United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021



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

For the transition period from __________ to __________

Commission File Number: 001-37661

(Exact name of registrant as specified in its charter)



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

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

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

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



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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

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

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

Yes ☐ No ☒

As of ~~November 06, 2020,~~May 05, 2021, there were ~~15,235,227~~15,104,661 shares of common stock, $1.00 par value per share, issued and outstanding.

Table of Contents

TABLE OF CONTENTS


PART I –FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	3

	Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	4

	Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	6

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3836

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5449

Item 4.	Controls and Procedures	5449

PART II – OTHER INFORMATION		5550

Item 1.	Legal Proceedings	5550

Item 1A.	Risk Factors	5550

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5650

Item 3.	Defaults Upon Senior Securities	5650

Item 4.	Mine Safety Disclosures	5651

Item 5.	Other Information	5651

Item 6.	Exhibits	5752

Table of Contents

PART I –FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share data)

(Unaudited)



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


	(Unaudited)
	March 31,		December 31,
	2021		2020*
ASSETS:
Cash and due from banks	$	46,594	$	50,460
Interest-bearing deposits with banks		442,793		364,846
Federal funds sold		67,314		66,413
Total cash and cash equivalents		556,701		481,719
Securities available-for-sale, at fair value		250,937		215,634
Other investments		14,728		14,794
Loans held for sale		7,870		11,721
Loans		2,487,129		2,382,243
Less: Allowance for loan losses		(18,370)		(18,346)
Loans, net		2,468,759		2,363,897
Premises and equipment, net		72,697		72,682
Other real estate owned		3,946		4,619
Goodwill and core deposit intangible, net		86,350		86,471
Bank owned life insurance		71,586		31,215
Other assets		23,629		22,197
Total assets	$	3,557,203	$	3,304,949

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	777,968	$	685,957
Interest-bearing demand		683,887		649,129
Money market and savings		1,073,941		919,631
Time deposits		512,417		550,498
Total deposits		3,048,213		2,805,215
Borrowings		82,642		81,199
Subordinated debt		39,367		39,346
Other liabilities		22,923		22,021
Total liabilities		3,193,145		2,947,781
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding		0		0
Common stock, $1 par value; 40,000,000 shares authorized; 15,104,536 and 15,107,214 shares issued and outstanding, respectively		15,105		15,107
Additional paid-in capital		251,836		252,693
Retained earnings		96,034		87,185
Accumulated other comprehensive income		1,083		2,183
Total shareholders' equity		364,058		357,168
Total liabilities and shareholders' equity	$	3,557,203	$	3,304,949

* Derived from audited financial statements.

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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


		Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Interest income:
Loans, including fees	$	28,621	$	25,515	$	83,718	$	75,768	$	28,018	$	26,434
Securities available-for-sale:
Taxable		546		748		1,813		2,591		724		679
Tax-exempt		364		338		1,064		1,173		259		283
Federal funds sold and other earning assets		327		743		1,206		2,059		291		602
Total interest income		29,858		27,344		87,801		81,591		29,292		27,998
Interest expense:
Deposits		2,897		5,605		11,016		16,644		2,331		4,754
Borrowings		334		15		674		250		117		89
Subordinated debt		584		584		1,751		1,757		584		584
Total interest expense		3,815		6,204		13,441		18,651		3,032		5,427
Net interest income		26,043		21,140		74,360		62,940		26,260		22,571
Provision for loan losses		2,634		724		8,683		1,914		67		3,200
Net interest income after provision for loan losses		23,409		20,416		65,677		61,026		26,193		19,371
Noninterest income:
Service charges on deposit accounts		892		767		2,370		2,129		1,009		770
Gain (loss) on sale of securities		(9)		1		6		34
Mortgage banking		1,029		518		2,544		1,192		1,139		584
Investment services		359		260		1,159		684		531		437
Insurance commissions		560		0		1,302		0		1,466		269
Interchange and debit card transaction fees		868		148		1,652		467
Merger termination fee		0		0		0		6,400
Interchange and debit card transaction fees, net										839		276
Other		422		502		1,417		1,405		707		482
Total noninterest income		4,121		2,196		10,450		12,311		5,691		2,818
Noninterest expense:
Salaries and employee benefits		11,032		9,072		31,395		26,357		10,869		10,006
Occupancy and equipment		2,186		1,635		6,093		4,967		2,341		1,911
FDIC insurance		534		(219)		894		140		371		180
Other real estate and loan related expense		643		335		1,535		1,067		602		545
Advertising and marketing		253		263		653		817		190		198
Data processing		558		273		1,689		1,465
Data processing and technology										1,379		1,008
Professional services		594		573		2,172		1,724		641		711
Amortization of intangibles		402		341		1,169		1,027		444		362
Software as service contracts		573		560		1,604		1,696
Merger related and restructuring expenses		290		73		3,863		2,792		103		2,096
Other		2,102		1,802		5,699		5,045		2,524		1,776
Total noninterest expense		19,167		14,708		56,766		47,097		19,464		18,793
Income before income tax expense		8,363		7,904		19,361		26,240		12,420		3,396
Income tax expense		1,968		1,941		4,059		6,425		2,664		664
Net income	$	6,395	$	5,963	$	15,302	$	19,815	$	9,756	$	2,732
Earnings per common share:
Basic	$	0.42	$	0.43	$	1.03	$	1.42	$	0.65	$	0.19
Diluted		0.42		0.42	$	1.02	$	1.41	$	0.65	$	0.19
Weighted average common shares outstanding:
Basic		15,160,579		13,955,859		14,903,757		13,949,325		15,011,573		14,395,103
Diluted		15,210,611		14,053,432		14,965,455		14,038,414		15,111,947		14,479,671

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
		2020		2019	2020		2019			2021		2020
Net income	$	6,395	$	5,963	$	15,302	$	19,815	$	9,756	$	2,732
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		(2,808)		1,095
Tax effect		(142)		543		(779)		(888)		738		(244)
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		(2,070)		851
Unrealized gains (losses) on fair value municipal security hedges		538		2,451		(1,843)		(70)		1,313		(3,072)
Tax effect		(46)		(643)		482		18		(343)		806
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		492		1,808		(1,361)		(52)		970		(2,266)

Total other comprehensive income		420		274		844		2,468
Total other comprehensive (loss)										(1,100)		(1,415)
Comprehensive income	$	6,815	$	6,237	$	16,146	$	22,283	$	8,656	$	1,317

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

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

For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

(Dollars in thousands, except for share data)

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


								Accumulated
								Other
	Common Stock			Additional		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Earnings		(Loss) Income		Total
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	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)
Repurchases 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

Balance, December 31, 2020	15,107,214	$	15,107	$	252,693	$	87,185	$	2,183	$	357,168
Net income	—		—		—		9,756		—		9,756
Other comprehensive loss	—		—		—		—		(1,100)		(1,100)
Common stock issued pursuant to:
Exercise of stock options	15,965		16		131		—		—		147
Restricted stock	40,967		41		(41)		—		—		—
Stock compensation expense	—		—		201		—		—		201
Common stock dividend ($0.06 per share)	—		—		—		(907)		—		(907)
Repurchases of common stock	(59,610)		(59)		(1,148)		—		—		(1,207)
Balance, March 31, 2021	15,104,536	$	15,105	$	251,836	$	96,034	$	1,083	$	364,058

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

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


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net income	$	9,756	$	2,732
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,499		1,634
Accretion of fair value purchase accounting adjustments, net		(1,636)		(1,841)
Provision for loan losses		67		3,200
Stock compensation expense		201		110
Deferred income tax expense		446		90
Increase in cash surrender value of bank owned life insurance		(370)		(162)
Net losses from sale of other real estate owned		151		14
Net gains from mortgage banking		(1,139)		(576)
Origination of loans held for sale		(35,229)		(15,195)
Proceeds from sales of loans held for sale		40,219		15,582
Net change in:
Accrued interest receivable		(86)		35
Accrued interest payable		367		784
Other assets		(1,234)		685
Other liabilities		3,078		2,010
Net cash provided by operating activities		16,090		9,102
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		9,097		3,250
Proceeds from paydowns of securities available-for-sale		7,144		3,816
Proceeds from sales of other investments		147		—
Purchases of securities available-for-sale		(55,757)		(3,377)
Purchases of other investments		(80)		(507)
Purchases of bank owned life insurance		(40,000)		—
Net increase in loans		(103,308)		(52,721)
Purchases of premises and equipment		(1,009)		(2,429)
Proceeds from sale of other real estate owned		98		120
Net cash and cash equivalents received from business combination		—		46,132
Net cash used in investing activities		(183,668)		(3,601)
Cash flows from financing activities:
Net increase in deposits		243,084		22,158
Net increase (decrease) in securities sold under agreements to repurchase		1,447		(20)
Proceeds from borrowings		—		100,000
Repayment borrowings		(4)		—
Cash dividends paid		(907)		(702)
Issuance of common stock		147		173
Repurchase of common stock		(1,207)		(1,992)
Net cash provided by financing activities		242,560		119,617
Net change in cash and cash equivalents		74,982		125,118
Cash and cash equivalents, beginning of period		481,719		183,971
Cash and cash equivalents, end of period	$	556,701	$	309,089
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	2,665	$	4,643
Noncash investing and financing activities:
Acquisition of real estate through foreclosure		14		676
Change in goodwill due to acquisitions		324		8,302

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

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

Basis of Presentation and Accounting Estimates:

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

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired and liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company’s annual report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Recently Issued and Adopted Accounting Pronouncements:

AsIn December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of ~~January 1, 2020, the Company adopted ASU 2019-01,~~ ~~Leases: Codification Improvements~~ ~~(“ASU 2019-01”). ASU 2019-01 provides clarification to increase transparency and comparability among organizations by recognizing lease assets and~~deferred tax liabilities ~~on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value~~for outside basis differences. The new guidance also simplifies aspects of the ~~underlying asset reported by lessors~~accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Finally, it clarifies that single-member limited liability companies and similar disregarded entities that are not ~~manufacturers or dealers~~subject to ~~continue~~income tax are not required to ~~be its cost~~recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for interim and 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 ofannual reporting periods beginning after December 15, 2020. ASU ~~2019-01~~2019-12 did not have a material impact on the Company’s ~~consolidated financial statements.~~Consolidated Financial Statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, ~~2019~~2020 as filed in its Annual Report on Form 10-K with the Securities and Exchange Commission ("SEC"). The following is a summary of recent authoritative pronouncements issued but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In October 2019, the Financial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that ~~CECL~~the Current Expected Credit Loss (“CECL”) model will be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as currently defined by the SEC, for fiscal years beginning after December 15, 2019, and interim

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 an SRC.

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~~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.

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 consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”). It is intended to help stakeholders during the global market-wide reference rate transition period. The ~~guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The~~ Company is implementing 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. On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA provides several amendments to the PPP, including additional funding for first and second draws of PPP loans up to March 31, 2021. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extends the program to May 31, 2021. The Company is a participant in the PPP. See Note 5 Loans and 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 (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

●

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. See Note 5 Loans and 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 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 such loan modifications as TDRs. On August 3, 2020, the Federal Financial Institutions Examination Council on behalf of its members (collectively “the FFIEC members”) issued a joint statement on additional loan accommodations related to COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. To be eligible, each loan modification must be (1) related to the COVID event; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The December 31, 2020 deadline was subsequently extended to January 1, 2022, by the CAA. All of the Company’s loan modifications granted under Section 4013 of the CARES Act are in compliance with the aforementioned FFIEC requirements. Accordingly, the Company does not account for such loan modifications as TDRs.

Reclassifications:

Certain captions and amounts in the ~~2019~~2020 consolidated financial statements were reclassified to conform to the ~~2020~~2021 financial statement presentation. These reclassifications had no impact on net income or shareholders’ equity as previously reported.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

~~Acquisition of~~ Progressive Financial Inc.

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

In connection with the merger, the Company acquired $301 million of assets and assumed $272 million of liabilities. Pursuant to the Merger Agreement, each outstanding share of Progressive common stock was converted into and cancelled in exchange to the right to receive $474.82 in cash, and 62.3808 shares of SmartFinancial common stock. SmartFinancial issued 1,292,578 shares of SmartFinancial common stock and paid $9.8 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of ~~$9.3~~$8.8 million, representing the intangible value of Progressive’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.4 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

The ~~Company’s operating results for~~Company also established two intangible assets related to the ~~three and nine month periods ended September 30, 2020, include the operating results~~insurance agency acquired as part of the ~~acquired business for the period subsequent to the merger date~~PFG acquisition; 1.) Customer relationships of ~~March 1, 2020.~~$1.1 million, amortizing sum-of-the-years digits over 120 months (10 years), 2.) Tradename of $63 thousand, amortizing straight-line over 60 months (5 years).

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


									Initial
	As recorded		Fair value		As recorded		As recorded		Fair value		Subsequent		As recorded
	by PFG		adjustments ⁽¹⁾		by the Company		by PFG		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	55,971	$	0	$	55,971	$	55,971	$	—	$	—	$	55,971
Investment securities available-for-sale		27,054		203		27,257		27,054		203		—		27,257
Restricted investments		692		0		692		692		—		—		692
Loans		191,672		(3,691)		187,981		191,672		(3,691)		—		187,981
Allowance for loan losses		(2,832)		2,832		0		(2,832)		2,832		—		—
Premises and equipment, net		15,681		(2,919)		12,762		15,681		(2,919)		—		12,762
Bank owned life insurance		5,560		0		5,560		5,560		—		—		5,560
Deferred tax asset, net		0		1,173		1,173		—		813		193		1,006
Intangibles		0		1,370		1,370		—		1,370		1,127		2,497
Other real estate owned		3,695		(1,474)		2,221		3,695		(100)		(1,862)		1,733
Interest Receivable		1,061		(280)		781		1,061		(280)		—		781
Prepaids		375		(174)		201		375		(174)		—		201
Goodwill		231		(231)		0		231		(231)		—		—
Other assets		1,881		0		1,881		1,881		—		—		1,881
Total assets acquired	$	301,041	$	(3,191)	$	297,850	$	301,041	$	(2,177)	$	(542)	$	298,322

Liabilities:
Deposits	$	271,276	$	0	$	271,276	$	271,276	$	—		—	$	271,276
Time deposit premium		0		729		729		—		729		—		729
Payables and other liabilities		776		0		776		776		—		—		776
Total liabilities assumed		272,052		729		272,781		272,052		729		—		272,781
Excess of assets assumed over liabilities assumed	$	28,989					$	28,989
Aggregate fair value adjustments			$	(3,920)					$	(2,906)	$	(542)
Total identifiable net assets						25,069								25,541
Consideration transferred:
Cash						9,838								9,838
Common stock issued (1,292,578 shares)						24,547								24,547
Total fair value of consideration transferred						34,385								34,385

Goodwill					$	9,316							$	8,844

⁽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

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

Merger-related costs from the PFG acquisition for the three and nine month periods ended September 30, 2020, were $290 thousand and $3.9 million, respectively, have been excluded from the pro-forma information presented below. The actual results and pro-forma information were as follows ~~(in thousands)~~:

Three Months Ended

Nine Months Ended

September 30,

September 30,

Revenue

Net Income

Revenue

Net Income

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

Note 3. Earnings Per Share

Basic earnings per common share is computed by dividing net income available to common ~~stockholders~~shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock options and restricted stock. The effect from the stock options and restricted stock on incremental shares from the assumed conversions for net income per share-basic and net income per share-diluted are presented below. There were 0 antidilutive shares for the three month period ended March 31, 2021. There were 64 thousand antidilutive shares for the three month period ended March 31, 2020.

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


	Three Months Ended
	March 31,
	2021		2020
Basic earnings per share computation:
Net income available to common shareholders	$	9,756	$	2,732
Average common shares outstanding – basic		15,011,573		14,395,103
Basic earnings per share	$	0.65	$	0.19
Diluted earnings per share computation:
Net income available to common shareholders	$	9,756	$	2,732
Average common shares outstanding – basic		15,011,573		14,395,103
Incremental shares from assumed conversions:
Stock options and restricted stock		100,374		84,568
Average common shares outstanding - diluted		15,111,947		14,479,671
Diluted earnings per common share	$	0.65	$	0.19

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):


	March 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Government-sponsored enterprises (GSEs)	$	73,905	$	41	$	(1,689)	$	72,257
Municipal securities		88,509		1,626		(6)		90,129
Other debt securities		26,019		154		(118)		26,055
Mortgage-backed securities (GSEs)		61,294		1,354		(152)		62,496
Total	$	249,727	$	3,175	$	(1,965)	$	250,937

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

presented below. There were 114 thousand and 85 thousand antidilutive shares for the three and nine month periods ended September 30, 2020, respectively, and NaN for the three and nine month periods ended September 30, 2019.

~~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

~~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


December 31, 2019:
									December 31, 2020
											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		Losses		Value
U.S. Government-sponsored enterprises (GSEs)	$	19,015	$	41	$	(56)	$	19,000	$	30,526	$	10	$	(6)	$	30,530
Municipal securities		63,792		618		(19)		64,391		89,644		2,345		—		91,989
Other debt securities		3,481		22		(33)		3,470		25,019		112		(13)		25,118
Mortgage-backed securities (GSEs)		91,531		382		(426)		91,487		66,425		1,754		(182)		67,997
Total	$	177,819	$	1,063	$	(534)	$	178,348	$	211,614	$	4,221	$	(201)	$	215,634

At ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, securities with a carrying value totaling approximately ~~$74.9~~$117.6 million and ~~$92.3~~$80.2 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

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

Proceeds from sale of securities available for sale, gross gains and gross losses on sales and redemptions for the three months ended March 31, 2021 and 2020 were as follows (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Proceeds from sales	$	-	$	2,115
Gross gains	$	-	$	-
Gross losses	$	-	$	-

Proceeds from maturities and calls	$	9,097	$	3,250

The amortized cost and estimated fair value of securities at March 31, 2021, 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.


	March 31, 2021
	Amortized		Fair
	Cost		Value
Due in one year or less	$	4,947	$	4,972
Due from one year to five years		4,569		4,596
Due from five years to ten years		56,988		56,896
Due after ten years		121,929		121,977
		188,433		188,441
Mortgage-backed securities		61,294		62,496
Total	$	249,727	$	250,937

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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 September 30, 2020 and 2019 were 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 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

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


	March 31, 2021
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Government-sponsored enterprises (GSEs)	$	60,310	$	(1,687)	14	$	585	$	(2)	2	$	60,895	$	(1,689)	16
Municipal securities		1,125		(6)	2		—		—	—		1,125		(6)	2
Other debt securities		12,882		(118)	6		—		—	—		12,882		(118)	6
Mortgage-backed securities (GSEs)		2,095		(2)	2		11,745		(150)	6		13,840		(152)	8
Total	$	76,412	$	(1,813)	24	$	12,330	$	(152)	8	$	88,742	$	(1,965)	32


	December 31, 2020
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Government-sponsored enterprises (GSEs)	$	15,510	$	(5)	3	$	132	$	(1)	1	$	15,642	$	(6)	4
Municipal securities		—		—	—		—		—	—		—		—	—
Other debt securities		1,495		(5)	1		977		(8)	1		2,472		(13)	2
Mortgage-backed securities (GSEs)		9,790		(87)	6		6,083		(95)	3		15,873		(182)	9
Total	$	26,795	$	(97)	10	$	7,192	$	(104)	5	$	33,987	$	(201)	15

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

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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 ~~September 30, 2020,~~March 31, 2021, represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of ~~September 30, 2020,~~March 31, 2021, 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,		March 31,		December 31,
	2020		2019		2021		2020
Federal Reserve Bank stock	$	8,641	$	7,917	$	8,460	$	8,606
Federal Home Loan Bank stock		5,838		4,646		5,918		5,838
First National Bankers Bank stock		350		350		350		350
Total	$	14,829	$	12,913	$	14,728	$	14,794

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

par value rather than recognizing temporary declines in value. As of ~~September 30, 2020,~~March 31, 2021, the Company determined that there was no0 impairment on its other investments.

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						March 31, 2021						December 31, 2020
	PCI		All Other				PCI		All Other				PCI		All Other				PCI		All Other
	Loans¹		Loans		Total		Loans¹		Loans		Total		Loans¹		Loans		Total		Loans¹		Loans		Total
Commercial real estate	$	16,469	$	1,014,182	$	1,030,651	$	15,255	$	890,051	$	905,306	$	13,877	$	1,056,764	$	1,070,641	$	16,123	$	996,853	$	1,012,976
Consumer real estate		10,801		429,509		440,310		6,541		410,941		417,482		9,597		422,889		432,486		10,258		433,672		443,930
Construction and land development		6,409		268,763		275,172		4,458		223,168		227,626		5,350		280,623		285,973		5,348		272,727		278,075
Commercial and industrial		317		644,181		644,498		407		336,668		337,075		303		685,707		686,010		308		634,138		634,446
Consumer and other		87		13,339		13,426		326		9,577		9,903		21		11,998		12,019		27		12,789		12,816
Total loans		34,083		2,369,974		2,404,057		26,987		1,870,405		1,897,392		29,148		2,457,981		2,487,129		32,064		2,350,179		2,382,243
Less: Allowance for loan losses		0		(18,817)		(18,817)		(156)		(10,087)		(10,243)		(376)		(17,994)		(18,370)		(309)		(18,037)		(18,346)

Loans, net	$	34,083	$	2,351,157	$	2,385,240	$	26,831	$	1,860,318	$	1,887,149	$	28,772	$	2,439,987	$	2,468,759	$	31,755	$	2,332,142	$	2,363,897

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

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~~ (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 inand 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. At March 31, 2021, the net deferred fees outstanding for the 2020 PPP loans is $1.9 million and $5.4 million for the 2021 PPP loans, respectively. PPP loans are included in the Commercial and Industrial loan class. As of ~~September 30, 2020,~~March 31, 2021, the Company had ~~approximately 2,950~~3,710 PPP loans outstanding, with an outstanding principal balance of ~~$300.8~~$338.3 million and as of December 31, 2020, the Company had 2,863 PPP loans outstanding, with an outstanding principal balance of $288.9 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

1615

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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
March 31, 2021:
Performing loans	$	1,053,610	$	420,419	$	280,623	$	685,598	$	11,998	$	2,452,248
Impaired loans		3,154		2,470		—		109		—		5,733
		1,056,764		422,889		280,623		685,707		11,998		2,457,981
PCI loans		13,877		9,597		5,350		303		21		29,148
Total loans	$	1,070,641	$	432,486	$	285,973	$	686,010	$	12,019	$	2,487,129

December 31, 2020:
Performing loans	$	992,982	$	432,356	$	272,727	$	633,992	$	12,789	$	2,344,846
Impaired loans		3,871		1,316		—		146		—		5,333
		996,853		433,672		272,727		634,138		12,789		2,350,179
PCI loans		16,123		10,258		5,348		308		27		32,064
Total loans	$	1,012,976	$	443,930	$	278,075	$	634,446	$	12,816	$	2,382,243

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


					Construction		Commercial		Consumer								Construction		Commercial		Consumer
	Commercial		Consumer		and Land		and		and				Commercial		Consumer		and Land		and		and
	Real Estate		Real Estate		Development		Industrial		Other		Total		Real Estate		Real Estate		Development		Industrial		Other		Total
September 30, 2020:
March 31, 2021:
Performing loans	$	7,729	$	3,366	$	2,060	$	5,055	$	121	$	18,331	$	7,386	$	3,018	$	1,968	$	5,022	$	108	$	17,502
Impaired loans		0		78		0		408		0		486		251		132		—		109		—		492
		7,729		3,444		2,060		5,463		121		18,817		7,637		3,150		1,968		5,131		108		17,994
PCI loans		0		0		0		0		0		0		—		158		—		216		2		376
Total loans	$	7,729	$	3,444	$	2,060	$	5,463	$	121	$	18,817	$	7,637	$	3,308	$	1,968	$	5,347	$	110	$	18,370

December 31, 2019:
December 31, 2020:
Performing loans	$	4,491	$	2,159	$	1,127	$	1,766	$	69	$	9,612	$	7,579	$	3,267	$	2,076	$	4,768	$	110	$	17,800
Impaired loans		0		343		0		132		0		475		—		116		—		121		—		237
		4,491		2,502		1,127		1,898		69		10,087		7,579		3,383		2,076		4,889		110		18,037
PCI loans		17		74		0		59		6		156		—		88		—		218		3		309
Total loans	$	4,508	$	2,576	$	1,127	$	1,957	$	75	$	10,243	$	7,579	$	3,471	$	2,076	$	5,107	$	113	$	18,346

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


	Three Months Ended September 30, 2020												Three Months Ended March 31, 2021
			Consumer		Construction		Commercial								Consumer		Construction		Commercial
	Commercial		Real		and Land		and		Consumer				Commercial		Real		and Land		and		Consumer
	Real Estate		Estate		Development		Industrial		and Other		Total		Real Estate		Estate		Development		Industrial		and Other		Total
Beginning balance	$	6,595	$	3,313	$	1,795	$	4,443	$	108	$	16,254	$	7,579	$	3,471	$	2,076	$	5,107	$	113	$	18,346
Charged-off loans		0		(21)		0		(60)		(89)		(170)		—		—		—		—		(120)		(120)
Recoveries of charge-offs		11		17		0		55		16		99		3		16		—		3		55		77
Provision (reallocation) charged to expense		1,123		135		265		1,025		86		2,634
Provision charged to expense														55		(179)		(108)		237		62		67
Ending balance	$	7,729	$	3,444	$	2,060	$	5,463	$	121	$	18,817	$	7,637	$	3,308	$	1,968	$	5,347	$	110	$	18,370

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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												Three Months Ended March 31, 2020
			Consumer		Construction		Commercial								Consumer		Construction		Commercial
	Commercial		Real		and Land		and		Consumer				Commercial		Real		and Land		and		Consumer
	Real Estate		Estate		Development		Industrial		and Other		Total		Real Estate		Estate		Development		Industrial		and Other		Total
Beginning balance	$	4,508	$	2,576	$	1,127	$	1,957	$	75	$	10,243	$	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
Charged-off loans														—		(2)		—		(8)		(76)		(86)
Recoveries of charge-offs														2		6		2		42		22		74
Provision charged to expense														1,453		721		355		566		105		3,200
Ending balance	$	7,729	$	3,444	$	2,060	$	5,463	$	121	$	18,817	$	5,963	$	3,301	$	1,484	$	2,557	$	126	$	13,431

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 three months ended March 31, 2021, is $67 thousand compared to $3.2 million in the same period of 2020, a decrease of $3.1 million. As of March 31, 2021, and December 31, 2020, our allowance for loan losses was $18.4 million and $18.3 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for loan loss as a percentage of total loans was 0.74% at March 31, 2021 and 0.77% at December 31, 2020.

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


	March 31, 2021
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
Non PCI Loans:	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	1,011,291	$	418,604	$	280,299	$	680,635	$	11,908	$	2,402,737
Watch		38,170		1,234		245		4,489		52		44,190
Special mention		3,922		44		—		297		—		4,263
Substandard		3,381		3,007		79		238		38		6,743
Doubtful		—		—		—		48		—		48
Total		1,056,764		422,889		280,623		685,707		11,998		2,457,981

PCI Loans:
Pass		11,088		8,173		1,430		257		20		20,968
Watch		1,592		206		3,405		—		1		5,204
Special mention		17		58		—		—		—		75
Substandard		1,180		1,160		515		46		—		2,901
Doubtful		—		—		—		—		—		—
Total		13,877		9,597		5,350		303		21		29,148
Total loans	$	1,070,641	$	432,486	$	285,973	$	686,010	$	12,019	$	2,487,129

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	December 31, 2020
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
Non PCI Loans:	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	922,153	$	417,302	$	269,350	$	625,836	$	12,622	$	2,247,263
Watch		66,287		14,218		3,296		7,673		137		91,611
Special mention		4,446		46		—		320		—		4,812
Substandard		3,967		2,020		81		261		30		6,359
Doubtful		—		86		—		48		—		134
Total		996,853		433,672		272,727		634,138		12,789		2,350,179

PCI Loans:
Pass		11,072		8,382		1,008		262		25		20,749
Watch		3,381		224		3,820		—		2		7,427
Special mention		19		57		—		—		—		76
Substandard		1,651		1,595		520		46		—		3,812
Doubtful		—		—		—		—		—		—
Total		16,123		10,258		5,348		308		27		32,064
Total loans	$	1,012,976	$	443,930	$	278,075	$	634,446	$	12,816	$	2,382,243

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

Past Due Loans:

~~We maintain~~A loan is considered past due if any required principal and interest payments have not been received as of the ~~allowance at a level that we deem appropriate~~date such payments were required to ~~adequately cover~~be made under the ~~probable losses inherent in~~terms of the loan ~~portfolio. Our provision for~~agreement. Generally, management places a loan ~~losses for~~on nonaccrual when there is a clear indicator that the ~~nine months ended September 30, 2020,~~borrower’s cash flow may not be sufficient to meet payments as they become due, which 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~~generally when a 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.

90 days past due.

The following tables ~~outline the amount~~present an aging analysis of ~~each~~our loan ~~classification and the amount categorized into each risk rating~~portfolio (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, 2021
	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	$	565	$	—	$	1,495	$	3,155	$	5,215	$	13,877	$	1,051,549	$	1,070,641
Consumer real estate		968		1,336		—		1,481		3,785		9,597		419,104		432,486
Construction and land development		643		—		—		11		654		5,350		279,969		285,973
Commercial and industrial		666		12		—		60		738		303		684,969		686,010
Consumer and other		3		—		—		32		35		21		11,963		12,019
Total	$	2,845	$	1,348	$	1,495	$	4,739	$	10,427	$	29,148	$	2,447,554	$	2,487,129


	December 31, 2020
	30-60 Days		61-89 Days		Past Due 90				Total
	Past Due and		Past Due and		Days or More				Past Due and		PCI		Current		Total
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		Loans		Loans		Loans
Commercial real estate	$	134	$	—	$	67	$	3,740	$	3,941	$	16,123	$	992,912	$	1,012,976
Consumer real estate		1,916		51		82		1,823		3,872		10,258		429,800		443,930
Construction and land development		245		—		—		12		257		5,348		272,470		278,075
Commercial and industrial		12		76		—		36		124		308		634,014		634,446
Consumer and other		14		5		—		22		41		27		12,748		12,816
Total	$	2,321	$	132	$	149	$	5,633	$	8,235	$	32,064	$	2,341,944	$	2,382,243

Table of Contents

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:~~

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

~~The following tables present 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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Impaired Loans:

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


	March 31, 2021						December 31, 2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans without a valuation allowance:
Commercial real estate	$	130	$	130	$	—	$	3,871	$	3,872	$	—
Consumer real estate		1,880		1,882		—		888		888		—
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—
		2,010		2,012		—		4,759		4,760		—

Impaired loans with a valuation allowance:
Commercial real estate		3,155		3,155		251		—		—		—
Consumer real estate		459		462		132		428		428		116
Construction and land development		—		—		—		—		—		—
Commercial and industrial		109		109		109		146		146		121
Consumer and other		—		—		—		—		—		—
		3,723		3,726		492		574		574		237
PCI loans:
Commercial real estate		—		—		—		—		—		—
Consumer real estate		1,210		1,347		158		1,827		2,086		88
Construction and land development		—		—		—		—		—		—
Commercial and industrial		266		233		216		270		234		218
Consumer and other		17		16		2		21		20		3
		1,493		1,596		376		2,118		2,340		309
Total impaired loans	$	7,226	$	7,334	$	868	$	7,451	$	7,674	$	546


													Three Months Ended March 31,
	September 30, 2020						December 31, 2019						2021				2020
			Unpaid						Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	551	$	551	$	—	$	256	$	261	$	—	$	2,001	$	1	$	196	$	3
Consumer real estate		795		795		—		553		553		—		1,384		12		550		4
Construction and land development		0		0		—		547		547		—		—		—		577		—
Commercial and industrial		0		0		—		0		0		—		—		—		—		—
Consumer and other		0		0		—		0		0		—		—		—		—		—
		1,346		1,346		—		1,356		1,361		—
														3,385		13		1,323		7
Impaired loans with a valuation allowance:
Commercial real estate		0		0		0		0		0		0		1,577		102		198		2
Consumer real estate		200		200		78		994		994		343		444		5		984		9
Construction and land development		0		0		0		0		0		0		—		—		—		—
Commercial and industrial		600		600		408		160		160		132		128		2		159		2
Consumer and other		0		0		0		0		0		0		—		—		—		—
		800		800		486		1,154		1,154		475		2,149		109		1,341		13
PCI loans:
Commercial real estate		0		0		0		17		99		17		—		—		964		1
Consumer real estate		1,852		2,113		0		1,205		1,371		74		1,215		22		456		1
Construction and land development		0		0		0		0		0		0		—		—		231		—
Commercial and industrial		279		242		0		396		534		59		268		1		355		—
Consumer and other		26		24		0		45		51		6
Consumer real estate														19		—		11		—
		2,157		2,379		0		1,663		2,055		156		1,502		23		2,017		2

Total impaired loans	$	4,303	$	4,525	$	486	$	4,173	$	4,570	$	631	$	7,036	$	145	$	4,681	$	22

~~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

2119

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Troubled Debt Restructurings:

At ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, impaired loans included loans that were classified as TDRs. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

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

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

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

As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, management had approximately $8$250 thousand and ~~$61~~$257 thousand, respectively, in loans that met the criteria for TDR, NaN of which were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

There ~~was 1 loan~~were 0 loans that ~~was~~were modified as a TDR during the ~~nine~~three month period ended ~~September 30, 2020,~~March 31, 2021, and ~~0 loans were~~1 loan that was modified during the ~~nine~~three month period ended ~~September 30, 2019.~~March 31, 2020. There were 0 loans that were modified as TDRs during the past ~~nine~~three months and for which there was a subsequent payment default.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. 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,~~March 31, 2021, the Company had ~~289~~10 loans remaining under COVID-19 modifications that amounted to ~~$232.5~~$1.7 million, or ~~9.7%~~0.07% of the total loans outstanding.

Foreclosure Proceedings and Balances:

As of ~~September 30, 2020,~~March 31, 2021, there was ~~only 1~~0 residential property secured by real estate included in other real estate owned and there ~~was one consumer mortgage loan collateralized by~~were 3 residential real estate ~~property that was~~loans totaling $448 thousand in the process of foreclosure.

2220

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,		March 31,		December 31,
	2020		2019		2021		2020
Commercial real estate	$	24,179	$	21,570	$	21,221	$	23,787
Consumer real estate		13,353		8,411		12,011		12,692
Construction and land development		1,910		5,394		968		1,812
Commercial and industrial		7,567		2,540		6,463		6,521
Consumer and other		199		504		122		161
Total loans		47,208		38,419		40,785		44,973
Less: Remaining purchase discount		(13,125)		(11,432)		(11,637)		(12,909)
Total loans, net of purchase discount		34,083		26,987		29,148		32,064
Less: Allowance for loan losses		0		(156)		(376)		(309)
Carrying amount, net of allowance	$	34,083	$	26,831	$	28,772	$	31,755

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Accretable yield, beginning of period	$	11,777	$	8,280	$	8,454	$	7,052	$	16,889	$	8,454
Additions		0		0		2,515		0		—		2,515
Accretion income		(1,267)		(1,073)		(4,401)		(3,353)		(1,931)		(2,077)
Reclassification		265		1,033		2,428		2,392		337		1,916
Other changes, net		7,405		390		9,184		2,539		(590)		171
Accretable yield, end of period	$	18,180	$	8,630	$	18,180	$	8,630	$	14,705	$	10,979

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.year. Considering the recent economic conditions resulting from the COVID-19 pandemic ~~as of September 30, 2020,~~ the Company performed a Step 1 goodwill impairment test (which compares the fair value of a reporting unit with its carrying amount, including goodwill)~~. The~~ at December 31, 2020, the results indicated that there was ~~no impairment as of September 30, 2020.~~0 impairment. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

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

2321

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,		March 31,		December 31,
	2020		2019		2021		2020
Goodwill:
Balance, beginning of period	$	65,614	$	66,087	$	74,135	$	65,614
Adjustment to values initially recorded for Acquisition of Foothills Bancorp, Inc.		0		(473)
Acquisition of PFG		8,302		0		323		8,521
Adjustment to values initially recorded for Acquisition of PFG		1,014		0
Balance, end of the period	$	74,930	$	65,614	$	74,458	$	74,135

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


	Core Deposit		Insurance Agency		Insurance Agency
Amortized other intangible assets:	Intangibles		Customer Relationships		Tradename		Total
Beginning balance January 1, 2021, gross	$	15,920	$	1,064	$	63	$	17,047
Less: accumulated amortization		(4,935)		(206)		(14)		(5,155)
Balance, March 31, 2021, other intangible assets, net	$	10,985	$	858	$	49	$	11,892

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

The aggregate amortization of core deposit intangibles expense for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2021 and 2020, was ~~$402~~$397 thousand and ~~$1.2 million, respectively, and for the three and nine months ended September 30, 2019, was $341~~$362 thousand, ~~and $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
Remainder of 2021			$	1,316
2022		1,526		1,697
2023		1,485		1,636
2024		1,456		1,588
2025				1,531
Thereafter		5,343		4,124
Total	$	11,780	$	11,892

Note 7. Borrowings and Line of Credit

Borrowings:

At ~~September 30, 2020,~~March 31, 2021, total borrowings were ~~$319.4~~$82.6 million compared to ~~$31.6~~$81.2 million at December 31, 2019. The $287.8 million increase was primarily due to borrowings from the Federal Reserve Bank 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 $50.0 million.2020. Borrowings consist of the following (dollars in thousands):


	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Securities sold under customer repurchase agreements	$	6,193	$	6,184	$	7,250	$	5,803
FHLB borrowings		75,000		25,000		75,000		75,000
PPPLF borrowings		237,780		—
Other borrowings		418		439		392		396
Total	$	319,391	$	31,623	$	82,642	$	81,199

Securities Sold Under Agreements to Repurchase:

At March 31, 2021 and December 31, 2020, the Company had securities sold under agreements to repurchase of $7.3 million and $5.8 million, respectively, with commercial checking customers which were secured by government agency securities. The carrying value of investment securities pledged as collateral under repurchase agreements was $6.8 million and $7.6 million at March 31, 2021 and December 31, 2020, respectively.

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Line of Credit:

The Company has a Loan and Security Agreement and revolving note with ServisFirst Bank, pursuant to which ServisFirst Bank has made a $25.0 million revolving line of credit available to the Company. The maturity of the line of credit is September 24, 2021. At ~~September 30, 2020,~~March 31, 2021, there was 0 outstanding balance under the line of credit, and the entire amount of the line of credit remained available to the Company.

Note 8. Employee Benefit Plans

401(k) Plan:

The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After 90 days of service the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The Company’s contribution to the Plan for the three ~~and nine~~ month periods ending ~~September 30,~~March 31, 2021 and 2020, respectively, was ~~$282~~$288 thousand and ~~$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.~~$251 thousand.

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At ~~September 30, 2020,~~March 31, 2021, the Company had 1 active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which had ~~28,549~~21,886 rights issued and ~~1,878,894~~1,834,427 Rights available for future grants or awards.

In addition, the Company has ~~33,250~~19,250 Rights issued from the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan, ~~41,250~~40,250 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			Weighted
		Average			Average
		Exercisable			Exercisable
	Number	Price		Number	Price
Outstanding at December 31, 2019	136,658	$	10.29
Outstanding at December 31, 2020				99,617	$	10.19
Granted	0		0	—		—
Exercised	(27,858)		10.13	(15,965)		9.24
Forfeited	(3,485)		15.05	—		—
Outstanding at September 30, 2020	105,315	$	10.18
Outstanding at March 31, 2021				83,652	$	10.37

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Information pertaining to stock options outstanding at September 30, 2020, is as follows:~~

Options Outstanding

Options Exercisable




Weighted-






Average

Weighted-

Weighted-

Remaining

Average

Average
Exercise

Number

Contractual

Exercise

Number

Exercise
Prices

Outstanding

Life

Price

Exercisable

Price
$
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 not recognize any stock option-based compensation expense during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, respectively, as all stock options issued are fully vested. ~~During the three and nine month periods ended September 30, 2019,~~

Information pertaining to stock ~~option-based compensation expense was $58 thousand and $122 thousand, respectively.~~options outstanding at March 31, 2021, is as follows:


		Options Outstanding				Options Exercisable
			Weighted-
			Average	Weighted-			Weighted-
			Remaining	Average			Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	6.60	19,250	0.95 years	$	6.60	19,250	$	6.60
	9.48	18,000	1.95 years		9.48	18,000		9.48
	9.60	22,250	2.75 years		9.60	22,250		9.60
	11.76	2,266	1.25 years		11.76	2,266		11.76
	15.05	21,886	4.28 years		15.05	21,886		15.05
Outstanding, end of period		83,652	2.52 years	$	10.37	83,652	$	10.37

The intrinsic value of options exercised during the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2021 and 2020, was ~~$75~~$192 thousand and ~~$141 thousand, respectively. The intrinsic value of options exercised during the three and nine month periods ended September 30, 2019 was $53 thousand and $165~~$65 thousand, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at ~~September 30, 2020,~~March 31, 2021, was ~~$401~~$944 thousand. Cash received from options exercised under all share-based payment arrangements for the ~~nine~~three month period ended ~~September 30, 2020~~March 31, 2021 was ~~$282~~$147 thousand.

NaN options vested during the periods ended ~~September 30,~~March 31, 2021, and 2020, ~~and 2019,~~ respectively. The income tax expense/benefit recognized for the exercise of options during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, was ~~an expense of $3 thousand and~~ a benefit of ~~$19 thousand, respectively, and for the three and nine months ended September 30, 2019, a benefit of $10~~$1 thousand and ~~$37~~$23 thousand, respectively.

As of ~~September 30, 2020,~~March 31, 2021, all options were fully vested and currently 0 future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

Restricted Stock ~~Appreciation Rights ("SARs"):~~Awards:

A summary of the ~~status~~activity of ~~SARs plans~~the Company’s unvested restricted stock awards for the period ended March 31, 2021 is presented ~~in the following table:~~below:


		Weighted			Weighted
		Average			Average
	Number	Exercisable Price			Grant-Date
Outstanding at December 31, 2019	67,000	$	20.54
				Number	Fair Value
Balance at December 31, 2020				100,218	$	19.07
Granted	18,000		15.19	48,967		20.08
Exercised	0		0
Forfeited	0		0
Outstanding at September 30, 2020	85,000	$	19.40
Vested				(3,918)		22.44
Forfeited/expired				—		—
Balance at March 31, 2021				145,267	$	19.32

The Company measures the fair value of restricted stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. The compensation expense for restricted stock awards during the three months ended March 31, 2021 and 2020, was $201 thousand and $110 thousand, respectively. As of March 31, 2021, there was $1.8 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 3.19 years. The grant-date fair value of restricted stock awards vested was $88 thousand for the period ended March 31, 2021.

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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, 2020	73,000	$	19.02
Granted	22,000		20.70
Exercised	—		—
Forfeited	—		—
Outstanding at March 31, 2021	95,000	$	19.41

Information pertaining to SARs outstanding at ~~September 30, 2020,~~March 31, 2021, is as follows:


		SARs Outstanding				SARs Exercisable				SARs Outstanding				SARs Exercisable
			Weighted-								Weighted-
			Average	Weighted-							Average	Weighted-
			Remaining	Average			Weighted- Average				Remaining	Average			Weighted- Average
Exercise	Exercise	Number	Contractual	Exercise		Number	Exercise		Exercise	Number	Contractual	Exercise		Number	Exercise
Prices	Prices	Outstanding	Life		Price	Exercisable	Price		Prices	Outstanding	Life		Price	Exercisable	Price
$	15.19	18,000	3.25 years	$	15.19	—	$	—	15.19	18,000	2.75 years	$	15.19	—	$	—
	18.12	21,000	2.25 years		18.12	—		—	18.12	21,000	1.75 years		18.12	—		—
	21.61	34,000	1.25 years		21.61	—		—	20.70	22,000	3.76 years		20.70	—		—
	21.72	12,000	0.25 years		21.72	12,000		21.72	21.61	34,000	0.75 years		21.61	34,000		21.61
	Outstanding, end of period	85,000	1.78 years	$	19.40	12,000	$	21.72	Outstanding, end of period	95,000	2.05 years	$	19.41	34,000	$	21.61

SARs compensation expense of ~~($63)~~$49 thousand and ($~~89)~~118) thousand was recognized for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2021 and 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 ~~September 30,~~March 31, 2020, ~~and the three month period ended September 30, 2019,~~ was due to adjustments related to the fair value evaluation of SARs.

~~Restricted Stock Awards:~~

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

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 stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. The compensation expense for restricted stock awards during the three and nine months ended September 30, 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 September 30, 2020, there was $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 3.10 years. The grant-date fair value of restricted stock awards vested was $134 thousand for the period ended September 30, 2020.

Note 9. Commitments and Contingent Liabilities

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

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~~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):


	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Commitments to extend credit	$	468,447	$	384,411	$	542,825	$	476,841
Standby letters of credit		5,530		11,727		6,920		5,261

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

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

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, the carrying amount of liabilities related to the Company’s obligation to perform under standby letters of credit was insignificant.

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

Note 10. Fair Value Disclosures

Determination of Fair Value:

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

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

28Fair Value Hierarchy:

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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

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prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

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

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

Measurements of Fair Value:

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				Quoted Prices in		Significant		Significant
			Active Markets		Other		Other				Active Markets		Other		Other
			for Identical		Observable		Unobservable				for Identical		Observable		Unobservable
			Assets		Inputs		Inputs				Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020:
March 31, 2021:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	30,210	$	0	$	30,210	$	0	$	72,257	$	—	$	72,257	$	—
Municipal securities		90,809		0		90,809		0		90,129		—		90,129		—
Other debt securities		17,502		0		17,502		0		26,055		—		26,055		—
Mortgage-backed securities (GSEs)		76,113		—		76,113		0		62,496		—		62,496		—
Total securities available-for-sale	$	214,634	$	0	$	214,634	$	0	$	250,937	$	—	$	250,937	$	—

Liabilities:
Derivative financial instruments	$	6,791	$	0	$	6,791	$	0	$	4,008	$	—	$	4,008	$	—

December 31, 2019:
December 31, 2020:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	19,000	$	0	$	19,000	$	0	$	30,530	$	—	$	30,530	$	—
Municipal securities		64,391		0		64,391		0		91,989		—		91,989		—
Other debt securities		3,470		0		3,470		0		25,118		—		25,118		—
Mortgage-backed securities (GSEs)		91,487		0		91,487		0		67,997		—		67,997		—
Total securities available-for-sale	$	178,348	$	0	$	178,348	$	0	$	215,634	$	—	$	215,634	$	—

Liabilities:
Derivative financial instruments	$	3,446		0	$	3,446		0	$	6,174		—	$	6,174		—

During the ~~nine~~three month period ending ~~September 30, 2020,~~March 31, 2021, there were 0 transfers between Level 1 and Level 2 in the fair value hierarchy.

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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				Quoted Prices in		Significant		Significant
			Active Markets		Other		Other				Active Markets		Other		Other
			for Identical		Observable		Unobservable				for Identical		Observable		Unobservable
			Assets		Inputs		Inputs				Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020:
March 31, 2021:
Impaired loans	$	3,817	$	0	$	0	$	3,817	$	4,348	$	—	$	—	$	4,348
Other real estate owned		3,932		0		0		3,932		3,946		—		—		3,946

December 31, 2019:
December 31, 2020:
Impaired loans	$	2,185	$	0	$	0	$	2,185	$	2,455	$	—	$	—	$	2,455
Other real estate owned		1,757		0		0		1,757		4,619		—		—		4,619

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


					Weighted						Weighted
			Valuation	Significant Other	Average of				Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input		Fair Value		Technique	Unobservable Input	Input
September 30, 2020:
March 31, 2021:
Impaired loans	$	3,817	Appraisal	Appraisal discounts	11	%	$	4,348	Appraisal	Appraisal discounts	17	%
Other real estate owned		3,932	Appraisal	Appraisal discounts	23	%		3,946	Appraisal	Appraisal discounts	27	%

December 31, 2019:
December 31, 2020:
Impaired loans	$	2,185	Appraisal	Appraisal discounts	22	%	$	2,455	Appraisal	Appraisal discounts	9	%
Other real estate owned		1,757	Appraisal	Appraisal discounts	29	%		4,619	Appraisal	Appraisal discounts	22	%

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

Carrying value and estimated fair value:

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


	Fair Value Measurements Using										Fair Value Measurements Using
	Carrying								Estimated		Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value		Amount		Level 1		Level 2		Level 3		Fair Value
September 30, 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:
March 31, 2021:
Assets:
Cash and cash equivalents	$	183,971	$	183,971	$	0	$	0	$	183,971	$	556,701	$	556,701	$	—	$	—	$	556,701
Securities available-for-sale		178,348		0		178,348		0		178,348		250,937		—		250,937		—		250,937
Other investments		12,913		N/A		N/A		N/A		N/A		14,728		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		2,476,629		—		—		2,477,120		2,477,120

Liabilities:
Noninterest-bearing demand deposits		364,155		0		364,155		0		364,155		777,968		—		777,968		—		777,968
Interest-bearing demand deposits		380,234		0		380,234		0		380,234		683,887		—		683,887		—		683,887
Money market and savings deposits		623,284		0		623,284		0		623,284		1,073,941		—		1,073,941		—		1,073,941
Time deposits		679,541		0		681,902		0		681,902		512,417		—		515,440		—		515,440
Borrowings		31,623		0		31,029		0		31,029		82,642		—		83,743		—		83,743
Subordinated debt		39,261		0		0		35,868		35,868		39,367		—		—		40,866		40,866
Derivative financial instruments		3,446		0		3,446		0		3,446		4,008		—		4,008		—		4,008

December 31, 2020:
Assets:
Cash and cash equivalents											$	481,719	$	481,719	$	—	$	—	$	481,719
Securities available-for-sale												215,634		—		215,634		—		215,634
Other investments												14,794		N/A		N/A		N/A		N/A
Loans, net and loans held for sale												2,375,618		—		—		2,377,581		2,377,581

Liabilities:
Noninterest-bearing demand deposits												685,957		—		685,957		—		685,957
Interest-bearing demand deposits												649,129		—		649,129		—		649,129
Money market and savings deposits												919,631		—		919,631		—		919,631
Time deposits												550,498		—		554,120		—		554,120
Borrowings												81,199		—		82,892		—		82,892
Subordinated debt												39,346		—		—		40,550		40,550
Derivative financial instruments												6,174		—		6,174		—		6,174

Limitations:

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

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

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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.

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 fair value hedge relationships for the periods presented are as follows (dollars in thousands):

Weighted

Average

Balance

Remaining

Weighted

Balance

Remaining

Weighted

Sheet

Maturity

Average

Receive

Notional

Estimated

Sheet

Maturity

Average

Receive

Notional

Estimated

Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

September 30, 2020:

March 31, 2021:

Interest rate swap agreements - securities

Other liabilities

7.38

3.08

3 month LIBOR

36,000

(6,791)

Other liabilities

6.18

3.09

3 month LIBOR

36,000

(4,008)

December 31, 2019:

December 31, 2020:

Interest rate swap agreements - securities

Other liabilities

8.20

3.09

3 month LIBOR

36,000

(3,446)

Other liabilities

7.13

3.08

3 month LIBOR

36,000

(6,174)

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Interest income on tax-exempt securities	$	565	$	400	$	1,586	$	1,305	$	564	$	440
Effects of fair value hedge relationships		(201)		(62)		(522)		(132)		(305)		(157)
Reported interest income on tax-exempt securities	$	364	$	338	$	1,064	$	1,173	$	259	$	283


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
Gain (loss) on fair value hedging relationship	2020		2019		2020		2019		2021		2020
Interest rate swap agreements - securities:
Hedged items	$	299	$	(1,045)	$	(3,345)	$	(3,282)	$	(4,008)	$	(6,885)
Derivative designated as hedging instruments	$	(299)	$	1,045	$	3,345	$	3,282	$	4,008	$	6,885

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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				Cumulative Amount of Fair
			Value Hedging Adjustment				Value Hedging Adjustment
	Carrying Amount		Included in Other Comprehensive		Carrying Amount		Included in Other Comprehensive
Line item on the balance sheet	of the Hedged Assets		Income		of the Hedged Assets		Income
September 30, 2020:
March 31, 2021:
Securities available-for-sale	$	43,643	$	(2,145)	$	43,073	$	250
December 31, 2019:
December 31, 2020:
Securities available-for-sale	$	42,710	$	3,446	$	44,017	$	(1,063)

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,			March 31,		December 31,
	Classification	2020		2019		Classification	2021		2020
Assets:
Operating lease right-of-use assets	Other assets	$	5,286	$	5,470	Other assets	$	4,588	$	4,797
Liabilities:
Operating lease liabilities	Other liabilities	$	5,315	$	5,479	Other liabilities	$	4,625	$	4,827

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

As of ~~September 30, 2020,~~March 31, 2021, the weighted average remaining lease term was ~~10.78~~11.32 years and the weighted average discount rate was ~~2.72%~~2.73%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Lease costs:
Operating lease costs	$	272	$	149	$	779	$	464	$	240	$	237
Short-term lease costs		0		2		0		13
Variable lease costs		29		23		84		69		24		26
Total	$	301	$	174	$	863	$	546	$	264	$	263
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	264	$	145	$	759	$	447	$	233	$	230

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~September 30, 2020,~~March 31, 2021, were as follows (in thousands):


	Amounts		Amounts
September 30, 2021	$	1,006
September 30, 2022		760
September 30, 2023		571
September 30, 2024		385
September 30, 2025		348
March 31, 2022			$	571
March 31, 2023				623
March 31, 2024				485
March 31, 2025				366
March 31, 2026				348
Thereafter		3,119		3,032
Total future minimum lease payments		6,189		5,425
Amounts representing interest		(874)		(800)
Present value of net future minimum lease payments	$	5,315	$	4,625

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.~~2015. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). ~~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 currently sufficient to satisfy the fully phased-in conservation buffer. At ~~September 30, 2020,~~March 31, 2021, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the "well capitalized" regulatory classification.

Regulatory Restrictions on Dividends:

Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (the “TDFI”), pay any dividends to the Company in a calendar year in excess of the total of the Bank’s retained net income for that year plus the retained net income for the preceding two years. Because this test involves a measure of net income, any charge on the Bank’s income statement, such as an impairment of goodwill, could impair the Bank’s ability to pay dividends to the Company. Under Tennessee corporate law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due

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

During the three months ended ~~September 30, 2020,~~March 31, 2021, the Bank paid ~~$1.4~~$5.0 million in dividends to the ~~Company. During~~Company and the ~~nine months ended September 30, 2020, the Bank paid $8.9 million in dividends to the Company. Since the fourth quarter of 2019, the~~ Company ~~has~~ paid a quarterly common stock dividend of ~~$0.05~~$0.06 per share. The amount and timing of all future dividend payments by the Company, if any, is subject to discretion of the Company’s board of directors and will depend on the Company’s earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to the Company.

Regulatory Capital Levels:

Actual and required capital levels at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019~~2020 are presented below (dollars in thousands):


									Minimum to be												Minimum to be
									well												well
									capitalized under												capitalized under
					Minimum for				prompt								Minimum for				prompt
					capital				corrective action								capital				corrective action
		Actual			adequacy purposes				provisions¹					Actual			adequacy purposes				provisions¹
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2020
March 31, 2021
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	323,297	13.81	%	$	187,225	8.00	%		N/A	N/A		$	337,484	13.62	%	$	198,250	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			279,747	11.29	%		148,687	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			279,747	11.29	%		111,515	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			279,747	8.55	%		130,918	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	%	$	323,288	13.05	%	$	198,174	8.00	%	$	247,718	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		294,052	12.57	%		140,413	6.00	%		187,217	8.00	%		304,918	12.31	%		148,631	6.00	%		198,174	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		294,052	12.57	%		105,310	4.50	%		152,114	6.50	%		304,918	12.31	%		111,473	4.50	%		161,017	6.50	%
Tier 1 Capital (to Average Assets)²		294,052	9.74	%		120,762	4.00	%		150,953	5.00	%		304,918	9.33	%		130,783	4.00	%		163,479	5.00	%

December 31, 2019
December 31, 2020
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	287,937	14.02	%	$	164,313	8.00	%		N/A	N/A		$	329,431	14.07	%	$	187,303	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			271,739	11.61	%		140,477	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			271,739	11.61	%		105,358	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)		238,433	10.34	%		92,258	4.00	%		N/A	N/A			271,739	8.70	%		125,002	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	%	$	317,660	13.57	%	$	187,294	8.00	%	$	234,117	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		263,189	12.81	%		123,229	6.00	%		164,305	8.00	%		299,314	12.78	%		140,470	6.00	%		187,294	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		263,189	12.81	%		92,422	4.50	%		133,498	6.50	%		299,314	12.78	%		105,353	4.50	%		152,176	6.50	%
Tier 1 Capital (to Average Assets)		263,189	11.41	%		92,254	4.00	%		115,317	5.00	%		299,314	9.58	%		124,969	4.00	%		156,212	5.00	%

~~Table of Contents~~

~~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.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 14. Other Comprehensive Income (Loss)

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

Three Months Ended September 30, 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)


							Three Months Ended March 31, 2021
											Accumulated
							Securities		Fair Value		Other
							Available-for-		Municipal		Comprehensive
							Sale		Security Hedges		Income (Loss)
Beginning balance, December 31, 2020							$	2,968	$	(785)	$	2,183

Other comprehensive income (loss)								(2,070)		970		(1,100)
Reclassification of amounts included in net income								—		—		—
Net other comprehensive income (loss) during period								(2,070)		970		(1,100)

Ending balance, March 31, 2021							$	898	$	185	$	1,083

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

Other comprehensive income (loss)		2,201		(1,361)		840		851		(2,266)		(1,415)
Reclassification of amounts included in net income		4		0		4		—		—		—
Net other comprehensive income (loss) during period		2,205		(1,361)		844		851		(2,266)		(1,415)

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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 15. Subsequent Events

On ~~October 8, 2020~~April 14, 2021, the Company ~~repaid $237.8 million~~entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sevier County Bancshares, Inc., a Tennessee corporation (“SCB”). The Merger Agreement provides that, upon the terms and subject to the ~~Federal Reserve~~conditions set forth therein, SCB will merge with and into the Company, with the Company continuing as the surviving entity (the "Merger"). Following the Merger, Sevier County Bank, ~~(“FRB”) relating~~a Tennessee state-chartered banking association and wholly-owned subsidiary of SCB, will merge with and into the Bank, with the Bank continuing as the surviving bank.

Subject to the ~~outstanding borrowings~~terms, conditions and adjustments set forth in the Merger Agreement, at the effective time of the Merger, (i) each share of SCB common stock owned by a holder of 20,000 or more shares of SCB common stock will be converted into the right to receive 0.4116 of a share of SmartFinancial common stock (the “Per Share Stock Consideration”) and (ii) each share of SCB common stock owned by a holder of fewer than 20,000 shares of SCB common stock will, at the election of such holder, be entitled to receive either (A) the Per Share Stock Consideration, or (B) an amount of cash equal to the Per Share Stock Consideration multiplied by the average closing price of SmartFinancial common stock as reported on the NASDAQ for the 10 consecutive trading days ending on the trading day immediately prior to the date that is five business days prior to the closing date (the “Per Share Cash Consideration”). Further, if SCB’s consolidated shareholders’ equity (as calculated in accordance with the Merger Agreement) is less than $30,326,000, then the Per Share Stock Consideration and Per Share Cash Consideration shall automatically be adjusted downward by an amount that is reflective of the overall shortfall. Additionally, at the effective time of the Merger, each share of SCB common stock subject to vesting restrictions shall become fully vested and converted automatically into the right to receive the merger consideration. Based upon SmartFinancial’s closing share price of $21.25 on April 13, 2021 and assuming that SCB’s

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

consolidated shareholders’ equity is at least $30,326,000, the implied merger consideration per share of SCB common stock is $8.75, with an aggregate transaction value of approximately $38.2 million.

The Merger Agreement contains customary representations, warranties, and covenants of both SmartFinancial and SCB. The completion of the Merger is subject to approval of SCB shareholders, regulatory approvals, and other customary closing conditions, and is expected to be completed in the third quarter of 2021.

On May 2, 2021, the Bank entered into a Purchase Agreement (the “Purchase Agreement”) with the members of Fountain Leasing, LLC, a Tennessee limited liability Company (“Fountain”), pursuant to which SmartBank will acquire all of the membership interests of Fountain (the “Acquisition”). The Acquisition was subsequently completed on May 3, 2021. In accordance with the Purchase Agreement, the Bank paid $14 million in cash to the members of Fountain at closing, and repaid approximately $45 million of Fountain’s indebtedness. In addition to the closing consideration, the Purchase Agreement contains a performance-based earnout, pursuant to which the former members of Fountain could be entitled to up to $6 million in future cash payments from the ~~PPPLF. These borrowings were used~~Bank. Following the completion of the Acquisition, the Bank changed the name of Fountain to ~~assist with the funding of PPP loans. The Company utilized its excess liquidity to fund the repayment.~~ “Fountain Equipment Finance, LLC”.

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

SmartFinancial, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the "Bank"). SmartBank provides a comprehensive suite of commercial and consumer banking services to clients through 3635 full-service bank branches and ~~two~~one loan production ~~offices~~office 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 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 the proposed acquisition of Sevier County Bancshares, Inc. (“SCB”) and our recently completed acquisition of ~~Progressive Financial Group, Inc ("PFG"~~Fountain Leasing, LLC (“Fountain”) 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~~SCB’s and Fountain’s businesses with our business;

●

lower than expected revenue following ~~these mergers;~~the acquisitions of SCB and Fountain;

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●

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

●

the dilution caused by SmartFinancial’s issuance of additional shares of its common stock in connection with the ~~PFG~~SCB 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.

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.

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

Executive Summary

The following is a summary of the Company’s financial highlights and significant events during the ~~third~~first quarter ~~and first nine months~~ of ~~2020:~~2021:

●

~~Completed~~Successfully completed the ~~acquisition and integration~~hiring of ~~Progressive Financial Group, Inc. ("PFG").~~an experienced banking team in the Gulf Coast Region.

●

Originated ~~approximately 2,950~~1,231 Paycheck Protection Program (“PPP”) loans totaling ~~$300.8~~$119.5 million.

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●

Net income totaled ~~$6.4~~$9.8 million, or ~~$0.42~~$0.65 per diluted common share, during the ~~third~~first quarter of ~~2020~~2021 compared to ~~$6.0~~$2.7 million, or ~~$0.42~~$0.19 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.~~2020.

●

Annualized return on average assets was ~~0.76%~~1.18% at ~~September 30, 2020~~March 31, 2021 compared to ~~1.01%~~0.43% at ~~September 30, 2019.~~March 31, 2020.

●

~~Allowance for loan losses increased~~On December 21, 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, was passed by Congress to ~~$18.8 million, an increase of 40.1% from the first quarter of 2020,~~provide economic stimulus to individuals and businesses in further response to the ~~current~~ economic ~~conditions related to COVID-19.~~

●

~~The COVID-19 pandemic has~~distress 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 ofby the COVID-19 pandemic. ~~The CARES Act included~~Among other things, the ~~PPP,~~legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a ~~nearly $350 billion~~$300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, ~~designed~~and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to ~~aid small and medium-sized businesses through federally guaranteed loans distributed through banks. These loans were intended to guarantee eight weeks of payroll~~transportation, education, agriculture, nutrition and other ~~costs to help those businesses remain viable~~public health measures, and ~~allow their workers to pay their bills. The initial $350~~(v) approximately $325 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~~business relief, including approximately $284 billion for a second round of PPP loans and a 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 loansimplified 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 periodprocedure for PPP loans ~~until~~of $150,000 or less. We are continuing to monitor the ~~date when~~potential development of additional legislation and further actions taken by 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.U.S. government.

Analysis of Results of Operations

~~Third~~First quarter of ~~2020~~2021 compared to ~~2019~~2020

Net income was ~~$6.4~~$9.8 million, or ~~$0.42~~$0.65 per diluted common share, for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~$6.0~~$2.7 million, or ~~$0.42~~$0.19 per diluted common share, for the ~~third~~first quarter of ~~2019.~~2020. The tax equivalent net interest margin was ~~3.39%~~3.48% for the ~~third~~first quarter of ~~2020~~2021 compared to ~~3.91%~~3.90% for the ~~third~~first quarter of ~~2019.~~2020. Noninterest income to average assets was ~~0.49%~~0.69% for the ~~third~~first quarter of ~~2020,~~2021, increasing from ~~0.37%~~0.44% for the ~~third~~first quarter of ~~2019.~~2020. Noninterest expense to average assets decreased to ~~2.28% in the third quarter of 2020, from 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%2.35% in the first ~~nine months~~quarter of ~~2020,~~2021, from ~~2.71%~~2.96% in the first ~~nine months~~quarter of ~~2019. The results above include operating effects of the PFG acquisition, which was completed on March 1,~~ 2020.

Net Interest Income and Yield Analysis

~~Third~~First quarter of ~~2020~~2021 compared to ~~2019~~2020

Net interest income, taxable equivalent, increased to ~~$26.2~~$26.4 million for the ~~third~~first quarter of ~~2020,~~2021, up from ~~$21.3~~$22.7 million for the ~~third~~first quarter of ~~2019.~~2020. Net interest income was positively impacted, compared to the prior year, primarily 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 ~~$2.16~~$2.34 billion for the ~~third~~first quarter of ~~2019,~~2020, to $3.08 billion for the ~~third~~first quarter of ~~2020,~~2021, primarily as a result of the acquisition of PFG being completed on March 1, 2020, ~~and~~ the Company’s participation in the ~~PPP.~~PPP, and the increase in our overall liquidity position. Over this period, average loan balances

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increased by ~~$568.2~~$445.5 million, average interest-bearing deposits increased by ~~$336.9~~$415.9 million, average noninterest-bearing deposits increased ~~$296.2~~$327.8 million and average borrowings increased ~~$306.0~~$29.9 million. The tax equivalent net interest margin decreased to ~~3.39%~~3.48% for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~3.91%~~3.90% for the ~~third~~first quarter of ~~2019.~~2020. The yield on earning assets decreased from ~~5.05%~~4.83% for the ~~third~~first quarter of ~~2019,~~2020, to 3.88% for the ~~third~~first quarter of ~~2020,~~2021, 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%~~1.10% for the ~~third~~first quarter of ~~2019,~~2020, to ~~0.59%~~0.44% for the ~~third~~first quarter of ~~2020,~~2021, primarily due to a lower interest rate environment during the period.

Table of Contents

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


	Three Months Ended September 30,												Three Months Ended March 31,
	2020						2019						2021						2020
	Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate
Assets:
Loans, including fees¹	$	2,410,173		28,508	4.71	%	$	1,842,007		25,471	5.49	%	$	2,428,499		27,943	4.67	%	$	1,982,997		26,389	5.35	%
Loans held for sale		8,048		113	5.57	%		4,189		44	4.17	%		7,913		75	3.82	%		4,294		45	4.24	%
Taxable securities		132,642		546	1.64	%		118,955		748	2.49	%		136,492		724	2.15	%		116,837		679	2.34	%
Tax-exempt securities²		88,129		515	2.32	%		56,598		448	3.14	%		90,849		409	1.82	%		70,397		400	2.28	%
Federal funds sold and other earning assets		438,785		327	0.30	%		135,444		743	2.18	%		417,144		291	0.28	%		165,512		602	1.46	%
Total interest-earning assets		3,077,777		30,009	3.88	%		2,157,193		27,454	5.05	%		3,080,897		29,442	3.88	%		2,340,037		28,115	4.83	%
Noninterest-earning assets		262,764						191,940						275,272						216,498
Total assets	$	3,340,541					$	2,349,133					$	3,356,169					$	2,556,535

Liabilities and Stockholders’ Equity:
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	509,999	$	199	0.16	%	$	343,827	$	511	0.59	%	$	641,214	$	256	0.16	%	$	389,500	$	434	0.45	%
Money market and savings deposits		833,022		704	0.34	%		637,290		1,829	1.14	%		983,893		821	0.34	%		664,983		1,389	0.84	%
Time deposits		615,714		1,994	1.29	%		640,679		3,265	2.02	%		526,062		1,254	0.97	%		680,830		2,931	1.73	%
Total interest-bearing deposits		1,958,735		2,897	0.59	%		1,621,796		5,605	1.37	%		2,151,169		2,331	0.44	%		1,735,313		4,754	1.10	%
Borrowings		319,265		334	0.42	%		13,310		15	0.45	%		81,837		117	0.58	%		51,921		89	0.69	%
Subordinated debt		39,311		584	5.91	%		39,226		584	5.91	%		39,354		584	6.01	%		39,269		584	5.98	%
Total interest-bearing liabilities		2,317,311		3,815	0.65	%		1,674,332		6,204	1.47	%		2,272,360		3,032	0.54	%		1,826,503		5,427	1.20	%
Noninterest-bearing deposits		649,489						353,315						700,962						373,125
Other liabilities		25,834						18,286						21,928						27,215
Total liabilities		2,992,634						2,045,933						2,995,250						2,226,843
Stockholders’ equity		347,907						303,200
Total liabilities and stockholders’ equity	$	3,340,541					$	2,349,133
Shareholders' equity														360,919						329,692
Total liabilities and shareholders’ equity													$	3,356,169					$	2,556,535
Net interest income, taxable equivalent			$	26,194					$	21,250					$	26,410					$	22,689
Interest rate spread					3.22	%					3.58	%					3.33	%					3.63	%
Tax equivalent net interest margin					3.39	%					3.91	%					3.48	%					3.90	%

Percentage of average interest-earning assets to average interest-bearing liabilities					132.82	%					128.84	%					135.58	%					128.12	%
Percentage of average equity to average assets					10.41	%					12.91	%					10.75	%					12.90	%

¹~~Includes nonaccrual~~Loans include PPP loans ~~and accretion income on acquired loans~~with an average balance of ~~$960 thousand and $1.2~~$312.6 million for the ~~quarters~~three month period ended ~~September 30,~~March 31, 2021. No PPP loans are included in the three month period ended March 31, 2020. Loan fees included in loan income was $2.9 million and $886 thousand for the three month periods ended March 31, 2021 and 2020, ~~and 2019,~~ respectively. ~~Also~~Loan fee income for the three month period ended March 31, 2021, includes $2.4 million accretion of loan fees on PPP ~~loans of $1.8 million for the quarter ended September 30, 2020.~~loans. No loan fees on PPP loans are included ~~for~~in the ~~quarter~~three month period ended ~~September 30, 2019.~~March 31, 2020.

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 ~~$151~~$150 thousand for the three month period ended ~~September 30, 2020~~March 31, 2021 and ~~$110~~$117 thousand for the three month period ended ~~September 30, 2019.~~March 31, 2020.

~~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 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

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Service charges on deposit accounts	$	892	$	767	$	2,370	$	2,129	$	1,009	$	770
Gain on sale of securities, net		(9)		1		6		34
Mortgage banking		1,029		518		2,544		1,192		1,139		584
Investment services		359		260		1,159		684		531		437
Insurance commissions		560		—		1,302		—		1,466		269
Interchange and debit card transaction fees		868		148		1,652		467
Merger termination fee		—		—		—		6,400
Interchange and debit card transaction fees, net										839		276
Other		422		502		1,417		1,405		707		482
Total noninterest income	$	4,121	$	2,196	$	10,450	$	12,311	$	5,691	$	2,818

~~Third~~First quarter of ~~2020~~2021 compared to ~~2019~~2020

Noninterest income increased by ~~$1.9~~$2.9 million, or ~~87.7%~~102.0%, during the ~~third~~first quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. This quarterly change in total noninterest income primarily resulted from the following:

●

Increase in service charges on deposit accounts of $239 thousand, related to the PFG acquisition, deposit growth and ~~deposit growth;~~transaction volume;

●

Increase in mortgage banking of $555 thousand, 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 of $1.2 million, primarily from commissions of $815 thousand from the placement of life insurance policies and an insurance agency acquired in the PFG acquisition; ~~and~~

●

Increase in interchange and debit card transaction fees, net of $563 thousand, related to increased volume, deposit growth and 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 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;~~acquisition: and

●

Increase in ~~interchange and debit card transaction fees, related to~~other of $225 thousand, primarily from the ~~PFG acquisition and deposit growth.~~increase in cash surrender value of bank owned life insurance (“BOLI”) of $208 thousand from the additional BOLI purchased during the first quarter of 2021.

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Noninterest Expense

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Salaries and employee benefits	$	11,032	$	9,072	$	31,395	$	26,357	$	10,869	$	10,006
Occupancy and equipment		2,186		1,635		6,093		4,967		2,341		1,911
FDIC insurance		534		(219)		894		140		371		180
Other real estate and loan related expense		643		335		1,535		1,067		602		545
Advertising and marketing		253		263		653		817		190		198
Data processing		558		273		1,689		1,465
Data processing and technology										1,379		1,008
Professional services		594		573		2,172		1,724		641		711
Amortization of intangibles		402		341		1,169		1,027		444		362
Software as service contracts		573		560		1,604		1,696
Merger related and restructuring expenses		290		73		3,863		2,792		103		2,096
Other		2,102		1,802		5,699		5,045		2,524		1,776
Total noninterest expense	$	19,167	$	14,708	$	56,766	$	47,097	$	19,464	$	18,793

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~~Third~~First quarter of ~~2020~~2021 compared to ~~2019~~2020

Noninterest expense increased by ~~$4.5 million,~~$671 thousand, or ~~30.3%~~3.6%, in the ~~third~~first quarter of ~~2020~~2021 as compared to the same period in ~~2019.~~2020. The quarterly increase in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits of $863 thousand, due to the overall franchise growth, including the acquisition of PFG;

●

Increase in occupancy and equipment ~~associated with~~of $430 thousand, due to ongoing infrastructure and facilities added to accommodate ~~our~~ growth in operations and the additional branches of the PFG acquisition;

●

Increase in FDIC insurance isof $191 thousand, related to ~~increase in assets due to overall assets~~asset 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~~and technology of $371 thousand, primarily due to ~~credit recognized~~implementation of new contactless chip card and tier pricing adjustments from our core ~~processor in third quarter of 2019;~~

●

~~Increase in merger related and restructure expenses from the acquisition of PFG;~~system provider; 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 following:

●

~~Increase~~of $748 thousand, primarily from an equity method investment 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;~~

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●

~~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.~~start-up fintech company.

Taxes

~~Third~~First quarter of ~~2020~~2021 compared to ~~2019~~2020

In the ~~third~~first quarter of ~~2020~~2021 income tax expense totaled ~~$2.0~~$2.7 million compared to ~~$1.9 million~~$664 thousand a year ago. The effective tax rate was approximately ~~23.5%~~21.5% in the ~~third~~first quarter of ~~2020~~2021 compared to ~~24.6%~~19.6% a year ago. The ~~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 reconciliation of our tax rates from operations.~~

~~First nine months of 2020 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 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~~quarter of ~~2020~~2021 compared to same ~~period~~quarter in ~~2019~~2020 was ~~primarily from~~due to utilization of an NOL carryforward in March 2020 that was available as part of 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.Act.

Loan Portfolio

The Company had total net loans outstanding, including organic and purchased loans, of approximately ~~$2.39~~$2.47 billion at ~~September 30, 2020~~March 31, 2021 compared to ~~$1.89~~$2.36 billion at December 31, ~~2019.~~2020. Loans secured by real estate, consisting of commercial orand residential property, are the principal component of our loan portfolio.

Organic Loans

Our organic net loans, which excludes loans purchased through acquisitions, increased by ~~$440.9~~$142.8 million, or ~~29.1%~~7.2%, from December 31, ~~2019,~~2020, to ~~$1.96~~$2.12 billion at ~~September 30, 2020.~~March 31, 2021. Included in the growth was ~~$300.8~~$119.5 million of PPP loans that were originated and funded during the ~~second~~first quarter of 2021 and ~~third quarters of 2020.~~offset by $82.0 million in forgiven PPP loans. Total net deferred fees associated with the PPP loans originated during the first quarter of 2021 was approximately ~~$11.0~~$5.6 million ~~and $3.7 million was~~with $116 thousand accreted into ~~income during the second and third quarters of 2020.~~ income.

Purchased Loans

Purchased non-credit impaired loans, net of ~~$393.1~~$315.8 million at ~~September 30, 2020 increased~~March 31, 2021 decreased by ~~$44.0~~$34.9 million from December 31, ~~2019.~~2020. Since December 31, ~~2019,~~2020, our net purchased credit impaired (“PCI”) loans, ~~increased~~net decreased by ~~$7.3~~$3.0 million to ~~$34.1~~$28.8 million at ~~September 30, 2020.~~March 31, 2021. The ~~increase~~decrease in purchased non-credit impaired loans and PCI loans 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 for the periods presented (dollars in thousands):


	September 30, 2020										March 31, 2021
			Purchased		Purchased								Purchased		Purchased
			Non-Credit		Credit				% of				Non-Credit		Credit				% of
	Organic		Impaired		Impaired		Total		Gross		Organic		Impaired		Impaired		Total		Gross
	Loans		Loans		Loans		Amount		Total		Loans		Loans		Loans		Amount		Total
Commercial real estate-mortgage	$	812,191	$	201,993	$	16,469	$	1,030,653	42.9	%	$	883,521	$	173,243	$	13,877	$	1,070,641	43.0	%
Consumer real estate-mortgage		295,912		133,596		10,801		440,309	18.3	%		315,709		107,180		9,597		432,486	17.4	%
Construction and land development		246,112		22,650		6,409		275,171	11.4	%		269,575		11,048		5,350		285,973	11.5	%
Commercial and industrial		611,439		32,742		317		644,498	26.8	%		662,337		23,370		303		686,010	27.6	%
Consumer and other		9,119		4,220		87		13,426	0.6	%		9,459		2,539		21		12,019	0.5	%
Total gross loans receivable, net of deferred fees		1,974,773		395,201		34,083		2,404,057	100.0	%		2,140,601		317,380		29,148		2,487,129	100.0	%
Allowance for loan losses		(16,704)	$	(2,113)		—		(18,817)				(16,411)	$	(1,583)		(376)		(18,370)
Total loans, net	$	1,958,069	$	393,088	$	34,083	$	2,385,240			$	2,124,190	$	315,797	$	28,772	$	2,468,759


	December 31, 2019										December 31, 2020
			Purchased		Purchased								Purchased		Purchased
			Non-Credit		Credit				% of				Non-Credit		Credit				% of
	Organic		Impaired		Impaired		Total		Gross		Organic		Impaired		Impaired		Total		Gross
	Loans		Loans		Loans		Amount		Total		Loans		Loans		Loans		Amount		Total
Commercial real estate-mortgage	$	705,691	$	184,360	$	15,255	$	905,306	47.7	%	$	807,913	$	188,940	$	16,123	$	1,012,976	42.5	%
Consumer real estate-mortgage		295,915		115,026		6,541		417,482	22.0	%		313,582		120,090		10,258		443,930	18.6	%
Construction and land development		210,421		12,747		4,458		227,626	12.0	%		259,622		13,105		5,348		278,075	11.7	%
Commercial and industrial		306,521		30,147		407		337,075	17.8	%		607,212		26,926		308		634,446	26.6	%
Consumer and other		2,817		6,760		326		9,903	0.5	%		9,250		3,539		27		12,816	0.5	%
Total gross loans receivable, net of deferred fees		1,521,365		349,040		26,987		1,897,392	100.0	%		1,997,579		352,600		32,064		2,382,243	100.0	%
Allowance for loan losses		(10,087)		—		(156)		(10,243)				(16,154)		(1,883)		(309)		(18,346)
Total loans, net	$	1,511,278	$	349,040	$	26,831	$	1,887,149			$	1,981,425	$	350,717	$	31,755	$	2,363,897

Loan Portfolio Maturities

The following table sets forth the maturity distribution of our loans at ~~September 30, 2020,~~March 31, 2021, including the interest rate sensitivity for loans maturing after one year (in thousands):


									Rate Structure for Loans												Rate Structure for Loans
									Maturing Over One Year												Maturing Over One Year
	One Year		One through		Over Five				Fixed		Floating		One Year		One through		Over Five				Fixed		Floating
	or Less		Five Years		Years		Total		Rate		Rate		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	$	108,966	$	465,687	$	495,988	$	1,070,641	$	751,532	$	210,143
Consumer real estate-mortgage		27,080		169,931		243,299		440,310		209,880		203,350		30,112		169,217		233,157		432,486		202,830		199,544
Construction and land development		83,912		96,043		95,216		275,171		91,711		99,548		51,168		129,351		105,454		285,973		109,451		125,354
Commercial and industrial		86,276		476,926		82,421		645,623		520,240		39,107		79,939		546,200		59,871		686,010		562,078		43,993
Consumer and other		4,591		6,658		388		11,637		6,738		308		4,491		6,861		667		12,019		7,149		379
Total Loans	$	316,169	$	1,172,443	$	915,445	$	2,404,057	$	1,496,958	$	590,930	$	274,676	$	1,317,316	$	895,137	$	2,487,129	$	1,633,040	$	579,413

Nonaccrual, Past Due, and Restructured Loans

Nonperforming loans as a percentage of total gross loans, net of deferred fees, was ~~0.09%~~0.25% as of ~~September 30, 2020, which decreased from 0.18%~~March 31, 2021, and 0.24% as of December 31, ~~2019.~~2020, respectively. Total nonperforming assets as a percentage of total assets as of ~~September 30, 2020~~March 31, 2021 totaled ~~0.18%~~0.29% compared to ~~0.21%~~0.31% as of December 31, ~~2019.~~2020. 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 nonperforming assets for the periods presented (in thousands):


	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Nonaccrual loans	$	2,248	$	2,743	$	4,739	$	5,633
Accruing loans past due 90 days or more		—		607		1,495		149
Total nonperforming loans		2,248		3,350		6,234		5,782
Other real estate owned		3,932		1,757		3,946		4,619
Total nonperforming assets	$	6,180	$	5,107	$	10,180	$	10,401
Restructured loans not included above	$	8	$	61	$	250	$	257

Potential Problem Loans

At ~~September 30, 2020~~March 31, 2021 potential problem loans amounted to approximately ~~$1.1~~$6.9 million or ~~0.04%~~0.29% of total loans outstanding. Potential problem loans, which are not included in nonperforming loans, represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Bank’s primary regulators for loans classified as substandard or worse, but not considered nonperforming loans.

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,~~March 31, 2021, the Company had 10 loans remaining under COVID-19 ~~modified loans~~modifications that amounted to ~~$232.5~~$1.7 million, or ~~9.7%~~0.07% 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~~three months ended ~~September 30, 2020,~~March 31, 2021, is ~~$8.7 million~~$67 thousand compared to ~~$1.9~~$3.2 million in the same period of ~~2019, an increase~~2020, a decrease of ~~$6.8~~$3.1 million. The allowance for loan loss provision for the quarter ended March 31, 2020, increased due to the onset of the COVID-19 pandemic and related economic uncertainty. As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, our allowance for loan losses was ~~$18.8~~$18.4 million and ~~$10.2~~$18.3 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%~~0.74% at ~~September 30, 2020~~March 31, 2021 and ~~0.54%~~0.77% at December 31, ~~2019.~~2020.

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 ~~September 30, 2020,~~March 31, 2021, the notional balances on PCI loans was ~~$47.2~~

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$40.8 million while the carrying value was ~~$34.1~~$29.1 million. At ~~September 30, 2020,~~March 31, 2021, there ~~were no loan loss allowances~~was an allowance on PCI ~~loans.~~loans of $376 thousand.

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				March 31, 2021				December 31, 2020
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial real estate-mortgage	$	7,729	42.9	%	$	4,508	47.7	%	$	7,637	43.0	%	$	7,579	42.5	%
Consumer real estate-mortgage		3,444	18.3	%		2,576	22.0	%		3,308	17.4	%		3,471	18.6	%
Construction and land development		2,060	11.4	%		1,127	12.0	%		1,968	11.5	%		2,076	11.7	%
Commercial and industrial		5,463	26.8	%		1,957	17.8	%		5,347	27.6	%		5,107	26.6	%
Consumer and other		121	0.6	%		75	0.5	%		110	0.5	%		113	0.5	%
Total allowance for loan losses	$	18,817	100.0	%	$	10,243	100.0	%	$	18,370	100.0	%	$	18,346	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

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allowance allocation. Specific valuation allowances related to impaired, non PCI, loans were approximately ~~$475~~$237 thousand at December 31, ~~2019~~2020, compared to ~~$486~~$492 thousand at ~~September 30, 2020.~~March 31, 2021.

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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,						Three Months Ended March 31,
	2020			2019			2020			2019			2021			2020
Balance at beginning of period	$	16,254		$	9,097		$	10,243		$	8,275		$	18,346		$	10,243
Provision for loan losses		2,634			724			8,683			1,914			67			3,200
Charged-off loans:
Commercial real estate-mortgage		—			(36)			—			(36)			—			—
Consumer real estate-mortgage		(21)			(1)			(23)			(3)			—			(2)
Construction and land development		—			—			—			—			—			—
Commercial and industrial		(60)			(20)			(77)			(353)			—			(8)
Consumer and other		(89)			(50)			(231)			(260)			(120)			(76)
Total charged-off loans		(170)			(107)			(331)			(652)			(120)			(86)
Recoveries of previously charged-off loans:
Commercial real estate-mortgage		11			39			16			63			3			2
Consumer real estate-mortgage		17			17			34			37			16			6
Construction and land development		—			3			2			7			—			2
Commercial and industrial		55			12			103			66			3			42
Consumer and other		16			7			67			82			55			22
Total recoveries of previously charged-off loans		99			78			222			255			77			74
Net loan charge-offs		(71)			(29)			(109)			(397)			(43)			(12)
Balance at end of period	$	18,817		$	9,792		$	18,817		$	9,792		$	18,370		$	13,431
Ratio of allowance for loan losses to total loans outstanding at end of period		0.78	%		0.53	%		0.78	%		0.53	%		0.74	%		0.63	%
Ratio of net loan charge-offs to average loans outstanding for the period (annualized)		—	%		0.01	%		—	%		0.03	%
Ratio of net loan charge-offs to average loans outstanding for the period														—	%		—	%

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

Securities Portfolio

Our securities portfolio, consisting primarily of Federal agency bonds, state and municipal securities, and mortgage-backed securities, amounted to fair values of ~~$214.6~~$250.9 million and ~~$178.3~~$215.6 million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. Our investments to assets ratio ~~decreased~~increased from ~~7.3%~~6.5% at December 31, ~~2019~~2020 to ~~6.3%~~7.1% at ~~September 30, 2020.~~March 31, 2021. Our securities portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income. All of the Company’s securities are designated as available-for-sale.

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The following table shows the amortized cost of the Company’s securities, byall investment ~~categories~~securities were classified as available for sale (in thousands):


	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
U.S. Government-sponsored enterprises (GSEs)	$	30,311	$	19,015	$	73,905	$	30,526
Municipal securities		88,864		63,792		88,509		89,644
Other debt securities		17,519		3,481		26,019		25,019
Mortgage-backed securities		74,424		91,531		61,294		66,425
Total securities	$	211,118	$	177,819	$	249,727	$	211,614

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The following table presents the contractual maturity of the Company’s securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at ~~September 30, 2020.~~March 31, 2021. 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															Maturity By Years
	1 or Less			1 to 5			5 to 10			Over 10			Total			1 or Less			1 to 5			5 to 10			Over 10			Total
U.S. Government agencies	$	—		$	641		$	7,402		$	22,268		$	30,311		$	—		$	124		$	26,130		$	47,651		$	73,905
State and political subdivisions		4,624			3,385			4,757			76,098			88,864			4,947			3,460			6,324			73,778			88,509
Other debt securities		—			983			14,036			2,500			17,519			—			985			24,534			500			26,019
Mortgage-backed securities		—			3,569			13,524			57,331			74,424			—			4,017			12,354			44,923			61,294
Total securities	$	4,624		$	8,578		$	39,719		$	158,197		$	211,118		$	4,947		$	8,586		$	69,342		$	166,852		$	249,727
Weighted average yield⁽¹⁾		1.92	%		1.22	%		3.24	%		2.56	%		2.62	%		1.90	%		1.43	%		2.92	%		2.46	%		2.54	%

(1)	Based on amortized cost, taxable equivalent basis

Deposits

Deposits are the primary source of funds for the Company’s lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company’s primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of ~~September 30, 2020,~~March 31, 2021, brokered deposits represented approximately ~~3.0%~~1.7% 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 ~~September 30, 2020~~March 31, 2021 was ~~0.59%~~0.44% compared to ~~1.37%~~1.10% 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.~~2020. The decreased cost of interest-bearing deposits was due to changes in rates caused by federal rate-changes during the periods.

Total deposits as of ~~September 30, 2020~~March 31, 2021 were ~~$2.65~~$3.05 billion, which was an increase of ~~$604.8~~$243.0 million from December 31, ~~2019.~~2020. This increase was primarily from ~~the completed acquisition of PFG and deposits related to the PPP loans.~~organic deposit growth. As of ~~September 30, 2020,~~March 31, 2021, the Company had outstanding time deposits under $250,000 with balances of ~~$437.1~~$383.5 million and time deposits over $250,000 with balances of ~~$140.0~~$129.0 million.

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


	September 30,		March 31,
	2020		2021
Three months or less	$	31,107	$	32,161
Three to six months		31,974		26,770
Six to twelve months		44,221		36,117
More than twelve months		32,681		33,906
Total	$	139,983	$	128,954

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 ~~$319.4~~$82.6 million at ~~September 30, 2020,~~March 31, 2021, and primarily consisted of $75.0 million in FHLB borrowings ~~$237.8 million from the PPPLF~~ and short-term borrowings totaled ~~$6.2~~$7.2 million and consisted entirely of securities sold under repurchase agreements. Long-term debt totaled $39.4 million at March 31, 2021, and $39.3 million at ~~September 30, 2020 and~~ December 31, ~~2019, respectively~~2020, and consisted entirely of subordinated debt. For more

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information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 – 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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, our capital ratios, including our Bank’s capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank subsidiary. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary. For more information regarding our capital, leverage and total capital ratios, see “Part I - Item 1. Consolidated Financial Statements - Note 13 - Regulatory Matters.”

Liquidity and Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. At ~~September 30, 2020,~~March 31, 2021, we had ~~$468.4~~$542.8 million of pre-approved but unused lines of credit and ~~$5.5~~$6.9 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~~off balance sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements - Note 9 – Commitments and Contingent Liabilities.”

Market Risk and Liquidity Risk Management

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

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%

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			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
March 31, 2021:	Increase +	Decrease -	Next 12 Months
An instantaneous, parallel rate increase or decrease of the following at the beginning of the third quarter:
± 100 basis points	6.22%	(0.81)%	8%
± 200 basis points	12.66%	(1.23)%	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:

Maximum

Percentage

Decline in

Economic Value

of Equity from

the Economic

Value of Equity

Current Estimated Instantaneous

at Currently

Current Estimated Instantaneous

at Currently

Rate Change

Prevailing

Rate Change

Prevailing

September 30, 2020:

Increase +

Decrease -

Interest Rates

March 31, 2021:

Increase +

Decrease -

Interest Rates

Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:

±100 basis points

7.07%

(3.35)%

10%

5.29%

(7.48)%

10%

±200 basis points

8.86%

14.17%

15%

9.26%

(8.03)%

15%

At ~~September 30, 2020,~~March 31, 2021, 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.

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The Company has ~~$4.6~~$4.9 million in investments that mature throughout the next 12 months. The Company also anticipates ~~$17.8~~$16.7 million of principal payments from mortgage-backed securities over the same period. The Company also has unused borrowing capacity in the amount of ~~$304.2~~$276.7 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 ~~September 30, 2020~~March 31, 2021 (the “Evaluation Date”). Based on such evaluation, SmartFinancial’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, SmartFinancial’s disclosure controls and procedures were effective to ensure that information required to be disclosed by SmartFinancial in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to SmartFinancial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding the required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended ~~September 30, 2020~~March 31, 2021 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~~In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in ~~its Annual Report on~~our Form 10-K for the year ended December 31, ~~2019. The risks described may not be the only risks facing us. Additional risks~~2020. These factors could materially 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,~~liquidity, results of operations and ~~financial condition,~~capital position, and ~~such effects will depend on future developments, which are highly uncertain~~could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Please be aware that these risks may change over time and ~~are difficult~~other risks may prove to ~~predict.~~

~~Global health concerns relating to~~be important in the ~~COVID-19 outbreak~~future. In addition, these risks may be heightened by the continued disruption and ~~related government actions taken to reduce the spread of the virus~~uncertainty resulting from COVID-19. There have been ~~weighing on~~no material changes from 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 operationalrisk factors ~~impacting us or our borrowers, customers or business partners, including but not limited to:~~

●

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries;

●

~~declines in collateral values;~~

●

~~third party disruptions, including outages at network providers and other suppliers;~~

●

~~increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;~~

●

~~risk of litigation or other third-party claims, including with respect to our participation in the Payroll Protection Program and any other government-sponsored stimulus programs; and~~

●

~~operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.~~

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

The spread of COVID-19 has caused us to 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.

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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.~~2020.

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

(a)

Not applicable

(b)

Not applicable

(c)

Issuer Purchases of Registered Equity Securities

On November 20, 2018, the Company announced that its board of directors has authorized a stock repurchase plan pursuant to which the Company may purchase up to $10.0 million in shares of the Company’s outstanding common stock. Stock repurchases under the plan will be made from time to time in the open market, at the discretion of the management of the Company, and in accordance with applicable legal requirements. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, amended, suspended, or discontinued at any time. As of ~~September 30, 2020,~~March 31, 2021, we have purchased ~~$2.1~~$5.5 million of the authorized $10.0 million and may purchase up to an additional ~~$7.9~~$4.5 million in the Company’s outstanding common stock.

The following table summarizes the Company’s repurchase activity during the three months ended ~~September 30, 2020.~~March 31, 2021.


					Maximum						Maximum
					Number (or						Number (or
					Approximate						Approximate
					Dollar Value) of						Dollar Value) of
					Shares That May						Shares That May
				Total Number of Shares	Yet Be Purchased					Total Number of Shares	Yet Be Purchased
	Total Number of			Purchased as Part of	Under the Plans		Total Number of	Weighted		Purchased as Part of	Under the Plans
	Shares	Average Price Paid		Publicly Announced	or Programs (in		Shares	Average Price Paid		Publicly Announced	or Programs (in
Period	Repurchased	Per Share		Plans or Programs	thousands)		Repurchased	Per Share		Plans or Programs	thousands)
July 1, 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
January 1, 2021 to January 31, 2021							28,189	$	20.15	28,189	$	5,124
February 1, 2021 to February 28, 2021							31,421		20.37	31,421		4,484
March 1, 2021 to March 31, 2021							—		—	—		4,484
Total	—	$	—	—	$	7,925	59,610	$	20.26	59,610	$	4,484

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits


Exhibit No.	Description	Location
2.1	Agreement and Plan of Merger, dated April 13, 2021, by and between SmartFinancial, Inc. and Sevier County Bancshares, Inc.	Incorporated by reference to Exhibit 2.1 to Form 8-K filed April 14, 2021
2.2	Purchase Agreement, dated as of May 2, 2021, by and among Warren Payne, G. Price Cooper, B. Wade West, Craig Phillipy, and SmartBank	Incorporated by reference to Exhibit 2.1 to Form 8-K filed May 3, 2021
3.1	Second Amended and Restated Charter of SmartFinancial, Inc.	Incorporated by reference to Exhibit 3.3 to Form 8-K filed September 2, 2015
3.2	Second Amended and Restated Bylaws of SmartFinancial, Inc.	Incorporated by reference to Exhibit 3.1 to Form 8-K filed October 26, 2015
31.1	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
31.2	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
32.1	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
32.2	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
101	Interactive Data Files (formatted as Inline XBRL)	Filed herewith.
104	Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101	Filed herewith

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

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SIGNATURES

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


		SmartFinancial, Inc.

Date:	~~November 6, 2020~~May 10, 2021	/s/ William Y. Carroll, Jr.
		William Y. Carroll, Jr.
		President and Chief Executive Officer
		(principal executive officer)

Date:	~~November 6, 2020~~May 10, 2021	/s/ Ronald J. Gorczynski
		Ronald J. Gorczynski
		Executive Vice President and Chief Financial Officer
		(principal financial officer and accounting officer)

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