~activity;~~secondary market interest rates driving lower volume;

●

Increase in investment services, related to the addition of a new wealth management team hired during the fourth quarter of 2021;

●

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

●

~~Increase~~Decrease in other, primarily related to decreased fees from new fee income from the acquisition of 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.~~activity.

First nine months of ~~2021~~2022 compared to ~~2020~~2021

Noninterest income increased by ~~$6.7~~$3.4 million, or ~~64.0%~~20.1%, during the first nine months of ~~2021~~2022 compared to the same period in ~~2020.~~2021. This change in total noninterest income primarily resulted from the following:

●

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

●

~~Increase~~Decrease in mortgage banking, ~~from~~related to increased ~~volume due to low rate environment;~~secondary market interest rates driving lower volume;

●

Increase in investment services, ~~stemming from increased production;~~related to the addition of a new wealth management team hired during the fourth quarter of 2021;

●

~~Increase~~Decrease in insurance commissions, primarily from ~~a full nine months of insurance~~ commissions ~~in 2021 and~~on placement of life insurance policies during the first quarter of 2021;

●

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

●

Increase in other, primarily from ~~new fee income from the acquisition of Fountain, cash surrender value of bank owned life insurance 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.~~2021 and new fee income from the acquisition of Fountain.

~~Table of Contents~~

Noninterest Expense

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2021		2020			Change	2021		2020			Change	2022		2021			Change	2022		2021			Change
Salaries and employee benefits	$	13,594	$	11,032	$	2,562	$	36,666	$	31,395	$	5,271	$	16,317	$	13,594	$	2,723	$	47,036	$	36,666	$	10,370
Occupancy and equipment		2,536		2,186		350		7,170		6,093		1,077		3,167		2,536		631		9,020		7,170		1,850
FDIC insurance		525		534		(9)		1,266		894		372		705		525		180		2,022		1,266		756
Other real estate and loan related expense		407		643		(236)		1,514		1,535		(21)		565		407		158		1,930		1,514		416
Advertising and marketing		235		253		(18)		654		653		1		288		235		53		985		654		331
Data processing and technology		1,753		1,131		622		4,642		3,293		1,349		1,872		1,753		119		5,185		4,642		543
Professional services		810		594		216		2,300		2,172		128		822		810		12		2,809		2,300		509
Amortization of intangibles		711		402		309		1,597		1,169		428		650		711		(61)		1,919		1,597		322
Merger related and restructuring expenses		464		290		174		939		3,863		(2,924)		87		464		(377)		607		939		(332)
Other		2,274		2,102		172		6,822		5,699		1,123		2,757		2,274		483		7,361		6,822		539
Total noninterest expense	$	23,309	$	19,167	$	4,142	$	63,570	$	56,766	$	6,804	$	27,230	$	23,309	$	3,921	$	78,874	$	63,570	$	15,304

Table of Contents

Third quarter of ~~2021~~2022 compared to ~~2020~~2021

Noninterest expense increased by ~~$4.1~~$3.9 million, or ~~21.6%~~16.8%, in the third quarter of ~~2021~~2022 as compared to the same period in ~~2020.~~2021. The quarterly increase in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits, related to ~~the Fountain acquisition completed May 3, 2021, SCB acquisition completed September 1, 2021, and~~ overall franchise growth from talent hired in Auburn, Dothan, Montgomery and Birmingham, Alabama and Tallahassee, ~~Florida;~~Florida in 2021;

●

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

●

Increase in ~~data processing~~other, primarily related training and ~~technology, primarily from continued infrastructure build~~education initiatives and overall ~~growth.~~growth of franchise.

First nine months of ~~2021~~2022 compared to ~~2020~~2021

Noninterest expense increased by ~~$6.8~~$15.3 million, or ~~12.0%~~24.1%, in the first nine months of ~~2021~~2022 as compared to the same period in ~~2020.~~2021. The change in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits, related to the ~~PFG acquisition,~~ Fountain acquisition completed May 3, ~~2021, SCB acquisition completed September 1,~~ 2021, and overall franchise growth from talent hired in Auburn, Dothan, Montgomery and Birmingham, Alabama and Tallahassee, ~~Florida;~~Florida in 2021;

●

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

●

Increase in FDIC insurance, related to ~~continued~~ asset ~~growth;~~growth stemming from our acquisition of SCB, deposit growth and production of originated loan and leases;

●

Increase in other real estate and loan related expenses, related to the production of originated loans and leases;

●

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

●

Increase in professional services, due to increased volume of professional services; and

●

~~Other increased,~~Increase in other, primarily ~~from an investment in a start-up fintech company~~related training and ~~other expenses related to continued franchise growth.~~education initiatives and overall growth of franchise.

Taxes

~~Table of Contents~~

~~Taxes~~

Third quarter of ~~2021~~2022 compared to ~~2020~~2021

In the third quarter of ~~2021~~2022 income tax expense totaled ~~$2.6~~$3.2 million compared to ~~$2.0~~$2.6 million in the ~~third~~second quarter of ~~2020.~~2021. The effective tax rate was approximately ~~22.0%~~21.8% in the second quarter of 2022 compared to 22.0% third quarter of 2021 compared to 23.5% third quarter of 2020. The lower effective tax rate for the third quarter of 2021 compared to same quarter in 2020 was due to a proportional higher amount of non-taxable income in relation to income taxes.2021.

First nine months of ~~2021~~2022 compared to ~~2020~~2021

In the first nine months of ~~2021~~2022 income tax expense totaled ~~$7.8~~$8.4 million compared to ~~$4.1~~$7.8 million in the first nine months of ~~2020.~~2021. The effective tax rate was approximately ~~21.6%~~21.8% for first nine months of ~~2021~~2022 compared to ~~21.0% a year ago. The higher effective tax rate~~21.6% for the first nine months of ~~2021 compared to same period~~2021.

The Inflation Reduction Act (“IRA”) was signed into law in ~~2020 was due to 2020 having~~August 2022, with most provisions effective beginning in the 2023 tax year, including an alternative corporate minimum tax if certain thresholds are met, a ~~proportionately higher amount~~non-deductible excise tax on share repurchase, and transferability of ~~non-taxable income in relation to income before taxes and, as part~~certain federal tax credits. We do not expect the provisions of the ~~CARES Act legislation,~~IRA to have a ~~tax benefit realized from~~material impact on our consolidated financial statements in the ~~recognition of net operating loss carryforwards from past acquisitions.~~near future.

Loan and Lease Portfolio

The Company had total net loans and leases outstanding, including organic and acquired loans and leases, of approximately ~~$2.63~~$3.08 billion at September 30, ~~2021~~2022, compared to ~~$2.36~~$2.67 billion at December 31, ~~2020.~~2021. Loans secured by real estate, consisting of commercial and residential property, are the principal component of our loan and lease portfolio.

Table of Contents

Organic Loans and Leases

Our organic net loans and leases, which excludes loans and leases purchased through acquisitions, increased by ~~$132.2~~$517.2 million, or ~~6.7%~~23.3%, from December 31, ~~2020,~~2021, to ~~$2.11~~$2.74 billion at September 30, 2021. Included in the growth was $138.4 million of PPP loans that were originated and funded during the first nine months of 2021 and offset by $341.5 million in forgiven PPP loans originated in 2020 and 2021. Total net deferred fees associated with the PPP loans originated during the first nine months of 2021 was approximately $7.0 million with $3.2 million accreted into income.2022.

Acquired Loans and Leases

~~Purchased~~Net purchased non-credit impaired loans and leases of ~~$476.5~~$304.6 million at September 30, ~~2021 increased~~2022 decreased by ~~$125.8~~$103.9 million from December 31, ~~2020.~~2021. Since December 31, ~~2020,~~2021, our net purchased credit impaired (“PCI”) loans and leases, ~~net increased~~decreased by ~~$11.4~~$10.9 million to ~~$43.2~~$30.2 million at September 30, ~~2021.~~2022. The ~~increase~~decrease 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.

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


	September 30, 2021										September 30, 2022
			Purchased		Purchased				% of				Purchased		Purchased				% of
			Non-Credit		Credit		Total		Gross				Non-Credit		Credit		Total		Gross
	Organic		Impaired		Impaired		Amount		Total		Organic		Impaired		Impaired		Amount		Total
Commercial real estate-mortgage	$	1,038,286	$	251,805	$	23,156	$	1,313,247	49.5	%	$	1,356,822	$	164,081	$	16,148	$	1,537,051	49.6	%
Consumer real estate-mortgage		339,503		127,795		10,863		478,161	18.0	%		463,773		89,940		8,695		562,408	18.1	%
Construction and land development		303,540		19,930		2,904		326,374	12.3	%		392,955		10,495		1,557		405,007	13.1	%
Commercial and industrial		426,168		40,700		2,871		469,739	17.7	%		489,347		22,410		2,523		514,280	16.6	%
Leases		11,625		38,023		3,748		53,396	2.0	%		44,069		19,257		1,472		64,798	2.1	%
Consumer and other		9,980		1,679		87		11,746	0.4	%		15,092		474		6		15,572	0.5	%
Total gross loans and leases receivable, net of deferred fees		2,129,102		479,932		43,629		2,652,663	100.0	%		2,762,058		306,657		30,401		3,099,116	100.0	%
Allowance for loan and leases losses		(15,443)	$	(3,425)		(427)		(19,295)				(20,583)	$	(2,019)		(167)		(22,769)
Total loans and leases, net	$	2,113,659	$	476,507	$	43,202	$	2,633,368			$	2,741,475	$	304,638	$	30,234	$	3,076,347


	December 31, 2021
			Purchased		Purchased				% of
			Non-Credit		Credit		Total		Gross
	Organic		Impaired		Impaired		Amount		Total
Commercial real estate-mortgage	$	1,157,702	$	205,579	$	20,875	$	1,384,156	51.4	%
Consumer real estate-mortgage		346,322		119,117		11,833		477,272	17.7	%
Construction and land development		258,196		17,308		2,882		278,386	10.3	%
Commercial and industrial		449,909		35,599		2,516		488,024	18.1	%
Leases		18,067		32,471		3,170		53,708	2.0	%
Consumer and other		10,536		1,244		71		11,851	0.4	%
Total gross loans and leases receivable, net of deferred fees		2,240,732		411,318		41,347		2,693,397	100.0	%
Allowance for loan and lease losses		(16,441)		(2,732)		(179)		(19,352)
Total loans and leases, net	$	2,224,291	$	408,586	$	41,168	$	2,674,045

4854

Table of Contents

December 31, 2020

Purchased

Purchased

% of

Non-Credit

Credit

Total

Gross


Organic

Impaired

Impaired

Amount

Total

Commercial real estate-mortgage

$
807,913

$
188,940

$
16,123

$
1,012,976

42.5
%
Consumer real estate-mortgage

313,582

120,090

10,258

443,930

18.6
%
Construction and land development

259,622

13,105

5,348

278,075

11.7
%
Commercial and industrial

607,212

26,926

308

634,446

26.6
%
Leases

—

—

—

—

—
%
Consumer and other

9,250

3,539

27

12,816

0.5
%
Total gross loans and leases receivable, net of deferred fees

1,997,579

352,600

32,064

2,382,243

100.0
%
Allowance for loan and lease losses

(16,154)

(1,883)

(309)

(18,346)



Total loans and leases, net

$
1,981,425

$
350,717

$
31,755

$
2,363,897

Loan and Lease Portfolio Maturities

The following table sets forth the maturity distribution of our loans and leases at September 30, ~~2021,~~2022, including the interest rate sensitivity for loans and leases maturing after one year (in thousands):


									Rate Structure for Loans and Leases														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			Five through	Over Fifteen				Fixed		Floating
	or Less		Five Years		Years		Total		Rate		Rate		or Less		Five Years			Fifteen Years	Years		Total		Rate		Rate
Commercial real estate-mortgage	$	112,664	$	487,065	$	713,518	$	1,313,247	$	833,575	$	367,008	$	92,689	$	683,726	$	744,300	$	16,336	$	1,537,051	$	930,384	$	513,978
Consumer real estate-mortgage		32,951		171,718		273,492		478,161		214,867		230,343		38,039		206,697		201,698		115,974		562,408		255,741		268,628
Construction and land development		73,654		153,507		99,213		326,374		120,573		132,147		126,582		178,407		75,525		24,493		405,007		165,462		112,963
Commercial and industrial		103,351		267,296		99,092		469,739		303,865		62,523		109,257		292,161		105,306		7,556		514,280		325,480		79,543
Leases		2,248		51,148		—		53,396		51,148		—		2,516		62,282		—		—		64,798		62,282		—
Consumer and other		4,656		6,481		609		11,746		6,921		169		7,985		7,081		453		53		15,572		6,890		697
Total loans and leases	$	329,524	$	1,137,215	$	1,185,924	$	2,652,663	$	1,530,949	$	792,190	$	377,068	$	1,430,354	$	1,127,282	$	164,412	$	3,099,116	$	1,746,239	$	975,809

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 ~~0.13%~~0.11% as of September 30, ~~2021,~~2022, and ~~0.24% as of~~0.12% December 31, ~~2020,~~2021, respectively. Total nonperforming assets as a percentage of total assets was 0.10% as of September 30, ~~2021, totaled 0.14% compared to 0.31%~~2022, and 0.11% as of December 31, ~~2020.~~2021, respectively. 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.

The following table ~~summarizes the Company’s nonperforming assets~~is a summary of our loans and leases that were past due at least 30 days but less than 89 days and 90 days or more past due for the periods presented (dollars in thousands):

September 30,

December 31,

2021

2020
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

2,415

4,619
Other repossessed property

77

—
Total nonperforming assets

$
6,059

$
10,401
Restructured loans not included above

$
212

$
257

~~COVID-19 Loan Modifications~~

As a result of the CARES Act, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. At September 30, 2021, the Company had no loans remaining under COVID-19 modifications.


			Accruing Loans				Accruing Loans
			30-89 Days				90 Days or More				Total Accruing
			Past Due				Past Due				Past Due Loans
					Percentage of				Percentage of				Percentage of
		Total			Loans in				Loans in				Loans in
		Loans		Amount	Category			Amount	Category			Amount	Category
September 30, 2022
Commercial real estate	$	1,537,051	$	103	0.01	%	$	-	-	%	$	103	0.01	%
Consumer real estate		562,408		403	0.07			-	-			403	0.07
Construction and land development		405,007		-	-			-	-			-	-
Commercial and industrial		514,280		154	0.03			-	-			154	0.03
Leases		64,798		143	0.22			20	0.03			163	0.25
Consumer and other		15,572		202	1.30			-	-			202	1.30
Total	$	3,099,116	$	1,005	0.03		$	20	0.00		$	1,025	0.03

December 31, 2021
Commercial real estate	$	1,384,156	$	172	0.01	%	$	-	-	%	$	172	0.01	%
Consumer real estate		477,272		894	0.19			-	-			894	0.19
Construction and land development		278,386		91	0.03			-	-			91	0.03
Commercial and industrial		488,024		1,310	0.27			45	0.01			1,355	0.28
Leases		53,708		361	0.67			-	-			361	0.67
Consumer and other		11,851		103	0.87			19	0.16			122	1.03
Total	$	2,693,397	$	2,931	0.11		$	64	-		$	2,995	0.11

4955

Table of Contents

The following table is a summary of our nonaccrual loans and leases for the periods presented (dollars in thousands):


	September 30, 2022						December 31, 2021
			Nonaccrual Loans						Nonaccrual Loans
					Percentage of						Percentage of
		Total			Loans in			Total			Loans in
		Loans		Amount	Category			Loans		Amount	Category
Commercial real estate	$	1,537,051	$	305	0.02	%	$	1,384,156	$	858	0.06	%
Consumer real estate		562,408		2,061	0.37			477,272		2,139	0.45
Construction and land development		405,007		858	0.21			278,386		-	-
Commercial and industrial		514,280		117	0.02			488,024		116	0.02
Leases		64,798		29	0.04			53,708		-	-
Consumer and other		15,572		9	0.06			11,851		11	0.09
Total	$	3,099,116	$	3,379	0.11		$	2,693,397	$	3,124	0.12

Allowance for loans and leases to nonaccrual loans				673.84%						619.46%

Allocation of the Allowance for Loan and Lease Losses

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the nine months ended September 30, ~~2021,~~2022, is ~~$1.2~~$3.2 million compared to ~~$8.7~~$1.2 million in the same period of ~~2020, a decrease~~2021, an increase of ~~$7.5~~$2.0 million. ~~The allowance for loan and lease loss provision for the nine months ended September 30, 2020, increased due to the onset of the COVID-19 pandemic and related economic uncertainty.~~ As of September 30, ~~2021~~2022, and December 31, ~~2020,~~2021, our allowance for loan and lease losses was ~~$19.3~~$22.8 million and ~~$18.3~~$19.4 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 0.73% at September 30, ~~2021~~2022 and ~~0.77%~~0.72% at December 31, ~~2020.~~2021, respectively.

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 and leases. A provision for loan and lease losses is recorded for any deterioration in these loans and leases subsequent to the acquisition. As of September 30, ~~2021,~~2022, the ~~notional balances~~outstanding principal balance on PCI ~~loans~~loan and leases was ~~$56.6~~$44.5 million ~~while~~and the carrying value was ~~$43.6 million.~~$30.2 million, for a net difference of $14.1 million in discounts. At September 30, ~~2021,~~2022, there was an allowance on PCI loans and leases of ~~$427~~$167 thousand.

The following table sets forth, based on ~~our~~management's best estimate, the allocation of the allowance for credit losses on loans and leases to ~~types~~categories of loans and leases ~~for the periods presented,~~and loan and lease balances by category and the percentage of loans and leases in each category to total loans and leases and allowance for credit losses as a percentage of total loans and leases within each loan and lease category for each period presented (dollars in thousands):


			Percentage of Loans					Ratio of Allowance
	Amount of		in Each Category			Total		Allocated to Loans in
	Allowance Allocated		to Total Loans			Loans		Each Category
September 30, 2022
Commercial real estate	$	10,579		49.6	%	$	1,537,051		0.69	%
Consumer real estate		4,008		18.1			562,408		0.71
Construction and land development		3,176		13.1			405,007		0.78
Commercial and industrial		3,835		16.6			514,280		0.75
Leases		1,034		2.1			64,798		1.60
Consumer and other		137		0.5			15,572		0.88
Total	$	22,769		100.0	%	$	3,099,116		0.73

December 31, 2021
Commercial real estate	$	9,781		51.4	%	$	1,384,156		0.71	%
Consumer real estate		3,454		17.7			477,272		0.72
Construction and land development		1,882		10.3			278,386		0.68
Commercial and industrial		3,781		18.1			488,024		0.77
Leases		330		2.0			53,708		0.61
Consumer and other		124		0.4			11,851		1.05
Total	$	19,352		100.0	%	$	2,693,397		0.72

September 30, 2021

December 31, 2020


Amount

Percent

Amount

Percent

Commercial real estate-mortgage

$
9,405

49.5
%
$
7,579

42.5
%
Consumer real estate-mortgage

3,541

18.0
%

3,471

18.6
%
Construction and land development

2,218

12.3
%

2,076

11.7
%
Commercial and industrial

3,801

17.7
%

5,107

26.6
%
Leases

225

2.0
%

—

—
%
Consumer and other

105

0.4
%

113

0.5
%
Total allowance for loan and lease losses

$
19,295

100.0
%
$
18,346

100.0
%

Table of Contents

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 loan and lease. For impaired loans and leases, those loans and leases are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired, non PCI loans and leases were approximately ~~$586~~$395 thousand at September 30, ~~2021,~~2022, compared to ~~$237~~$561 thousand at December 31, ~~2020.~~2021.

~~Table of Contents~~

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~~ (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,


2021

2020

2021

2020
Balance at beginning of period

$
18,310

$
16,254

$
18,346

$
10,243
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

—

(21)

(60)

(23)
Construction and land development

—

—

—

—
Commercial and industrial

(41)

(60)

(45)

(77)
Leases

(68)

—

(68)

—
Consumer and other

(132)

(89)

(341)

(231)
Total charged-off loans and leases

(241)

(170)

(514)

(331)
Recoveries of previously charged-off loans and leases:








Commercial real estate-mortgage

23

11

29

16
Consumer real estate-mortgage

13

17

34

34
Construction and land development

—

—

—

2
Commercial and industrial

3

55

13

103
Leases

5

—

5

—
Consumer and other

33

16

171

67
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

$
19,295

$
18,817

$
19,295

$
18,817
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
%

—


							Ratio of Net (charge-offs)
	Provision for		Net (charge-offs)		Average		Recoveries to
	Credit Losses		Recoveries		Loans		Average Loans
Three Months Ended September 30, 2022
Commercial real estate	$	(21)	$	-	$	1,531,028		-	%
Consumer real estate		166		7		546,286		-
Construction and land development		272		-		383,488		-
Commercial and industrial		208		(32)		497,378		(0.01)
Leases		198		29		63,831		0.05
Consumer and other		151		(147)		15,081		(0.97)
Total	$	974	$	(143)	$	3,037,092		-


Three Months Ended September 30, 2021
Commercial real estate	$	1,000		23	$	1,143,094		-	%
Consumer real estate		205		13		448,983		-
Construction and land development		157		-		300,308		-
Commercial and industrial		(603)		(38)		605,105		(0.01)
Leases		288		(63)		27,149		(0.23)
Consumer and other		102		(99)		11,952		(0.83)
Total	$	1,149	$	(164)	$	2,536,591		(0.01)


Nine Months Ended September 30, 2022
Commercial real estate	$	794	$	4	$	1,471,905		-	%
Consumer real estate		26		528		504,007		0.10
Construction and land development		1,294		-		350,872		-
Commercial and industrial		132		(78)		479,392		(0.02)
Leases		620		84		60,836		0.14
Consumer and other		364		(351)		13,432		(2.61)
Total	$	3,230	$	187	$	2,880,444		0.01


Nine Months Ended September 30, 2021
Commercial real estate	$	1,797		29	$	1,163,262		-	%
Consumer real estate		96		(26)		444,553		(0.01)
Construction and land development		142		-		299,494		-
Commercial and industrial		(1,274)		(32)		541,834		(0.01)
Leases		288		(63)		34,912		-
Consumer and other		162		(170)		11,512		(1.48)
Total	$	1,211	$	(262)	$	2,495,567		(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 $339.3 million and $215.6 million at September 30, 2021 and December 31, 2020, respectively. Our investments to assets ratio increased from 6.5% at December 31, 2020 to 7.7% at 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)~~:

September 30,

December 31,

2021

2020
U.S. Treasury

$
93,910

$
—
U.S. Government-sponsored enterprises (GSEs)

54,175

30,526
Municipal securities

93,422

89,644
Other debt securities

25,996

25,019
Mortgage-backed securities

68,837

66,425
Total securities

$
336,340

$
211,614

5157

Table of Contents

Securities Portfolio

Our available-for-sale securities portfolio is carried at fair market value and our held-to-maturity securities portfolio is carried at amortized cost, and consists primarily of Federal agency bonds, mortgage-backed securities, state and municipal securities and other debt securities. Our securities portfolio increased from $559.4 million at December 31, 2021, to $806.8 million at September 30, 2022, primarily as a result of strategically deploying a portion of the Bank’s cash position. New purchases were focused on U.S. Treasuries to provide cash flow and liquidity. Our securities to asset ratio has increased from 12.1% at December 31, 2021, to 16.8% at September 30, 2022. Over the past nine months the bank has increased its securities portfolio to strategically invest its excess liquidity.

The following table presents the contractual maturity of the Company’s securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at September 30, ~~2021.~~2022 (dollars in thousands). The composition and maturity/repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity ~~needs~~ ~~(dollars in thousands):~~needs.


	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					Weighted				Weighted				Weighted				Weighted				Weighted
																		Average				Average				Average				Average				Average
Available-for-sale:																	Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾
U.S. Treasury	$	59,999		$	—		$	33,911		$	—		$	93,910		$	—	-	%	$	198,158	1.31	%	$	43,860	1.29	%	$	—	-	%	$	242,018	1.31	%
U.S. Government agencies		—			—			25,590			28,585			54,175			—	-			1,650	3.42			—	-			—	-			1,650	3.42
State and political subdivisions		1,261			2,830			6,677			82,654			93,422			270	3.80			1,828	3.09			7,038	2.60			46,286	4.09			55,422	3.87
Other debt securities		—			987			24,509			500			25,996			—	-			990	2.95			29,477	4.59			500	4.50			30,967	4.54
Mortgage-backed securities		—			2,653			11,173			55,011			68,837			173	1.24			11,149	2.02			78,389	1.68			151,820	2.17			241,531	2.00
Total securities	$	61,260		$	6,470		$	101,860		$	166,750		$	336,340		$	443	2.80		$	213,775	1.39		$	158,764	2.15		$	198,606	2.62		$	571,588	2.03
Weighted average yield⁽¹⁾		0.08	%		1.56	%		2.25	%		2.51	%		1.97	%

Held-to-maturity:
U.S. Treasury																$	—	-	%	$	150,353	1.47	%	$	—	-	%	$	—	-	%	$	150,353	1.47	%
U.S. Government agencies																	—	-			—	-			34,013	1.83			16,825	1.92			50,838	1.86
State and political subdivisions																	—	-			—	-			4,298	2.20			49,637	2.13			53,935	2.14
Other debt securities																	—	-			—	-			—	-			—	-			—	-
Mortgage-backed securities																	—	-			—	-			4,893	2.14			27,085	2.12			31,978	2.12
Total securities																$	—	-		$	150,353	1.47		$	43,204	1.90		$	93,547	2.09		$	287,104	1.74

~~(1)~~

~~Based on amortized cost, taxable equivalent basis~~

⁽¹⁾Based on amortized cost, taxable equivalent basis

Deposits

Deposits are the primary source of funds for the Company’s lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company’s primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of September 30, ~~2021,~~2022, brokered deposits represented approximately ~~1.4%~~0.98% of total deposits.

The following tables summarize the average balances outstanding and average interest rates for each major category of deposits for the three and nine month periods ending September 30, 2022 and 2021, respectively (dollars in thousands):


	Three Months Ended						Three Months Ended
	September 30, 2022						September 30, 2021
	Average		% of		Average		Average		% of		Average
	Balance		Total		Rate		Balance		Total		Rate
Noninterest-bearing demand	$	1,192,813	27.8	%	—	%	$	877,831	25.8	%	—	%
Interest-bearing demand		966,437	22.5	%	0.80	%		763,613	22.5	%	0.21	%
Money market and savings		1,632,510	38.0	%	0.56	%		1,233,533	36.3	%	0.27	%
Time deposits		501,919	11.7	%	0.48	%		524,327	15.4	%	0.67	%
Total average deposits	$	4,293,679	100.0	%	0.45	%	$	3,399,304	100.0	%	0.25	%

Table of Contents


	Nine Months Ended						Nine Months Ended
	September 30, 2022						September 30, 2021
	Average		% of		Average		Average		% of		Average
	Balance		Total		Rate		Balance		Total		Rate
Noninterest-bearing demand	$	1,111,854	26.7	%	—	%	$	782,960	25.2	%	—	%
Interest-bearing demand		952,523	22.9	%	0.44	%		698,148	22.4	%	0.19	%
Money market and savings		1,572,287	37.7	%	0.36	%		1,112,342	35.8	%	0.31	%
Time deposits		531,419	12.7	%	0.49	%		517,566	16.6	%	0.82	%
Total average deposits	$	4,168,083	100.0	%	0.30	%	$	3,111,016	100.0	%	0.29	%

The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three months ended September 30, 2022, and 2021, was 0.62% and ~~2020, was~~ 0.34% ~~and 0.59%~~, respectively. The ~~decrease~~increase cost was primarily ~~due~~attributable to ~~maturing and repricing of time deposits, which decreased~~the increases in rates by ~~62 basis points.~~the Federal Reserve. The average cost of interest-bearing deposits for the nine months ended September 30, 2022, and 2021, was 0.41% and ~~2020, was~~ 0.39% ~~and 0.79%~~, respectively. The ~~decreased~~increase cost ~~of interest-bearing deposits~~ was ~~due~~primarily attributable to the ~~maturing and changes~~increases in rates ~~caused~~ by ~~federal rate-changes during~~ the ~~periods.~~Federal Reserve.

Total deposits as of September 30, ~~2021,~~2022, were ~~$3.80~~$4.28 billion, which was an increase of ~~$994.1~~$258.5 million from December 31, ~~2020.~~2021. This increase was primarily from organic deposit ~~growth and the acquisition of SCB.~~growth. As of September 30, ~~2021,~~2022, the Company had outstanding time deposits under $250,000 with balances of ~~$432.8~~$329.8 million and time deposits over $250,000 with balances of ~~$152.9~~$138.2 million.

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


	September 30,		September 30,
	2021		2022
Three months or less	$	39,165	$	41,538
Three to six months		30,888		32,254
Six to twelve months		42,425		44,249
More than twelve months		40,427		20,120
Total	$	152,905	$	138,161

~~Table of Contents~~

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 ~~$88.7~~$18.4 million at September 30, ~~2021,~~2022, and consisted of ~~$75.0 million in FHLB borrowing and~~ short-term borrowings ~~totaled $13.7~~of $12.5 million, and ~~consisted of $7.5 million with ServisFirst Bank and $6.3~~$5.9 million of securities sold under repurchase agreements. Long-term debt totaled ~~$41.9~~$42.0 million at September 30, ~~2021,~~2022, and ~~$39.3~~$41.9 million at December 31, ~~2020,~~2021, and consisted entirely of subordinated debt. For more information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 – Borrowings, ~~and~~ Line of Credit and Subordinated Debt."

Capital Resources

The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Bank’s Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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.”

Table of Contents

Liquidity and Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. At September 30, ~~2021,~~2022, we had ~~$616.3~~$885.9 million of pre-approved but unused lines of credit and ~~$10.4~~$16.1 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. For more information regarding our off-balance sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements - Note 9 – Commitments and Contingent Liabilities.”

Market Risk and Liquidity Risk Management

The Bank’s Asset Liability Management Committee (“ALCO”) ~~is responsible~~, oversees market risk management and establishes risk measures, limits on policy guidelines for ~~making decisions regarding liquidity and funding solutions based upon approved liquidity, loan and lease, capital and investment policies. The ALCO must consider~~managing the amount of interest rate ~~sensitivity~~risk and ~~liquidity~~its effect on net interest income and capital. A variety of measures are used to provide for a comprehensive overview of the Company’s magnitude of interest rate risk, ~~management when rendering a decision on funding solutions~~the distribution of risk, the level of risk over time and ~~loan and lease pricing. To assist~~the exposure to changes in ~~this process the Bank has contracted with~~certain interest rate relationships. We utilize an independent third party earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12-24 months. The model measures the impact on net interest income relative to ~~prepare quarterly reports that summarize several key asset-liability measurements.~~a flat-rate case scenario of hypothetical fluctuations in interest rates over the next 12-24 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered. In addition, third parties will join the ~~third party will also~~meetings of ALCO to provide ~~recommendations to the Bank’s ALCO~~feedback regarding future balance sheet structure, earnings and liquidity strategies. ~~Two critical areas~~ALCO continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. The objective is to manage the impact of ~~focus for ALCO are~~fluctuating market rates on net interest ~~rate sensitivity and liquidity risk management.~~income within acceptable levels. In order to meet this objective, management may lengthen or shorten the duration of assets or liabilities.

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

~~Table of Contents~~

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~~static interest rate forecast over the next 12 ~~and 24~~ months, limits in the decline in net interest income are as follows:

Maximum Percentage Decline

in Net Interest

Income from the Budgeted

Estimated % Change in Net

or Base Case

Interest Income Over 12

Projection of Net Interest

Months

Income
September 30, 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

7.57%

(0.69)%

8%
± 200 basis points

15.37%

(1.40)%

14%


		Estimated % Change in Net Interest Income Over 12 Months
September 30, 2022:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase		1.10%
200 basis points increase		2.15%
100 basis points decrease		(1.61)%

~~At September 30, 2021, our model results indicated that we were within our policy limits, except for the increase~~60

Table of ~~plus 200 basis points, due to excess cash on the balance sheet.~~Contents

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

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

Maximum

Percentage

Decline in

Economic Value

of Equity from

the Economic

Value of Equity

Current Estimated Instantaneous

at Currently

Rate Change

Prevailing
September 30, 2021:

Increase +

Decrease -

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




±100 basis points

5.36%

(8.98)%

10%
±200 basis points

10.79%

(10.69)%

15%


		Current Estimated Instantaneous Rate Change
September 30, 2022:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase		0.90%
200 basis points increase		0.71%
100 basis points decrease		(2.49)%

~~At September 30, 2021, our model results indicated that we were within 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~~securities 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.

The Company has ~~$61.3 million~~$443 thousand in ~~investments~~securities that mature throughout the next 12 months. The Company also anticipates ~~$11.2~~$31.2 million of principal payments from mortgage-backed securities over the same period. The Company also has unused borrowing capacity in the amount of ~~$263.8~~$548.5 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~~The information presented in the Market Risk and Liquidity Risk Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report is ~~not required for a Smaller Reporting Company.~~incorporated herein by reference.

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 June 30, ~~2021~~2022 (the “Evaluation Date”). Based on such evaluation, SmartFinancial’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, SmartFinancial’s disclosure controls and procedures were effective to ensure that information required to be disclosed by SmartFinancial in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to SmartFinancial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding the required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended September 30, ~~2021~~2022, 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.~~2021. 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.~~2021.

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~~had authorized a stock repurchase plan pursuant to which the Company may purchase up to $10.0 million in shares of the Company’s outstanding common stock. Stock repurchases under the plan will be made from time to time in the open market, at the discretion of the management of the Company, and in accordance with applicable legal requirements. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, amended, suspended, or discontinued at any time. As of September 30, ~~2021,~~2022, 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 September 30, ~~2021.~~2022.


					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)
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
July 1, 2022 to July 31, 2022							—	$	—	—	$	4,484
August 1, 2022 to August 31, 2022							—		—	—		4,484
September 1, 2022 to September 30, 2022							—		—	—		4,484
Total	—	$	—	—	$	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	Asset Purchase Agreement, dated as of September 1, 2022, by Sunbelt Group, LLC, A. Mark Slater., and ~~Plan of Merger, dated April 13, 2021, by and between SmartFinancial, Inc. and Sevier County Bancshares,~~Rains Agency 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~~September 6, 2022
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~~101)	Filed herewith

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

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SIGNATURES

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


		SmartFinancial, Inc.

Date:	November 9, ~~2021~~2022	/s/ William Y. Carroll, Jr.
		William Y. Carroll, Jr.
		President and Chief Executive Officer
		(principal executive officer)

Date:	November 9, ~~2021~~2022	/s/ Ronald J. Gorczynski
		Ronald J. Gorczynski
		Executive Vice President and Chief Financial Officer
		(principal financial officer and accounting officer)

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	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


			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)


			Maximum Percentage Decline
			in Net Interest
			Income from the Budgeted
	Estimated % Change in Net		or Base Case
	Interest Income Over 12		Projection of Net Interest
	Months		Income
September 30, 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	7.57%	(0.69)%	8%
± 200 basis points	15.37%	(1.40)%	14%


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

Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
±100 basis points	5.36%	(8.98)%	10%
±200 basis points	10.79%	(10.69)%	15%