SmartFinancial (SMBK) 10-Q 2024 Q3 Quarterly report

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United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2024

☐ 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 New York Stock Exchange

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 05, 2024, there were 16,926,374 shares of common stock, $1.00 par value per share, issued and outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at September 30, 2024 and December 31, 2023	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2024 and 2023	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023	7
	Condensed Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56
PART II – OTHER INFORMATION		57
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	58

2

PART I –FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share data)

	(Unaudited)
	September 30,		December 31,
	2024		2023*
ASSETS:
Cash and due from banks	$	65,109	$	61,586
Interest-bearing deposits with banks		125,298		233,237
Federal funds sold		2,507		57,448
Total cash and cash equivalents		192,914		352,271
Securities available-for-sale, at fair value		501,336		408,410
Securities held-to-maturity, at amortized cost		127,779		281,236
Other investments		20,352		13,662
Loans held for sale		5,804		4,418
Loans and leases		3,717,478		3,444,462
Less: Allowance for credit losses		(35,609)		(35,066)
Loans and leases, net		3,681,869		3,409,396
Premises and equipment, net		91,055		92,963
Other real estate owned		179		517
Goodwill and other intangibles, net		105,324		107,148
Bank owned life insurance		105,025		83,434
Other assets		77,297		75,932
Total assets	$	4,908,934	$	4,829,387
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	863,949	$	898,044
Interest-bearing demand		834,207		1,006,915
Money market and savings		1,854,777		1,812,427
Time deposits		769,558		550,468
Total deposits		4,322,491		4,267,854
Borrowings		8,997		13,078
Subordinated debt		39,663		42,099
Other liabilities		48,760		46,470
Total liabilities		4,419,911		4,369,501
Commitments and contingent liabilities - see Note 8		—		—
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding		—		—
Common stock, $1 par value; 40,000,000 shares authorized; 16,926,374 and 16,988,879 shares issued and outstanding, respectively		16,926		16,989
Additional paid-in capital		293,909		295,699
Retained earnings		195,537		173,105
Accumulated other comprehensive income (loss)		(17,349)		(25,907)
Total shareholders' equity		489,023		459,886
Total liabilities and shareholders' equity	$	4,908,934	$	4,829,387

* Derived from audited financial statements.

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

3

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,
	2024		2023		2024		2023
Interest income:
Loans and leases, including fees	$	54,738	$	47,539	$	155,611	$	137,712
Securities:
Taxable		5,233		4,335		15,101		12,322
Tax-exempt		350		356		1,056		1,066
Federal funds sold and other earning assets		3,635		3,045		13,255		9,448
Total interest income		63,956		55,275		185,023		160,548
Interest expense:
Deposits		27,350		23,433		81,824		59,333
Borrowings		709		210		985		775
Subordinated debt		865		626		2,647		1,877
Total interest expense		28,924		24,269		85,456		61,985
Net interest income		35,032		31,006		99,567		98,563
Provision for credit losses		2,575		795		3,018		1,458
Net interest income after provision for credit losses		32,457		30,211		96,549		97,105
Noninterest income:
Service charges on deposit accounts		1,780		1,736		5,084		4,838
Loss on sale of securities		—		(6,801)		—		(6,801)
Mortgage banking		410		309		1,038		813
Investment services		1,881		1,461		4,563		3,766
Insurance commissions		1,477		1,153		3,865		3,551
Interchange and debit card transaction fees, net		1,349		1,357		3,945		4,087
Other		2,242		1,476		6,627		4,492
Total noninterest income		9,139		691		25,122		14,746
Noninterest expense:
Salaries and employee benefits		18,448		16,785		52,348		49,474
Occupancy and equipment		3,423		3,547		10,144		10,073
FDIC insurance		825		825		2,565		2,241
Other real estate and loan related expense		460		603		1,582		1,616
Advertising and marketing		327		346		924		1,006
Data processing and technology		2,519		2,378		7,435		6,777
Professional services		1,201		735		3,190		2,307
Amortization of intangibles		604		647		1,824		1,981
Merger related and restructuring expenses		—		110		—		110
Other		3,039		2,540		8,587		7,870
Total noninterest expense		30,846		28,516		88,599		83,455
Income before income tax expense		10,750		2,386		33,072		28,396
Income tax expense		1,610		319		6,572		5,993
Net income	$	9,140	$	2,067	$	26,500	$	22,403
Earnings per common share:
Basic	$	0.55	$	0.12	$	1.58	$	1.33
Diluted	$	0.54	$	0.12	$	1.57	$	1.33
Weighted average common shares outstanding:
Basic		16,726,658		16,807,548		16,782,200		16,801,840
Diluted		16,839,998		16,918,635		16,874,316		16,907,325

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

4

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Net income	$	9,140	$	2,067	$	26,500	$	22,403
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on securities available-for-sale		12,193		(5,830)		11,084		(5,178)
Tax effect		(3,150)		1,505		(2,863)		1,337
Amortization of unrealized gains (losses) on investment securities transferred from available-for-sale to held-to-maturity		33		37		101		115
Tax effect		(8)		(10)		(26)		(30)
Reclassification adjustment for realized losses (gains) included in net income		—		6,801		—		6,801
Tax effect		—		(1,757)		—		(1,757)
Unrealized gains (losses) on securities available-for-sale, net of tax		9,068		746		8,296		1,288
Fair value hedging activities:
Unrealized gains (losses) on fair value municipal security hedges		(928)		—		(30)		—
Tax effect		239		—		8		—
Reclassification adjustment for realized losses (gains) included in net income		(142)		—		(391)		—
Tax effect		38		—		102		—
Unrealized gains (losses) on fair value hedged instruments arising during the period, net of tax		(793)		—		(311)		—
Cash flow hedging activities:
Unrealized gains (losses) on cash flow hedges		258		139		886		(273)
Tax effect		(68)		(36)		(229)		71
Reclassification adjustment for realized losses (gains) included in net income		(24)		16		(114)		110
Tax effect		8		(4)		30		(28)
Unrealized gains (losses) on cash flow hedge instruments arising during the period, net of tax		174		115		573		(120)
Total other comprehensive income		8,449		861		8,558		1,168
Comprehensive income	$	17,589	$	2,928	$	35,058	$	23,571

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

5

SMARTFINANCIAL, INC. AND SUBSIDIARY

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

For the Three and Nine Months Ended September 30, 2024 and 2023

(Dollars in thousands, except for share data)

								Accumulated
								Other
	Common Stock			Additional		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Earnings		Income (Loss)		Total
Balance, December 31, 2022	16,900,805	$	16,901	$	294,330	$	156,545	$	(35,324)	$	432,452
Cumulative effect adjustment for adoption of ASU 2016-13, net of tax	—		—		—		(6,606)		—		(6,606)
Balance, January 1, 2023, adjusted	16,900,805		16,901		294,330		149,939		(35,324)		425,846
Net income	—		—		—		22,403		—		22,403
Other comprehensive income	—		—		—		—		1,168		1,168
Common stock issued pursuant to:
Stock options exercised	15,705		16		149		—		—		165
Restricted stock, net of forfeitures	79,670		80		(80)		—		—		—
Restricted stock withheld for taxes	(1,637)		(2)		(33)		—		—		(35)
Stock compensation expense	—		—		1,176		—		—		1,176
Common stock dividend ($0.24 per share)	—		—		—		(4,071)		—		(4,071)
Balance, September 30, 2023	16,994,543	$	16,995	$	295,542	$	168,271	$	(34,156)	$	446,652
Balance, December 31, 2023	16,988,879	$	16,989	$	295,699	$	173,105	$	(25,907)	$	459,886
Net income	—		—		—		26,500		—		26,500
Other comprehensive income	—		—		—		—		8,558		8,558
Common stock issued pursuant to:
Stock options exercised	6,192		6		62		—		—		68
Restricted stock, net of forfeitures	78,757		79		(79)		—		—		—
Restricted stock withheld for taxes	(11,259)		(12)		(208)		—		—		(220)
Stock compensation expense	—		—		1,266		—		—		1,266
Common stock dividend ($0.24 per share)	—		—		—		(4,068)		—		(4,068)
Repurchases of common stock	(136,195)		(136)		(2,831)		—		—		(2,967)
Balance, September 30, 2024	16,926,374	$	16,926	$	293,909	$	195,537	$	(17,349)	$	489,023
Balance, June 30, 2023	17,004,092	$	17,004	$	295,296	$	167,564	$	(35,017)	$	444,847
Net income	—		—		—		2,067		—		2,067
Other comprehensive income	—		—		—		—		861		861
Common stock issued pursuant to:
Restricted stock, net of forfeitures	(7,912)		(7)		7		—		—		—
Restricted stock withheld for taxes	(1,637)		(2)		(33)		—		—		(35)
Stock compensation expense	—		—		272		—		—		272
Common stock dividend ($0.08 per share)	—		—		—		(1,360)		—		(1,360)
Balance, September 30, 2023	16,994,543	$	16,995	$	295,542	$	168,271	$	(34,156)	$	446,652
Balance, June 30, 2024	16,925,902	$	16,926	$	293,586	$	187,751	$	(25,798)	$	472,465
Net income	—		—		—		9,140		—		9,140
Other comprehensive income	—		—		—		—		8,449		8,449
Common stock issued pursuant to:
Stock options exercised	1,692		2		24		—		—		26
Restricted stock, net of forfeitures	4,000		4		(4)		—		—		—
Restricted stock withheld for taxes	(5,220)		(6)		(69)		—		—		(75)
Stock compensation expense	—		—		372		—		—		372
Common stock dividends ($0.08 per share)	—		—		—		(1,354)		—		(1,354)
Balance, September 30, 2024	16,926,374	$	16,926	$	293,909	$	195,537	$	(17,349)	$	489,023

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

6

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2024		2023
Cash flows from operating activities:
Net income	$	26,500	$	22,403
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,900		8,372
Amortization of intangible assets		1,824		1,981
Provision for credit losses		3,018		1,458
Stock compensation expense		1,266		1,176
Loss on sale of securities available-for-sale		—		6,801
Deferred income tax expense		628		1,801
Increase in cash surrender value of bank-owned life insurance		(1,591)		(1,445)
Net losses from sale and write-downs of other real estate owned and other repossessed assets		569		12
Net gains from mortgage banking		(950)		(813)
Origination of loans held for sale		(41,010)		(28,585)
Proceeds from sales of loans held for sale		40,574		28,416
Net (gain) loss from sale/disposal of fixed assets		(1,647)		56
Net change in:
Accrued interest receivable		(198)		(919)
Accrued interest payable		250		1,458
Other assets		3,361		(11,885)
Other liabilities		(3,478)		(2,278)
Net cash provided by operating activities		36,016		28,009
Cash flows from investing activities:
Available-for-sale:
Proceeds from sales		—		152,775
Proceeds from maturities, calls and paydowns		36,816		32,404
Purchases		(119,935)		(94,424)
Held-to-maturity:
Proceeds from maturities, calls and paydowns		151,881		1,986
Proceeds from sales of other investments		348		2,669
Purchases of other investments		(7,407)		(944)
Purchases of bank-owned life insurance		(20,000)		—
Net increase in loans and leases		(279,709)		(148,006)
Proceeds from sale of fixed assets		4,698		633
Purchases of premises and equipment		(5,072)		(4,016)
Proceeds from sale of other real estate owned and other repossessed assets		2,083		326
Net cash used in investing activities		(236,297)		(56,597)
Cash flows from financing activities:
Net increase in deposits		54,693		169,521
Net (decrease) increase in securities sold under agreements to repurchase		(1,082)		1,342
Proceeds from borrowings		155,000		26,000
Repayment of borrowings		(160,500)		(30,500)
Cash dividends paid		(4,068)		(4,071)
Issuance of common stock		68		165
Restricted shares withheld for taxes		(220)		(35)
Repurchases of common stock		(2,967)		—
Net cash provided by financing activities		40,924		162,422
Net change in cash and cash equivalents		(159,357)		133,834
Cash and cash equivalents, beginning of period		352,271		266,424
Cash and cash equivalents, end of period	$	192,914	$	400,258
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	85,207	$	60,437
Net cash paid during the period for income taxes		6,724		9,406
Noncash investing and financing activities:
Recognition of operating lease assets in exchange for lease liabilities		2,959		1,751
Acquisition of real estate through foreclosure		179		272
Acquisition of other repossessed assets		3,896		—
Financed sales of other repossessed assets		618		—

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

7

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

SmartFinancial, Inc. (the “Company,” “SmartFinancial,” “we,” “our” or “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 Florida. 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 credit losses, the valuation of foreclosed assets and deferred taxes, 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 following unaudited condensed financial statement notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.  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, 2023.

Recently Issued and Adopted Accounting Pronouncements:

In June 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to 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.  ASU 2022-03 did not have an impact on the Company’s Consolidated Financial Statements.

In March 2023, the FASB issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” ASU 2023-01 requires entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. ASU 2023-01 also provides certain practical expedients applicable to private companies and not-for-profit organizations. The guidance is effective for fiscal years beginning after December 15, 2023. ASU 2023-01 did not have an impact on the Company’s Consolidated Financial Statements.

In March 2023, the FASB issued ASU No. 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” ASU 2023-02 is intended to improve the accounting and disclosures for investments in tax credit structures. ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the

8

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. The guidance is effective for fiscal years beginning after December 15, 2023. ASU 2023-02 did not have an 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, 2023, as filed in its Annual Report on Form 10-K with the 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 November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.  The Company is assessing ASU 2023-07, and its adoption is not expected to have a significant impact on our Consolidated Financial Statements.

In December 2023, FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in certain categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. The guidance is effective for us for fiscal years beginning after December 15, 2024, though early adoption is permitted. The Company is assessing ASU 2023-09, and its adoption is not expected to have a significant impact on our Consolidated Financial Statements.

In March 2024, the SEC adopted the final rule under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This rule will require registrants to disclose certain climate-related information in registration statements and annual reports. Subsequent to adoption, a number of businesses and business groups filed petitions seeking a judicial review of the final rule, asserting that the SEC does not have the authority to promulgate it. In April 2024, the SEC issued an order staying its final rule pending completion of the judicial review of certain petitions consolidated in the U.S. Court of Appeals for the Eighth Circuit. The Company will continue to monitor the outcome of this judicial review.

Note 2. 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

presented below. There were no antidilutive shares for the three and nine months ended September 30, 2024, and September 30, 2023, 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
	September 30,				September 30,
	2024		2023		2024		2023
Basic earnings per share computation:
Net income available to common shareholders	$	9,140	$	2,067	$	26,500	$	22,403
Average common shares outstanding – basic		16,726,658		16,807,548		16,782,200		16,801,840
Basic earnings per share	$	0.55	$	0.12	$	1.58	$	1.33
Diluted earnings per share computation:
Net income available to common shareholders	$	9,140	$	2,067	$	26,500	$	22,403
Average common shares outstanding – basic		16,726,658		16,807,548		16,782,200		16,801,840
Incremental shares from assumed conversions:
Stock options and restricted stock		113,340		111,087		92,116		105,485
Average common shares outstanding - diluted		16,839,998		16,918,635		16,874,316		16,907,325
Diluted earnings per common share	$	0.54	$	0.12	$	1.57	$	1.33

Note 3. Securities

Available-for-sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell, but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in accumulated other comprehensive income (loss). Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the estimated life of the security. Prepayments are anticipated for mortgage-backed and Small Business Administration (“SBA”) securities. Premiums on callable securities are amortized to their earliest call date.

Held-to-maturity securities (“HTM”), which include any security for which the Company has both the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the security’s estimated life. Prepayments are anticipated for mortgage-backed and SBA securities. Premiums on callable securities are amortized to their earliest call date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The amortized cost, gross unrealized gains and losses and fair value of securities AFS and HTM are summarized as follows (in thousands):

	September 30, 2024
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	83,576	$	—	$	(5,665)	$	77,911
U.S. Government-sponsored enterprises (GSEs)		41,964		710		(108)		42,566
Municipal securities		18,319		78		(300)		18,097
Other debt securities		42,254		243		(2,265)		40,232
Mortgage-backed securities (GSEs)		337,205		2,886		(17,561)		322,530
Total	$	523,318	$	3,917	$	(25,899)	$	501,336

	September 30, 2024
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Government-sponsored enterprises (GSEs)	$	48,423	$	—	$	(5,643)	$	42,780
Municipal securities		51,913		—		(5,779)		46,134
Mortgage-backed securities (GSEs)		27,443		—		(3,090)		24,353
Total	$	127,779	$	—	$	(14,512)	$	113,267

	December 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	84,307	$	—	$	(8,274)	$	76,033
U.S. Government-sponsored enterprises (GSEs)		46,983		1,256		(146)		48,093
Municipal securities		18,616		135		(475)		18,276
Other debt securities		36,863		93		(3,887)		33,069
Mortgage-backed securities (GSEs)		254,288		588		(21,937)		232,939
Total	$	441,057	$	2,072	$	(34,719)	$	408,410

	December 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	150,066	$	—	$	(1,482)	$	148,584
U.S. Government-sponsored enterprises (GSEs)		49,336		—		(7,143)		42,193
Municipal securities		52,680		—		(6,178)		46,502
Mortgage-backed securities (GSEs)		29,154		—		(3,895)		25,259
Total	$	281,236	$	—	$	(18,698)	$	262,538

At September 30, 2024 and December 31, 2023, securities with a carrying value totaling approximately $452.5 million and $358.3 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

For the three and nine months ended September 30, 2024, there were no gross gains or gross losses related to the sale of investment securities.  For the three and nine months ended September 30, 2023, the Company recorded gross losses of $6.8 million related to the sale of securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The amortized cost and estimated fair value of securities at September 30, 2024, 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, 2024
	Amortized		Fair
Available-for-sale:	Cost		Value
Due in one year or less	$	1,478	$	1,451
Due from one year to five years		94,342		88,500
Due from five years to ten years		81,054		79,751
Due after ten years		9,239		9,104
		186,113		178,806
Mortgage-backed securities		337,205		322,530
Total	$	523,318	$	501,336
Held-to-maturity:
Due in one year or less	$	—	$	—
Due from one year to five years		736		706
Due from five years to ten years		50,443		44,997
Due after ten years		49,157		43,211
		100,336		88,914
Mortgage-backed securities		27,443		24,353
Total	$	127,779	$	113,267

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

	September 30, 2024
	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	$	—	$	—	—	$	77,911	$	(5,665)	9	$	77,911	$	(5,665)	9
U.S. Government-sponsored enterprises (GSEs)		5,494		(9)	2		5,217		(99)	4		10,711		(108)	6
Municipal securities		546		(2)	1		11,582		(298)	17		12,128		(300)	18
Other debt securities		5,340		(36)	3		28,687		(2,229)	25		34,027		(2,265)	28
Mortgage-backed securities (GSEs)		44,736		(1,185)	20		171,441		(16,376)	83		216,177		(17,561)	103
Total	$	56,116	$	(1,232)	26	$	294,838	$	(24,667)	138	$	350,954	$	(25,899)	164
	September 30, 2024
	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)	$	—	$	—	—	$	42,780	$	(5,643)	13	$	42,780	$	(5,643)	13
Municipal securities		—		—	—		46,134		(5,779)	35		46,134		(5,779)	35
Mortgage-backed securities (GSEs)		—		—	—		24,353		(3,090)	5		24,353		(3,090)	5
Total	$	—	$	—	—	$	113,267	$	(14,512)	53	$	113,267	$	(14,512)	53

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

		December 31, 2023
		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		$	—	$	—	—	$	76,033	$	(8,274)	9	$	76,033	$	(8,274)	9
U.S. Government-sponsored enterprises (GSEs)			9,743		(137)	3		1,482		(9)	3		11,225		(146)	6
Municipal securities			2,786		(2)	2		9,849		(473)	17		12,635		(475)	19
Other debt securities			2,986		(17)	2		29,057		(3,870)	26		32,043		(3,887)	28
Mortgage-backed securities (GSEs)			16,401		(229)	8		176,351		(21,708)	88		192,752		(21,937)	96
Total		$	31,916	$	(385)	15	$	292,772	$	(34,334)	143	$	324,688	$	(34,719)	158
	��	December 31, 2023
		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		$	—	$	—	—	$	148,584	$	(1,482)	4	$	148,584	$	(1,482)	4
U.S. Government-sponsored enterprises (GSEs)			—		—	—		42,194		(7,143)	13		42,194		(7,143)	13
Municipal securities			—		—	—		46,500		(6,178)	35		46,500		(6,178)	35
Mortgage-backed securities (GSEs)			—		—	—		25,258		(3,895)	5		25,258		(3,895)	5
Total		$	—	$	—	—	$	262,536	$	(18,698)	57	$	262,536	$	(18,698)	57

For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether it intends to sell the security, or more likely than not will be required to sell the security before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because the Company currently does not intend to sell those available-for-sale securities that have an unrealized loss at September 30, 2024, and it is not likely that they we will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company has determined that no write-down is necessary. In addition, the Company evaluates whether any portion of the decline in fair value of available-for-sale securities is the result of credit deterioration, which would require the recognition of an allowance for credit losses.  The unrealized losses associated with available-for-sale securities at September 30, 2024, are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at September 30, 2024.  Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.

The unrealized losses in the Company’s held-to-maturity portfolio were caused by changes in the interest rate environment.  The Company has a zero-loss expectation for its U.S. Treasury securities in addition to U.S. Government-sponsored enterprises (GSEs) and mortgage-backed securities (GSEs), and accordingly, no allowance for credit losses is estimated for these securities.  The held-to-maturity state and municipal securities are general obligation bonds, which have a very low historical default rate due to issuers generally having unlimited taxing authority to service the debt.  All debt securities in an unrealized loss position as of September 30, 2024, continue to perform as scheduled and we do not believe an allowance for credit losses is necessary.

The Company utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity.  At September 30, 2024, all debt securities classified as held-to-maturity were rated AA- or higher by the ratings agencies.  Updated credit ratings are obtained as they become available from the ratings agencies.

Allowance for Credit Losses (“ACL”)

There were no past due or nonaccrual AFS or HTM securities at September 30, 2024, or December 31, 2023.  Accrued interest receivable is excluded from the estimate of credit losses and based on the analysis of the underlying risk

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

characteristics of its AFS and HTM portfolios, including credit ratings and other qualitative factors, there was no provision for credit losses related to AFS or HTM securities recorded during the three or nine months ended September 30, 2024, and 2023, respectively, because the ACL was deemed immaterial.  

Other Investments:

Our other 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, 2024, the Company determined that there was no impairment on its other investment securities.

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

	September 30,		December 31,
	2024		2023
Federal Reserve Bank stock	$	9,184	$	9,526
Federal Home Loan Bank stock		10,818		3,786
First National Bankers Bank stock		350		350
Total	$	20,352	$	13,662

Note 4. Loans and Leases and Allowance for Credit Losses

Portfolio Segmentation:

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

	September 30,		December 31,
	2024		2023
Commercial real estate	$	1,899,785	$	1,739,205
Consumer real estate		690,504		649,867
Construction and land development		315,006		327,185
Commercial and industrial		731,600		645,918
Leases		67,052		68,752
Consumer and other		13,531		13,535
Total loans and leases		3,717,478		3,444,462
Less: Allowance for credit losses		(35,609)		(35,066)
Loans and leases, net	$	3,681,869	$	3,409,396

The loan and lease portfolio is disaggregated into segments. There are six loan and lease portfolio segments which include commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, and consumer and other.

The following describe risk characteristics relevant to each of the portfolio segments:

Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 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 secured by a secured interest in the equipment being leased.

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.

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

	Three Months Ended September 30, 2024
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	15,630	$	7,543	$	3,496	$	7,234	$	670	$	117	$	34,690
Charged-off loans and leases		—		—		—		(430)		(924)		(72)		(1,426)
Recoveries of charge-offs		1		—		—		40		8		23		72
Provision charged to expense (1)		(57)		(14)		222		785		1,291		46		2,273
Ending balance	$	15,574	$	7,529	$	3,718	$	7,629	$	1,045	$	114	$	35,609

	Three Months Ended September 30, 2023
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	14,314	$	6,748	$	5,446	$	5,504	$	586	$	149	$	32,747
Charged-off loans and leases		—		(9)		—		(179)		(143)		(86)		(417)
Recoveries of charge-offs		2		4		—		48		—		19		73
Provision charged to expense (2)		691		413		(369)		307		201		41		1,284
Ending balance	$	15,007	$	7,156	$	5,077	$	5,680	$	644	$	123	$	33,687

	Nine Months Ended September 30, 2024
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	15,264	$	7,249	$	4,874	$	6,924	$	640	$	115	$	35,066
Charged-off loans and leases		—		—		(441)		(853)		(1,246)		(263)		(2,803)
Recoveries of charge-offs		34		4		—		136		8		73		255
Provision charged to expense (1)		276		276		(715)		1,422		1,643		189		3,091
Ending balance	$	15,574	$	7,529	$	3,718	$	7,629	$	1,045	$	114	$	35,609

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Nine Months Ended September 30, 2023
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	10,821	$	4,028	$	3,059	$	3,997	$	1,293	$	136	$	23,334
Impact of adopting ASU 2016-13		879		1,952		2,145		1,451		(683)		13		5,757
Purchased credit-deteriorated gross up		2,652		166		25		27		28		—		2,898
Charged-off loans and leases		—		(9)		—		(387)		(211)		(332)		(939)
Recoveries of charge-offs		5		13		25		153		—		187		383
Provision charged to expense (2)		650		1,006		(177)		439		217		119		2,254
Ending balance	$	15,007	$	7,156	$	5,077	$	5,680	$	644	$	123	$	33,687

(1) In the provision expense in the consolidated statements of income there was a provision of $302 thousand and a release of $73 thousand unfunded commitments through the provision for credit losses not reflected in the three and nine months ended September 30, 2024.

(2) In the provision expense in the consolidated statements of income was a release of $489 thousand and $796 thousand of unfunded commitments through the provision for credit losses not reflected in the three and nine months ended September 30, 2023.

We maintain the allowance for credit losses at a level that we deem appropriate to adequately cover the expected credit loss in the loan and lease portfolio. Our provision for credit losses on loan and lease for the three and nine months ended September 30, 2024, is $2.3 million and $3.1 million, respectively, and $1.3 million and $2.3 million, during the three and nine months ended September 30, 2023, respectively.  As of September 30, 2024, and December 31, 2023, our allowance for credit losses was $35.6 million and $35.1 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans and leases was 0.96% at September 30, 2024, and 1.02% at December 31, 2023.  

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

16

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 credit 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 credit loss methodology on an ongoing basis.  

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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 based on year of origination as of September 30, 2024, and December 31, 2023 (in thousands):

	September 30, 2024
	Loans Amortized Cost Basis by Origination Year
															Revolving
															Loans
													Revolving		Converted
	2024		2023		2022		2021		2020		Prior		Loans		to Term		Total
Commercial real estate
Pass	$	236,517	$	264,292	$	599,952	$	392,605	$	158,693	$	200,108	$	14,092	$	899	$	1,867,158
Watch		-		7,293		5,192		1,883		2,600		6,911		557		-		24,436
Special mention		-		-		3,153		-		-		-		-		-		3,153
Substandard		485		342		-		3,317		303		591		-		-		5,038
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate		237,002		271,927		608,297		397,805		161,596		207,610		14,649		899		1,899,785
YTD gross charge-offs		-		-		-		-		-		-		-		-		-
Consumer real estate
Pass		85,179		112,549		159,602		85,817		49,505		68,295		122,522		1,463		684,932
Watch		-		82		-		250		110		105		1,157		-		1,704
Special mention		-		-		-		-		-		51		-		-		51
Substandard		189		-		-		176		-		3,225		227		-		3,817
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer real estate		85,368		112,631		159,602		86,243		49,615		71,676		123,906		1,463		690,504
YTD gross charge-offs		-		-		-		-		-		-		-		-		-
Construction and land development
Pass		150,971		79,728		48,854		6,443		2,222		9,956		8,618		983		307,775
Watch		2,170		956		106		3,231		-		-		-		-		6,463
Special mention		558		-		-		-		-		-		-		-		558
Substandard		-		-		-		72		-		138		-		-		210
Doubtful		-		-		-		-		-		-		-		-		-
Total construction and land development		153,699		80,684		48,960		9,746		2,222		10,094		8,618		983		315,006
YTD gross charge-offs		-		-		-		-		(441)		-		-		-		(441)
Commercial and industrial
Pass		97,216		135,390		146,669		47,162		18,926		28,823		246,985		3,091		724,262
Watch		109		125		127		4,209		13		-		1,600		92		6,275
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		159		455		200		129		76		20		24		1,063
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial		97,325		135,674		147,251		51,571		19,068		28,899		248,605		3,207		731,600
YTD gross charge-offs		-		(618)		(235)		-		-		-		-		-		(853)
Leases
Pass		21,003		20,591		18,741		4,841		1,420		456		-		-		67,052
Watch		-		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total leases		21,003		20,591		18,741		4,841		1,420		456		-		-		67,052
YTD gross charge-offs		(29)		(602)		(585)		(1)		(1)		(28)		-		-		(1,246)
Consumer and other
Pass		3,966		2,585		1,121		470		282		243		4,853		-		13,520
Watch		5		-		-		-		-		-		-		-		5
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		2		-		-		4		-		-		6
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer and other		3,971		2,585		1,123		470		282		247		4,853		-		13,531
YTD gross charge-offs		(5)		(72)		(54)		(30)		(45)		(57)		-		-		(263)
Total loans
Pass		594,852		615,135		974,939		537,338		231,048		307,881		397,070		6,436		3,664,699
Watch		2,284		8,456		5,425		9,573		2,723		7,016		3,314		92		38,883
Special mention		558		-		3,153		-		-		51		-		-		3,762
Substandard		674		501		457		3,765		432		4,034		247		24		10,134
Doubtful		-		-		-		-		-		-		-		-		-
Total loans	$	598,368	$	624,092	$	983,974	$	550,676	$	234,203	$	318,982	$	400,631	$	6,552	$	3,717,478
Total YTD gross charge-offs	$	(34)	$	(1,292)	$	(874)	$	(31)	$	(487)	$	(85)	$	-	$	-	$	(2,803)

18

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	December 31, 2023
	Loans Amortized Cost Basis by Origination Year
															Revolving
															Loans
													Revolving		Converted
	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial real estate
Pass	$	237,110	$	578,227	$	433,505	$	181,374	$	134,495	$	106,315	$	15,132	$	6,690	$	1,692,848
Watch		22,295		1,267		1,950		921		4,426		2,926		-		3,500		37,285
Special mention		-		3,215		-		-		-		-		-		-		3,215
Substandard		903		-		3,932		310		282		430		-		-		5,857
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate		260,308		582,709		439,387		182,605		139,203		109,671		15,132		10,190		1,739,205
YTD gross charge-offs		-		-		-		-		-		-		-		-		-
Consumer real estate
Pass		123,203		174,755		98,460		53,688		33,598		48,378		107,949		3,026		643,057
Watch		171		-		258		116		-		55		1,581		-		2,181
Special mention		-		-		-		-		-		53		-		-		53
Substandard		196		824		176		253		164		2,850		113		-		4,576
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer real estate		123,570		175,579		98,894		54,057		33,762		51,336		109,643		3,026		649,867
YTD gross charge-offs		-		-		-		-		-		(9)		-		-		(9)
Construction and land development
Pass		113,752		115,032		23,823		2,749		5,056		6,595		40,667		7,489		315,163
Watch		6,670		3,233		607		-		-		1		-		-		10,511
Special mention		437		-		-		-		-		-		-		-		437
Substandard		-		-		35		620		-		419		-		-		1,074
Doubtful		-		-		-		-		-		-		-		-		-
Total construction and land development		120,859		118,265		24,465		3,369		5,056		7,015		40,667		7,489		327,185
YTD gross charge-offs		-		-		-		-		-		-		-		-		-
Commercial and industrial
Pass		168,957		162,799		62,796		22,639		9,135		25,207		185,619		7,270		644,422
Watch		54		15		13		-		-		-		120		83		285
Special mention		-		-		-		-		-		-		-		-		-
Substandard		193		614		200		129		75		-		-		-		1,211
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial		169,204		163,428		63,009		22,768		9,210		25,207		185,739		7,353		645,918
YTD gross charge-offs		(75)		(274)		(50)		(183)		-		-		(2)		-		(584)
Leases
Pass		28,922		26,658		8,658		3,603		703		208		-		-		68,752
Watch		-		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total leases		28,922		26,658		8,658		3,603		703		208		-		-		68,752
YTD gross charge-offs		(122)		(193)		(18)		-		(12)		-		-		-		(345)
Consumer and other
Pass		5,926		2,049		841		373		132		206		3,931		67		13,525
Watch		-		-		-		-		10		-		-		-		10
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer and other		5,926		2,049		841		373		142		206		3,931		67		13,535
YTD gross charge-offs		(40)		(135)		(74)		(54)		(33)		(89)		-		-		(425)
Total loans
Pass		677,870		1,059,520		628,083		264,426		183,119		186,909		353,298		24,542		3,377,767
Watch		29,190		4,515		2,828		1,037		4,436		2,982		1,701		3,583		50,272
Special mention		437		3,215		-		-		-		53		-		-		3,705
Substandard		1,292		1,438		4,343		1,312		521		3,699		113		-		12,718
Doubtful		-		-		-		-		-		-		-		-		-
Total loans	$	708,789	$	1,068,688	$	635,254	$	266,775	$	188,076	$	193,643	$	355,112	$	28,125	$	3,444,462
Total YTD gross charge-offs	$	(237)	$	(602)	$	(142)	$	(237)	$	(45)	$	(98)	$	(2)	$	-	$	(1,363)

19

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.

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

	September 30, 2024
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	1,909	$	37	$	802	$	2,748	$	1,897,037	$	1,899,785
Consumer real estate		596		709		387		1,692		688,812		690,504
Construction and land development		—		—		41		41		314,965		315,006
Commercial and industrial		454		—		1,653		2,107		729,493		731,600
Leases		1,814		812		1,601		4,227		62,825		67,052
Consumer and other		85		18		16		119		13,412		13,531
Total	$	4,858	$	1,576	$	4,500	$	10,934	$	3,706,544	$	3,717,478

	December 31, 2023
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	52	$	270	$	1,660	$	1,982	$	1,737,223		1,739,205
Consumer real estate		2,216		1,347		561		4,124		645,743		649,867
Construction and land development		631		—		620		1,251		325,934		327,185
Commercial and industrial		956		330		2,286		3,572		642,346		645,918
Leases		1,208		132		212		1,552		67,200		68,752
Consumer and other		80		9		98		187		13,348		13,535
Total	$	5,143	$	2,088	$	5,437	$	12,668	$	3,431,794	$	3,444,462

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at September 30, 2024 and December 31, 2023. Also presented is the balance of loans on nonaccrual status at September 30, 2024 and December 31, 2023, for which there was no related allowance for credit losses is recorded (in thousands):

	September 30, 2024						December 31, 2023
	Total		Nonaccrual		Loans Past Due		Total		Nonaccrual		Loans Past Due
	Nonaccrual		With No Allowance		Over 90 Days		Nonaccrual		With No Allowance		Over 90 Days
	Loans		for Credit Losses		Still Accruing		Loans		for Credit Losses		Still Accruing
Commercial real estate	$	1,416	$	802	$	—	$	2,044	$	1,352	$	—
Consumer real estate		3,242		1,800		—		2,647		1,562		—
Construction and land development		41		—		—		620		—		—
Commercial and industrial		1,990		—		—		2,480		160		—
Leases		2,626		—		156		140		—		72
Consumer and other		4		—		16		—		—		98
Total	$	9,319	$	2,602	$	172	$	7,931	$	3,074	$	170

20

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents the amortized cost basis of collateral-dependent loans, which are individually evaluated to determine expected credit losses (in thousands):

	September 30, 2024
	Real Estate		Other		Total
Commercial real estate	$	4,353	$	—	$	4,353
Consumer real estate		2,096		—		2,096
Construction and land development		—		—		—
Commercial and industrial		—		859		859
Leases		—		534		534
Consumer and other		—		—		—
Total	$	6,449	$	1,393	$	7,842
	December 31, 2023
	Real Estate		Other		Total
Commercial real estate	$	5,155	$	—	$	5,155
Consumer real estate		2,756		—		2,756
Construction and land development		1,411		—		1,411
Commercial and industrial		—		1,018		1,018
Leases		—		—		—
Consumer and other		—		—		—
Total	$	9,322	$	1,018	$	10,340

Loan Modifications to Borrowers Experiencing Financial Difficulty:

The table below shows the amortized cost of loans and leases made to borrowers experiencing financial difficulty that were modified during the three and nine months ended September 30, 2024 and 2023, respectively. (dollars in thousands):

					Payment Delay
	Payment		Term		and Term
Three Months Ended September 30, 2024	Delay		Extension		Extension		Total
Commercial real estate	$	—	$	—	$	—	$	—
Consumer real estate		—		83		—		83
Construction and land development		—		—		—		—
Commercial and industrial		—		27		—		27
Leases		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	110	$	—	$	110
Nine Months Ended September 30, 2024
Commercial real estate	$	—	$	226	$	—	$	226
Consumer real estate		—		83		—		83
Construction and land development		—		—		—		—
Commercial and industrial		—		27		—		27
Leases		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	336	$	—	$	336

21

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

					Payment Delay
	Payment		Term		and Term
Three Months Ended September 30, 2023	Delay		Extension		Extension		Total
Commercial real estate	$	—	$	528	$	—	$	528
Consumer real estate		—		514		—		514
Construction and land development		—		748		—		748
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	1,790	$	—	$	1,790
Nine Months Ended September 30, 2023
Commercial real estate	$	403	$	566	$	—	$	969
Consumer real estate		—		514		—		514
Construction and land development		—		748		—		748
Commercial and industrial		63		—		153		216
Leases		—		—		—		—
Consumer and other		—		—		—		—
Total	$	466	$	1,828	$	153	$	2,447

The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 and 2023, respectively. (dollars in thousands):

	Weighted-Average
	Term		Weighted-Average
	Extension		Total Payment
Three Months Ended September 30, 2024	(in months)		Delay
Commercial real estate		—	$	—
Consumer real estate		62		—
Construction and land development		—		—
Commercial and industrial		38		—
Leases		—		—
Consumer and other		—		—
Nine Months Ended September 30, 2024
Commercial real estate		64	$	—
Consumer real estate		62		—
Construction and land development		—		—
Commercial and industrial		38		—
Leases		—		—
Consumer and other		—		—

	Weighted-Average
	Term		Weighted-Average
	Extension		Total Payment
Three Months Ended September 30, 2023	(in months)		Delay
Commercial real estate		12	$	—
Consumer real estate		20		—
Construction and land development		9		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		—		—
Nine Months Ended September 30, 2023
Commercial real estate		23	$	23
Consumer real estate		15		—
Construction and land development		9		—
Commercial and industrial		30		7
Leases		—		—
Consumer and other		—		—

22

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The table below shows an age analysis of loans and leases made to borrowers experiencing financial difficulty that were modified in the last twelve months, (in thousands):

	September 30, 2024
					90 Days
			30-89 Days		or More
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial real estate	$	637	$	55	$	—	$	398	$	1,090
Consumer real estate		354		—		—		176		530
Construction and land development		2,307		—		—		—		2,307
Commercial and industrial		16		—		—		169		185
Leases		—		—		—		—		—
Consumer and other		—		—		—		—		—
Total	$	3,314	$	55	$	—	$	743	$	4,112

Foreclosure Proceedings and Balances:

As of September 30, 2024, there was no residential real estate property secured by real estate included in other real estate owned and there were no residential real estate loans in the process of foreclosure.

Note 5. Goodwill and Intangible Assets

In accordance with FASB ASC No. 2021-03, “Goodwill and Other (Topic 350),” 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.  

The Company’s other intangible assets consist of core deposit intangibles, insurance agency customer relationships and insurance agency tradename. They are initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer deposits, the insurance agency customer relationships are amortized over 14 years and the insurance agency tradename is amortized over five years.

The carrying amount of goodwill at September 30, 2024, and December 31, 2023, was $96.1 million.

Other intangible assets as of the dates indicated is summarized below (in thousands):

	Core Deposit		Customer Relationships		Tradename
Amortized other intangible assets:	Intangibles		Intangibles		Intangibles		Total
September 30, 2024:
Beginning balance January 1, 2024, gross	$	17,470	$	5,670	$	63	$	23,203
Less: accumulated amortization		(11,021)		(2,940)		(63)		(14,024)
Balance, September 30, 2024, other intangible assets, net	$	6,449	$	2,730	$	-	$	9,179
December 31, 2023:
Beginning balance January 1, 2023, gross	$	17,470	$	5,670	$	63	$	23,203
Less: accumulated amortization		(9,758)		(2,379)		(63)		(12,200)
Balance, December 31, 2023, other intangible assets, net	$	7,712	$	3,291	$	-	$	11,003

The aggregate amortization expense for other intangible assets for the three and nine months ended September 30, 2024, was $604 thousand and $1.8 million, respectively, and for the three and nine months ended September 30, 2023, was $647 thousand and $2.0 million, respectively.

23

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of September 30, 2024, the estimated aggregate amortization expense for future periods for intangibles is as follows (in thousands):

Remainder of 2024	$	600
2025		2,256
2026		2,086
2027		1,904
2028		1,139
Thereafter		1,194
Total	$	9,179

Note 6. Borrowings, Line of Credit and Subordinated Debt

Borrowings:

At September 30, 2024, total borrowings were $9.0 million compared to $13.1 million at December 31, 2023.  Borrowings consist of the following (in thousands):

	September 30,		December 31,
	2024		2023
Securities sold under customer repurchase agreements	$	3,997	$	5,078
Other borrowings		5,000		8,000
Total	$	8,997	$	13,078

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 $6.6 million and $7.6 million at September 30, 2024 and December 31, 2023, respectively. The average balance of repurchase agreements during the nine-month period ended September 30, 2024, and 2023 was $4.8 million and $5.0 million, respectively.  The maximum month-end outstanding balance for the nine-month period ended September 30, 2024, and 2023 was $5.8 million and $6.1 million, respectively.

Other Borrowings:

The Company has a revolving line of credit for an aggregate amount of $35 million.  The maturity of the line of credit is February 1, 2025. At September 30, 2024, $5.0 million was outstanding under the line of credit, and $30.0 million of the line of credit remained available to the Company.

Subordinated Debt:

On September 28, 2018, the Company issued $40 million of 5.625% fixed-to-floating rate subordinated notes (the "Notes"), which were outstanding as of September 30, 2024 and December 31, 2023. Unamortized debt issuance cost was $337 thousand and $401 thousand at September 30, 2024 and December 31, 2023, respectively.

The Notes initially bore 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. As of October 2, 2023, to but excluding the maturity date or early redemption date, the interest rate has, with the sunset of the London Inter-bank Offered Rate,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

reset quarterly to an annual floating rate equal to three-month Chicago Mercantile Exchange published term Secured Overnight Financing Rate (“SOFR”), plus 281.161 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 $337 thousand at September 30, 2024 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, 2024, and 2023, respectively.

On September 1, 2021, the Company acquired $2.5 million of subordinated notes (“sub-debt”) from the acquisition of Sevier County Bancshares, Inc. 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. On August 14, 2024, the Company redeemed this sub-debt in whole.

Note 7. Employee Benefit Plans

401(k) Plan:

The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After 90 days of service, the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The Company’s contribution to the Plan for the three and nine month periods ending September 30, 2024, was $504 thousand and $1.5 million, respectively.  The Company’s contribution to the Plan for the three and nine months ended September 30, 2023, was $475 thousand and $1.4 million, 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, 2024, the Company had one active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which has 1,595,020 Rights available for future grants or awards.

The Company’s 2015 Stock Incentive Plan has 10,148 Rights issued.

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, 2023	16,340	$	13.55
Granted	—		—
Exercised	(6,192)		11.09
Forfeited	—		—
Outstanding at September 30, 2024	10,148	$	15.05

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Information pertaining to stock options outstanding at September 30, 2024, is as follows:

		Options Outstanding				Options Exercisable
			Weighted-
			Average	Weighted-			Weighted-
			Remaining	Average			Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	15.05	10,148	1.00 years	$	15.05	10,148	$	15.05
Outstanding, end of period		10,148	1.00 years	$	15.05	10,148	$	15.05

The Company did not recognize any stock option-based compensation expense during the three and nine months ended September 30, 2024, and 2023, 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 Plan.

Stock options of 1,692 and 6,192 shares were exercised during the three and nine month periods ended September 30, 2024, respectively. No stock options were exercised during the three months ended September 30, 2023.  Stock options of 15,705 shares were exercised during the nine month period ended September 30, 2023.   The income tax benefit recognized for the exercise of options during the three and nine months ended September 30, 2024, was a benefit of $0 and $14 thousand, respectively, and for the nine months ended September 30, 2023, a benefit of $60 thousand.

The intrinsic value of options exercised during the three and nine months ended September 30, 2024, was $15 thousand and $69 thousand, respectively.  No stock options were exercised during the three months ended September 30, 2023.  The intrinsic value of options exercised during the nine months ended September 30, 2023, was $242 thousand.  The aggregate intrinsic value of total options outstanding and exercisable options at September 30, 2024, was $143 thousand.  Cash received from options exercised under all share-based payment arrangements for the nine months ended September 30, 2024, was $68 thousand.

Restricted Stock Awards:

A summary of the activity of the Company’s unvested restricted stock awards for the period ended September 30, 2024, is presented below:

		Weighted
		Average
		Grant-Date
	Number	Fair Value
Balance at December 31, 2023	171,770	$	22.22
Granted	79,643		24.04
Vested	(51,236)		21.74
Forfeited/expired	(3,309)		24.75
Balance at September 30, 2024	196,868	$	23.04

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, 2024, was $372 thousand and $1.3 million, respectively, and was $271 thousand and $1.2 million, during the three and nine months ended September 30, 2023, respectively.  As of September 30, 2024, there was $2.1 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 2.15 years.  The grant-date fair value of restricted stock awards vested was $1.1 million for the nine months ended September 30, 2024.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Stock Appreciation Rights (“SARs”):

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

		Weighted
		Average
	Number	Exercisable Price
Outstanding at December 31, 2023	20,000	$	20.70
Granted	—		—
Exercised	(16,000)		20.70
Forfeited	—		—
Outstanding at September 30, 2024	4,000	$	20.70

Information pertaining to SARs outstanding at September 30, 2024, is as follows:

		SARs Outstanding				SARs Exercisable
			Weighted-
			Average	Weighted-
			Remaining	Average			Weighted- Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life		Price	Exercisable	Price
$	20.70	4,000	0.25 years	$	20.70	4,000	$	20.70
	Outstanding, end of period	4,000	0.25 years	$	20.70	4,000	$	20.70

SARs compensation expense of $41 thousand and $7 thousand was recognized for the three and nine months ended September 30, 2024, respectively, and $5 thousand and ($118) thousand for the three and nine months ended September 30, 2023.  The credit adjustment for the nine month periods ended September 30, 2023, was due to adjustments related to the fair value evaluation of SARs.

Note 8. 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,
	2024		2023
Commitments to extend credit	$	780,576	$	716,951
Standby letters of credit		29,280		7,611

At September 30, 2024, and December 31, 2023, the allowance for credit losses for these off-balance sheet commitments was $2.3 million and $2.4 million, respectively. The expense (credit) related to the allowance for off-balance sheet commitments during the three and nine months ended September 30, 2024, was $302 thousand and ($73) thousand,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

respectively, and was ($489) thousand and ($795) thousand, respectively, during the three and nine months ended September 30, 2023, respectively.  

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

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At September 30, 2024 and December 31, 2023, 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 9. 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.

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

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

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

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

The following methodologies were used by the Company in estimating fair value disclosures for financial instruments measured on a recurring basis:

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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, 2024:
Assets:
Securities available-for-sale:
U.S. Treasury	$	77,911	$	—	$	77,911	$	—
U.S. Government-sponsored enterprises (GSEs)		42,566		—		42,566		—
Municipal securities		18,097		—		18,097		—
Other debt securities		40,232		—		40,232		—
Mortgage-backed securities (GSEs)		322,530		—		322,530		—
Total securities available-for-sale		501,336		—		501,336		—
Derivative financial instruments and interest rate swap agreements		12,387		—		12,387		—
Total assets at fair value	$	513,723	$	—	$	513,723	$	—
Liabilities:
Derivative financial instruments and interest rate swap agreements	$	14,023	$	—	$	14,023	$	—
December 31, 2023:
Assets:
Securities available-for-sale:
U.S. Treasury	$	76,033	$	—	$	76,033	$	—
U.S. Government-sponsored enterprises (GSEs)		48,093		—		48,093		—
Municipal securities		18,276		—		18,276		—
Other debt securities		33,069		—		33,069		—
Mortgage-backed securities (GSEs)		232,939		—		232,939		—
Total securities available-for-sale		408,410		—		408,410		—
Derivative financial instruments and interest rate swap agreements		12,821		—		12,821		—
Total assets at fair value	$	421,231	$	—	$	421,231	$	—
Liabilities:
Derivative financial instruments and interest rate swap agreements	$	14,807	$	—	$	14,807	$	—

During the nine months ending September 30, 2024, and twelve months ended December 31, 2023, there were no transfers between Level 1 and Level 2 or into our out of Level 3 in the fair value hierarchy.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2024:
Collateral-dependent loans	$	656	$	—	$	—	$	656
Other real estate owned		—		—		—		—
December 31, 2023:
Collateral-dependent loans	$	1,295	$	—	$	—	$	1,295
Other real estate owned		279		—		—		279

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

					Weighted
			Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input
September 30, 2024:
Collateral-dependent loans	$	656	Appraisal	Appraisal discounts	79	%
Other real estate owned		—	Appraisal	Appraisal discounts	—	%
December 31, 2023:
Collateral-dependent loans	$	1,295	Appraisal	Appraisal discounts	73	%
Other real estate owned		279	Appraisal	Appraisal discounts	33	%

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. 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.  The amount of valuation allowance on all collateral-dependent loans was $3.2 million and $3.5 million as of September 30, 2024, and December 31, 2023, respectively.

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

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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
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
September 30, 2024:
Assets:
Cash and cash equivalents	$	192,914	$	192,914	$	—	$	—	$	192,914
Securities available-for-sale		501,336		—		501,336		—		501,336
Securities held-to-maturity		127,779		—		113,267		—		113,267
Other investments		20,352		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		3,687,673		—		—		3,564,572		3,564,572
Derivative financial instruments and interest rate swap agreements		12,387		—		12,387		—		12,387
Liabilities:
Noninterest-bearing demand deposits		863,949		—		863,949		—		863,949
Interest-bearing demand deposits		834,207		—		834,207		—		834,207
Money market and savings deposits		1,854,777		—		1,854,777		—		1,854,777
Time deposits		769,558		—		769,621		—		769,621
Borrowings		8,997		—		8,997		—		8,997
Subordinated debt		39,663		—		—		37,860		37,860
Derivative financial instruments and interest rate swap agreements		14,023		—		14,023		—		14,023
December 31, 2023:
Assets:
Cash and cash equivalents	$	352,271	$	352,271	$	—	$	—	$	352,271
Securities available-for-sale		408,410		—		408,410		—		408,410
Securities held-to-maturity		281,236		—		262,538				262,538
Other investments		13,662		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		3,413,814		—		—		3,308,980		3,308,980
Derivative financial instruments and interest rate swap agreements		12,821		—		12,821		—		12,821
Liabilities:
Noninterest-bearing demand deposits		898,044		—		898,044		—		898,044
Interest-bearing demand deposits		1,006,915		—		1,006,915		—		1,006,915
Money market and savings deposits		1,812,427		—		1,812,427		—		1,812,427
Time deposits		550,468		—		548,397		—		548,397
Borrowings		13,078		—		13,078		—		13,078
Subordinated debt		42,099		—		—		39,822		39,822
Derivative financial instruments and interest rate swap agreements		14,807		—		14,807		—		14,807

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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Note 10.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 certain fixed rate securities designated as available-for-sale. The hedging strategy converts the fixed interest rates to SOFR-based variable interest rates. These derivatives are designated as partial term hedges covering specified periods of time prior to the maturity date of the hedged securities. The Company adopted ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities” in 2018, which allows such partial term hedge designations.

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

		Weighted
		Average
	Balance	Remaining	Weighted
	Sheet	Maturity	Average		Receive	Notional		Estimated
Asset/Liability derivatives	Location	(In Years)	Pay Rate		Rate	Amount		Fair Value
September 30, 2024:
Interest rate swap agreements - securities	Other liabilities	2.03	4.30	%	SOFR	$	55,507	$	(955)
December 31, 2023:
Interest rate swap agreements - securities	Other liabilities	3.40	4.25	%	SOFR	$	27,050	$	(536)

The effects of the Company’s fair value hedge relationships reported in interest income on taxable securities on the consolidated income statement were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Interest income on taxable securities	$	5,091	$	4,335	$	14,710	$	7,986
Effects of fair value hedge relationships		142		—		391		—
Reported interest income on taxable securities	$	5,233	$	4,335	$	15,101	$	7,986

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Gain (loss) on fair value hedging relationship	2024		2023		2024		2023
Interest rate swap agreements - securities:
Hedged items	$	(1,069)	$	—	$	(955)	$	—
Derivative designated as hedging instruments		1,069		—		955		—
Carry amount of hedged assets - mortgage-backed securities		48,886		—		48,886		—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Derivatives Designated as Cash Flow Hedges:

The Company enters into interest rate derivative contracts on assets and liabilities that are designated as qualifying cash flow hedges.  The Company hedges the exposure to variability in expected future cash flows attributable to changes in contractual specified interest rates.  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 offsetting cash flows attributable to the hedged risk.  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 accumulated other comprehensive income (“AOCI”) is recognized in earnings immediately.  The cash flow hedges are recorded at fair value in other assets and 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 or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability, as future interest payments are made on the underlying assets.  At September 30, 2024, the Company estimates that in the next 12 months an additional $126 thousand will be reclassified as a decrease in interest income and $634 thousand will be reclassified as an increase in interest expense.

At September 30, 2024 and December 31, 2023, cash flow hedges are as follows (in thousands):

	September 30, 2024					December 31, 2023
	Balance Sheet	Notional		Estimated		Balance Sheet	Notional		Estimated
	Location	Amount		Fair Value		Location	Amount		Fair Value
Cash flow hedges:
Assets	Other liabilities	$	50,000	$	(37)	Other liabilities	$	100,000	$	(556)
Assets	Other assets		50,000		13	Other assets		-		-
Liabilities	Other liabilities		150,000		(636)	Other liabilities		150,000		(881)
Liabilities	Other assets		25,000		2	Other assets		25,000		7

The following table presents the effect of fair value and cash flow hedge accounting on AOCI (in thousands):

Derivatives in cash flow hedging relationships:		Amount of Gain (Loss) Recognized on OCI on Derivative	Location of Gain or (Loss) Recognized from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income
Three Months Ended September 30, 2024
Interest rate swaps - Assets	$	1,177	Interest income	$	(203)
Interest rate swaps - Liabilities		(943)	Interest expense		227
Three Months Ended September 30, 2023
Interest rate swaps - Assets	$	(432)	Interest income	$	(173)
Interest rate swaps - Liabilities		587	Interest expense		157
Nine Months Ended September 30, 2024
Interest rate swaps - Assets	$	532	Interest income	$	(610)
Interest rate swaps - Liabilities		240	Interest expense		724
Nine Months Ended September 30, 2023
Interest rate swaps - Assets	$	(861)	Interest income	$	(275)
Interest rate swaps - Liabilities		698	Interest expense		165

34

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents the effect of fair value and cash flow hedge accounting on the income statement (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Total interest income	$	64,159	$	55,448	$	185,633	$	160,823
Effects of cash flow hedge relationships		(203)		(173)		(610)		(275)
Reported total interest income	$	63,956	$	55,275	$	185,023	$	160,548
Total interest expense	$	29,151	$	24,426	$	86,180	$	62,150
Effects of cash flow hedge relationships		(227)		(157)		(724)		(165)
Reported total interest expense	$	28,924	$	24,269	$	85,456	$	61,985

Non-hedged derivatives:

The Company provides 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 are recognized as other noninterest income in the current period.

At September 30, 2024 and December 31, 2023, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):

	September 30, 2024				December 31, 2023
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	360,003	$	12,373	$	294,133	$	12,813
Liabilities		360,003		(12,373)		294,133		(12,813)

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):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Interest rate swap agreements	$	1,103	$	326	$	1,378	$	823

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, 2024, collateral totaling $150 thousand and $390 thousand at December 31, 2023, was pledged to the derivative counterparties to comply with collateral requirements.

35

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11. 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. The Company follows the guidance of ASU Topic 842.

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 2044. All of our leases are classified as 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,
	Classification	2024		2023
Assets:
Operating lease right-of-use assets	Other assets	$	11,741	$	9,894
Liabilities:
Operating lease liabilities	Other liabilities	$	12,240	$	10,303

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 of 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.

As of September 30, 2024, the weighted average remaining lease term was 10.57 years and the weighted average discount rate was 3.48%.

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):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Lease costs:
Operating lease costs	$	492	$	438	$	1,411	$	1,247
Variable lease costs		16		30		72		87
Total	$	508	$	468	$	1,483	$	1,334
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	462	$	393	$	1,322	$	1,142

36

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2024, were as follows (in thousands):

	Amounts
Remainder of 2024	$	452
2025		1,714
2026		1,599
2027		1,392
2028		1,388
Thereafter		8,562
Total future minimum lease payments		15,107
Amounts representing interest		(2,867)
Present value of net future minimum lease payments	$	12,240

Note 12. 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 Basel III 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 (“CET1”), 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, 2024, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the “well capitalized” regulatory classification.

In December 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (“FDIC”) issued a final rule revising regulatory capital rules in anticipation of the adoption of ASU 2016-13, Financial Instruments—Credit Losses Measurement of Credit Losses on Financial Instruments (Topic 326),  that provided an option to phase in over a three-year period on a straight line basis the day-one impact of the adoption on earnings and tier one capital. The Company adopted ASU 2016-13 on January 1, 2023, and has chosen the three-year phase in option.  

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 discretionary bonuses to executive officers if the Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

37

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During the nine months ended September 30, 2024, the Bank paid $17.5 million in dividends to the Company, and the Company has paid a quarterly common stock dividend of $0.08 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, 2024, and December 31, 2023 are presented below (dollars in thousands):

									Minimum to be
									well
									capitalized under
					Minimum for				prompt
					capital				corrective action
		Actual			adequacy purposes				provisions1
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2024
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	469,276	11.62	%	$	323,034	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		406,264	10.06	%		242,275	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		406,264	10.06	%		181,706	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)2		406,264	8.44	%		192,472	4.00	%		N/A	N/A
SmartBank:
Total Capital (to Risk Weighted Assets)	$	471,875	11.69	%	$	322,834	8.00	%	$	403,542	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		440,593	10.92	%		242,125	6.00	%		322,834	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		440,593	10.92	%		181,594	4.50	%		262,302	6.50	%
Tier 1 Capital (to Average Assets)2		440,593	9.17	%		192,095	4.00	%		240,119	5.00	%
December 31, 2023
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	448,050	11.80	%	$	303,658	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		385,795	10.16	%		227,744	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		385,795	10.16	%		170,808	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)		385,795	8.27	%		186,672	4.00	%		N/A	N/A
SmartBank:
Total Capital (to Risk Weighted Assets)	$	456,134	12.02	%	$	303,680	8.00	%	$	379,600	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		427,559	11.26	%		227,760	6.00	%		303,680	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		427,559	11.26	%		170,820	4.50	%		246,740	6.50	%
Tier 1 Capital (to Average Assets)		427,559	9.18	%		186,363	4.00	%		232,954	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.

38

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13. Other Comprehensive Income (Loss)

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

	Three Months Ended September 30, 2024
									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, 2024	$	(24,640)	$	(582)	$	85	$	(661)	$	(25,798)
Other comprehensive income (loss)		9,043		—		(689)		190		8,544
Reclassification of amounts included in net income		—		25		(104)		(16)		(95)
Net other comprehensive income (loss) during period		9,043		25		(793)		174		8,449
Ending balance, September 30, 2024	$	(15,597)	$	(557)	$	(708)	$	(487)	$	(17,349)
	Three Months Ended September 30, 2023
									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, 2023	$	(33,132)	$	(684)	$	—	$	(1,201)	$	(35,017)
Other comprehensive income (loss)		(4,325)		—		—		115		(4,210)
Reclassification of amounts included in net income		5,044		27		—		—		5,071
Net other comprehensive income (loss) during period		719		27		—		115		861
Ending balance, September 30, 2023	$	(32,413)	$	(657)	$	—	$	(1,086)	$	(34,156)

	Nine Months Ended September 30, 2024
									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, 2023	$	(23,818)	$	(632)	$	(397)	$	(1,060)	$	(25,907)
Other comprehensive income (loss)		8,221		—		(22)		657		8,856
Reclassification of amounts included in net income		—		75		(289)		(84)		(298)
Net other comprehensive income (loss) during period		8,221		75		(311)		573		8,558
Ending balance, September 30, 2024	$	(15,597)	$	(557)	$	(708)	$	(487)	$	(17,349)
	Nine Months Ended September 30, 2023
									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, 2022	$	(33,616)	$	(742)	$	—	$	(966)	$	(35,324)
Other comprehensive income (loss)		(3,841)		—		—		(120)		(3,961)
Reclassification of amounts included in net income		5,044		85		—		—		5,129
Net other comprehensive income (loss) during period		1,203		85		—		(120)		1,168
Ending balance, September 30, 2023	$	(32,413)	$	(657)	$	—	$	(1,086)	$	(34,156)

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

SmartFinancial, Inc. (the “Company,” “SmartFinancial,” “we,” “our” or “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 Florida. The Bank’s primary deposit products are noninterest-bearing and interest-bearing demand deposits, savings and money market deposits, and time deposits. Its primary lending products are commercial, residential, and consumer loans.

While we offer a wide range of commercial banking services, we focus on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans to individuals for a variety of purposes. Our principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. We offer a broad range of deposit products, including checking (“NOW”), savings, money market accounts and 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 Quarterly Report on Form 10-Q (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 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:

● the impact of current and future economic and market conditions generally (including seasonality) and in the financial services industry, nationally and within our primary market areas (particularly Tennessee), including the effects of inflationary pressures, changes in interest rates, slowdowns in economic growth, and the potential for high unemployment rates, as well as the financial stress on borrowers and changes to customer and client behavior (including the velocity of loan repayment) and credit risk as a result of the foregoing;

● the risks of changes in interest rates on the level and composition of deposits (as well as the cost of, and competition for, deposits), loan demand, liquidity and the values of loan collateral, securities and market fluctuations, and interest rate sensitive assets and liabilities;

● adverse developments in the banking industry and the impact of such developments on customer confidence, liquidity and regulatory responses to these developments (including increases in the cost of our deposit insurance assessments), our ability to effectively manage our liquidity risk and any growth plans and the availability of capital and funding;

● 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;

40

● weakness in the real estate market, including the secondary residential mortgage market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, profits on sales of mortgage loans, and the value of mortgage servicing rights;

● 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;

● the risks of mergers, acquisitions and divestitures, including our ability to continue to identify acquisition targets, successfully acquire and integrate desirable financial institutions and realize expected revenues and revenue synergies;

● 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, including as a result of increased remote working, which may be exacerbated by recent developments in generative artificial intelligence;

● results of examinations by our primary regulators, the TDFI, 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 as a result of the 2024 United States presidential election), including the interest rate policies of the Federal Reserve, as well as legislative, tax and regulatory changes that impact the money supply and inflation;

● 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, natural disasters, acts of war or terrorism and 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;

● changes in accounting principles, policies, or guidelines, including the impact of ASU 2016-13, Current Expected Credit Loss;

● political instability, acts of God, or of war or terrorism, natural disasters, including in the Company’s footprint, health emergencies, epidemics or pandemics, or other catastrophic events that may affect general economic conditions;

● risks related to environmental, social and governance (“ESG”) strategies and initiatives, the scope and pace of which could alter our reputation and shareholder, associate, customer and third-party affiliations;

● a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;

● the risk that the regulatory environment may not be conducive to or may prohibit the consummation of future mergers and/or business combinations, may increase the length of time and amount of resources required to consummate such transactions, and may reduce the anticipated benefit; and

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

41

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.

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 in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.  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, 2023. There have been no other significant changes in the Company’s application of critical accounting policies since December 31, 2023.

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 2024:

● Net income totaled $9.1 million, or $0.54 per diluted common share, during the third quarter of 2024 compared to $2.1 million, or $0.12 per diluted common share, for the same period in 2023.  

● Net income totaled $26.5 million, or $1.57 per diluted common share, during the first nine months of 2024 compared to $22.4 million, or $1.33 per diluted common share, for the same period in 2023.

● Annualized return on average assets for the three months ended September 30, 2024, and 2023 was 0.74% and 0.17%, respectively.

● Annualized return on average assets for the nine months ended September 30, 2024, and 2023 was 0.72% and 0.63%, respectively.

● Net organic loan and lease increased year-to-date for 2024, with net loans and leases increasing $272.5 million from December 31, 2023.

● Deposit growth of $54.6 million from December 31, 2023.

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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, 2024 and 2023 and as of September 30, 2024 and December 31, 2023 (dollars in thousands, except per share data):

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2024			2023				Change		2024			2023				Change
Income Statement:
Interest income	$	63,956		$	55,275		$	8,681		$	185,023		$	160,548		$	24,475
Interest expense		28,924			24,269			4,655			85,456			61,985			23,471
Net interest income		35,032			31,006			4,026			99,567			98,563			1,004
Provision for credit losses		2,575			795			1,780			3,018			1,458			1,560
Net interest income after provision for credit losses		32,457			30,211			2,246			96,549			97,105			(556)
Noninterest income		9,139			691			8,448			25,122			14,746			10,376
Noninterest expense		30,846			28,516			2,330			88,599			83,455			5,144
Income before income taxes		10,750			2,386			8,364			33,072			28,396			4,676
Income tax expense		1,610			319			1,291			6,572			5,993			579
Net income	$	9,140		$	2,067		$	7,073		$	26,500		$	22,403		$	4,097
Per Share Data:
Basic income per common share	$	0.55		$	0.12		$	0.42		$	1.58		$	1.33		$	0.25
Diluted income per common share	$	0.54		$	0.12		$	0.43		$	1.57		$	1.33		$	0.26
Performance Ratios:
Return on average assets		0.74	%		0.17	%		0.58	%		0.72	%		0.63	%		0.09	%
Return on average shareholders' equity		7.60	%		1.84	%		5.76	%		7.55	%		6.80	%		0.76	%

	September 30,		December 31,
	2024		2023			Change
Balance Sheet:
Loans and leases, net	$	3,681,869	$	3,409,396	$	272,473
Deposits		4,322,491		4,267,854		54,637

Analysis of Results of Operations

Third quarter of 2024 compared to 2023

Net income was $9.1 million, or $0.54 per diluted common share, for the third quarter of 2024, compared to $2.1 million, or $0.12 per diluted common share, for the third quarter of 2023.  For the three months ended September 30, 2024, when compared to the comparable period in 2023, the increase in net income of $7.1 million was due to an increase in noninterest income of $8.4 million and net interest income after provision for loan and lease losses of $2.2 million, offset by an increase in noninterest expense of $2.3 million and income tax expense of $1.3 million.  The increase in noninterest income was associated with a $6.8 million pre-tax loss on the sale of available-for-sale securities, as a result of a balance sheet optimization transaction in September 2023.  The tax equivalent net interest margin was 3.11% for the third quarter of 2024, compared to 2.81% for the third quarter of 2023. Noninterest income to average assets was 0.74% for the third quarter of 2024, increasing from 0.06% for the third quarter of 2023. Noninterest expense to average assets increased to 2.50% in the third quarter of 2024, from 2.37% in the third quarter of 2023.

First nine months of 2024 compared to 2023

Net income totaled $26.5 million, or $1.57 per diluted common share, for the nine months ended 2024, compared to $22.4 million, or $1.33 per diluted common share, for the nine months ended 2023.  The increase in net income of $4.1 million for this period was primarily from the increase of $10.4 million in noninterest income, offset by an  increase of $5.1 million in noninterest expense and $579 thousand in income tax expense.  The increase in noninterest income was associated with a $6.8 million pre-tax loss on the sale of available-for-sale securities, as a result of a balance sheet optimization transaction in September 2023.  The tax equivalent net interest margin was 2.97% for the first nine months of 2024, compared to 3.01% for the first nine months of 2023. Noninterest income to average assets was 0.69% for the first nine months of 2024,

43

increasing from 0.41% for the first nine months of 2023. Noninterest expense to average assets increased to 2.42% in the first nine months of 2024, from 2.35% in the first nine months of 2023.

Net Interest Income and Yield Analysis

Third quarter of 2024 compared to 2023

Net interest income, taxable equivalent, increased to $35.4 million for the third quarter of 2024, up from $31.1 million for the third quarter of 2023. Net interest income was positively impacted by the increase in balances of loans and leases and the increase in yield/rate on these interest-earning assets, offset by the increase in the cost of interest-bearing liabilities.  Average interest-earning assets increased from $4.40 billion for the third quarter of 2023, to $4.53 billion for the third quarter of 2024, primarily from the increase in our average loan and lease balances and average cash balances, which was offset by decreases in average securities. Over this period, average loan and lease balances increased by $274.1 million, average federal funds sold and other interest-earning assets increased by $37.8 million, average interest-bearing deposits increased by $129.3 million, and average borrowing increased by $37.4 million.  Average securities decreased by $179.2 million and noninterest-bearing deposits decreased by $66.2 million. The tax equivalent net interest margin increased to 3.11% for the third quarter of 2024, compared to 2.81% for the third quarter of 2023. The yield on earning assets increased from 4.99% for the third quarter of 2023, to 5.65% for the third quarter of 2024, primarily due to the deployment of excess cash and cash equivalents into loans and leases and the increase in rates by the Federal Reserve. The cost of average interest-bearing deposits increased from 2.84% for the third quarter of 2023, to 3.20% for the third quarter of 2024, primarily due to the increase in rates by the Federal Reserve and increased pricing competition.

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

	Three Months Ended September 30,
	2024						2023
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Assets:
Loans and leases, including fees1	$	3,634,808	$	54,993	6.02	%	$	3,360,678	$	47,539	5.61	%
Taxable securities		564,978		5,233	3.68	%		743,054		4,335	2.31	%
Tax-exempt securities2		63,561		443	2.77	%		64,707		451	2.77	%
Federal funds sold and other earning assets		267,252		3,634	5.41	%		229,487		3,045	5.26	%
Total interest-earning assets		4,530,599		64,303	5.65	%		4,397,926		55,370	4.99	%
Noninterest-earning assets		381,306						379,456
Total assets	$	4,911,905					$	4,777,382
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	925,307		5,289	2.27	%	$	969,122		5,463	2.24	%
Money market and savings deposits		1,917,301		16,608	3.45	%		1,753,671		13,744	3.11	%
Time deposits		560,699		5,453	3.87	%		551,191		4,226	3.04	%
Total interest-bearing deposits		3,403,307		27,350	3.20	%		3,273,984		23,433	2.84	%
Borrowings		53,592		709	5.26	%		16,228		210	5.13	%
Subordinated debt		40,846		865	8.42	%		42,065		626	5.90	%
Total interest-bearing liabilities		3,497,745		28,924	3.29	%		3,332,277		24,269	2.89	%
Noninterest-bearing deposits		884,938						951,179
Other liabilities		50,580						48,494
Total liabilities		4,433,263						4,331,950
Shareholders' equity		478,642						445,432
Total liabilities and shareholders’ equity	$	4,911,905					$	4,777,382
Net interest income, taxable equivalent			$	35,379					$	31,101
Interest rate spread					2.36	%					2.11	%
Tax equivalent net interest margin					3.11	%					2.81	%
Percentage of average interest-earning assets to average interest-bearing liabilities					129.53	%					131.98	%
Percentage of average equity to average assets					9.74	%					9.32	%

¹Yields related to tax-exempt loans 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 $255 thousand for the three months ended September 30, 2024, and $0 thousand for the three months ended September 30, 2023.

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 $93 thousand and $95 thousand for the three months ended September 30, 2024, and 2023, respectively.

First nine months of 2024 compared to 2023

Net interest income, taxable equivalent, increased to $100.4 million for the first nine months of 2024, up from $98.9 million for the first nine months of 2023. Net interest income was positively impacted, compared to the prior year, primarily by the increase in balances of loans and leases and the increase in yield/rate on interest-earning assets, offset by the increase in the cost of interest-bearing liabilities.  Average interest-earning assets increased from $4.39 billion for the first nine months of 2023 to $4.51 billion for the first nine months of 2024, primarily because of the Company’s continued organic loan and lease growth and the increase in our average cash balances, offset by a decrease in our securities. Over this period, average loan and lease balances increased by $223.2 million, federal funds sold and other interest earning assets increased by $120.0 million, average interest-bearing deposits increased by $189.1 million and average borrowings increased by $6.6 million.  Average securities decreased by $158.4 million and noninterest-bearing deposits decreased by $90.3 million.  The tax equivalent net interest margin decreased to 2.97% for the first nine months of 2024, compared to 3.01% for the first nine months of 2023. The yield on earning assets increased from 4.90% for the first nine months of 2023, to 5.51% for the first nine months of 2024, primarily due to the deployment of excess cash and cash equivalents into loans and leases and the increase in rates by the Federal Reserve. The cost of average interest-bearing deposits increased from 2.45% for the first nine months of 2023 to 3.19% for the first nine months of 2024, primarily due to the increase in rates by the Federal Reserve and increased pricing competition.

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	Nine Months Ended September 30,
	2024						2023
	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
Assets:
Loans and leases, including fees1	$	3,532,768	$	156,123	5.90	%	$	3,309,616	$	137,712	5.56	%
Taxable Securities		588,679		15,101	3.43	%		745,694		12,322	2.21	%
Tax-exempt securities2		63,804		1,336	2.80	%		65,170		1,349	2.77	%
Federal funds and other earning assets		322,339		13,255	5.49	%		267,124		9,448	4.73	%
Total interest-earning assets		4,507,590		185,815	5.51	%		4,387,604		160,831	4.90	%
Noninterest-earning assets		381,743						365,123
Total assets	$	4,889,333					$	4,752,727
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	968,139		17,299	2.39	%	$	954,585		14,583	2.04	%
Money market and savings deposits		1,910,452		49,285	3.45	%		1,770,232		35,912	2.71	%
Time deposits		543,887		15,240	3.74	%		508,600		8,838	2.32	%
Total interest-bearing deposits		3,422,478		81,824	3.19	%		3,233,417		59,333	2.45	%
Borrowings		25,941		985	5.07	%		19,309		775	5.37	%
Subordinated debt		41,691		2,647	8.48	%		42,044		1,877	5.97	%
Total interest-bearing liabilities		3,490,110		85,456	3.27	%		3,294,770		61,985	2.52	%
Noninterest-bearing deposits		882,168						972,507
Other liabilities		48,299						44,703
Total liabilities		4,420,577						4,311,980
Shareholders' equity		468,756						440,747
Total liabilities and shareholders’ equity	$	4,889,333					$	4,752,727
Net interest income, taxable equivalent			$	100,359					$	98,846
Interest rate spread					2.24	%					2.39	%
Tax equivalent net interest margin					2.97	%					3.01	%
Percentage of average interest-earning assets to average interest-bearing liabilities					129.15	%					133.17	%
Percentage of average equity to average assets					9.59	%					9.27	%

¹Yields related to tax-exempt loans 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 $512 thousand for the nine months ended September 30, 2024, and $0 thousand for the nine months ended September 30, 2023.

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 $280 thousand for the nine months ended September 30, 2024, and $283 thousand for the nine months ended September 30, 2023.

Noninterest Income

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2024		2023			Change	2024		2023			Change
Service charges on deposit accounts	$	1,780	$	1,736	$	44	$	5,084	$	4,838	$	246
Gain (loss) on sale of securities		—		(6,801)		6,801		—		(6,801)		6,801
Mortgage banking		410		309		101		1,038		813		225
Investment services		1,881		1,461		420		4,563		3,766		797
Insurance commissions		1,477		1,153		324		3,865		3,551		314
Interchange and debit card transaction fees, net		1,349		1,357		(8)		3,945		4,087		(142)
Other		2,242		1,476		766		6,627		4,492		2,135
Total noninterest income	$	9,139	$	691	$	8,448	$	25,122	$	14,746	$	10,376

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Third quarter of 2024 compared to 2023

Noninterest income increased by $8.4 million during the third quarter of 2024 compared to the same period in 2023. This quarterly change in total noninterest income primarily resulted from the following:

● Loss on sale of securities during the third quarter of 2023 was associated with a pre-tax loss on the sale of $159.6 million of available-for-sale securities and moving into higher yielding assets;

● Increase in investment services from a higher volume of investment activity;

● Increase in insurance commissions, driven by organic growth; and

● Increase in other, primarily related to fees from capital markets activity.

First nine months of 2024 compared to 2023

Noninterest income increased by $10.4 million during the first nine months of 2024 compared to the same period in 2023. This change in total noninterest income primarily resulted from the following:

● Loss on sale of securities during the third quarter of 2023 was associated with a pre-tax loss on the sale of $159.6 million of available-for-sale securities and moving into higher yielding assets;

● Increase in investment services from a higher volume of investment activity; and

● Increase in other, primarily related to the $1.6 million gain on sale of bank-owned properties and $540 thousand from fees related to capital market activity.

Noninterest Expense

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2024		2023			Change	2024		2023			Change
Salaries and employee benefits	$	18,448	$	16,785	$	1,663	$	52,348	$	49,474	$	2,874
Occupancy and equipment		3,423		3,547		(124)		10,144		10,073		71
FDIC insurance		825		825		—		2,565		2,241		324
Other real estate and loan-related expense		460		603		(143)		1,582		1,616		(34)
Advertising and marketing		327		346		(19)		924		1,006		(82)
Data processing and technology		2,519		2,378		141		7,435		6,777		658
Professional services		1,201		735		466		3,190		2,307		883
Amortization of intangibles		604		647		(43)		1,824		1,981		(157)
Merger-related and restructuring expenses		—		110		(110)		—		110		(110)
Other		3,039		2,540		499		8,587		7,870		717
Total noninterest expense	$	30,846	$	28,516	$	2,330	$	88,599	$	83,455	$	5,144

Third quarter of 2024 compared to 2023

Noninterest expense increased by $2.3 million in the third quarter of 2024 as compared to the same period in 2023. The quarterly increase in total noninterest expense primarily resulted from the following:

● Increase in salary and employee benefits, related to an increase in incentive accruals, commissions and employee health insurance;

● Increase in professional services, primarily due to increases in audit fees, advisory board fees and consulting expenses; and

● Increase in other, related to overall franchise growth.

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First nine months of 2024 compared to 2023

Noninterest expense increased by $5.1 million in the first nine months of 2024 as compared to the same period in 2023. The change in total noninterest expense primarily resulted from the following:

● Increase in salary and employee benefits, related to an increase in incentive accrual, commissions, employee health insurance and overall franchise growth;

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

● Increase in professional services, primarily due to increases in audit fees, advisory board fees and consulting expenses; and

● Increase in other, related to overall franchise growth.

Taxes

Third quarter of 2024 compared to 2023

In the third quarter of 2024 income tax expense totaled $1.6 million as compared to $319 thousand in same period of 2023.  The effective tax rate was approximately 15.0% in the third quarter of 2024 compared to 13.4% in the second quarter of 2023.  During the third quarter of 2024 the Bank established a Real Estate Investment Trust (“REIT”) subsidiary.  The REIT subsidiary is expected to result in a lower effective tax rate during future periods by lowering the Bank’s state income tax expense.

First nine months of 2024 compared to 2023

In the first nine months of 2024 income tax expense totaled $6.6 million compared to $6.0 million in the first nine months of 2023.  The effective tax rate was approximately 19.9% for first nine months of 2024 compared to 21.1% for the nine months ended 2023.

Loan and Lease Portfolio

The Company had total net loans and leases outstanding of approximately $3.68 billion at September 30, 2024, compared to $3.41 billion at December 31, 2023. Loans secured by real estate, consisting of commercial and residential property, are the principal component of our loan and lease portfolio.

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

			% of				% of
	September 30,		Gross		December 31,		Gross
	2024		Total		2023		Total
Commercial real estate	$	1,899,785	51.0	%	$	1,739,205	50.4	%
Consumer real estate		690,504	18.6	%		649,867	18.9	%
Construction and land development		315,006	8.5	%		327,185	9.5	%
Commercial and industrial		731,600	19.7	%		645,918	18.8	%
Leases		67,052	1.8	%		68,752	2.0	%
Consumer and other		13,531	0.4	%		13,535	0.4	%
Total loans and leases		3,717,478	100.0	%		3,444,462	100.0	%
Less: Allowance for credit losses		(35,609)				(35,066)
Loans and leases, net	$	3,681,869			$	3,409,396

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Loan and Lease Portfolio Maturities

The following table sets forth the maturity distribution of our loans and leases at September 30, 2024, including the interest rate sensitivity for loans and leases maturing after one year (in thousands):

											Rate Structure for Loans and Leases
											Maturing Over One Year
	One Year		One through			Five through	Over Fifteen				Fixed		Floating
	or Less		Five Years			Fifteen Years	Years		Total		Rate		Rate
Commercial real estate-mortgage	$	73,492	$	1,113,812	$	656,393	$	56,088	$	1,899,785	$	1,047,258	$	779,035
Consumer real estate-mortgage		35,597		201,756		101,646		351,505		690,504		267,094		387,813
Construction and land development		73,806		154,284		39,415		47,501		315,006		90,508		150,692
Commercial and industrial		203,073		429,444		75,356		23,727		731,600		361,518		167,009
Leases		2,206		64,692		154		—		67,052		64,846		—
Consumer and other		7,637		5,594		269		31		13,531		5,639		255
Total loans and leases	$	395,811	$	1,969,582	$	873,233	$	478,852	$	3,717,478	$	1,836,863	$	1,484,804

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 0.26% as of September 30, 2024, and 0.24% December 31, 2023, respectively. Total nonperforming assets, as a percentage of total assets, was 0.26% as of September 30, 2024, and 0.20% as of December 31, 2023, respectively.

The following table 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, excluding nonaccrual loans for the periods presented (dollars in thousands):

			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, 2024
Commercial real estate	$	1,899,785	$	1,673	0.09	%	$	-	-	%	$	1,673	0.09	%
Consumer real estate		690,504		740	0.11			-	-			740	0.11
Construction and land development		315,006		-	-			-	-			-	-
Commercial and industrial		731,600		454	0.06			-	-			454	0.06
Leases		67,052		1,446	2.16			156	0.23			1,602	2.39
Consumer and other		13,531		99	0.73			16	0.12			115	0.85
Total	$	3,717,478	$	4,412	0.12		$	172	-		$	4,584	0.12
December 31, 2023
Commercial real estate	$	1,739,205	$	322	0.02	%	$	-	-	%	$	322	0.02	%
Consumer real estate		649,867		2,229	0.34			-	-			2,229	0.34
Construction and land development		327,185		631	0.19			-	-			631	0.19
Commercial and industrial		645,918		1,286	0.20			-	-			1,286	0.20
Leases		68,752		1,340	1.95			72	0.10			1,412	2.05
Consumer and other		13,535		89	0.66			98	0.72			187	1.38
Total	$	3,444,462	$	5,897	0.17		$	170	-		$	6,067	0.18

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

	September 30, 2024						December 31, 2023
			Nonaccrual Loans						Nonaccrual Loans
					Percentage of						Percentage of
		Total			Loans in			Total			Loans in
		Loans		Amount	Category			Loans		Amount	Category
Commercial real estate	$	1,899,785	$	1,416	0.07	%	$	1,739,205	$	2,044	0.12	%
Consumer real estate		690,504		3,242	0.47			649,867		2,647	0.41
Construction and land development		315,006		41	0.01			327,185		620	0.19
Commercial and industrial		731,600		1,990	0.27			645,918		2,480	0.38
Leases		67,052		2,626	3.92			68,752		140	0.20
Consumer and other		13,531		4	0.03			13,535		-	-
Total	$	3,717,478	$	9,319	0.25		$	3,444,462	$	7,931	0.23
Allowance for credit losses to nonaccrual loans				382.11%						424.75%

Allocation of the Allowance for Credit Losses

We maintain the allowance at a level that we deem appropriate to adequately cover change in the loan and lease portfolio. Our provision for credit losses for loans and leases for the nine months ended September 30, 2024, is $3.1 million compared to $2.3 million in the same period of 2023, an increase of $837 thousand.  As of September 30, 2024, and December 31, 2023, our allowance for credit losses was $35.6 million and $35.1 million, respectively, which we deemed to be adequate at each of the respective dates.  Our allowance for credit loss as a percentage of total loans and leases was 0.96% at September 30, 2024 and 1.02% at December 31, 2023, respectively.

The following table sets forth, based on management's best estimate, the allocation of the allowance for credit losses on loans and leases to categories of loans and leases 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, 2024
Commercial real estate	$	15,574		51.0	%	$	1,899,785		0.82	%
Consumer real estate		7,529		18.6			690,504		1.09
Construction and land development		3,718		8.5			315,006		1.18
Commercial and industrial		7,629		19.7			731,600		1.04
Leases		1,045		1.8			67,052		1.56
Consumer and other		114		0.4			13,531		0.84
Total	$	35,609		100.0	%	$	3,717,478		0.96
December 31, 2023
Commercial real estate	$	15,264		50.4	%	$	1,739,205		0.88	%
Consumer real estate		7,249		18.9			649,867		1.12
Construction and land development		4,874		9.5			327,185		1.49
Commercial and industrial		6,924		18.8			645,918		1.07
Leases		640		2.0			68,752		0.93
Consumer and other		115		0.4			13,535		0.85
Total	$	35,066		100.0	%	$	3,444,462		1.02

The allowance associated with the individually evaluated loans and leases were approximately $3.2 million at September 30, 2024, compared to $3.5 million at December 31, 2023.    

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Analysis of the Allowance for Credit Losses

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

							Ratio of Net (charge-offs)
	Provision for		Net (charge-offs)		Average		Recoveries to
	Credit Losses		Recoveries		Loans		Average Loans
Three Months Ended September 30, 2024
Commercial real estate	$	(57)	$	1	$	1,840,376		-	%
Consumer real estate		(14)		-		681,852		-
Construction and land development		222		-		321,734		-
Commercial and industrial		785		(390)		707,005		(0.06)
Leases		1,291		(916)		70,201		(1.30)
Consumer and other		46		(49)		13,640		(0.36)
Total	$	2,273	$	(1,354)	$	3,634,808		(0.04)
Three Months Ended September 30, 2023
Commercial real estate	$	691		2	$	1,655,592		-	%
Consumer real estate		413		(5)		632,102		-
Construction and land development		(369)		-		384,166		-
Commercial and industrial		307		(131)		606,183		(0.02)
Leases		201		(143)		67,515		(0.21)
Consumer and other		41		(67)		15,120		(0.44)
Total	$	1,284	$	(344)	$	3,360,678		(0.01)
Nine Months Ended September 30, 2024
Commercial real estate	$	276	$	34	$	1,790,580		-	%
Consumer real estate		276		4		665,288		-
Construction and land development		(715)		(441)		305,554		(0.14)
Commercial and industrial		1,422		(717)		689,208		(0.10)
Leases		1,643		(1,238)		68,646		(1.80)
Consumer and other		189		(190)		13,492		(1.41)
Total	$	3,091	$	(2,548)	$	3,532,768		(0.07)
Nine Months Ended September 30, 2023
Commercial real estate	$	650		5	$	1,636,661		-	%
Consumer real estate		1,006		4		618,883		-
Construction and land development		(177)		25		382,005		0.01
Commercial and industrial		439		(234)		590,088		(0.04)
Leases		217		(211)		67,076		(0.31)
Consumer and other		119		(145)		14,903		(0.97)
Total	$	2,254	$	(556)	$	3,309,616		(0.02)

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 decreased from $689.6 million at December 31, 2023, to $629.1 million at September 30, 2024, primarily as a result of Treasury securities maturities. Our securities to asset ratio has decreased from 14.3% at December 31, 2023, to 12.8% at September 30, 2024.

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, 2024 (dollars in thousands).

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The composition and maturity/repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.

	One Year				One through				Five through				Over Ten
	or Less				Five Years				Ten Years				Years				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	$	—	-	%	$	83,576	1.27	%	$	—	-	%	$	—	-	%	$	83,576	1.27	%
U.S. Government agencies		—	-			130	6.59			41,834	6.70			—	-			41,964	6.70
State and political subdivisions		480	2.53			3,708	2.92			5,391	3.30			8,740	3.72			18,319	3.40
Other debt securities		998	4.15			6,928	7.23			33,828	5.07			500	4.50			42,254	5.40
Mortgage-backed securities		—	-			15,586	3.68			123,661	3.72			197,958	3.88			337,205	3.81
Total securities	$	1,478	3.62		$	109,928	2.05		$	204,714	4.54		$	207,198	3.87		$	523,318	3.75
Held-to-maturity:
U.S. Treasury	$	—	-	%	$	—	-	%	$	—	-	%	$	—	-	%	$	—	-	%
U.S. Government agencies		—	-			—	-			42,155	1.84			6,268	2.01			48,423	1.86
State and political subdivisions		—	-			736	1.32			8,288	1.99			42,889	2.18			51,913	2.14
Other debt securities		—	-			—	-			—	-			—	-			—	-
Mortgage-backed securities		—	-			—	-			4,792	2.14			22,651	2.14			27,443	2.14
Total securities	$	—	-		$	736	1.32		$	55,235	1.89		$	71,808	2.15		$	127,779	2.03

(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, 2024, brokered deposits represented approximately 4.55% 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, 2024, and 2023, respectively (dollars in thousands):

	Three Months Ended						Three Months Ended
	September 30, 2024						September 30, 2023
	Average		% of		Average		Average		% of		Average
	Balance		Total		Rate		Balance		Total		Rate
Noninterest-bearing demand	$	884,938	20.6	%	—	%	$	951,179	22.5	%	—	%
Interest-bearing demand		925,307	21.6	%	2.27	%		969,122	22.9	%	2.24	%
Money market and savings		1,917,301	44.7	%	3.45	%		1,753,671	41.5	%	3.11	%
Time deposits		560,699	13.1	%	3.87	%		551,191	13.0	%	3.04	%
Total average deposits	$	4,288,245	100.0	%	2.54	%	$	4,225,163	100.0	%	2.20	%

	Nine Months Ended						Nine Months Ended
	September 30, 2024						September 30, 2023
	Average		% of		Average		Average		% of		Average
	Balance		Total		Rate		Balance		Total		Rate
Noninterest-bearing demand	$	882,168	20.5	%	—	%	$	972,507	23.1	%	—	%
Interest-bearing demand		968,139	22.5	%	2.39	%		954,585	22.7	%	2.04	%
Money market and savings		1,910,452	44.4	%	3.45	%		1,770,232	42.1	%	2.71	%
Time deposits		543,887	12.6	%	3.74	%		508,600	12.1	%	2.32	%
Total average deposits	$	4,304,646	100.0	%	2.54	%	$	4,205,924	100.0	%	1.89	%

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The Company believes its deposit product offerings are properly structured to attract and retain core deposit relationships. The average cost of interest-bearing deposits for the three months ended September 30, 2024, and 2023, was 3.20% and 2.84%, respectively. The cost increase was primarily attributable to the rate increases.  The average cost of interest-bearing deposits for the nine months ended September 30, 2024, and 2023, was 3.19% and 2.45%, respectively. The cost increase was primarily attributable to the increases in rates and increased pricing competition.

Total deposits as of September 30, 2024, were $4.32 billion, which was an increase of $54.6 million from December 31, 2023. This overall increase was driven primarily by the issuance of brokered deposits of $174.8 million, increase in other time deposits of $44.3 million and savings deposits of $42.4 million, offset by a decline in interest-bearing demand deposits of $172.7 million and noninterest bearing deposits of $34 million. During the quarter, the Bank elected not to pursue a higher cost public funds depository relationship and utilized Federal Home Loan Advances temporarily, which was replaced with brokered deposits.  As of September 30, 2024, the Company had outstanding time deposits under $250,000 with balances of $516.9 million and time deposits over $250,000 with balances of $252.7 million.

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

	September 30,
	2024
Three months or less	$	58,243
Three to six months		71,861
Six to twelve months		91,887
More than twelve months		30,676
Total	$	252,667

The Company's estimated uninsured deposits totaled $1.86 billion at September 30, 2024, compared to $1.76 billion at December 31, 2023, representing 43.0% and 41.3% of total deposits at September 30, 2024, and December 31, 2023, respectively.  These estimates were derived using the same methodologies and assumptions used for the Bank's regulatory reporting.  

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 down-streamed as Tier 1 capital to the Bank. Borrowings totaled $9.0 million at September 30, 2024, and consisted of short-term borrowings of $5.0 million, and $4.0 million of securities sold under repurchase agreements. Long-term debt totaled $39.7 million and $42.1 million at September 30, 2024, and December 31, 2023, respectively, and consisted entirely of subordinated debt.  For more information regarding our borrowings, see “Part I - Item 1. Consolidated Financial Statements – Note 6 – Borrowings, Line of Credit and Subordinated Debt” of this report.

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, 2024 and December 31, 2023, 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 12 – Regulatory Matters” of this report.

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, 2024, we had $780.6 million of pre-approved but unused lines of credit and $29.3 million of standby letters of credit. These commitments generally have fixed expiration

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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 8 – Commitments and Contingent Liabilities” of this report.

Market Risk and Liquidity Risk Management  

The Bank’s Asset Liability Management Committee (“ALCO”) oversees market risk management and establishes risk measures, limits on policy guidelines for managing the amount of interest rate risk and 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, the distribution of risk, the level of risk over time and the exposure to changes in 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 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 meetings of ALCO to provide feedback regarding future balance sheet structure, earnings and liquidity strategies.  ALCO continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. The objective is to manage the impact of fluctuating market rates on net interest 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. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from our static interest rate forecast over the next 12 months, limits in the decline in net interest income are as follows:

	Estimated % Change in Net Interest Income Over 12 Months
September 30, 2024:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase	(1.43)%
200 basis points increase	(2.81)%
100 basis points decrease	0.80%
200 basis points decrease	1.21%

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.

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

	Current Estimated Instantaneous Rate Change
September 30, 2024:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase	(4.97)%
200 basis points increase	(10.00)%
100 basis points decrease	5.32%
200 basis points decrease	8.72%

At September 30, 2024, 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.

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 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 $1.5 million in securities that mature throughout the next 12 months. The Company also has unused borrowing capacity in the amount of $917.7 million available with the Federal Reserve, Federal Home Loan Bank, 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.

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 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 September 30, 2024 (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, 2024, 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, 2023. 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.

There are no material changes during the period covered by this report to the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2023.

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 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, 2024, we have purchased $8.5 million of the authorized $10.0 million and may purchase up to an additional $1.5 million in the Company’s outstanding common stock.

The following table summarizes the Company’s repurchase activity during the three months ended September 30, 2024.

					Maximum
					Number (or
					Approximate
					Dollar Value) of
					Shares That May
				Total Number of Shares	Yet Be Purchased
	Total Number of	Weighted		Purchased as Part of	Under the Plans
	Shares	Average Price Paid		Publicly Announced	or Programs (in
Period	Repurchased	Per Share		Plans or Programs	thousands)
July 1, 2024 to July 31, 2024	—	$	—	—	$	—
August 1, 2024 to August 31, 2024	—		—	—		—
September 1, 2024 to September 30, 2024	—		—	—		—
Total	—	$	—	—	$	—

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

(a) Not applicable

(b) Not applicable

(c) Pursuant to Item 408(a) of Regulation S-K, none of the Company's directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2024.  

Item 6. Exhibits

Exhibit No.	Description	Location
3.1	Second Amended and Restated Charter of SmartFinancial, Inc.	Incorporated by reference to Exhibit 3.3 to Form 8-K filed September 2, 2015
3.2	Second Amended and Restated Bylaws of SmartFinancial, Inc.	Incorporated by reference to Exhibit 3.1 to Form 8-K filed October 26, 2015
31.1	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
31.2	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
32.1	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
32.2	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
101	Interactive Data Files (formatted as Inline XBRL)	Filed herewith.
104	Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101)	Filed herewith

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

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SIGNATURES

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

		SmartFinancial, Inc.
Date:	November 12, 2024	/s/ William Y. Carroll, Jr.
		William Y. Carroll, Jr.
		President and Chief Executive Officer
		(principal executive officer)
Date:	November 12, 2024	/s/ Ronald J. Gorczynski
		Ronald J. Gorczynski
		Executive Vice President and Chief Financial Officer
		(principal financial officer and accounting officer)

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