United States Securities and Exchange Commission

Washington, D.C. 20549



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



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

For the transition period from __________to ��

Commission File Number:~~333-203449~~001-37661



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

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

~~865-453-2650~~ 865-437-5700						Not Applicable
(Registrant’s telephone number, including area code)						(Former name, former address and former fiscal
						year, if changed since last report)

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



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

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).

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

Large accelerated filer ¨☐

Accelerated filer 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).

As of ~~August 1, 2019~~May 8, 2020 there were ~~13,953,209~~15,216,932 shares of common stock, $1.00 par value per share, issued and outstanding.

PART I –FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except for share data)


	(Unaudited) March 31, 2020		December 31, 2019
ASSETS:
Cash and due from banks	$	38,802	$	33,205
Interest-bearing deposits with banks	194,454		127,329
Federal funds sold	75,833		23,437
Total cash and cash equivalents	309,089		183,971
Securities available-for-sale, at fair value	201,002		178,348
Other investments	14,113		12,913
Loans held for sale	6,045		5,856
Loans	2,139,247		1,897,392
Less: Allowance for loan losses	(13,431)		(10,243)
Loans, net	2,125,816		1,887,149

Premises and equipment, net	73,801		59,433
Other real estate owned	5,894		1,757
Goodwill and core deposit intangible, net	86,503		77,193
Bank owned life insurance	30,671		24,949
Other assets	20,781		17,554
Total assets	$	2,873,715	$	2,449,123
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	431,781	$	364,155
Interest-bearing demand	444,141		380,234
Money market and savings	730,392		623,284
Time deposits	735,616		679,541
Total deposits	2,341,930		2,047,214
Securities sold under agreement to repurchase	6,164		6,184
Federal Home Loan Bank advances and other borrowings	125,439		25,439
Subordinated debt	39,283		39,261
Other liabilities	24,699		18,278
Total liabilities	2,537,515		2,136,376
Shareholders' equity:
Preferred 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, respectively	15,222		14,008
Additional paid-in capital	254,356		232,732
Retained earnings	67,869		65,839
Accumulated other comprehensive income (loss)	(1,247)		168
Total shareholders' equity	336,200		312,747
Total liabilities and shareholders' equity	$	2,873,715	$	2,449,123

(Unaudited)
June 30,
2019 December 31,
2018
ASSETS

Cash and due from banks $ 44,500
$ 40,015
Interest-bearing deposits with banks 75,371
75,807
Federal funds sold 79,663
—
Total cash and cash equivalents 199,534
115,822
Securities available-for-sale, at fair value 174,114
201,688
Other investments 12,905
11,499
Loans held for sale 4,087
1,979
Loans 1,832,902
1,775,260
Less: Allowance for loan losses (9,097 ) (8,275 )
Loans, net 1,823,805
1,766,985
Premises and equipment, net 56,589
56,012
Other real estate owned 1,814
2,495
Goodwill and core deposit intangible, net 78,348
79,034
Bank owned life insurance 24,695
24,381
Other assets 15,366
14,514
Total assets $ 2,391,257
$ 2,274,409
LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:

Noninterest-bearing demand $ 357,220
$ 319,861
Interest-bearing demand 333,705
311,482
Money market and savings 648,132
641,945
Time deposits 673,243
648,676
Total deposits 2,012,300
1,921,964
Securities sold under agreement to repurchase 8,219
11,756
Federal Home Loan Bank advances and other borrowings 15,460
11,243
Subordinated debt 39,219
39,177
Other liabilities 16,448
7,258
Total liabilities 2,091,646
1,991,398
Shareholders' equity:

Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding —
—
Common stock, $1 par value; 40,000,000 shares authorized; 13,953,209 and 13,933,504 shares issued and outstanding, respectively 13,953
13,933
Additional paid-in capital 232,386
231,852
Retained earnings 53,843
39,991
Accumulated other comprehensive loss (571 ) (2,765 )
Total shareholders' equity 299,611
283,011
Total liabilities and shareholders' equity $ 2,391,257
$ 2,274,409

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

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

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

(Dollars in thousands)


	Three Months Ended March 31,
	2020		2019
Net income	$	2,732	$	4,731
Other comprehensive income:
Unrealized holding gains and hedge effects on securities available-for-sale arising during the period	1,095		2,851
Tax effect	(244)		(748)


Unrealized gains on securities available-for-sale arising during the period, net of tax	851		2,103
Unrealized gains (losses) on fair value municipal security hedges	(3,072)		309
Tax effect	806		(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

Three Months Ended
June 30, Six Months Ended
June 30,
2019 2018 2019 2018
Net income $ 9,121
$ 3,932
$ 13,852
$ 7,346
Other comprehensive income, net of tax:

Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period (112 ) (397 ) 2,219
(1,769 )
Reclassification adjustment for (gains) losses realized (25 ) 1
(25 ) 1
Total other comprehensive income (loss) (137 ) (396 ) 2,194
(1,768 )
Comprehensive income $ 8,984
$ 3,536
$ 16,046
$ 5,578

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

(Dollars in thousands, except for share data)


	Common Stock
	Shares	Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Total
Balance, December 31, 2018	13,933,504	$	13,934	$	231,852	$	39,991	$	(2,765)	$	283,011
Net income	—	—		—		4,731		—		4,731
Other comprehensive income	—	—		—		—		2,331		2,331




Common stock issued pursuant to:
Stock awards	3,298	3		61		—		—		65
Exercise of stock options	14,788	15		184		—		—		199

Stock compensation expense	—	—		143		—		—		143
Balance, March 31, 2019	13,951,590	$	13,952	$	232,241	$	44,722	$	(434)	$	290,481

Common Stock
Shares Amount Additional Paid-in Capital
Retained
Earnings
Accumulated Other Comprehensive (Loss) Gain Total
Balance, December 31, 2017 11,152,561
$ 11,153
$ 174,009
$ 21,889
$ (1,198 ) $ 205,852
Net income —
—
—
7,346
—
7,346
Other comprehensive loss —
—
—
—
(1,768 ) (1,768 )
Common stock issued pursuant to:
Stock awards 394
—
9
—
—
9
Exercise of stock options 92,645
93
978
—
—
1,071
Shareholders of TN Bancshares, Inc. 1,458,981
1,459
33,273
—
—
34,732
Stock compensation expense —
—
244
—
—
244
Balance, June 30, 2018 12,704,581
$ 12,705
$ 208,513
$ 29,235
$ (2,966 ) $ 247,487


Balance, December 31, 2019													Balance, December 31, 2019	14,008,233	$	14,008	$	232,732	$	65,839	$	168	$	312,747
Net income													Net income	—	—		—		2,732		—		2,732
Other comprehensive loss													Other comprehensive loss	—	—		—		—		(1,415)		(1,415)

Balance, December 31, 2018	13,933,504	$	13,934	$	231,852	$	39,991	$	(2,765	)	$	283,011
Net income	—	—		—		13,852		—			13,852
Other comprehensive income	—	—		—		—		2,194			2,194
Common stock issued pursuant to:													Common stock issued pursuant to:
Stock awards	3,298	3		61		—		—			65

Exercise of stock options	16,407	16		196		—		—			213		Exercise of stock options	14,858	15		158		—		—		173
Restricted stock, net of forfeitures													Restricted stock, net of forfeitures	31,900	32		(32)		—		—		—
Shareholders of Progressive Financial Group, Inc.													Shareholders of Progressive Financial Group, Inc.	1,292,578	1,293		23,254		—		—		24,547
Stock compensation expense	—	—		276		—		—			276		Stock compensation expense	—	—		110		—		—		110
Balance, June 30, 2019	13,953,209	$	13,953	$	232,386	$	53,843	$	(571	)	$	299,611
Common stock dividend ($0.05 per share)													Common stock dividend ($0.05 per share)	—	—		—		(702)		—		(702)
Purchase of common stock													Purchase of common stock	(125,579)	(126)		(1,866)		—		—		(1,992)
Balance, March 31, 2020													Balance, March 31, 2020	15,221,990	$	15,222	$	254,356	$	67,869	$	(1,247)	$	336,200

Balance, March 31, 2018 11,233,806
$ 11,234
$ 174,981
$ 25,303
$ (2,569 ) $ 208,949
Net income —
—
—
3,932
—
3,932
Other comprehensive loss —
—
—
—
(396 ) (396 )
Common stock issued pursuant to:
Stock awards 394
—
9
—
—
9
Exercise of stock options 11,400
11
109
—
—
120
Shareholders of TN Bancshares, Inc. 1,458,981
1,459
33,273
—
—
34,732
Stock compensation expense —
—
141
—
—
141
Balance, June 30, 2018 12,704,581
$ 12,705
$ 208,513
$ 29,235
$ (2,966 ) $ 247,487

Balance, March 31, 2019 13,951,590
$ 13,952
$ 232,241
$ 44,722
$ (434 ) $ 290,481
Net income —
—
—
9,121
—
9,121
Other comprehensive loss —
—
—
—
(137 ) (137 )
Common stock issued pursuant to:
Exercise of stock options 1,619
2
12
—
—
14
Stock compensation expense —
—
133
—
—
133
Balance, June 30, 2019 13,953,209
$ 13,953
$ 232,386
$ 53,843
$ (571 ) $ 299,611

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

(Dollars in thousands)

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Basis of Presentation and Accounting Estimates:

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 as of January 1, 2019. See Note 8 Leases for more information.

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

~~Recently Issued Not Yet Effective Accounting Pronouncements:~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Recently Issued Not Yet Effective Accounting Pronouncements:

~~On July 17,~~In October 2019, the Financial Accounting Standards Board ~~unanimously voted to propose~~approved a delay for the implementation of ASU 2016-13,, Financial ~~Instruments-Credit~~Instruments - Credit Losses (Topic 326). The Board decided that CECL will be effective for ~~PBEs~~larger Public Business Entities ("PBEs") that are SEC ~~Filers,~~filers, excluding ~~SRCs~~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.~~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 ~~Board decided~~Company does not plan to adopt this standard early and being that the ~~comment period~~Company is an SRC, adoption is required for fiscal years beginning after December 15, 2022.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In December 2019, the ~~proposed Update~~FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for 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, 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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

Acquisition of Progressive Financial Inc.

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


	As recorded		Fair value		As recorded
	by PFG		adjustments ⁽¹⁾		by the Company
Assets:
Cash & cash equivalents	$	55,971	$	—	$	55,971
Investment securities available-for-sale	27,054		203		27,257
Restricted investments	692		—		692
Loans	191,672		(3,691)		187,981
Allowance for loan losses	(2,832)		2,832		—
Premises and equipment, net	15,681		(2,919)		12,762
Bank owned life insurance	5,560		—		5,560
Deferred tax asset, net	—		813		813
Intangibles	—		1,370		1,370
Other real estate owned	3,695		(100)		3,595
Interest Receivable	1,061		(280)		781
Prepaids	375		(174)		201
Goodwill	231		(231)		—
Other assets	1,881		—		1,881
Total assets acquired	$	301,041	$	(2,177)	$	298,864

Liabilities:
Deposits	$	271,276	$	—	$	271,276
Time deposit premium	—		729		729
Payables and other liabilities	776		—		776
Total liabilities assumed	272,052		729		272,781
Excess of assets assumed over liabilities assumed	$	28,989
Aggregate fair value adjustments			$	(2,906)
Total identifiable net assets					26,083
Consideration transferred:
Cash					9,838
Common stock issued (1,292,578 shares)					24,547
Total fair value of consideration transferred					34,385

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.

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 differences	4,706
Cash flows expected to be collected	16,401
Accretable yield	2,515
Fair value	$	13,886

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,
	Revenue		Net 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, 2019	28,050		4,013

2019:
Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019	$	26,766	$	3,513

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2.3. Earnings Per Share

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Net income $ 9,121
$ 3,932
$ 13,852
$ 7,346

Weighted average basic common shares outstanding 13,951,643
12,201,185
13,946,856
11,708,746
Effect of dilutive securities 94,857
119,313
89,934
113,751
Weighted average dilutive shares outstanding 14,046,500
12,320,498
14,036,790
11,822,497

Basic earnings per common share $ 0.65
$ 0.32
$ 0.99
$ 0.63
Diluted earnings per common share $ 0.65
$ 0.32
$ 0.99
$ 0.62


	Three Months Ended March 31,
	2020		2019
Basic earnings per share computation:
Net income available to common stockholders	$	2,732	$	4,731
Average common shares outstanding - basic	14,395,103		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 - basic	14,395,103		13,942,016
Incremental shares from assumed conversions:
Stock options and restricted stock	84,568		76,147
Average common shares outstanding - diluted	14,479,671		14,018,163
Diluted earnings per common share	$	0.19	$	0.34

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 are summarized as follows ~~(in~~(in thousands):


											Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2019:
March 31, 2020:										March 31, 2020:
U.S. Government-sponsored enterprises (GSEs)	$	24,031	$	22	$	(65	)	$	23,988	U.S. Government-sponsored enterprises (GSEs)	$	17,012	$	96	$	(63)	$	17,045
Municipal securities	56,251		492		(17		)	56,726		Municipal securities	82,599		970		(252)		83,317
Other debt securities	979		—		(42		)	937		Other debt securities	5,461		129		(128)		5,462
Mortgage-backed securities (GSEs)	92,718		154		(409		)	92,463		Mortgage-backed securities (GSEs)	94,306		1,482		(610)		95,178
	$	173,979	$	668	$	(533	)	$	174,114		$	199,378	$	2,677	$	(1,053)	$	201,002

December 31, 2018:
U.S. Government-sponsored enterprises (GSEs) $ 44,117
$ 12
$ (626 ) $ 43,503
Municipal securities 55,248
276
(363 ) 55,161
Other debt securities 977
—
(67 ) 910
Mortgage-backed securities (GSEs) 103,875
153
(1,914 ) 102,114
$ 204,217
$ 441
$ (2,970 ) $ 201,688


December 31, 2019:
U.S. Government-sponsored enterprises (GSEs)	$	19,015	$	41	$	(56)	$	19,000
Municipal securities	63,792		618		(19)		64,391
Other debt securities	3,481		22		(33)		3,470
Mortgage-backed securities (GSEs)	91,531		382		(426)		91,487
	$	177,819	$	1,063	$	(534)	$	178,348

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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


	Amortized Cost		Fair Value
Due in one year or less	$	8,491	$	8,440
Due from one year to five years	5,177		5,182
Due from five years to ten years	19,145		19,254
Due after ten years	72,258		72,947
	105,071		105,823
Mortgage-backed securities	94,307		95,179
	$	199,378	$	201,002

Amortized
Cost

Fair
Value
Due in one year or less $ 294
$ 297
Due from one year to five years 16,000
15,935
Due from five years to ten years 13,302
13,283
Due after ten years 51,665
52,136
81,261
81,651
Mortgage-backed securities 92,718
92,463
$ 173,979
$ 174,114


	Less than 12 Months						12 Months or Greater						Total
	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 securities	16,370		(250)		527		(2)		16,897		(252)
Other debt securities	1,970		(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)

Less than 12 Months 12 Months or Greater Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses
June 30, 2019:
U.S. Government- sponsored enterprises (GSEs) $ —
$ —
$ 10,935
$ (65 ) $ 10,935
$ (65 )
Municipal securities —
—
2,021
(17 ) 2,021
(17 )
Other debt securities —
—
937
(42 ) 937
(42 )
Mortgage-backed securities (GSEs) 5,165
(20 ) 43,805
(389 ) 48,970
(409 )
$ 5,165
$ (20 ) $ 57,698
$ (513 ) $ 62,863
$ (533 )

December 31, 2018:
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 )

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Less than 12 Months						12 Months or Greater						Total
	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 securities	3,656		(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 ~~June 30, 2019,~~March 31, 2020, the categories of temporarily impaired securities in an unrealized loss position twelve months or greater are as follows ~~(dollars~~(dollars in thousands):


	Gross Unrealized Loss		Number 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

Gross Unrealized Loss Number of Securities
U.S. Government-sponsored enterprises (GSEs) $ (65 ) 3
Municipal securities (17 ) 4
Other debt securities (42 ) 1
Mortgage-backed securities (GSEs) (389 ) 47
$ (513 ) 55

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


	March 31,		December 31,
	2020		2019
Federal Reserve Bank stock	$	7,925	$	7,917
Federal Home Loan Bank stock	5,838		4,646
First National Bankers Bank stock	350		350
	$	14,113	$	12,913

June 30, 2019 December 31, 2018
Federal Reserve Bank stock $ 7,909
$ 7,010
Federal Home Loan Bank stock 4,646
4,139
First National Bankers Bank stock 350
350
$ 12,905
$ 11,499

Our restricted investments consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of ~~June 30, 2019,~~March 31, 2020, the Company determined that there was no impairment on its other ~~investment~~ securities.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4.5. Loans and Allowance for Loan Losses

Portfolio Segmentation:

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


	March 31, 2020										December 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 estate	11,950		476,823		488,773		6,541		416,797		423,338
Construction and land development	6,479		246,966		253,445		4,458		223,168		227,626
Commercial and industrial	143		377,030		377,173		407		336,668		337,075
Consumer and other	325		16,541		16,866		326		9,577		9,903
Total loans	35,486		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

June 30, 2019 December 31, 2018

PCI Loans¹

All Other
Loans²
Total
PCI Loans¹

All Other
Loans²
Total
Commercial real estate $ 17,040
$ 861,547
$ 878,587
$ 17,682
$ 842,345
$ 860,027
Consumer real estate 7,412
398,844
406,256
8,712
398,542
407,254
Construction and land development 4,669
200,027
204,696
4,602
183,293
187,895
Commercial and industrial 2,137
333,361
335,498
2,557
305,697
308,254
Consumer and other 400
11,552
11,952
605
13,204
13,809
Total loans 31,658
1,805,331
1,836,989
34,158
1,743,081
1,777,239
Less: Allowance for loan losses (54 ) (9,043 ) (9,097 ) —
(8,275 ) (8,275 )
Loans, net $ 31,604
$ 1,796,288
$ 1,827,892
$ 34,158
$ 1,734,806
$ 1,768,964

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

²Includes loans held for sale.

The composition of loans by loan classification for impaired and performing loan status is summarized in the tables below ~~(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	$	991,914	$	475,303	$	246,359	$	376,872	$	16,541	$	2,106,989
Impaired loans	532		1,520		607		158		—		2,817
	992,446		476,823		246,966		377,030		16,541		2,109,806
PCI loans	16,589		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 loans	256		1,547		547		160		—		2,510
	890,051		416,797		223,168		336,668		9,577		1,876,261
PCI loans	15,255		6,541		4,458		407		326		26,987
Total loans	$	905,306	$	423,338	$	227,626	$	337,075	$	9,903	$	1,903,248

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
June 30, 2019:
Performing loans $ 861,288
$ 398,061
$ 199,326
$ 333,109
$ 11,552
$ 1,803,336
Impaired loans 259
783
701
252
—
1,995
861,547
398,844
200,027
333,361
11,552
1,805,331
PCI loans 17,040
7,412
4,669
2,137
400
31,658
Total $ 878,587
$ 406,256
$ 204,696
$ 335,498
$ 11,952
$ 1,836,989

December 31, 2018:
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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	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 loans	46		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

Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and
Other
Total
June 30, 2019:
Performing loans $ 4,062
$ 1,935
$ 946
$ 1,641
$ 114
$ 8,698
PCI loans 40
14
—
—
—
54
Impaired loans —
240
—
105
—
345
Total $ 4,102
$ 2,189
$ 946
$ 1,746
$ 114
$ 9,097

The following tables detail the changes in the allowance for loan losses by loan classification ~~(in~~(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-offs	2		6		2		42		22		74
Provision (reallocation) charged to expense	1,453		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-offs	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

Commercial
Real Estate Consumer
Real
Estate Construction
and Land
Development Commercial
and
Industrial Consumer
and Other Total
Three Months Ended June 30, 2019:
Beginning balance $ 4,074
$ 1,949
$ 854
$ 1,709
$ 118
$ 8,704
Loans charged off —
—
—
(14 ) (80 ) (94 )
Recoveries of charge-offs 22
16
2
41
13
94
Provision (reallocation) charged to expense 6
224
90
10
63
393
Ending balance $ 4,102
$ 2,189
$ 946
$ 1,746
$ 114
$ 9,097

Three Months Ended June 30, 2018:
Beginning balance $ 2,925
$ 1,519
$ 627
$ 1,210
$ 196
$ 6,477
Loans charged off —
(25 ) —
—
(59 ) (84 )
Recoveries of charge-offs —
27
3
16
18
64
Provision (reallocation) charged to expense 210
7
114
141
145
617
Ending balance $ 3,135
$ 1,528
$ 744
$ 1,367
$ 300
$ 7,074

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Commercial
Real Estate

Consumer
Real
Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Six Months Ended June 30, 2019:
Beginning balance $ 3,639
$ 1,789
$ 795
$ 1,746
$ 306
$ 8,275
Loans charged off —
(2 ) —
(333 ) (210 ) (545 )
Recoveries of charge-offs 24
20
4
53
76
177
Provision (reallocation) charged to expense 439
382
147
280
(58 ) 1,190
Ending balance $ 4,102
$ 2,189
$ 946
$ 1,746
$ 114
$ 9,097

Six Months Ended June 30, 2018:
Beginning balance $ 2,465
$ 1,596
$ 521
$ 1,062
$ 216
$ 5,860
Loans charged off (38 ) (25 ) —
(78 ) (101 ) (242 )
Recoveries of charge-offs —
50
5
56
40
151
Provision (reallocation) charged to expense 708
(93 ) 218
327
145
1,305
Ending balance $ 3,135
$ 1,528
$ 744
$ 1,367
$ 300
$ 7,074


	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
Watch	81,277		5,697		7,587		7,233		38		101,832
Special mention	7,225		748		—		1,020		—		8,993
Substandard	638		1,722		678		221		56		3,315
Doubtful	—		162		—		50		24		236
Total	992,446		476,823		246,966		377,030		16,541		2,109,806


PCI Loans:
Pass	13,220		8,122		2,169		48		300		23,859
Watch	2,189		743		3,743		—		14		6,689
Special mention	21		59		—		—		—		80
Substandard	1,159		3,026		567		95		11		4,858
Doubtful	—		—		—		—		—		—
Total	16,589		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
Watch	25,180		989		6,089		6,786		40		39,084
Special mention	4,057		738		—		1,033		—		5,828
Substandard	367		1,713		620		228		51		2,979
Doubtful	—		165		—		57		24		246
Total	890,051		416,797		223,168		336,668		9,577		1,876,261


PCI Loans:
Pass	12,473		5,258		902		41		300		18,974
Watch	2,234		38		3,556		—		13		5,841
Special mention	139		60		—		—		—		199
Substandard	409		1,185		—		366		13		1,973
Doubtful	—		—		—		—		—		—
Total	15,255		6,541		4,458		407		326		26,987
Total loans	$	905,306	$	423,338	$	227,626	$	337,075	$	9,903	$	1,903,248

June 30, 2019
Non PCI Loans:
Commercial
Real Estate

Consumer
Real Estate

Construction
and Land
Development

Commercial
and
Industrial

Consumer
and Other
Total
Pass $ 848,287
$ 395,438
$ 198,469
$ 326,328
$ 11,459
$ 1,779,981
Watch 12,387
2,353
624
5,492
44
20,900
Special mention 500
8
156
1,181
—
1,845
Substandard 373
875
778
352
25
2,403
Doubtful —
170
—
8
24
202
Total $ 861,547
$ 398,844
$ 200,027
$ 333,361
$ 11,552
$ 1,805,331

PCI Loans:

Pass $ 12,795
$ 5,050
$ 3,576
$ 2,039
$ 354
$ 23,814
Watch 2,463
453
1,093
3
14
4,026
Special mention 920
434
—
—
7
1,361
Substandard 862
1,475
—
95
25
2,457
Doubtful —
—
—
—
—
—
Total $ 17,040
$ 7,412
$ 4,669
$ 2,137
$ 400
$ 31,658
Total loans $ 878,587
$ 406,256
$ 204,696
$ 335,498
$ 11,952
$ 1,836,989

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

The following tables present an aging analysis of our loan portfolio ~~(in~~(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		Nonaccrual		Total Past Due and Nonaccrual		PCI Loans		Current Loans		Total Loans
Commercial real estate	$	4,305	$	418	$	—	$	397	$	5,120	$	16,589	$	987,326	$	1,009,035
Consumer real estate	4,029		486		—		1,860		6,375		11,950		470,448		488,773
Construction and land development	564		40		—		679		1,283		6,479		245,683		253,445
Commercial and industrial	665		302		—		48		1,015		143		376,015		377,173
Consumer and other	373		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		Nonaccrual		Total 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 estate	1,564		30		—		1,872		3,466		6,541		413,331		423,338
Construction and land development	507		—		607		620		1,734		4,458		221,434		227,626
Commercial and industrial	559		53		—		57		669		407		335,999		337,075
Consumer and other	86		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

June 30, 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 $ 133
$ —
$ 139
$ 124
$ 396
$ 17,040
$ 861,151
$ 878,587
Consumer real estate 1,026
226
441
1,024
2,717
7,412
396,127
406,256
Construction and land development 838
112
—
624
1,574
4,669
198,453
204,696
Commercial and industrial 417
30
95
336
878
2,137
332,483
335,498
Consumer and other 131
—
15
40
186
400
11,366
11,952
Total $ 2,545
$ 368
$ 690
$ 2,148
$ 5,751
$ 31,658
$ 1,799,580
$ 1,836,989

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended March 31,
	2020						2019
	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 estate	550		4		967		4
Construction and land development	577		—		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 estate	198		2		24		1
Consumer real estate	984		9		99		—
Construction and land development	—		—		28		—
Commercial and industrial	159		2		644		9
Consumer and other	—		—		57		—
	1,341		13		852		10

PCI loans:
Commercial real estate	964		1		845		(10)
Consumer real estate	456		1		367		3
Construction and land development	231		—		—		—
Commercial and industrial	355		—		—		—
Consumer real estate	11		—		—		—
	2,017		2		1,212		(7)

Total impaired loans	$	4,681	$	22	$	4,295	$	29

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Troubled Debt Restructurings:

Foreclosure Proceedings and Balances:

As of ~~June 30, 2019,~~March 31, 2020, there ~~was $257 thousand residential~~were 7 properties secured by real estate included in other 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 are as follows ~~(in~~(in thousands):


	March 31,		December 31,
	2020		2019
Commercial real estate	$	24,557	$	21,570
Consumer real estate	14,703		8,411
Construction and land development	2,321		5,394
Commercial and industrial	7,806		2,540
Consumer and other	486		504
Total loans	49,873		38,419
Less: Remaining purchase discount	(14,387)		(11,432)
Total loans, net of purchase discount	35,486		26,987
Less: Allowance for loan losses	—		(156)
Carrying amount, net of allowance	$	35,486	$	26,831

June 30, 2019 December 31, 2018
Commercial real estate $ 23,895
$ 24,849
Consumer real estate 9,556
11,108
Construction and land development 5,700
5,731
Commercial and industrial 5,125
5,824
Consumer and other 612
892
Total loans 44,888
48,404
Less: Remaining purchase discount (13,230 ) (14,246 )
Total loans, net of purchase discount 31,658
34,158
Less: Allowance for loan losses (54 ) —
Carrying amount, net of allowance $ 31,604
$ 34,158

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended
	March 31,
	2020		2019
Accretable yield, beginning of period	$	8,454	$	7,052
Additions	2,515		—
Accretion income	(2,077)		(1,254)
Reclassification	1,916		1,035
Other changes, net	171		1,811
Accretable yield, end of period	$	10,979	$	8,644

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 period. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

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


	March 31, 2020		December 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 PFG	8,302		—
Balance, end of the period	$	73,916	$	65,614


	March 31, 2020		December 31, 2019
Core deposit intangible:
Balance, beginning of period	$	14,549	$	14,549
Acquisition of PFG	1,370		—
Balance, gross core deposit intangible	15,919		14,549
Less: accumulated amortization	(3,332)		(2,970)
Net core deposit intangible, net	$	12,587	$	11,579

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


Remainder of 2020	$	1,207
2021	1,570
2022	1,526
2023	1,485
2024	1,456
Thereafter	5,343
Total	$	12,587

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7. Borrowings and Line of Credit

FHLB advances consist of the following (dollars in thousands):


	March 31, 2020		December 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

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.

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
2021	45
2022	47
2023	50
2024	52
Thereafter	75,202
Total	$	125,439

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.


	Number	Weighted Average Exercisable Price
Outstanding at December 31, 2019	136,658	$	10.29
Granted	—	—
Exercised	(14,858)	11.62
Forfeited	—	—
Outstanding at March 31, 2020	121,800	$	10.13

Information pertaining to stock options outstanding at March 31, 2020, is as follows:


		Options Outstanding							Options Exercisable
			Weighted- Average Remaining	Weighted- Average			Weighted- Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	6.60	25,000	1.6 years	$	6.60	25,000	$	6.60
6.80		13,250	0.9 years	6.80		13,250	6.80
9.48		21,000	2.7 years	9.48		21,000	9.48
9.60		28,250	3.2 years	9.60		28,250	9.60
11.76		2,266	2.2 years	11.76		2,266	11.76
$	15.05	32,034	5.0 years	15.05		32,034	15.05


Outstanding, end of period		121,800	3.0 years	$	10.13	121,800	$	10.13

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Stock Appreciation Rights ("SARs"):


	Number	Weighted Average Exercisable Price
Outstanding at December 31, 2019	67,000	$	20.54
Granted	18,000	15.19
Exercised	—	—
Forfeited	—	—
Outstanding at March 31, 2020	85,000	$	19.40


		SARs Outstanding							SARs Exercisable
			Weighted- Average Remaining	Weighted- Average			Weighted- Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	15.19	18,000	3.8 years	$	15.19	—	$	—
18.12		21,000	2.8 years	18.12		—	—
21.61		34,000	1.8 years	21.61		—	—
$	21.72	12,000	0.8 years	21.72		12,000	21.72
Outstanding, end of period		85,000	2.3 years	$	19.40	12,000	$	21.72

Other stock based awards:

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Accretable yield, beginning of period $ 8,644
$ 7,780
$ 7,052
$ 9,287
Additions —
1,292
—
1,292
Accretion income (1,026 ) (1,928 ) (2,280 ) (3,029 )
Reclassification 323
120
1,358
382
Other changes, net 339
(58 ) 2,150
(726 )
Accretable yield, end of period $ 8,280
$ 7,206
$ 8,280
$ 7,206
Restricted Stock Awards:


	Number	Weighted 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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 5.9. Commitments and Contingent Liabilities


	March 31,		December 31,
	2020		2019
Commitments to extend credit	$	419,287	$	384,411
Standby letters of credit	22,994		11,727

June 30, 2019 December 31, 2018
Commitments to extend credit $ 376,037
$ 333,900
Standby letters of credit 15,090
12,200

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 6.10. Fair Value Disclosures

Determination of 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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Description	Fair Value		Quoted 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 securities	83,317		—		83,317		—
Other debt securities	5,462		—		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	$	—

Description Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)
June 30, 2019:
Assets:
Securities available-for-sale:

U.S. Government-sponsored enterprises (GSEs) $ 23,988
$ —
$ 23,988
$ —
Municipal securities 56,726
—
56,726
—
Other debt securities 937
—
937
—
Mortgage-backed securities (GSEs) 92,463
—
92,463
—
Total securities available-for-sale $ 174,114
$ —
$ 174,114
$ —

Liabilities:
Derivative financial instruments $ 3,411
$ —
$ 3,411
$ —


December 31, 2019:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	19,000	$	—	$	19,000	$	—
Municipal securities	64,391		—		64,391		—
Other debt securities	3,470		—		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	—

December 31, 2018:
Assets:
Securities available-for-sale:

U.S. Government-sponsored enterprises (GSEs) $ 43,503
$ —
$ 43,503
$ —
Municipal securities 55,161
—
55,161
—
Other debt securities 910
—
910
—
Mortgage-backed securities (GSEs) 102,114
—
102,114
—
Total securities available-for-sale $ 201,688
$ —
$ 201,688
$ —

Liabilities:
Derivative financial instruments $ 1,174
—
$ 1,174
—

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 Value		Quoted 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 owned	5,894		—		—		5,894

December 31, 2019:
Impaired loans	$	2,185	$	—	$	—	$	2,185
Other real estate owned	1,757		—		—		1,757

Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3)
June 30, 2019:
Impaired loans $ 3,870
$ —
$ —
$ 3,870
Other real estate owned 1,814
—
—
1,814
December 31, 2018:
Impaired loans $ 671
$ —
$ —
$ 671
Other real estate owned 2,495
—
—
2,495

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	Fair Value		Valuation Technique	Significant Other Unobservable Input	Weighted Average of Input
March 31, 2020:
Impaired loans	$	2,262	Appraisal and cashflow	Appraisal and cashflow discounts	20	%
Other real estate owned	5,894		Appraisal	Appraisal discounts	27	%

December 31, 2019:
Impaired loans	$	2,185	Appraisal	Appraisal and cashflow discounts	22	%
Other real estate owned	1,757		Appraisal	Appraisal discounts	29	%

Fair Value Valuation
Technique Significant Other
Unobservable Input Weighted
Average of Input
June 30, 2019:
Impaired loans $ 3,870
Appraisal and cashflow Appraisal and cashflow discounts 9 %
Other real estate owned 1,814
Appraisal Appraisal discounts 12 %
December 31, 2018:
Impaired loans $ 671
Appraisal Appraisal Discounts 44 %
Other real estate owned 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 was 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.

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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Carrying value and estimated fair value:

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


			Fair Value Measurements Using
	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
March 31, 2020:
Assets:
Cash and cash equivalents	$	309,089	$	309,089	$	—	$	—	$	309,089
Securities available-for-sale	201,002		—		201,002		—		201,002
Other investments	14,113		N/A		N/A		N/A		N/A
Loans, net	2,131,861		—		—		2,115,550		2,115,550
Liabilities:
Noninterest-bearing demand deposits	431,781		—		431,781		—		431,781
Interest-bearing demand deposits	444,141		—		444,141		—		444,141
Money market and savings deposits	730,392		—		730,392		—		730,392
Time deposits	735,616		—		739,277		—		739,277
Securities sold under agreements to repurchase	6,164		—		6,164		—		6,164
Federal Home Loan Bank advances and other borrowings	125,439		—		124,797		—		124,797
Subordinated debt	39,283		—		—		34,379		34,379
Derivative financial instruments	6,885		—		6,885		—		6,885

Fair Value Measurements Using

Carrying
Amount
Level 1 Level 2 Level 3
Estimated
Fair Value
June 30, 2019:
Assets:

Cash and cash equivalents $ 199,534
$ 199,534
$ —
$ —
$ 199,534
Securities available-for-sale 174,114
—
174,114
—
174,114
Other investments 12,905
N/A
N/A
N/A
N/A
Loans, net 1,827,892
—
—
1,822,099
1,822,099
Liabilities:

Noninterest-bearing demand deposits 357,220
—
357,220
—
357,220
Interest-bearing demand deposits 333,705
—
333,705
—
333,705
Money market and savings deposits 648,132
—
648,132
—
648,132
Time deposits 673,243
—
674,278
—
674,278
Securities sold under agreements to repurchase 8,219
—
8,219
—
8,219
Federal Home Loan Bank advances and other borrowings 15,460
—
15,460
—
15,460
Subordinated debt 39,219
—
—
37,618

37,618
Derivative financial instruments 3,411
—
3,411
—
3,411


December 31, 2019:
Assets:
Cash and cash equivalents	$	183,971	$	183,971	$	—	$	—	$	183,971
Securities available-for-sale	178,348		—		178,348		—		178,348
Other investments	12,913		N/A		N/A		N/A		N/A
Loans, net	1,893,005		—		—		1,879,825		1,879,825
Liabilities:
Noninterest-bearing demand deposits	364,155		—		364,155		—		364,155
Interest-bearing demand deposits	380,234		—		380,234		—		380,234
Money market and savings deposits	623,284		—		623,284		—		623,284
Time deposits	679,541		—		681,902		—		681,902
Securities sold under agreements to repurchase	6,184		—		6,184		—		6,184
Federal Home Loan Bank advances and other borrowings	25,439		—		24,845		—		24,845
Subordinated debt	39,261		—		—		35,868		35,868
Derivative financial instruments	3,446		—		3,446		—		3,446

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

December 31, 2018:
Assets:

Cash and cash equivalents $ 115,822
$ 115,822
$ —
$ —
$ 115,822
Securities available-for-sale 201,688
—
201,688
—
201,688
Other investments 11,499
N/A
N/A
N/A
N/A
Loans, net 1,768,964
—
—
1,766,838
1,766,838
Liabilities:

Noninterest-bearing demand deposits 319,861
—
319,861
—
319,861
Interest-bearing demand deposits 311,482
—
311,482
—
311,482
Money market and savings deposits 641,945
—
641,945
—
641,945
Time deposits 648,676
—
649,169
—
649,169
Securities sold under agreements to repurchase 11,756
—
11,756
—
11,756
Federal Home Loan Bank advances and other borrowings 11,243
—
11,243
—
11,243
Subordinated debt 39,177
—
—
39,190
39,190
Derivative financial instruments 1,174
—
1,174
—
1,174

Limitations:

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. 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.

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

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

Liability derivatives Balance Sheet Location Weighted Average Remaining Maturity (In Years) Weighted Average Pay Rate Receive Rate Notional Amount Estimated Fair Value
June 30, 2019:
Interest rate swap agreements - securities Other liabilities 8.70 3.09% 3 month LIBOR $ 36,000
$ (3,411 )
December 31, 2018:
Interest rate swap agreements - securities Other liabilities 9.23 3.10% 3 month LIBOR $ 35,000
$ (1,174 )


Liability derivatives	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value
March 31, 2020:
Interest rate swap agreements - securities	Other liabilities	7.95	3.09%	3 month LIBOR	$	36,000	$	(6,885)
December 31, 2019:
Interest rate swap agreements - securities	Other liabilities	8.20	3.09%	3 month LIBOR	$	36,000	$	(3,446)

The effects of the Company's fair value hedge relationships reported in interest income on tax-exempt available-for-sale securities

on the consolidated income statement were as follows ~~(in~~(in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018		2019			2018			2020		2019
Interest income on tax-exempt securities	$	449		$	—	$	906		$	—	Interest income on tax-exempt securities	$	440	$	456
Effects of fair value hedge relationships	(38		)	—		(70		)	—		Effects of fair value hedge relationships	(157)		(32)
Reported interest income on tax-exempt securities	$	411		$	—	$	836		$	—	Reported interest income on tax-exempt securities	$	283	$	424

	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended March 31,
Gain (loss) on fair value hedging relationship	2019			2018		2019			2018		Gain (loss) on fair value hedging relationship	2020		2019
Interest rate swap agreements - securities:											Interest rate swap agreements - securities:
Hedged items	$	1,348		—		$	2,237		—		Hedged items	$	6,885	2,063
Derivative designated as hedging instruments	(1,348		)	—		(2,237		)	—		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 ~~(in~~(in thousands):

Line item on the balance sheet Carrying Amount of the Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
June 30, 2019:
Securities available-for-sale $ 42,850
$ 3,411
December 31, 2018:
Securities available-for-sale $ 39,730
$ 1,174

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 and all subsequent ASUs that modified this topic (collectively referred to as "Topic 842"). For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through ~~2033.~~2034. All of our leases are classified as operating leases, and therefore, were previously not recognized

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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,
	Classification	2020		2019
Assets:
Operating lease right-of-use assets	Other assets	$	5,493	$	5,470
Liabilities:
Operating lease liabilities	Other liabilities	$	5,508	$	5,479

Classification June 30, 2019
Assets:
Operating lease right-of-use assets Other assets $ 2,085
Liabilities:
Operating lease liabilities Other liabilities $ 2,099

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 ~~June 30, 2019,~~March 31, 2020, the weighted average remaining lease term was ~~7.49~~11.17 years and the weighted average discount rate was ~~3.23%~~2.78%.

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


	Three Months Ended
	March 31,
	2020		2019
Lease costs:
Operating lease costs	$	237	$	146
Short-term lease costs	—		36
Variable lease costs	26		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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended Six Months Ended
June 30, 2019 June 30, 2019
Lease costs:
  Operating lease costs $ 157
$ 315
  Short-term lease costs 5
11
  Variable lease costs 23
46
    Total $ 185
$ 372
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
  Operating cash flows from operating leases $ 150
$ 302

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~June 30, 2019~~March 31, 2020, were as follows ~~(in~~(in thousands):


	Amounts
March 31, 2021	$	729
March 31, 2022	846
March 31, 2023	668
March 31, 2024	463
March 31, 2025	366
Thereafter	3,381
Total future minimum lease payments	6,453
Amounts representing interest	(945)
Present value of net future minimum lease payments	$	5,508

Amounts
June 30, 2020 $ 466
June 30, 2021 486
June 30, 2022 222
June 30, 2023 152
June 30, 2024 74
Thereafter 699
Total future minimum lease payments 2,099
Amounts representing interest (319 )
Present value of net future minimum lease payments $ 1,780

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13. Regulatory Matters

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 and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the "well capitalized" regulatory classification.

Regulatory Restrictions on Dividends:

Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (TDFI), pay any dividends to the Company in a calendar year in excess of the total of the Bank's retained net income for that year plus the retained net income for the preceding two years. Under Tennessee corporate law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, the Company's board of directors must consider its and the Bank's current and prospective capital, liquidity, and other needs. In addition to state law limitations on the Company's ability to pay dividends, the Federal Reserve imposes limitations on the Company's ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company's regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer. During the three months ended 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 Company has paid a quarterly common stock dividend of $0.05 per share. The amount and timing of all future dividend payments by the Company, if any, is subject to discretion of the Company's board of directors and will depend on the Company's earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to the Company.

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):


	Actual						Minimum for capital adequacy purposes						Minimum to be well capitalized under prompt corrective action provisions¹
	Amount		Ratio		Amount		Ratio		Amount		Ratio
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.

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-Sale		Fair Value Municipal Security Hedges		Accumulated 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 period	851		(2,266)		(1,415)

Ending balance, March 31, 2020	$	1,242	$	(2,489)	$	(1,247)

	Three Months Ended March 31, 2019
	Securities Available-for-Sale		Fair Value Municipal Security Hedges		Accumulated 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 period	2,103		228		2,331

Ending balance, March 31, 2019	$	124	$	(558)	$	(434)

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 Company~~SmartBank 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 ~~financial services~~purposes. Our principal sources of funds for loans and investing in securities are deposits and, to ~~individuals and corporate customers through its offices in Tennessee, Alabama, Florida, and Georgia. The Bank's primary~~a lesser extent, borrowings. We offer a broad range of deposit products, ~~are noninterest-bearing and interest-bearing demand deposits,~~including checking (“NOW”), savings, ~~and~~ money market ~~deposits,~~accounts and ~~time deposits. Its primary lending products are commercial, residential,~~certificates of deposit. We actively pursue business relationships by utilizing the business contacts of our senior management, other bank officers and ~~consumer loans.~~our directors, thereby capitalizing on our knowledge of our local market areas.

Forward-Looking Statements

~~This~~SmartFinancial, Inc. (“SmartFinancial”) may from time to time make written or oral statements, including statements contained in this report ~~may contain~~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 ~~the Private Securities Litigation Reform Act of 1995,~~ Section 27A of the Securities Act, ~~of 1933,~~ as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as ~~amended.~~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 ~~in nature and~~or current facts or matters are forward-looking statements. You can ~~generally be identified~~identify some of the forward-looking statements by the use of forward-looking words (and their derivatives), such ~~words~~ as ~~“expect,~~“may,” “will,” “could,” “project,” “believe,” “anticipate,” ~~“intend,~~“expect,” “estimate,” “continue,” “potential,” “plan,” ~~“believe,” “seek,” “may,” “estimate,~~“forecast,” and ~~similar expressions. All~~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 ~~are subject to~~involve known and unknown risks, uncertainties, and other factors that may cause ~~the~~our actual results, levels of ~~SmartFinancial~~activity, performance, financial condition, or achievements to ~~differ~~be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such ~~risks, uncertainties,~~factors include, but are not limited to:

•weakness or a decline in the U.S. economy, in particular in Tennessee, and other ~~factors include, among others, (1)~~ markets in which we operate;

•the ~~risk of litigation related to the termination of~~possibility that our ~~agreement and plan of merger with Entegra Financial Corp. (the “Entegra Merger Agreement”)~~asset quality would decline or the abandonment of the transactions that were contemplated by the Entegra Merger Agreement; (2) reputational risk resulting from the termination of the Entegra Merger Agreement; (3) potential changes to, or the risk that we ~~may not be able to execute~~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, ~~strategy~~including changes to statutes, regulations or regulatory policies or practices as a result of, or in response to COVID-19;

•negative changes in the ~~termination of~~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 ~~Entegra Merger Agreement; (4) the risk that~~companies we acquire, which may relate to contractual issues, environmental laws, fiduciary responsibility, and other matters;

•expected revenue synergies and cost savings ~~and revenue synergies~~ from our recently completed ~~acquisitions~~acquisition of Progressive Financial Group, Inc ("PFG") may not be fully realized or may take longer than anticipated to ~~realize, (5)~~ be realized;

•disruption from ~~recently completed acquisitions~~the merger with ~~customer, supplier, employee,~~customers, suppliers or employees or other business ~~relationships, (6)~~ 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 obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems and negatively impact our operations and our reputation in the market;

•results of examinations by our primary regulators, the 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, change the way we do business, or limit or eliminate certain other banking activities;

•government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve;

•our inability to pay dividends at current levels, or at all, because of inadequate future earnings, 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 ~~successfully integrate~~retain the ~~businesses acquired~~services of key personnel;

•adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as ~~part~~a result of ~~previous~~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 ~~with the business~~ of SmartBank, (7) changes in management’s plans for the future, (8) prevailing, or changes in, economic or political conditions, particularly in our market areas, (9) credit risk associated with our lending activities, (10) changes in interest rates, loan demand, real estate values, or competition, (11) changes in accounting principles, policies, or guidelines, (12) changes in applicable laws, rules, or regulations, and (13) other general competitive, economic, political, and market factors, including those affecting our business, operations, pricing, products, or services. 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, ~~(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 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 peers. 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 ~~useful in evaluating~~not reflective of the ~~company’s~~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 ~~facilitate comparisons with~~financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of ~~other~~the company. Non-GAAP financial ~~institutions. However, that information~~measures have limitations as analytical tools, and investors should ~~be considered supplemental~~not consider them in ~~nature and not~~isolation or as a substitute for ~~related~~analysis of the results or financial ~~information prepared in accordance with~~condition as reported under GAAP.

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

Executive Summary

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

•Completed the ~~first six months~~acquisition of ~~2019:~~Progressive Financial Group, Inc. ("PFG") on March 1, 2020.

•Net income totaled ~~$9.1~~$2.7 million, or $0.19 per diluted common share, during the ~~second~~first quarter of ~~2019~~2020 compared to ~~$3.9~~$4.7 million, or $0.34 per diluted common share, for the same period in ~~2018.~~2019.

~~Net income totaled $13.9 million during the first six months of 2019 compared to $7.3 million for the same period in 2018.~~

~~Recorded a $6.4 million merger termination fee.~~

Earnings per diluted common share was $0.65 during the second quarter of 2019, compared to $0.32 for the same period in 2018. Earnings per diluted common share was $0.99 during the first six months of 2019 compared to $0.62 for the same period in 2018.

~~Annualized return~~•Return on average assets was ~~1.56% for the second quarter of 2019 compared to 0.82% for the same period in 2018. For the first six months of 2019 the annualized return on average assets was 1.21%~~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 ~~same period in 2018.~~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

~~Second~~First quarter of ~~2019~~2020 compared to ~~2018~~2019

Net income was ~~$9.1~~$2.7 million, or ~~$0.65~~$0.19 per diluted common share, for the ~~second~~first quarter of ~~2019,~~2020, compared to ~~$3.9~~$4.7 million, or ~~$0.32~~$0.34 per diluted common share, for the ~~second~~first quarter of ~~2018.~~2019. The tax equivalent net interest margin was ~~3.94%~~3.90% for the ~~second~~first quarter of ~~2019~~2020 compared to ~~4.57%~~4.10% for the ~~second~~first quarter of ~~2018.~~2019. Noninterest income to average assets was ~~1.44%~~0.44% for ~~second~~the first quarter of ~~2019,~~2020, increasing from ~~0.33%~~0.30% for the ~~second~~first quarter of ~~2018.~~2019. Noninterest expense to average assets ~~was 2.88% for second~~increased to 2.96% in the first quarter of ~~2019, decreasing~~2020, from ~~3.15% for~~2.77% in the ~~second~~first quarter of ~~2018.~~2019. The results above include ~~a $6.4 million termination fee received for the merger termination~~one month of ~~Entegra Financial Corp. during the second quarter of 2019, and the~~ operating effects of the ~~Tennessee Bancshares, Inc. and Foothills Bancorp, Inc. acquisitions~~PFG acquisition, which ~~were~~was completed ~~in the second and fourth quarters of 2018, respectively.~~on March 1, 2020.

~~First six months of 2019 compared to 2018~~

Net income was $13.9 million, or $0.99 per diluted common share, for the first six months of 2019, compared to $7.3 million, or $0.62 per diluted common share, for the first six months of 2018. The tax equivalent net interest margin was 4.04% for the first six months of 2019 compared to 4.48% for the first six months of 2018. Noninterest income to average assets was 0.88% for the first six months of 2019, increasing from 0.33% for the first six months of 2018. Noninterest expense to average assets was 2.82% for the first six months of 2019, decreasing from 3.14% for the first six months of 2018. The results above include a $6.4 million termination fee received for the merger termination of Entegra Financial Corp. during the second quarter of 2019, and the operating effects of the Tennessee Bancshares, Inc. and Foothills Bancorp, Inc. acquisitions which were completed in the second and fourth quarters of 2018, respectively.

Net Interest Income and Yield Analysis

~~Second~~First quarter of ~~2019~~2020 compared to ~~2018~~2019

Net interest income, taxable equivalent, increased to ~~$20.9~~$22.7 million for the ~~second~~first quarter of ~~2019~~2020, up from ~~$19.6~~$21.1 million for the ~~second~~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 securities portfolios.~~ Average ~~earning~~interest-earning assets increased from ~~$1.72~~$2.09 billion for the ~~second~~first quarter of ~~2018~~2019, to ~~$2.13~~$2.34 billion for the ~~second~~first quarter of ~~2019~~2020, primarily as a result of the ~~acquisitions~~acquisition of PFG completed ~~during 2018,~~March 1, 2020, and ~~to a lesser extent,~~ continued organic growth. Over this period, average loan balances increased by ~~$331.6~~$185.3 million, average interest-bearing deposits increased by ~~$280.5~~$126.4 million, and average noninterest-bearing deposits increased ~~$53.5~~$53.0 million. The tax equivalent net interest margin decreased to ~~3.94%~~3.90% for the ~~second~~first quarter of ~~2019,~~2020, compared to ~~4.57%~~4.10% for the ~~second~~first quarter of ~~2018, primarily resulting from increases in the cost of interest-bearing deposits.~~2019. The yield on earning assets decreased from ~~5.37%~~5.25% for the ~~second quarter of 2018 to 5.17% for the second~~first quarter of 2019, to 4.83% for the first quarter of 2020, primarily due to ~~lower~~rate cuts by the Federal Reserve over the past nine months and, to a lesser extent loan yields ~~stemming~~have declined from ~~decreased accretion income on acquired loans.~~market competition. The cost of average interest-bearing deposits ~~increased~~decreased from ~~0.96%~~1.32% for the ~~second quarter of 2018 to 1.42% for the second~~first quarter of 2019, to 1.10% for the first quarter of 2020, primarily due to ~~increases in deposit rates from federal~~a lower interest rate ~~increases and increased competition.~~environment during the period.

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,
	2020										2019
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Assets
Loans¹	$	1,987,291	26,434		5.35	%	$	1,802,014	24,975		5.62	%
Taxable securities	116,837		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 assets	165,512		602		1.46	%	86,688		573		2.68	%
Total interest-earning assets	2,340,037		28,115		4.83	%	2,089,540		27,058		5.25	%
Noninterest-earning assets	216,498						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 deposits	664,983		1,389		0.84	%	665,018		2,029		1.24	%
Time deposits	680,830		2,931		1.73	%	637,767		2,800		1.78	%
Total interest-bearing deposits	1,735,313		4,754		1.10	%	1,608,949		5,251		1.32	%
Securities sold under agreement to repurchase	5,601		5		0.36	%	7,971		8		0.41	%
Federal funds purchased and other borrowings	46,320		84		0.73	%	10,217		103		4.09	%
Subordinated debt	39,269		584		5.98	%	39,184		584		6.04	%
Total interest-bearing liabilities	1,826,503		5,427		1.20	%	1,666,321		5,946		1.45	%
Noninterest-bearing deposits	373,125						320,134
Other liabilities	27,215						10,707
Total liabilities	2,226,843						1,997,162
Stockholders’ equity	329,692						286,076
Total liabilities and stockholders’ equity	$	2,556,535					$	2,283,238

Net interest income, taxable equivalent			$	22,688					$	21,112
Interest rate spread					3.63	%					3.80	%
Tax equivalent net interest margin					3.90	%					4.10	%

Percentage of average interest-earning assets to average interest-bearing liabilities					128.12	%					125.40	%
Percentage of average equity to average assets					12.90	%					12.53	%

Tax-exempt securities²

~~First six months~~ of ~~2019 compared to 2018~~

~~The following table summarizes the major components of net interest income and the related yields and costs for the periods~~

~~presented (dollars in thousands):~~

Six Months Ended June 30,
2019 2018
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets

Loans¹
$ 1,817,411
$ 50,253
5.58 % $ 1,424,021
$ 39,884
5.65 %
Taxable securities 141,994
1,842
2.62 % 150,365
1,770
2.37 %
Tax-exempt securities²
55,070
1,065
3.90 % 9,046
142
3.17 %
Federal funds sold and other earning assets 85,798
1,315
3.09 % 55,349
610
2.22 %
Total interest-earning assets 2,100,273
54,475
5.23 % 1,638,781
42,406
5.22 %
Noninterest-earning assets 213,122

191,358

Total assets $ 2,313,395

$ 1,830,139

Liabilities and Stockholders’ Equity
Interest-bearing demand deposits $ 318,091
$ 887
0.56 % $ 247,011
$ 585
0.48 %
Money market and savings deposits 669,067
4,302
1.30 % 561,920
2,288
0.82 %
Time deposits 633,601
5,850
1.86 % 482,707
2,766
1.16 %
Total interest-bearing deposits 1,620,759
11,039
1.37 % 1,291,638
5,639
0.88 %
Securities sold under agreement to repurchase 7,608
14
0.37 % 15,913
24
0.30 %
Federal funds purchased and other borrowings 13,343
221
3.34 % 24,707
360
2.94 %
Subordinated debt 39,195
1,173
6.04 % —
—
0.00 %
Total interest-bearing liabilities 1,680,905
12,447
1.49 % 1,332,258
6,023
0.91 %
Noninterest-bearing deposits 328,549

257,528

Other liabilities 12,589

12,823

Total liabilities 2,022,043

1,602,609

Stockholders’ equity 291,352

227,530

Total liabilities and stockholders’ equity $ 2,313,395

$ 1,830,139

Net interest income, taxable equivalent $ 42,028

$ 36,383

Interest rate spread 3.74 %

4.31 %
Tax equivalent net interest margin 4.04 %

4.48 %

Percentage of average interest-earning assets to average interest-bearing liabilities 124.95 %

123.01 %
Percentage of average equity to average assets 12.59 % 12.43 %


~~(1)~~	~~Includes nonaccrual loans and accretion income on acquired loans included was $3.3 million and $3.9 million for the six months ended June 30, 2019 and 2018, 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 $229 thousand for the period ended June 30, 2019 and $34 thousand for the period ended June 30, 2018.

Noninterest Income

~~Second~~First quarter of ~~2019~~2020 compared to ~~2018~~2019

Noninterest income ~~totaled $8.4~~increased by $1.1 million, inor 66.0%, during the ~~second~~first quarter of ~~2019,~~2020 compared to ~~$1.6 million~~the same period in ~~the second quarter of 2018. Noninterest~~2019. This quarterly change in total noninterest income ~~to average assets of 1.44% for the quarter decreased from 0.33% in 2018. Noninterest income increased~~ primarily ~~due to the $6.4 million merger termination fee received in the second quarter of 2019. Other increases were due to customer service fees as a result of greater deposit account volumes~~resulted from the ~~acquisition~~following:

•Increase in ~~the fourth quarter of 2018, increased income from~~ mortgage banking, ~~and wealth~~from increased activity;

•Increase in investment ~~commissions.~~services, stemming from personnel hires in 2019; and

•Addition of insurance commissions from the PFG acquisition.

~~First six months of 2019 compared to 2018~~

Noninterest income totaled $10.1 million for the first six months of 2019, compared to $3.1 million first six months of 2018. Noninterest income to average assets of 0.88% for the period increased from 0.33% percent in 2018 . Noninterest income increased primarily due to the merger termination fee received in the second quarter of 2019 and due to customer service fees increasing due to the merger in the fourth quarter of 2018. The following table summarizes noninterest income by category ~~(in~~(in thousands):


	Three Months Ended
	March 31,
	2020		2019
Service charges on deposit accounts	$	770	$	654

Mortgage banking	584		282
Investment services	437		169
Insurance commissions	269		—
Interchange and debit card transaction fees	276		175

Other	482		418
Total noninterest income	$	2,818	$	1,698

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Customer service fees $ 707
$ 557
1,361
$ 1,135
Gain (loss) on sale of securities, net 33
(1 ) 33
(1 )
Mortgage banking 392
322
674
688
Interchange and debit card transaction fees 143
121
318
267
Merger termination fee 6,400
—
6,400
—
Other 741
578
1,328
984
Total noninterest income $ 8,416
$ 1,577
$ 10,114
$ 3,073

Noninterest Expense

~~Second~~First quarter of ~~2019~~2020 compared to ~~2018~~2019

Noninterest expense ~~totaled $16.8~~increased by $3.2 million, or 20.6%, in the ~~second~~first quarter of ~~2019 compared to $15.3 million in the second quarter of 2018. Noninterest expense to average assets decreased from 3.18% a year ago to 2.88% in the quarter. The increase in noninterest expense~~2020 as compared to the ~~prior year was~~same period in 2019. The quarterly increase in total noninterest expense primarily ~~due to~~resulted from the ~~acquisition of Tennessee Bancshares, Inc. in May 2018 and Foothills Bancorp, Inc. in the fourth quarter of 2018 which resulted in higher~~following:

•Increase is salary and employee ~~benefit expenses, higher~~benefits from the addition of talented staff throughout 2019 and one month of salary and benefits related to the PFG acquisition;

•Increase in occupancy ~~expenses,~~ and ~~higher amortization~~equipment associated with ongoing infrastructure and facilities added to accommodate our growth in operations and to lesser extent the additional branches of ~~intangibles. Merger~~the PFG acquisition; and

•Increase in merger related and restructuring expenses ~~in 2019 were higher than 2018 due to~~from the ~~planned merger with Entegra Financial, which was subsequently terminated.~~PFG acquisition.

~~First six months of 2019 compared to 2018~~

~~Noninterest expense totaled $32.4 million first six months of 2019 compared to $28.5 million for the first six months of 2018.~~

Noninterest expense to average assets decreased from 3.14% a year ago to 2.82% in the quarter. The increase in noninterest expense compared to the prior year was primarily due to the acquisition of Tennessee Bancshares, Inc. in May 2018 and Foothills Bancorp, Inc. in the fourth quarter of 2018 which resulted in higher salary and employee benefit expenses, higher occupancy expenses, higher advertising and marketing expense, and higher data processing expenses. Merger and restructuring expenses of $2.7 million in 2019 were higher than 2018 due to the planned merger with Entegra Financial, which was subsequently terminated.

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


	Three Months Ended
	March 31,
	2020		2019
Salaries and employee benefits	$	10,006	$	8,398
Occupancy and equipment	1,911		1,640
FDIC insurance	180		179
Other real estate and loan related expense	545		490
Advertising and marketing	198		295
Data processing	538		615
Professional services	711		662
Amortization of intangibles	362		344
Software as service contracts	470		567
Merger related and restructuring expenses	2,096		923
Other	1,776		1,466
Total noninterest expense	$	18,793	$	15,579

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Salaries and employee benefits $ 8,984
$ 7,649
$ 17,382
$ 14,825
Occupancy and equipment 1,658
1,522
3,298
3,055
FDIC insurance 180
317
359
419
Other real estate and loan related expense 242
926
732
1,596
Advertising and marketing 259
215
554
399
Data processing 577
600
1,192
1,127
Professional services 489
587
1,151
1,259
Amortization of intangibles 343
229
686
417
Software as service contracts 568
492
1,136
970
Merger related and restructuring expenses 1,796
1,123
2,719
1,621
Other 1,714
1,611
3,179
2,848
Total noninterest expense $ 16,809
$ 15,271
$ 32,388
$ 28,536

Taxes

~~Second~~First quarter of ~~2019~~2020 compared to ~~2018~~2019

In the ~~second~~first quarter of ~~2019~~2020 income tax expense totaled ~~$2.9 million~~$664 thousand compared to ~~$1.3~~$1.6 million a year ago. The effective tax rate was approximately ~~24.1% in the second quarter of 2019 compared to 24.8% a year ago.~~

~~First six months of 2019 compared to 2018~~

~~In the first six months of 2019 income tax expense totaled $4.5 million compared to $2.2 million. The effective tax rate was approximately 23.33% a year ago compared to approximately 24.45% percent~~19.6% in the first ~~six months~~quarter of ~~2019.~~2020 compared to 25.1% 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 ~~$1.83~~$2.13 billion at ~~June 30, 2019~~March 31, 2020 compared to ~~$1.77~~$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 ~~$194.3~~$97.0 million, or ~~16.9%~~6.4%, from December 31, ~~2018,~~2019, to ~~$1.34~~$1.61 billion at ~~June 30, 2019.~~March 31, 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 continues~~markets, 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 ~~$451.6~~$482.2 million at ~~June 30, 2019 decreased~~March 31, 2020 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 ~~decreased~~increased by ~~$2.6~~$8.7 million to ~~$31.6~~$35.5 million at ~~June 30, 2019.~~March 31, 2020. The ~~activity within the~~increase in purchased ~~credit~~non-credit impaired loans ~~will be impacted by how quickly these~~and PCI loans are ~~resolved and/or future~~related 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 ~~(in~~(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-mortgage	309,672		167,151		11,950		488,773		22.8	%
Construction and land development	219,172		27,794		6,479		253,445		11.8	%
Commercial and industrial	329,987		47,043		143		377,173		17.6	%
Consumer and other	9,343		7,198		325		16,866		0.8	%
Total gross loans receivable, net of deferred fees	1,626,574		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-mortgage	301,771		115,026		6,541		423,338		22.2	%
Construction and land development	210,421		12,747		4,458		227,626		12.0	%
Commercial and industrial	306,521		30,147		407		337,075		17.7	%
Consumer and other	2,817		6,760		326		9,903		0.5	%
Total gross loans receivable, net of deferred fees	1,527,221		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

June 30, 2019
Organic
Loans Purchased
Non-Credit
Impaired Loans Purchased
Credit
Impaired Loans Total Amount % of
Gross
Total
Commercial real estate-mortgage $ 626,399
$ 235,148
$ 17,040
$ 878,587
47.8 %
Consumer real estate-mortgage 255,191
143,653
7,412
406,256
22.1 %
Construction and land development 179,793
20,234
4,669
204,696
11.1 %
Commercial and industrial 283,534
49,827
2,137
335,498
18.3 %
Consumer and other 8,802
2,750
400
11,952
0.7 %
Total gross loans receivable, net of deferred fees 1,353,719
451,612
31,658
1,836,989
100.0 %
Allowance for loan losses (9,043 ) $ —
(54 ) (9,097 )
Total loans, net $ 1,344,676
$ 451,612
$ 31,604
$ 1,827,892

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		Total		Fixed Rate		Floating Rate
Commercial real estate-mortgage	$	93,156	$	430,195	$	485,684	$	1,009,035	$	736,451	$	179,854
Consumer real estate-mortgage	38,565		179,200		271,008		488,773		267,342		182,866
Construction and land development	71,456		97,634		84,355		253,445		100,953		81,036
Commercial and industrial	90,593		194,135		92,445		377,173		242,063		45,652
Consumer and other	6,223		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 $ 110,936
$ 447,516
$ 320,135
$ 878,587
$ 492,311
$ 275,339
Consumer real estate-mortgage 44,559
171,054
190,643
406,256
164,810
196,887
Construction and land development 72,340
81,967
50,389
204,696
21,957
110,399
Commercial and industrial 108,429
168,293
58,776
335,498
120,572
106,497
Consumer and other 5,145
6,111
696
11,952
5,333
1,475
Total Loans $ 341,409
$ 874,941
$ 620,639
$ 1,836,989
$ 804,983
$ 690,597

Nonaccrual, Past Due, and Restructured Loans

Nonperforming loans as a percentage of total gross loans, net of deferred fees, was ~~0.15%~~0.14% as of ~~June 30, 2019,~~March 31, 2020, which decreased from 0.18% as of December 31, ~~2018.~~2019. Total nonperforming assets as a percentage of total assets as of ~~June 30, 2019~~March 31, 2020 totaled ~~0.19%~~0.31% compared to ~~0.25%~~0.21% 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 ~~(in~~(in thousands).:


	March 31,		December 31,
	2020		2019
Nonaccrual loans	$	3,060	$	2,743
Accruing loans past due 90 days or more	10		607
Total nonperforming loans	3,070		3,350
Other real estate owned	5,894		1,757
Total nonperforming assets	$	8,964	$	5,107

Restructured loans not included above	$	9	$	61

June 30, 2019 December 31, 2018
Nonaccrual loans $ 2,148
$ 2,696
Accruing loans past due 90 days or more (1) 690
584
Total nonperforming loans 2,838
3,280
Other real estate owned 1,814
2,495
Total nonperforming assets $ 4,652
$ 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 ~~June 30, 2019~~March 31, 2020 potential problem loans amounted to approximately ~~$457~~$695 thousand or ~~0.02%~~0.03% 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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, our allowance for loan losses was ~~$9.1~~$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 at ~~June 30, 2019,~~March 31, 2020, as compared to December 31, ~~2018~~2019 is primarily due to ~~increased balances of~~the deterioration in the 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 ~~0.50%~~0.63% at ~~June 30, 2019~~March 31, 2020 and ~~0.47%~~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 ~~June 30, 2019~~March 31, 2020 the notional balances on PCI loans was ~~$44.9~~$49.9 million while the carrying value was ~~$31.6~~$35.5 million. At ~~June 30, 2019,~~March 31, 2020, there ~~were $54 thousand of~~was no loan loss allowances on PCI loans.

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


	March 31, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
Commercial real estate-mortgage	$	5,963	44.5	%	$	4,508	44.1	%
Consumer real estate-mortgage	3,301		24.6	%	2,576		25.1	%
Construction and land development	1,484		11.0	%	1,127		11.0	%
Commercial and industrial	2,557		19.0	%	1,957		19.1	%
Consumer and other	126		0.9	%	75		0.7	%
Total allowance for loan losses	$	13,431	100.0	%	$	10,243	100.0	%

June 30, 2019 December 31, 2018
Amount Percent Amount Percent
Commercial real estate-mortgage $ 4,102
45.1 % $ 3,639
44.0 %
Consumer real estate-mortgage 2,189
24.1 % 1,789
21.6 %
Construction and land development 946
10.4 % 795
9.6 %
Commercial and industrial 1,746
19.2 % 1,746
21.1 %
Consumer and other 114
1.2 % 306
3.7 %
Total allowance for loan losses $ 9,097
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, ~~2018~~2019 compared to ~~$345~~$0 thousand at ~~June 30, 2019.~~March 31, 2020.

Analysis of the Allowance for Loan Losses

The following is a summary of changes in the allowance for loan losses for the periods presented 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,
	2020			2019
Balance at beginning of period	$	10,243		$	8,275
Provision for loan losses	3,200			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-mortgage	2			2
Consumer real estate-mortgage	6			4
Construction and land development	2			2
Commercial and industrial	42			12
Consumer and other	22			62
Total recoveries of previously charged-off loans	74			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 period	0.63		%	0.47		%
Ratio of net loan charge-offs to average loans outstanding for the period (annualized)	—		%	0.08		%

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Balance at beginning of period $ 8,704
$ 6,477
$ 8,275
$ 5,860
Provision for loan losses 393
617
1,190
1,305
Charged-off loans:

Commercial real estate-mortgage —
—
—
(38 )
Consumer real estate-mortgage —
(25 ) (2 ) (25 )
Construction and land development —
—
—
—
Commercial and industrial (14 ) —
(333 ) (78 )
Consumer and other (80 ) (59 ) (210 ) (101 )
Total charged-off loans (94 ) (84 ) (545 ) (242 )
Recoveries of previously charged-off loans:

Commercial real estate-mortgage 22
—
24
—
Consumer real estate-mortgage 16
27
20
50
Construction and land development 2
3
4
5
Commercial and industrial 41
16
53
56
Consumer and other 13
18
76
40
Total recoveries of previously charged-off loans 94
64
177
151
Net charge-offs —
(20 ) (368 ) (91 )
Balance at end of period $ 9,097
$ 7,074
$ 9,097
$ 7,074

Ratio of allowance for loan losses to total loans outstanding at end of period 0.50 % 0.45 % 0.50 % 0.45 %
Ratio of net charge-offs (recoveries) to average loans outstanding for the period (annualized) — % 0.01 % 0.04 % 0.01 %

We assess the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon our evaluation of the loan 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.

Securities Portfolio

Our securities portfolio, consisting primarily of Federal agency bonds, state and municipal securities, and mortgage-backed securities amounted to fair values of ~~$174.1~~$201.0 million and ~~$201.7~~$178.3 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Our investments to assets ratio decreased ~~slightly~~ from ~~8.9~~7.3 percent at December 31, ~~2018~~2019 to ~~7.3~~7.0 percent at ~~June 30, 2019.~~March 31, 2020. Our ~~investment~~securities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income. All of the Company's securities are designated as available-for-sale.

The following table shows the amortized cost of the Company’s ~~securities. In the periods presented, all~~securities by investment ~~securities were classified as available-for-sale (in~~categories (in thousands).:


	March 31,		December 31,
	2020		2019
U.S. Government-sponsored enterprises (GSEs)	$	17,012	$	19,015
Municipal securities	82,599		63,792
Other debt securities	5,461		3,481
Mortgage-backed securities	94,306		91,531
Total securities	$	199,378	$	177,819

June 30, 2019 December 31, 2018
U.S. Government agencies $ 24,031
$ 44,117
State and political subdivisions 56,251
55,248
Other debt securities 979
977
Mortgage-backed securities 92,718
103,875
Total securities $ 173,979
$ 204,217

The following table presents the contractual maturity of the Company's securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at ~~June 30, 2019 (in thousands).~~March 31, 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
	1 or Less			1 to 5			5 to 10			Over 10			Total				Maturity By Years
																	1 or Less			1 to 5			5 to 10			Over 10			Total
U.S. Government agencies	$	—		$	16,000		$	8,031		$	—		$	24,031		U.S. Government agencies	$	8,000		$	3,007		$	6,005		$	—		$	17,012
State and political subdivisions	294			—			4,292			51,665			56,251			State and political subdivisions	490			2,170			7,679			72,260			82,599
Other debt securities	—			—			979			—			979			Other debt securities	—			—			5,461			—			5,461
Mortgage-backed securities	—			4,316			16,788			71,614			92,718			Mortgage-backed securities	—			4,738			14,275			75,293			94,306
Total securities available for sale	$	294		$	20,316		$	30,090		$	123,279		$	173,979
Total securities																Total securities	$	8,490		$	9,915		$	33,420		$	147,553		$	199,378
Weighted average yield (1)	2.94		%	1.70		%	2.24		%	3.04		%	3.01		%	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 ~~June 30, 2019,~~March 31, 2020, brokered deposits represented approximately ~~11.9%~~11.2% 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 ~~June 30, 2019~~March 31, 2020 was ~~1.42%~~1.10% compared to ~~0.96%~~1.32% for the same period in ~~2018 and 1.37% and 0.88% for the six months ended June 30,~~ 2019, ~~and June 30, 2018,~~ respectively. The ~~increase in~~decreased cost on interest-bearing deposits was due to ~~increased competition and increases~~changes in ~~deposit~~ rates ~~from~~caused by federal ~~rate increases and higher rates on interest-bearing deposit accounts.~~rate-changes during the periods.

Total deposits as of ~~June 30, 2019~~March 31, 2020 were ~~$2.0~~$2.3 billion, which was an increase of ~~$90.3~~$294.7 million from December 31, ~~2018.~~2019. This increase was primarily from the completed acquisition of PFG. As of ~~June 30, 2019~~March 31, 2020 the Company had outstanding time deposits under $250,000 with balances of ~~$329.7~~$584.6 million and time deposits over $250,000 with balances of ~~$343.5~~$151.0 million.

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

June 30,
2019
Three months or less $ 110,876
Three to six months 119,698
Six to twelve months 76,529
More than twelve months 36,403
Total $ 343,506


	March 31,
	2020
Three months or less	$	28,136
Three to six months	24,768
Six to twelve months	47,981
More than twelve months	50,106
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. Borrowings totaled $125.4 million at March 31, 2020, and primarily consisted of $75.0 million in Federal Home Loan Bank borrowings and $50.0 million from the Federal Reserve Discount Window. Short-term borrowings totaled ~~$15.5~~$6.2 million at ~~June 30, 2019~~March 31, 2020 and ~~$11.2 million at~~ December 31, ~~2018,~~2019, respectively and consisted ~~primarily~~entirely of ~~federal funds purchased.~~securities sold under repurchase agreements. Long-term debt totaled ~~$39.2~~$39.3 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~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 ~~June 30, 2019~~March 31, 2020 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 ~~June 30, 2019,~~March 31, 2020, we had ~~$376.0~~$419.3 million of pre-approved but unused lines of credit and ~~$15.1~~$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 ~~March 31, 2019, the model simulations projected that 100 and 200 basis point increases in~~

interest rates ~~would result~~for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in ~~positive variances~~instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from our 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 Months			Maximum 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 points	0.88%	0.39%	8%
± 200 basis points	0.13%	0.18%	14%

Economic Value of ~~2.47%~~Equity Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and ~~3.07%, respectively, relative to the current financial statement structure over the next twelve months, while~~off-balance sheet items will change as a ~~decrease in interest rates~~result of 100 basis points would result in a negative variance in net interest income of (3.07)% 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 ~~sensitivity~~changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.

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


March 31, 2020:	Current Estimated Instantaneous Rate Change			Maximum 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 to the period ended June 30, 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.

The Company has ~~no significant~~$8.5 million in investments that mature throughout the next 12 months. The Company also anticipates ~~$13.1~~$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, ~~and~~FHLB, 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

This item is not required for a Smaller Reporting Company.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of ~~June 30, 2019~~March 31, 2020 (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 ~~June 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

SmartFinancial, Inc. and its wholly owned subsidiary, SmartBank, are periodically involved as a plaintiff or a defendant in various legal actions in the ordinary course of business. While the outcome of these matters is not currently determinable, management does not expect the disposition of any of these matters to have a material adverse impact on the Company’s financial condition, financial statements or results of operations.

Item 1A. Risk Factors.

~~In addition to the other information set forth~~The Company disclosed risk factors in ~~this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in our~~its Annual Report on Form 10-K for the year ended December 31, ~~2018. These factors could~~2019. 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 cause~~such 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 ~~actual~~workforce 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 ~~differ~~modify 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

experience materially ~~from~~adverse impacts to our ~~historical results~~business 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 factors~~of 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

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.


Period	Total Number of Shares Repurchased	Average Price Paid Per Share		Total 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, 2020	6,263	19.17		6,263	9,880
March 1, 2020 to March 31, 2020	119,316	15.68		119,316	8,009
Total	125,579	$	15.86	125,579	$	8,009

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

~~None.~~On March 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; Ronald J. Gorczynski, the Chief Financial Officer of the Company and 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 10.7 (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.


Name						Shares of Restricted Stock Granted
William ("Billy") Y. Carroll, Jr.						6,500
Wesley M. ("Miller") Welborn						4,400
Ronald J. Gorczynski						2,500

Generally, up to 50% of each Designated Officer’s restricted shares can be earned if the Company achieves certain operating earnings per share targets for the fiscal year ending December 31, 2020, and up to 50% of each Designated Officer’s restricted shares can be earned if the Company achieves certain operating return on average assets targets for the fiscal year ending December 31, 2020. All restricted shares so earned generally will vest on January 1, 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.

Item 6. Exhibits



Exhibit No.	Description	Location
2.1	Agreement and Plan of Merger, dated as of October 29, 2019, by and between SmartFinancial, Inc. and Progressive Financial Group, Inc.	Incorporated by reference to Exhibit 2.1 to Form 8-K filed 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	Executive ~~Severance~~Change in Control Agreement ~~and Release~~with W. Miller Welborn, dated as of ~~Claims~~March 9, 2020	Incorporated by reference to Exhibit 10.1 to Form 8-K filed March 11, 2020
10.2	Employment Agreement with William Y. Carroll, Jr., dated ~~May 2, 2019, by and among SmartFinancial, Inc., SmartBank, and C. Bryan Johnson~~as of March 9, 2020	Incorporated by reference to Exhibit 10.2 to Form 8-K filed ~~May 6, 2019~~ March 11, 2020
10.3	Employment Agreement with Ronald J. Gorczynski, dated as of March 9, 2020	Incorporated 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 Lender	Incorporated 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 Lender	Incorporated 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 2002	Furnished herewith.
32.2	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
101	Interactive Data Files	Filed herewith.

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

SIGNATURES

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

SmartFinancial, Inc.

Date:

~~August 8, 2019~~May 11, 2020

/s/ William Y. Carroll, Jr.

William Y. Carroll, Jr.

President and Chief Executive Officer

(principal executive officer)

Date:

~~August 8, 2019~~May 11, 2020

/s/ Ronald J. Gorczynski

Ronald J. Gorczynski

Executive Vice President and Chief Financial Officer

(principal financial officer and accounting officer)


								Three Months Ended March 31,
	Six Months Ended June 30,							2020		2019
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operating activities:							Cash flows from operating activities:
Net income	$	13,852		$	7,346		Net income	$	2,732	$	4,731
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,088			1,908			Depreciation and amortization	1,634		1,156
Accretion of fair value purchase accounting adjustments, net	(3,091		)	(4,205		)	Accretion of fair value purchase accounting adjustments, net	(1,841)		(1,717)
Provision for loan losses	1,190			1,305			Provision for loan losses	3,200		797
Stock compensation expense	276			244			Stock compensation expense	110		143
(Gains) losses from redemption and sale on securities available-for-sale	(33		)	1

Deferred income tax expense	1,039			945			Deferred income tax expense	90		1,039
Increase in cash surrender value of bank owned life insurance	(314		)	(297		)	Increase in cash surrender value of bank owned life insurance	(162)		(158)
Loss on disposal of fixed assets	14			41			Loss on disposal of fixed assets	—		7
Net (gains) losses from sale of other real estate owned	(16		)	372
Net losses from sale of other real estate owned							Net losses from sale of other real estate owned	14		26
Net gains from sale of loans	(674		)	(688		)	Net gains from sale of loans	(576)		(282)
Origination of loans held for sale	(33,491		)	(29,499		)	Origination of loans held for sale	(15,195)		(16,805)
Proceeds from sales of loans held for sale	32,057			25,648			Proceeds from sales of loans held for sale	15,582		16,061
Net change in:							Net change in:
Accrued interest receivable	(612		)	(250		)	Accrued interest receivable	35		(1,093)
Accrued interest payable	454			48			Accrued interest payable	784		748
Other assets	(593		)	2,546			Other assets	685		(1,660)
Other liabilities	5,792			(1,324		)	Other liabilities	2,010		4,702
Net cash provided by operating activities	17,938			4,141			Net cash provided by operating activities	9,102		7,695
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities:							Cash flows from investing activities:
Proceeds from sales of securities available-for-sale	16,515			24,563			Proceeds from sales of securities available-for-sale	2,115		—
Proceeds from maturities and calls of securities available-for-sale	10,305			2,525			Proceeds from maturities and calls of securities available-for-sale	3,250		5,000
Proceeds from paydowns of securities available-for-sale	6,554			7,436			Proceeds from paydowns of securities available-for-sale	3,816		3,173
Purchases of securities available-for-sale	(1,054		)	(17,240		)	Purchases of securities available-for-sale	(3,377)		(1,054)
Purchases of other investments	(1,406		)	(1,378		)	Purchases of other investments	(507)		(899)
Net cash and cash equivalents received in business combination	—			5,653

Net increase in loans	(55,323		)	(65,138		)	Net increase in loans	(52,721)		(61,011)
Purchases of premises and equipment	(2,011		)	(992		)	Purchases of premises and equipment	(2,429)		(1,296)
Proceeds from sale of other real estate owned	1,100			2,126			Proceeds from sale of other real estate owned	120		458
Net cash and cash equivalents received from business combination							Net cash and cash equivalents received from business combination	46,132		—
Net cash used in investing activities	(25,320		)	(42,445		)	Net cash used in investing activities	(3,601)		(55,629)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities:							Cash flows from financing activities:
Net increase in deposits	90,136			75,410			Net increase in deposits	22,158		72,166
Net decrease in securities sold under agreements to repurchase	(3,537		)	(5,420		)	Net decrease in securities sold under agreements to repurchase	(20)		(4,686)
Issuance of common stock	278			1,080

Proceeds from Federal Home Loan Bank advances and other borrowings	120,176			127,040			Proceeds from Federal Home Loan Bank advances and other borrowings	100,000		50,094
Repayment of Federal Home Loan Bank advances and other borrowings	(115,959		)	(102,600		)	Repayment of Federal Home Loan Bank advances and other borrowings	—		(52,732)
Cash dividends paid							Cash dividends paid	(702)		—
Issuance of common stock							Issuance of common stock	173		264
Purchase of common stock							Purchase of common stock	(1,992)		—
Net cash provided by financing activities	91,094			95,510			Net cash provided by financing activities	119,617		65,106
NET INCREASE IN CASH AND CASH EQUIVALENTS	83,712			57,206
CASH AND CASH EQUIVALENTS, beginning of period	115,822			113,027
CASH AND CASH EQUIVALENTS, end of period	$	199,534		$	170,233
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net change in cash and cash equivalents							Net change in cash and cash equivalents	125,118		17,172
Cash and cash equivalents, beginning of period							Cash and cash equivalents, beginning of period	183,971		115,822
Cash and cash equivalents, end of period							Cash and cash equivalents, end of period	$	309,089	$	132,994
Supplemental disclosures of cash flow information:							Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	11,993		$	5,974		Cash paid during the period for interest	$	4,643	$	5,198
Cash paid during the period for income taxes	2,630			713			Cash paid during the period for income taxes	—		—
NONCASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized (gains) losses on securities available-for-sale	$	(2,664	)	$	2,348
Noncash investing and financing activities:							Noncash investing and financing activities:
Acquisition of real estate through foreclosure	403			2,351			Acquisition of real estate through foreclosure	676		55
Financed sales of other real estate owned	—			257
Change in goodwill due to acquisition	—			15,739

Change in goodwill due to acquisitions							Change in goodwill due to acquisitions	8,302		—
Initial recognition of operating lease right-of-use assets	2,344			—			Initial recognition of operating lease right-of-use assets	222		2,344
Initial recognition of operating lease liabilities	2,344			—			Initial recognition of operating lease liabilities	222		2,344


PART I –FINANCIAL INFORMATION

Item 1.			Consolidated Financial Statements (Unaudited)		3

~~PART I –FINANCIAL INFORMATION~~

~~Item 1.~~	~~Consolidated Financial Statements (Unaudited)~~			4

	Consolidated Balance Sheets at ~~June 30, 2019~~March 31 , 20 20 and December 31, ~~2018~~201 9	43

			Consolidated Statements of Income for the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31 , 20 20 and ~~2018~~201 9		54

			Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30, 2019~~Marc h 31 , 20 20 and ~~2018~~201 9		65

			Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31 , 20 20 and ~~2018~~201 9		76

			Consolidated Statements of Cash Flows for the ~~Six~~ Three Months Ended ~~June 30, 2019~~March 31 , 20 20 and ~~2018~~201 9		87

			Notes to Consolidated Financial Statements		98

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations		3040

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		4152

Item 4.			Controls and Procedures		4153

PART II – OTHER INFORMATION

Item 1.			Legal Proceedings		4254

Item 1A.			Risk Factors		4254

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		4255

Item 3.			Defaults Upon Senior Securities		4255

Item 4.			Mine Safety Disclosures		4255

Item 5.			Other Information		4255

Item 6.			Exhibits		4357



	(Unaudited) June 30, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	44,500		$	40,015
Interest-bearing deposits with banks	75,371			75,807
Federal funds sold	79,663			—
Total cash and cash equivalents	199,534			115,822
Securities available-for-sale, at fair value	174,114			201,688
Other investments	12,905			11,499
Loans held for sale	4,087			1,979
Loans	1,832,902			1,775,260
Less: Allowance for loan losses	(9,097		)	(8,275		)
Loans, net	1,823,805			1,766,985
Premises and equipment, net	56,589			56,012
Other real estate owned	1,814			2,495
Goodwill and core deposit intangible, net	78,348			79,034
Bank owned life insurance	24,695			24,381
Other assets	15,366			14,514
Total assets	$	2,391,257		$	2,274,409
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	357,220		$	319,861
Interest-bearing demand	333,705			311,482
Money market and savings	648,132			641,945
Time deposits	673,243			648,676
Total deposits	2,012,300			1,921,964
Securities sold under agreement to repurchase	8,219			11,756
Federal Home Loan Bank advances and other borrowings	15,460			11,243
Subordinated debt	39,219			39,177
Other liabilities	16,448			7,258
Total liabilities	2,091,646			1,991,398
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding	—			—
Common stock, $1 par value; 40,000,000 shares authorized; 13,953,209 and 13,933,504 shares issued and outstanding, respectively	13,953			13,933
Additional paid-in capital	232,386			231,852
Retained earnings	53,843			39,991
Accumulated other comprehensive loss	(571		)	(2,765		)
Total shareholders' equity	299,611			283,011
Total liabilities and shareholders' equity	$	2,391,257		$	2,274,409


												Three Months Ended March 31,
	Three Months Ended June 30,					Six Months Ended June 30,						2020		2019
	2019		2018			2019		2018
INTEREST INCOME
Interest income:											Interest income:
Loans, including fees	$	25,278	$	21,652		$	50,253	$	39,880		Loans, including fees	$	26,434	$	24,975
Securities available-for-sale:											Securities available-for-sale:
Taxable	871		897			1,842		1,770			Taxable	679		971
Tax-exempt	411		76			836		112			Tax-exempt	283		424
Federal funds sold and other earning assets	743		368			1,315		609			Federal funds sold and other earning assets	602		573
Total interest income	27,303		22,993			54,246		42,371			Total interest income	27,998		26,943
INTEREST EXPENSE

Interest expense:											Interest expense:
Deposits	5,788		3,238			11,039		5,639			Deposits	4,754		5,251
Securities sold under agreements to repurchase	6		11			14		23			Securities sold under agreements to repurchase	5		8
Federal Home Loan Bank advances and other borrowings	117		206			221		360			Federal Home Loan Bank advances and other borrowings	84		103
Subordinated debt	590		—			1,173		—			Subordinated debt	584		584
Total interest expense	6,501		3,455			12,447		6,022			Total interest expense	5,427		5,946
Net interest income	20,802		19,538			41,799		36,349			Net interest income	22,571		20,997
Provision for loan losses	393		617			1,190		1,305			Provision for loan losses	3,200		797
Net interest income after provision for loan losses	20,409		18,921			40,609		35,044			Net interest income after provision for loan losses	19,371		20,200
NONINTEREST INCOME
Customer service fees	707		557			1,361		1,135
Gain (loss) on sale of securities, net	33		(1		)	33		(1		)

Noninterest income:											Noninterest income:
Service charges on deposit accounts											Service charges on deposit accounts	770		654

Mortgage banking	392		322			674		688			Mortgage banking	584		282
Investment services											Investment services	437		169
Insurance commissions											Insurance commissions	269		—
Interchange and debit card transaction fees	143		121			318		267			Interchange and debit card transaction fees	276		175
Merger termination fee	6,400		—			6,400		—

Other	741		578			1,328		984			Other	482		418
Total noninterest income	8,416		1,577			10,114		3,073			Total noninterest income	2,818		1,698
NONINTEREST EXPENSE

Noninterest expense:											Noninterest expense:
Salaries and employee benefits	8,984		7,649			17,382		14,825			Salaries and employee benefits	10,006		8,398
Occupancy and equipment	1,658		1,522			3,298		3,055			Occupancy and equipment	1,911		1,640
FDIC insurance	180		317			359		419			FDIC insurance	180		179
Other real estate and loan related expense	242		926			732		1,596			Other real estate and loan related expense	545		490
Advertising and marketing	259		215			554		399			Advertising and marketing	198		295
Data processing	577		600			1,192		1,127			Data processing	538		615
Professional services	489		587			1,151		1,259			Professional services	711		662
Amortization of intangibles	342		229			686		417			Amortization of intangibles	362		344
Software as service contracts	568		492			1,136		970			Software as service contracts	470		567
Merger related and restructuring expenses	1,796		1,123			2,719		1,621			Merger related and restructuring expenses	2,096		923
Other	1,714		1,611			3,179		2,848			Other	1,776		1,466
Total noninterest expense	16,809		15,271			32,388		28,536			Total noninterest expense	18,793		15,579
Income before income tax expense	12,016		5,227			18,335		9,581			Income before income tax expense	3,396		6,319
Income tax expense	2,895		1,295			4,483		2,235			Income tax expense	664		1,588

Net income	$	9,121	$	3,932		$	13,852	$	7,346		Net income	$	2,732	$	4,731
EARNINGS PER COMMON SHARE

Earnings per common share:											Earnings per common share:
Basic	$	0.65	$	0.32		$	0.99	$	0.63		Basic	$	0.19	$	0.34
Diluted	$	0.65	$	0.32		$	0.99	$	0.62		Diluted	$	0.19	$	0.34
Weighted average common shares outstanding
Weighted average common shares outstanding:											Weighted average common shares outstanding:
Basic	13,951,643		12,201,185			13,946,856		11,708,746			Basic	14,395,103		13,942,016
Diluted	14,046,500		12,320,498			14,036,790		11,822,497			Diluted	14,479,671		14,018,163



Balance, March 31, 2018	11,233,806	$	11,234	$	174,981	$	25,303	$	(2,569	)	$	208,949
Net income	—	—		—		3,932		—			3,932
Other comprehensive loss	—	—		—		—		(396		)	(396		)
Common stock issued pursuant to:
Stock awards	394	—		9		—		—			9
Exercise of stock options	11,400	11		109		—		—			120
Shareholders of TN Bancshares, Inc.	1,458,981	1,459		33,273		—		—			34,732
Stock compensation expense	—	—		141		—		—			141
Balance, June 30, 2018	12,704,581	$	12,705	$	208,513	$	29,235	$	(2,966	)	$	247,487



December 31, 2018:
U.S. Government-sponsored enterprises (GSEs)	$	44,117	$	12	$	(626	)	$	43,503
Municipal securities	55,248		276		(363		)	55,161
Other debt securities	977		—		(67		)	910
Mortgage-backed securities (GSEs)	103,875		153		(1,914		)	102,114
	$	204,217	$	441	$	(2,970	)	$	201,688



December 31, 2018:
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	)



	Gross Unrealized Loss			Number of Securities
U.S. Government-sponsored enterprises (GSEs)	$	(65	)	3
Municipal securities	(17		)	4
Other debt securities	(42		)	1
Mortgage-backed securities (GSEs)	(389		)	47
	$	(513	)	55



	June 30, 2019		December 31, 2018
Federal Reserve Bank stock	$	7,909	$	7,010
Federal Home Loan Bank stock	4,646		4,139
First National Bankers Bank stock	350		350
	$	12,905	$	11,499



December 31, 2018:
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



Three Months Ended June 30, 2018:
Beginning balance	$	2,925	$	1,519		$	627	$	1,210	$	196		$	6,477
Loans charged off	—		(25		)	—		—		(59		)	(84		)
Recoveries of charge-offs	—		27			3		16		18			64
Provision (reallocation) charged to expense	210		7			114		141		145			617
Ending balance	$	3,135	$	1,528		$	744	$	1,367	$	300		$	7,074



Six Months Ended June 30, 2018:
Beginning balance	$	2,465		$	1,596		$	521	$	1,062		$	216		$	5,860
Loans charged off	(38		)	(25		)	—		(78		)	(101		)	(242		)
Recoveries of charge-offs	—			50			5		56			40			151
Provision (reallocation) charged to expense	708			(93		)	218		327			145			1,305
Ending balance	$	3,135		$	1,528		$	744	$	1,367		$	300		$	7,074



PCI Loans:
Pass	$	12,795	$	5,050	$	3,576	$	2,039	$	354	$	23,814
Watch	2,463		453		1,093		3		14		4,026
Special mention	920		434		—		—		7		1,361
Substandard	862		1,475		—		95		25		2,457
Doubtful	—		—		—		—		—		—
Total	$	17,040	$	7,412	$	4,669	$	2,137	$	400	$	31,658
Total loans	$	878,587	$	406,256	$	204,696	$	335,498	$	11,952	$	1,836,989



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


Line item on the balance sheet	Carrying Amount of the Hedged Assets		Cumulative 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



	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Lease costs:
Operating lease costs	$	157	$	315
Short-term lease costs	5		11
Variable lease costs	23		46
Total	$	185	$	372
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	150	$	302



	Amounts
June 30, 2020	$	466
June 30, 2021	486
June 30, 2022	222
June 30, 2023	152
June 30, 2024	74
Thereafter	699
Total future minimum lease payments	2,099
Amounts representing interest	(319		)
Present value of net future minimum lease payments	$	1,780


~~(1)~~	(1)Includes nonaccrual loans and accretion income on acquired loans ~~included was $1.4 million and $2.6 million for the quarters ended June 30, 2019 and 2018, respectively.~~



	June 30, 2019
Three months or less	$	110,876
Three to six months	119,698
Six to twelve months	76,529
More than twelve months	36,403
Total	$	343,506