United States Securities and Exchange Commission
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
x☒QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
2020
¨☐TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to


Commission File Number:333-203449001-37661
tlogoa01.jpg smbk-20200331_g1.jpg


(Exact name of small business issuerregistrant as specified in its charter) 
Tennessee62-1173944
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
5401 Kingston Pike, Suite 600 Knoxville, Tennessee37919
(Address of principal executive offices)(Zip Code)
865-453-2650
865-437-5700
Not Applicable
(Registrant’s telephone number, including area code)(Former name, former address and former fiscal
year, if changeschanged since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of Exchange on which Registered
Common Stock, par value $1.00SMBKThe Nasdaq Stock Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x☒   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  x☒    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. (Check one):
Act:
Large accelerated filer  ¨☐
Accelerated filer  x☒
Non-accelerated filer  ¨☐
Smaller reporting company  x
☒
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  ☒

Yes  ¨    No  x

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
CommonSMBKNASDAQ


As of May 1, 20198, 2020 there were 13,951,59015,216,932 shares of common stock, $1.00 par value per share, issued and outstanding.

1


TABLE OF CONTENTS
 
3
3
4
5
6
7
8
Consolidated Financial Statements (Unaudited)
5
Item 2.
3240
4252
4353
4454
4454
4455
4455
4455
4455
4557
 




2
FORWARD-LOOKING STATEMENTS

Certain of the statements made in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” and “estimate,” and similar expressions, are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking, including statements pertaining to the intent, belief, or current expectations of SmartFinancial’s management regarding the company’s strategic direction, plans, objectives, prospects, or future results or financial performance. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of SmartFinancial to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties, and other factors include, among others, (1) the risk that the recent announcement of the termination of our agreement and plan of merger with Entegra Financial Corp. (the “Entegra Merger Agreement”) could have adverse effects on the market price of our common stock; (2) the risk that the termination of the Entegra Merger Agreement or the announcement of the same could have an adverse effect on our business generally, including our ability to retain customers, retain or hire key personnel, or maintain relationships with customers or suppliers; (3) reputational risk from the announcement of the termination of the Entegra Merger Agreement.; (4) the fact that we have incurred significant costs and expenses related to the Entegra Merger Agreement and the transactions that were contemplated by the Entegra Merger Agreement; (5) the risk of litigation related to the termination of the Entegra Merger Agreement or the abandonment of the transactions that were contemplated by the Entegra Merger Agreement; (6) potential changes to, or the risk that we may not be able to execute on, our business strategy as a result of the termination of the Entegra Merger Agreement; (7) the risk that cost savings and revenue synergies from recently completed acquisitions may not be realized or may take longer than anticipated to realize, (8) disruption from recently completed acquisitions with customer, supplier, employee, or other business relationships, (9) our ability to successfully integrate the businesses acquired as part of previous acquisitions with the business of SmartBank, (10) changes in management’s plans for the future, (11) prevailing, or changes in, economic or political conditions, particularly in our market areas, (12) credit risk associated with our lending activities, (13) changes in interest rates, loan demand, real estate values, or competition, (14) changes in accounting principles, policies, or guidelines, (15) changes in applicable laws, rules, or regulations, and (16) other general competitive, economic, political, and market factors, including those affecting our business, operations, pricing, products, or services. Certain additional factors which could affect the forward-looking statements can be found in SmartFinancial’s 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). SmartFinancial disclaims any obligation to update or revise any forward-looking statements contained in this report, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.


Non-GAAP Financial Measures

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled “Net Interest Income and Yield Analysis”), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.





PART I –FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED BALANCE SHEETS 
(Dollars in thousands, except for share data)
(Unaudited) March 31,
2020		December 31,
2019
ASSETS:ASSETS:  
Cash and due from banksCash and due from banks$38,802  $33,205  
Interest-bearing deposits with banksInterest-bearing deposits with banks194,454  127,329  
Federal funds soldFederal funds sold75,833  23,437  
Total cash and cash equivalentsTotal cash and cash equivalents309,089  183,971  
Securities available-for-sale, at fair valueSecurities available-for-sale, at fair value201,002  178,348  
Other investmentsOther investments14,113  12,913  
Loans held for saleLoans held for sale6,045  5,856  
LoansLoans2,139,247  1,897,392  
Less: Allowance for loan losses Less: Allowance for loan losses(13,431) (10,243) 
Loans, net Loans, net2,125,816  1,887,149  
 Unaudited
March 31,
2019		 December 31,
2018
ASSETS  
  
Cash and due from banks $47,667,920
 $40,015,438
Interest-bearing deposits at other financial institutions 85,326,515
 75,807,021
Total cash and cash equivalents 132,994,435
 115,822,459
    
Securities available-for-sale, at fair value 198,272,685
 201,687,683
Restricted investments, at cost 12,397,950
 11,499,000
Loans, net of allowance for loan losses of $8,704,413 at March 31, 2019 and $8,275,055 at December 31, 2018 1,831,864,834
 1,768,963,569
Bank premises and equipment, net 56,582,528
 56,012,184
Foreclosed assets 2,066,263
 2,495,458
Premises and equipment, netPremises and equipment, net73,801  59,433  
Other real estate ownedOther real estate owned5,894  1,757  
Goodwill and core deposit intangible, net 78,690,076
 79,033,607
Goodwill and core deposit intangible, net86,503  77,193  
Cash surrender value of life insurance 24,539,512
 24,381,485
Bank owned life insuranceBank owned life insurance30,671  24,949  
Other assets 16,572,478
 14,513,890
Other assets20,781  17,554  
Total assets $2,353,980,761
 $2,274,409,335
Total assets$2,873,715  $2,449,123  
    
LIABILITIES AND SHAREHOLDERS' EQUITY  
  
LIABILITIES AND SHAREHOLDERS' EQUITY:LIABILITIES AND SHAREHOLDERS' EQUITY:  
Deposits:  
  
Deposits:  
Noninterest-bearing demand deposits $329,095,443
 $319,861,237
Interest-bearing demand deposits 331,628,819
 311,482,434
Money market and savings deposits 698,430,851
 641,944,880
Noninterest-bearing demandNoninterest-bearing demand$431,781  $364,155  
Interest-bearing demandInterest-bearing demand444,141  380,234  
Money market and savingsMoney market and savings730,392  623,284  
Time deposits 635,175,084
 648,675,440
Time deposits735,616  679,541  
Total deposits 1,994,330,197
 1,921,963,991
Total deposits2,341,930  2,047,214  
    
Securities sold under agreement to repurchase 7,069,668
 11,755,923
Securities sold under agreement to repurchase6,164  6,184  
Federal Home Loan Bank advances and other borrowings 8,604,917
 11,242,533
Federal Home Loan Bank advances and other borrowings125,439  25,439  
Subordinated debt 39,198,068
 39,176,947
Subordinated debt39,283  39,261  
Accrued expenses and other liabilities 14,297,108
 7,258,460
Other liabilitiesOther liabilities24,699  18,278  
Total liabilities 2,063,499,958
 1,991,397,854
Total liabilities2,537,515  2,136,376  
    
Shareholders' equity:  
  
Shareholders' equity:  
Preferred stock - $1 par value; 2,000,000 shares authorized; None issued and outstanding as of March 31, 2019 and December 31, 2018 —
 —
Common stock - $1 par value; 40,000,000 shares authorized; 13,951,590 and 13,933,504 shares issued and outstanding in 2019 and 2018, respectively 13,951,590
 13,933,504
Preferred stock, $1 par value; 2,000,000 shares authorized; NaN shares issued and outstandingPreferred stock, $1 par value; 2,000,000 shares authorized; NaN shares issued and outstanding—  —  
Common stock, $1 par value; 40,000,000 shares authorized; 15,221,990 and 14,008,233 shares issued and outstanding, respectivelyCommon stock, $1 par value; 40,000,000 shares authorized; 15,221,990 and 14,008,233 shares issued and outstanding, respectively15,222  14,008  
Additional paid-in capital 232,240,747
 231,851,730
Additional paid-in capital254,356  232,732  
Retained earnings 44,722,239
 39,990,990
Retained earnings67,869  65,839  
Accumulated other comprehensive loss (433,773) (2,764,743)
Accumulated other comprehensive income (loss)Accumulated other comprehensive income (loss)(1,247) 168  
Total shareholders' equity 290,480,803
 283,011,481
Total shareholders' equity336,200  312,747  
    
Total liabilities and shareholders' equity $2,353,980,761
 $2,274,409,335
Total liabilities and shareholders' equity$2,873,715  $2,449,123  


The Notes to Consolidated Financial Statementsaccompanying notes are an integral part of thesethe financial statements.

3


SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(Dollars in thousands, except share and per share data)
Three Months Ended
March 31,
 Three Months Ended
March 31,		 20202019
 2019 2018
INTEREST INCOME  
  
Interest income:Interest income:  
Loans, including fees $24,974,939
 $18,227,880
Loans, including fees$26,434  $24,975  
Securities and interest-bearing deposits at other financial institutions 1,787,632
 1,049,356
Securities available-for-sale:Securities available-for-sale:
Taxable Taxable679  971  
Tax-exempt Tax-exempt283  424  
Federal funds sold and other earning assets 179,964
 100,818
Federal funds sold and other earning assets602  573  
Total interest income 26,942,535
 19,378,054
Total interest income27,998  26,943  
INTEREST EXPENSE  
  
Interest expense:Interest expense:  
Deposits 5,250,501
 2,401,462
Deposits4,754  5,251  
Securities sold under agreements to repurchase 7,788
 12,496
Securities sold under agreements to repurchase5  8  
Federal Home Loan Bank advances and other borrowingsFederal Home Loan Bank advances and other borrowings84  103  
Subordinated debt 583,621
 —
Subordinated debt584  584  
Federal Home Loan Bank advances and other borrowings 103,385
 152,775
Total interest expense 5,945,295
 2,566,733
Total interest expense5,427  5,946  
Net interest income before provision for loan losses 20,997,240
 16,811,321
Net interest incomeNet interest income22,571  20,997  
Provision for loan losses 797,129
 688,796
Provision for loan losses3,200  797  
Net interest income after provision for loan losses 20,200,111
 16,122,525
Net interest income after provision for loan losses19,371  20,200  
NONINTEREST INCOME  
  
Customer service fees 654,000
 578,003
Gain on sale of loans and other assets 281,903
 325,345
Noninterest income:Noninterest income:  
Service charges on deposit accountsService charges on deposit accounts770  654  
Mortgage bankingMortgage banking584  282  
Investment servicesInvestment services437  169  
Insurance commissionsInsurance commissions269  —  
Interchange and debit card transaction fees 174,912
 145,536
Interchange and debit card transaction fees276  175  
Other noninterest income 587,355
 406,308
OtherOther482  418  
Total noninterest income 1,698,170
 1,455,192
Total noninterest income2,818  1,698  
NONINTEREST EXPENSES  
  
Noninterest expense:Noninterest expense:  
Salaries and employee benefits 8,398,191
 7,176,344
Salaries and employee benefits10,006  8,398  
Net occupancy and equipment expense 1,640,126
 1,533,413
Occupancy and equipmentOccupancy and equipment1,911  1,640  
FDIC insurance 178,832
 101,804
FDIC insurance180  179  
Foreclosed assets 61,918
 189,427
Advertising 295,237
 184,476
Other real estate and loan related expenseOther real estate and loan related expense545  490  
Advertising and marketingAdvertising and marketing198  295  
Data processing 614,858
 526,308
Data processing538  615  
Professional services 796,856
 898,360
Professional services711  662  
Amortization of intangible assets 343,531
 187,757
Amortization of intangiblesAmortization of intangibles362  344  
Software as service contracts 567,296
 478,607
Software as service contracts470  567  
Merger expenses 923,141
 497,740
Other operating expenses 1,759,512
 1,448,255
Total noninterest expenses 15,579,498
 13,222,491
Merger related and restructuring expensesMerger related and restructuring expenses2,096  923  
OtherOther1,776  1,466  
Total noninterest expenseTotal noninterest expense18,793  15,579  
Income before income tax expense 6,318,783
 4,355,226
Income before income tax expense3,396  6,319  
Income tax expense 1,587,534
 940,455
Income tax expense664  1,588  
Net income available to common shareholders $4,731,249
 $3,414,771
EARNINGS PER COMMON SHARE  
  
Net incomeNet income$2,732  $4,731  
Earnings per common share:Earnings per common share:  
Basic $0.34
 $0.30
Basic$0.19  $0.34  
Diluted 0.34
 0.30
Diluted$0.19  $0.34  
Weighted average common shares outstanding  
  
Weighted average common shares outstanding:Weighted average common shares outstanding:  
Basic 13,942,016
 11,210,836
Basic14,395,103  13,942,016  
Diluted 14,018,163
 11,319,694
Diluted14,479,671  14,018,163  
The Notes to Consolidated Financial Statementsaccompanying notes are an integral part of thesethe financial statements.

4


SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited) 
(Dollars in thousands)
  Three Months Ended
March 31,
  2019 2018
Net income available to common shareholders $4,731,249
 $3,414,771
Other comprehensive loss, net of tax:  
  
Unrealized holding gains (losses) on securities arising during the period, net of tax expense (benefit) of $700,014 and $(445,994) in 2019 and 2018, respectively 2,330,970
 (1,371,394)
     
Total other comprehensive income (loss) 2,330,970
 (1,371,394)
     
Comprehensive income $7,062,219
 $2,043,377

Three Months Ended
March 31,
 20202019
Net income$2,732  $4,731  
Other comprehensive income:  
Unrealized holding gains and hedge effects on securities available-for-sale arising during the period1,095  2,851  
Tax effect(244) (748) 
Unrealized gains on securities available-for-sale arising during the period, net of tax851  2,103  
Unrealized gains (losses) on fair value municipal security hedges(3,072) 309  
Tax effect806  (81) 
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax(2,266) 228  
Total other comprehensive income (loss)(1,415) 2,331  
Comprehensive income$1,317  $7,062  

The Notes to Consolidated Financial Statementsaccompanying notes are an integral part of thesethe financial statements.





5

SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - (Unaudited) 
For the Three Months Ended March 31, 20192020 and 20182019
(Dollars in thousands, except for share data)

Common Stock
SharesAmountAdditional Paid-in CapitalRetained
Earnings		Accumulated Other Comprehensive (Loss) IncomeTotal
Balance, December 31, 2018Balance, December 31, 201813,933,504  $13,934  $231,852  $39,991  $(2,765) $283,011  
Net incomeNet income—  —  —  4,731  —  4,731  
Other comprehensive incomeOther comprehensive income—  —  —  —  2,331  2,331  
 Common
Stock		 Additional
Paid-in
Capital		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 Total
Shareholders'
Equity
          
BALANCE, December 31, 2018 $13,933,504
 $231,851,730
 $39,990,990
 $(2,764,743) $283,011,481
          
Net income —
 —
 4,731,249
 —
 4,731,249
          
Other comprehensive income —
 —
 —
 2,330,970
 2,330,970
          
Issuance of stock grants and restricted stock 3,298
 61,409
 —
 —
 64,707
          
Common stock issued pursuant to:Common stock issued pursuant to:
Stock awardsStock awards3,298  3  61  —  —  65  
Exercise of stock options 14,788
 184,219
 —
 —
 199,007
Exercise of stock options14,788  15  184  —  —  199  
          
Stock compensation expense —
 143,389
 —
 —
 143,389
Stock compensation expense—  —  143  —  —  143  
          
BALANCE, March 31, 2019 $13,951,590
 $232,240,747
 $44,722,239
 $(433,773) $290,480,803
Balance, March 31, 2019Balance, March 31, 201913,951,590  $13,952  $232,241  $44,722  $(434) $290,481  

Balance, December 31, 201914,008,233  $14,008  $232,732  $65,839  $168  $312,747  
Net income—  —  —  2,732  —  2,732  
Other comprehensive loss—  —  —  —  (1,415) (1,415) 
Common stock issued pursuant to:
Exercise of stock options14,858  15  158  —  —  173  
Restricted stock, net of forfeitures31,900  32  (32) —  —  —  
Shareholders of Progressive Financial Group, Inc.1,292,578  1,293  23,254  —  —  24,547  
Stock compensation expense—  —  110  —  —  110  
Common stock dividend ($0.05 per share)—  —  —  (702) —  (702) 
Purchase of common stock(125,579) (126) (1,866) —  —  (1,992) 
Balance, March 31, 202015,221,990  $15,222  $254,356  $67,869  $(1,247) $336,200  
   
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
            
BALANCE, December 31, 2017  $11,152,561
 $174,008,753
 $21,888,575
 $(1,198,049) $205,851,840
            
Net income  —
 —
 3,414,771
 —
 3,414,771
            
Other comprehensive loss  —
 —
 —
 (1,371,394) (1,371,394)
            
Exercise of stock options  81,245
 869,276
 —
 —
 950,521
            
Stock compensation expense  —
 103,177
 —
 —
 103,177
            
BALANCE, March 31, 2018  $11,233,806
 $174,981,206
 $25,303,346
 $(2,569,443) $208,948,915

The Notes to Consolidated Financial Statementsaccompanying notes are an integral part of these statements

the financial statements.


SMARTFINANICAL,
6

SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
  Three Months Ended March 31,
  2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income $4,731,249
 $3,414,771
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation, amortization and accretion (560,383) (645,364)
Provision for loan losses 797,129
 688,796
Stock compensation expense 143,389
 103,177
Deferred income tax expense 1,038,865
 1,315,696
Income on bank owned life insurance (158,027) (150,066)
 Loss on disposal of fixed assets 6,961
 40,956
Net gains from sale of loans and other assets (281,903) (325,345)
Net losses from sale of foreclosed assets 25,558
 146,540
Loans originated for sale (16,804,564) (10,213,891)
Proceeds from sale of loans originated for sale 16,061,157
 11,217,169
Changes in other assets and liabilities:    
Accrued interest receivable (1,092,865) (352,171)
Accrued interest payable 747,512
 21,507
Other assets and liabilities 3,040,906
 (2,618,866)
Net cash provided by operating activities 7,694,984
 2,642,909
CASH FLOWS FROM INVESTING ACTIVITIES    
Proceeds from sales, maturities, and paydowns of securities available-for-sale 8,172,785
 5,007,826
Purchase of securities available-for-sale (1,053,710) (11,239,649)
Purchase of restricted investments (898,950) (1,377,600)
Loan originations and principal collections, net (61,010,912) (50,058,787)
Purchase of bank premises and equipment (1,296,250) (1,830,300)
Proceeds from sale of foreclosed assets 458,157
 320,417
Net cash used in investing activities (55,628,880) (59,178,093)
CASH FLOWS FROM FINANCING ACTIVITIES    
Net increase in deposits 72,166,029
 60,954,797
Net decrease in securities sold under agreements to repurchase (4,686,255) (8,086,929)
Issuance of common stock 263,714
 950,521
Proceeds from Federal Home Loan Bank advances and other borrowings 50,094,474
 65,000,000
Repayment of Federal Home Loan Bank advances and other borrowings (52,732,090) (78,600,000)
Net cash provided by financing activities 65,105,872
 40,218,389
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,171,976
 (16,316,795)
CASH AND CASH EQUIVALENTS, beginning of year 115,822,459
 113,026,884
CASH AND CASH EQUIVALENTS, end of period $132,994,435
 $96,710,089
     
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION    
Cash paid during the period for interest $5,197,783
 $2,545,226
     
NONCASH INVESTING AND FINANCING ACTIVITIES    
Change in unrealized losses on securities available for sale $(3,030,984) $1,817,388
Acquisition of real estate through foreclosure 54,520
 135,038
Financed sales of foreclosed assets —
 257,416
Change in goodwill due to acquisition —
 10,778
(Unaudited)

(Dollars in thousands)
Three Months Ended March 31,
 20202019
Cash flows from operating activities:
Net income$2,732  $4,731  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization1,634  1,156  
Accretion of fair value purchase accounting adjustments, net(1,841) (1,717) 
Provision for loan losses3,200  797  
Stock compensation expense110  143  
Deferred income tax expense90  1,039  
Increase in cash surrender value of bank owned life insurance(162) (158) 
Loss on disposal of fixed assets—  7  
Net losses from sale of other real estate owned14  26  
Net gains from sale of loans(576) (282) 
Origination of loans held for sale(15,195) (16,805) 
Proceeds from sales of loans held for sale15,582  16,061  
Net change in:
Accrued interest receivable35  (1,093) 
Accrued interest payable784  748  
Other assets685  (1,660) 
Other liabilities2,010  4,702  
Net cash provided by operating activities9,102  7,695  
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale2,115  —  
Proceeds from maturities and calls of securities available-for-sale3,250  5,000  
Proceeds from paydowns of securities available-for-sale3,816  3,173  
Purchases of securities available-for-sale(3,377) (1,054) 
Purchases of other investments(507) (899) 
Net increase in loans(52,721) (61,011) 
Purchases of premises and equipment(2,429) (1,296) 
Proceeds from sale of other real estate owned120  458  
Net cash and cash equivalents received from business combination46,132  —  
Net cash used in investing activities(3,601) (55,629) 
Cash flows from financing activities:
Net increase in deposits22,158  72,166  
Net decrease in securities sold under agreements to repurchase(20) (4,686) 
Proceeds from Federal Home Loan Bank advances and other borrowings100,000  50,094  
Repayment of Federal Home Loan Bank advances and other borrowings—  (52,732) 
Cash dividends paid(702) —  
Issuance of common stock173  264  
Purchase of common stock(1,992) —  
Net cash provided by financing activities119,617  65,106  
Net change in cash and cash equivalents125,118  17,172  
Cash and cash equivalents, beginning of period183,971  115,822  
Cash and cash equivalents, end of period$309,089  $132,994  
Supplemental disclosures of cash flow information:
Cash paid during the period for interest$4,643  $5,198  
Cash paid during the period for income taxes—  —  
Noncash investing and financing activities:
Acquisition of real estate through foreclosure676  55  
Change in goodwill due to acquisitions8,302  —  
Initial recognition of operating lease right-of-use assets222  2,344  
Initial recognition of operating lease liabilities222  2,344  
The Notes to Consolidated Financial Statementsaccompanying notes are an integral part of thesethe financial statements.

7
9
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)





Note 1. Presentation of Financial Information
  
Interim Financial Information (Unaudited):Nature of Business:

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

Basis of Presentation and Accounting Estimates:

The accounting and financial information in this report for March 31, 2019reporting policies of SmartFinancial (the "Company") and March 31, 2018 has not been audited. The information included herein should be read in conjunction with the Company’s annual consolidated financial statements and footnotes included in the Company's most recent Annual Report on Form 10-K. The consolidated financial statements presented hereinits wholly-owned subsidiary conform to U.S. generally accepted accounting principles (“GAAP”) and to general industry practices. In the opinionreporting guidelines of SmartFinancial’s management, thebanking regulatory authorities and regulators. The accompanying interim financial statements contain all material adjustments necessary to present fairly the Company's financial condition, the results of operations, and cash flows for the interim period. Results for interim periods are not necessarily indicative of the results to be expected for a full year.
Basis of Presentation and Accounting Estimates:
All adjustments consisting of normal recurring accruals that in the opinion of management are necessary for a fair presentation of the financial position and the results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with those appearing in the most recent Annual Report previously filed on Form 10-K.
The consolidated financial statements include the accounts offor the Company and its wholly-owned subsidiary.subsidiary have not been audited. All significantmaterial intercompany balances and transactions have been eliminated in consolidation.eliminated.
In preparingmanagement’s opinion, all accounting adjustments necessary to accurately reflect the consolidatedfinancial position and results of operations on the accompanying financial statements in conformity with accounting principles generally accepted in the U.S, management is required to make estimateshave been made. These adjustments are normal and assumptions that affect the reported amounts of assetsrecurring accruals considered necessary for a fair and liabilities as of the date of the balance sheet, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and business combination elements (Day 1the fair value of assets acquired and Day 2 Valuation).liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company's annual report on Form 10-K for the year ended December 31, 2019.

Recently Issued and Adopted Accounting Pronouncements:


As of January 1, 2019, the Company adopted certain accounting standard updates related to accounting for leases (Topic 842 - Leases), primarily Accounting Standards Update ASU 2016-02 and subsequent updates. Among other things, these updates require lessees to recognize a lease liability, measured on a discounted basis, related to the lessee's obligation to make lease payments arising under a lease contract; and a right-of-use asset related to the lessee's right to use, or control the use of, a specified asset for the lease term. The updates did not significantly change lease accounting requirements applicable to lessors and did not significantly impact the Company's consolidated financial statements in relation to contracts whereby the Company acts as a lessor. The Company adopted the updates using a modified-retrospective transition approach and recognized right-of-use lease assets and related lease liabilities totaling $2.3 million each as of January 1, 2019. As of March 31, 2019, right-of-use lease assets and related lease liabilities totaled $2.2 million each.

In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach was applied on January 1, 2019.

10
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 1. Presentation of Financial Information, Continued

Recently Issued and Adopted Accounting Pronouncements (continued):
The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). We elected to apply certain practical adoption expedients provided under the updates whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations or office space, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated balance sheet. The new guidance requires these lease agreements to be recognized on the consolidated balance sheet as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 8 Leases for more information.
In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted ASU 2018-11 on its required effective date of January 1, 2019 and elected both transition options mentioned above.

As of January 1, 2019,2020, the Company adopted ASU 2018-07, Compensation-Stock Compensation (Topic 718):2019-01, Leases: Codification Improvements (“ASU 2019-01”).ASU 2019-01provides clarification to Nonemployee Share-Based Payment Accounting. Theincrease transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU expands2019-01 (i) allows the scopefair value of Topic 718, Compensation-Stock Compensation (which previously only included paymentsthe underlying asset reported by lessors that are not manufacturers or dealers to employees), to include share-based payment transactions for acquiring goods and services from non-employees. This required entities to apply the requirements of Topic 718 to non-employee awards, except for specific guidance on inputs to an option pricing model and the attribution of cost (i.e., the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). Additionally, the amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or servicescontinue to be used or consumed inits cost and not fair value as measured under the grantor’s own operations by issuing share-based payment awards,fair value definition, (ii) allows for the cash flows received for sales-type and clarifydirect financing leases to continue to be presented as results from investing, and (iii) clarifies that Topic 718 doesentities do not applyhave to share-based payments used to effectively provide (1) financing todisclose the issuer, or (2) awards granted in conjunction with selling goods or services to customers as parteffect of a contract accounted for under Topic 606, Revenue from Contracts with Customers.the lease standard on adoption year interim amounts. The adoption of this ASU 2019-01 did not have a material impact on the Company’s consolidated financial statements.

As of January 1, 2019, the Company adopted ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonably estimable. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.


Recently Issued Not Yet Effective Accounting Pronouncements:


During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, 20182019 as filed in its Annual Report on Form 10-K with the Securities and Exchange Commission.Commission ("SEC"). The following is a summary of recent authoritative pronouncements issued since December 31, 2018 but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In October 2019, the Financial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that CECL will be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as currently defined by the SEC, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For calendar-year-end companies, this will be January 1, 2020.  The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations and the Company meets the regulations as a SRC.  For all other entities, the Board decided that CECL will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The Company does not plan to adopt this standard early and being that the Company is an SRC, adoption is required for fiscal years beginning after December 15, 2022.  




11
8
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




Note 1. Presentation of Financial Information, Continued

Recently Not Yet Effective Accounting Pronouncements (continued):

In June 2016,December 2019, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses2019-12, Income Taxes (Topic 326)740): Measurement of Credit Losses on Financial Instruments. The ASU changedSimplifying the credit loss model on financial instruments measured at amortized cost, availableAccounting for sale securities and certain purchased financial instruments. Credit losses on financial instruments measured at amortized cost will be determined using a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. Purchased financial assets with more-than-insignificant credit deterioration since origination ("PCD assets" which are currently named "PCI Loans") measured at amortized cost will have an allowance for credit losses established at acquisition as part of the purchase price. Subsequent increases or decreases to the allowance for credit losses on PCD assets will be recognized in the income statement. Interest income should be recognized on PCD assets based on the effective interest rate, determined excluding the discount attributed to credit losses at acquisition. Credit losses relating to available-for-sale debt securities will be recognized through an allowance for credit losses. The amount of the credit loss is limited to the amount by which fair value is below amortized cost of the available-for-sale debt security.Income Taxes. The amendments in this update simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years beginning after December 15, 2019,2020, with early adoption permitted. The Company does not plan to adopt this standard early and adoption should not have a material impact on the Company's consolidated financial statements.

In March 2020, various regulatory agencies, including interim periods within those fiscal years for the Company and other SEC filers. Early adoption is permitted and if early adopted, all provisions must be adopted in the same period. The amendments should be applied through a cumulative-effect adjustment to retained earnings asBoard of Governors of the beginningFederal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the period adopted. A prospective approach is required for securities with other than temporary impairment recognizedFASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to adoption. The Companyany relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is continuing its implementation efforts through its company-wide implementation team. The implementation team meets periodicallyimplemented. As of March 31, 2020, the Bank had provided modifications to discussapproximately $70.1 million in loans, per the latest developments and ensure progress is being made. The team also keeps currentguidance stated above. This interagency guidance could have a material impact on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, conferences, and peer bank meetings. The team continues to evaluate and validate data resources and different loss methodologies. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular an increase to the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact. The guidance of ASU 2016-13 was recently amended by ASU 2018-19, Codification Improvements to Topic 326, Financialstatements; however, this impact cannot be quantified at this time.

Instruments - Credit Losses, which changed the effective date for non-public companies and clarified that operating lease receivables are not within the scope of the standard.


Reclassifications:


Certain captions and amounts in the 20182019 consolidated financial statements were reclassified to conform to the 2019 presentation and these2020 financial statement presentation. These reclassifications had no impact on net income or shareholders' equity as previously reported.


Earnings per common share:
Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance (excluding tax impact). Potential common shares that may be issued by the Company relate solely to outstanding stock options, determined using the treasury stock method, and restricted stock awards, determined by the fair value of the Company's stock on date of grant.



12
9
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

Acquisition of Progressive Financial Inc.

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

In connection with the merger, the Company acquired $301 million of assets and assumed $272 million of liabilities. Pursuant to the Merger Agreement, each outstanding share of Progressive common stock was converted into and cancelled in exchange to the right to receive $474.82 in cash, and 62.3808 shares of SmartFinancial common stock. SmartFinancial issued 1,292,578 shares of SmartFinancial common stock and paid $9.8 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $8.3 million, representing the intangible value of Progressive's business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.4 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

The Company's operating results for the period ended March 31, 2020, include the operating results of the acquired business for the period subsequent to the merger date of March 1, 2020.

The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands).
As recordedFair valueAs recorded
by PFG
adjustments (1)
by the Company
Assets:
Cash & cash equivalents$55,971  $—  $55,971  
Investment securities available-for-sale27,054  203  27,257  
Restricted investments692  —  692  
Loans191,672  (3,691) 187,981  
Allowance for loan losses(2,832) 2,832  —  
Premises and equipment, net15,681  (2,919) 12,762  
Bank owned life insurance5,560  —  5,560  
Deferred tax asset, net—  813  813  
Intangibles—  1,370  1,370  
Other real estate owned3,695  (100) 3,595  
Interest Receivable1,061  (280) 781  
Prepaids375  (174) 201  
Goodwill231  (231) —  
Other assets1,881  —  1,881  
Total assets acquired$301,041  $(2,177) $298,864  
Liabilities:
  Deposits$271,276  $—  $271,276  
  Time deposit premium—  729  729  
  Payables and other liabilities776  —  776  
Total liabilities assumed272,052  729  272,781  
Excess of assets assumed over liabilities assumed$28,989  
Aggregate fair value adjustments$(2,906) 
Total identifiable net assets26,083  
Consideration transferred:
  Cash9,838  
  Common stock issued (1,292,578 shares)24,547  
    Total fair value of consideration transferred34,385  
Goodwill$8,302  
(1) Fair values are preliminary and are subject to refinement for a period of one year after the closing date of an acquisition as information relative to the closing date fair value becomes available.



10
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents additional information related to the acquired loan portfolio at the acquisition date (in thousands):
March 1, 2020
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest$21,107 
Non-accretable differences4,706 
Cash flows expected to be collected16,401 
Accretable yield2,515 
Fair value$13,886 

The following table discloses the impact of the merger with PFG since the acquisition date through March 31, 2020. The table also presents certain pro forma information (net interest income and noninterest income ("Revenue") and net income) as if the PFG acquisition had occurred on January 1, 2019. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

Merger-related cost from the PFG acquisition of $2.1 million have been excluded from the three months period of 2020 pro- forma information presented below and included in the three months period of 2019 pro-forma information below. The actual results and pro-forma information were as follows (in thousands):
Three Months Ended March 31,
RevenueNet Income
2020:
Actual PFG results included in statement of income since acquisition date$505  $117  
Supplemental consolidation pro-forma as if PFG had been acquired January 1, 201928,050  4,013  
2019:
Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019$26,766  $3,513  







11
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 2.3. Earnings per sharePer Share

The following is a summary of the basic and dilutedBasic earnings per common share is computed by dividing net income available to common stockholders 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 the three months ended March 31, 2019net income per share-basic and 2018.

 Three Months Ended March 31, 
 2019 2018 
Net income available to common shareholders$4,731,249
 $3,414,771
 
Weighted average common shares outstanding13,942,016
 11,210,836
 
Effect of dilutive stock options76,147
 108,858
 
Diluted shares14,018,163
 11,319,694
 
Basic earnings per common share$0.34
 $0.30
 
Diluted earnings per common share$0.34
 $0.30
 

net income per share-diluted are presented below. There were no64 thousand antidilutive shares for the three month periods endingperiod ended March 31, 20192020, and 2018.none for the period ended March 31, 2019.


 Three Months Ended March 31,
 20202019
Basic earnings per share computation:
Net income available to common stockholders$2,732  $4,731  
Average common shares outstanding - basic14,395,103  13,942,016  
Basic earnings per share$0.19  $0.34  
Diluted earnings per share computation:
Net income available to common stockholders$2,732  $4,731  
Average common shares outstanding - basic14,395,103  13,942,016  
Incremental shares from assumed conversions:
Stock options and restricted stock84,568  76,147  
Average common shares outstanding - diluted14,479,671  14,018,163  
Diluted earnings per common share$0.19  $0.34  


12
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 3.4. Securities
 
The amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale at March 31, 2019 and December 31, 2018 are summarized as follows (in(in thousands):
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
March 31, 2020:
U.S. Government-sponsored enterprises (GSEs)$17,012  $96  $(63) $17,045  
Municipal securities82,599  970  (252) 83,317  
Other debt securities5,461  129  (128) 5,462  
Mortgage-backed securities (GSEs)94,306  1,482  (610) 95,178  
 $199,378  $2,677  $(1,053) $201,002  

  March 31, 2019
  
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Government-sponsored enterprises (GSEs) $39,106
 $21
 $(299) $38,828
Municipal securities 58,260
 1,506
 (838) 58,928
Other debt securities 978
 —
 (43) 935
Mortgage-backed securities (GSEs) 100,600
 95
 (1,113) 99,582
  $198,944
 $1,622
 $(2,293) $198,273

 December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2019:December 31, 2019:
U.S. Government-sponsored enterprises (GSEs) $44,117
 $12
 $(626) $43,503
U.S. Government-sponsored enterprises (GSEs)$19,015  $41  $(56) $19,000  
Municipal securities 55,248
 276
 (363) 55,161
Municipal securities63,792  618  (19) 64,391  
Other debt securities 977
 —
 (67) 910
Other debt securities3,481  22  (33) 3,470  
Mortgage-backed securities (GSEs) 103,875
 153
 (1,914) 102,114
Mortgage-backed securities (GSEs)91,531  382  (426) 91,487  
 $204,217
 $441
 $(2,970) $201,688
 $177,819  $1,063  $(534) $178,348  
 
At March 31, 20192020, and December 31, 2018,2019, securities with a carrying value totaling approximately $108.0$95.7 million and $97.2$92.3 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.


For the three months ended March 31, 20192020, approximately $2.1 million available-for-sale securities were sold and March 31, 2018, there were no available-for-sale securities sold which resulted in no gross0 gains or losses realized. For the three months ended March 31, 2019, there was one security called/redeemed forwere 0 available-for-sale securities sold. For the three months ended March 31, 2020, there were approximately $3.3 million available-for-sale securities redeemed. For the three months ended March 31, 2019, there were approximately $5 million.million available-for-sale securities redeemed.



13
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 3. Securities, Continued

The amortized cost and estimated fair value of securities at March 31, 2019,2020, by contractual maturity for non-mortgage backed securities are shown below (in(in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost		Fair
Value
Due in one year or less$8,491  $8,440  
Due from one year to five years5,177  5,182  
Due from five years to ten years19,145  19,254  
Due after ten years72,258  72,947  
 105,071  105,823  
Mortgage-backed securities94,307  95,179  
 $199,378  $201,002  

  
Amortized
Cost
 
Fair
Value
Due in one year or less $—
 $—
Due from one year to five years 31,111
 30,930
Due from five years to ten years 14,567
 14,352
Due after ten years 52,666
 53,409
  98,344
 98,691
Mortgage-backed securities 100,600
 99,582
  $198,944
 $198,273

The following tables present the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities available-for-sale have been in a continuous unrealized loss position as of March 31, 2019 and December 31, 2018 (in(in thousands): 
 Less than 12 Months12 Months or GreaterTotal
Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses
March 31, 2020:
U.S. Government- sponsored enterprises (GSEs)$696  $(63) $—  $—  $696  $(63) 
Municipal securities16,370  (250) 527  (2) 16,897  (252) 
Other debt securities1,970  (10) 863  (118) 2,833  (128) 
Mortgage-backed securities (GSEs)29,967  (425) 7,125  (185) 37,092  (610) 
$49,003  $(748) $8,515  $(305) $57,518  $(1,053) 
13
  As of March 31, 2019
  Less than 12 Months 12 Months or Greater Total
  
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Government- sponsored enterprises (GSEs) $—
 $—
 $28,807
 $(299) $28,807
 $(299)
Municipal securities —
 —
 4,059
 (838) 4,059
 (838)
Other debt securities —
 —
 935
 (43) 935
 (43)
Mortgage-backed securities (GSEs) 8,915
 (29) 72,886
 (1,084) 81,801
 (1,113)
  $8,915
 $(29) $106,687
 $(2,264) $115,602
 $(2,293)
  As of December 31, 2018
  Less than 12 Months 12 Months or Greater Total
  
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. Government- sponsored enterprises (GSEs) $14,763
 $(237) $13,728
 $(389) $28,491
 $(626)
Municipal securities 16,455
 (150) 4,767
 (213) 21,222
 (363)
Other debt securities —
 —
 910
 (67) 910
 (67)
Mortgage-backed securities (GSEs) 10,516
 (155) 69,884
 (1,759) 80,400
 (1,914)
  $41,734
 $(542) $89,289
 $(2,428) $131,023
 $(2,970)


14
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 3. Securities, Continued
Less than 12 Months12 Months or GreaterTotal
Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses
December 31, 2019:
U.S. Government- sponsored enterprises (GSEs)$2,972  $(43) $5,987  $(13) $8,959  $(56) 
Municipal securities3,656  (16) 527  (3) 4,183  (19) 
Other debt securities—  —  947  (33) 947  (33) 
Mortgage-backed securities (GSEs)13,208  (194) 19,988  (232) 33,196  (426) 
 $19,836  $(253) $27,449  $(281) $47,285  $(534) 


At March 31, 2019,2020, the categories of temporarily impaired securities and management’s evaluation of those securities,in an unrealized loss position twelve months or greater are as follows:follows (dollars in thousands):

Gross Unrealized LossNumber
of
Securities
U.S. Government-sponsored enterprises (GSEs)$—  —  
Municipal securities(2) 1  
Other debt securities(118) 1  
Mortgage-backed securities (GSEs)(185) 11  
$(305) 13  
U.S. Government-sponsored enterprises: At
The Company reviews the securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

Based on this evaluation, the Company concluded that any unrealized losses at March 31, 2019, 8 (or eight) investments in U.S. GSE securities had unrealized losses. These2020, represented a temporary impairment, as these unrealized losses related principallyare primarily attributable to changes in interest rates and current market interest rates. The contractual termsconditions, and not credit deterioration of the investments do not permitissuers. As of March 31, 2020, the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the BankCompany does not intend to sell any of the investments and it is more likely thansecurities, does not that the Bank will notexpect to be required to sell any of the investments before recovery of theirsecurities, and expects to recover the entire amortized cost bases, which may be maturity,of all of the Bank does not considersecurities.

The following is the amortized cost and carrying value of other investments (in thousands):
March 31,December 31,
20202019
Federal Reserve Bank stock$7,925  $7,917  
Federal Home Loan Bank stock5,838  4,646  
First National Bankers Bank stock350  350  
$14,113  $12,913  

Our restricted investments consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these investments to be other-than temporarily impaired atsecurities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of March 31, 2019.2020, the Company determined that there was no impairment on its other securities.


Municipal securities: At March 31, 2019, 8 (or eight) investments in obligations of municipal securities had unrealized losses. The Bank believes the unrealized losses on those investments were caused by the interest rate environment and do not relate to the underlying credit quality of the issuers. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider these investments to be other-than temporarily impaired at March 31, 2019.
14

SMARTFINANCIAL, INC. AND SUBSIDIARY
Other debt securities: At March 31, 2019, 1 (or one) investment in other debt securities had unrealized losses. The Bank believes the unrealized loss on this investment was caused by the interest rate environment and does not relate to the underlying credit quality of the issuer. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its amortized cost bases, which may be maturity, the Bank does not consider this investment to be other-than temporarily impaired at March 31, 2019.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Mortgage-backed securities: At March 31, 2019, 68 (or sixty-eight) investments in residential mortgage-backed securities had unrealized losses.  This impairment is believed to be caused by the current interest rate environment.  The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government.  Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not deem these investments to be other-than-temporarily impaired at March 31, 2019.

Note 4.5. Loans and Allowance for Loan Losses
 
Portfolio Segmentation:
 
At March 31, 2019 and December 31, 2018,Major categories of loans are summarized as follows (in(in thousands):
 March 31, 2020December 31, 2019
 
PCI Loans1
All Other
Loans2
Total
PCI Loans1
All Other
Loans2
Total
Commercial real estate$16,589  $992,446  $1,009,035  $15,255  $890,051  $905,306  
Consumer real estate11,950  476,823  488,773  6,541  416,797  423,338  
Construction and land development6,479  246,966  253,445  4,458  223,168  227,626  
Commercial and industrial143  377,030  377,173  407  336,668  337,075  
Consumer and other325  16,541  16,866  326  9,577  9,903  
  Total loans35,486  2,109,806  2,145,292  26,987  1,876,261  1,903,248  
Less:  Allowance for loan losses—  (13,431) (13,431) (156) (10,087) (10,243) 
  Loans, net$35,486  $2,096,375  $2,131,861  $26,831  $1,866,174  $1,893,005  
  March 31, 2019 December 31, 2018
  
PCI Loans1
 
All Other
Loans
 Total 
PCI Loans1
 
All Other
Loans
 Total
Commercial real estate $17,299
 $871,643
 $888,942
 $17,682
 $842,345
 $860,027
Consumer real estate 8,146
 402,835
 410,981
 8,712
 398,542
 407,254
Construction and land development 4,670
 182,339
 187,009
 4,602
 183,293
 187,895
Commercial and industrial 2,300
 339,171
 341,471
 2,557
 305,697
 308,254
Consumer and other 453
 11,713
 12,166
 605
 13,204
 13,809
Total loans 32,868
 1,807,701
 1,840,569
 34,158
 1,743,081
 1,777,239
Less:  Allowance for loan losses (54) (8,650) (8,704) —
 (8,275) (8,275)
Loans, net $32,814
 $1,799,051
 $1,831,865
 $34,158
 $1,734,806
 $1,768,964
1Purchased Credit Impaired loans (“PCI loans”) are loans with evidence of credit deterioration at purchase.

2 Includes loans held for sale.

For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are five5 loan portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, and consumer and other.



The composition of loans by loan classification for impaired and performing loan status is summarized in the tables below (in thousands):
Commercial
Real Estate		Consumer
Real Estate		Construction
and Land
Development		Commercial
and
Industrial		Consumer
and Other		Total
March 31, 2020:
Performing loans$991,914  $475,303  $246,359  $376,872  $16,541  $2,106,989  
Impaired loans532  1,520  607  158  —  2,817  
 992,446  476,823  246,966  377,030  16,541  2,109,806  
PCI loans16,589  11,950  6,479  143  325  35,486  
  Total loans$1,009,035  $488,773  $253,445  $377,173  $16,866  $2,145,292  

December 31, 2019:
Performing loans$889,795  $415,250  $222,621  $336,508  $9,577  $1,873,751  
Impaired loans256  1,547  547  160  —  2,510  
 890,051  416,797  223,168  336,668  9,577  1,876,261  
PCI loans15,255  6,541  4,458  407  326  26,987  
  Total loans$905,306  $423,338  $227,626  $337,075  $9,903  $1,903,248  














15
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management:

The composition of loans by loan classification for impaired and performing loan status at March 31, 2019 and December 31, 2018, is summarized in the tables below (in thousands):

  March 31, 2019
  
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
Performing loans $871,007
 $401,937
 $181,684
 $338,806
 $11,660
 $1,805,094
Impaired loans 636
 898
 655
 365
 53
 2,607
  871,643
 402,835
 182,339
 339,171
 11,713
 1,807,701
PCI loans 17,299
 8,146
 4,670
 2,300
 453
 32,868
Total $888,942
 $410,981
 $187,009
 $341,471
 $12,166
 $1,840,569
  December 31, 2018
  
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
Performing loans $841,709
 $397,306
 $182,746
 $304,673
 $13,088
 $1,739,522
Impaired loans 636
 1,236
 547
 1,024
 116
 3,559
  842,345
 398,542
 183,293
 305,697
 13,204
 1,743,081
PCI loans 17,682
 8,712
 4,602
 2,557
 605
 34,158
Total loans $860,027
 $407,254
 $187,895
 $308,254
 $13,809
 $1,777,239

The following tables show the allowance for loan losses allocation by loan classification for impaired, PCI, and performing loans as of March 31, 2019 and December 31, 2018 (in(in thousands):

Commercial
Real Estate		Consumer
Real Estate		Construction
and Land
Development		Commercial
and
Industrial		Consumer
and
Other		Total
March 31, 2020:
Performing loans$5,917  $2,922  $1,484  $2,427  $126  $12,876  
Impaired loans46  379  —  130  —  555  
5,963  3,301  1,484  2,557  126  13,431  
PCI loans—  —  —  —  —  —  
  Total loans$5,963  $3,301  $1,484  $2,557  $126  $13,431  

  March 31, 2019
  
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and
Other
 Total
Performing loans $4,023
 $1,902
 $846
 $1,545
 $114
 $8,430
PCI loans 40
 14
 —
 —
 —
 54
Impaired loans 11
 33
 8
 164
 4
 220
Total $4,074
 $1,949
 $854
 $1,709
 $118
 $8,704

December 31, 2019:December 31, 2019:
Performing loansPerforming loans$4,491  $2,159  $1,127  $1,766  $69  $9,612  
Impaired loansImpaired loans—  343  —  132  —  475  
4,491  2,502  1,127  1,898  69  10,087  
 December 31, 2018
 
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and
Other
 Total
Performing loans $3,639
 $1,763
 $795
 $1,304
 $240
 $7,741
PCI loans —
 —
 —
 —
 —
 —
PCI loans17  74  —  59  6  156  
Impaired loans —
 26
 —
 442
 66
 534
Total $3,639
 $1,789
 $795
 $1,746
 $306
 $8,275
Total loans Total loans$4,508  $2,576  $1,127  $1,957  $75  $10,243  
 

The following tables detail the changes in the allowance for loan losses by loan classification (in thousands):
Three Months Ended March 31, 2020
Commercial
Real Estate		Consumer
Real
Estate		Construction
and Land
Development		Commercial
and
Industrial		Consumer
and Other		Total
Beginning balance$4,508  $2,576  $1,127  $1,957  $75  $10,243  
Charged off loans—  (2) —  (8) (76) (86) 
Recoveries of charge-offs2  6  2  42  22  74  
Provision (reallocation) charged to expense1,453  721  355  566  105  3,200  
Ending balance$5,963  $3,301  $1,484  $2,557  $126  $13,431  

Three Months Ended March 31, 2019
Commercial
Real Estate		Consumer
Real
Estate		Construction
and Land
Development		Commercial
and
Industrial		Consumer
and Other		Total
Beginning balance$3,639  $1,789  $795  $1,746  $306  $8,275  
Charged off loans—  (2) —  (318) (130) (450) 
Recoveries of charge-offs2  4  2  12  62  82  
Provision (reallocation) charged to expense433  158  57  269  (120) 797  
Ending balance$4,074  $1,949  $854  $1,709  $118  $8,704  

16
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):
The following tables detail the changes in the allowance for loan losses for the three month periods ending March 31, 2019 and March 31, 2018, by loan classification (in thousands):

  March 31, 2019
  Commercial
Real Estate		 Consumer
Real
Estate		 Construction
and Land
Development		 Commercial
and
Industrial		 Consumer
and Other		 Total
Beginning balance $3,639
 $1,789
 $795
 $1,746
 $306
 $8,275
Loans charged off —
 (2) —
 (318) (130) (450)
Recoveries of loans charged off 2
 4
 2
 12
 62
 82
Provision (reallocation) charged to expense 433
 158
 57
 269
 (120) 797
Ending balance $4,074
 $1,949
 $854
 $1,709
 $118
 $8,704

  March 31, 2018
  Commercial
Real Estate		 Consumer
Real
Estate		 Construction
and Land
Development		 Commercial
and
Industrial		 Consumer
and Other		 Total
Beginning balance $2,465
 $1,596
 $521
 $1,062
 $216
 $5,860
Loans charged off (38) —
 —
 (78) (42) (158)
Recoveries of charge-offs —
 23
 2
 40
 21
 86
Provision (reallocation) charged to expense 498
 (100) 104
 186
 1
 689
Ending balance $2,925
 $1,519
 $627
 $1,210
 $196
 $6,477

The following table details the changes in the allowance for loan losses for the year ending December 31, 2018, by loan classification (in thousands):
  December 31, 2018
  
Commercial
Real Estate
 
Consumer
Real
Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
Beginning balance $2,465
 $1,596
 $521
 $1,062
 $216
 $5,860
Loans charged off (38) (275) —
 (177) (370) (860)
Recoveries of charge-offs 2
 100
 9
 72
 156
 339
Provision (reallocation) charged to expense 1,210
 368
 265
 789
 304
 2,936
Ending balance $3,639
 $1,789
 $795
 $1,746
 $306
 $8,275


17
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):

The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of March 31, 2019 and December 31, 2018 (in(in thousands):

 March 31, 2020
Non PCI Loans:Commercial
Real Estate		Consumer
Real Estate		Construction
and Land
Development		Commercial
and
Industrial		Consumer
and Other		Total
Pass$903,306  $468,494  $238,701  $368,506  $16,423  $1,995,430  
Watch81,277  5,697  7,587  7,233  38  101,832  
Special mention7,225  748  —  1,020  —  8,993  
Substandard638  1,722  678  221  56  3,315  
Doubtful—  162  —  50  24  236  
Total992,446  476,823  246,966  377,030  16,541  2,109,806  

PCI Loans:
Pass13,220  8,122  2,169  48  300  23,859  
Watch2,189  743  3,743  —  14  6,689  
Special mention21  59  —  —  —  80  
Substandard1,159  3,026  567  95  11  4,858  
Doubtful—  —  —  —  —  —  
Total16,589  11,950  6,479  143  325  35,486  
Total loans$1,009,035  $488,773  $253,445  $377,173  $16,866  $2,145,292  

 December 31, 2019
Non PCI Loans:Commercial
Real Estate		Consumer
Real Estate		Construction
and Land
Development		Commercial
and
Industrial		Consumer
and Other		Total
Pass$860,447  $413,192  $216,459  $328,564  $9,462  $1,828,124  
Watch25,180  989  6,089  6,786  40  39,084  
Special mention4,057  738  —  1,033  —  5,828  
Substandard367  1,713  620  228  51  2,979  
Doubtful—  165  —  57  24  246  
Total890,051  416,797  223,168  336,668  9,577  1,876,261  

PCI Loans:
Pass12,473  5,258  902  41  300  18,974  
Watch2,234  38  3,556  —  13  5,841  
Special mention139  60  —  —  —  199  
Substandard409  1,185  —  366  13  1,973  
Doubtful—  —  —  —  —  —  
Total15,255  6,541  4,458  407  326  26,987  
Total loans$905,306  $423,338  $227,626  $337,075  $9,903  $1,903,248  

  March 31, 2019
Non PCI Loans 
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
Pass $863,455
 $400,139
 $180,904
 $333,423
 $11,527
 $1,789,448
Watch 7,547
 1,775
 623
 4,228
 131
 14,304
Special mention —
 15
 157
 1,155
 —
 1,327
Substandard 641
 906
 655
 357
 55
 2,614
Doubtful —
 —
 —
 8
 —
 8
Total $871,643
 $402,835
 $182,339
 $339,171
 $11,713
 $1,807,701
17
PCI Loans 
 
 
 
 
 
Pass $12,825
 $5,555
 $3,554
 $2,196
 $397
 $24,527
Watch 2,736
 581
 1,116
 —
 16
 4,449
Special mention 1,010
 440
 —
 —
 9
 1,459
Substandard 728
 1,570
 —
 104
 31
 2,433
Doubtful —
 —
 —
 —
 —
 —
Total $17,299
 $8,146
 $4,670
 $2,300
 $453
 $32,868
Total loans $888,942
 $410,981
 $187,009
 $341,471
 $12,166
 $1,840,569

  December 31, 2018
Non PCI Loans 
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
Pass $834,912
 $394,728
 $182,524
 $303,805
 $12,927
 $1,728,896
Watch 6,791
 2,678
 64
 1,090
 135
 10,758
Special mention —
 14
 158
 137
 —
 309
Substandard 642
 1,122
 547
 462
 142
 2,915
Doubtful —
 —
 —
 203
 —
 203
Total $842,345
 $398,542
 $183,293
 $305,697
 $13,204
 $1,743,081

PCI Loans 
 
 
 
 
 
Pass $14,050
 $5,617
 $4,033
 $2,382
 $541
 $26,623
Watch 1,805
 756
 569
 —
 17
 3,147
Special mention 1,030
 446
 —
 50
 10
 1,536
Substandard 797
 1,893
 —
 125
 37
 2,852
Doubtful —
 —
 —
 —
 —
 —
Total $17,682
 $8,712
 $4,602
 $2,557
 $605
 $34,158
Total loans $860,027
 $407,254
 $187,895
 $308,254
 $13,809
 $1,777,239



18
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 4. Loans and Allowance for Loan Losses, Continued

Past Due Loans:
 
A loan 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 agreement. Generally, management places a loan on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due.
 
The following tables present thean aging analysis of the recorded investment our loan portfolio (in loans as of March 31, 2019 and December 31, 2018 (in thousands): 
 March 31, 2020
30-60 Days
Past Due and
Accruing		61-89 Days
Past Due and
Accruing		Past Due 90
Days or More
and Accruing		NonaccrualTotal
Past Due
and Nonaccrual		PCI LoansCurrent
Loans		Total
Loans
Commercial real estate$4,305  $418  $—  $397  $5,120  $16,589  $987,326  $1,009,035  
Consumer real estate4,029  486  —  1,860  6,375  11,950  470,448  488,773  
Construction and land development564  40  —  679  1,283  6,479  245,683  253,445  
Commercial and industrial665  302  —  48  1,015  143  376,015  377,173  
Consumer and other373  6  10  76  465  325  16,076  16,866  
Total$9,936  $1,252  $10  $3,060  $14,258  $35,486  $2,095,548  $2,145,292  

 December 31, 2019
30-60 Days
Past Due and
Accruing		61-89 Days
Past Due and
Accruing		Past Due 90
Days or More
and Accruing		NonaccrualTotal
Past Due
and Nonaccrual		PCI
Loans		Current
Loans		Total
Loans
Commercial real estate$466  $22  $—  $124  $612  $15,255  $889,439  $905,306  
Consumer real estate1,564  30  —  1,872  3,466  6,541  413,331  423,338  
Construction and land development507  —  607  620  1,734  4,458  221,434  227,626  
Commercial and industrial559  53  —  57  669  407  335,999  337,075  
Consumer and other86  14  —  70  170  326  9,407  9,903  
Total$3,182  $119  $607  $2,743  $6,651  $26,987  $1,869,610  $1,903,248  


18
  March 31, 2019
  
30-60 Days
 Past Due and
Accruing
 
61-89 Days
 Past Due and
Accruing
 
Past Due 90
 Days or More
and Accruing
 Nonaccrual 
Total
 Past Due
and NonAccrual
 PCI Loans 
Current
Loans
 
Total
Loans
Commercial real estate $1,625
 $764
 $—
 $272
 $2,661
 $17,299
 $868,982
 $888,942
Consumer real estate 1,492
 123
 73
 807
 2,495
 8,146
 400,340
 410,981
Construction and land development —
 79
 —
 655
 734
 4,670
 181,605
 187,009
Commercial and industrial 92
 165
 114
 296
 667
 2,300
 338,504
 341,471
Consumer and other 132
 131
 23
 42
 328
 453
 11,385
 12,166
Total $3,341
 $1,262
 $210
 $2,072
 $6,885
 $32,868
 $1,800,816
 $1,840,569

  December 31, 2018
  
30-60 Days
Past Due and
Accruing
 
61-89 Days
Past Due and
Accruing
 
Past Due 90
Days or More
and Accruing
 Nonaccrual 
Total
Past Due
and NonAccrual
 
PCI
Loans
 
Current
Loans
 
Total
Loans
Commercial real estate $377
 $19
 $—
 $272
 $668
 $17,682
 $841,677
 $860,027
Consumer real estate 1,168
 462
 454
 844
 2,928
 8,712
 395,614
 407,254
Construction and land development 343
 —
 —
 547
 890
 4,602
 182,403
 187,895
Commercial and industrial 155
 —
 101
 909
 1,165
 2,557
 304,532
 308,254
Consumer and other 117
 —
 29
 124
 270
 605
 12,934
 13,809
Total $2,160
 $481
 $584
 $2,696
 $5,921
 $34,158
 $1,737,160
 $1,777,239



19
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 4. Loans and Allowance for Loan Losses, Continued

Impaired Loans:


The following is an analysis of the impaired loan portfolio, including PCI loans, detailing the related allowance recorded as of March 31, 2019 and December 31, 2018 (in(in thousands):  
       For the three months ended
 At March 31, 2019 March 31, 2019 March 31, 2020December 31, 2019
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Recorded
Investment		Unpaid
Principal
Balance		Related
Allowance		Recorded
Investment		Unpaid
Principal
Balance		Related
Allowance
Impaired loans without a valuation allowance:  
  
  
  
  
Impaired loans without a valuation allowance:      
Commercial real estate $589
 $601
 $—
 $613
 $20
Commercial real estate$136  $136  $—  $256  $261  $—  
Consumer real estate 863
 879
 —
 967
 4
Consumer real estate546  546  —  553  553  —  
Construction and land development 599
 599
 —
 573
 —
Construction and land development607  607  —  547  547  —  
Commercial and industrial 31
 32
 —
 50
 1
Commercial and industrial—  —  —  —  —  —  
Consumer and other 27
 31
 —
 28
 1
Consumer and other—  —  —  —  —  —  
 2,109
 2,142
 —
 2,231
 26
 1,289  1,289  —  1,356  1,361  —  
Impaired loans with a valuation allowance:  
  
  
  
  
Impaired loans with a valuation allowance:      
Commercial real estate 47
 47
 11
 24
 1
Commercial real estate396  402  46  —  —  —  
Consumer real estate 35
 40
 33
 99
 —
Consumer real estate974  974  379  994  994  343  
Construction and land development 56
 56
 8
 28
 —
Construction and land development—  —  —  —  —  —  
Commercial and industrial 334
 349
 164
 644
 9
Commercial and industrial158  158  130  160  160  132  
Consumer and other 26
 26
 4
 57
 —
Consumer and other—  —  —  —  —  —  
 498
 518
 220
 852
 10
 1,528  1,534  555  1,154  1,154  475  
PCI loans:          PCI loans:
Commercial real estate 2,535
 2,837
 40
 845
 (10)Commercial real estate1,010  1,019  —  17  99  17  
Consumer real estate 1,101
 1,271
 14
 367
 3
Consumer real estate486  491  —  1,205  1,371  74  
Construction and land developmentConstruction and land development253  254  —  —  —  —  
Commercial and industrialCommercial and industrial376  378  —  396  534  59  
Consumer and otherConsumer and other14  14  —  45  51  6  
2,139  2,156  —  1,663  2,055  156  
Total impaired loans $6,243
 $6,768
 $274
 $4,295
 $29
Total impaired loans$4,956  $4,979  $555  $4,173  $4,570  $631  



20
19
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 4. Loans and Allowance for Loan Losses, Continued
 Three Months Ended March 31,
 20202019
Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized
Impaired loans without a valuation allowance:    
Commercial real estate$196  $3  $613  $20  
Consumer real estate550  4  967  4  
Construction and land development577  —  573  —  
Commercial and industrial—  —  50  1  
Consumer and other—  —  28  1  
 1,323  7  2,231  26  
Impaired loans with a valuation allowance:    
Commercial real estate198  2  24  1  
Consumer real estate984  9  99  —  
Construction and land development—  —  28  —  
Commercial and industrial159  2  644  9  
Consumer and other—  —  57  —  
 1,341  13  852  10  
PCI loans:
Commercial real estate964  1  845  (10) 
Consumer real estate456  1  367  3  
Construction and land development231  —  —  —  
Commercial and industrial355  —  —  —  
Consumer real estate11  —  —  —  
2,017  2  1,212  (7) 
Total impaired loans$4,681  $22  $4,295  $29  


Impaired Loans (continued):


20
        For the year ended
  At December 31, 2018 December 31, 2018
  
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Impaired loans without a valuation allowance:  
  
  
  
  
Commercial real estate $636
 $648
 $—
 $855
 $33
Consumer real estate 1,073
 1,089
 —
 934
 29
Construction and land development 547
 547
 —
 547
 —
Commercial and industrial 69
 70
 —
 69
 6
Consumer and other 29
 33
 —
 15
 3
  2,354
 2,387
 —
 2,420
 71
Impaired loans with a valuation allowance:  
  
  
  
  
Commercial real estate —
 —
 —
 —
 —
Consumer real estate 163
 205
 26
 365
 —
Construction and land development —
 —
 —
 —
 —
Commercial and industrial 955
 973
 442
 476
 37
Consumer and other 87
 87
 66
 86
 3
  1,205
 1,265
 534
 927
 40
PCI loans:          
Commercial real estate 0
 0
 0
 11
 0
Total impaired loans $3,559
 $3,652
 $534
 $3,358
 $111
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Troubled Debt Restructurings:
 
At March 31, 20192020, and December 31, 2018,2019, impaired loans included loans that were classified as Troubled Debt Restructurings ("TDRs"). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.
 
In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor's projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.
 
The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan.
 

21
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 4. Loans and Allowance for Loan Losses, Continued

Troubled Debt Restructurings (continued):

The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. As of March 31, 20192020, and December 31, 2018,2019, management had approximately $62$9 thousand and $116$61 thousand, respectively, in loans that met the criteria for restructured, noneTDR, NaN of which were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that managementthe Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.


There were no loanswas 1 loan that werewas modified as troubled debt restructuringsa TDR during the three month period ended March 31, 20192020, and 2018.0 loans were modified during the three month period ended March 31, 2019. There were no0 loans that were modified as troubled debt restructurings during the past three months and for which there was a subsequent payment default.


Foreclosure Proceedings and Balances:


As of March 31, 2019,2020, there was no residentialwere 7 properties secured by real estate included in foreclosed assetsother real estate owned and there were no consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure.


Purchased Credit Impaired Loans:
 
The Company has acquired loans where there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of as of March 31, 2019 and December 31, 2018 isare as follows (in(in thousands):
March 31,December 31,
20202019
Commercial real estate$24,557  $21,570  
Consumer real estate14,703  8,411  
Construction and land development2,321  5,394  
Commercial and industrial7,806  2,540  
Consumer and other486  504  
  Total loans49,873  38,419  
Less: Remaining purchase discount(14,387) (11,432) 
  Total loans, net of purchase discount35,486  26,987  
Less: Allowance for loan losses—  (156) 
  Carrying amount, net of allowance$35,486  $26,831  

21
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 March 31, 2019 December 31, 2018
Commercial real estate$24,226
 $24,849
Consumer real estate10,464
 11,108
Construction and land development5,724
 5,731
Commercial and industrial5,369
 5,824
Consumer and other721
 892
Total loans46,504
 48,404
Less remaining purchase discount(13,636) (14,246)
Total loans, net of purchase discount32,868
 34,158
Less: Allowance for loan losses(54) —
Carrying amount, net of allowance$32,814
 $34,158

Activity related to the accretable yield on loans acquired with deteriorated credit quality is as follows (in thousands):
Three Months Ended
March 31,
 20202019
Accretable yield, beginning of period$8,454  $7,052  
Additions2,515  —  
Accretion income(2,077) (1,254) 
Reclassification1,916  1,035  
Other changes, net171  1,811  
Accretable yield, end of period$10,979  $8,644  



22
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 6. Goodwill and Intangible Assets

In accordance with FASB ASC 350, Goodwill and Other, regarding testing goodwill for impairment provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company performs its annual goodwill impairment test as of December 31 of each year and at December 31, 2019, the results of the qualitative assessment provided no indication of potential impairment. Goodwill will continue to be monitored for triggering events that may indicate impairment prior to the next scheduled annual impairment test. As of March 31, 2020 the Company was closely monitoring the effects of COVID-19 on the economy and considered this a triggering event and performed an interim goodwill impairment analysis. The results was no impairment charge for the three monthperiod. Management will continue to evaluate the economic conditions at future reporting periods endedfor applicable changes.

The Company's other intangible assets consist of core deposit intangibles, and is 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 carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands):
March 31, 2020December 31, 2019
Goodwill:
  Balance, beginning of period$65,614  $66,087  
  Adjustment to values initially recorded for Acquisition of Foothills Bancorp, Inc.—  (473) 
  Acquisition of PFG8,302  —  
  Balance, end of the period$73,916  $65,614  

March 31, 2020December 31, 2019
Core deposit intangible:
  Balance, beginning of period$14,549  $14,549  
  Acquisition of PFG1,370  —  
    Balance, gross core deposit intangible15,919  14,549  
  Less: accumulated amortization(3,332) (2,970) 
    Net core deposit intangible, net$12,587  $11,579  

The aggregate amortization of core deposit intangibles expense for March 31, 2020, and 2019, was $362 thousand and 2018 (in$344 thousand, respectively.

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


Remainder of 2020$1,207  
20211,570  
20221,526  
20231,485  
20241,456  
Thereafter5,343  
Total$12,587  

23
  Three Months Ended March 31,
  2019 2018
Accretable yield, beginning of period $7,052
 $9,287
Additions —
 —
Accretion income (1,254) (1,101)
Reclassification to accretable 1,035
 262
Other changes, net 1,811
 (668)
Accretable yield $8,644
 $7,780
SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7. Borrowings and Line of Credit


FHLB:

The Bank has agreements with the Federal Home Loan Bank of Cincinnati ("FHLB") that can provide additional advances to the Bank in an amount up to $52.0 million. All of the loans are secured by first mortgages on 1-4 family residential, multi-family properties and commercial properties and are pledged as collateral for these advances. There were 0 securities pledged to FHLB at March 31, 2020, or December 31, 2019.

FHLB advances consist of the following (dollars in thousands):
March 31, 2020December 31, 2019
Long-term advance dated September 10, 2019, requiring monthly interest payments, fixed at 0.93%, with a put option exercisable on September 10, 2020 and then quarterly thereafter, principal due in September 2029.1
$25,000  $25,000  
Long-term advance dated February 28, 2020, requiring monthly interest payments, fixed at 0.46%, with a put option exercisable on February, 26, 2021 and then quarterly thereafter, principal due in February 2030.1
50,000  —  
Total$75,000  $25,000  
1On agreements with put options, the FHLB has the right, at its discretion, to terminate the entire advance prior to the stated maturity date. The termination option may only be exercised on the expiration date of the predetermined lockout period and on a quarterly basis thereafter.

Federal Reserve of Atlanta Discount Window:

The Bank has agreements with the Federal Reserve Bank of Atlanta Discount Window ("FRB") that can provide additional advances to the Bank in an amount up to $50.0 million. All of the loans are secured by commercial loans, first mortgages of farmland properties and commercial construction properties and are pledged as collateral for these advances There were 0 securities pledged to the FRB at March 31, 2020. The Company did 0t have any borrowings from the FRB at December 31, 2019.

FRB advances consist of the following (dollars in thousands):
March 31, 2020
FRB advance dated March 27, 2020, fixed at 0.25%, with principal due in June 25, 2020$50,000 

Other borrowings:

On May 1, 2018, the Company entered into a loan agreement in the amount of $500 thousand at a rate of 4.75% with semi-annual payments of principal plus accrued interest over an amortization period of ten years. The outstanding principal balance of the borrowing at March 31, 2020, and December 31, 2019, was $439 thousand, with a maturity on April 30, 2028.

Line of Credit:

During the first quarter of 2020, the Company entered into a Loan and Security Agreement and revolving note with ServisFirst Bank, pursuant to which ServisFirst Bank has made a $25.0 million revolving line of credit available to the Company. The maturity of the line of credit is September 24, 2021. At March 31, 2020, there was 0 outstanding balance under the line of credit, and the entire amount of the line of credit remained available to the Company.

The Loan and Security Agreement requires the Company to comply with certain covenants including those related to asset quality, capital levels, and incurring new indebtedness above certain amounts. The Company was in compliance with all covenants associated with this line of credit at March 31, 2020.






22
24
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Scheduled maturities:

At March 31, 2020, scheduled maturities of the FHLB advances, FRB advance and other borrowings are as follows (dollars in thousands):

Remainder of 2020$50,043  
202145  
202247  
202350  
202452  
Thereafter75,202  
Total$125,439  

25

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 8. Employee Benefit Plans

401(k) Plan:
The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After one year of service the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The Company's contribution to the Plan for the three month period ending March 31, 2020, and 2019, respectively, was $251 thousand and $198 thousand.
Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At March 31, 2020, the Company had 1 active equity incentive plan administered by the Board of Directors, the 2015 Stock Incentive Plan. The Company had 32,034 Rights issued and 1,883,107 Rights available for grants or awards under this plan.

In addition to the 2015 Stock Incentive Plan, the Company has 38,250 Rights issued from the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan, 49,250 Rights issued from the Cornerstone Non-Qualified Plan Options, and 2,266 Rights issued from the Capstone Stock Option Plan.These plans do not have any Rights available for future grants or awards.

Stock Options:

A summary of the status of stock option plans is presented in the following table:   
NumberWeighted
Average
Exercisable
Price
Outstanding at December 31, 2019136,658  $10.29  
Granted—  —  
Exercised(14,858) 11.62  
Forfeited—  —  
Outstanding at March 31, 2020121,800  $10.13  

Information pertaining to stock options outstanding at March 31, 2020, is as follows: 
 Options OutstandingOptions Exercisable
Weighted-
Average
Remaining		Weighted-
Average		Weighted-
Average
ExerciseNumberContractualExerciseNumberExercise
PricesOutstandingLifePriceExercisablePrice
$6.60  25,000  1.6 years$6.60  25,000  $6.60  
6.80  13,250  0.9 years6.80  13,250  6.80  
9.48  21,000  2.7 years9.48  21,000  9.48  
9.60  28,250  3.2 years9.60  28,250  9.60  
11.76  2,266  2.2 years11.76  2,266  11.76  
$15.05  32,034  5.0 years15.05  32,034  15.05  
Outstanding, end of period121,800  3.0 years$10.13  121,800  $10.13  

The Company did 0t recognize any stock option-based compensation expense during the three months ended March 31, 2020, as all stock options issued are fully vested. During the three month period ended March 31, 2019, stock option-based compensation expense was $31 thousand.

The intrinsic value of options exercised during the periods ended March 31, 2020, and 2019 was $65 thousand and $81 thousand, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at March 31,
26
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2020, was $618 thousand. Cash received from options exercised under all share-based payment arrangements for the period ended March 31, 2020 was $173 thousand.

NaN shares vested during the periods ended March 31, 2020, and 2019, respectively. The income tax benefit recognized for the exercise of options for the periods ended March 31, 2020, and 2019, was $23 thousand and $22 thousand, respectively.

As of March 31, 2020, all options are fully vested and currently no future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

Stock Appreciation Rights ("SARs"):

A summary of the status of SARs plans is presented in the following table: 
NumberWeighted
Average
Exercisable
Price
Outstanding at December 31, 201967,000  $20.54  
Granted18,000  15.19  
Exercised—  —  
Forfeited—  —  
Outstanding at March 31, 202085,000  $19.40  


Information pertaining to SARs outstanding at March 31, 2020, is as follows: 
SARs OutstandingSARs Exercisable
Weighted- Average RemainingWeighted- AverageWeighted- Average
ExerciseNumberContractualExerciseNumberExercise
PricesOutstandingLifePriceExercisablePrice
$15.19  18,000  3.8 years$15.19  —  $—  
18.12  21,000  2.8 years18.12  —  —  
21.61  34,000  1.8 years21.61  —  —  
$21.72  12,000  0.8 years21.72  12,000  21.72  
Outstanding, end of period85,000  2.3 years$19.40  12,000  $21.72  


SARs compensation expense of ($118) thousand and $21 thousand was recognized for the period ended March 31, 2020 and 2019, respectively. The credit in expense for the period ended March 31, 2020, was due to adjustments related to the current fair value evaluation of SARs.

Other stock based awards:

Direct stock grants of 3,298 shares were issued to local advisory board members during the three month period ended March 31, 2019. The expense for these grants was $65 thousand and was included in salary and benefit expense for the period ended March 31, 2019. There were 0 direct stock grants issued for the period ended March 31, 2020.










27
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Restricted Stock Awards:

A summary of the activity of the Company's unvested restricted stock awards for the period ended March 31, 2020 is presented below:
  NumberWeighted Average Grant-Date Fair Value
Balance at December 31, 2019 65,400  $21.04  
Granted 37,400  16.20  
Vested (4,500) 18.12  
Forfeited/expired (1,500) 18.12  
Balance at March 31, 2020 96,800  $19.35  

The Company measures the fair value of restricted shares based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. For the three months ended March 31, 2020 and 2019, compensation expense was $110 thousand and $112 thousand, respectively, for restricted stock awards. As of March 31, 2020, there was $1.3 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 3.59 years. The grant-date fair value of restricted stock grants vested was $82 thousand for the period ended March 31, 2020. NaN restricted stock vested during the period ended March 31, 2019.
28
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 5.9. Commitments and Contingent Liabilities
 
Loan Commitments:

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 inon the balance sheets.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 Bank’sCompany’s total contractual amount for all off-balance sheet commitments at March 31, 2019 isare as follows:
follows (in thousands):
March 31,December 31,
20202019
Commitments to extend credit$356.0 millionCommitments to extend credit$419,287  $384,411  
Standby letters of credit$14.6 millionStandby letters of credit22,994  11,727  


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 March 31, 20192020 and December 31, 2018,2019, the carrying amount of liabilities related to the Company's obligation to perform under standby letters of credit was insignificant.

The Company has not been required to perform on any standby letters of credit, and the Company has not incurred any losses on standby letters of credit for the period ending March 31, 2019.

Contingencies:

Inis 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 may become involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have awill be material effect onto 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.


29
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 6.10. Fair Value Disclosures
 
Determination of Fair Value:
 
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.


ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact business at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.


23
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 6. Fair Value Disclosures, Continued

Fair Value Hierarchy:

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
 
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
 
Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted 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.


Measurements
















30
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The tables below present the recorded amount of Fair Value:

Assetsassets and liabilities recordedmeasured at fair value on a recurring basis are as follows (in(in thousands): 
DescriptionFair ValueQuoted Prices in
Active Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Other
Unobservable
Inputs
(Level 3)
March 31, 2020:
Assets:
Securities available-for-sale:    
U.S. Government-sponsored enterprises (GSEs)$17,045  $—  $17,045  $—  
Municipal securities83,317  —  83,317  —  
Other debt securities5,462  —  5,462  —  
Mortgage-backed securities (GSEs)95,178  —  95,178  —  
Total securities available-for-sale$201,002  $—  $201,002  $—  
Liabilities:
Derivative financial instruments$6,885  $—  $6,885  $—  
  Balance as of
March 31,
2019		 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
Debt securities available-for-sale:  
  
  
  
U.S. Government-sponsored enterprises (GSEs) $38,828
 $—
 $38,828
 $—
Mortgage-backed securities 99,582
 —
 99,582
 —
Other debt securities 935
 —
 935
 —
Municipal securities 58,928
 —
 58,928
 —
Total securities available-for-sale $198,273
 $—
 $198,273
 $—
Derivative financial instruments $2,063
 $—
 $2,063
 $—

December 31, 2019:
Assets:
Securities available-for-sale:    
U.S. Government-sponsored enterprises (GSEs)$19,000  $—  $19,000  $—  
Municipal securities64,391  —  64,391  —  
Other debt securities3,470  —  3,470  —  
Mortgage-backed securities (GSEs)91,487  —  91,487  —  
Total securities available-for-sale$178,348  $—  $178,348  $—  
Liabilities:
Derivative financial instruments$3,446  —  $3,446  —  
  Balance as of
December 31,
2018		 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
Debt securities available-for-sale:  
  
  
  
U.S. Government-sponsored enterprises (GSEs) $43,503
 $—
 $43,503
 $—
Mortgage-backed securities 102,114
 —
 102,114
 —
Other debt securities 910
 —
 910
 —
Municipal securities 55,161
 —
 55,161
 —
Total securities available-for-sale $201,688
 $—
 $201,688
 $—
Derivative financial instruments $1,174
 —
 $1,174
 —

The Company has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally,In the periods presented, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

24
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 6. Fair Value Disclosures, Continued


Assets Measured at Fair Value on a Nonrecurring Basis:
 
Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in(in thousands):
Fair ValueQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Other Unobservable Inputs (Level 3)
March 31, 2020:
Impaired loans$2,262  $—  $—  $2,262  
Other real estate owned5,894  —  —  5,894  
December 31, 2019:
Impaired loans$2,185  $—  $—  $2,185  
Other real estate owned1,757  —  —  1,757  

31
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
  Balance as of
March 31,
2019		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3)
Impaired loans $3,860
 $—
 $—
 $3,860
Foreclosed assets 2,066
 —
 —
 2,066

  Balance as of
December 31,
2018		 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3)
Impaired loans $671
 $—
 $—
 $671
Foreclosed assets 2,495
 —
 —
 2,495

For Level 3 assets measured at fair value on a non-recurring basis, as of March 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements are presented below (in(dollars in thousands).:

 Fair ValueValuation
Technique		Significant Other
Unobservable Input		Weighted
Average of Input
March 31, 2020:
Impaired loans$2,262  Appraisal and cashflowAppraisal and cashflow discounts20 %
Other real estate owned5,894  AppraisalAppraisal discounts27 %
December 31, 2019:
Impaired loans$2,185  AppraisalAppraisal and cashflow discounts22 %
Other real estate owned1,757  AppraisalAppraisal discounts29 %

  Balance as of
March 31,
2019		 Valuation
Technique		 Significant Other
Unobservable Input		 Weighted
Average of Input
Impaired loans $3,860
 Appraisal and Cashflow Appraisal and Cashflow Discounts 7%
Foreclosed assets 2,066
 Appraisal Appraisal Discounts 20%

  Balance as of
December 31,
2018		 Valuation
Technique		 Significant Other
Unobservable Input		 Weighted
Average of Input
Impaired loans $671
 Appraisal Appraisal Discounts 44%
Foreclosed assets 2,495
 Appraisal Appraisal Discounts 23%

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



25
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 6. Fair Value Disclosures, Continued

Assets Measured at Fair Value on a Nonrecurring Basis (continued):

Foreclosed assets: Foreclosed assets,Other real estate owned: Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.


Carrying value and estimated fair value:


The carrying amount and estimated fair value of the Company’s financial instruments at March 31, 2019 and December 31, 2018 are as follows (in thousands):














32
  March 31, 2019
    Fair Value Measurements Using  
  
Carrying
Amount
 Level 1 Level 2 Level 3 
Estimated
Fair Value
Assets:  
        
Cash and cash equivalents $132,994
 132,994
 —
 —
 $132,994
Securities available-for-sale 198,273
 —
 198,273
 —
 198,273
Restricted investments 12,398
 N/A
 N/A
 N/A
 N/A
Loans, net 1,831,865
 —
 —
 1,824,680
 1,824,680
           
Liabilities:  
        
Noninterest-bearing demand deposits 329,095
 —
 329,095
 —
 329,095
Interest-bearing demand deposits 331,629
 —
 331,629
 —
 331,629
Money Market and Savings deposits 698,431
 —
 698,431
 —
 698,431
Time deposits 635,175
 —
 635,272
 —
 635,272
Securities sold under agreements to repurchase 7,070
 —
 7,070
 —
 7,070
Federal Home Loan Bank advances and other borrowings 8,605
 —
 8,605
 —
 8,605
Subordinated debt 39,198
 —
 —
 37,606

37,606
Derivative financial instruments 2,063
 —
 2,063
 —
 2,063


26
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 6. Fair Value Disclosures, Continued

Carrying value and estimated fair value:

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

Fair Value Measurements Using
Carrying
Amount		Level 1Level 2Level 3Estimated
Fair Value
March 31, 2020:
Assets:  
Cash and cash equivalents$309,089  $309,089  $—  $—  $309,089  
Securities available-for-sale201,002  —  201,002  —  201,002  
Other investments14,113  N/A  N/A  N/A  N/A  
Loans, net2,131,861  —  —  2,115,550  2,115,550  
Liabilities:  
Noninterest-bearing demand deposits431,781  —  431,781  —  431,781  
Interest-bearing demand deposits444,141  —  444,141  —  444,141  
Money market and savings deposits730,392  —  730,392  —  730,392  
Time deposits735,616  —  739,277  —  739,277  
Securities sold under agreements to repurchase6,164  —  6,164  —  6,164  
Federal Home Loan Bank advances and other borrowings125,439  —  124,797  —  124,797  
Subordinated debt39,283  —  —  34,379  34,379  
Derivative financial instruments6,885  —  6,885  —  6,885  

 December 31, 2018
   Fair Value Measurements Using  
 
Carrying
Amount
 Level 1 Level 2 Level 3 
Estimated
Fair Value
December 31, 2019:December 31, 2019:
Assets:  
        
Assets:  
Cash and cash equivalents $115,822
 115,822
 —
 —
 $115,822
Cash and cash equivalents$183,971  $183,971  $—  $—  $183,971  
Securities available-for-sale 201,688
 —
 201,688
 —
 201,688
Securities available-for-sale178,348  —  178,348  —  178,348  
Restricted investments 11,499
 N/A
 N/A
 N/A
 N/A
Other investmentsOther investments12,913  N/A  N/A  N/A  N/A  
Loans, net 1,768,964
 —
 —
 1,766,838
 1,766,838
Loans, net1,893,005  —  —  1,879,825  1,879,825  
          
Liabilities:  
        
Liabilities:  
Noninterest-bearing demand deposits 319,861
 —
 319,861
 —
 319,861
Noninterest-bearing demand deposits364,155  —  364,155  —  364,155  
Interest-bearing demand deposits 311,482
 —
 311,482
 —
 311,482
Interest-bearing demand deposits380,234  —  380,234  —  380,234  
Money Market and Savings deposits 641,945
 —
 641,945
 —
 641,945
Money market and savings depositsMoney market and savings deposits623,284  —  623,284  —  623,284  
Time deposits 648,675
 —
 649,169
 —
 649,169
Time deposits679,541  —  681,902  —  681,902  
Securities sold under agreements to repurchase 11,756
 —
 11,756
 —
 11,756
Securities sold under agreements to repurchase6,184  —  6,184  —  6,184  
Federal Home Loan Bank advances and other borrowings 11,243
 —
 11,243
 —
 11,243
Federal Home Loan Bank advances and other borrowings25,439  —  24,845  —  24,845  
Subordinated debt 39,177
 —
 —
 39,190
 39,190
Subordinated debt39,261  —  —  35,868  35,868  
Derivative financial instruments 1,174
 —
 1,174
 —
 1,174
Derivative financial instruments3,446  —  3,446  —  3,446  


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. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.


Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition,
the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.



27
33
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 7.11.  Derivatives


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 derivatives not designated as hedges, the gain or loss is recognized in current period earnings.

Derivatives designated as fair value hedges:

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 lossgain or gainloss on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate tax-exempt callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. The Company has elected early adoption of FASB ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, which allows such partial term hedge designations.


In September 2018, December 2018, and February 2019, the Company entered into sixteen swap transactions with a notional amount of $36 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities.

A summary of the Company's fair value hedge relationships as of March 31, 2019 and December 31, 2018for the periods presented are as follows
(dollars in thousands):
     March 31, 2019
 Balance Sheet LocationWeighted Average Remaining Maturity (In Years)Weighted Average Pay RateReceive RateNotional AmountEstimated Fair Value
       
Liability derivatives      
Interest rate swap agreements - securitiesOther liabilities8.953.09%3 month LIBOR$36,000-$2,063
       
     December 31, 2018
 Balance Sheet LocationWeighted Average Remaining Maturity (In Years)Weighted Average Pay RateReceive RateNotional AmountEstimated Fair Value
       
Liability derivatives      
Interest rate swap agreements - securitiesOther liabilities9.233.10%3 month LIBOR$35,000-$1,174


Liability derivativesBalance Sheet LocationWeighted Average Remaining Maturity (In Years)Weighted Average Pay RateReceive RateNotional AmountEstimated Fair Value
March 31, 2020:
Interest rate swap agreements - securitiesOther liabilities7.953.09%3 month LIBOR$36,000  $(6,885) 
December 31, 2019:
Interest rate swap agreements - securitiesOther liabilities8.203.09%3 month LIBOR$36,000  $(3,446) 
28
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 7.     Derivatives, Continued

Derivatives designated as fair value hedges (continued):

The effects of the Company's fair value hedge relationships reported in interest income on tax-exempt available-for-sale securities on the consolidated income statement during the three months ended March 31, 2019 were as follows (in(in thousands):
 Three Months Ended March 31, 2019
Interest Income
Total amount of income and expense line items presented in the consolidated statements of income$26,943
Gain (loss) on fair value hedging relationship
Interest rate swap agreements - securities:
  Hedged items(2,063)
  Derivative designated as hedging instruments2,063
There were no hedging relationships as of March 31, 2018.
 Three Months Ended
March 31,
20202019
Interest income on tax-exempt securities$440  $456  
Effects of fair value hedge relationships(157) (32) 
   Reported interest income on tax-exempt securities$283  $424  
Three Months Ended
March 31,
Gain (loss) on fair value hedging relationship20202019
Interest rate swap agreements - securities:
    Hedged items$6,885  2,063  
    Derivative designated as hedging instruments(6,885) (2,063) 


The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at March 31, 2019 and December 31, 2018:(in thousands):
Line item on the balance sheetCarrying Amount of the Hedged AssetsCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
March 31, 2020:
Securities available-for-sale$46,060  $6,885  
December 31, 2019:
Securities available-for-sale$42,710  $3,446  

34
 Carrying Amount of the Hedged Assets (in thousands)Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Line item on the balance sheetMarch 31, 2019March 31, 2019
   
Securities available-for-sale$41,587$2,063
   
Line item on the balance sheetDecember 31, 2018December 31, 2018
   
Securities available-for-sale$39,730$1,174



29
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 8.12. Leases


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

Lessee Accounting:


Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space with terms extending through 2033. Substantially all2034. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.


The following table represents the consolidated balance sheet classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet (dollars (in thousands):
March 31,December 31,
Classification20202019
Assets:
  Operating lease right-of-use assetsOther assets$5,493  $5,470  
Liabilities:
  Operating lease liabilitiesOther liabilities$5,508  $5,479  
Lease Right-of-Use AssetsClassificationMarch 31, 2019
Operating lease right-of-use assetsOperating lease right-of-use assets$2,215
Lease Liabilities
Operating lease liabilitiesOperating lease liabilities$2,222


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


As of March 31, 2019,2020, the weighted average remaining lease term was 7.8111.17 years and the weighted average discount rate was 3.24%2.78%.

30
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 8. Leases, Continued

The following table represents lease costs and other lease information, in thousands. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance.maintenance (in thousands).
Three Months Ended
March 31,
20202019
Lease costs:
  Operating lease costs$237  $146  
  Short-term lease costs—  36  
  Variable lease costs26  23  
    Total$263  $205  
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
  Operating cash flows from operating leases$230  $139  








35
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
   Three Months Ended
Lease Costs  March 31, 2019
    
Operating lease costs  $146
Short term lease costs  36
Variable lease costs  23
    Total  205
    
    
Other information   
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows from operating leases$139


Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 20192020, were as follows (in(in thousands):
Amounts
March 31, 2021$729 
March 31, 2022846 
March 31, 2023668 
March 31, 2024463 
March 31, 2025366 
Thereafter3,381 
Total future minimum lease payments6,453 
Amounts representing interest(945)
Present value of net future minimum lease payments$5,508 

36
  Amounts
March 31, 2020 $533
March 31, 2021 531
March 31, 2022 332
March 31, 2023 213
March 31, 2024 107
Thereafter 842
Total future minimum lease payments 2,558
Amounts representing interest (336)
Present value of net future minimum lease payments $2,222
SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 9.     Subsequent Events13. Regulatory Matters


On April 24,Regulatory Capital Requirements:

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. Under Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is 2.50%. At March 31, 2020, and 2019, the Company announcedand the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the "well capitalized" regulatory classification.

Regulatory Restrictions on Dividends:
Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (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 Entegra Financial Corp. (Nasdaq: ENFC) (“Entegra”) electedyear plus the retained net income for the preceding two years. Under Tennessee corporate law, the Company is not permitted to terminate effective April 23,pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, the Company's board of directors must consider its and the Bank's current and prospective capital, liquidity, and other needs. In addition to state law limitations on the Company's ability to pay dividends, the Federal Reserve imposes limitations on the Company's ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company's regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer. During the three months ended March 31, 2020, the Bank paid $7.5 million in dividends to the Company. As of March 31, 2020, the Bank could pay approximately $52.0 million of additional dividends to the Company without prior approval of the Commissioner of the TDFI. Since the fourth quarter of 2019, the previously announced AgreementCompany has paid a quarterly common stock dividend of $0.05 per share. The amount and Plantiming of Merger dated January 15, 2019 (the “Merger Agreement”), among SmartFinancial, Entegra, and CT Merger Sub, Inc. Entegra electedall future dividend payments by the Company, if any, is subject to terminate the Merger Agreement in order to enter into a definitive merger agreement with a large North Carolina-based financial institution that made a competing offer to acquire Entegra, an offer that SmartFinancial chose not to match. Under the termsdiscretion of the Merger Agreement, SmartFinancial has received a termination feeCompany's board of $6.4 million.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.
































37
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Regulatory Capital Levels:
Actual and required capital levels at March 31, 2020, and December 31, 2019 are presented below (dollars in thousands): 
ActualMinimum for capital adequacy purposes
Minimum to be well capitalized under prompt corrective action provisions1
AmountRatioAmountRatioAmountRatio
March 31, 2020
SmartFinancial:
Total Capital (to Risk Weighted Assets)$306,982  13.13 %$187,099  8.00 %N/A  N/A  
Tier 1 Capital (to Risk Weighted Assets)254,268  10.87 %140,324  6.00 %N/A  N/A  
Common Equity Tier 1 Capital (to Risk Weighted Assets)254,268  10.87 %105,243  4.50 %N/A  N/A  
Tier 1 Capital (to Average Assets)2
254,268  10.28 %98,934  4.00 %N/A  N/A  
SmartBank:
Total Capital (to Risk Weighted Assets)$295,105  12.62 %$187,077  8.00 %$233,847  10.00 %
Tier 1 Capital (to Risk Weighted Assets)281,674  12.05 %140,308  6.00 %187,077  8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets)281,674  12.05 %105,231  4.50 %152,000  6.50 %
Tier 1 Capital (to Average Assets)2
281,674  11.42 %98,636  4.00 %123,295  5.00 %
December 31, 2019
SmartFinancial:
Total Capital (to Risk Weighted Assets)$287,937  14.02 %$164,313  8.00 %N/A  N/A  
Tier 1 Capital (to Risk Weighted Assets)238,433  11.61 %123,235  6.00 %N/A  N/A  
Common Equity Tier 1 Capital (to Risk Weighted Assets)238,433  11.61 %92,426  4.50 %N/A  N/A  
Tier 1 Capital (to Average Assets)238,433  10.34 %92,258  4.00 %N/A  N/A  
SmartBank:
Total Capital (to Risk Weighted Assets)$273,432  13.31 %$164,305  8.00 %$205,382  10.00 %
Tier 1 Capital (to Risk Weighted Assets)263,189  12.81 %123,229  6.00 %164,305  8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets)263,189  12.81 %92,422  4.50 %133,498  6.50 %
Tier 1 Capital (to Average Assets)263,189  11.41 %92,254  4.00 %115,317  5.00 %

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 14. Other Comprehensive (loss) income.

The changes in each component of accumulated other comprehensive income (loss), net of tax, were as follows (in thousands):
Three Months Ended March 31, 2020
Securities Available-for-SaleFair Value Municipal Security HedgesAccumulated Other Comprehensive Income (Loss)
Beginning balance, January 1, 2020$391  $(223) $168  
Other comprehensive income (loss)851  (2,266) (1,415) 
Reclassification of amounts included in net income—  —  —  
Net other comprehensive income (loss) during period851  (2,266) (1,415) 
Ending balance, March 31, 2020$1,242  $(2,489) $(1,247) 
Three Months Ended March 31, 2019
Securities Available-for-SaleFair Value Municipal Security HedgesAccumulated Other Comprehensive Income (Loss)
Beginning balance, January 1, 2019$(1,979) $(786) $(2,765) 
Other comprehensive income (loss)2,103  228  2,331  
Reclassification of amounts included in net income—  —  —  
Net other comprehensive income (loss) during period2,103  228  2,331  
Ending balance, March 31, 2019$124  $(558) $(434) 

39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
SmartFinancial, Inc. (the "Company") is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the "Bank"). The CompanySmartBank provides a comprehensive suite of commercial and consumer banking services to clients through 35 full-service bank branches and two loan production offices in select markets in East and Middle Tennessee, Alabama and the Florida Panhandle.

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

Forward-Looking Statements

SmartFinancial, Inc. (“SmartFinancial”) may from time to time make written or oral statements, including statements contained in this report and information incorporated by reference herein (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2), that constitute forward-looking statements within the meaning of Section 27A of the Securities Act, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements, including statements regarding the potential effects of the COVID-19 pandemic on the Company’s business and financial results and conditions, are based on assumptions and estimates and are not guarantees of future performance. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words (and their derivatives), such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, the negatives of such expressions, or the use of the future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of a current condition. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, financial condition, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to:

•weakness or a decline in the U.S. economy, in particular in Tennessee, and other markets in which we operate;
•the possibility that our asset quality would decline or that we experience greater loan losses than anticipated;
•the impact of liquidity needs on our results of operations and financial condition;
•competition from financial institutions and other financial service providers;
•the impact of negative developments in the financial industry and U.S. and global capital and credit markets;
•the impact of recently enacted and future legislation and regulation on our business, including changes to statutes, regulations or regulatory policies or practices as a result of, or in response to COVID-19;
•negative changes in the real estate markets in which we operate and have our primary lending activities, which may result in an unanticipated decline in real estate values in our market area;
•risks associated with our growth strategy, including a failure to implement our growth plans or an inability to manage our growth effectively;
•claims and litigation arising from our business activities and from the companies we acquire, which may relate to contractual issues, environmental laws, fiduciary responsibility, and other matters;
•expected revenue synergies and cost savings from our recently completed acquisition of Progressive Financial Group, Inc ("PFG") may not be fully realized or may take longer than anticipated to be realized;
•disruption from the merger with customers, suppliers or employees or other business partners’ relationships;
•the risk of successful integration of the PFG's businesses with our business;
•lower than expected revenue following these mergers;
•SmartFinancial’s ability to manage the combined company’s growth following the mergers;
•the dilution caused by SmartFinancial’s issuance of additional shares of its common stock in connection with the PFG merger;
•cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems we operate or rely upon for services to individualsobtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems and corporatenegatively impact our operations and our reputation in the market;
40
•results of examinations by our primary regulators, the Tennessee Department of Financial Institutions (the “TDFI”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, require us to reimburse customers, throughchange the way we do business, or limit or eliminate certain other banking activities;
•government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve;
•our inability to pay dividends at current levels, or at all, because of inadequate future earnings, 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 portfolio;
•unanticipated credit deterioration in our loan portfolio or higher than expected loan losses within one or more segments of our loan portfolio;
•unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors;
•unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;
•changes in expected income tax expense or tax rates, including changes resulting from revisions in tax laws, regulations and case law;
•our ability to retain the services of key personnel;
•adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of the Company’s participation in and execution of government programs related to the COVID-19 pandemic;
•the impact of the COVID-19 pandemic on the Company’s assets, business, cash flows, financial condition, liquidity, prospects and results of operations;
•potential increases in the provision for loan losses resulting from the COVID-19 pandemic; and
•the impact of Tennessee’s anti-takeover statutes and certain of our charter provisions on potential acquisitions of us.

These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in SmartFinancial’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, in each case filed with or furnished to the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website (www.sec.gov). Undue reliance should not be placed on forward-looking statements. SmartFinancial disclaims any obligation to update or revise any forward-looking statements contained in this release, which speak only as of the date hereof, whether as a result of new information, future events, or otherwise.

Non-GAAP Financial Measures

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin, have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that Non-GAAP financial measures provide additional useful information that allows investors to evaluate the ongoing performance of the company and provide meaningful comparisons to its officespeers. Management believes these non-GAAP financial measures also enhance investors' ability to compare period-to-period financial results and allow investors and company management to view our operating results excluding the impact of items that are not reflective of the underlying operating performance. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider SmartFinancial's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in Tennessee, Alabama, Florida,isolation or as a substitute for analysis of the results or financial condition as reported under GAAP.

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

41
Executive Summary


The following is a summary of the Company’s financial highlights and significant events during the first quarter of 2019:2020:

•Completed the acquisition of Progressive Financial Group, Inc. ("PFG") on March 1, 2020.
•Net income available tototaled $2.7 million, or $0.19 per diluted common shareholders totaled $4.7 millionshare, during the first quarter of 20192020 compared to $3.4 million for the same period in 2018.
Earnings per diluted common share was $0.34 during the first quarter of 2019, compared to $0.30 for the same period in 2018.
Annualized return on average assets was 0.84 percent for the first quarter of 2019, compared to 0.80 percent a year ago.
Yield on earning assets, taxable equivalent, of 5.25 percent, an increase of 0.24 percentage points from the first quarter of 2018.
Noninterest expense to average assets of 2.77 percent, a decrease of 0.32 percentage points from a year ago.

Analysis of Results of Operations

First quarter of 2019 compared to 2018

Net income available to common shareholders was $4.7 million, or $0.34 per diluted common share, for the same period in 2019.
•Return on average assets was 0.43% at March 31, 2020 compared to 0.84% at March 31, 2019.
•Allowance for loan losses increased to $13.4 million, an increase of 31.1%, in light of the current economic conditions.
•The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative relief package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations.

Analysis of Results of Operations

First quarter of 2020 compared to 2019

Net income was $2.7 million, or $0.19 per diluted common share, for the first quarter of 2020, compared to $4.7 million, or $0.34 per diluted common share, for the first quarter of 2019. The tax equivalent net interest margin was 3.90% for the first quarter of 2020 compared to 4.10% for the first quarter of 2019. Noninterest income to average assets was 0.44% for the first quarter of 2020, increasing from 0.30% for the first quarter of 2019. Noninterest expense to average assets increased to 2.96% in the first quarter of 2019, compared to $3.4 million, or $0.30 per diluted common share,2020, from 2.77% in the first quarter of 2018. Net interest income to average assets2019. The results above include one month of 3.73 percent inoperating effects of the first quarter of 2019 decreased from 3.93 percent in the first quarter of 2018 primarily due to higher deposit costs. Noninterest income to average assets of 0.30 percent in first quarter of 2019 decreased from 0.34 percent in the first quarter of 2018. Noninterest expense to average assets decreased from 3.09 percent in the first quarter of 2018 to 2.77 percent in first quarter of 2019.PFG acquisition, which was completed on March 1, 2020.


Net Interest Income and Yield Analysis


First quarter of 20192020 compared to 20182019
 
Net interest income, taxable equivalent, improvedincreased to $21.1$22.7 million infor the first quarter of 20192020, up from $16.8$21.1 million infor the first quarter of 2018.2019. Net interest income was positively impacted, compared to the prior year, primarily due to increases in average loan and securities balances and increases in the yields of the loan and securities portfolios. Average earninginterest-earning assets increased from $1.6$2.09 billion in the first quarter of 2018 to $2.1 billion infor the first quarter of 2019, to $2.34 billion for the first quarter of 2020, primarily as a result of the mergers in the secondacquisition of PFG completed March 1, 2020, and fourth quarters of 2018.continued organic growth. Over this period, average loan balances increased by $449.7$185.3 million, average interest-bearing deposits increased by $378.4$126.4 million, and average noninterest-bearing deposits increased $88.8$53.0 million. NetThe tax equivalent net interest incomemargin decreased to average assets of 3.73 percent3.90% for the first quarter in 2019 decreased from 3.93 percent during the same period in 2018. Net interest margin, taxable equivalent, decreased to 4.10 percent in the quarter,of 2020, compared to 4.35 percent a year ago as a result4.10% for the first quarter of of increases in the cost of interest-bearing liabilities.2019. The yield on earning assets increaseddecreased from 5.01 percent a year ago5.25% for the first quarter of 2019, to 5.25 percent in4.83% for the first quarter of 2020, primarily due to higherrate cuts by the Federal Reserve over the past nine months and, to a lesser extent loan balances and higher yields on loans and securities.have declined from market competition. The cost of average interest-bearing deposits decreased from 1.32% for the first quarter of 2019, to 1.10% for the first quarter of 2020, primarily due to a lower interest rate environment during the period.

















42
The following table summarizes the major components of net interest income and the related yields and costs for the periods presented (dollars(dollars in thousands): 
Three Months Ended March 31,
 20202019
Average Yield/Average Yield/
 BalanceInterestRateBalanceInterestRate
Assets      
Loans1
$1,987,291  26,434  5.35 %$1,802,014  24,975  5.62 %
Taxable securities116,837  679  2.34 %147,188  971  2.68 %
Tax-exempt securities2
70,397  400  2.28 %53,650  539  4.07 %
Federal funds sold and other earning assets165,512  602  1.46 %86,688  573  2.68 %
Total interest-earning assets2,340,037  28,115  4.83 %2,089,540  27,058  5.25 %
Noninterest-earning assets216,498  193,698  
Total assets$2,556,535  $2,283,238  
Liabilities and Stockholders’ Equity
Interest-bearing demand deposits$389,500  $434  0.45 %$306,164  $422  0.56 %
Money market and savings deposits664,983  1,389  0.84 %665,018  2,029  1.24 %
Time deposits680,830  2,931  1.73 %637,767  2,800  1.78 %
Total interest-bearing deposits1,735,313  4,754  1.10 %1,608,949  5,251  1.32 %
Securities sold under agreement to repurchase5,601  5  0.36 %7,971  8  0.41 %
Federal funds purchased and other borrowings46,320  84  0.73 %10,217  103  4.09 %
Subordinated debt39,269  584  5.98 %39,184  584  6.04 %
Total interest-bearing liabilities1,826,503  5,427  1.20 %1,666,321  5,946  1.45 %
Noninterest-bearing deposits373,125  320,134  
Other liabilities27,215  10,707  
Total liabilities2,226,843  1,997,162  
Stockholders’ equity329,692  286,076  
Total liabilities and stockholders’ equity$2,556,535  $2,283,238  
Net interest income, taxable equivalent$22,688  $21,112  
Interest rate spread3.63 %3.80 %
Tax equivalent net interest margin3.90 %4.10 %
Percentage of average interest-earning assets to average interest-bearing liabilities128.12 %125.40 %
Percentage of  average equity to average assets12.90 %12.53 %
  Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
  Average   Yield/ Average   Yield/
  Balance Interest Cost Balance Interest Cost
Assets  
  
  
  
  
  
Loans1
 $1,802,014
 $24,977
 5.62% $1,352,319
 $18,230
 5.47%
Taxable securities 147,346
 971
 2.67% 151,573
 872
 2.33%
Tax-exempt securities2
 53,492
 537
 4.07% 6,366
 46
 2.93%
Federal funds sold and other earning assets 86,688
 573
 2.68% 58,869
 242
 1.67%
Total interest-earning assets 2,089,540
 27,058
 5.25% 1,569,127
 19,390
 5.01%
Noninterest-earning assets 193,698
     166,035
    
Total assets $2,283,238
     $1,735,162
    
             
Liabilities and Stockholders’ Equity            
Interest-bearing demand deposits $306,164
 $474
 0.63% $249,846
 $320
 0.52%
Money market and savings deposits 665,018
 1,978
 1.21% 526,093
 870
 0.67%
Time deposits 637,767
 2,799
 1.78% 454,660
 1,211
 1.08%
Total interest-bearing deposits 1,608,949
 5,251
 1.32% 1,230,599
 2,401
 0.79%
Securities sold under agreement to repurchase 7,971
 8
 0.41% 16,186
 12
 0.31%
Federal funds purchased and other borrowings 10,217
 103
 4.09% 26,655
 153
 2.32%
Subordinated debt 39,184
 584
 6.04% —
 —
  
Total interest-bearing liabilities 1,666,321
 5,946
 1.45% 1,273,440
 2,566
 0.82%
Noninterest-bearing deposits 320,134
     231,355
    
Other liabilities 10,707
     8,656
    
Total liabilities 1,997,162
     1,513,451
    
Stockholders’ equity 286,076
     221,711
    
Total liabilities and stockholders’ equity $2,283,238
     $1,735,162
    
             
Net interest income, taxable equivalent   $21,112
     $16,824
  
Interest rate spread3
     3.80%     4.19%
Tax equivalent net interest margin4
     4.10%     4.35%
             
Percentage of average interest-earning assets to average interest-bearing liabilities     125.40%     123.22%
Percentage of  average equity to average assets     12.53%     12.78%
(1)Loans include(1)Includes nonaccrual loans. Loan fees included in loan income was $687 thousand and $640 thousand for the quarters ended March 31, 2019 and 2018, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0 percent. The taxable-equivalent adjustment was $2 thousand for the period ended March 31, 2019 and $2 thousand for the period ended March 31, 2018.
(2)Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0 percent. The taxable-equivalent adjustment was $113 thousand for the period ended March 31, 2019 and $10 thousand for the period ended March 31, 2018.
(3)Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average interest-earning assets.

Rate and Volume Analysis

Changes in net interestaccretion income are attributed to changes in average balances (volume change)on acquired loans of $1.8 million and changes in average rates (rate change) in the period presented$1.9 million for earning assets and sources of funds on which interest is received or paid.  Volume change is calculated as change in volume times the previous rate, and rate change is change in rate times the previous volume.  The change attributed to rates and volumes (change in rate times change in volume) is considered as a change in volume.



First quarter of 2019 compared to 2018

Net interest income, taxable equivalent, increased by $4.3 million between the quarters ended March 31, 2020 and 2019, respectively.
(2)Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0 percent. The taxable-equivalent adjustment was $117 thousand for the period ended March 31, 2020 and 2018. The following is an analysis of$115 thousand for the changes in net interest income comparing the changes attributable to rates and those attributable to volumes (in thousands): period ended March 31, 2019.

43
 Three Months Ended March 31,
 2019Compared to2018
 Increase (decrease) due to
Interest Earning Assets Rate
 Volume Net
Loans1
 $682
 $6,065
 $6,747
Taxable securities 123
 (24) 99
Tax-exempt securities2
 151
 340
 491
Federal funds sold and other earning assets 216
 115
 331
Total interest-earning assets 1,172
 6,496
 7,668
       
Interest-bearing liabilities:      
Interest-bearing demand deposits 82
 72
 154
Money market and savings deposits 878
 230
 1,108
Time deposits 1,100
 488
 1,588
Total interest-bearing deposits 2,060
 790
 2,850
Securities sold under agreement to repurchase 2
 (6) (4)
Federal funds purchased and other borrowings 44
 (94) (50)
Subordinated debt 584
 —
 584
Total interest-bearing liabilities 2,690
 690
 3,380
Net interest income $(1,518) $5,806
 $4,288

(1)Loans include nonaccrual loans. Loan fees included in loan income was $687 thousand and $640 thousand for the quarters ended March 31, 2019 and 2018, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0 percent. The taxable-equivalent adjustment was $2 thousand for the period ended March 31, 2019 and $2 thousand for the period ended March 31, 2018.
(2)Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0 percent. The taxable-equivalent adjustment was $113 thousand for the period ended March 31, 2019 and $10 thousand for the period ended March 31, 2018.

Noninterest Income
 
First quarter of 20192020 compared to 20182019
 
Noninterest income totaled $1.7increased by $1.1 million, inor 66.0%, during the first quarter of 2019,2020 compared to $1.5 millionthe same period in the first quarter of 2018. Noninterest income to average assets of 0.30 percent for the quarter decreased from 0.34 percent2019. This quarterly change in 2018. Noninterest income increased due to increases in customer service fees as a result of greater deposit account volumes from the mergers in the second and fourth quarters of 2018 and higher othertotal noninterest income primarily resulted from the following:

•Increase in mortgage banking, from increased activity;
•Increase in investment commissions.services, stemming from personnel hires in 2019; and
•Addition of insurance commissions from the PFG acquisition.

  Three months ended March 31,
(Dollars in thousands) 2019 2018
Customer service fees $654
 $578
Gain on sale of loans and other assets 282
 325
Interchange and debit card transaction fees 175
 146
Other noninterest income 587
 406
Total noninterest income $1,698
 $1,455
The following table summarizes noninterest income by category (in thousands):

Three Months Ended
 March 31,
20202019
Service charges on deposit accounts$770  $654  
Mortgage banking584  282  
Investment services437  169  
Insurance commissions269  —  
Interchange and debit card transaction fees276  175  
Other482  418  
Total noninterest income$2,818  $1,698  





Noninterest Expense
 
First quarter of 20192020 compared to 20182019


Noninterest expense totaled $15.6increased by $3.2 million, or 20.6%, in the first quarter of 2019 compared to $13.2 million in the first quarter of 2018. Noninterest expense to average assets decreased from 3.09 percent a year ago to 2.77 percent in the quarter. The increase in noninterest expense2020 as compared to the prior year wassame period in 2019. The quarterly increase in total noninterest expense primarily due toresulted from the acquisitions of Tennessee Bancshares, Inc. and Foothills Bancorp, Inc. which resulted in higherfollowing:

•Increase is salary and employee benefit expenses, higher occupancy expenses, higher depository expense,benefits from the addition of talented staff throughout 2019 and higher amortizationone month of intangibles. Merger expenses in 2019 were higher than 2018 duesalary and benefits related to the planned mergerPFG acquisition;
•Increase in occupancy and equipment associated with Entegra Financial, which was subsequently terminated (See Note 9ongoing infrastructure and facilities added to accommodate our growth in operations and to lesser extent the additional branches of the Company's consolidated financial statements).PFG acquisition; and
•Increase in merger related and restructuring expenses from the PFG acquisition.

The following table summarizes noninterest expense by category (in thousands):
Three Months Ended
 March 31,
20202019
Salaries and employee benefits$10,006  $8,398  
Occupancy and equipment1,911  1,640  
FDIC insurance180  179  
Other real estate and loan related expense545  490  
Advertising and marketing198  295  
Data processing538  615  
Professional services711  662  
Amortization of intangibles362  344  
Software as service contracts470  567  
Merger related and restructuring expenses2,096  923  
Other1,776  1,466  
Total noninterest expense$18,793  $15,579  






44
        
  Three months ended March 31,
(Dollars in thousands) 2019 2018
Salaries and employee benefits $8,398
 $7,176
Net occupancy and equipment expense 1,640
 1,533
FDIC insurance 179
 102
Foreclosed assets 62
 190
Advertising 295
 184
Data processing 615
 526
Professional services 797
 898
Amortization of intangible assets 343
 188
Software as service contracts 567
 479
Merger expenses 923
 498
Other operating expenses 1,760
 1,448
Total noninterest expense $15,579
 $13,222

Taxes


First quarter of 20192020 compared to 20182019


In the first quarter of 20192020 income tax expense totaled $1.6 million$664 thousand compared to $940 thousand$1.6 million a year ago. The effective tax rate was approximately 25.1 percent19.6% in the first quarter of 20192020 compared to 21.6 percent25.1% a year ago. The decrease is primarily due to the utilization of an NOL carryforward in March of 2020, that was available as part of the CARES Act.


Loan Portfolio Composition


The Company had total net loans outstanding, including organic and purchased loans, of approximately $1.8$2.13 billion at March 31, 20192020 compared to $1.8$1.89 billion at December 31, 2018.2019. Loans secured by real estate, consisting of commercial or residential property, are the principal component of our loan portfolio. We do not generally originate traditional long-term residential fixed rate mortgages for our portfolio but we do originate and hold traditional second mortgage residential real estate loans, adjustable rate mortgages and home equity lines of credit. Even if the principal purpose of the loan is not to finance real estate, when reasonable, we attempt to obtain a security interest in the real estate in addition to any other available collateral to increase the likelihood of ultimate repayment or collection of the loan.


Organic Loans


Our organic net loans. which excludes loans purchased through the PFG and other acquisitions, increased by $133.5$97.0 million, or 11.6 percent,6.4%, from December 31, 2018,2019, to $1.3$1.61 billion at March 31, 2019.2020. Our goal of streamlining the credit process has improved our efficiency and is a competitive advantage in many of our markets. In addition, the overall business environment continuesmarkets, and contributed to rebound from recessionary conditions. Organic loans include loans which were originally purchased non-credit impaired loans but have been renewed since purchase.our organic loan growth.




Purchased Loans


Purchased non-credit impaired loans of $515.3$482.2 million at March 31, 2019 decreased2020 increased by $133.2 million from $584.5 million at December 31, 2018.2019. Since December 31, 2018,2019, our net purchased credit impaired (“PCI”) loans decreasedincreased by $1.3$8.7 million to $32.8$35.5 million at March 31, 2019.2020. The activity within theincrease in purchased creditnon-credit impaired loans will be impacted by how quickly theseand PCI loans are resolved and/or our futurerelated to the acquisition activity.of PFG and offset by maturities, paydowns and payoffs.


The following tables summarize the composition of our loan portfolio (includes loans held for sale) for the periods presented (dollars(dollars in thousands):

 March 31, 2020
 Organic
Loans		Purchased
Non-Credit
Impaired Loans		Purchased
Credit
Impaired Loans		Total Amount% of
Gross
Total
Commercial real estate-mortgage$758,400  $234,046  $16,589  $1,009,035  47.0 %
Consumer real estate-mortgage309,672  167,151  11,950  488,773  22.8 %
Construction and land development219,172  27,794  6,479  253,445  11.8 %
Commercial and industrial329,987  47,043  143  377,173  17.6 %
Consumer and other9,343  7,198  325  16,866  0.8 %
Total gross loans receivable, net of deferred fees1,626,574  483,232  35,486  2,145,292  100.0 %
Allowance for loan losses(12,412) $(1,019) —  (13,431)  
Total loans, net$1,614,162  $482,213  $35,486  $2,131,861   

 December 31, 2019
 Organic
Loans		Purchased
Non-Credit
Impaired Loans		Purchased
Credit
Impaired Loans		Total Amount% of
Gross
Total
Commercial real estate-mortgage$705,691  $184,360  $15,255  $905,306  47.6 %
Consumer real estate-mortgage301,771  115,026  6,541  423,338  22.2 %
Construction and land development210,421  12,747  4,458  227,626  12.0 %
Commercial and industrial306,521  30,147  407  337,075  17.7 %
Consumer and other2,817  6,760  326  9,903  0.5 %
Total gross loans receivable, net of deferred fees1,527,221  349,040  26,987  1,903,248  100.0 %
Allowance for loan losses(10,087) —  (156) (10,243)  
Total loans, net$1,517,134  $349,040  $26,831  $1,893,005   


45
  March 31, 2019
  Organic
Loans		 Purchased
Non-Credit
Impaired Loans		 Purchased
Credit
Impaired Loans		 Total Amount % of
Gross
Total
Commercial real estate-mortgage $615,600
 $256,043
 $17,299
 $888,942
 48.2%
Consumer real estate-mortgage $243,509
 $159,326
 8,146
 410,981
 22.3%
Construction and land development $145,771
 $36,568
 4,670
 187,009
 10.2%
Commercial and industrial $279,278
 $59,893
 2,300
 341,471
 18.6%
Consumer and other $8,283
 $3,430
 453
 12,166
 0.7%
Total gross loans receivable, net of deferred fees $1,292,441
 $515,260
 32,868
 1,840,569
 100.0%
Allowance for loan losses $(8,650) $—
 (54) (8,704)  
Total loans, net $1,283,791
 $515,260
 $32,814
 $1,831,865
  
  December 31, 2018
  Organic
Loans		 Purchased
Non-Credit
Impaired Loans		 Purchased
Credit
Impaired Loans		 Total Amount % of
Gross
Total
Commercial real estate-mortgage $555,915
 $286,430
 $17,682
 $860,027
 48.4%
Consumer real estate-mortgage 224,958
 173,584
 8,712
 407,254
 22.9%
Construction and land development 134,232
 49,061
 4,602
 187,895
 10.6%
Commercial and industrial 234,877
 70,820
 2,557
 308,254
 17.3%
Consumer and other 8,627
 4,577
 605
 13,809
 0.8%
Total gross loans receivable, net of deferred fees 1,158,609
 584,472
 34,158
 1,777,239
 100.0%
Allowance for loan losses (8,275) —
 —
 (8,275)  
Total loans, net $1,150,334
 $584,472
 $34,158
 $1,768,964
  


Loan Portfolio Maturities


The following table sets forth the maturity distribution of our loans, including the interest rate sensitivity for loans maturing after one year (in(in thousands).:

     Rate Structure for Loans
  Maturing Over One Year
One Year
or Less		One through
Five Years		Over Five
Years		TotalFixed
Rate		Floating
Rate
Commercial real estate-mortgage$93,156  $430,195  $485,684  $1,009,035  $736,451  $179,854  
Consumer real estate-mortgage38,565  179,200  271,008  488,773  267,342  182,866  
Construction and land development71,456  97,634  84,355  253,445  100,953  81,036  
Commercial and industrial90,593  194,135  92,445  377,173  242,063  45,652  
Consumer and other6,223  9,056  1,587  16,866  8,975  107  
Total Loans$299,993  $910,220  $935,079  $2,145,292  $1,355,784  $489,515  
          Rate Structure for Loans
    Maturing Over One Year
  
One Year
or Less
 
One through
Five Years
 
Over Five
Years
 Total 
Fixed
Rate
 
Floating
Rate
Commercial real estate-mortgage $112,499
 $435,860
 $340,582
 $888,941
 $531,545
 $244,897
Consumer real estate-mortgage 46,331
 169,204
 195,446
 410,981
 168,706
 195,944
Construction and land development 77,019
 72,456
 37,534
 187,009
 50,350
 59,640
Commercial and industrial 112,114
 152,227
 77,130
 341,471
 203,145
 26,212
Consumer and other 5,619
 5,553
 995
 12,167
 5,909
 639
Total Loans $353,582
 $835,300
 $651,687
 $1,840,569
 $959,655
 $527,332


Nonaccrual, Past Due, and Restructured Loans


Nonperforming loans as a percentage of total gross loans, net of deferred fees, was 0.12 percent0.14% as of March 31, 2019,2020, which decreased from 0.18 percent0.18% as of December 31, 2018.2019. Total nonperforming assets as a percentage of total assets as of March 31, 20192020 totaled 0.18 percent0.31% compared to 0.25 percent0.21% as of December 31, 2018.2019. The increase was primarily the result of the addition of other real estate owned from the PFG acquisition. Acquired PCI loans that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets unless the pools are 90 days or greater past due.assets.


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

March 31,December 31,
20202019
Nonaccrual loans$3,060  $2,743  
Accruing loans past due 90 days or more10  607  
Total nonperforming loans3,070  3,350  
Other real estate owned5,894  1,757  
Total nonperforming assets$8,964  $5,107  
Restructured loans not included above$9  $61  
  March 31, 2019 December 31, 2018
Nonaccrual loans $2,072
 $2,696
Accruing loans past due 90 days or more (1) 210
 584
Total nonperforming loans 2,282
 3,280
Foreclosed assets 2,066
 2,495
Total nonperforming assets $4,348
 $5,775
     
Restructured loans not included above $62
 $116
(1)    Balances include PCI loans past due 90 days or more that are grouped in pools which accrue interest based on pool yields. 


Potential Problem Loans


At March 31, 20192020 potential problem loans amounted to approximately $0.4 million$695 thousand or 0.02 percent0.03% of total loans outstanding. Potential problem loans, which are not included in nonperforming loans, represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Bank’s primary regulators for loans classified as substandard or worse, but not considered nonperforming loans.




Allocation of the Allowance for Loan Losses


We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio. As of March 31, 20192020 and December 31, 2018,2019, our allowance for loan losses was $8.7$13.4 million and $8.3$10.2 million, respectively, which we deemed to be adequate at each of the respective dates. The increase in the allowance for loan losses inat March 31, 20192020, as compared to December 31, 20182019 is primarily due to the result of increasesdeterioration in balance ofthe qualitative factors, such as unemployment and GDP, in our organic loan portfolio.loss allowance methodology which was caused by the unstable economic conditions facing the U.S. economy related to the challenges being faced with the world wide COVID-19 pandemic. Our allowance for loan loss as a percentage of total loans was 0.47 percent0.63% at March 31, 20192020 and 0.54% at December 31, 2018.2019.


Our purchased loans were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans will be accreted into income over the life of the loans. A provision for loan losses is recorded for any deterioration in these loans subsequent to the acquisition.acquisition. As of March 31, 20192020 the balancenotional balances on PCI loans was $46.5$49.9 million while the carrying value was $32.8$35.5 million. At March 31, 2019,2020, there were $54 thousand ofwas no loan loss allowances on PCI loans.


46
The following table sets forth, based on our best estimate, the allocation of the allowance to types of loans as of March 31, 2019 and December 31, 2018for the periods presented and the percentage of loans in each category to total loans (in(dollars in thousands):

 March 31, 2020December 31, 2019
 AmountPercentAmountPercent
Commercial real estate-mortgage$5,963  44.5 %$4,508  44.1 %
Consumer real estate-mortgage3,301  24.6 %2,576  25.1 %
Construction and land development1,484  11.0 %1,127  11.0 %
Commercial and industrial2,557  19.0 %1,957  19.1 %
Consumer and other126  0.9 %75  0.7 %
Total allowance for loan losses$13,431  100.0 %$10,243  100.0 %

  March 31, 2019 December 31, 2018
  Amount Percent Amount Percent
Commercial real estate-mortgage $4,074
 46.8% $3,639
 44.0%
Consumer real estate-mortgage 1,949
 22.4% 1,789
 21.6%
Construction and land development 854
 9.8% 795
 9.6%
Commercial and industrial 1,709
 19.6% 1,746
 21.1%
Consumer and other 118
 1.4% 306
 3.7%
Total allowance for loan losses $8,704
 100.0% $8,275
 100.0%

The increase in the overall allowance for loan losses is due to the increased balance of organic loans. The allocation by category is determined based on the assigned risk rating, if applicable, and environmental factors applicable to each category of loans. For impaired loans, those loans are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired, non PCI, loans were approximately $534$156 thousand at December 31, 20182019 compared to $220$0 thousand at March 31, 2019.2020.




Analysis of the Allowance for Loan Losses


The following is a summary of changes in the allowance for loan losses for the periods ended March 31, 2019 and December 31, 2018presented including the ratio of the allowance for loan losses to total loans as of the end of each period (in(dollars in thousands):

Three Months Ended March 31,
 20202019
Balance at beginning of period$10,243  $8,275  
Provision for loan losses3,200  797  
Charged-off loans:  
Commercial real estate-mortgage—  —  
Consumer real estate-mortgage(2) (2) 
Construction and land development—  —  
Commercial and industrial(8) (318) 
Consumer and other(76) (130) 
Total charged-off loans(86) (450) 
Recoveries of previously charged-off loans:  
Commercial real estate-mortgage2  2  
Consumer real estate-mortgage6  4  
Construction and land development2  2  
Commercial and industrial42  12  
Consumer and other22  62  
Total recoveries of previously charged-off loans74  82  
Net loan charge-offs(12) (368) 
Balance at end of period$13,431  $8,704  
Ratio of allowance for loan losses to total loans outstanding at end of period0.63 %0.47 %
Ratio of net loan charge-offs to average loans outstanding for the period (annualized)— %0.08 %
  Three Months Ended Twelve Months Ended
  March 31, 2019 December 31, 2018
Balance at beginning of period $8,275
 $5,860
Provision for loan losses 797
 2,936
Charged-off loans:  
  
Commercial real estate-mortgage —
 (38)
Consumer real estate-mortgage (2) (275)
Construction and land development —
 —
Commercial and industrial (318) (177)
Consumer and other (130) (370)
Total charged-off loans (450) (860)
Recoveries of previously charged-off loans:  
  
Commercial real estate-mortgage 2
 2
Consumer real estate-mortgage 4
 100
Construction and land development 2
 9
Commercial and industrial 12
 72
Consumer and other 62
 156
Total recoveries of previously charged-off loans 82
 339
Net charge-offs (368) (521)
Balance at end of period $8,704
 $8,275
     
Ratio of allowance for loan losses to total loans outstanding at end of period 0.47% 0.47 %
Ratio of net charge-offs (recoveries) to average loans outstanding for the period (annualized) 0.08% (0.03)%


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





47
InvestmentSecurities Portfolio


Our investmentsecurities portfolio, consisting primarily of Federal agency bonds, mortgage-backedstate and municipal securities, and state and municipalmortgage-backed securities amounted to fair values of $198.3$201.0 million and $201.7$178.3 million at March 31, 20192020 and December 31, 2018,2019, respectively. Our investments to assets ratio decreased slightly from 8.97.3 percent at December 31, 20182019 to 8.47.0 percent at March 31, 2019.2020. Our investmentsecurities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income. All of the Company's securities are designated as available-for-sale.


The following table shows the amortized cost of the Company’s securities by investment securities. In the periods ended March 31, 2019 and December 31, 2018 all investment securities were classified as available for sale (incategories (in thousands).:

March 31,December 31,
20202019
U.S. Government-sponsored enterprises (GSEs)$17,012  $19,015  
Municipal securities82,599  63,792  
Other debt securities5,461  3,481  
Mortgage-backed securities94,306  91,531  
Total securities$199,378  $177,819  

  March 31, 2019 December 31, 2018
U.S. Government agencies $39,106
 $44,117
State and political subdivisions 58,260
 55,248
Other debt securities 978
 974
Mortgage-backed securities 100,600
 103,875
Total securities $198,944
 $204,214

The following table presents the contractual maturity of investmentthe Company's securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at March 31, 2019 (in thousands).2020.  The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.needs (dollars in thousands):

Maturity By Years
 Maturity By Years 1 or Less1 to 55 to 10Over 10Total
 1 or Less 1 to 5 5 to 10 Over 10 Total
Available for Sale  
  
  
  
  
U.S. Government agencies $—
 $31,000
 $8,106
 $—
 $39,106
U.S. Government agencies$8,000  $3,007  $6,005  $—  $17,012  
State and political subdivisions —
 111
 5,483
 52,666
 58,260
State and political subdivisions490  2,170  7,679  72,260  82,599  
Other debt securities —
 —
 978
 —
 978
Other debt securities—  —  5,461  —  5,461  
Mortgage-backed securities —
 9,285
 17,864
 73,451
 100,600
Mortgage-backed securities—  4,738  14,275  75,293  94,306  
Total securities available for sale $—
 $40,396
 $32,431
 $126,117
 $198,944
Total securitiesTotal securities$8,490  $9,915  $33,420  $147,553  $199,378  
Weighted average yield (1)
 —% 2.22% 2.26% 3.43% 2.99%
Weighted average yield (1)
1.56 %1.67 %2.78 %3.00 %2.82 %
(1)  Based on amortized cost, taxable equivalent basis




Deposits


Deposits are the primary source of funds for the Company's lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company's primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of March 31, 2019,2020, brokered deposits represented approximately 13.3 percent11.2% of total deposits.


The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three months ended March 31, 20192020 was 1.32 percent1.10% compared to 0.79 percent1.32% for the same period in 2018.2019, respectively. The increase indecreased cost on interest-bearing deposits was due to changes in deposit mix and higher rates on interest-bearing deposit accounts.caused by federal rate-changes during the periods.


Total deposits as of March 31, 20192020 were $2.0$2.3 billion, which was an increase of $72.4$294.7 million from December 31, 2018.2019. This increase was primarily from the completed acquisition of PFG. As of March 31, 20192020 the Company had outstanding time deposits under $100,000$250,000 with balances of $330.1$584.6 million and time deposits over $100,000$250,000 with balances of $305.1$151.0 million.







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The following table summarizes the maturities of time deposits $100,000$250,000 or more as of March 31, 2019 (in(in thousands).
 March 31,
2019
Three months or less$35,797
Three to six months43,206
Six to twelve months121,493
More than twelve months104,589
Total$305,085

March 31,
2020
Three months or less$28,136 
Three to six months24,768 
Six to twelve months47,981 
More than twelve months50,106 
Total$150,991 
Borrowings


The Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital using debt at the Company level which can be downstreamed as Tier 1 capital to the Bank. Short-term borrowingsBorrowings totaled $8.6$125.4 million at March 31, 20192020, and $11.2primarily consisted of $75.0 million at December 31, 2018,in Federal Home Loan Bank borrowings and consisted primarily of federal funds purchased. Long-term debt$50.0 million from the Federal Reserve Discount Window. Short-term borrowings totaled $39.2$6.2 million at March 31, 20192020 and December 31, 20182019, respectively and consisted entirely of securities sold under repurchase agreements. Long-term debt totaled $39.3 million at March 31, 2020 and December 31, 2019, respectively and consisted entirely of subordinated debt. For more information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 - Borrowings."


Capital Resources


The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Bank’s Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. At March 31, 20192020 and December 31, 2018,2019, 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.necessary.. For more information regarding our capital, leverage and total capital ratios, see "Part I - Item 1. Consolidated Financial Statements - Note 13 - Regulatory Matters."


Liquidity and Off-Balance Sheet Arrangements


The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. At March 31, 2019,2020, we had $356$419.3 million of pre-approved but unused lines of credit and $14.6$23.0 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions.



Market Risk and Liquidity Risk Management


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


Interest Rate Sensitivity
 
Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and 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. AsThese 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 December 31, 2018, the model simulations projected that 100 and 200 basis point increases in
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interest rates would resultfor the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in positive variancesinstantaneous 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 dynamic interest rate forecast over the next 12 and 24 months, limits in the decline in net interest income are as follows:
Estimated % Change in Net Interest Income Over 12 MonthsMaximum Percentage Decline in Net Interest Income from the Budgeted or Base Case Projection of Net Interest Income
March 31, 2020:Increase +Decrease -Next 12 Months
An instantaneous, parallel rate increase or decrease of the following at the beginning of the first quarter:
± 100 basis points0.88%0.39%8%
± 200 basis points0.13%0.18%14%

Economic Value of 2.32 percentEquity Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and 2.46 percent, respectively, relative to the current financial statement structure over the next twelve months, whileoff-balance sheet items will change as a decrease in interest ratesresult of 100 basis points would result in a negative variance in net interest income of (2.77) percent relative to the current financial statement structure over the next twelve months. We do not believe there have been any material changes to the Company’s interest rate sensitivitychanges. Economic values are determined by discounting expected cash flows from December 31, 2018 toassets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.
To help monitor our related risk, we’ve established the period endedfollowing policy limits regarding simulated changes in our economic value of equity:
March 31, 2020:Current Estimated Instantaneous Rate ChangeMaximum Percentage Decline in Economic Value of Equity from the Economic Value of Equity at Currently Prevailing Interest Rates
Instantaneous, Parallel Change in Prevailing
Interest Rates Equal to		Increase +Decrease -
±100 basis points(0.36)%(5.17)%10%
±200 basis points(3.86)%1.35%15%

At March 31, 2019.2020, our model results indicated that we were within these policy limits.


Liquidity Risk Management
 
The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan 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 payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.


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The Company has no$8.5 million in investments that mature throughout the next 12 months. The Company also anticipates $22.2$14.4 million of principal payments from mortgage-backed securities over the same period. The Company also has unused borrowing capacity in the amount of $196.6 million available with the Federal Home Loan Bank of Cincinatti, the Federal Reserve, andFHLB, several correspondent banks.banks and a line of credit. With these sources of funds, the Company currently anticipates adequate liquidity to meet the expected obligations of its customers.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
This item is not required for a Smaller Reporting Company.


 

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ITEM 4. CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31, 20192020 (the “Evaluation Date”). Based on such evaluation, SmartFinancial's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, SmartFinancial’s disclosure controls and procedures were effective to ensure that information required to be disclosed by SmartFinancial in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to SmartFinancial's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding the required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
 
There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended March 31, 20192020 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, neither SmartFinancial nor SmartBank is involved inmanagement does not expect the disposition of any litigation that is expectedof these matters to have a material adverse impact on ourthe Company’s financial position,condition, financial statements or results of operations, or cash flow. Management believes that any claims pending against SmartFinancial or SmartBank are without merit or that the ultimate liability, if any, resulting from such claims will not materially affect SmartBank’s financial condition or SmartFinancial’s consolidated financial position.operations.



Item 1A. Risk Factors.
 
In addition to the other information set forthThe Company disclosed risk factors in this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in ourits Annual Report on Form 10-K for the year ended December 31, 2018. These factors could2019. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially and adversely affect our business, financial condition, liquidity,and/or operating results. The following risk factors have been included in this Quarterly Report on Form 10-Q in response to the global market disruptions that have resulted from the COVID-19 pandemic.

The ongoing COVID-19 pandemic and measures implemented to prevent its spread could have a material adverse effect on our business, results of operations and capital position,financial condition, and could causesuch effects will depend on future developments, which are highly uncertain and are difficult to predict.

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

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

•credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries;
•declines in collateral values;
•third party disruptions, including outages at network providers and other suppliers;
•increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;
•risk of litigation or other third-party claims, including with respect to our participation in the Payroll Protection Program and any other government-sponsored stimulus programs; and
•operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

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

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

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

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results contemplated by the forward-looking statements contained in this report. There have been no material changes from the risk factorsof operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018.
.2019.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.(a) Not applicable
(b) Not applicable
(c) Issuer Purchases of Registered Equity Securities

On November 20, 2018, the Company announced that its board of directors has authorized a stock repurchase plan pursuant to which the Company may purchase up to $10.0 million in shares of the Company’s outstanding common stock. Stock repurchases under the plan will be made from time to time in the open market, at the discretion of the management of the Company, and in accordance with applicable legal requirements. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, amended, suspended, or discontinued at any time. As of March 31, 2020 we have purchased $2.0 million of the authorized $10.0 million and may purchase up to an additional $8.0 million in the Company's outstanding common stock.

The following table summarizes the Company's repurchase activity during the three months ended March 31, 2020.
PeriodTotal Number of Shares RepurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands)
January 1, 2020 to January 31, 2020—  $—  —  $10,000  
February 1, 2020 to February 29, 20206,263  19.17  6,263  9,880  
March 1, 2020 to March 31, 2020119,316  15.68  119,316  8,009  
Total125,579  $15.86  125,579  $8,009  
 
Item 3. Defaults Upon Senior Securities.
 
None.
 
Item 4. Mine Safety Disclosures.
 
Not Applicable.
 
Item 5. Other Information.

(a)    On January 24, 2019March 9, 2020 (the “Grant Date”), pursuant to the SmartFinancial, Inc. 2015 Stock Incentive Plan (the “Plan”), the Board of Directors of the Company approved grants of performance-based restricted stock (the “Restricted Stock Awards”) to certain officers and employees of the Company and SmartBank, including William (“Billy”) Y. Carroll, Jr., the President and Chief Executive Officer of the Company and SmartBank; C. Bryan Johnson,Ronald J. Gorczynski, the Chief Financial Officer of the Company and SmartBank; Rhett D. Jordan, the Chief Credit Officer of SmartBank; and Wesley M. (“Miller”) Welborn, Chairman of the Company and SmartBank (such individuals, collectively, the “Designated Officers”). The Restricted Stock Award for each Designated Officer is subject to the terms of a Performance-Based Restricted Stock Award Agreement entered into by the Company and the Designated Officer, the form of which is filed herewith as Exhibit 10.210.7 (the “Form of Performance-Based Restricted Stock Award Agreement”). The number of shares of performance-based restricted stock granted to each Designated Officer is set forth below.

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NAMENameSHARES OF RESTRICTED STOCK GRANTEDShares of Restricted Stock Granted
William (“Billy”("Billy") Y. Carroll, Jr.6,500
C. Bryan JohnsonWesley M. ("Miller") Welborn1,5004,400
Rhett D. JordanRonald J. Gorczynski2,500
Wesley M. (“Miller”) Welborn4,4002,500


Generally, up to 50% of each Designated Officer’s restricted shares can be earned if the Company achieves certain core dilutedoperating earnings per share targets for the fiscal year ending December 31, 2019,2020, and up to 50% of each Designated Officer’s restricted shares can be earned if the Company achieves certain coreoperating return on average assets targets for the fiscal year ending


December 31, 2019.2020. All restricted shares so earned generally will vest on January 1, 2024,2025, subject to the Designated Officer’s continuous employment until such date.


If a Designated Officer’s employment is terminated for “cause” (as defined in the Form of Performance-Based Restricted Stock Award Agreement) or by the Designated Officer without “good reason” (as defined in the Form of Performance-Based Restricted Stock Award Agreement), any unvested restricted shares will be forfeited by the Designated Officer.


If a Designated Officer’s employment is terminated without cause or by the Designated Officer with good reason, or in the event of a Designated Officer’s “retirement” (as defined in the Form of Performance-Based Restricted Stock Award Agreement), any restricted shares that have been earned but that have not vested will vest on a pro rata basis based on the number of full calendar months the Designated Officer has been employed since the Grant Date. Any restricted shares that have been earned but that have not vested will vest on an accelerated basis in full upon the death or disability (as defined in the Plan) of a Designated Officer. In the event of a change in control (as defined in the Form of Performance-Based Restricted Stock Award Agreement), all unvested restricted shares, whether or not they have been earned, will vest on an accelerated basis in full.


The foregoing summary of the terms of the Restricted Stock Awards is not complete and is qualified in its entirety by reference to the Form of Performance-Based Restricted Stock Award Agreement, which is incorporated herein by reference.


(b)    None
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Item 6. Exhibits
 
Exhibit No.DescriptionLocation
2.1
Agreement and Plan of Merger, dated as of January 15,October 29, 2019, by and amongbetween SmartFinancial, Inc., CT Merger Sub, and Progressive Financial Group, Inc., and Entegra Financial Corp.*
Incorporated by reference to Exhibit 2.1 to Form 8-K filed January 16,October 30, 2019

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


4.1
Specimen Common Stock Certificate
Incorporated by reference to Exhibit 4.2 to Form 10-K filed March 30, 2016


4.2
The rights of securities holders are defined in the Charter and Bylaws provided in Exhibits 3.1 and 3.2
10.1
EmploymentExecutive Change in Control Agreement with W. Miller Welborn, dated January 15, 2019, by and among SmartFinancial, Inc., SmartBank, and David A. Brightas of March 9, 2020
Incorporated by reference to Exhibit 10.1 to Form 8-K filed January 16, 2019

March 11, 2020
10.2
Employment Agreement with William Y. Carroll, Jr., dated January 15, 2019, by and among SmartFinancial, Inc., SmartBank, and Ryan M. Scaggsas of March 9, 2020
Incorporated by reference to Exhibit 10.2 to Form 8-K filed January 16, 2019

March 11, 2020
10.3
Employment Agreement with Ronald J. Gorczynski, dated as of March 9, 2020Incorporated by reference to Exhibit 10.3 to Form 8-K filed March 11, 2020
10.4
Loan and Security Agreement, dated as of March 31, 2020, by and between SmartFinancial, Inc., as Borrower, and SerrvisFirst Bank, as LenderIncorporated by reference to Exhibit 10.1 to Form 8-K filed April 3, 2020
10.5
Revolving Note, dated as of March 31, 2020, by and between SmartFinancial, Inc., as Borrower, and ServisFirst Bank, as LenderIncorporated by reference to Exhibit 10.2 to Form 8-K filed April 3, 2020
10.6
Pledge Agreement, dated as of March 31, 2020, by and between SmartFinancial, Inc., as Borrower, and ServisFirst Bank, as Lender
Incorporated by reference to Exhibit 10.3 to Form 8-K filed April 3, 2020
10.7
Form of Performance-Based Restricted Stock Award Agreement*Filed herewith.
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 2002Furnished herewith.
32.2
Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002Furnished herewith.
101Interactive Data Files
Filed herewith.


* The registrant has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish a copy of any omitted schedule or similar attachment to the SEC upon request.


*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
 
In accordance withPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
SmartFinancial, Inc.
Date:May 10, 201911, 2020/s/ William Y. Carroll, Jr.
William Y. Carroll, Jr.
President and Chief Executive Officer
(principal executive officer)
Date:May 10, 201911, 2020/s/ Christopher Bryan JohnsonRonald J. Gorczynski
Christopher Bryan JohnsonRonald J. Gorczynski
Executive Vice President and Chief Financial Officer
(principal financial officer and accounting officer)
 





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