United States Securities and Exchange Commission

Washington, D.C. 20549


☒	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~~

__________ to __________

Commission File Number: 001-37661

~~001-37661~~


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

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

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

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



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

Indicate by check mark whether the registrant 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 ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

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

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

As of ~~May 8,~~November 06, 2020, there were ~~15,216,932~~15,235,227 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)
	September 30,		December 31,
	2020		2019
ASSETS:
Cash and due from banks	$	63,884	$	33,205
Interest-bearing deposits with banks		411,625		127,329
Federal funds sold		66,306		23,437
Total cash and cash equivalents		541,815		183,971
Securities available-for-sale, at fair value		214,634		178,348
Other investments		14,829		12,913
Loans held for sale		11,292		5,856
Loans		2,404,057		1,897,392
Less: Allowance for loan losses		(18,817)		(10,243)
Loans, net		2,385,240		1,887,149
Premises and equipment, net		73,934		59,433
Other real estate owned		3,932		1,757
Goodwill and core deposit intangible, net		86,710		77,193
Bank owned life insurance		31,034		24,949
Other assets		24,168		17,554
Total assets	$	3,387,588	$	2,449,123

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	669,733	$	364,155
Interest-bearing demand		534,128		380,234
Money market and savings		871,098		623,284
Time deposits		577,064		679,541
Total deposits		2,652,023		2,047,214
Borrowings		319,391		31,623
Subordinated debt		39,325		39,261
Other liabilities		27,060		18,278
Total liabilities		3,037,799		2,136,376
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; NaN shares issued and outstanding		0		0
Common stock, $1 par value; 40,000,000 shares authorized; 15,233,227 and 14,008,233 shares issued and outstanding, respectively		15,233		14,008
Additional paid-in capital		254,626		232,732
Retained earnings		78,918		65,839
Accumulated other comprehensive income		1,012		168
Total shareholders' equity		349,789		312,747
Total liabilities and shareholders' equity	$	3,387,588	$	2,449,123

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

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

Three Months Ended
March 31,
2020 2019
Interest income:
Loans, including fees $ 26,434 $ 24,975
Securities available-for-sale:
Taxable 679 971
Tax-exempt 283 424
Federal funds sold and other earning assets 602 573
Total interest income 27,998 26,943
Interest expense:
Deposits 4,754 5,251
Securities sold under agreements to repurchase 5 8
Federal Home Loan Bank advances and other borrowings 84 103
Subordinated debt 584 584
Total interest expense 5,427 5,946
Net interest income 22,571 20,997
Provision for loan losses 3,200 797
Net interest income after provision for loan losses 19,371 20,200
Noninterest income:
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
Noninterest expense:
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
Income before income tax expense 3,396 6,319
Income tax expense 664 1,588
Net income $ 2,732 $ 4,731
Earnings per common share:
Basic $ 0.19 $ 0.34
Diluted $ 0.19 $ 0.34
Weighted average common shares outstanding:
Basic 14,395,103 13,942,016
Diluted 14,479,671 14,018,163


		Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Interest income:
Loans, including fees	$	28,621	$	25,515	$	83,718	$	75,768
Securities available-for-sale:
Taxable		546		748		1,813		2,591
Tax-exempt		364		338		1,064		1,173
Federal funds sold and other earning assets		327		743		1,206		2,059
Total interest income		29,858		27,344		87,801		81,591
Interest expense:
Deposits		2,897		5,605		11,016		16,644
Borrowings		334		15		674		250
Subordinated debt		584		584		1,751		1,757
Total interest expense		3,815		6,204		13,441		18,651
Net interest income		26,043		21,140		74,360		62,940
Provision for loan losses		2,634		724		8,683		1,914
Net interest income after provision for loan losses		23,409		20,416		65,677		61,026
Noninterest income:
Service charges on deposit accounts		892		767		2,370		2,129
Gain (loss) on sale of securities		(9)		1		6		34
Mortgage banking		1,029		518		2,544		1,192
Investment services		359		260		1,159		684
Insurance commissions		560		0		1,302		0
Interchange and debit card transaction fees		868		148		1,652		467
Merger termination fee		0		0		0		6,400
Other		422		502		1,417		1,405
Total noninterest income		4,121		2,196		10,450		12,311
Noninterest expense:
Salaries and employee benefits		11,032		9,072		31,395		26,357
Occupancy and equipment		2,186		1,635		6,093		4,967
FDIC insurance		534		(219)		894		140
Other real estate and loan related expense		643		335		1,535		1,067
Advertising and marketing		253		263		653		817
Data processing		558		273		1,689		1,465
Professional services		594		573		2,172		1,724
Amortization of intangibles		402		341		1,169		1,027
Software as service contracts		573		560		1,604		1,696
Merger related and restructuring expenses		290		73		3,863		2,792
Other		2,102		1,802		5,699		5,045
Total noninterest expense		19,167		14,708		56,766		47,097
Income before income tax expense		8,363		7,904		19,361		26,240
Income tax expense		1,968		1,941		4,059		6,425
Net income	$	6,395	$	5,963	$	15,302	$	19,815
Earnings per common share:
Basic	$	0.42	$	0.43	$	1.03	$	1.42
Diluted		0.42		0.42	$	1.02	$	1.41
Weighted average common shares outstanding:
Basic		15,160,579		13,955,859		14,903,757		13,949,325
Diluted		15,210,611		14,053,432		14,965,455		14,038,414

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

(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				Nine Months Ended
	September 30,				September 30,
		2020		2019	2020		2019
Net income	$	6,395	$	5,963	$	15,302	$	19,815
Other comprehensive income:
Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period		77		(2,078)		2,980		3,383
Tax effect		(142)		543		(779)		(888)
Reclassification adjustment for realized gains (losses) included in net income		(9)		1		6		34
Tax effect		2		—		(2)		(9)
Unrealized gains (losses) on securities available-for-sale arising during the period, net of tax		(72)		(1,534)		2,205		2,520
Unrealized gains (losses) on fair value municipal security hedges		538		2,451		(1,843)		(70)
Tax effect		(46)		(643)		482		18
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		492		1,808		(1,361)		(52)

Total other comprehensive income		420		274		844		2,468
Comprehensive income	$	6,815	$	6,237	$	16,146	$	22,283

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

(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


								Accumulated
								Other
	Common Stock			Additional		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Earnings		(Loss) Income		Total
Balance, December 31, 2018	13,933,504	$	13,933	$	231,852	$	39,991	$	(2,765)	$	283,011
Net income	0		0		0		19,815		0		19,815
Other comprehensive gain	0		0		0		0		2,468		2,468
Common stock issued pursuant to:
Stock awards	3,298		3		61		0		0		64
Exercise of stock options	21,171		22		228		0		0		250
Stock compensation expense	0		0		432		0		0		432
Balance, September 30, 2019	13,957,973	$	13,958	$	232,573	$	59,806	$	(297)	$	306,040

Balance, December 31, 2019	14,008,233	$	14,008	$	232,732	$	65,839	$	168	$	312,747
Net income	0		0		0		15,302		0		15,302
Other comprehensive gain	0		0		0		0		844		844
Common stock issued pursuant to:
Exercise of stock options	27,858		28		254		0		0		282
Restricted stock, net of forfeitures	36,113		36		(36)		0		0		0
Shareholders of Progressive Financial Group, Inc.	1,292,578		1,293		23,254		0		0		24,547
Stock compensation expense	0		0		365		0		0		365
Common stock dividend ($0.15 per share)	0		0		0		(2,223)		0		(2,223)
Repurchase of common stock	(131,555)		(132)		(1,943)		0		0		(2,075)
Balance, September 30, 2020	15,233,227	$	15,233	$	254,626	$	78,918	$	1,012	$	349,789

Balance, June 30, 2019	13,953,209	$	13,953	$	232,386	$	53,843	$	(571)	$	299,611
Net income	0		0		0		5,963		0		5,963
Other comprehensive gain	0		0		0		0		274		274
Common stock issued pursuant to:
Exercise of stock options	4,764		5		33		0		0		38
Restricted stock	0		0		0		0		0		0
Stock compensation expense	0		0		154		0		0		154
Balance, September 30, 2019	13,957,973	$	13,958	$	232,573	$	59,806	$	(297)	$	306,040

Balance, June 30, 2020	15,216,932	$	15,217	$	254,396	$	73,283	$	592	$	343,488
Net income	0		0		0		6,395		0		6,395
Other comprehensive gain	0		0		0		0		420		420
Common stock issued pursuant to:
Exercise of stock options	12,500		12		92		0		0		104
Restricted stock	3,795		4		(4)		0		0		0
Stock compensation expense	0		0		142		0		0		142
Common stock dividends ($0.05 per share)	0		0		0		(760)		0		(760)
Repurchase of common stock	0		0		0		0		0		0
Balance, September 30, 2020	15,233,227	$	15,233	$	254,626	$	78,918	$	1,012	$	349,789

Balance, December 31, 2019 14,008,233 $ 14,008 $ 232,732 $ 65,839 $ 168 $ 312,747
Net income — — — 2,732 — 2,732
Other comprehensive loss — — — — (1,415) (1,415)
Common stock issued pursuant to:
Exercise of stock options 14,858 15 158 — — 173
Restricted stock, net of forfeitures 31,900 32 (32) — — —
Shareholders of Progressive Financial Group, Inc. 1,292,578 1,293 23,254 — — 24,547
Stock compensation expense — — 110 — — 110
Common stock dividend ($0.05 per share) — — — (702) — (702)
Purchase of common stock (125,579) (126) (1,866) — — (1,992)
Balance, March 31, 2020 15,221,990 $ 15,222 $ 254,356 $ 67,869 $ (1,247) $ 336,200

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

(Dollars in thousands)

Three Months Ended March 31,
2020 2019
Cash flows from operating activities:
Net income $ 2,732 $ 4,731
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,634 1,156
Accretion of fair value purchase accounting adjustments, net (1,841) (1,717)
Provision for loan losses 3,200 797
Stock compensation expense 110 143
Deferred income tax expense 90 1,039
Increase in cash surrender value of bank owned life insurance (162) (158)
Loss on disposal of fixed assets — 7
Net losses from sale of other real estate owned 14 26
Net gains from sale of loans (576) (282)
Origination of loans held for sale (15,195) (16,805)
Proceeds from sales of loans held for sale 15,582 16,061
Net change in:
Accrued interest receivable 35 (1,093)
Accrued interest payable 784 748
Other assets 685 (1,660)
Other liabilities 2,010 4,702
Net cash provided by operating activities 9,102 7,695
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 2,115 —
Proceeds from maturities and calls of securities available-for-sale 3,250 5,000
Proceeds from paydowns of securities available-for-sale 3,816 3,173
Purchases of securities available-for-sale (3,377) (1,054)
Purchases of other investments (507) (899)
Net increase in loans (52,721) (61,011)
Purchases of premises and equipment (2,429) (1,296)
Proceeds from sale of other real estate owned 120 458
Net cash and cash equivalents received from business combination 46,132 —
Net cash used in investing activities (3,601) (55,629)
Cash flows from financing activities:
Net increase in deposits 22,158 72,166
Net decrease in securities sold under agreements to repurchase (20) (4,686)
Proceeds from Federal Home Loan Bank advances and other borrowings 100,000 50,094
Repayment of Federal Home Loan Bank advances and other borrowings — (52,732)
Cash dividends paid (702) —
Issuance of common stock 173 264
Purchase of common stock (1,992) —
Net cash provided by financing activities 119,617 65,106
Net change in cash and cash equivalents 125,118 17,172
Cash and cash equivalents, beginning of period 183,971 115,822
Cash and cash equivalents, end of period $ 309,089 $ 132,994
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 4,643 $ 5,198
Cash paid during the period for income taxes — —
Noncash investing and financing activities:
Acquisition of real estate through foreclosure 676 55
Change in goodwill due to acquisitions 8,302 —
Initial recognition of operating lease right-of-use assets 222 2,344
Initial recognition of operating lease liabilities 222 2,344


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	15,302	$	19,815
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,437		3,296
Accretion of fair value purchase accounting adjustments, net		(3,689)		(4,337)
Provision for loan losses		8,683		1,914
Stock compensation expense		365		432
Gain from redemption and sale of securities available-for-sale		(6)		(34)
Deferred income tax expense		(37)		1,178
Increase in cash surrender value of bank owned life insurance		(526)		(415)
Loss on disposal of fixed assets		0		14
Net (gains) losses from sale of other real estate owned		142		(43)
Net gains from sale of loans		(2,544)		(1,192)
Origination of loans held for sale		(99,223)		(49,333)
Proceeds from sales of loans held for sale		96,330		49,435
Net change in:
Accrued interest receivable		(3,221)		(207)
Accrued interest payable		807		900
Other assets		1,850		(330)
Other liabilities		3,556		5,029
Net cash provided by operating activities		22,226		26,122
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		11,759		16,515
Proceeds from maturities and calls of securities available-for-sale		45,800		15,555
Proceeds from paydowns of securities available-for-sale		18,622		10,166
Purchases of securities available-for-sale		(81,893)		(6,074)
Purchases of other investments		(1,223)		(1,414)
Net increase in loans		(316,075)		(85,424)
Purchases of premises and equipment		(4,450)		(4,506)
Proceeds from sale of other real estate owned		875		1,395
Net cash and cash equivalents received from business combination		46,132		0
Net cash used in investing activities		(280,453)		(53,787)
Cash flows from financing activities:
Net increase in deposits		332,319		75,634
Net increase (decrease) in securities sold under agreements to repurchase		9		(7,388)
Proceeds from borrowings		338,340		145,176
Repayment borrowings		(50,581)		(130,959)
Cash dividends paid		(2,223)		0
Issuance of common stock		282		314
Purchase of common stock		(2,075)		0
Net cash provided by financing activities		616,071		82,777
Net change in cash and cash equivalents		357,844		55,112
Cash and cash equivalents, beginning of period		183,971		115,822
Cash and cash equivalents, end of period	$	541,815	$	170,934
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	12,633	$	17,751
Cash paid during the period for income taxes		5,778		3,635
Noncash investing and financing activities:
Acquisition of real estate through foreclosure		971		417
Change in goodwill due to acquisitions		9,316		(473)
Initial recognition of operating lease right-of-use assets		484		2,344
Initial recognition of operating lease liabilities		484		2,344

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

Basis of Presentation and Accounting Estimates:

Recently Issued and Adopted Accounting Pronouncements:

As of January 1, 2020, the Company adopted ASU 2019-01, Leases: Codification Improvements (“ASU 2019-01”).ASU 2019-01provides clarification to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. The adoption of ASU 2019-01 did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

In October 2019, the Financial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that CECL will be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as currently defined by the SEC, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For calendar-year-end companies, this will be January 1, 2020. The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations and the Company meets the regulations as aan SRC.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For all other entities, the Board decided that CECL will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The Company does not plan to adopt this standard early and being that the Company is an SRC, adoption is required for fiscal years beginning after December 15, 2022.

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

In December 2019, the 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~~Company’s consolidated financial statements.

In March 2020, ~~various regulatory agencies,~~the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”). It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is implementing a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the transition away from LIBOR for its loan and other financial instruments.

In August 2020, the SEC issued amendments to its disclosure rules to modernize the requirements in Regulation S-K, Item 101 on description of a business, Item 103 on legal proceedings, and Item 105 on risk factors. These amendments are intended to improve the readability of disclosures, reduce repetition, and eliminate immaterial information, thereby simplifying compliance for registrants and making disclosures more meaningful for investors. The amendments to the disclosure requirements related to a registrant’s description of its business and risk factors are intended to expand the use of a principles-based approach that gives registrants more flexibility to tailor disclosures. The amendments to the disclosure requirements related to legal proceedings continue to reflect the current, more prescriptive approach because those requirements depend less on a registrant’s specific characteristics. Further, additional human capital disclosures are required as part of the amendments to the description of the business. The final rule is effective on November 9, 2020, and the Company will incorporate these changes as part of our annual filing on Form 10-K.

Operating, Accounting and Reporting Considerations related to COVID-19:

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

●

Accounting for Loan Modifications – Section 4013 of the CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. See Note 5 Loans and Allowance for Loan Losses for more information.

●

Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Loan Program (“EIDL”), administered directly by the SBA. The Company is a participant in the PPP. See Note 5 Loans and Allowance for Loan Losses for more information.

●

Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. A multifamily borrower with a federally backed multifamily mortgage loan that was current as of February 1, 2020, and is experiencing financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.

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

●

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. See Note 5 Loans and Allowance for Loan Losses for more information.

●

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

●

Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Company offered deferral options of: 1) three months deferral of payment and ~~reporting~~then three months of interest only, 2) three months of interest only, 3) three months deferral of payment, 4) six months of interest only. These modifications generally meet the criteria of both Section 4013 of the CARES Act and the joint interagency statement, and therefore, the Company does not account for ~~financial institutions working with customers affected by~~such loan modifications as TDRs. On August 3, 2020, the Federal Financial Institutions Examination Council on behalf of its members (collectively “the FFIEC members”) issued a joint statement on additional loan accommodations related to COVID-19. The ~~interagency~~joint statement ~~was effective immediately and impacted accounting~~clarifies that for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasonsmodifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. To be eligible, each loan modification must be (1) related to the ~~debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made~~COVID event; (2) executed on a ~~good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are~~loan that was not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are lessmore than 30 days past due ~~on their contractual payments at~~as of December 31, 2019; and (3) executed between March 1, 2020, and the ~~time a modification program is implemented. As~~earlier of ~~March~~(A) 60 days after the date of termination of the National Emergency or (B) December 31, ~~2020, the Bank had provided modifications to approximately $70.1 million in loans, per the guidance stated above. This interagency guidance could have a material impact on~~2020. All of the Company’s ~~financial statements; however, this impact cannot be quantified at this time.~~

loan modifications granted under Section 4013 of the CARES Act are in compliance with the aforementioned FFIEC requirements. Accordingly, the Company does not account for such loan modifications as TDRs.

Reclassifications:

Certain captions and amounts in the 2019 consolidated financial statements were reclassified to conform to the 2020 financial statement presentation. These reclassifications had no impact on net income or ~~shareholders'~~shareholders’ equity as previously reported.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

Acquisition of Progressive Financial Inc.

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

In connection with the merger, the Company acquired $301 million of assets and assumed $272 million of liabilities. Pursuant to the Merger Agreement, each outstanding share of Progressive common stock was converted into and cancelled in exchange to the right to receive $474.82 in cash, and 62.3808 shares of SmartFinancial common stock. SmartFinancial issued 1,292,578 shares of SmartFinancial common stock and paid $9.8 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of ~~$8.3~~$9.3 million, representing the intangible value of ~~Progressive's~~Progressive’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.4 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

The ~~Company's~~Company’s operating results for the ~~period~~three and nine month periods ended ~~March 31,~~September 30, 2020, include the operating results of the acquired business for the period subsequent to the merger date of March 1, 2020.

The purchased assets and assumed liabilities were recorded at their acquisition date fair values ⁽¹⁾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	$	0	$	55,971
Investment securities available-for-sale		27,054		203		27,257
Restricted investments		692		0		692
Loans		191,672		(3,691)		187,981
Allowance for loan losses		(2,832)		2,832		0
Premises and equipment, net		15,681		(2,919)		12,762
Bank owned life insurance		5,560		0		5,560
Deferred tax asset, net		0		1,173		1,173
Intangibles		0		1,370		1,370
Other real estate owned		3,695		(1,474)		2,221
Interest Receivable		1,061		(280)		781
Prepaids		375		(174)		201
Goodwill		231		(231)		0
Other assets		1,881		0		1,881
Total assets acquired	$	301,041	$	(3,191)	$	297,850

Liabilities:
Deposits	$	271,276	$	0	$	271,276
Time deposit premium		0		729		729
Payables and other liabilities		776		0		776
Total liabilities assumed		272,052		729		272,781
Excess of assets assumed over liabilities assumed	$	28,989
Aggregate fair value adjustments			$	(3,920)
Total identifiable net assets						25,069
Consideration transferred:
Cash						9,838
Common stock issued (1,292,578 shares)						24,547
Total fair value of consideration transferred						34,385

Goodwill					$	9,316

⁽¹⁾Fair values are preliminary and are subject to refinement for a period of one year after the closing date of an acquisition as information relative to the closing date fair value becomes available.

As recorded Fair value 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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	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


	~~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~~

The following table discloses the impact of the merger with PFG since the acquisition date through ~~March 31,~~the three and nine month periods ended September 30, 2020. The table also presents certain ~~pro forma~~pro-forma information (net interest income and noninterest income ~~("Revenue"~~(“Revenue”) and net income) as if the PFG acquisition had occurred on January 1, 2019. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

Merger-related ~~cost~~costs from the PFG acquisition ~~of $2.1~~for the three and nine month periods ended September 30, 2020, were $290 thousand and $3.9 million, respectively, have been excluded from the ~~three months period of 2020 pro- forma~~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				Nine Months Ended
	September 30,				September 30,
	Revenue		Net Income		Revenue		Net Income
2020:
Actual PFG results included in statement of income since acquisition date	$	3,029	$	1,228	$	7,189	$	2,707
Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019		30,163		6,609		87,852		17,887

2019:
Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019	$	27,409	$	8,989	$	87,464	$	20,868

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 3. Earnings Per Share

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

presented below. There were 64114 thousand and 85 thousand antidilutive shares for the ~~period~~three and nine month periods ended ~~March 31,~~September 30, 2020, respectively, and ~~none~~NaN for the ~~period~~three and nine month periods ended ~~March 31,~~September 30, 2019.

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Basic earnings per share computation:
Net income available to common stockholders	$	6,395	$	5,963	$	15,302	$	19,815
Average common shares outstanding – basic		15,160,579		13,955,859		14,903,757		13,949,325
Basic earnings per share	$	0.42	$	0.43	$	1.03	$	1.42
Diluted earnings per share computation:
Net income available to common stockholders	$	6,395	$	5,963	$	15,302	$	19,815
Average common shares outstanding – basic		15,160,579		13,955,859		14,903,757		13,949,325
Incremental shares from assumed conversions:
Stock options and restricted stock		50,032		97,573		61,698		89,089
Average common shares outstanding - diluted		15,210,611		14,053,432		14,965,455		14,038,414
Diluted earnings per common share	$	0.42	$	0.42	$	1.02	$	1.41

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 4. Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2020:
U.S. Government-sponsored enterprises (GSEs)	$	30,311	$	49	$	(150)	$	30,210
Municipal securities		88,864		1,948		(3)		90,809
Other debt securities		17,519		49		(66)		17,502
Mortgage-backed securities (GSEs)		74,424		1,938		(249)		76,113
Total	$	211,118	$	3,984	$	(468)	$	214,634

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
March 31, 2020:
U.S. Government-sponsored enterprises (GSEs) $ 17,012 $ 96 $ (63) $ 17,045
Municipal securities 82,599 970 (252) 83,317
Other debt securities 5,461 129 (128) 5,462
Mortgage-backed securities (GSEs) 94,306 1,482 (610) 95,178
$ 199,378 $ 2,677 $ (1,053) $ 201,002


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
Total	$	177,819	$	1,063	$	(534)	$	178,348

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

At ~~March 31,~~September 30, 2020, and December 31, 2019, securities with a carrying value totaling approximately ~~$95.7~~$74.9 million and $92.3 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Proceeds from sale of securities available for sale, gross gains and gross losses on sales and redemptions for the three and nine months ended ~~March 31,~~September 30, 2020 ~~approximately $2.1 million available-for-sale securities~~and 2019 were sold and there were 0 gains or losses realized. For the three months ended March 31, 2019, there were 0 available-for-sale securities sold. For the three months ended March 31, 2020, there were approximately $3.3 million available-for-sale securities redeemed. For the three months ended March 31, 2019, there were approximately $5 million available-for-sale securities redeemed.

as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Proceeds from sales	$	4,884	$	-	$	11,759	$	16,515
Gross gains	$	17	$	-	$	43	$	35
Gross losses	$	(26)	$	-	$	(37)	$	(1)

Proceeds from redemptions	$	30,350	$	5,250	$	45,800	$	15,555

The amortized cost and estimated fair value of securities at ~~March 31,~~September 30, 2020, by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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		Fair
	Cost		Value
Due in one year or less	$	4,623	$	4,679
Due from one year to five years		5,009		5,025
Due from five years to ten years		26,195		26,386
Due after ten years		100,867		102,431
		136,694		138,521
Mortgage-backed securities		74,424		76,113
Total	$	211,118	$	214,634

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


	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
September 30, 2020:
U.S. Government-sponsored enterprises (GSEs)	$	20,985	$	(149)	5	$	140	$	(1)	1	$	21,125	$	(150)	6
Municipal securities		3,892		(3)	3		0		0	—		3,892		(3)	3
Other debt securities		3,980		(55)	2		973		(11)	1		4,953		(66)	3
Mortgage-backed securities (GSEs)		10,456		(114)	7		7,636		(135)	3		18,092		(249)	10
Total	$	39,313	$	(321)	17	$	8,749	$	(147)	5	$	48,062	$	(468)	22

December 31, 2019:
U.S. Government-sponsored enterprises (GSEs)	$	2,972	$	(43)	2	$	5,987	$	(13)	2	$	8,959	$	(56)	4
Municipal securities		3,656		(16)	4		527		(3)	1		4,183		(19)	5
Other debt securities		0		0	—		947		(33)	1		947		(33)	1
Mortgage-backed securities (GSEs)		13,208		(194)	10		19,988		(232)	31		33,196		(426)	41
Total	$	19,836	$	(253)	16	$	27,449	$	(281)	35	$	47,285	$	(534)	51

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)

~~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 March 31, 2020, the categories of temporarily impaired securities in an unrealized loss position twelve months or greater are as follows~~ ~~(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

The Company reviews the securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a ~~security's~~security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

Based on this evaluation, the Company concluded that any unrealized losses at ~~March 31,~~September 30, 2020, represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of ~~March 31,~~September 30, 2020, the Company does not intend to sell any of the securities, does not expect to be required to sell any of the securities, and expects to recover the entire amortized cost of all of the securities.

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


	September 30,		December 31,
	2020		2019
Federal Reserve Bank stock	$	8,641	$	7,917
Federal Home Loan Bank stock		5,838		4,646
First National Bankers Bank stock		350		350
Total	$	14,829	$	12,913

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

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 ~~March 31,~~September 30, 2020, the Company determined that there was no impairment on its other ~~securities.~~

investments.

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 5. Loans and Allowance for Loan Losses

Portfolio Segmentation:

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


	September 30, 2020						December 31, 2019
	PCI		All Other				PCI		All Other
	Loans¹		Loans		Total		Loans¹		Loans		Total
Commercial real estate	$	16,469	$	1,014,182	$	1,030,651	$	15,255	$	890,051	$	905,306
Consumer real estate		10,801		429,509		440,310		6,541		410,941		417,482
Construction and land development		6,409		268,763		275,172		4,458		223,168		227,626
Commercial and industrial		317		644,181		644,498		407		336,668		337,075
Consumer and other		87		13,339		13,426		326		9,577		9,903
Total loans		34,083		2,369,974		2,404,057		26,987		1,870,405		1,897,392
Less: Allowance for loan losses		0		(18,817)		(18,817)		(156)		(10,087)		(10,243)

Loans, net	$	34,083	$	2,351,157	$	2,385,240	$	26,831	$	1,860,318	$	1,887,149

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

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

²~~Includes loans held for sale.~~

For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are 5 loan portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, and consumer and other.

As previously mentioned in Note 1 – Presentation of Financial Information, the CARES Act established the PPP, administered directly by the SBA. The PPP provides loans of up to $10 million to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. PPP loans carry an interest rate of one percent, and a maturity of two or five years. These loans are fully guaranteed by the SBA and are not included in the Company’s loan loss allowance calculations. The loans may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA pays the Company fees for processing PPP loans in the following amounts: (1) five percent for loans of not more than $350,000; (2) three percent for loans of more than $350,000 and less than $2,000,000; and (3) one percent for loans of at least $2,000,000. These processing fees are accounted for as loan origination fees and recognized over the contractual loan term as a yield adjustment on the loans. PPP loans are included in the Commercial and Industrial loan class. As of September 30, 2020, the Company had approximately 2,950 PPP loans outstanding, with an outstanding principal balance of $300.8 million.

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


					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
	Real Estate		Real Estate		Development		Industrial		and Other		Total
September 30, 2020:
Performing loans	$	1,013,631	$	428,514	$	268,763	$	643,581	$	13,339	$	2,367,828
Impaired loans		551		995		0		600		0		2,146
		1,014,182		429,509		268,763		644,181		13,339		2,369,974
PCI loans		16,469		10,801		6,409		317		87		34,083
Total loans	$	1,030,651	$	440,310	$	275,172	$	644,498	$	13,426	$	2,404,057

December 31, 2019:
Performing loans	$	889,795	$	409,394	$	222,621	$	336,508	$	9,577	$	1,867,895
Impaired loans		256		1,547		547		160		0		2,510
		890,051		410,941		223,168		336,668		9,577		1,870,405
PCI loans		15,255		6,541		4,458		407		326		26,987
Total loans	$	905,306	$	417,482	$	227,626	$	337,075	$	9,903	$	1,897,392

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


					Construction		Commercial		Consumer
	Commercial		Consumer		and Land		and		and
	Real Estate		Real Estate		Development		Industrial		Other		Total
September 30, 2020:
Performing loans	$	7,729	$	3,366	$	2,060	$	5,055	$	121	$	18,331
Impaired loans		0		78		0		408		0		486
		7,729		3,444		2,060		5,463		121		18,817
PCI loans		0		0		0		0		0		0
Total loans	$	7,729	$	3,444	$	2,060	$	5,463	$	121	$	18,817

December 31, 2019:
Performing loans	$	4,491	$	2,159	$	1,127	$	1,766	$	69	$	9,612
Impaired loans		0		343		0		132		0		475
		4,491		2,502		1,127		1,898		69		10,087
PCI loans		17		74		0		59		6		156
Total loans	$	4,508	$	2,576	$	1,127	$	1,957	$	75	$	10,243

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

December 31, 2019:
Performing loans $ 4,491 $ 2,159 $ 1,127 $ 1,766 $ 69 $ 9,612
Impaired loans — 343 — 132 — 475
4,491 2,502 1,127 1,898 69 10,087
PCI loans 17 74 — 59 6 156
Total loans $ 4,508 $ 2,576 $ 1,127 $ 1,957 $ 75 $ 10,243

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


	Three Months Ended September 30, 2020
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and		Consumer
	Real Estate		Estate		Development		Industrial		and Other		Total
Beginning balance	$	6,595	$	3,313	$	1,795	$	4,443	$	108	$	16,254
Charged-off loans		0		(21)		0		(60)		(89)		(170)
Recoveries of charge-offs		11		17		0		55		16		99
Provision (reallocation) charged to expense		1,123		135		265		1,025		86		2,634
Ending balance	$	7,729	$	3,444	$	2,060	$	5,463	$	121	$	18,817


	Three Months Ended September 30, 2019
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and		Consumer
	Real Estate		Estate		Development		Industrial		and Other		Total
Beginning balance	$	4,102	$	2,189	$	946	$	1,746	$	114	$	9,097
Charged-off loans		(36)		(1)		0		(20)		(50)		(107)
Recoveries of charge-offs		39		17		3		12		7		78
Provision (reallocation) charged to expense		155		65		94		410		0		724
Ending balance	$	4,260	$	2,270	$	1,043	$	2,148	$	71	$	9,792


	Nine Months Ended September 30, 2020
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and		Consumer
	Real Estate		Estate		Development		Industrial		and Other		Total
Beginning balance	$	4,508	$	2,576	$	1,127	$	1,957	$	75	$	10,243
Loans charged-off		0		(23)		0		(77)		(231)		(331)
Recoveries of loans charged-off		16		34		2		103		67		222
Provision (reallocation) charged to expense		3,205		857		931		3,480		210		8,683
Ending balance	$	7,729	$	3,444	$	2,060	$	5,463	$	121	$	18,817

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Nine Months Ended September 30, 2019
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and		Consumer
	Real Estate		Estate		Development		Industrial		and Other		Total
Beginning balance	$	3,639	$	1,789	$	795	$	1,746	$	306	$	8,275
Loans charged-off		(36)		(3)		0		(353)		(260)		(652)
Recoveries of loans charged-off		63		37		7		66		82		255
Provision (reallocation) charged to expense		594		447		241		689		(57)		1,914
Ending balance	$	4,260	$	2,270	$	1,043	$	2,148	$	71	$	9,792

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio. Our provision for loan losses for the nine months ended September 30, 2020, is $8.7 million compared to $1.9 million in the same period of 2019, an increase of $6.8 million. As of September 30, 2020, and December 31, 2019, our allowance for loan losses was $18.8 million and $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 September 30, 2020, as compared to December 31, 2019, is primarily attributable to the ongoing economic uncertainties related to the COVID-19 pandemic. Also, during 2020, the Company updated the Allowance for Loan Loss policy to increase the additional basis points allowed for the unallocated risk portion from 100 basis points to 125 basis points. In addition, the Company added a new qualitative factor based on the percentage of COVID modified loans / total loans. The qualitative factors were also expanded to provide additional granularity related to the hospitality and restaurant industries which are most impacted by the pandemic within our footprint. The changes in our economic factors and the addition of the COVID modified factors equated to an additional $8.3 million in reserve. Our allowance for loan loss as a percentage of total loans was 0.78% at September 30, 2020 and 0.54% at December 31, 2019.

The following tables outline the amount of each loan classification and the amount categorized into each risk rating (in thousands):


	September 30, 2020
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
Non PCI Loans:	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	666,865	$	394,794	$	247,424	$	619,308	$	13,004	$	1,941,395
Watch		336,122		32,578		21,269		23,655		294		413,918
Special mention		10,547		463		0		385		0		11,395
Substandard		648		1,588		70		728		17		3,051
Doubtful		0		86		0		105		24		215
Total		1,014,182		429,509		268,763		644,181		13,339		2,369,974

PCI Loans:
Pass		8,248		8,974		1,383		222		70		18,897
Watch		6,819		255		4,491		0		12		11,577
Special mention		19		56		0		0		0		75
Substandard		1,383		1,516		535		95		5		3,534
Doubtful		0		0		0		0		0		0
Total		16,469		10,801		6,409		317		87		34,083
Total loans	$	1,030,651	$	440,310	$	275,172	$	644,498	$	13,426	$	2,404,057

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	December 31, 2019
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
Non PCI Loans:	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	860,447	$	407,336	$	216,459	$	328,564	$	9,462	$	1,822,268
Watch		25,180		989		6,089		6,786		40		39,084
Special mention		4,057		738		0		1,033		0		5,828
Substandard		367		1,713		620		228		51		2,979
Doubtful		0		165		0		57		24		246
Total		890,051		410,941		223,168		336,668		9,577		1,870,405

PCI Loans:
Pass		12,473		5,258		902		41		300		18,974
Watch		2,234		38		3,556		0		13		5,841
Special mention		139		60		0		0		0		199
Substandard		409		1,185		0		366		13		1,973
Doubtful		0		0		0		0		0		0
Total		15,255		6,541		4,458		407		326		26,987
Total loans	$	905,306	$	417,482	$	227,626	$	337,075	$	9,903	$	1,897,392

Past Due Loans:

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


	September 30, 2020
	30-60 Days		61-89 Days		Past Due 90				Total
	Past Due and		Past Due and		Days or More				Past Due and		PCI		Current		Total
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		Loans		Loans		Loans
Commercial real estate	$	561	$	616	$	0	$	418	$	1,595	$	16,469	$	1,012,587	$	1,030,651
Consumer real estate		975		124		0		1,586		2,685		10,801		426,824		440,310
Construction and land development		10		0		0		0		10		6,409		268,753		275,172
Commercial and industrial		16		6		0		204		226		317		643,955		644,498
Consumer and other		70		522		0		40		632		87		12,707		13,426
Total	$	1,632	$	1,268	$	0	$	2,248	$	5,148	$	34,083	$	2,364,826	$	2,404,057


	December 31, 2019
	30-60 Days		61-89 Days		Past Due 90				Total
	Past Due and		Past Due and		Days or More				Past Due and		PCI		Current		Total
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		Loans		Loans		Loans
Commercial real estate	$	466	$	22	$	0	$	124	$	612	$	15,255	$	889,439	$	905,306
Consumer real estate		1,564		30		0		1,872		3,466		6,541		407,475		417,482
Construction and land development		507		0		607		620		1,734		4,458		221,434		227,626
Commercial and industrial		559		53		0		57		669		407		335,999		337,075
Consumer and other		86		14		0		70		170		326		9,407		9,903
Total	$	3,182	$	119	$	607	$	2,743	$	6,651	$	26,987	$	1,863,754	$	1,897,392

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	September 30, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans without a valuation allowance:
Commercial real estate	$	551	$	551	$	—	$	256	$	261	$	—
Consumer real estate		795		795		—		553		553		—
Construction and land development		0		0		—		547		547		—
Commercial and industrial		0		0		—		0		0		—
Consumer and other		0		0		—		0		0		—
		1,346		1,346		—		1,356		1,361		—

Impaired loans with a valuation allowance:
Commercial real estate		0		0		0		0		0		0
Consumer real estate		200		200		78		994		994		343
Construction and land development		0		0		0		0		0		0
Commercial and industrial		600		600		408		160		160		132
Consumer and other		0		0		0		0		0		0
		800		800		486		1,154		1,154		475
PCI loans:
Commercial real estate		0		0		0		17		99		17
Consumer real estate		1,852		2,113		0		1,205		1,371		74
Construction and land development		0		0		0		0		0		0
Commercial and industrial		279		242		0		396		534		59
Consumer and other		26		24		0		45		51		6
		2,157		2,379		0		1,663		2,055		156

Total impaired loans	$	4,303	$	4,525	$	486	$	4,173	$	4,570	$	631

March 31, 2020 December 31, 2019
Recorded
Investment Unpaid
Principal
Balance Related
Allowance Recorded
Investment Unpaid
Principal
Balance Related
Allowance
Impaired loans without a valuation allowance:
Commercial real estate $ 136 $ 136 $ — $ 256 $ 261 $ —
Consumer real estate 546 546 — 553 553 —
Construction and land development 607 607 — 547 547 —
Commercial and industrial — — — — — —
Consumer and other — — — — — —
1,289 1,289 — 1,356 1,361 —
Impaired loans with a valuation allowance:
Commercial real estate 396 402 46 — — —
Consumer real estate 974 974 379 994 994 343
Construction and land development — — — — — —
Commercial and industrial 158 158 130 160 160 132
Consumer and other — — — — — —
1,528 1,534 555 1,154 1,154 475
PCI loans:
Commercial real estate 1,010 1,019 — 17 99 17
Consumer real estate 486 491 — 1,205 1,371 74
Construction and land development 253 254 — — — —
Commercial and industrial 376 378 — 396 534 59
Consumer and other 14 14 — 45 51 6
2,139 2,156 — 1,663 2,055 156
Total impaired loans $ 4,956 $ 4,979 $ 555 $ 4,173 $ 4,570 $ 631

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended September 30,
	2020				2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	552	$	3	$	258	$	3
Consumer real estate		758		3		568		4
Construction and land development		0		0		701		3
Commercial and industrial		0		0		0		0
Consumer and other		0		0		0		0
		1,310		6		1,527		10
Impaired loans with a valuation allowance:
Commercial real estate		198		0		0		0
Consumer real estate		440		4		396		4
Construction and land development		0		0		0		0
Commercial and industrial		379		2		352		1
Consumer and other		0		0		0		0
		1,017		6		748		5
PCI loans:
Commercial real estate		8		0		2,520		0
Consumer real estate		1,869		38		1,151		0
Construction and land development		0		0		0		0
Commercial and industrial		305		2		0		0
Consumer real estate		27		0		0		0
		2,209		40		3,671		0

Total impaired loans	$	4,536	$	52	$	5,946	$	15


	Nine Months Ended September 30,
	2020				2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	374	$	7	$	435	$	28
Consumer real estate		653		17		768		8
Construction and land development		289		0		637		5
Commercial and industrial		0		0		25		1
Consumer and other		0		0		14		1
		1,316		24		1,879		43
Impaired loans with a valuation allowance:
Commercial real estate		198		2		12		1
Consumer real estate		712		18		248		6
Construction and land development		0		0		14		0
Commercial and industrial		269		7		498		10
Consumer and other		0		0		28		0
		1,179		27		800		17
PCI loans:
Commercial real estate		250		1		1,894		(10)
Consumer real estate		1,344		77		851		3
Construction and land development		58		0		0		0
Commercial and industrial		343		5		0		0
Consumer and other		29		0		0		0
		2,024		83		2,745		(7)

Total impaired loans	$	4,519	$	134	$	5,424	$	53

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Troubled Debt Restructurings:

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid Relief and Economic Security (“CARES”) Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 Presentation of Financial Information for more information. At September 30, 2020, the Company had 289 loans remaining under COVID-19 modifications that amounted to $232.5 million, or 9.7% of the total loans outstanding.

Foreclosure Proceedings and Balances:

As of ~~March 31,~~September 30, 2020, there ~~were 7 properties~~was only 1 residential property secured by real estate included in other real estate owned and there ~~were no~~was one consumer mortgage ~~loans~~loan collateralized by residential real estate property that ~~were~~was in the process of foreclosure.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 thousands):


	September 30,		December 31,
	2020		2019
Commercial real estate	$	24,179	$	21,570
Consumer real estate		13,353		8,411
Construction and land development		1,910		5,394
Commercial and industrial		7,567		2,540
Consumer and other		199		504
Total loans		47,208		38,419
Less: Remaining purchase discount		(13,125)		(11,432)
Total loans, net of purchase discount		34,083		26,987
Less: Allowance for loan losses		0		(156)
Carrying amount, net of allowance	$	34,083	$	26,831

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

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Accretable yield, beginning of period	$	11,777	$	8,280	$	8,454	$	7,052
Additions		0		0		2,515		0
Accretion income		(1,267)		(1,073)		(4,401)		(3,353)
Reclassification		265		1,033		2,428		2,392
Other changes, net		7,405		390		9,184		2,539
Accretable yield, end of period	$	18,180	$	8,630	$	18,180	$	8,630

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. AsConsidering the recent economic conditions resulting from the COVID-19 pandemic, as of ~~March 31,~~September 30, 2020, the Company ~~was closely monitoring the effects of COVID-19 on the economy and considered this~~performed a ~~triggering event and performed an interim~~Step 1 goodwill impairment ~~analysis.~~test (which compares the fair value of a reporting unit with its carrying amount, including goodwill). The results indicated that there was no impairment ~~charge for the period.~~as of September 30, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

The ~~Company's~~Company’s other intangible assets consist of core deposit intangibles, and is initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer deposits.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	September 30,		December 31,
	2020		2019
Goodwill:
Balance, beginning of period	$	65,614	$	66,087
Adjustment to values initially recorded for Acquisition of Foothills Bancorp, Inc.		0		(473)
Acquisition of PFG		8,302		0
Adjustment to values initially recorded for Acquisition of PFG		1,014		0
Balance, end of the period	$	74,930	$	65,614

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


	September 30,		December 31,
	2020		2019
Core deposit intangible:
Balance, beginning of period	$	14,550	$	14,550
Acquisition of PFG		1,370		0
Balance, gross core deposit intangible		15,920		14,550
Less: accumulated amortization		(4,140)		(2,971)
Net core deposit intangible, net	$	11,780	$	11,579

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 aggregate amortization of core deposit intangibles expense for ~~March 31,~~the three and nine month periods ended September 30, 2020, was $402 thousand and $1.2 million, respectively, and for the three and nine months ended September 30, 2019, was ~~$362~~$341 thousand and ~~$344 thousand,~~$1.0 million, respectively.

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


Remainder of 2020	$	400
2021		1,570
2022		1,526
2023		1,485
2024		1,456
Thereafter		5,343
Total	$	11,780

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:~~

Borrowings:

At September 30, 2020, total borrowings were $319.4 million compared to $31.6 million at December 31, 2019. The $287.8 million increase was primarily due to borrowings from the Federal Reserve Bank ~~has agreements with~~Payroll Protection Program Liquidity Facility (“PPPLF”) of $237.8 million in the second quarter of 2020 and an increase in Federal Home Loan Bank (“FHLB”) borrowings of ~~Cincinnati ("FHLB") that can provide additional advances to the Bank in an amount up to $52.0~~$50.0 million. All of the loans are secured by first mortgages on 1-4 family residential, multi-family properties and commercial properties and are pledged as collateral for these advances. There were 0 securities pledged to FHLB at March 31, 2020, or December 31, 2019.

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


	September 30,		December 31,
	2020		2019
Securities sold under customer repurchase agreements	$	6,193	$	6,184
FHLB borrowings		75,000		25,000
PPPLF borrowings		237,780		—
Other borrowings		418		439
Total	$	319,391	$	31,623

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~~

Table of ~~Atlanta Discount Window:~~Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

~~FRB advances consist of the following~~ ~~(dollars in thousands)~~:


	~~March 31, 2020~~
~~FRB advance dated March 27, 2020, fixed at 0.25%, with principal due in June 25, 2020~~	$	~~50,000~~

~~Other borrowings:~~

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

Line of Credit:

~~During the first quarter of 2020, the~~

The Company ~~entered into~~has a Loan and Security Agreement and revolving note with ServisFirst Bank, pursuant to which ServisFirst Bank has made a $25.0 million revolving line of credit available to the Company. The maturity of the line of credit is September 24, 2021. At ~~March 31,~~September 30, 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)~~

Note 8. Employee Benefit Plans

401(k) Plan:

The Company provides a deferred salary reduction plan (“~~Plan~~”Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After ~~one year~~90 days of service the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The ~~Company's~~Company’s contribution to the Plan for the three and nine month ~~period~~periods ending ~~March 31,~~September 30, 2020, ~~and 2019, respectively,~~ was ~~$251~~$282 thousand and ~~$198 thousand.~~

$840 thousand, respectively. The Company’s contribution to the Plan for the three and nine months periods ending September 30, 2019, was $187 thousand and $602 thousand, respectively.

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At ~~March 31,~~September 30, 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 future grants, ~~or awards under this plan.~~

~~In addition to~~ the 2015 Stock Incentive Plan, which had 28,549 rights issued and 1,878,894 Rights available for future grants or awards.

In addition, the Company has ~~38,250~~33,250 Rights issued from the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan, ~~49,250~~41,250 Rights issued from the Cornerstone Non-Qualified Plan Options, and 2,266 Rights issued from the Capstone Stock Option Plan.These plans do not have any Rights available for future grants or awards.

Stock Options:

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


		Weighted
		Average
		Exercisable
	Number	Price
Outstanding at December 31, 2019	136,658	$	10.29
Granted	0		0
Exercised	(27,858)		10.13
Forfeited	(3,485)		15.05
Outstanding at September 30, 2020	105,315	$	10.18

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Information pertaining to stock options outstanding at ~~March 31,~~September 30, 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


		Options Outstanding				Options Exercisable
			Weighted-
			Average	Weighted-			Weighted-
			Remaining	Average			Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	6.60	20,000	1.45 years	$	6.60	20,000	$	6.60
	6.80	13,250	0.42 years		6.80	13,250		6.80
	9.48	18,500	2.45 years		9.48	18,500		9.48
	9.60	22,750	3.25 years		9.60	22,750		9.60
	11.76	2,266	1.75 years		11.76	2,266		11.76
	15.05	28,549	4.83 years		15.05	28,549		15.05
Outstanding, end of period		105,315	2.81 years	$	10.18	105,315	$	10.18

The Company did 0tnot recognize any stock option-based compensation expense during the three and nine months ended ~~March 31,~~September 30, 2020, as all stock options issued are fully vested. During the three and nine month ~~period~~periods ended ~~March 31,~~September 30, 2019, stock option-based compensation expense was ~~$31 thousand.~~

$58 thousand and $122 thousand, respectively.

The intrinsic value of options exercised during the three and nine month periods ended ~~March 31,~~September 30, 2020 was $75 thousand and $141 thousand, respectively. The intrinsic value of options exercised during the three and nine month periods ended September 30, 2019 was ~~$65~~$53 thousand and ~~$81~~$165 thousand, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at ~~March 31,~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

September 30, 2020, was ~~$618~~$401 thousand. Cash received from options exercised under all share-based payment arrangements for the nine month period ended ~~March 31,~~September 30, 2020 was ~~$173~~$282 thousand.

NaN ~~shares~~options vested during the periods ended ~~March 31,~~September 30, 2020, and 2019, respectively. The income tax expense/benefit recognized for the exercise of options during the three and nine months ended September 30, 2020, was an expense of $3 thousand and a benefit of $19 thousand, respectively, and for the ~~periods~~three and nine months ended ~~March 31, 2020, and~~September 30, 2019, ~~was $23~~a benefit of $10 thousand and ~~$22~~$37 thousand, respectively.

As of ~~March 31,~~September 30, 2020, all options ~~are~~were fully vested and currently no0 future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

Stock Appreciation Rights ("SARs"):

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


		Weighted
		Average
	Number	Exercisable Price
Outstanding at December 31, 2019	67,000	$	20.54
Granted	18,000		15.19
Exercised	0		0
Forfeited	0		0
Outstanding at September 30, 2020	85,000	$	19.40

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Information pertaining to SARs outstanding at ~~March 31,~~September 30, 2020, is as follows:

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


		SARs Outstanding				SARs Exercisable
			Weighted-
			Average	Weighted-
			Remaining	Average			Weighted- Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life		Price	Exercisable	Price
$	15.19	18,000	3.25 years	$	15.19	—	$	—
	18.12	21,000	2.25 years		18.12	—		—
	21.61	34,000	1.25 years		21.61	—		—
	21.72	12,000	0.25 years		21.72	12,000		21.72
	Outstanding, end of period	85,000	1.78 years	$	19.40	12,000	$	21.72

SARs compensation expense of ($~~118)~~63) thousand and ~~$21~~($89) thousand was recognized for the ~~period~~three and nine month periods ended ~~March 31,~~September 30, 2020, respectively, and ($7) thousand and $73 thousand for three and nine month periods ended September 30, 2019, respectively. The credit in expense for the three and nine month period ended ~~March 31,~~September 30, 2020, and the three month period ended September 30, 2019, was due to adjustments related to the ~~current~~ fair value evaluation of SARs.

~~Other stock based awards:~~

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

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Restricted Stock Awards:

A summary of the activity of the ~~Company's~~Company’s unvested restricted stock awards for the period ended ~~March 31,~~September 30, 2020 is presented below:

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


		Weighted
		Average
		Grant-Date
	Number	Fair Value
Balance at December 31, 2019	65,400	$	21.04
Granted	41,613		16.04
Vested	(7,295)		18.32
Forfeited/expired	(1,500)		18.12
Balance at September 30, 2020	98,218	$	19.17

The Company measures the fair value of restricted ~~shares~~stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. ~~For the three months ended March 31, 2020 and 2019,~~The compensation expense ~~was $110 thousand and $112 thousand, respectively,~~ for restricted stock ~~awards.~~awards during the three and nine months ended September 30, 2020, was $142 thousand and $365 thousand, respectively, and was $95 thousand and $310 thousand, during the three and nine month periods ended September 30, 2019, respectively. As of ~~March 31,~~September 30, 2020, there was ~~$1.3~~$1.1 million, respectively, of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of ~~3.59~~3.10 years. The grant-date fair value of restricted stock ~~grants~~awards vested was ~~$82~~$134 thousand for the period ended ~~March 31,~~September 30, 2020. ~~NaN restricted stock vested during the period ended March 31, 2019.~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 9. Commitments and Contingent Liabilities

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized on the balance sheet. The majority of all commitments to extend credit are variable rate instruments while the standby letters of credit are primarily fixed rate instruments. The ~~Company's~~Company’s exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A summary of the Company’s total contractual amount for all off-balance sheet commitments are as follows (in thousands):

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


	September 30,		December 31,
	2020		2019
Commitments to extend credit	$	468,447	$	384,411
Standby letters of credit		5,530		11,727

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established

in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on ~~management's~~management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At ~~March 31,~~September 30, 2020, and December 31, 2019, the carrying amount of liabilities related to the ~~Company's~~Company’s obligation to perform under standby letters of credit was insignificant.

The Company is subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company will be material to the ~~Company's~~Company’s consolidated financial position. On an on-going basis, the Company assesses any potential liabilities or contingencies in connection with such legal proceedings. For those matters where it is deemed probable that the Company will incur losses and the amount of the losses can be reasonably estimated, the Company would record an expense and corresponding liability in its consolidated financial statements.

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 10. Fair Value Disclosures

Determination of Fair Value:

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

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

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

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

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

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

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	30,210	$	0	$	30,210	$	0
Municipal securities		90,809		0		90,809		0
Other debt securities		17,502		0		17,502		0
Mortgage-backed securities (GSEs)		76,113		—		76,113		0
Total securities available-for-sale	$	214,634	$	0	$	214,634	$	0

Liabilities:
Derivative financial instruments	$	6,791	$	0	$	6,791	$	0

December 31, 2019:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	19,000	$	0	$	19,000	$	0
Municipal securities		64,391		0		64,391		0
Other debt securities		3,470		0		3,470		0
Mortgage-backed securities (GSEs)		91,487		0		91,487		0
Total securities available-for-sale	$	178,348	$	0	$	178,348	$	0

Liabilities:
Derivative financial instruments	$	3,446		0	$	3,446		0

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 $ —

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 —

During the ~~periods presented,~~nine month period ending September 30, 2020, there were no 0 transfers between Level 1 and Level 2 in the fair value hierarchy.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 thousands):


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020:
Impaired loans	$	3,817	$	0	$	0	$	3,817
Other real estate owned		3,932		0		0		3,932

December 31, 2019:
Impaired loans	$	2,185	$	0	$	0	$	2,185
Other real estate owned		1,757		0		0		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)
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

~~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 (dollars in thousands):


					Weighted
			Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input
September 30, 2020:
Impaired loans	$	3,817	Appraisal	Appraisal discounts	11	%
Other real estate owned		3,932	Appraisal	Appraisal discounts	23	%

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

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 %

Impaired 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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 thousands):


	Fair Value Measurements Using
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
September 30, 2020:
Assets:
Cash and cash equivalents	$	541,815	$	541,815	$	0	$	0	$	541,815
Securities available-for-sale		214,634		0		214,634		0		214,634
Other investments		14,829		N/A		N/A		N/A		N/A
Loans and loans held for sale		2,415,349		0		0		2,406,262		2,406,262

Liabilities:
Noninterest-bearing demand deposits		669,733		0		669,733		0		669,733
Interest-bearing demand deposits		534,128		0		534,128		0		534,128
Money market and savings deposits		871,098		0		871,098		0		871,098
Time deposits		577,064		0		581,389		0		581,389
Borrowings		319,391		0		315,340		0		315,340
Subordinated debt		39,325		0		0		33,644		33,644
Derivative financial instruments		6,791		0		6,791		0		6,791

December 31, 2019:
Assets:
Cash and cash equivalents	$	183,971	$	183,971	$	0	$	0	$	183,971
Securities available-for-sale		178,348		0		178,348		0		178,348
Other investments		12,913		N/A		N/A		N/A		N/A
Loans, net and loans held for sale		1,893,005		0		0		1,879,825		1,879,825

Liabilities:
Noninterest-bearing demand deposits		364,155		0		364,155		0		364,155
Interest-bearing demand deposits		380,234		0		380,234		0		380,234
Money market and savings deposits		623,284		0		623,284		0		623,284
Time deposits		679,541		0		681,902		0		681,902
Borrowings		31,623		0		31,029		0		31,029
Subordinated debt		39,261		0		0		35,868		35,868
Derivative financial instruments		3,446		0		3,446		0		3,446

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

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

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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 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.

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

Weighted

Average

Balance

Remaining

Weighted

Sheet

Maturity

Average

Receive

Notional

Estimated

Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

September 30, 2020:

Interest rate swap agreements - securities

Other liabilities

7.38

3.08

3 month LIBOR

36,000

(6,791)

December 31, 2019:

Interest rate swap agreements - securities

Other liabilities

8.20

3.09

3 month LIBOR

36,000

(3,446)

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Interest income on tax-exempt securities	$	565	$	400	$	1,586	$	1,305
Effects of fair value hedge relationships		(201)		(62)		(522)		(132)
Reported interest income on tax-exempt securities	$	364	$	338	$	1,064	$	1,173


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Gain (loss) on fair value hedging relationship	2020		2019		2020		2019
Interest rate swap agreements - securities:
Hedged items	$	299	$	(1,045)	$	(3,345)	$	(3,282)
Derivative designated as hedging instruments	$	(299)	$	1,045	$	3,345	$	3,282

Three Months Ended
March 31,
2020 2019
Interest income on tax-exempt securities $ 440 $ 456
Effects of fair value hedge relationships (157) (32)
   Reported interest income on tax-exempt securities $ 283 $ 424
Three Months Ended
March 31,
Gain (loss) on fair value hedging relationship 2020 2019
Interest rate swap agreements - securities:
    Hedged items $ 6,885 2,063
    Derivative designated as hedging instruments (6,885) (2,063)

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


			Cumulative Amount of Fair
			Value Hedging Adjustment
	Carrying Amount		Included in Other Comprehensive
Line item on the balance sheet	of the Hedged Assets		Income
September 30, 2020:
Securities available-for-sale	$	43,643	$	(2,145)
December 31, 2019:
Securities available-for-sale	$	42,710	$	3,446

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

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 12. Leases

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

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

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


		September 30,		December 31,
	Classification	2020		2019
Assets:
Operating lease right-of-use assets	Other assets	$	5,286	$	5,470
Liabilities:
Operating lease liabilities	Other liabilities	$	5,315	$	5,479

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

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

As of ~~March 31,~~September 30, 2020, the weighted average remaining lease term was ~~11.17~~10.78 years and the weighted average discount rate was ~~2.78%~~2.72%.

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

lease component, the variable lease cost primarily represents variable payments such as common area maintenance (in thousands).


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Lease costs:
Operating lease costs	$	272	$	149	$	779	$	464
Short-term lease costs		0		2		0		13
Variable lease costs		29		23		84		69
Total	$	301	$	174	$	863	$	546
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	264	$	145	$	759	$	447

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)~~

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


	Amounts
September 30, 2021	$	1,006
September 30, 2022		760
September 30, 2023		571
September 30, 2024		385
September 30, 2025		348
Thereafter		3,119
Total future minimum lease payments		6,189
Amounts representing interest		(874)
Present value of net future minimum lease payments	$	5,315


	~~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~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 13. Regulatory Matters

Regulatory Capital Requirements:

The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, beginning January 1, 2016 and became fully effective on January 1, 2019. As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are ~~subject~~currently sufficient 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,satisfy the ~~Company must hold a capital~~fully phased-in conservation ~~buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is 2.50%.~~buffer. At ~~March 31,~~September 30, 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)~~(the “TDFI”), pay any dividends to the Company in a calendar year in excess of the total of the ~~Bank's~~Bank’s retained net income for that year plus the retained net income for the preceding two years. Because this test involves a measure of net income, any charge on the Bank’s income statement, such as an impairment of goodwill, could impair the Bank’s ability to pay dividends to the Company. Under Tennessee corporate law, the Company is not

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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~~Company’s board of directors must consider its and the ~~Bank's~~Bank’s current and prospective capital, liquidity, and other needs. In addition to state law limitations on the ~~Company's~~Company’s ability to pay dividends, the Federal Reserve imposes limitations on the ~~Company's~~Company’s ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the ~~Company's~~Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

During the three months ended ~~March 31,~~September 30, 2020, the Bank paid ~~$7.5~~$1.4 million in dividends to the Company. ~~As of March 31,~~During the nine months ended September 30, 2020, the Bank ~~could pay approximately $52.0~~paid $8.9 million ~~of additional~~in dividends to the ~~Company without prior approval of the Commissioner of the TDFI.~~Company. 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~~Company’s board of directors and will depend on the ~~Company's~~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,~~September 30, 2020, and December 31, 2019 are presented below (dollars in thousands):


									Minimum to be
									well
									capitalized under
					Minimum for				prompt
					capital				corrective action
		Actual			adequacy purposes				provisions¹
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2020
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	323,297	13.81	%	$	187,225	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		265,155	11.33	%		140,419	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		265,155	11.33	%		105,314	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)²		265,155	8.78	%		120,766	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	312,869	13.37	%	$	187,217	8.00	%	$	234,022	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		294,052	12.57	%		140,413	6.00	%		187,217	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		294,052	12.57	%		105,310	4.50	%		152,114	6.50	%
Tier 1 Capital (to Average Assets)²		294,052	9.74	%		120,762	4.00	%		150,953	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	%

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 %

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.~~

Income (Loss)

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


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

Other comprehensive income (loss)		(64)		492		428
Reclassification of amounts included in net income		(8)		0		(8)
Net other comprehensive income (loss) during period		(72)		492		420

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

	Three Months Ended September 30, 2019
					Accumulated
	Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)
Beginning balance, June 30, 2019	$	2,075	$	(2,646)	$	(571)

Other comprehensive income (loss)		(1,535)		1,808		273
Reclassification of amounts included in net income		1		0		1
Net other comprehensive income (loss) during period		(1,534)		1,808		274

Ending balance, September 30, 2019	$	541	$	(838)	$	(297)


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

Other comprehensive income (loss)		2,201		(1,361)		840
Reclassification of amounts included in net income		4		0		4
Net other comprehensive income (loss) during period		2,205		(1,361)		844

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

	Nine Months Ended September 30, 2019
					Accumulated
	Securities		Fair Value		Other
	Available-for-		Municipal		Comprehensive
	Sale		Security Hedges		Income (Loss)
Beginning balance, December 31, 2018	$	(1,979)	$	(786)	$	(2,765)

Other comprehensive income (loss)		2,495		(52)		2,443
Reclassification of amounts included in net income		25		0		25
Net other comprehensive income (loss) during period		2,520		(52)		2,468

Ending balance, September 30, 2019	$	541	$	(838)	$	(297)

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)

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 15. Subsequent Events

On October 8, 2020 the Company repaid $237.8 million to the Federal Reserve Bank (“FRB”) relating to the outstanding borrowings from the PPPLF. These borrowings were used to assist with the funding of PPP loans. The Company utilized its excess liquidity to fund the repayment.

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

SmartFinancial, Inc. (the ~~"Company"~~“Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the "Bank"). SmartBank provides a comprehensive suite of commercial and consumer banking services to clients through 3536 full-service bank branches and two loan production offices in select markets in East and Middle Tennessee, Alabama and the Florida Panhandle.

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

Forward-Looking ~~Statements~~

Statement

SmartFinancial, Inc. (“SmartFinancial”) may from time to time make written or oral statements, including statements contained in this report and information incorporated by reference herein (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2), that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements, including statements regarding the potential effects of the COVID-19 pandemic on the Company’s business and financial results and conditions, are based on assumptions and estimates and are not guarantees of future performance. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words (and their derivatives), such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, the negatives of such expressions, or the use of the future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of a current condition. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, financial condition, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to:

●

weakness or a decline in the U.S. economy, in particular in Tennessee, and other markets in which we operate;

●

the possibility that our asset quality would decline or that we experience greater loan losses than anticipated;

●

the impact of liquidity needs on our results of operations and financial condition;

●

competition from financial institutions and other financial service providers;

●

the impact of negative developments in the financial industry and U.S. and global capital and credit markets;

●

the impact of recently enacted and future legislation and regulation on our business, including changes to statutes, regulations or regulatory policies or practices as a result of, or in response to the COVID-19 pandemic;

●

negative changes in the real estate markets in which we operate and have our primary lending activities, which may result in an unanticipated decline in real estate values in our market area;

●

risks associated with our growth strategy, including a failure to implement our growth plans or an inability to manage our growth effectively;

●

claims and litigation arising from our business activities and from the companies we acquire, which may relate to contractual issues, environmental laws, fiduciary responsibility, and other matters;

●

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

●

disruption from the merger with customers, suppliers or employees or other business partners’ relationships;

●

the risk of successful integration of the PFG’s businesses with our business;

●

lower than expected revenue following these mergers;

•~~weakness or a decline in the U.S. economy, in particular in Tennessee, and other markets in which we operate;~~

•~~the possibility that our asset quality would decline or that we experience greater loan losses than anticipated;~~

•~~the impact of liquidity needs on our results of operations and financial condition;~~

•~~competition from financial institutions and other financial service providers;~~

•~~the impact of negative developments in the financial industry and U.S. and global capital and credit markets;~~

•the impact of recently enacted and future legislation and regulation on our business, including changes to statutes, regulations or regulatory policies or practices as a result of, or in response to COVID-19;

•~~negative changes in the real estate markets in which we operate and have our primary lending activities, which may result in an unanticipated decline in real estate values in our market area;~~

•~~risks associated with our growth strategy, including a failure to implement our growth plans or an inability to manage our growth effectively;~~

•~~claims and litigation arising from our business activities and from the companies we acquire, which may relate to contractual issues, environmental laws, fiduciary responsibility, and other matters;~~

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

•~~disruption from the merger with customers, suppliers or employees or other business partners’ relationships;~~

•~~the risk of successful integration of the PFG's businesses with our business;~~

•~~lower than expected revenue following these mergers;~~

•~~SmartFinancial’s ability to manage the combined company’s growth following the mergers;~~

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

•cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems we operate or rely upon for services to 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;

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•~~results of examinations by our primary regulators, the Tennessee Department of Financial Institutions (the “TDFI”),~~

●

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 TDFI, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, require us to reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

●

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

●

our inability to pay dividends at current levels, or at all, because of inadequate future earnings, impairments to goodwill, regulatory restrictions or limitations, and changes in the composition of qualifying regulatory capital and minimum capital requirements;

●

the relatively greater credit risk of commercial real estate loans and construction and land development loans in our loan portfolio;

●

unanticipated credit deterioration in our loan portfolio or higher than expected loan losses within one or more segments of our loan portfolio;

●

unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors;

●

unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;

●

changes in expected income tax expense or tax rates, including changes resulting from revisions in tax laws, regulations and case law;

●

our ability to retain the services of key personnel;

●

adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of the Company’s participation in and execution of government programs related to the COVID-19 pandemic;

●

the impact of the COVID-19 pandemic on the Company’s assets, business, cash flows, financial condition, liquidity, prospects and results of operations;

●

potential increases in the provision for loan losses resulting from the COVID-19 pandemic; and

●

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

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

•our inability to pay dividends at current levels, or at all, because of inadequate future earnings, regulatory restrictions or limitations, and changes in the composition of qualifying regulatory capital and minimum capital requirements;

•~~the relatively greater credit risk of commercial real estate loans and construction and land development loans in our loan portfolio;~~

•~~unanticipated credit deterioration in our loan portfolio or higher than expected loan losses within one or more segments of our loan portfolio;~~

•~~unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors;~~

•~~unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;~~

•~~changes in expected income tax expense or tax rates, including changes resulting from revisions in tax laws, regulations and case law;~~

•~~our ability to retain the services of key personnel;~~

•adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of the Company’s participation in and execution of government programs related to the COVID-19 pandemic;

•~~the impact of the COVID-19 pandemic on the Company’s assets, business, cash flows, financial condition, liquidity, prospects and results of operations;~~

•~~potential increases in the provision for loan losses resulting from the COVID-19 pandemic; and~~

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

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

~~Non-GAAP Financial Measures~~

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

Executive Summary

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

●

Completed the acquisition and integration of Progressive Financial Group, Inc. ("PFG").

●

Originated approximately 2,950 Paycheck Protection Program (“PPP”) loans totaling $300.8 million.

•~~Completed the acquisition~~Table of ~~Progressive Financial Group, Inc. ("PFG") on March 1, 2020.~~Contents

•~~Net income totaled $2.7 million, or $0.19~~

●

Net income totaled $6.4 million, or $0.42 per diluted common share, during the third quarter of 2020 compared to $6.0 million, or $0.42 per diluted common share, for the same period in 2019.

●

Net income totaled $15.3 million, or $1.02 per diluted common share, during the first nine months of 2020 compared to $19.8 million, or $1.41 per diluted common share, for the same period in 2019.

●

Annualized return on average assets was 0.76% at September 30, 2020 compared to 1.01% at September 30, 2019.

●

Allowance for loan losses increased to $18.8 million, an increase of 40.1% from the first quarter of 2020, in response to the current economic conditions related to COVID-19.

●

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. On March 27, 2020, the CARES Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the PPP, a nearly $350 billion program designed to aid small and medium-sized businesses through federally guaranteed loans distributed through banks. These loans were intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. The initial $350 billion program was supplemented in late April 2020 with $310 billion in additional funding. On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “new Act”) was signed into law and made significant changes to the PPP to provide additional relief for small businesses. The new Act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability or have been unable to operate as normal due to COVID-19 related restrictions. It extended the period that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules. The new Act also relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness. In addition, the new Act extended the payment deferral period for PPP loans until the date when the amount of loan forgiveness is determined and remitted to the lender. For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends. The PPP program expired August 8, 2020.

Analysis of Results of Operations

Third quarter of 2020 compared to ~~$4.7~~2019

Net income was $6.4 million, or ~~$0.34~~$0.42 per diluted common share, for the ~~same period in 2019.~~

•~~Return on average assets was 0.43% at March 31, 2020 compared to 0.84% at March 31, 2019.~~

•~~Allowance for loan losses increased to $13.4 million, an increase of 31.1%, in light of the current economic conditions.~~

•The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative relief package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations.

~~Analysis of Results of Operations~~

~~First~~third quarter of 2020, compared to ~~2019~~

~~Net income was $2.7~~$6.0 million, or ~~$0.19~~$0.42 per diluted common share, for the ~~first quarter of 2020, compared to $4.7 million, or $0.34 per diluted common share, for the first~~third quarter of 2019. The tax equivalent net interest margin was ~~3.90%~~3.39% for the ~~first~~third quarter of 2020 compared to ~~4.10%~~3.91% for the ~~first~~third quarter of 2019. Noninterest income to average assets was ~~0.44%~~0.49% for the ~~first~~third quarter of 2020, increasing from ~~0.30%~~0.37% for the ~~first~~third quarter of 2019. Noninterest expense to average assets ~~increased~~decreased to ~~2.96%~~2.28% in the ~~first~~third quarter of 2020, from ~~2.77%~~2.48% in the third quarter of 2019.

First nine months of 2020 compared to 2019

Net income was $15.3 million, or $1.02 per diluted common share, for the first nine months of 2020, compared to $19.8 million, or $1.41 per diluted common share, for the first nine months of 2019. The decrease in net income for this period was primarily from the $6.4 million termination fee recognized in the second quarter of 2019. The tax equivalent net interest margin was 3.62% for the first nine months of 2020 compared to 3.99% for the first nine months of 2019. Noninterest income to average assets was 0.46% for the first nine months of 2020, decreasing from 0.71% for the first nine months of 2019. Noninterest expense to average assets decreased to 2.52% in the first ~~quarter~~nine months of 2020, from 2.71% in the first nine months of 2019. The results above include ~~one month of~~ operating effects of the PFG acquisition, which was completed on March 1, 2020.

Net Interest Income and Yield Analysis

~~First~~Third quarter of 2020 compared to 2019

Net interest income, taxable equivalent, increased to ~~$22.7~~$26.2 million for the ~~first~~third quarter of 2020, up from ~~$21.1~~$21.3 million for the ~~first~~third quarter of 2019. Net interest income was positively impacted, compared to the prior year, primarily ~~due to increases~~by the full-quarters effects of the Company’s March 1, 2020 acquisition of PFG, the increase in loan balances and the reduction in interest expense on interest bearing liabilities. Average interest-earning assets increased from ~~$2.09~~$2.16 billion for the ~~first~~third quarter of 2019, to ~~$2.34~~$3.08 billion for the ~~first~~third quarter of 2020, primarily as a result of the acquisition of PFG being completed on March 1, 2020, and ~~continued organic growth.~~the Company’s participation in the PPP. Over this period, average loan balances

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increased by ~~$185.3~~$568.2 million, average interest-bearing deposits increased by ~~$126.4~~$336.9 million, ~~and~~ average noninterest-bearing deposits increased ~~$53.0~~$296.2 million and average borrowings increased $306.0 million. The tax equivalent net interest margin decreased to ~~3.90%~~3.39% for the ~~first~~third quarter of 2020, compared to ~~4.10%~~3.91% for the ~~first~~third quarter of 2019. The yield on earning assets decreased from ~~5.25%~~5.05% for the ~~first~~third quarter of 2019, to ~~4.83%~~3.88% for the ~~first~~third quarter of 2020, primarily due to rate cuts by the Federal Reserve over the past ~~nine months~~year and, to a lesser extent, loan yields ~~have declined~~declining from market competition. The cost of average interest-bearing deposits decreased from ~~1.32%~~1.37% for the ~~first~~third quarter of 2019, to ~~1.10%~~0.59% for the ~~first~~third quarter of 2020, primarily due to a lower interest rate environment during the period.

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


	Three Months Ended September 30,
	2020						2019
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Assets:
Loans, including fees¹	$	2,410,173		28,508	4.71	%	$	1,842,007		25,471	5.49	%
Loans held for sale		8,048		113	5.57	%		4,189		44	4.17	%
Taxable securities		132,642		546	1.64	%		118,955		748	2.49	%
Tax-exempt securities²		88,129		515	2.32	%		56,598		448	3.14	%
Federal funds sold and other earning assets		438,785		327	0.30	%		135,444		743	2.18	%
Total interest-earning assets		3,077,777		30,009	3.88	%		2,157,193		27,454	5.05	%
Noninterest-earning assets		262,764						191,940
Total assets	$	3,340,541					$	2,349,133

Liabilities and Stockholders’ Equity:
Interest-bearing demand deposits	$	509,999	$	199	0.16	%	$	343,827	$	511	0.59	%
Money market and savings deposits		833,022		704	0.34	%		637,290		1,829	1.14	%
Time deposits		615,714		1,994	1.29	%		640,679		3,265	2.02	%
Total interest-bearing deposits		1,958,735		2,897	0.59	%		1,621,796		5,605	1.37	%
Borrowings		319,265		334	0.42	%		13,310		15	0.45	%
Subordinated debt		39,311		584	5.91	%		39,226		584	5.91	%
Total interest-bearing liabilities		2,317,311		3,815	0.65	%		1,674,332		6,204	1.47	%
Noninterest-bearing deposits		649,489						353,315
Other liabilities		25,834						18,286
Total liabilities		2,992,634						2,045,933
Stockholders’ equity		347,907						303,200
Total liabilities and stockholders’ equity	$	3,340,541					$	2,349,133
Net interest income, taxable equivalent			$	26,194					$	21,250
Interest rate spread					3.22	%					3.58	%
Tax equivalent net interest margin					3.39	%					3.91	%

Percentage of average interest-earning assets to average interest-bearing liabilities					132.82	%					128.84	%
Percentage of average equity to average assets					10.41	%					12.91	%

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 %

~~(1)~~

¹Includes nonaccrual loans and accretion income on acquired loans of ~~$1.8 million~~$960 thousand and ~~$1.9~~$1.2 million for the quarters ended ~~March 31,~~September 30, 2020 and 2019, respectively.

~~(2)~~ Also includes accretion of loan fees on PPP loans of $1.8 million for the quarter ended September 30, 2020. No loan fees on PPP loans are included for the quarter ended September 30, 2019.

²Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of ~~21.0 percent.~~21.0%. The taxable-equivalent adjustment was ~~$117~~$151 thousand for the three month period ended ~~March 31,~~September 30, 2020 and ~~$115~~$110 thousand for the three month period ended September 30, 2019.

First nine months of 2020 compared to 2019

Net interest income, taxable equivalent, increased to $88.2 million for the first nine months of 2020, up from $81.9 million for the first nine months of 2019. Net interest income was positively impacted, compared to the prior year, primarily due to increases in loan balances and a reduction in interest expense on deposits. Average interest-earning assets increased from $2.12 billion for the first nine months of 2019, to $2.76 billion for the first nine months of 2020, primarily as a result of the acquisition of PFG completed March ~~31, 2019.~~1, 2020, organic loan growth and the Company’s participation in the PPP. Over this period, average loan balances increased by $428.6 million, average interest-bearing deposits increased by $200.9 million, average noninterest-bearing deposits increased $246.6 million and average borrowings increased $184.8 million.

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The tax equivalent net interest margin decreased to 3.62% for the first nine months of 2020, compared to 3.99% for the first nine months of 2019. The yield on earning assets decreased from 5.17% for the first nine months of 2019, to 4.27% for the first nine months of 2020, primarily due to rate cuts by the Federal Reserve over the past year and, to a lesser extent loan yields declining from market competition. The cost of average interest-bearing deposits decreased from 1.37% for the first nine months of 2019, to 0.79% for the first nine months of 2020, primarily due to a lower interest rate environment during the period.


	Nine Months Ended September 30,
	2020						2019

	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
Assets:
Loans, including fees¹	$	2,252,075	$	83,487	4.95	%	$	1,823,523	$	75,645	5.55	%
Loans held for sale		6,409		231	4.81	%		3,589		123	4.58	%
Taxable Securities		123,895		1,813	1.95	%		134,230		2,591	2.58	%
Tax-exempt securities²		81,604		1,486	2.43	%		55,585		1,512	3.64	%
Federal funds and other earning assets		296,449		1,206	0.54	%		102,528		2,056	2.68	%
Total interest-earning assets		2,760,432		88,223	4.27	%		2,119,455		81,927	5.17	%
Noninterest-earning assets		248,293						205,984
Total assets	$	3,008,725					$	2,325,439

Liabilities and Stockholders’ Equity:
Interest-bearing demand deposits	$	451,074		782	0.23	%	$	326,764		1,397	0.57	%
Money market and savings deposits		749,316		2,707	0.48	%		669,067		4,302	1.30	%
Time deposits		667,303		7,527	1.51	%		633,601		5,850	1.86	%
Total interest-bearing deposits		1,867,693		11,016	0.79	%		1,621,108		16,644	1.37	%
Borrowings		203,202		674	0.44	%		18,377		250	1.82	%
Subordinated debt		39,290		1,751	5.95	%		39,205		1,757	5.99	%
Total interest-bearing liabilities		2,110,185		13,441	0.85	%		1,678,690		18,651	1.49	%
Noninterest-bearing deposits		537,860						336,895
Other liabilities		23,826						14,509
Total liabilities		2,671,871						2,030,094
Stockholders’ equity		336,854						295,345
Total liabilities and stockholders’ equity	$	3,008,725					$	2,325,439
Net interest income, taxable equivalent			$	74,782					$	63,276
Interest rate spread					3.42	%					3.68	%
Tax equivalent net interest margin					3.62	%					3.99	%

Percentage of average interest-earning assets to average interest-bearing liabilities					130.81	%					126.26	%
Percentage of average equity to average assets					11.20	%					12.70	%

¹Includes nonaccrual loans and accretion income on acquired loans of $3.7 million and $4.3 million for the nine months ended September 30, 2020 and 2019, respectively. Also includes accretion of loan fees on PPP loans of $3.7 million for the nine months ended September 30, 2020. No loan fees on PPP loans are included for the nine months ended September 30, 2019.

²Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0%. The taxable-equivalent adjustment was $422 thousand for the nine month period ended September 30, 2020 and $336 thousand for the nine month period ended September 30, 2019.

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Noninterest Income

~~First~~

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Service charges on deposit accounts	$	892	$	767	$	2,370	$	2,129
Gain on sale of securities, net		(9)		1		6		34
Mortgage banking		1,029		518		2,544		1,192
Investment services		359		260		1,159		684
Insurance commissions		560		—		1,302		—
Interchange and debit card transaction fees		868		148		1,652		467
Merger termination fee		—		—		—		6,400
Other		422		502		1,417		1,405
Total noninterest income	$	4,121	$	2,196	$	10,450	$	12,311

Third quarter of 2020 compared to 2019

Noninterest income increased by ~~$1.1~~$1.9 million, or ~~66.0%~~87.7%, during the ~~first~~third quarter of 2020 compared to the same period in 2019. This quarterly change in total noninterest income primarily resulted from the following:

•~~Increase in mortgage banking, from increased activity;~~

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

•

●

Increase in service charges on deposit accounts, related to the PFG acquisition and deposit growth;

●

Increase in mortgage banking, from increased volume due to low rate environment;

●

Increase in investment services, stemming from increased production from personnel hires in 2019;

●

Addition of insurance commissions from the PFG acquisition; and

●

Increase in interchange and debit card transaction fees, related to the PFG acquisition and deposit growth.

First nine months of 2020 compared to 2019

Noninterest income decreased by $1.9 million, or 15.1%, during the first nine months of 2020 compared to the same period in 2019. This change in total noninterest income primarily resulted from the ~~PFG acquisition.~~following:

●

Decrease in merger termination fee recognized in the second quarter of 2019;

●

Increase in service charges on deposit accounts, related to the PFG acquisition and deposit growth;

●

Increase in mortgage banking, from increased volume due to low rate environment;

●

Increase in investment services, stemming from increased production from personnel hires in 2019;

●

Addition of insurance commissions from the PFG acquisition; and

●

Increase in interchange and debit card transaction fees, related to the PFG acquisition and deposit growth.

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Noninterest Expense

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Salaries and employee benefits	$	11,032	$	9,072	$	31,395	$	26,357
Occupancy and equipment		2,186		1,635		6,093		4,967
FDIC insurance		534		(219)		894		140
Other real estate and loan related expense		643		335		1,535		1,067
Advertising and marketing		253		263		653		817
Data processing		558		273		1,689		1,465
Professional services		594		573		2,172		1,724
Amortization of intangibles		402		341		1,169		1,027
Software as service contracts		573		560		1,604		1,696
Merger related and restructuring expenses		290		73		3,863		2,792
Other		2,102		1,802		5,699		5,045
Total noninterest expense	$	19,167	$	14,708	$	56,766	$	47,097

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

~~Noninterest Expense~~

~~First~~Third quarter of 2020 compared to 2019

Noninterest expense increased by ~~$3.2~~$4.5 million, or ~~20.6%~~30.3%, in the ~~first~~third quarter of 2020 as compared to the same period in 2019. The quarterly increase in total noninterest expense primarily resulted from the following:

•~~Increase is~~

●

Increase in salary and employee benefits due to the overall franchise growth, including the acquisition of PFG;

●

Increase in occupancy and equipment associated with ongoing infrastructure and facilities added to accommodate our growth in operations and the additional branches of the PFG acquisition;

●

Increase in FDIC insurance is related to increase in assets due to overall assets growth stemming from our acquisition of PFG, deposit growth and production of PPP loans. The Company recognized a credit in the third quarter of 2019 from the FDIC, as result of the FDIC Insurance exceeding 1.38% of insured deposits as of June 30, 2019;

●

Increase in other real estate and loan related expenses, primarily attributable to increased activity in loan related production and an evaluation adjustment on other real estate owned;

●

Increase in data processing is attributable to credit recognized from core processor in third quarter of 2019;

●

Increase in merger related and restructure expenses from the acquisition of PFG; and

●

Increase in other noninterest expenses due to overall franchise growth.

First nine months of 2020 compared to 2019

Noninterest expense increased by $9.7 million, or 20.5%, in the first nine months of 2020 as compared to the same period in 2019. The quarterly increase in total noninterest expense primarily resulted from the ~~addition~~following:

●

Increase in salary and employee benefits due to the overall franchise growth, including the acquisition of PFG;

●

Increase in occupancy and equipment associated with ongoing infrastructure and facilities added to accommodate our growth in operations and the additional branches of the PFG acquisition;

●

Increase in FDIC insurance related to increase in assets due to overall assets growth stemming from our acquisition of PFG, deposit growth and production of PPP loans. The Company recognized a credit in the third quarter of 2019 from the FDIC, as result of the FDIC Insurance exceeding 1.38% of insured deposits as of June 30, 2019;

●

Increase in other real estate and loan related expenses, primarily attributable to increased activity in loan related production;

●

Increase in data processing is attributable to credit recognized from core processor in third quarter of 2019;

Table of ~~talented staff throughout 2019 and one month of salary and benefits related to the PFG acquisition;~~Contents

●

Increase in professional services from increases in legal and auditing services;

●

Increase in merger related and restructure expenses from the acquisition of PFG; and

●

Increase in other noninterest expenses due to overall franchise growth.

Taxes

•Increase in occupancy and equipment associated with ongoing infrastructure and facilities added to accommodate our growth in operations and to lesser extent the additional branches of the PFG acquisition; and

•~~Increase in merger related and restructuring expenses from the PFG acquisition.~~

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

Three Months Ended
March 31,
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

~~Taxes~~

~~First~~Third quarter of 2020 compared to 2019

In the ~~first~~third quarter of 2020 income tax expense totaled ~~$664 thousand~~$2.0 million compared to ~~$1.6~~$1.9 million a year ago. The effective tax rate was approximately ~~19.6%~~23.5% in the ~~first~~third quarter of 2020 compared to ~~25.1%~~24.6% a year ago. The ~~decrease is primarily~~lower effective tax rate for the third quarter of 2020 compared to same quarter in 2019 was due to having a proportionately higher amount of non-taxable income in relation to income before taxes, as well as tax benefit derived from the ~~utilization~~reconciliation of ~~an NOL carryforward in March~~our tax rates from operations.

First nine months of 2020 ~~that~~compared to 2019

In the first nine months of 2020 income tax expense totaled $4.6 million compared to $6.4 million a year ago. The effective tax rate was ~~available as part~~approximately 21.0% for first nine months of 2020 compared to 24.5% a year ago. The lower effective tax rate for the first nine months of 2020 compared to same period in 2019 was primarily from the CARES Act.

legislation and having a proportionately higher amount of non-taxable income in relation to income before taxes and a tax benefit realized from the recognition of net operating loss carryforwards from past acquisitions.

Loan Portfolio

The Company had total net loans outstanding, including organic and purchased loans, of approximately ~~$2.13~~$2.39 billion at ~~March 31,~~September 30, 2020 compared to $1.89 billion at December 31, 2019. Loans secured by real estate, consisting of commercial or residential property, are the principal component of our loan portfolio.

Organic Loans

Our organic net ~~loans.~~loans, which excludes loans purchased through ~~the PFG and other~~ acquisitions, increased by ~~$97.0~~$440.9 million, or ~~6.4%~~29.1%, from December 31, 2019, to ~~$1.61~~$1.96 billion at ~~March 31,~~September 30, 2020. ~~Our goal~~Included in the growth was $300.8 million of ~~streamlining~~PPP loans that were originated and funded during the ~~credit process has improved our efficiency~~second and ~~is a competitive advantage in many~~third quarters of ~~our markets,~~2020. Total net deferred fees associated with the PPP loans was approximately $11.0 million and ~~contributed to our organic loan growth.~~

$3.7 million was accreted into income during the second and third quarters of 2020.

Purchased Loans

Purchased non-credit impaired loans of ~~$482.2~~$393.1 million at ~~March 31,~~September 30, 2020 increased by ~~$133.2~~$44.0 million from December 31, 2019. Since December 31, 2019, our net purchased credit impaired (“PCI”) loans increased by ~~$8.7~~$7.3 million to ~~$35.5~~$34.1 million at ~~March 31,~~September 30, 2020. The increase in purchased non-credit impaired loans and PCI loans ~~are~~is related to the acquisition of PFG and offset by maturities, paydowns and payoffs.

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


	September 30, 2020
			Purchased		Purchased
			Non-Credit		Credit				% of
	Organic		Impaired		Impaired		Total		Gross
	Loans		Loans		Loans		Amount		Total
Commercial real estate-mortgage	$	812,191	$	201,993	$	16,469	$	1,030,653	42.9	%
Consumer real estate-mortgage		295,912		133,596		10,801		440,309	18.3	%
Construction and land development		246,112		22,650		6,409		275,171	11.4	%
Commercial and industrial		611,439		32,742		317		644,498	26.8	%
Consumer and other		9,119		4,220		87		13,426	0.6	%
Total gross loans receivable, net of deferred fees		1,974,773		395,201		34,083		2,404,057	100.0	%
Allowance for loan losses		(16,704)	$	(2,113)		—		(18,817)
Total loans, net	$	1,958,069	$	393,088	$	34,083	$	2,385,240

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
			Purchased		Purchased
			Non-Credit		Credit				% of
	Organic		Impaired		Impaired		Total		Gross
	Loans		Loans		Loans		Amount		Total
Commercial real estate-mortgage	$	705,691	$	184,360	$	15,255	$	905,306	47.7	%
Consumer real estate-mortgage		295,915		115,026		6,541		417,482	22.0	%
Construction and land development		210,421		12,747		4,458		227,626	12.0	%
Commercial and industrial		306,521		30,147		407		337,075	17.8	%
Consumer and other		2,817		6,760		326		9,903	0.5	%
Total gross loans receivable, net of deferred fees		1,521,365		349,040		26,987		1,897,392	100.0	%
Allowance for loan losses		(10,087)		—		(156)		(10,243)
Total loans, net	$	1,511,278	$	349,040	$	26,831	$	1,887,149

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

Loan Portfolio Maturities

The following table sets forth the maturity distribution of our loans at September 30, 2020, including the interest rate sensitivity for loans maturing after one year (in thousands):


									Rate Structure for Loans
									Maturing Over One Year
	One Year		One through		Over Five				Fixed		Floating
	or Less		Five Years		Years		Total		Rate		Rate
Commercial real estate-mortgage	$	114,310	$	422,885	$	494,121	$	1,031,316	$	668,389	$	248,617
Consumer real estate-mortgage		27,080		169,931		243,299		440,310		209,880		203,350
Construction and land development		83,912		96,043		95,216		275,171		91,711		99,548
Commercial and industrial		86,276		476,926		82,421		645,623		520,240		39,107
Consumer and other		4,591		6,658		388		11,637		6,738		308
Total Loans	$	316,169	$	1,172,443	$	915,445	$	2,404,057	$	1,496,958	$	590,930

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

Nonaccrual, Past Due, and Restructured Loans

Nonperforming loans as a percentage of total gross loans, net of deferred fees, was ~~0.14%~~0.09% as of ~~March 31,~~September 30, 2020, which decreased from 0.18% as of December 31, 2019. Total nonperforming assets as a percentage of total assets as of ~~March 31,~~September 30, 2020 totaled ~~0.31%~~0.18% compared to 0.21% as of December 31, 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.

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


	September 30,		December 31,
	2020		2019
Nonaccrual loans	$	2,248	$	2,743
Accruing loans past due 90 days or more		—		607
Total nonperforming loans		2,248		3,350
Other real estate owned		3,932		1,757
Total nonperforming assets	$	6,180	$	5,107
Restructured loans not included above	$	8	$	61

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

Potential Problem Loans

At ~~March 31,~~September 30, 2020 potential problem loans amounted to approximately ~~$695 thousand~~$1.1 million or ~~0.03%~~0.04% 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~~borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Bank’s primary regulators for loans classified as substandard or worse, but not considered nonperforming loans.

COVID-19 Loan Modifications

As a result of the CARES Act, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. At September 30, 2020, COVID-19 modified loans amounted to $232.5 million, or 9.7% of the total loans outstanding.

The Company offered deferral options of: 1) three months deferral of payment and then three months of interest only, 2) three months of interest only, 3) three months deferral of payment, 4) six months of interest only, and approximately all of the $232.5 million remaining COVID-19 modified loans will mature during the fourth quarter of 2020.

Included in the COVID-19 modified loans were $56.2 million and $30.4 million of hospitality and restaurant loans, respectively. These sectors had increased vulnerability from COVID-19. At September 30, 2020, the short-term loan modifications were still expected to mature on the original maturity schedule. All of the COVID-19 modified loans were transitioned into watchlist categories internally.

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. Our provision for loan losses for the nine months ended September 30, 2020, is $8.7 million compared to $1.9 million in the same period of 2019, an increase of $6.8 million. As of ~~March 31,~~September 30, 2020, and December 31, 2019, our allowance for loan losses was ~~$13.4~~$18.8 million and $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 ~~March 31,~~September 30, 2020, as compared to December 31, 2019, is primarily ~~due~~attributable to the ~~deterioration in the qualitative factors, such as unemployment and GDP, in our loan loss allowance methodology which was caused by the unstable~~ongoing economic ~~conditions facing the U.S. economy~~uncertainties related to the ~~challenges being faced with~~COVID-19 pandemic. Also, during 2020, the ~~world wide COVID-19 pandemic.~~Company updated the Allowance for Loan Loss policy to increase the additional basis points allowed for the unallocated risk portion from 100 basis points to 125 basis points. In addition, the Company added a new qualitative factor based on the percentage of COVID modified loans / total loans. The qualitative factors were also expanded to provide additional granularity related to the hospitality and restaurant industries which are most impacted by the pandemic within our footprint. The changes in our economic factors and the addition of the COVID modified factors equated to an additional $8.3 million in reserve. Our allowance for loan loss as a percentage of total loans was ~~0.63%~~0.78% at ~~March 31,~~September 30, 2020 and 0.54% at December 31, 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. As of ~~March 31,~~September 30, 2020, the notional balances on PCI loans was ~~$49.9~~ $47.2

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million while the carrying value was ~~$35.5~~$34.1 million. At ~~March 31,~~September 30, 2020, there ~~was~~were 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 in thousands):


	September 30, 2020				December 31, 2019
	Amount		Percent		Amount		Percent
Commercial real estate-mortgage	$	7,729	42.9	%	$	4,508	47.7	%
Consumer real estate-mortgage		3,444	18.3	%		2,576	22.0	%
Construction and land development		2,060	11.4	%		1,127	12.0	%
Commercial and industrial		5,463	26.8	%		1,957	17.8	%
Consumer and other		121	0.6	%		75	0.5	%
Total allowance for loan losses	$	18,817	100.0	%	$	10,243	100.0	%

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 %

The allocation by category is determined based on the loans individually 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 ~~$156~~$475 thousand at December 31, 2019 compared to $0$486 thousand at ~~March 31,~~September 30, 2020.

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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 (dollars in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Balance at beginning of period	$	16,254		$	9,097		$	10,243		$	8,275
Provision for loan losses		2,634			724			8,683			1,914
Charged-off loans:
Commercial real estate-mortgage		—			(36)			—			(36)
Consumer real estate-mortgage		(21)			(1)			(23)			(3)
Construction and land development		—			—			—			—
Commercial and industrial		(60)			(20)			(77)			(353)
Consumer and other		(89)			(50)			(231)			(260)
Total charged-off loans		(170)			(107)			(331)			(652)
Recoveries of previously charged-off loans:
Commercial real estate-mortgage		11			39			16			63
Consumer real estate-mortgage		17			17			34			37
Construction and land development		—			3			2			7
Commercial and industrial		55			12			103			66
Consumer and other		16			7			67			82
Total recoveries of previously charged-off loans		99			78			222			255
Net loan charge-offs		(71)			(29)			(109)			(397)
Balance at end of period	$	18,817		$	9,792		$	18,817		$	9,792
Ratio of allowance for loan losses to total loans outstanding at end of period		0.78	%		0.53	%		0.78	%		0.53	%
Ratio of net loan charge-offs to average loans outstanding for the period (annualized)		—	%		0.01	%		—	%		0.03	%

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 %

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'~~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 ~~$201.0~~$214.6 million and $178.3 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. Our investments to assets ratio decreased from ~~7.3 percent~~7.3% at December 31, 2019 to ~~7.0 percent~~6.3% at ~~March 31,~~September 30, 2020. Our securities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income. All of the ~~Company's~~Company’s securities are designated as available-for-sale.

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The following table shows the amortized cost of the Company’s securities by investment categories (in thousands):


	September 30,		December 31,
	2020		2019
U.S. Government-sponsored enterprises (GSEs)	$	30,311	$	19,015
Municipal securities		88,864		63,792
Other debt securities		17,519		3,481
Mortgage-backed securities		74,424		91,531
Total securities	$	211,118	$	177,819

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

The following table presents the contractual maturity of the ~~Company's~~Company’s securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at ~~March 31,~~September 30, 2020. The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs (dollars in thousands):


	Maturity By Years
	1 or Less			1 to 5			5 to 10			Over 10			Total
U.S. Government agencies	$	—		$	641		$	7,402		$	22,268		$	30,311
State and political subdivisions		4,624			3,385			4,757			76,098			88,864
Other debt securities		—			983			14,036			2,500			17,519
Mortgage-backed securities		—			3,569			13,524			57,331			74,424
Total securities	$	4,624		$	8,578		$	39,719		$	158,197		$	211,118
Weighted average yield⁽¹⁾		1.92	%		1.22	%		3.24	%		2.56	%		2.62	%

(1)	Based on amortized cost, taxable equivalent basis

Maturity By Years
1 or Less 1 to 5 5 to 10 Over 10 Total
U.S. Government agencies $ 8,000 $ 3,007 $ 6,005 $ — $ 17,012
State and political subdivisions 490 2,170 7,679 72,260 82,599
Other debt securities — — 5,461 — 5,461
Mortgage-backed securities — 4,738 14,275 75,293 94,306
Total securities $ 8,490 $ 9,915 $ 33,420 $ 147,553 $ 199,378
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~~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~~Company’s primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of ~~March 31,~~September 30, 2020, brokered deposits represented approximately ~~11.2%~~3.0% of total deposits.

The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three months ended ~~March 31,~~September 30, 2020 was ~~1.10%~~0.59% compared to ~~1.32%~~1.37% for the same period in 2019 and 0.79% and 1.37% for the nine months ended September 30, 2020 and September 30, 2019, respectively. The decreased cost onof interest-bearing deposits was due to changes in rates caused by federal rate-changes during the periods.

Total deposits as of ~~March 31,~~September 30, 2020 were ~~$2.3~~$2.65 billion, which was an increase of ~~$294.7~~$604.8 million from December 31, 2019. This increase was primarily from the completed acquisition of ~~PFG.~~PFG and deposits related to the PPP loans. As of ~~March 31,~~September 30, 2020, the Company had outstanding time deposits under $250,000 with balances of ~~$584.6~~$437.1 million and time deposits over $250,000 with balances of ~~$151.0~~$140.0 million.

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


	September 30,
	2020
Three months or less	$	31,107
Three to six months		31,974
Six to twelve months		44,221
More than twelve months		32,681
Total	$	139,983


	~~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~~$319.4 million at ~~March 31,~~September 30, 2020, and primarily consisted of $75.0 million in ~~Federal Home Loan Bank~~FHLB borrowings, ~~and $50.0~~$237.8 million from the ~~Federal Reserve Discount Window. Short-term~~PPPLF and short-term borrowings totaled $6.2 million ~~at March 31, 2020 and December 31, 2019, respectively~~ and consisted entirely of securities sold under repurchase agreements. Long-term debt totaled $39.3 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively and consisted entirely of subordinated debt. For more information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 ~~- Borrowings.~~– Borrowings and Line of Credit."

Capital Resources

The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Bank’s Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. At ~~March 31,~~September 30, 2020 and December 31, 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~~“Part I - Item 1. Consolidated Financial Statements - Note 13 - Regulatory Matters."

”

Liquidity and Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. At ~~March 31,~~September 30, 2020, we had ~~$419.3~~$468.4 million of pre-approved but unused lines of credit and ~~$23.0~~$5.5 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions.

For more information regarding our off-balanc8e sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements - Note 9 – Commitments and Contingent Liabilities.”

Market Risk and Liquidity Risk Management

The Bank’s Asset Liability Management Committee (“ALCO”) is responsible 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

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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. These measurements are used in conjunction with competitive pricing analysis and are further described below.

Earnings Simulation Model We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of

interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also 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%


			Maximum Percentage Decline
			in Net Interest
			Income from the Budgeted
	Estimated % Change in Net		or Base Case
	Interest Income Over 12		Projection of Net Interest
	Months		Income
September 30, 2020:	Increase +	Decrease -	Next 12 Months
An instantaneous, parallel rate increase or decrease of the following at the beginning of the third quarter:
± 100 basis points	4.15%	0.68%	8%
± 200 basis points	6.36%	1.01%	14%

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

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

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%


			Maximum
			Percentage
			Decline in
			Economic Value
			of Equity from
			the Economic
			Value of Equity
	Current Estimated Instantaneous		at Currently
	Rate Change		Prevailing
September 30, 2020:	Increase +	Decrease -	Interest Rates

Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
±100 basis points	7.07%	(3.35)%	10%
±200 basis points	8.86%	14.17%	15%

At ~~March 31,~~September 30, 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.

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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 ~~$8.5~~$4.6 million in investments that mature throughout the next 12 months. The Company also anticipates ~~$14.4~~$17.8 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~~$304.2 million available with the Federal Reserve, FHLB, several correspondent banks and a line of credit. With these sources of funds, the Company currently anticipates adequate liquidity to meet the expected obligations of its customers.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

This item is not required for a Smaller Reporting Company.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of ~~March 31,~~September 30, 2020 (the “Evaluation Date”). Based on such evaluation, ~~SmartFinancial's~~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~~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~~SEC’s rules and forms.

There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended ~~March 31,~~September 30, 2020 that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

The Company disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 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 adversely affect our business, financial condition, 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 financial condition, and 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 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.

•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 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.

Table of Contents

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 adverse impacts to our 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 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, 2019.

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

(a)

Not applicable

(b)

Not applicable

(c)

Issuer Purchases of Registered Equity Securities

~~(a) Not applicable~~

~~(b) Not applicable~~

~~(c) Issuer Purchases of Registered Equity Securities~~

On November 20, 2018, the Company announced that its board of directors has authorized a stock repurchase plan pursuant to which the Company may purchase up to $10.0 million in shares of the Company’s outstanding common stock. Stock repurchases under the plan will be made from time to time in the open market, at the discretion of the management of the Company, and in accordance with applicable legal requirements. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, amended, suspended, or discontinued at any time. As of ~~March 31,~~September 30, 2020, we have purchased ~~$2.0~~$2.1 million of the authorized $10.0 million and may purchase up to an additional ~~$8.0~~$7.9 million in the ~~Company's~~Company’s outstanding common stock.

The following table summarizes the ~~Company's~~Company’s repurchase activity during the three months ended ~~March 31,~~September 30, 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


					Maximum
					Number (or
					Approximate
					Dollar Value) of
					Shares That May
				Total Number of Shares	Yet Be Purchased
	Total Number of			Purchased as Part of	Under the Plans
	Shares	Average Price Paid		Publicly Announced	or Programs (in
Period	Repurchased	Per Share		Plans or Programs	thousands)
July 1, 2020 to July 31, 2020	—	$	—	—	$	7,925
August 1, 2020 to August 31, 2020	—		—	—		7,925
September 1, 2020 to September 31, 2020	—		—	—		7,925
Total	—	$	—	—	$	7,925

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.

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Item 6. Exhibits


Exhibit No.	~~Description~~	Description		Location
~~2.1~~ 3.1	~~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~~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~~Inc.		Incorporated by reference to Exhibit 3.1 to Form 8-K filed October 26, 2015
~~4.1~~ 31.1	~~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 Change in Control Agreement with W. Miller Welborn, dated as of 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 as of March 9, 2020~~		~~Incorporated by reference to Exhibit 10.2 to Form 8-K filed 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 (formatted as Inline XBRL)		Filed herewith.
104		Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101		Filed herewith

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

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SIGNATURES

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


		SmartFinancial, Inc.

Date:	~~May 11,~~ November 6, 2020		/s/ William Y. Carroll, Jr.
			William Y. Carroll, Jr.
			President and Chief Executive Officer
			(principal executive officer)

Date:	~~May 11,~~ November 6, 2020		/s/ Ronald J. Gorczynski
			Ronald J. Gorczynski
			Executive Vice President and Chief Financial Officer
			(principal financial officer and accounting officer)


PART I –FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at ~~March 31, 20~~20 September 30, 2020 and December 31, ~~201~~2019 9	3

	Consolidated Statements of Income for the Three and Nine Months Ended ~~March 31, 20~~20 September 30, 2020 and ~~201~~2019 9	4

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended ~~March 31, 20~~20 September 30, 2020 and ~~201~~2019 9	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended ~~March 31, 20~~20 September 30, 2020 and ~~201~~2019 9	6

	Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31, 20~~20 September 30, 2020 and ~~201~~2019 9	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52 54

Item 4.	Controls and Procedures	53 54

PART II – OTHER INFORMATION			55

Item 1.	Legal Proceedings	54 55

Item 1A.	Risk Factors	54 55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55 56

Item 3.	Defaults Upon Senior Securities	55 56

Item 4.	Mine Safety Disclosures	55 56

Item 5.	Other Information	55 56

Item 6.	Exhibits	57


	(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


	Three Months Ended March 31,
	2020		2019
Interest income:
Loans, including fees	$	26,434	$	24,975
Securities available-for-sale:
Taxable	679		971
Tax-exempt	283		424
Federal funds sold and other earning assets	602		573
Total interest income	27,998		26,943

Interest expense:
Deposits	4,754		5,251
Securities sold under agreements to repurchase	5		8
Federal Home Loan Bank advances and other borrowings	84		103
Subordinated debt	584		584
Total interest expense	5,427		5,946
Net interest income	22,571		20,997
Provision for loan losses	3,200		797
Net interest income after provision for loan losses	19,371		20,200

Noninterest income:
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

Noninterest expense:
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
Income before income tax expense	3,396		6,319
Income tax expense	664		1,588


Net income	$	2,732	$	4,731

Earnings per common share:
Basic	$	0.19	$	0.34
Diluted	$	0.19	$	0.34
Weighted average common shares outstanding:
Basic	14,395,103		13,942,016
Diluted	14,479,671		14,018,163


	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


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


Common stock issued pursuant to:

Exercise of stock options	14,858	15		158		—		—		173
Restricted stock, net of forfeitures	31,900	32		(32)		—		—		—
Shareholders of Progressive Financial Group, Inc.	1,292,578	1,293		23,254		—		—		24,547
Stock compensation expense	—	—		110		—		—		110
Common stock dividend ($0.05 per share)	—	—		—		(702)		—		(702)
Purchase of common stock	(125,579)	(126)		(1,866)		—		—		(1,992)
Balance, March 31, 2020	15,221,990	$	15,222	$	254,356	$	67,869	$	(1,247)	$	336,200


	Three Months Ended March 31,
	2020		2019
Cash flows from operating activities:
Net income	$	2,732	$	4,731
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,634		1,156
Accretion of fair value purchase accounting adjustments, net	(1,841)		(1,717)
Provision for loan losses	3,200		797
Stock compensation expense	110		143

Deferred income tax expense	90		1,039
Increase in cash surrender value of bank owned life insurance	(162)		(158)
Loss on disposal of fixed assets	—		7
Net losses from sale of other real estate owned	14		26
Net gains from sale of loans	(576)		(282)
Origination of loans held for sale	(15,195)		(16,805)
Proceeds from sales of loans held for sale	15,582		16,061
Net change in:
Accrued interest receivable	35		(1,093)
Accrued interest payable	784		748
Other assets	685		(1,660)
Other liabilities	2,010		4,702
Net cash provided by operating activities	9,102		7,695
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale	2,115		—
Proceeds from maturities and calls of securities available-for-sale	3,250		5,000
Proceeds from paydowns of securities available-for-sale	3,816		3,173
Purchases of securities available-for-sale	(3,377)		(1,054)
Purchases of other investments	(507)		(899)

Net increase in loans	(52,721)		(61,011)
Purchases of premises and equipment	(2,429)		(1,296)
Proceeds from sale of other real estate owned	120		458
Net cash and cash equivalents received from business combination	46,132		—
Net cash used in investing activities	(3,601)		(55,629)
Cash flows from financing activities:
Net increase in deposits	22,158		72,166
Net decrease in securities sold under agreements to repurchase	(20)		(4,686)

Proceeds from Federal Home Loan Bank advances and other borrowings	100,000		50,094
Repayment of Federal Home Loan Bank advances and other borrowings	—		(52,732)
Cash dividends paid	(702)		—
Issuance of common stock	173		264
Purchase of common stock	(1,992)		—
Net cash provided by financing activities	119,617		65,106
Net change in cash and cash equivalents	125,118		17,172
Cash and cash equivalents, beginning of period	183,971		115,822
Cash and cash equivalents, end of period	$	309,089	$	132,994
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	4,643	$	5,198
Cash paid during the period for income taxes	—		—
Noncash investing and financing activities:
Acquisition of real estate through foreclosure	676		55


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


	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.


	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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2020:
U.S. Government-sponsored enterprises (GSEs)	$	17,012	$	96	$	(63)	$	17,045
Municipal securities	82,599		970		(252)		83,317
Other debt securities	5,461		129		(128)		5,462
Mortgage-backed securities (GSEs)	94,306		1,482		(610)		95,178
	$	199,378	$	2,677	$	(1,053)	$	201,002


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


	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)


	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


	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


	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


	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


	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


	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


	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


	March 31, 2020										December 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans without a valuation allowance:
Commercial real estate	$	136	$	136	$	—	$	256	$	261	$	—
Consumer real estate	546		546		—		553		553		—
Construction and land development	607		607		—		547		547		—
Commercial and industrial	—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—
	1,289		1,289		—		1,356		1,361		—

Impaired loans with a valuation allowance:
Commercial real estate	396		402		46		—		—		—
Consumer real estate	974		974		379		994		994		343
Construction and land development	—		—		—		—		—		—
Commercial and industrial	158		158		130		160		160		132
Consumer and other	—		—		—		—		—		—
	1,528		1,534		555		1,154		1,154		475

PCI loans:
Commercial real estate	1,010		1,019		—		17		99		17
Consumer real estate	486		491		—		1,205		1,371		74
Construction and land development	253		254		—		—		—		—
Commercial and industrial	376		378		—		396		534		59
Consumer and other	14		14		—		45		51		6
	2,139		2,156		—		1,663		2,055		156

Total impaired loans	$	4,956	$	4,979	$	555	$	4,173	$	4,570	$	631


	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


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


	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.


Remainder of 2020	$	50,043
2021	45
2022	47
2023	50
2024	52
Thereafter	75,202
Total	$	125,439


	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


		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


		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


	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


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	$	—